The Evolution of PEMEX and Incentive Based Contracts

June 18, 2010

On Wednesday, June 16th Baker and McKenzie hosted a Global Forum focused on the new legal and regulatory environment within Mexico and its impact on doing business with PEMEX. As background, The Mexican congress passed legislation in November of 2008 that dramatically impacts how PEMEX can and will do business.

Historical Contracts

Historically, PEMEX contracts have been classified as ‘public works contracts’ more commonly known as Multiple Service Contracts (MSC). The key defining element of these contracts was that the contractor only received payment based upon unit prices. The MSC did not establish a concession, nor a production sharing contract, risk services contract or similar arrangement. These contracts, obviously, had limited success in developing US/Western investment.

The Evolution to Incentive Based Contracts

The legislation of 2008 has established a more traditional corporate governance structure over PEMEX and has also established the National Hydrocarbon Commission. The NHC will serve as the technical arm of PEMEX and provide oversight for all PEMEX activities. The new regulatory environment has led PEMEX to establish what appear to be incentive based contracts that will allow contractors to recoup a percentage of costs, share in risk, and benefit from actual hydrocarbons produced. \

What this Means

While the law is very clear that the contractor will never be allowed to own the production of hydrocarbons, it appears that PEMEX will begin offering ‘hybrid’ production sharing agreements. While the model contracts will not be published for a few months, the impact of this shift should not be overlooked. It appears that the new legislative structure may allow for producers to establish favorable contracts with PEMEX. For more information regarding the new legislation in Mexico, how it affects doing business with PEMEX and its translation implications, please contact Camilo Munoz, Founder of Translation Source at camilo.munoz@translation-source.com.

 

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