September 21, 2017 ENERGY ALERT Draft of Bidding Terms and License Contract for the second Petroleos Mexicanos (Pemex) deep waters Farm-Out were announced by the CNH On September 18, 2017, the Mexican National Hydrocarbons Commission (CNH) published the drafts of the Bidding Terms for the election of a partner for Pemex s subsidiary Pemex Exploración y Producción (PEP), to jointly carry out exploration and extraction activities in the Maximino-Nobilis deep waters block, as well as the License Contract and the Joint Operating Agreement (JOA) models. It is important to mention that the terms of the bidding guidelines, License Contract and Joint Operating Agreement model are similar to the ones applicable to the first deep water farm out of Trion. However, there are some modifications that were made in terms of the following items: Timing for publishing the final drafts of the bidding guidelines, License Contract and Joint Operating Agreement was established was modified. Two new restrictions for interested parties for purposes of participating in the bidding were included in the bidding guidelines. As in the fourth call of Round 2, was included the possibility that Oil and Gas associations such as the Mexican Association of Hydrocarbons Companies ( AMEXHI per its acronym in Spanish), are allowed to request formal meetings with CNH in order to provide comments and feedback of the industry regarding the Bidding Guidelines. Additional legal requirements were included for parties interested in participating in the bidding as Non Operators It was clarified at the level of the bidding guidelines that parties appointed as Operator of a Consortium, should have at least a participation of 30%. As part of the prequalification requirements, interested parties will have to submit a certificate issued by the National Agency for the Industrial Safety and Environmental Protection of the Hydrocarbons Sector.
As in round 2.4 and recent shallow waters and onshore farm outs, the Signing Bonus that is offered in case of a tie, will automatically became part of the EconomiValue of the Proposal. In other words, even in the case that there is no tie in the Economic Value of Proposals, with only the fact of bidding the Maximum Bid Variables, the Bidder will have the obligation to pay the Signing Bonus. In terms of the Minimum Work Program, it will be provided less work units per drilled meter. Transition Stage for Startup period provided by the License Contract was extended from 120 to 180 days. The amount of the limited Corporate Guarantee was reduced. It was clarified the procedure by which the Ministry of Finance will carry out audits and revisions to the Operators and Consortium members. New grounds for Operator s removal were included in the JOA. Modifications related to the untie mechanism for Operating Committee decisions were made in the JOA. Modifications to the voting rights of the Consortium members were made in the JOA. Procurement procedures for the Operator were amended in the JOA. Exclusive Operations clauses were amended in the JOA. Certain clarifications were made with respect to the compliance obligations (i.e. invoices, accounting information) that the Operator will have to carry out. Below is a summary of the most important terms and conditions of the aforementioned documents. These documents are published in Spanish language and accessible to the public in the CNH s webpage (http://rondasmexico.gob.mx/). Bidding Terms The migrating block has a total area of 1,509.421 km2 and includes the reserves found in the following drilled wells: Maximino-1 Supremus-1 Mirus-1 Nobilis-1 The interested participant will be able to participate as Operator or Non-Operator, as an individual or in the form of a Consortium, which will then enter into a Joint Operating Agreement (JOA) with PEP to jointly carry out exploration and extraction activities in the Maximino-Nobilis block. Consortiums should be incorporated at least with 1 Operator. Bidding and Contract terms might be subject to change at any point in time before their final publication. The bidding process will occur in the following stages: i) publication of call and Bidding Terms, ii) access to data rooms, iii) registration, iv) clarifications to the Bidding Terms, v) prequalification, v) filing of proposals, vi) awarding of Contract and vii) execution of the Contract. The following payments will apply: Registry fee - $750,000 MXP. It is worth mentioning that such payment was established during the call s announcement; however, the amount pending to be set forth in the Bidding Terms. License for the use of information from the National Center of Information on Hydrocarbons (CNIH) - $3,700,000 MXP. This payment is only mandatory for the Operator. It is worth mentioning that companies which previously acquired the License codes for the use of the information that corresponds for this bidding (i.e. MNS or MSP) should not be required to make this payment. Access to data room will be granted to companies engaged in exploration and/or extraction of hydrocarbon activities or those that show interest in participating as Non-Operators. Operators and Non-Operators are subject to different registration processes. Non-Operator participants can access the data room through the Operators of their Consortiums. For purposes of the Q&A process, there will be three clarification stages: i) questions regarding payment process for the access to the information of the data room; ii) questions regarding prequalification process and bidding structure, and iii) filing and opening of proposals, Contract awarding, JOA and Contract terms. The following timeline indicates the most relevant dates of the bidding process:
In order to prequalify for the bidding process, companies have to demonstrate, among others, the following: 1. Legal origin of the funds Should be filed either by parties interested to prequalify as Operator or Non Operator If the interested parties were prequalified for any of the bidding procedures corresponding to Rounds 1 and/or 2, and/or Farm-Out for Trion, Ayin-Batsil, Ogarrio and/or Cardenas Mora block (s), this information will not have to be re filed. It will be only required to file Form CNH-8 in order to confirm to the CNH that the information previously submitted has not changed as of to the date of this bid procedure. 2. Technical requirements Operators i. Participation as Operator in at least one hydrocarbon s exploration and/or extraction project in ultra-deep waters (greater than 1,500 meters depth) within the last 10 years; ii. Participation in deep and/or ultra-deep waters projects with a minimum average annual production of 50 Mboed in any year between 2012-2016, and iii. Experience in industrial safety and environmental protection 3. Financial requirements Operators Operator shall demonstrate economic capacity, meaning any of the following 2 requirements: 1) shareholder s equity of at least USD $5 billion; or, 2) investment in assets of at least USD $25 billion and an investment credit rating. Capital investments in hydrocarbon exploration and/or extraction projects for at least 2 billion dollars. Non-Operators Shall demonstrate economic capacity, meaning that their shareholder s equity shall be of at least USD $250 million. If the information provided by the participants in prior bidding procedures meets the financial, technical and experience requirements of this bid, no additional information will need to be provided. It will be only required to file Form CNH-8 in order to confirm to the CNH that the information previously submitted has not changed as of to the date of this bid procedure. PEP shall have a participation of 49% in the Consortium, while the Operator should have the following: a. at least 30%, in the case of a Consortium, b. 51%, in case of an individual bidder. Pursuant to the Bidding Terms, the JOA should recognize a carry to PEP on contributions (costs, expenses and capital investments) to the joint account for an amount of USD $815 million.
The weighted average of the offer or biding factor to determine the winner will be calculated considering the value of the over-royalty, determined as percentage of the contractual value of the hydrocarbons. As set for the previous Farm-outs, minimum and maximum values for the variables determining the economic proposal will be established in this bid. Such values will be determined by the Ministry of Finance before the CNH publishes the final version of the Bidding Terms and License Contract. In case of a tie, 10% of the cash payment will be paid as a Signing Bonus at the moment of the execution of the Contract. The rest of the cash payment (i.e. 90%) will be added to the carry in favor to PEP. A USD $3,000,000 letter of credit should be submitted by the bidder as bidding bond, which should be valid for 100 days following the day proposals are filed. Note that only bonds from the first and second place awarded bidders will have to be valid for the aforementioned period. As in Trion bidding procedure, an activity catalogue for the Contractor to elect the activities to carry out in order to comply with the Minimum Work Program is established in the Contract. A Minimum Work Program is established for the exploration period and as well as for the appraisal period corresponding to the discovery already declared by PEP. Contract should be executed within 90 days after the awarding day. License Contract for the Exploration and Extraction of Hydrocarbons in the Maximino-Nobilis block The initial term of the Contract will be 35 years. The term may be extended for 2 additional periods. First extension of up to 10 years and the second extension of up to 5 years. Contract includes a transition phase of 180 days following the effective date of the IThe Contract includes a transition phase of 180 days following the effective date of the Contract. In such period the Contractor will have to document the status and integrity of the fields and equipment and initiate social impact and environmental studies. Within said phase, the Contractor shall submit the corresponding technical and economic studies in order to determine which of the existing wells and materials may be qualified as useful for exploration and extraction activities purposes. Such classification will be considered for the following matters, in accordance with the provisions within the Contract and the JOA: Preexistent damages expenses Wells abandonment activities Social liabilities redress. The Contractor shall file an Exploration Plan for approval within the 180 days following the effective date of the Contract. Late filing of the Exploration Plan will be subject to a conventional penalty of USD $10,000 per late day. The Contract includes an initial exploration period of 4 years. In such period, the Contractor will be obliged to finish the Minimum Work Program activities. The exploration period may be extended for two additional periods of 3 years each, but additional work commitments will apply for each extension. The Contractor may request an extension of the exploration periods in case the activities contemplated in the Exploration Plan cannot be completed for causes that are not attributable to the Contractor. As in prior Rounds and Farm-Outs, the Minimum Work Program is measured in Work Units. For purposes of this bid, the Minimum Work Program working units for Exploration and Appraisal activities are as follows: Minimum Work Program working units Activity Amount of Work Units Required Total Exploration 97,536 Total Appraisal 145,326 Total MWP working units 242,862
Estimated amount of the Minimum Work Program is USD $ 250 million, pursuant to current reference values indicated in the Annex 5 of the Contract. The Contractor shall specify in the corresponding Plan (i.e. Exploration or Appraisal) a description of the activities that will be carried out in order to credit the Minimum Work Program working units. The Contractor shall file a performance guarantee to cover their obligations related to the Minimum Work Program. The amount of said bond will be the result of multiplying the reference value of the working unit (which is indexed to the Brent crude oil price) by 75% of the working units corresponding to the Minimum Work Program. The Contractor will have to inform the CNH in case of a discovery within the subsequent 30 days the discovery is confirmed. Once the Contractor notifies the CNH, they will have 180 days to file the Appraisal Plan. With respect to the discoveries already declared by PEP in Maximino and Nobilis fields, the Contractor shall file the Appraisal Plan within 180 days following the effective date of the Contract. The Appraisal Plan should include the activities that the Contractor will carry out for a maximum period of 3 months. This Plan shall include the minimum scope of the appraisal activities established in the Contract. Regarding the discovery that has been already declared by PEP, the appraisal plan shall also include the Minimum Work Program established in the Contract. Within 90 days after the ending of any appraisal period, the Contractor will have to inform if the discovery is a commercial discovery. Likewise, within the following 2 years after the confirmation of a commercial discovery, the Contractor will have to file a Development Plan. Provisions related to the relinquishment and unitization are included. The Contractor shall to keep an Operating Account where transactions related to the Contract should be recorded. Additionally, the Contractor will have the obligation to file budgets of the costs to be incurred during the implementation of each work program and shall comply with the requirements set forth in the Annex 4 of the License Contract and the corresponding guidelines published by SHCP. Immovable property generated or acquired by the Contractor to carry out the exploration and extraction activities will be automatically transferred to the Government when the Contract is terminated. The immovable property that provides services to more than one contractual area will be exempted from being transferred until the provision of said service is completed. The consideration for the Government will include i) Signing Bonus, ii) Quota for Exploration Phase, iii) Royalties and iii) Over-Royalties that will be adjusted according to an R-factor included in the Contract. The consideration for the Contractor will be the onerous transfer of the hydrocarbons. R-factor should be computed on a quarterly basis and is based on the profitability of the Contractor. As in Trion, the value of the assets already invested by PEP in this project will be considered as costs incurred. According to Annex 11 the value of said assets is USD $756 million subject to verification by SHCP. The list of PEP s assets is depicted below PEP existing assets within the contractual area Asset type Name Original Investment Value (MMUSD) Well Supremus -1 151.08 Maximino - 1 210.88 Maximino - 1DL 199.86 Nobilis -1 90.75 Nobilis - 101 103.98 Total 756.55
The Ministry of Finance has the right to review the considerations paid by the Contractor to the Government. Failing to perform the payments within 5 days following any adjustment made by Ministry s of Finance notification will oblige the Contractor to repay the undue amount plus a daily penalization (i.e. 28 days interbank rate TIIE per its acronym in Spanish +20%). The Contractor should also provide a Corporate Guarantee issued by its ultimate holding company, or by another entity. In case the Corporate Guarantee is not issued by the ultimate holding company, the Contractor should elect to provide its audited consolidated financial statements that demonstrate a shareholder s equity equal to its Working Interest times USD $5 billion. Decommissioning provisions are included. The Contractor will have to incorporate a trust to fund the decommissioning activities on quarterly basis. Local Content obligations are included: 3% during the initial exploration phase; 6% during the first extension of the exploration phase and 8% during the second extension of the exploration phase will apply. For the appraisal period the same percentage applicable at the moment the discovery took place will apply. During the development phase the percentage will be of 4%. Such percentage will increase to 10% when the regular commercial production starts. Penalties will be applicable in case that the Ministry of Economy determines in an audit the noncompliance of said percentages. The Ministry of Finance shall verify the Contractor s compliance of all the provisions set forth in Annexes 4, 7 and 8 (i.e. accounting and financial obligations). To such purposes, the Contract specifies the SHCP can carry out the following procedures: Audits through a formal request of Information Requirement ; In-situ audits, and Audits through Analytic Procedures The Contract allows to carry out exploration and extraction activities with no restriction in any geological formation within the contractual area. The Contractor shall have insurance policies that cover civil liability, well control and damage to the immovable materials used for the exploration and production activities within the contractual area. Administrative and Contractual rescission clauses are included in the Contract as well as provision related to dispute resolution mechanisms under ICC rules as in prior rounds. Shared infrastructure regulations were also included in Annex 10 of the Contract. Annex 12 of the Contract provides a list of the procurement agreements for goods and services entered into by PEP before the Effective Date of the Contract and that may be transferred to the winning bidder. The most relevant are the following: Current Procurement Agreements of PEP Company Services Valid through Dowell Schlumberger de México, S.A. de C.V. Naviera Bourbon Tamaulipas, S.A. de C.V. Comunicaciones y Electrónica Industrial, S.A. de C.V. Universidad Tecnológica de Campeche Drilling, test and completion of deep waters wells Fire security and prevention services Hazardous waste management services Technical assistance for the Mexican Gulf ocean description and characterization Mantenimiento Express Marítimo, S.A.P.I DE C.V. Material and equipment transportation services Transportes Aéreos Pegasos, S.A. de C.V. Personnel transportation services Tubacero, S. de R.L. de C.V. Acquisition and technical assistance for the installation of pipelines Vetco Gray de México, S.A. de C.V. Grupo R Exploración Marina, S.A. de C.V. Acquisition and technical assistance for the installation of subaquatic equipment Platform lease agreements December 2019 / March 2020
Pursuant to the rules provided by the JOA, the Operator will have the opportunity to decide whether or not this agreements should be terminated in advance. Joint Operating Agreement with PEP It is important to note that the applicable JOA should meet international standards, since it follows the 2012 Model International Joint Operating Agreement of the Association of International Petroleum Negotiators (AIPN). A careful review should be made for the elections made by PEP based on the model and review any deviations from it. The main relevant aspects of the JOA, are among others, the following: The subject matter of the JOA is to establish the joint rights and obligations regarding the development of (i) the operation activities under the Contract, including exploration, appraisal, extraction, treatment, storage and management of Hydrocarbons; (ii) the determination of the parties respective interest at the Measurement Point; and (iii) the decommissioning and final remediation of the fields. According to the JOA, the Participation Interest of the Parties is 49% for PEP and 51% for the Operator. Any Party is allowed to transfer the totality or a part of its Participation Interest, however if as a result of a transfer of shares, the total Participation Interest of the Operator and its Affiliates decreases below 30%, and this percentage is allowed by the Applicable Laws or the Exploration and Extraction Contract, the Operator must notify such circumstance to the other Parties, who will in turn vote during the next 60 days in order to decide whether the Operator should remain or if they appoint another Operator. In order to remove the Operator in such circumstance, the affirmative vote of one or more of the Non-Operators representing at least 65% of the Participation Interest is required. As in the prior JOA, the costs and responsibilities in which the Operator or PEP might incur will be charged to the Joint Account and shared by the Parties according to their Participation Interest. Obligations during Carry Period : Carrying Parties shall assume any cost or obligations to be charged to the Joint Account during the carry period. In this regard, carry period is defined as the term between the execution of the Contract and the date when costs and liabilities charged to the Joint Account are equal to the Total Contribution Amount, which is calculated as follows: Where: Minimum Contribution: USD $815 million Additional Contribution= 90% of the Signing Bonus The carrying obligations shall not imply (i) the disposal, purchase or transfer of any assets between the carried Party and the carrying Parties; or (ii) the transfer of assets in favor of the carried Party, or a payment from the carried Party. If during the Carry Period the JOA is terminated by any cause (excluding the breach of the carried Party), or a carrying Party withdraws from the JOA before the payment of the Total Carry obligations, the carrying Parties must pay to the carried Party the corresponding amount according to the established formula. Each of the carrying Parties, must pay the corresponding amount in relation to its Participation Interest in regard to the total Participation Interest of the carrying parties. During the next 90 days following to the first Day of the Month in which the Minimum Work Obligations have been fulfilled, any carrying Party shall be able to withdraw from the agreement. PEP shall be responsible for payments arising from the restauration, compensation, characterization and remediation of the preexisting damages. However, if any of the existing wells are used for purposes of the exploration and extraction activities under the JOA, all costs including the final remediation and decommissioning thereof shall be charged to the Joint Account. Some of the most representative Operator s obligations are: Establish and carry out an Administration System according to the Industry s best practices. Prior to appointing or hiring an independent Contractor, an audit must be carried out to determine that (i) the proposed Contractor has the required capabilities; (ii) the cost of its services may be included in the budget; and (iii) it complies with the procurement procedures.
Supervising that the Contractor complies with all requirements regarding tax withholding and payments, the Administration System, imports and exports, and commercial and migration obligations. Operator s Personnel: The Operator may determine the number of employees, Commissioned Personnel (i.e. Non-Operators and/or its affiliates employees added to the Operators organization), contractors, consultants and agents that are reasonably needed to carry out the Joint Operations. Within 120 days from the Effective Date and any time later, PEP may appoint no more than 3 people and up to 10% of the Operator s full-time workers as Commissioned Personnel. Such Commissioned Personnel will be able to carry out administration and technical activities. They may not be considered employees of the Operator. Operator can reject any nominations proposed by PEP with due cause. A training program (to be developed by PEP and the Operator) is included for Commissioned Personnel at PEP s expense. Claims and Proceedings regarding Joint Operations: Any claim in excess to USD $500,000 is not subject to settlement. Operator s Insurance: The JOA allows the Parties more freedom for choosing their insurance companies and they may opt for self-insurance. If the Parties are not willing to participate in a common insurance, the JOA provides for special processes. Operator s removal: The voting percentage for Operator removal is 90%. The Operator cannot be removed without cause. Unlike previous Farm-Outs (i.e. Ogarrio, Cardenas-Mora, Ayin-Batsil), the possibility by a non-operating Party to remove the Operator after 3 years with grounds on more favorable conditions is NOT considered. Parties agree that all the invoices shall be issued on behalf of the Operator. The Operator shall provide to each party the corresponding invoices, information and supporting documentation in order for them to be able to comply with all applicable tax obligations. Calls to Meetings. The Operative Committee must meet at least quarterly. However, a Non-Operator may request a meeting of the Operative Committee out of schedule with notice to the other parties. Calls to the meetings must include an agenda. During the Initial Exploration Period, the Consortium shall carry out the following activities as part of the Minimum Work Program: Drilling of one exploratory well Drilling of two delimitation wells Processing and acquisition of Narrow Azimuth 3D seismic information Voting Procedure. The voting procedure establishes the requirements to be met for Exclusive Operations and Non-exclusive Operations. Awarding of the Contract. The JOA foresees a procurement procedure, however, in the event of a change of law the Parties must comply with the new procurement amounts for each proceeding: Procedure A, Procedure B and Procedure C. Natural Gas Disposition. The Parties agree that in event of a Natural Gas discovery, it shall be necessary to enter into special agreements for its disposition. Such agreements shall be consistent with the development plan and shall be subject to the Contract terms. Abandonment of Wells drilled under Joint Operations. If the Operative Committee decides to close and abandon an Exploration or Delimitation Well, any Party voting against such decision may propose an alternative to be carried out as an Exclusive Operation. Resignation, reduction or devolution. Given the case that Hydrocarbons are found in an area resigned, reduced or returned, each Party shall resign to any claims or actions against the Operator and against any Party regarding such area. Industrial Property. Unless otherwise agreed all industrial property rights shall belong to the parties that have legal right to them. However, any of the Parties of the JOA may use, without authorization, all the rights of industrial property in the Joint Operations, and any E&P Contract subscribed by any Party or its subsidiaries thereunder. Liability. None of the Parties shall be liable for indirect damages, or environmental losses, unless the JOA establishes the contrary.
In addition to the above, several exhibits have been included: Exhibit A. Contractual area. Exhibit B. Accounting Procedures. The JOA includes the Accounting Procedures under which the Joint Operations must be performed, with intention to provide a fair allocation of profits and losses. Exhibit C. Technical Working Positions for the Commissioned Personnel. Exhibit D. Service Agreement. It regulates rights and obligations of the Commissioned Personnel pursuant to the scope of work Exhibit E. Integral Teams for the Project. It regulates the right of the Parties to conform working teams in order to perform the scope of the work. Exhibit F. Powers of Attorney. It includes a template for granting of Powers of Attorney in relation to the JOA. Contacts: Alfredo Álvarez alfredo.alvarez@mx.ey.com Rodrigo Ochoa rodrigo.ochoa@mx.ey.com Enrique Pérez-Grovas enrique.perezgrovas@ey.com Javier Noguez javier.noguez@ey.com Rodrigo Mondragón rodrigo.mondragon@ey.com Jeffrey Helm jeffrey.helm1@mx.ey.com Jimena González de Cossío jimena.gonzalez@mx.ey.com José Fano jose.fano@mx.ey.com Yuri Barrueco yuri.barrueco@mx.ey.com Salvador Meljem salvador.meljem@mx.ey.com Source: Mexican Ministry of Energy