On March 1 2011 Pemex-Exploración y Producción (PEP) - the exploration and production subsidiary of the state-controlled oil company Pemex - announced a call for an international public bid for an exploration and production project. This will be the first such bid under the new exploration and production model contracts, which were recently declared valid by the Supreme Court of Justice (for further details please see "Supreme Court gives all-clear to new incentive-based contracts").

The process relates to three initial blocks identified by PEP - Magallanes, Santuario and Carrizo - with an approximate area of 312 square kilometres and an aggregate of 207 million barrels of oil equivalent.

Three contracts will be awarded - one for each area - for the oil evaluation, development and production for a 25-year period. Companies may participate in the bid individually or as part of a consortium; however, Pemex will have a minimum participation of 10% in each contract, either through one of its subsidiaries or through a new special-purpose company. Interested parties should obtain a set of bidding guidelines before June 24 2011. According to the bidding schedule, the contracts will be executed between August 11 2011 and October 11 2011.

In addition to the question-and-answer sessions normally held in connection with Pemex bidding procedures, PEP will hold workshops with bidders in order to share information, opinions and comments. Proposals will be subject to a pre-qualification process, whereby bidders will be required to demonstrate their technical experience and their financial capacity. The technical experience requirement will be met by any company that has carried out exploration and production projects with production levels of at least 10,000 barrels a day, having invested a minimum of $35 million in any given project. Contracts will be awarded to the bidder that offers the lowest fee per barrel in US dollars. The successful company or consortium may form a new special-purpose company for the purposes of the execution of the contract.

The 25-year term of the contracts is divided into two stages: evaluation and development. The evaluation stage may last up to two years, at which point the contractor may opt for early termination of the contract, provided that the terms of the minimum evaluation programme have been met.

The hydrocarbons produced during the performance of the contract must be delivered to PEP, including hydrocarbons obtained during the evaluation stage. Payments to contractors will be made on the basis of the quantities delivered to PEP, on the understanding that PEP retains title over the proceeds of production at all times. The fee per barrel payable to contractors will not be linked to the market price for oil and gas or the sale price obtained by Pemex; thus, it is not linked to oil revenues. However, this first round of incentive-based contracts is a big step towards more flexible and modern exploration and production in Mexico.

For further information on this topic please contact Rogelio López-Velarde or Ruben Almaraz at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334), fax (+52 55 3685 3399) or email ([email protected] or [email protected]).