Fernando Zendejas
The Legal Unit of the Ministry of Energy (SENER)
View from the Top

New Contract Models and their Regulatory Faculties

Mon, 09/01/2014 - 15:02

Q: Which mechanisms will be used to streamline cooperation between SENER, SHCP, CNH, and other regulatory and coordinating institutions?

A: The Energy Reform puts SENER in charge of deciding which areas of the country will be offered in bidding rounds and establishing the technical terms for the contracts. CNH will provide technical assistance and geologic data to SENER to help this institution choose the best contract model for each of the areas in Mexico, including complex places like Chicontepec and mature fields. The Hydrocarbons Act, in accordance with the Constitutional Amendment, will also provide different stages of prequalification that will allow CNH to filter potential participants in bidding rounds according to their expertise, financial, technological, and operational capabilities. Assisted with SHCP’s advice, SENER will establish the parameters for prequalification. PEMEX and the other operators will be able to participate on those bidding rounds, independently or through partnerships.

SHCP will be in charge of drafting the economic aspects of the contracts, including the fiscal regime. CNH will then organize the bidding rounds and allocate, sign, and administer the exploration and production contracts. The Hydrocarbons Act will state that the main awarding variable will be government take. With that being taken into consideration, SENER, SHCP, and CNH will work together to attract investors from around the globe. Mexican bidding rounds will be engineered to lure international oil companies based on the industry’s best practices, and contracts will be awarded in each bidding round to the operators that offer the government the highest earnings. CNH will administer the contracts and supervise so that operators stick to the development plan authorized for each field. This plan will be designed to maximize long-term recovery factors in order to avoid a premature decline of oil and gas fields. CNH will also have the possibility of imposing sanctions and rescinding contracts.

The Regulators’ Act will consider the creation of a Coordination Council of the Energy Sector, in which SENER, CNH, CRE, CENAGAS, and CENACE will be represented. The Coordination Council will serve as a forum in which the entities of the energy sector will learn about the policy dictated by SENER, and as a forum in which the enlisted authorities will communicate about shared challenges.

Q: What is the rationale behind allowing several upstream contracting models, and how does Mexico’s framework compare to other countries?

A: Mexican lawmakers decided to include four types of contracts in the Energy Reform, based on payment methods: production-sharing, profit-sharing, licences, and service contracts. The idea was to include every option because oil and gas fields differ from one to another. SENER will be able to choose the best alternative for each field, based on its characteristics, once it determines the contract’s technical aspects. Mexico is one of the last countries to allow private participation in its oil and gas sector, so we were able to examine international experiences before reforming the sector. In that regard, Mexico’s framework will allow the state to maximize earnings by choosing the best contracting model in each case. Several Latin American countries allow the contracting options that Mexico will offer. For example, Brazil has production-sharing contracts and Peru has licence contracts, among other options.

Q: In which ways do the new contracting models provide PEMEX with additional freedom to operate and invest?

A: The new contracting models free PEMEX of the burden entailed in being the only operator in the Mexican oil industry. Just like any other national oil company, PEMEX could not be an expert in every single type of field. After the Energy Reform, PEMEX will be able to focus and specialize in the areas where it has been internationally recognized for its expertise. Furthermore, our national oil company will be able to form partnerships with other players that will share their knowledge and technology with PEMEX. As a result, it will be able to decide where it wants to focus its resources. With the secondary legislation, PEMEX will have operational and financial autonomy. Therefore, the company will have more resources to reinvest in itself, and the state will increase its earnings through the returns obtained from the contracts signed with other operators.