Guiding Private Sector Bidders Through ISCs

In the second round of integrated service contracts (ISCs), the consortium known as Monclova Pirineos Gas (MPG) was awarded two contracts at Tierra Blanca and San Andrés. Their legal representative in the bidding process was Thompson & Knight. Gabriel Ruíz Rocha, a lawyer at the firm, explains the contracting process from a legal perspective, and discusses his experience of guiding the consortium through the procedure.

Q: What were your experiences guiding Monclova Pirineos Gas through the ISC bidding process?

A: With two existing contracts in the Mexican market, MPG had a proven track record with Pemex, which helped them establish their credentials for the second round of ISCs. However, despite this, it was interesting to see a partner in the consortium that was not directly experienced in the oil and gas industry, Grupo Alfa. The mix of the two companies was very compelling, as was following the bidding rules for consortiums. As a result of this match, we have been working on both preparing the project, and the consortium internally.

Q: What were the most challenging aspects of the bidding process, in your opinion?

A: The most challenging aspect has been preparing for the type of contract that this second round entails. The multiple service contracts that MPG already had with Pemex at Burgos were good experience, but this oil production contract represents new challenges, such as dealing with environmental, labor and community issues, that were not present in the same fashion in the natural gas contracts.

We are currently entering the transition phase of the contract, and a lot of care has been put into selecting the company that will do the environmental baseline report, dealing with labor law issues, being regularly in contact with Pemex to determine the baseline production, and generally preparing the company to be physically located in Poza Rica, recruiting personnel, and so on. The companies are looking to take possession of the block as soon as possible, and start production, so that the economics of the project start working.

Q: What were the most noticeable dierences between the first and the second round of ISCs, from a contractual and legal perspective?

A: There are two major changes: the exploration costs, which are 100% covered by Pemex in this second round, and the formula to calculate the obligation in the development period.

On the other side there are operational changes, and the blocks themselves are considered by many in the industry to have very di†erent profiles between the first and the second rounds. It is generally agreed that the second round blocks are much more attractive in terms of production than those that were o†ered in the first round.

Q: What are the biggest hurdles for international companies that do not have operations in Mexico to participating in the integrated services contracting rounds?

A: The most challenging aspect is competing with the companies that are already present in Mexico and have a long history of working with Pemex. That has been the most important challenge in dealing with international companies: the expectations and economics of companies with no experience in Mexico are entirely di†erent to those of companies that already have a presence in the country.

Q: What contractual commitments do companies have to make regarding establishing a presence in Mexico?

A: Companies had to make very specific investment commitments in the first round of integrated service contracts. There are also specific commitments in the second round, but the heavier part of that commitment is not yet defined, which is the development phase investment obligation. However, I think companies like Petrofac, which is a pure service company, are the ones that are taking the most advantage of these new contracts.

Seeing how service companies have capitalized on these contracts that represent a di†erent level of risk has been the interesting aspect of these rounds. Service companies are not accustomed to taking the amount of risk that these contracts entail.