David Enríquez
Lawyer
Goodrich, Riquelme y Asociados
/
Insight

Effectiveness of the ISC Contractual Model

Wed, 01/25/2012 - 14:41

“You can only cook your dinner with whatever you have in your fridge, and that is precisely what Pemex has been doing,” says David Enríquez, a lawyer at Goodrich Riquelme y Asociados, one of the firms Mexico’s Senate invited to deliver its perspective on the contracting model President Calderón proposed in April 2008. “We have been following each step, including meetings at our oces with some of the key players giving their input to the Energy Ministry. We went directly into the details of the wording of the given articles of Pemex Law. We helped the evolution of the model from early 2009 all the way to when Petrofac, our client, was awarded one of the first contracts under the new model. Goodrich Riquelme has had experience on both sides of the table regarding these new contracts,” says Enríquez.

Enríquez believes that compared to the old multiple service contracts, the new incentive-based contracts allow Pemex to generate economic value for the participants at their projects using contractual tools that were previously lacking.

“A good way to measure the eectiveness of the contractual model, at least in the context of a public bid, is the number and the quality of the participants,” says Enríquez. “For this first round of integrated service contracts, 27 companies expressed interest and 17 of these pre-qualified. The bids were extremely interesting in terms of their economic proposals. At Santuario and Magallanes, Pemex was considering a fee per barrel of nearly US$10 for one, and US$8 for another.” Petrofac eventually won the fields with a fee per barrel of just over the minimum US$5 bid amount.

“It has clearly been a very good exercise for Pemex and very good business indeed, because they have managed to find a partner that will cost them half as much as they originally intended,” says Enríquez.

Regarding whether further energy reform is desirable in Mexico, Enríquez says “after living and suering through the 2008 Energy Reform, I would say that an oil and gas reform would be appealing and commendable, but it is not absolutely necessary. Through the model laid out by the 2008 reform, we have all the elements to make even deepwater a success story without any future reform. According to the Pemex Law, the board of directors has all the elements to make it happen within the restrictions of the Pemex Law. We can accommodate the now positively tested contractual arrangements for marginal fields and those to come from the northern region. The alternative options for rearranging the compensation formula will not require a legislative amendment. If Pemex can work out the econometrics of the compensation regime, there is no need, at least in the upstream. Downstream and midstream is another story, but for the upstream, reform would only be advisable, not a necessity.” To read more about Enríquez’s views on exactly how the current incentive-based model could be successfully applied to higher risk exploration projects, please see page 178-179.

Q: WHAT WOULD YOU SAY ARE THE MORE PROBLEMATIC ASPECTS OF THE REFORM FOR THE COMPANIES CONTRACTING WITH PEMEX?

A: The issue of a non-limitation of liability is tough for everyone, even if you have the set of guarantees and bonds and so on. However, we can understand it in the context of Mexican law. The limitation of liabilities can only come from a statutory provision. So for instance, in shipping law, you have international conventions determining the quantum in which your liability is determined. That does not happen in the oil and gas industry. So if there is no legal provision indicating that you can be financially limited in terms of liability, then Pemex would have no elements to go for limitation of liability.

Now this does not mean contracted companies are liable for everything. For instance, when it comes to environmental liability, in the contracting model Pemex runs the environmental liability, and this turns to the operator, in this case to Petrofac, only in the case that Petrofac has breached a legal obligation, for instance an environmental obligation in terms of what they were required to do to prevent an oil spillage. If Petrofac breaches a legal obligation, then that is a liability that is originally accommodated to Pemex and it turns to Petrofac.

These are sensitive elements that have been an element of the discussion all along the negotiation process of the contracting model. The reason that unlimited liability is still in the terms of the contract is not a result of Pemex flexing its muscles, so to speak, but the result of many hours of discussion that took place in the contracting committee of Pemex. Despite such clauses, the compensation formula has proven to be ecient. If it weren’t, I do not believe we would have seen 27 companies participating in the first bidding round.