Under the recently enacted energy reform, the government has set out the ground rules for new players entering the upstream, midstream and downstream markets – including rules governing exploration and production under production sharing agreements and licences and rules for permitting and operating pipelines and terminals for crude oil, gas, products and liquids (for further details please see "Energy reform implementing legislation now in force: oil and gas provisions").
Despite the arrival of new players in all sectors of the industry, Mexican Petroleum (Pemex) – as the dominant upstream operator and a significant player in the rest of the value chain – will continue to play a major role in the Mexican oil and gas industry. As its role in the industry is reshaped, Pemex has introduced two critical legal instruments to regulate its relationships with private players.
In the upstream sector, the reform calls for Pemex's continued operation of its existing producing fields, for which it has been granted the corresponding allocations under Round Zero. Given that Pemex will continue to operate a large portion of the existing fields in production, it is expected that the oilfield services industry – which has historically catered exclusively to Pemex – will grow considerably. Existing companies will likely face increased competition and both Pemex and service providers will benefit from a more commercially driven relationship and contractual framework for operation. The reform envisages that Pemex will now be able to contract goods and services in a more commercially oriented environment; with a few limited exceptions, its contracts will be fully governed by commercial law. However, the Pemex Law continues to contemplate procurement rules – to be dictated by the board of directors of Pemex – governing its contracting procedures.
As part of the pending actions, the Pemex board of directors approved and published in the Federal Register the General Contracting Provisions of Pemex and its Subsidiary Productive Enterprises.
These new general contracting provisions, which are now in effect, have replaced the former administrative contracting provisions issued by the Pemex board of directors in 2008. The former administrative contracting provisions continue to apply only to the procurement processes of public instrumentalities that have not yet been converted to 'subsidiary productive enterprises'.
The new general contracting provisions govern the procurement and contracting of Pemex and its subsidiary productive enterprises. Among other things, they include rules and regulations on:
- bidding processes, which are referred to in the new provisions as 'open tenders' and will continue to be the general procedure for the award of contracts;
- exemptions from the bidding process, which are basically the same as those stipulated in the Pemex Law. These exemptions will be made through, among other things, a restricted invitation to bid sent to at least three parties or a direct award;
- the publication of projects and contracts to be awarded in a given calendar year – information on such projects and contracts will be made available to the general public in the Annual Programme for Acquisitions, Leases, Works and Services, which must be published no later than November of the previous year;
- required features of all contracts, including the following provisions:
- different types of dispute resolution mechanism may be included (as opposed to the former administrative contracting provisions, the options included are not exhaustive);
- no administrative rescission provisions – while the obligation to include rescission (unilateral termination) clauses in all contracts has been maintained, the administrative rescission principle has been removed, following the general principle that Pemex contracts will now generally be governed by commercial law; and
- in order to make Pemex's contracts more bankable, a list of required minimum provisions for all contracts whereby the assignment of collection rights is expressly established;
- exploration and production service contracts, including a provision that any consideration paid under such contracts must always be paid in cash; and
- the transferral of contracts entered into under the former administrative contracting provisions to the new general contracting provisions.
Within 60 business days of the entry into force of the new general contracting provisions, Pemex will issue, among other things, the operational guidelines for procurement and supply and the directives for the preparation of the Annual Programme for Acquisitions, Leases, Works and Services.
Given the technological challenges and budgetary concerns, Pemex is set to adopt a policy of undertaking joint ventures with high-tech companies with financial resources. Pemex will partner with international companies on a broad spectrum of activities, from exploration and production contracts – whereby it will participate in bids under Round One and subsequent rounds called by the National Hydrocarbons Commission – to joint ventures for the operation of terminals and refineries, whereby Pemex may contribute assets and third parties may contribute capital and expertise for reconfiguration and overhaul.
After being approved by its board of directors, Pemex has published the policies and guidelines that set out the rules to be followed by Pemex, its subsidiary productive enterprises and affiliates for new investments, associations and joint ventures. Among other matters, these joint venture policies are intended to guide Pemex in determining and identifying the most profitable projects to be undertaken with third parties and assessing the associated risks and mitigation measures.
Pursuant to the joint venture policies, the eligibility of a given project will be assessed based on the following factors:
- the needs to be met by the project;
- existing alternatives;
- the profits to be obtained;
- the financing structure; and
- the project's technical, economic, legal and environmental feasibility.
As a general rule, before engaging in any project with a third party, Pemex must assess the party's solvency, expertise, resources and reputation in prior projects. The goal is to engage with the most capable partners to undertake the most efficient processes and provide the best products or services.
Pemex will maintain an investment register and joint ventures and associations will need to consider the sufficiency and availability of resources throughout the relevant project.
The issuance of corporate guarantees by Pemex, its subsidiary productive enterprises and affiliates in favour of third parties will be limited to their corresponding assets. Pemex will not be deemed jointly and severally liable for those guarantees as ultimate parent.
The process for entering into an investment, association or joint venture with Pemex comprises the following stages:
- Assessment – the documentation of the participants will be assessed in order to determine the feasibility and decision-making process during the pre-investment stage.
- Approval – before execution of the project, the authorisation of the corresponding office must be secured.
- Execution and assessment – this stage entails the execution of the development plan.
- Operation – this stage entails the assessment of the satisfaction and achievement of the goals reflected in the strategic institutional plan.
- Cancellation and divestiture – this stage will be undertaken whenever the proposed goals are not achieved.
The joint venture policies cover different types of project, including:
- capital investment projects involving investment by Pemex in productive infrastructure and the acquisition of assets, and investments that extend the life of existing productive infrastructure;
- productive projects developed by third parties upon Pemex's request, pursuant to service contracts for the provision of goods and services;
- capital investments in other companies; and
- real estate investments for administrative purposes.
To supplement the joint venture policies, the Pemex board of directors must issue the Regulations for the Development of Alliances and New Business within 180 days. These regulations will address issues such as:
- the justification for the incorporation of special purpose vehicles;
- shareholder agreements;
- corporate governance mechanisms;
- non-compete covenants; and
- mechanisms to resolve conflicts of interest.
For projects where Pemex will not act as operator, accountability and surveillance mechanisms (technical, accountability and financing) will also be provided under these regulations.
The joint venture policies set out the investments and associations which, given their importance or magnitude, will require the approval of the investment and strategy committee of the Pemex board of directors, based on monetary thresholds that vary depending on the type of project and structure of Pemex participation (through capital investment or an anchor contract).
Once a transaction has been concluded, the joint venture policies provide for periodic reporting and follow-up to verify achievement of goals, profitability and service levels, among other things.
Pemex faces a considerable challenge in the coming years: after decades of stagnation, it must reinvent itself as a more efficient, profitable and commercially oriented undertaking. It remains to be seen whether these rules will give Pemex sufficient leverage to cope with the challenge. The benefit of the energy sector reform in this regard is that the board of directors can now learn from experience and adjust the rules as the market continues to develop.
For further information on this topic please contact Rogelio López-Velarde or Jorge Jiménez at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334) or email (firstname.lastname@example.org or email@example.com). The López Velarde, Heftye y Soria website can be accessed at www.lvhs.com.mx.
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