ENERGY REFORM IN MEXICO ROUND TWO SHALLOW WATER BID ROUND

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1 ENERGY REFORM IN MEXICO ROUND TWO SHALLOW WATER BID ROUND On July 20, 2016, Mexico s National Hydrocarbons Commission (the CNH ) published bid guidelines (the Guidelines ) pursuant to which 15 shallow water oil exploration and production blocks will be tendered in This tender is the first of at least five Round Two tenders contemplated in the five-year plan to open exploration and production of hydrocarbons in Mexico promulgated by Mexico s Ministry of Energy. The Round Two tender offers light crude and natural gas areas located in the Tampico-Misantla, Veracruz, and Cuenca del Sureste basins in the Gulf of Mexico. This Client Alert provides a brief summary of the key terms in the Guidelines and offers commentary regarding its significance in the overall context of Mexico s growing oil and gas industry. I. SUMMARY OF TERMS Blocks 15 contractual areas with the following characteristics: CONTRACT AREA LOCATION EXTENSION (KM 2 ) Tampico-Misantla Veracruz Cuenca Salina **Please see Exhibit A for a map of the blocks. 1 The Guidelines are available at:

2 Bid Process and Timeline Divided into the following progressive phases: (i) Data Room Access and Registration Companies may access the Data Room by acquiring a License for the use of information from the National Hydrocarbons Information Center (CNIH) and paying an Access Fee of $8,000, Pesos (approximately US$430,760.00). Additionally, companies wishing to prequalify as bidders (and ultimately submit a bid) must also pay a Registration Fee of $750, Pesos (approximately US$40,385.00). For companies participating through a consortium, only one member is required to pay the Access Fee and the Registration Fee. Only those companies/consortia that have paid the Access Fee and the Registration Fee may request a prequalification appointment. Data Room access requests may be scheduled from August 1, 2016 to December 2, Registration can occur from August 1, 2016 to December 15, (ii) Prequalification Interested companies will need to show: Technical (Individual Bidder or Joint Bidder Operator) (i) Experience as Operator from in at least three exploration and/or production projects, or capital investments in exploration and/or production projects that collectively total US$1 billion; and (ii) Experience as Operator in at least one hydrocarbon exploration and/or production project in shallow and/or deep waters, or experience as Partner in at least two hydrocarbon exploration and/or production projects in shallow and/or deep waters, in the last five years. Safety and Environmental (Individual Bidder or Joint Bidder Operator) Experience in last five years operating safety programs in E&P projects. Financial (Individual Bidder or Joint Bidder Operator) Shareholder s equity of at least US$1 billion or total assets with a value of at least US$10 billion and an investment grade credit rating from Fitch, Moody s, or S&P. If the Operator does not comply with the financial requirement, it may participate in a consortia demonstrating a shareholder s equity of at least US$600 million, provided that the other members of the consortia demonstrate, in total, a shareholder s equity of US$400 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 August 1, 2016 to December 15, 2016, and delivery of prequalification documents will occur from December 19, 2016 to December 23, (iii) Proposal Submission and Award Proposals shall be evaluated on a weighted value basis considering the State s participation in the operating profit and an additional investment amount (calculated in Work Units equivalent to the amount of one or two exploratory 2

3 wells resulting in an investment factor of 1 for one well, 1.5 for two wells, and 0 for zero wells). Bidders must submit a US$500, stand-by letter of credit to guarantee each of their proposals. The proposal submission date is scheduled for March 22, Consortium Restrictions Interested companies may participate as an Individual Bidder and/or as part of one or more Joint Bidders, with the following limitations: (i) an interested company may not form part of more than four bidders; and (ii) every Joint Bidder must have an Operator that has at least one third of the economic participation in the consortia. Contract Terms The draft Production Sharing Agreement contains the following terms: Term Phases Fiscal Terms Rescission 30 years, extendable up to 40 years. Transition Phase of 120 days; Initial Exploration Period of 4 years, extendable for one additional period of 2 years; an Appraisal Period of 1 year; and the Development Period. Consideration for the Mexican State shall consist of an Exploratory Phase Fee, Royalties, and a Percentage of the Operating Profit for each month, subject to an adjustment mechanism. The Contractor shall be entitled to recover costs (limited to 60% for oil and 80% for nonassociated gas, per month) and to the remaining Operating Profit after the government take. Administrative Rescission For causes listed in article 20 of the Hydrocarbons Law (i.e., default on minimum contract obligations, serious accident caused by negligence, or willful misconduct of Operator). Contractual Rescission For causes included in the contract such as default on delivery of guarantees, bankruptcy of the contractor, and other material defaults. Guarantees Performance Guarantee Stand-by letter of credit for 75% 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 that a minimum shareholder s equity is evidenced. Guarantors that do not meet the foregoing have other alternatives. National Content Exploration, Appraisal, and Development Period 15% of the value of specific items, such as technology, goods and services, qualified labor, training, and infrastructure during the Exploration Period; 17% during the Appraisal Period; and 25% to 35% (from 2025) during the Development Period. 3

4 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 shall take place in The Hague, Netherlands, in Spanish, and in accordance with UNCITRAL Conciliation and Arbitration Rules. II. CONCLUSION The publication of the Guidelines reflects the continuing effort by the Mexican Government to implement the Energy Reform process and open its oil and gas industry to private investment, despite a complex international economic environment. In addition, Round Two provides the Mexican Government another opportunity to continue adjusting the model contract seeking greater competitiveness by industry standards. We will keep you advised, either through our periodic alerts or our upcoming live seminars, 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 Luis.Gomar@tklaw.com Gabriel Ruiz Rocha Gabriel.Ruiz@tklaw.com Andrew B. Derman Andrew.Derman@tklaw.com 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

5 EXHIBIT A: 5