Sergio Pimentel
View from the Top

The Balance Between Licenses and Profit-Sharing Contracts

Wed, 01/20/2016 - 16:02

Q: How do the conditions of Mexico’s bidding rounds fare against those offered in other countries?

A: The Energy Reform allowed competition in Mexico by opening exploration and production activities beyond PEMEX, but it also opened the door for Mexico to compete in an international arena against countries that also offer hydrocarbon resources. The Mexican side of the Gulf of Mexico presents an attractive basin for international players mainly because it has not been thoroughly explored. Superficial exploration has been carried out recently, and the results suggest positive prospects regarding the resources that could be extracted. It is widely known that the Gulf of Mexico is a world-class geological area that is rich in hydrocarbon resources, and Cantarell, the largest offshore discovery, is proof of the region’s wealth. The superficial exploration activities and production operations that will take place in the Gulf will generate greater interest from international companies.

Q: How have contracts evolved in the first three phases of Round One?

A: The first phase comprised 14 exploration blocks in shallow waters in the Gulf of Mexico. The element that drastically changed the results from R1-L01 to R1-L02 was the fact that, for the exploration round, the Ministry of Finance revealed the minimum share for the state the same day the participants’ offers were disclosed. For the second tender the, Ministry of Finance decided to reveal the minimum share 15 days in advance, providing a significant advantage for the participants, who considered this information and submitted proposals above the established value. In the first round, there were offers that were only slightly below the established value. The first phase resulted in two out of the 14 blocks being awarded, but if the information about minimum share had been revealed earlier, it is probable that six contracts would have been awarded. The Ministry of Finance established appropriate fiscal terms, although we have to understand that companies always want better conditions and the Ministry will always work to maximize value for the state. Achieving this balance is a significant challenge that the Ministry of Finance will face in every tender. The main difference between the first two rounds and the third is that the very nature of the contract model changed in the latter. The first two awarded production-sharing agreements, while R1-L03 offered licenses. All 25 blocks were awarded in the third phase, but we have to keep in mind that these were smaller fields than the ones offered in the shallow water rounds.

Q: How can you balance the attractiveness of productionsharing contracts with licenses?

A: Both models can be equally attractive given the right fiscal terms, the drafting of which falls under the Ministry of Finance’s jurisdiction. We should look at profit-sharing agreements and licenses alike and make both attractive for participants. The distinctive difference with licenses is that these entail a transfer of ownership of the hydrocarbons at the wellhead, which then belong to the contractor, who pays the considerations established in the law. The profit-sharing scheme is more complex, as the contractor will only own the percentage indicated in the contract. Licenses were chosen in the third tender because this entailed many contracts for smaller and mature fields, and licenses are easier to administer from the regulators’ perspective. For instance, licenses do not deal with cost recovery matters, unlike profit-sharing agreements.

Q: What are the main concerns of the private sector, and how can these be addressed?

A: The industry has voiced concerns regarding the possible reversal of the Energy Reform, but it is highly unlikely that this would happen. An important aspect in the Energy Reform is that its key premises were included in a Constitutional Amendment. Only three Constitutional Articles were modified, but there is an extensive transitory regime supporting the reform. The fact that the reform was made in and through the Constitution makes it difficult to revert the changes that have been made. There are additional instruments, such as the Trans-Pacific Partnership, which has clear rules in terms of international arbitrage. Nonetheless, it would be quite difficult to once again reach the political climate that led to the Constitutional Amendment.