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The bidding terms for the first blocks of Round One were presented yesterday in a ceremony that marked the starting point for oil exploration by local and international private companies in Mexico, something that was defined as an “unprecedented milestone in the history of the country“ by Pedro Joaquín Coldwell, Minister of Energy.

“Today we are catching up in terms of international practices and methods for the awarding of contracts for the exploration and extraction of hydrocarbons,” said the government official. The minister did not undermine how much is at stake for Mexico with the current volatile prices of crude oil in the international market, which will force companies to be more selective on the countries and areas in which to invest.

In this first bidding round, which includes 14 exploration blocks in shallow waters of the Gulf of Mexico off the coast of Veracruz, Tabasco, and Campeche, the tendered areas were selected by the Ministry of Energy. Likewise, it has also developed the contract model, in this case a shared production contract, as well as the technical guidelines.

The body responsible for tendering, awarding, and administrating the contracts, the National Hydrocarbons Commission (CNH), also participated in defining these 14 blocks and will be responsible for making the data of each one available. Juan Carlos Zepeda, president of the institution, explained the technical and financial requirements, processes, and deadlines to be met by companies interested in this first round.

Initially, operators must prove technical experience in exploration and field development in shallow waters. The participating companies and consortia must have taken part in at least three projects of this type or one or two large-scale projects, all of which involved a capital investment of US$1 billion. The experience of experts and technicians who will be in charge of them will also be evaluated. Ultimately, the operator must also demonstrate expertise in managing systems of industrial safety and environmental protection.

In regards to financial capabilities, the companies and consortia must demonstrate a net worth of US$1 billion, provided that the consortia are not composed of more than three partners. The operating company within the consortium must have at least one third of the economic interest of the project and a minimum net worth of US$600 million. Otherwise, it must have an investment grade rating of US$10 billion worth of assets. According to the director of CNH, these strict financial restrictions aim to ensure the soundness of the participating companies in meeting their commitments.

Requirements for competition were also released, which stipulate that companies can partner up, but none may be part of more than one consortium. On the other hand, the large-scale enterprises, defined as those whose production exceeds 1.6 million barrels of oil equivalent, may not be part of the same consortium and will be forced to compete with each other on the bidding of these 14 blocks. Finally, companies or consortia participating in this round may only submit their financial proposal for five of the 14 blocks.  “We want to ensure a diverse participation of multiple oil companies from all over the world. As such we want to prevent a few business groups from overpowering the sector,” said Zepeda.

The bidding terms contemplate clarification and adjustments periods for processes and deadlines, which will run from January 15 until July 15, 2015. During this period companies can inform themselves, study and evaluate all available data, and seek clarification from CNH. The final terms and contracts will be published one month before the end of that period (June 15) to give companies time to know the final details before submitting their economic positions, which will be received in a public ceremony that will broadcast live via a website created for this purpose.

The 14 blocks that will be tendered are located in several areas amounting 4,222km2. These areas have seen plenty of oil production activities in the past 40 years, including the development of Cantarell and Ku-Maloob-Zaap. “It is an area where we know the costs of production, required technology, and opportunities to undertake activities that will increase production in a short time. Therefore, we selected the production sharing contract model, which was designed so that we can protect the state’s interest without taking away the attractiveness for investors,” explained the Undersecretary of Hydrocarbons, Lourdes Melgar.

The contract will run for 25 years, although it may be extended for two additional periods of five years in which additional investment and an advanced recovery program will be required. For the exploration stage there will be an initial phase of three years, which may be extended to five years with prior approval from CNH. Similarly, the contractor must obtain approval from CNH for its annual work program for the duration of the contract. The Ministry of Finance and Public Credit will monitor the cost recovery, the Ministry of Economy will ensures the compliance with local content targets, and the National Agency of Industrial Safety and Environmental Protection (ANSIPA) will evaluate the risk management programs.

“The contract we have drafted seeks to encourage the acceleration of the country’s reserve restitution rate,” said Melgar. For that reason a maximum period for the exploration stage is set with the goal of having 26 additional exploratory wells in the 14 tendered blocks by the end of the first 36 months. Therefore, a program of gradual reduction of undeveloped areas has also been planned. This states that after five years a contractor will only be able to keep the areas that are at the development or production stages.

“From a fiscal standpoint, the priority was to establish a framework that guarantees that the extraordinary profitability from oil revenues remains part of the nation.” These words lead to the intervention of the Ministry of Finance and Public Credit’s Undersecretary of Revenue, Luís Miguel Messmacher, who detailed the specific conditions of the fiscal framework stated in the Law of Hydrocarbons Revenue.

As defined by law, the companies will be subjected to income tax, as well as a contractual fee during the exploratory phase. This is intended to encourage companies to move to the development phase as quickly as possible. In addition, there will be a tax on exploration and extraction activities, which will be received by the states and municipalities, and a basic royalty on the hydrocarbon discoveries.

As a new element defined in the bidding terms, there is the recovery cost limit of 60% of revenues per period. This cannot be viewed as a guarantee in case the contractor fails to make any discoveries, which will result in losses for the operator. “Cost recovery will be given only if a marketable field is discovered and materialized in positive revenues. This entails that the state will be receiving a percentage of the generated revenues and production,” said Messmacher.

Jose Rogelio Garza, Undersecretary of Industry and Trade of the Ministry of Economy, said his agency has established a formula for measuring local content for each project, for which it has created a specialized unit for verifying and forecasting compliance. Finally, Carlos Salvador De Regules, head of ANSIPA, detailed the requirements regarding risk prevention that companies wishing to participate in the bidding round most comply with.

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