E&P Contract Migration in Mexico

Mexico's Energy Reform liberalized the entire supply chain of the energy sector opening the upstream oil industry to domestic and foreign investors. The Reform allows local and foreign operators, including Petróleos Mexicanos (Pemex) and other state-owned Productive Companies, to participate in E&P ("E&E", acronym for Exploration and Production in accordance with the current Mexican legal framework) by competing in public tenders carried out by the National Hydrocarbons Commission ("CNH", for its acronym in Spanish), an industry regulator responsible for representing the State and carrying on resource management functions. Local and foreign qualified companies can participate in these tenders, including Pemex. Bid winners sign an Exploration & Extraction Contract (CEE) with the CNH.

Prior to the time CNH began conducting tenders, Pemex was given the right to retain certain E&P legacy assets; a total of 4891 blocks, so-called Assignations ("Asignaciones", awarded to Pemex under Round Zero. In fact, these Assignations are agreements or "contracts" between Pemex and the Mexican State through the CNH. The parties are subject to a special (onerous) tax regime. Some assets retained by Pemex are not economically viable under the applicable fiscal regime. Therefore, the new Hydrocarbons Law allows Pemex the option to request both, Energy and Treasury authorities to move to or "Migrate" Assignations from the governing fiscal and contractual Assignations applicable terms to a more lenient scheme with fiscal and contractual terms available to the contractors that have won acreage in CNH's tenders. The key criteria to allow for migration of an Assignation to less burdensome fiscal and contractual regime are that the migrated assets must be operated more efficiently. Often requiring new capital investment, translates into greater benefits, measured in Net Present Value terms to the State that would not be otherwise possible under the original fiscal regime.

The current Hydrocarbons Law also provides Pemex with the option to share risks and rewards of a Migrated Assignation with a partner. It is noteworthy to mention that the partner must be selected in a competitive tender carried out by the CNH. That process is known in Mexico as "Farm-Out". Some Pemex assets operated under service contracts, awarded prior to the Reform are grandfathered and may migrate its contractual terms without the partner selection tender. Between 2003 and 2013, Pemex awarded 22...