Tips on Bids: Pemex New Rules

20 January 2011 Publication
Authors: Charles E. Meacham Roberto Arena Reyes Retana Daniel Aranda

In December 2010, the Mexican Supreme Court of Justice confirmed by unanimous vote the constitutionality and legality of the Administrative Dispositions for Contracting Rules for Pemex (the DAC's), which were implemented in August 2010. The referred ruling confirmed among the most important issues the legality of incentive-oriented contracts and provided strong grounds for the provisions of the DAC's which leave behind the old rules set forth in the Mexican Acquisition and Public Works Laws.

As discussed at Gardere's panel event "Tips on Bids: Pemex New Rules" on Oct. 7, 2010, the DAC's present an array of exciting new opportunities and challenges for companies that wish to continue or commence direct or indirect business with Pemex.

Opportunities

Among the opportunities that are presented to contractors, we find the following to be the most significant:

  1. Incentive-Oriented Contracts. The DAC's, Pemex Law and its regulations (collectively referred to as the "Regulations"), confirm Pemex's ability to include monetary performance bonuses in exploration and production related contracts. The incentives may relate to diverse factors, such as well production, efficiency in extraction, oil barrel price, etc.
  2. Booking of Rights Related to Services on Reservoirs. The DAC's reaffirm Pemex's ownership over reservoirs and the prohibition for contractors to book reservoirs as their own. However, there is no restriction on contractors creating a financial instrument that would allow securitization of their rights to provide services (isolated or integrated) over a specific zone addressing one or multiple reservoirs; thus, reaching an equivalent result.
  3. Contract Trading. When Pemex's economic model issues a contract or group of contracts, to the extent that such model remains unaffected, contractors may request authorization to assign not only the collection rights but also the entire contract to a third party.
  4. Joint Ventures With Pemex. The Regulations invite joint ventures with Pemex, or any of its subsidiaries, to provide services that are not exclusively reserved to Pemex (e.g., construction of drilling rigs, vessels, etc.). This will facilitate the possibility of meeting national content requirements, reducing mobilization costs, and showcasing experience in fields where a contractor needs additional input.
  5. Liability Caps. The DAC's confirm the possibility of developing projects with a pre-set liability cap.
  6. Foreign Law and Courts. The Regulations enable Pemex to submit itself to the application of foreign law, or the venue of foreign courts or arbitral tribunals when circumstances enable Pemex to achieve its goals (e.g., causing foreign companies to agree to do business with Pemex).
  7. Flexibility on Contracting Methods. The scope of exceptions to the requirement of holding public bids is broadened to enable Pemex to award contracts in a more efficient manner (e.g., direct awards on spill remediation or other incidents that may jeopardize lives, environment or integrity of facilities, etc.).

New Rules To Be Considered

The other factors that should be considered while structuring projects with Pemex under the new rules are the following:

  • The statutory cap allowing amendments to a contract to increase as much as 20 percent of the contract value have been eliminated, thereby enabling Pemex to amend a contract as many times as needed to meet the business plan's goals to the extent that such amendment does not affect the economic model upon which Pemex issued the contract.
  • Pemex's requested guarantee from contractors would be based on Pemex's risk assessment and not determined by statutory thresholds (i.e., the old rule of 10 to 20 percent of the value of the contract).
  • A pre-qualification and a price negotiation stage may be included by Pemex. Bidders that fail to meet a pre-qualification stage will be barred from submitting proposals for that particular project.
  • Pemex will favor proposals that include Mexican content and the participation of Mexican medium and small companies. These circumstances may favor joint proposals with Mexican partners or the incorporation of Mexican subsidiaries.
  • Joint-bidders will be entitled to replace a member of a joint-proposal to the extent that such replacement is performed prior to the execution of the agreement.
  • Contractors will be able to outsource and subcontract parts of their contract subject to Pemex's authorization, even if some are not related to public works.

At Gardere, in addition to providing sound legal advice, our mission is to help you understand and walk you through the potential business opportunities that this new set of contracting rules has created. Our lawyers have broad and in-depth knowledge of this industry and are eager to assist you, not only in detecting and avoiding regulatory pitfalls, but also in providing business insight to assist you in reaching your goals.

If you have any questions about Pemex's new rules or about the Mexican Energy Industry, please contact Charles E. Meacham (cmeacham@gardere.com or 713.276.5633), Roberto Arena (rarena@gardere.com or 011 (52) 55 5.284.8542) or Daniel Aranda (daranda@gardere.com or 011 (42) 55 5.284.4519). 

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