The hype surrounding the release of the exploration areas and production fields in Mexico’s hydrocarbon assets that will be available for the private sector to bid has finally simmered to a reality. The general terms that will be applicable to all contracts were just released by SENER this week and even though Round One’s first set of prerequisites are scheduled to be announced by CNH on November 2014, the timeline of the country’s first contracting rounds has already been established. Before the end of next month, bids for 11 shallow water assets will open up and by May 2015 contracts will be awarded through the combined efforts of SENER, CNH, and SHCP.
Following the first bid for contracts, opportunities in extra-heavy oil fields are planned to be released in December of this year and awarded by June 2015. The next in line are unconventionals assets, which will include the infamous Chicontepec and are set to be announced by January 2015 and awarded by August 2015. Then, onshore projects will be posted by February 2015 and awarded by September 2015, and finally, the gems of the Gulf of Mexico, Lakach and its satellites as well as Trion and Exploratus will be released in March 2015 to be awarded by October of the same year. It is important to point out that PEMEX has just announced that it deems necessary to find a key partner for the development of Trion while it feels comfortable to become the leading operator in Exploratus.
Crucial aspects are outlined that will be inherent to all fields awarded to the private sector and PEMEX. One key trait of all contracts is that companies, including the NOC, will book the expected economic benefits rather than the reserves. With this, any player participating in the Mexican oil and gas industry as an operator will work under the premise that all hydrocarbons in Mexico’s subsurface still belong to the country. Additionally, the Mexican Petroleum Fund for Stabilization and Development will be in charge of disbursing the amounts prescribed by each contract awarded and will also have the responsibility of managing the federal revenues from hydrocarbon activities.
As is already commonly known among the industry’s key stakeholders, there will be three contractual schemes that will help to design the most adequate terms for each area’s specific characteristics. PSAs and Licenses will require companies a payment-in-kind for their E&P activities, while profit-sharing agreements will demand the parties involved to pay in cash. Moreover, all of these three types of contracts will be subject to corporate income tax, land use rent, state and municipal taxes, royalties, and an adjustment mechanism, all of which will be defined according to each block’s specific traits. Unlike PSAs and profit-sharing agreements, licenses will require companies to provide a signature bonus for each of the areas awarded. Awarding variables will also be determined, depending on each contract’s terms and conditions and will exclusively serve to define government take and the degree of contribution from a firm’s investment in order to optimize federal revenue.
Land ownership in Mexico is an issue that has concerned operators looking for onshore opportunities. Considering the possibility of social problems to arise, handling a given project’s development early stages makes any negotiation a process that must be carried out with the help of local expertise, given that all negotiations for land use and occupation have to be conducted by companies and the respective landowners. Additionally, the compensation stemming from the commercial use of leased properties will adhere to the terms outlined by SENER. In the case of natural gas extraction, the operator will pay no less than 0.5% and no more than 3% of its earnings. Similarly, extracting any other hydrocarbon will be subject to no less than 0.5% and no more than 2% of the operator’s earnings.
Beyond the fine print of all the legal framework pertinent to all future contracts, Round One offers a well-balanced set of exploration areas and field for production that encompass a wide-array of resources. Anticipated investments for all of Round One’s assets, including PEMEX’s farm outs over the coming four years stand at US$50.5 billion, or US$12.6 billion per year. The exploration of 109 blocks is expected to receive US$4.7 billion per year to recover 14.6 billion boe of prospective resources. 2P reserves are distributed among 60 blocks, which are set to capture US$3.7 billion per year to develop 3.7 billion boe. In addition, PEMEX’s 10 farm out contracts of 14 different areas await US$4.1 billion per year to push forward 1.5 billion boe.
Evidently, Round One has demonstrated the ambitious nature of Mexico’s government to maximize its federal budget. Sticking to the fast-paced agenda that has characterized the Energy Reform as a process, the upcoming months will surely keep many people busy so that the bidding rounds can be kept on schedule and thus keep surprising the leading oil and gas companies with eyes on Mexico.
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