The Mexican Model Production Sharing Contract

Transcription

1 The Mexican Model Production Sharing Contract Scott Schwind Jones Day, Houston o Office February, 2015

2 An Overview of the Production Sharing Contract Mexico s National Hydrocarbons Commission (the CNH ) published the model production sharing contract (the Contract ) for Round One on December 11, The Contract allows Contractor to perform surface reconnaissance and exploration, exploration, appraisal, extraction ti and abandonment activities iti to be performed under a production-sharing arrangement in the contract area, at its sole cost and risk, in exchange for a share of hydrocarbon production. Contractor will perform all construction, installation, repair and reconditioning of wells, gathering facilities and any other facilities necessary for production activities, and will maintain them in accordance with industry best practices The Contract does not grant to Contractor any title to the hydrocarbons in the subsoil, which are the property of the Mexican government. Contractor will have no title to other mineral resources in the contract area, and has no right to use or develop any other minerals. Contractor may book reserves and report the Contract and its expected benefits for accounting and financial purposes. 3 CNH production-sharing arrangement 4

3 Initial Industry Reaction to the Mexican Production Sharing Contract The international oil & gas industry s reaction to the Contract so far has not been positive. The Contract s fiscal terms are not as competitive as the industry was hoping. The Contract s fiscal and other terms and conditions are more appropriate for the industry paradigm that existed before the drop in crude oil prices. The Contract includes an unusually high number of reporting requirements. The Contract requires the Contractor to comply with a very heavy regulatory burden, which Mexico s regulatory agencies may not be able to handle. The work requirements and procurement procedures in the Contract are too strict. The term of contract t may be too short for riskier exploration opportunities. The Contract is subject to modification by the CNH and the Mexican Secretary of Energy during the bid process. 5 CNH Secretary S t of Energy 6

4 Obligations of Contractor Continuously and efficiently conduct development operations pursuant to work programs and development plans that have been approved by the CNH, in a manner that complies with the Contract and applicable law, and that is consistent with best industry practices. Supply all personnel, technical, financial and other resources necessary to perform the development activities. Obtain all necessary government permits for the development activities on a timely basis. Acquire all necessary equipment and materials for the development activities and ensure they are adequate for such purposes. Install, operate, maintain and calibrate meters Be current with all its tax obligations, be a resident of Mexico for tax purposes, and have as its sole purpose exploration and production activities. Provide CNH with all information, data and interpretations related to the development activities. Adequately plug wells prior to their abandonment in order to avoid environmental hazards. Implement and ensure that subcontractors implement appropriate measures to protect the environment, life and archaeological discoveries. 7 CNH CNH 8

5 Additional Obligations of Contractor (con t) Implement emergency response plans to mitigate effects of emergency situations or force majeure events. Immediately inform CNH of any judicial or administrative a proceedings involving Contractor related to the contract or the Development activities. Compliance with programs for training and transfer of technology approved by CNH in the Exploration Plan and in the Development Plan. 9 CNH CNH 10

6 Term The term of the Contract is twenty five (25) years, with the possibility of extension for two (2) additional five (5) year terms. Each extension must be approved by the CNH. For both extensions, Contractor t must submit proposals for the modification of the development plan, a work program, a budget, and an anticipated production profile. For the second extension, Contractor must agree to make additional investments related to the new enhanced recovery program CNH 2 12

7 Exploration Period Contractor must submit an Exploration Plan to CNH for approval. The Exploration Plan must include all activities provided in the Minimum Work Program and a Risk Management Program. The Initial Exploration Period is three (3) years, during which Contractor must complete the Minimum Work Program. Additional Exploration Periods of one (1) year each are possible, provided that t Contractor t must drill an additional well for each extension period. Contractor is required to shoot seismic during the exploration period and drill a minimum number of exploratory wells. Contractor must notify CNH of a discovery and provide all technical information related thereto, a report analyzing such information, and preliminary data as to the advisability of conducting an appraisal of the discovery. Contractor is subject to liquidated damages for failure to comply with the Minimum Work Program or additional commitments. 13 CNH CNH 3 1 CNH 14

8 Appraisal of a Discovery Upon a discovery, Contractor is required to determine the limits, characteristics and production capacity of that discovery and whether or not it is commercial. Appraisal activities include additional surface reconnaissance and exploration activities, geological and geophysical surveys, and the drilling of test wells. Contractor may submit to CNH a work program and budget for appraisal activities, and will have twelve (12) month appraisal period to complete them (with a possible extension of an additional twelve (12) months). Contractor is required to deliver an appraisal report to CNH at the end of the appraisal period. Contract is required to notify the Ministry of Energy and CNH of any discovery that is part of a structure, formation and deposit extending beyond the contract area, and the Ministry of Energy will make a determination regarding unitization. 15 CNH CNH CNH unitization 16

9 Commercial Discovery and Development Plans Contractor t must inform CNH whether it considers any discovery to be commercial. A declaration of commerciality includes delimiting the development area. Contractor must prepare a development plan for any commercial discovery. The development plan must be approved by CNH, which has the authority to require changes and development of the discovery must be consistent with that plan. Any amendment to the development plan also must be approved by CNH. Beginning in the year in which commencement of regular commercial production is expected, Contractor must include a production forecast for each well and reservoir in its development plan. 17 CNH CNH CNH 18

10 Work Programs Contractor must submit annual work programs to CNH for all activities that t it plans to conduct (including drilling, construction, ti installation, ti repair and reconditioning of wells, gathering facilities and other infrastructure). Work programs must be detailed d and must include a time estimate. t The first work program is required to be submitted to for the first year in the exploration period, and each year thereafter. CNH may object to or request amendments to a work program, and Contractor must comply. CNH also must approve any amendment to a work program. During any drilling, Contractor must submit drilling reports to CNH, must maintain a digital record of all the geological and geophysical information related to the contract area, and must deliver that record to CNH, along with log files for the wells. Contractor is also required to submit to CNH a detailed progress report on its activities on a quarterly basis. 19 CNH CNH CNH CNH CNH CNH 20

11 Budgets Contractor must submit to CNH a budget of costs to be incurred in the implementation ti of each work program. The budget must contain: a. A detailed estimate of costs necessary to implement the activities described in the corresponding work program b. A schedule of estimated expenditures; and c. Any assumptions on which the budget is based. Contractor may not amend a budget without the prior approval of CNH. Generally, Contractor may only incur the costs and expenses related to activities specified in approved work programs or budgets. Costs incurred with regard to development activities are considered recoverable costs only if they meet the guidelines issued by the Ministry of Finance. 21 CNH a. b. c. CNH 22

12 Reduction and Relinquishment i of the Contract Area Contractor may relinquish all or part of the contract area at any time during the term, and the Contract will be terminated with respect to the relinquished area. If Contractor was not granted an additional exploration period then: 1. Upon expiration of the initial exploration period, Contractor must relinquish i and return 100% of the contract t area that t does not have a development plan, unless it has been designated for appraisal. 2. Upon expiration of the appraisal period, Contractor must relinquish and return 100% of the contract area if it does not declare a commercial discovery or if a commercial discovery does not have a development plan approved by CNH. If Contractor was granted an additional exploration period, then at the end of that period, Contractor must relinquish and return 50% of the contract area that does not have a development plan approved by CNH CNH 100 CNH 50 24

13 Reduction and Relinquishment i of the Contract Area (con t) Upon termination of the Contract for any reason, Contractor must relinquish and return 100% of the contract area, including any appraisal appasa aeaa area and ddevelopment eop e aea area. Relinquishment will not reduce Contractor s obligations to perform the Minimum Work Program, perform work programs for additional exploration periods, or perform abandonment activities. Portions of the contract area that are returned must be contiguous and form regular polygons. CNH must approve any variation from these relinquishment requirements CNH 26

14 Government Compensation (a) Monthly Payments: Payable only during the exploration phase. During the first sixty (60) months of the term: 1,150 pesos (approximately US$ 77) per square kilometer of the contract area. After that: 2,750 pesos (approximately US$ 185) per square kilometer of the contract area. The monthly payment will be adjusted each year for inflation. 27 (a)

15 Government Compensation (con t) (b) Royalty: Payable only upon commercial production, and calculated according to a formula. For crude oil, approximately 7.5 (subject to an upward adjustment of an additional 1.5% if crude oil prices exceed US$ 48 per barrel, adjusted annually for inflation). For associated natural gas, a percentage calculated according to a formula based on a price determined by the Mexican Energy Regulatory Commission ( CRE ), the actual sales price for the gas, and the corresponding contractual year, adjusted annually for inflation. For non-associated natural gas, a percentage calculated according to a formula based on a price determined by the Mexican Energy Regulatory Commission ( CRE ), the actual sales price for the gas, and the corresponding contractual year, adjusted annually for inflation. Approximately 5% for condensate (subject to adjustment based on market prices). Royalties may be paid in-kind, in the form of production. 29 (b) Energy Regulatory Commission, CRE CRE

16 Government Compensation (con t) (c) Share of Production: (1) Cost Oil Up to 60% of the value of monthly production may be allocated to cost recovery, with a carry-forward of unrecovered costs. Costs will be eligible for recovery only if they are indispensable and meet criteria established by the Contract and the Mexican Ministry of Finance. The Contract includes a list of certain costs that are not recoverable, including (i) costs or expenses that are not related to the Contract or that were incurred before the Contract was signed; (ii) costs or expenses that cannot be supported with documentation, that are not registered in the Contractor s operating account, or that are not in a CNH-approved budget or work program; (iii) costs or expenses that exceed the budget for any individual item by 10% or that exceed the relevant e annual budget by 5%; (iv) financing costs; (v) costs or expenses in obtaining rights of way, easements or other land-use rights; and (vi) legal and consulting fees. 31 (c) (1) 60 (i) (ii) CNH (iii) 105 (iv) (v) (vi) 32

17 Government Compensation (con t) (2) Profit Oil The percentage of profit oil to be paid to the Mexican government will be specified by Contractor in the bid for the applicable block. The Mexican government may take its share of production in-kind. The percentage of profit oil to be paid to the Mexican government will be subject to adjustment based on Contractor s rate of return. Profit oil is calculated net of royalties, monthly fees, processing and storage costs. 33 (2) 34

18 Use and Marketing of Production Contractor may use produced hydrocarbons for development activities, as fuel or for injection or pneumatic lifting, at no cost, up to levels authorized by CNH in the Development Plan. Contractor may not flare or vent natural gas, except within certain legal limits or to the extent necessary to prevent or mitigate and emergency. Production is owned by the Mexican government until it reaches the metering point, at which point ownership of the Contractor s share of production is transferred to Contractor. Contractor may market its share of production on its own behalf or through a marketer that is registered with the Mexican Energy Regulatory Commission. Contractor will deliver all production that belongs to the Mexican government to a marketer designated by the CNH, with the money from sales to be deposited in the Mexican Oil Fund. The Mexican Oil Fund will determine what percentage of the Mexican government s production will be taken in-kind and what percentage will be marketed and sold. 35 for for injection or pneumatic lifting CNH CNH 36

19 Ownership of Equipment and Materials Contractor must retain ownership of all tools, equipment, infrastructure, etc. used in development activities during the term of the Contract. Ownership of fixtures will automatically transfer to the Mexican government, free of charge, upon termination of the Contract. Use by Contractor of materials is limited to the pursuit of Development activities under the Contract. Leases for assets to be used in development activities must include a provision giving CNH the option of requiring assignment to a third party (designated by CNH and on the same terms and conditions as the original lease), in the event of an early termination of the Contract. Contractor may not sell, lease, encumber, pledge or otherwise dispose of assets to be used in development activities without the prior consent of CNH. 37 CNH CNH CNH 38

20 Subcontractors Contractor may engage subcontractors to supply equipment, goods and services. But, subcontracting must not be a de facto replacement of Contractor as operator. All procurement activities must be transparent, economic and efficient. Contractor must give preference to Mexican subcontractors for equipment, goods and services. Contractor may subcontract with its affiliates, provided that prices are at market rates, but companies disqualified by government authorities may not be subcontracted. Contractor will remain responsible for all obligations of Contractor under the Contract. For subcontracts with a value greater than US$1 million, Contractor must obtain at least ten (10) different bids, including at least three (3) from Mexican bidders. For subcontracts s with a value aue greater e than US$20 million, Contractor o must hold od an international bidding process. Contractor may not impose or permit the imposition of any liens on its rights under the Contract or on the materials without the prior written consent of CNH CNH 40

21 Local Content t Obligations During the Exploration Period: Minimum of 13% During the Development Period: a. Minimum of 25% in the first year b. Annual increase at a constant rate until 2025, to eventually be 35% Contractor must submit a local content compliance plan to the CNH, as part of its development plan, for the CNH s approval. Compliance will be verified by the Mexican Ministry of Commerce on an annual basis. Failure to comply with national content percentages will result in liquidated damages payable to the Mexican Petroleum Fund. 41 : 13% : a. 1 25% b % CNH Mexican Petroleum Fund 42

22 Anti-Corruption The Contract prohibits Contractor and its affiliates, directors, officers, advisors, employees and personnel from offering any payment, gift, promise or other advantage to or for the benefit of any public official or any political party, official or candidate thereof to: (a) influence any decision; (b) obtain or maintain the Contract or any other business; (c) obtain approval for any recoverable costs; or (d) obtain any other illegal benefit or advantage for Contractor, its affiliates or any other person. Contractor shall ensure that it and its affiliates comply with any antibribery laws and maintain adequate internal controls. Contractor shall not incur any conflict between its own interests and those of the Mexican government in dealings with subcontractors, customers and any other organization or individual that conducts business with Contractor with respect to its obligations under the Contract. 43 (a) (b) (c) (d) 44

23 Guarantees Contractor is required to submit an unconditional and irrevocable letter of credit, issued in favor of the Mexican Petroleum Fund by a Mexican or foreign bank, to guarantee performance of the Minimum Work Program during the initial exploration period and any additional exploration periods. Contractor is also required to submit a corporate guarantee upon execution of the Contract. 45 Mexican Petroleum Fund 46

24 Insurance It is Contractor s obligation to provide insurance to cover risks inherent to the Development activities. Contractor may use its global policies provided such policies satisfy requirements provided by applicable law. Insurance policies i must comply with the terms and conditions set by the Agency and must be issued by solvent insurers approved thereby. Benefits must be payable in U.S. dollars

25 Force Majeure None of the parties will be liable for any failure, suspension or delay in the performance of its obligations if such failure, suspension or delay was the result of force majeure. The party invoking force majeure must have the burden of proof. The work program must be extended d for a period not to exceed the length of the delay in performance only to the extent the work program is actually affected. If Contractor s performance of the development activities is interrupted for a continuous period of one year or more, any party may terminate the Contract without liability

26 Abandonment Obligations Contractor is required to perform all activities to abandon the contract area specified in the Development Plan, in each work program, and in the budget approved by CNH, including permanent plugging of wells, clean-up, restoration of the contract area to its natural state and removal of equipment, debris and waste. In addition, at the time Contractor declares a commercial discovery, it must establish an abandonment trust, to be jointly controlled by the CNH. Contractor must make a deposit in the abandonment trust each quarter, in an amount calculated based on a percentage of estimated annual production, estimated annual reserves, and estimated overall abandonment costs. Notwithstanding, Contractor must perform abandonment work regardless of whether sufficient funds are available in the abandonment trust. Notice of abandonment must be given to the Agency and CNH at tleast t60 days prior to plugging any well or uninstalling any materials. 51 CNH CNH CNH abandonment trust abandonment trust abandonment trust CNH 60 52

27 Assignment and Change of Control Any assignment by Contractor requires the prior written consent of CNH, which will consider the prequalification criteria established during the public tender process for the Contract. Assignment does not relieve Contractor from its obligation under the Contract, and Contractor shall remain jointly and severally liable with the assignee. Contractor may not directly or indirectly undergo a change of control during the term of the Contract without the prior written consent of CNH. Contractor must notify CNH of any changes in its capital structure that do not result in a change of control. 53 CNH CNH CNH 54

28 Governing Law and Dispute Resolution The Contract is governed by Mexican law. Any dispute not resolved through negotiation will be resolved by arbitration pursuant to UNCITRAL arbitration rules. The arbitration proceeding will be conducted by three (3) arbiters, in Spanish, in The Hague, Netherlands. Contractor must continue performing its development activities pending resolution of a dispute. 55 UNCITRAL 3 56

29 Thank You! If you have any question, please contact: Alberto de la Parra Jones Day - Mexico City adelaparra@jonesday.com Scott Schwind Jones Day - Houston sschwind@jonesday.com Stephen J. DeCosse Jones Day - Tokyo sdecosse@jonesday.com Disclaimer The views expressed by a speaker at the seminar or contained in this presentation material are those of such individual s own, and do not reflect the views of the Firm. This presentation material is prepared for the sole purpose of explanation of the subject matters of this seminar, and is not intended to provide, and should not be deemed to constitute, legal advice on any specific facts or circumstances. This presentation material is protected by the copyright law, and may not duplicated, quoted, modified, translated or distributed without the prior consent of the Firm JONES DAY, All Rights Reserved. 57 adelaparra@jonesday.com sschwind@jonesday.comcom sdecosse@jonesday.com JONES DAY, All Rights Reserved. 58