By: Sergio Ostos and Antonio Franck
Cacheaux Cavazos & Newton
Mexico City, Mexico
This article offers information about the procedures known as “migration” of contracts provided for in the Hydrocarbons Law and the Hydrocarbons Income Law, through which Petróleos Mexicanos (PEMEX) can request from the Department of Energy (SENER) the transformation of certain Contracts for the Production of Hydrocarbons (CIEPs) and the Financed Public Works Contracts (COPFs) to any of the following four new types of Exploration and Extraction Contracts (CEEs): license, production sharing, profit sharing and services contracts.
The migration procedure of CIEPs and COPFs into CECs must be conducted based on the technical guidelines established by SENER, with input from Pemex, and pursuant to the economic conditions and fiscal terms stipulated by the Department of Finance (SHCP).
In selecting the contract model for the migration, SENER, SHCP and Pemex shall consider as criteria the following: (i) increases in the value of the block for the participants in the association; (ii) that the contractors and assignees maintain the position of operators of the block; (iii) that Pemex Exploration and Production (PEP) maintain an active participation in the associations that will migrate; and (iv) that it has the opportunity to capitalize on best practices and be able to take advantage of the areas of potential improvement.
However, while Pemex may have requested the migration, in the event that the technical and fiscal guidelines set forth by SENER and SHCP are not acceptable or convenient for Pemex and its contractors, such parties may decide to maintain the original contractual relationship under the existing CIEPs and COPFs pursuant to their original terms and conditions.
In the process known as “Round Zero”, Pemex announced the possible migration of CIEPs and COPFs. The migration of 11 of the assigned blocks was prioritized according to their volume of production and economic viability, without the benefits for marginal fields. Currently, 22 CIEPs and COPFs exist, and their migration proceeding has been divided in two phases: the first with 11 CIEPs and COPFs, which began in August 2014; and the second with 11 CIEPs and COPFs, which will begin in February 2015.
In order to perform the migration of the CIEPs and the COPFs regarding such blocks, PEP has outlined a strategy consisting of: (i) the preparation of a work plan that provides for carrying out the migration of the corresponding contracts; (ii) the designation of contact persons between PEP and the contractors; (iii) the preparation of the contract model; (iv) the hiring of independent experts for the preparation of technical, fiscal and financial studies; (v) the review of agreements with contractors regarding the possible migration; and (vi) the authorization and formalization of the CEEs with the authorities.
Once Pemex and its contractors state their approval with respect to the guidelines set by the SENER and the SHCP, then the SENER will approve the migration and proceed to formalize the CEE model, which will then be signed by the National Hydrocarbons Commission (CNH) and the associations or alliances that are formed for such purposes by the state productive company subsidiary and the respective Mexican company.
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November 2014
Sources of information and disclaimer: The following sources of information, among others, have been used in preparing this document: Official Journal of the Federation, presentations by the Department of Energy, and the website of the Federal Commission for Regulatory Improvement. Mexican Energy Law does not constitute legal or tax advice and should not be used for purposes other than as purely informative for the general public. For more information on Mexican Energy Law, any of the issues mentioned therein or to inquire about legal services, please contact CCN energy practice attorneys, whose data can be found at http://ccn-law.com/en/practice-areas/energy.
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