ENERGY REFORM IN MEXICO ROUND ONE DEEP-WATER BID ROUND

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1 ENERGY REFORM IN MEXICO ROUND ONE DEEP-WATER BID ROUND Mexico s National Hydrocarbons Commission (the CNH ) published bid guidelines (the Guidelines ) pursuant to which 10 deep-water oil exploration and production blocks will be publicly tendered in This bid round is the fourth of five Round One tenders and offers offshore light crude areas located in the Perdido and Salina del Istmo basins in the Gulf of Mexico. This Client Alert provides a brief summary of the key terms in the Guidelines along with our commentary with regard to the significance of their publication in connection with the Mexican oil and gas industry. I. SUMMARY OF TERMS Blocks 10 contractual areas with the following characteristics: CONTRACT AREA LOCATION EXTENSION (KM 2 ) 1 Cinturón Plegado Perdido Polygon No. 1 and 2 1, Cinturón Plegado Perdido 2, Cinturón Plegado Perdido 1, Cinturón Plegado Perdido 1, Cuenca Salina 2, Cuenca Salina 2, Cuenca Salina 3, Cuenca Salina 2, Cuenca Salina 2, Cuenca Salina 2,605.5 **Please see Exhibit A for a map of the blocks. Bid Process and Timeline Divided into the following progressive phases: (i) Data Room Access and Registration The Data Room access fee is $38.5 million Pesos (approximately USD$2.2 million), and the registration fee is $280 thousand Pesos (approximately USD$16 thousand). Those companies interested in prequalifying as Operators are required to pay the Data Room access fee. Non-operators are only required to pay the Registration fee. 1 The preliminary bid guidelines are available at:

2 Only those companies/consortia that have paid the Data Room access fee (for Operators) and the Registration fee may request a prequalification appointment. Data Room access requests may be scheduled from January 6, 2016 to April 15, Registration can occur from January 6, 2016 to May 13, (ii) Prequalification Interested companies will need to show: Technical (Operator only) Experience as Operator in at least one deepwater E&P project with depth of more than 1000 meters at any point between , and capital investments in E&P projects that collectively total USD$2 billion. Safety and Environmental (Operator only) Experience during the last five years operating safety and environmental programs in E&P projects. Financial Operators are required to demonstrate shareholder s equity of at least USD$2 billion or total assets with a value of at least USD$10 billion and an investment grade credit rating from Fitch, Moody s, or S&P. Nonoperators must show a shareholder s equity of USD$250 million. In addition, companies will have to deliver customary legal documents and information as well as prove the legitimacy of their sources of funding. Prequalification appointments may be requested from January 6, 2016 to May 13, 2016, and delivery of prequalification documents is to occur from June 14, 2016 to July 1, (iii) Proposal Submission and Award Proposals will be evaluated on a weighted value basis considering an additional royalty amount and an additional investment amount. Bidders are required to submit a USD$3 million stand-by letter of credit to guarantee each of their proposals. The proposal submission date will be defined in the third quarter of Consortium Restrictions Prequalified Operators may participate individually and as part of one or more consortia with another Operator or Non-Operator for different blocks. Non-Operators may not have a participating interest greater than the Operator. Contract Terms The draft License Agreement contains, among others, the following key terms: Term Phases Fiscal Terms 35 years extendable up to 50 years. Initial Exploration Period of four years, extendable twice for additional three year periods each; a three year Appraisal Period; and the Development Period. The Mexican State s consideration will consist of an Exploratory Phase Fee, Royalties, and a Percentage of the Contractual Value of the 2

3 hydrocarbons produced. The Contractor will be entitled to the produced hydrocarbons as long as the State s consideration is paid. Rescission Administrative Rescission For causes enumerated in article 20 of the Hydrocarbons Law such as default on minimum contract obligations, serious accident caused by negligence, or willful misconduct of Operator and others. Contractual Rescission For causes enumerated in the Contract such as default on development plan obligations, non-delivery of performance guarantee, and others. Guarantees Performance Guarantee Stand-by letter of credit for 75 percent of the total Work Units to be executed in the Initial Exploration Period. Corporate Guarantee Submitted by the ultimate parent company of the Contractor, or by other guarantors, provided a minimum shareholder s equity is evidenced. Guarantors that do not meet the foregoing have other alternatives. National Content Exploration and Appraisal Period Three percent of the value of specific items, such as technology, goods and services, qualified labor, training, and infrastructure; increases to six percent and eight percent during the First and Second Additional Exploration Periods. Development Period Four percent of the value of specific items purchased or contracted from the Development Period through the commencement of Regular Commercial Production. Dispute Resolution Conciliation Applicable for any controversy related to the Contract, except for administrative rescission. Federal Courts All disputes related to the events of administrative rescission. Contractor may challenge the amount of damages ruled by the Court in arbitration. Arbitration Any dispute arising from or relating to the Contract that has not been resolved during conciliation. The arbitration will take place in The Hague, Netherlands, in Spanish, and in accordance with UNCITRAL Conciliation and Arbitration Rules. II. CONCLUSION The publication of these Guidelines for deep-water E&P blocks represents a significant milestone in Mexico s multiple-phase strategy to implement the Energy Reform process and the most highly anticipated tender from the Round One process. Despite a challenging international economic environment, Mexico has continued its progress towards opening its oil and gas industry to private investment, with interest and participation increasing on each subsequent tender (two blocks awarded in 3

4 Tender 1, three blocks awarded in Tender 2, and all 25 blocks awarded in Tender 3). We will keep you advised as developments unfold. If you have additional questions, please do not hesitate to contact the Thompson & Knight attorney with whom you regularly work or one of the attorneys listed below. CONTACTS: Luis Fernando Gomar Gabriel Ruiz Rocha Andrew B. Derman This Client Alert is sent for the information of our clients and friends. It is not intended as legal advice or an opinion on specific circumstances Thompson & Knight LLP 4

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