Rogelio López-Velarde
Founding Partner
López Velarde Heftye y Soria
/
Insight

Legal Implications of the New Contracts

Wed, 01/25/2012 - 14:23

Perhaps the most important implication of the new integrated service contracts is aligning the interests of Pemex with those of its contractors, according to Rogelio López-Velarde, Managing Partner of law firm LópezVelarde, Heftye y Soria. López-Velarde says that under previous contractual arrangements, both international and domestic contractors were not keen to provide performance bonds, because there was no reward, but rather only penalties when the terms of the contract were broken.

“Therefore, one of the most important results of these integrated service contracts will be that under them, contractors have been allowed to become more creative and increase their performance indicators. Previously, Article 6, which was reformed in 2008, forbade contractors from participating in the results of exploitation. That was taken very broadly and restrictively by saying you cannot participate in any form. Performing well and being paid more as a result counted as participating in the results of the exploitation. Changing this article has allowed Pemex to introduce incentive-based contracts,” he says.

López-Velarde argues that the system is now much better after having moved Pemex’s contracting guidelines away from the public works law and the acquisition law. “One of the critical issues with the existing law was that the statutes were not crafted to address E&P issues, which by definition are dierent to the Education Ministry building a school, for example,” he states. “Now, anything relating to substantive activities of a productive nature have to be governed by Pemex’s Administrative Dispositions for Contracting (DAC), which have been approved by the Pemex board of directors, and which can be improved by them without the need for Congress or administrative actions.” In addition, LópezVelarde states that with the new contracts, Pemex has much better contracting guidelines with regard to foreign work, “that was a very smart move,” he says.

These changes mean that Pemex now has a great deal of flexibility in its contracting terms. López-Velarde explains further that “contracts say ‘may’ do this, rather than ‘shall’ do this; ‘shall include an early termination clause for general interest’ was a clause in previous contracts that killed many agreements.

However, the company is still not utilizing this freedom to create a more attractive contracting environment for potential partners. “Contracts can say ‘may’, but Pemex is still not taking advantage of that, because of internal inertia,” explains López-Velarde. “Pemex is being asked to be responsible for their work, to become creative, and they are not taking advantage of the flexibility that DAC gives them. All Pemex contracts are subject to general contract law, which have to be consistent with international industry standards and certain minimum public policy restrictions that are more related to the ownership and deposition of hydrocarbons during their exploration and development. When Pemex has a covenant regarding the limitation of liability, it now has to be consistent with industry standards.”

As well as creating the integrated service contracts, the 2008 Energy Reform gave Pemex an unquestionable mandate, which fits in with the spirit of the contracting reform. “As a result of the reform, it is now clear that Pemex’s mandate is to create economic value for Pemex, rather than for the community or the State. Before, this was simply not clear. Now, Pemex’s directors must use the company to create value, consistent with the strategic energy plan, the policies dictated by the Energy Ministry, and based on technical regulatory considerations by the National Hydrocarbons Commission (CNH). Pemex is an operator rather than an authority or a policy maker. We needed to have this made clear, in order to allow further liberalization of the industry.”