Strasburger & Price, LLP attorney Julian Nihill has written an excellent summary of the implications of the Mexican legislature’s recent approval of reforms to Pemex, which is set forth below in its entirety.

Amid much political jockeying and posturing, particularly by the PRD, the party of the narrowly defeated leftist candidate for the Presidency, Andrés Manuel López Obrador, the Mexican Congress, on Tuesday, October 28, passed a series of bills aimed at reforming how Pemex conducts business.  The bills go to President Calderón for his signature.  Although President Calderón has expressed his approval of this legislation, and is likely to sign it, the reforms that he proposed in his original draft of the law have been significantly watered down, and, for U.S. companies interested in participating in drilling and exploration activities in México, the legislation is a disappointment.

 

The good news is that this law marks a move toward a more nimble, market-responsive and accountable Pemex, which may be able to entice much needed foreign drilling and exploration technology into México.  The bad news is that it does not go nearly far enough, and is still mired in the old politics of national sovereignty  that has dogged Pemex since its foundation.

 

The law authorizes Pemex to:

 

- Raise funds in the world market and to issue so called “citizens bonds”, both of which suggest an increasing transparency and willingness to respond to outside financial market process.  But Pemex is not permitted to issue equity interests, a step that was widely anticipated by investors and commentators alike.

 

- Enter into contracts for drilling and exploration which contain incentives for the contractors.  But the incentives fall far short of what was hoped for.  Contractors may have no rights whatsoever to the reserves, and they may not report any such interest on their balance sheets or for financing purposes.  All payments must be in cash, and such payments may not be calculated by reference to a percentage of production or to the value of the sales of hydrocarbons, their derivatives, or the profitability of the Pemex entity that is contracting for services.  Contractors may not be granted preferential purchase rights nor any other rights that could impact the price at which the hydrocarbons (or derivatives) will be sold to third parties.

 

- Include in their contracts clauses permitting contractual modification as a result of technological advances brought by the contracting party, variations in the cost of equipment used in the project, or by other factors which result in increased efficiencies in the project.  These provisions in Article 60 of the Law of Pemex, are all considered advances in the rules governing Pemex’s contractual flexibility, but even these are restricted.  What Article 60 gives, Article 61 takes away.  Article 61 limits additional compensation to those situations in which (i) Pemex obtains economies resulting from early completion of the project, (ii) Pemex benefits from new technologies brought by the contractor, and (iii) “other circumstances attributable to the contractor which redound to the benefit of Pemex… provided that they are not in the form of a percentage of sales or production of hydrocarbons.”

 

Many potential foreign technology and equipment partners will consider these potential limitations too restrictive to warrant the investment of their time, equipment and human resources into the volatile Mexican hydrocarbon market.  Others may see this as a crack in the doorway, in particular the provisions for cash bonuses for benefits to Pemex.  It is expected that bidding for service contracts will begin as early as January 2009, and it may well be that those contractors who are willing to bid a relatively conservative price with the possibility of a contractual bonus, may be the real winners under this legislation.