Mexico Launches Round One Auction for Shallow Water Fields

Firm Thought Leadership

Mexico's National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or ";CNH") has launched its long-awaited Round One auction process for 14 shallow water production sharing agreements. Access to the technical data room will be available January 15, 2015.

On Thursday, December 11, the CNH announced the bidding guidelines, forms of model contracts and other relevant information for its Round One auction process for 14 shallow water exploration blocks. These materials are available at the CNH-administered website, available here. Presently, the information at the Round One website is in Spanish, but CNH has indicated that it intends to provide English translations of certain key documents, including the model forms of contracts.

Set forth below is a summary of: (i) the key events in the auction process timetable; (ii) the notable requirements in the bidding guidelines; and (iii) the highlights of the proposed contract terms. CNH is expected to launch the related auction process for shallow water farm-in opportunities with Petroleos Mexicanos in January 2015. Round One auction processes for blocks involving heavy oil, onshore, unconventional and deep water opportunities are expected to be launched through the course of 2015.

Timetable of Key Events

  • Opening of Technical Data Room: The data room for all 14 contracts areas will open January 15, 2015 and access can be purchased at an approximate cost of US$350,000 ($5.3 Million pesos).
  • Prequalification Deadlines: Prequalification documents may be submitted until March 31, 2015. Documents must be submitted in person and the deadline to request an appointment to present documents is March 16, 2015.
  • Clarification Processes: The submission of online clarification questions is the official process through which potential bidders can submit questions about the CNH auction process. Data room and prequalification-related questions are currently open to submission and will be accepted until February 25 and March 5, respectively. Questions related to the proposal and award of contracts will be accepted between April 28, 2015 and June 1, 2015. The CNH will publish responses to questions throughout each respective period.
  • Deadline for Offers and Contract Awards: Bids are to be submitted on July 15, 2015. Winning bids will be announced by July 17th, at the latest, and must be executed by August 21, 2015.

Notable Requirements in Bidding Guidelines

  • Technical Prequalification Criteria for Operators: Notable technical criteria for qualifying as an "operator" includes demonstrating experience: (i) between 2010 and 2014 with operating either (a) three exploration and production projects, or (b) one or more exploration and production projects with US$1 billion in capital expenditures; and (ii) operating at least one offshore project or serving as a non-operating member in at least two offshore projects in the past five years. These criteria apply both to individual bidders and any party who may be designated as the operator in a consortium bid.
  • Financial Prequalification Criteria for Operators: Notable financial criteria for qualifying as an "operator" include demonstrating evidence of having either (i) total assets of at least US$10 billion and an investment grade credit rating; or (ii) (a) $1 billion of capital investments (in the case of an individual bidder) or (b) $600 million if the party is a member of a consortium and, provided, further, that the consortium itself satisfies the $1 billion capital requirement among no more than 3 of its members and none of the non-operating parties has an economic interest in the consortium that exceeds that of the operator.
  • Prohibition on Consortium Bids by "Large Scale Oil Companies": Oil companies which have an average production of 1,600,000 barrels per day are prohibited from participating in consortium bids during this shallow water bid process.
  • Maximum of Five Bids: Individual and consortium bidders may only submit bids for up to 5 contract areas.
  • Award Formula: Blocks will be awarded based on the application of a weighted formula that considers the share of operating profits offered by the bidder and a multiplier of the minimum investment commitment.

Highlights of Proposed Contract Terms

  • National Content Requirements: Participants are required to meet a 13% national content requirement during the exploration phase. During the development phase, a 25% national content applies until 2025 and, from that date until the end of the term, the national content requirement is 35%. Any proposed development or exploration plan must include a plan for meeting the national content requirement.
  • Contract Term: The contract term is 25 years, 3 of which is for the exploration period. The exploration period can be extended by 2 one-year periods and the overall term itself can be extended by 2 five-year periods.
  • Minimum Work Commitments: Estimates of the minimum work commitments for each block range between US$57 million and US$171 million.
  • Governing Law and Dispute Resolution: The laws of Mexico will govern the contract and dispute resolution is pursuant to both the Mexican courts and the UNCITRAL arbitration rules.

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