Dallas Parker, Gabriel Salinas and Diego Perez, of law firm Mayer Brown, assess the terms of Mexico’s phase four bid round to be held in 2016.
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The Mexican National Hydrocarbons Commission (CNH) published the bidding and contract terms for its next round on 17 December 2015, kicking off the fourth phase of Mexico’s Round One.
The contract form selected for this phase is a license contract, which will have 35-year term, extendable for a first additional period of 10 years and a second additional period of five years.
The 10 contract areas offered in the fourth phase are in the deepwater and ultra-deepwater of the Mexican Gulf of Mexico and within the areas of Cinturón Plegado Perdido and Cuenca Salina.
Bidding process
The phases of the bidding process are as follows:
a. Publication of the bidding invitation and terms
b. Access to the information data room
c. Registration for the bidding round
d. Clarification to the bidding terms and contract
e. Prequalification of companies
f. Delivery and opening of proposals
g. Awarding of contract and decision
h. Contract execution
Prequalification
Both operators and non-operators will need to prequalify in order to submit a bid offer. The technical, operational and financial prequalification requirements relating to the deepwater bidding process include:
1. Technical and operational experience and qualifications of the operator that will be verified:
a. Demonstrate experience as an operator during the period 2011-2015 in at least one exploration and/or extraction in a project with a water depth greater than 1000m;
b. Demonstrate aggregate capital investments in exploration and extraction projects of at least US$2 billion;
c. Demonstrate experience in industrial safety and environmental protection within the last five years. Must have experience in the implementation and operation of industrial safety management systems, operational security and environmental protection in facilities or exploration and/or extraction projects.
2. Financial requirements of the operator that will be verified:
a. Demonstrate stockholders’ equity of at least US$2 billion; or
b. Demonstrate total assets with a value of at least $10 billion and an investment-grade credit rating by one of the following rating services: Fitch Ratings, Moody’s Investors Service or Standard & Poors.
3. Financial requirements for non-operators:
a. Demonstrate stockholders’ equity of at least $250 million.
Forms of participation
A prequalified operator may participate both as an individual bidder and as part of one or more joint bidders with another operator or non-operator. The request for authorization must clearly state the intended form in which the bidder wishes to participate.
Joint bidders may submit a proposal without needing to incorporating a new legal entity, provided that each participating company has obtained CNH authorization and qualification to participate as a joint bidder.
Only one bid offer may be submitted per individual bidder or joint bidder for each contract area through the bidder itself, in the case of individual bidders, or through the designated Operator, in the case of joint bidders. The bidders must take into account minimum national content requirements during the exploration and evaluation periods and the development period.
Delivery and opening of proposals
Proposals are to be made per contract area. Each proposal must be comprised of two different sealed envelopes, one containing the economic proposal and a cash offer as an additional compensation in the case of a tie, and the other containing the bid bond (garantía de seriedad) in favor of the CNH. This guarantee shall be in the form of a standby letter of credit issued or confirmed by a credit institution doing business in Mexico, with a value of US$3 million, valid for 100 calendar days from the date of submission of the proposals.
The opening of proposals will take place in a public act attested by a Mexican notary public that will be streamed on the Internet. The winning and second-place bidders per contract area will be publicly announced in the same act.
Economic criteria for determination of winning bidder
Before the deadline for publishing the updated version of the bidding terms, the Ministry of Treasury will determine and publicize the minimum values that will be acceptable with respect to each of the variables comprising the economic proposal.
The winning bidder per contract area will be determined using a formula that takes into account: (i) the additional royalty offered by bidders to the State and (ii) the additional investment commitment that may be offered by bidders in addition to the minimum work program set forth in the bidding guidelines.
In case of a tie, the winning bidder shall be the bidder who, among the tied bidders, offers the highest cash payment to the state. If the tie persists, the bidder will be chosen by a random (insaculación) drawing among the tied bidders.
Execution of contracts
The CNH may only execute license contracts with Mexican-incorporated commercial entities that meet certain criteria.
Any winning bidder or member of a winning bidding group that is not a Mexican entity must incorporate a Mexican entity for the execution of the contract.
Simultaneously with the execution of a contract, the contractor must deliver: i) a performance guarantee and ii) a corporate guarantee of each of the participating companies. The corporate guarantee must be granted by the ultimate parent of each joint bidder member or, in case the guarantor is not the ultimate parent company, the guarantor must submit to the CNH its duly audited consolidated financial statements that prove minimum stockholders’ equity equivalent to the participating interest of the participating company multiplied by US$14 billion. Except for the operator, if the guarantors are unable to meet the requirement of minimum stockholders’ equity, they may submit to the CNH their duly audited consolidated financial statements evidencing assets equivalent to five times the requested value of the minimum stockholders’ equity. In addition, a document showing an investment grade credit rating issued during 2015 or 2016 by Fitch Ratings, Moody’s Investors Service or Standard & Poors must be submitted.
The guarantor’s minimum average stockholders’ equity or required assets must be maintained until all obligations of the corresponding participating company have been met; otherwise, the guarantee would need to be replaced by a conforming guarantor. If the winning bidder does not execute the contract in a timely fashion for reasons attributable to it, the CNH may award the contract to the second-place bidder and draw the winner bidder’s bid bond.
Dallas Parker is leader of Mayer Brown’s Mexico Energy Reform Initiative and serves as leader of the Corporate & Securities practice in the firm’s Houston office. Parker represents clients in a wide range of corporate and securities law matters with a career-long focus on the oil and gas industry. He earned a BA from Vanderbilt University and a JD from The University of Texas School of Law.
Gabriel Salinas is a senior associate in Mayer Brown’s Global Energy Practice Group. Salinas has experience representing companies in energy projects and transactions throughout Latin America, with particular experience in oil and gas, power generation and infrastructure projects in Mexico. He obtained his LLM from Harvard Law School and JD from Facultad Libre de Derecho de Monterrey in Mexico.
Diego Perez is a foreign attorney in Mayer Brown’s Global Energy and Corporate & Securities practices in the firm’s Houston office. His practice focuses on energy and infrastructure projects, with particular experience in the oil and gas industry. He earned his LLM from Columbia University Law School, and received a JD from the Pontificia Universidad Católica del Perú.
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