The Mexican government through the National Hydrocarbon Commission (NHC) released the fourth bidding round for deep-water exploration on December 17, 2015. As expected, the NHC opted for a license contract as opposed to the production-sharing approach used in previous rounds 1.1 and 1.2.
In this round, the NHC is putting to bid 10 contract areas distributed within the Perdido Fold Belt (four areas) and Salina’s Basin (Cuenca Salina, six areas), both deep-water regions in the Gulf of Mexico.
The bidding guidelines as well as the model license templates are available for review on the NHC’s website, ronda1.gob.mx. The timeline for the bidding process is summarized in the graph below.
So far, 23 companies have expressed interest in participating in Round 1.4., from which nine have already begun the prequalification process.3
Though the nine companies already in process of qualifying are publicly traded and thus subject to funding from the capital markets, other service integration companies could also benefit from such financing, especially considering that Mexico has already issued an energy investment vehicle for pipelines and storage facilities known as Fibra E which mimics U.S. master limited partnerships (MLPs) which pose different investment opportunities.
Investors should consider that there are certain aspects that are not fully disclosed in the contracts being offered when assessing their risk exposure and consequently when reporting to their investors and the SEC.
Environmental risks.
The new Environmental Liability Law enables condemnation to punitive and consequential (indirect) damages for the first time in Mexico; hence, even though the model contract effectively assesses the res-
ponsibility for ensuring environmental safety to the contractor, what is not spelled-out in the contract is that contractors will become liable not only before the NHC, but also before the populations that could be affected by an environmental accident, as well as by non-governmental organizations and federal and local environmental protection agencies. Thus, while assessing and reporting to the public their risk exposure, companies must consider that there are no precedents in Mexico on how to determine limitations to punitive or consequential damages.
To this extent, both the initial transition period, as well as the relinquishment of the awar-
ded areas become of the utmost importance since the contractor will assume any and all environmental liabilities that are not disclosed to the NHC.
Civil liability.
As in the case of environmental liability, recent court decisions stand in clear opposition to more than 65 years of consistent legal precedents, with the imposition of punitive damages being used to dissuade others from committing acts that qualify as pain and suffering or slander (moral damage). However, such damages are often assessed entirely at the discretion of a judge who may not yet have faced the question of what should be considered dissuasive in this situation. The issue of class action lawsuits has also recently been introduced to the legal framework, as, a claim has already been brought (though not yet accepted) against BP related to the Deepwater Horizon spill.
As of 2013, the courts have issued more than 13 isolated legal precedents that set aside Mexican legal traditions upholding the validity of the corporate veil. As a result, even though Mexican legal tradition has upheld that the liability of the shareholders or members of a company was limited to their economic contributions, as of now, contractors should also include in their risk matrix the possibility of a Mexican judge piercing the corporate veil to impose personal liability on its shareholders or members if a claim is brought against them by a third party different from the NHC.
Vicinity of contractual areas.
Though the contract model includes a clause that addresses the possibility of requesting unitization of related contractual areas, it is unclear as to whether the unitization contract will void or supersede the provisions of the license agreement. Moreover, when looking at the location of the first contractual area, it should be evident whether the model contract fails to include perhaps one of the major challenges not addressed in the RFP—the existence of a transboundary reservoir.
In case of such a reservoir, by law, PEMEX would become a partner of the contractor for at least 20 percent of the required investment. This unforeseen circumstance could ultimately affect the financial matrix of a contractor when booking reserves.
Thus, while assessing a company’s participation into Round 1.4, contractors should carefully consider the foregoing among the potential risks in order to prevent any unpleasant irrevocable surprises.
