The Mexican government has taken a number of steps to modernise the procurement by public entities. In past briefs, we informed of the amendments to the Law for Government Acquisitions, Leases and Services (Ley de Adquisiciones, Arrendamientos y Servicios del Sector Publico or the Acquisitions Law) and the Public Works and Related Services Law (Ley de Obras Públicas y Servicios Relacionados con las Mismas, the Public Works Law), which grant enhanced flexibility to procurement by the Mexican government. In addition to these amendments, the Regulations to the Petroleos Mexicanos Law (Reglamento de la Ley de Petroleos Mexicanos, the regulations) were enacted to contribute to the modernisation effort. This is because it relates specifically to the recent amendments to the legal regime governing the hydrocarbons sector in Mexico.
Hydrocarbon exploration and production in Mexico is still reserved for the Mexican state, the activities of which are carried out through Petroleos Mexicanos and its subsidiary entities (jointly, Pemex). Prior to the enactment of the Regulations, Pemex was subject, in respect of all its acquisitions and procurement of public works contracts, to the Acquisitions Law and the Public Works Law. This resulted in Pemex being required to conduct its procurement activities subject to the same standards and restrictions as the rest of the public administration. These are detailed in the Acquisitions Law and the Public Works Law. (Exceptions included contracts that were applicable only to the Comisión Federal de Electricidad, the Mexican electric power utility). As a result, Pemex was obligated to conduct its hydrocarbons exploration and extraction activities with the standards applicable to the acquisition of office equipment or minor construction or remodelling works. Clearly, such a regime limited the ability of Pemex to negotiate terms with internationally recognised hydrocarbons exploration and production companies in line with industry practice worldwide.
With a view to making procurement more flexible and consistent with international standards and practice, the regulations now provide for rules applicable to acquisitions and public works required by Pemex. In addition to regulating national and international bidding processes of Pemex, the regulations allow the issuance of requests for proposals electronically as well as the filing by the bidders to present such proposals by the same means. The regulations also allow Pemex to prequalify bidders as well as to carry out other activities aimed at expediting the bidding processes conducted by Pemex.
The most relevant change included in the regulations is the inclusion of specific procurement rules in respect of Substantive Activities of Productive Character (Actividades Substantivas de Caracter Productivo). This provides enhanced flexibility in contracts relating to its core activities and include exploration, extraction, refining, transport, distribution and sales of oil; the exploration, extraction, production, sales, certain storage and transport activities necessary for the exploration and extraction of gas, and production, transfer, storage, distribution and sales of certain basic petrochemicals.
In a clear change to the general procurement regime provided for in the Acquisitions Law and the Public Works Law, the special regime set out in the regulations with respect to contracting in relation to substantive activities allows contracts entered into by Pemex to provide for prices calculated on the basis of formulas or other mechanisms to determine a certain cash consideration. The consideration for these contracts, as well as the formula or mechanism to arrive at the consideration payable, must be clearly stated in the contract. They may be determined on the basis of milestones of contract completion or referred to productivity, capacity, incorporated reserves, recuperation of reserves, term for execution, incurred costs or savings, economic efficiency or other explicit and quantifiable indicators expressed in commonly used measuring units. This is because these elements may be result in greater profits for Pemex or that contribute to the benefit of the overall result of the specific project.
The regulations further state that consideration payable to the contractor may be conditioned to the generation of cash flow. It is relevant to note that any penalties provided for in the relevant contract, as well as rules regarding set-off shall be taken into account in calculating the overall consideration payable to the contractor.
The regulations do not allow Pemex to grant: (i) licenses, concessions or leases allowing the contractor to become the owner of the hydrocarbons produced at the site with the infrastructure owned by the contractor at the site, subject to the of royalties or similar consideration to the government, or (ii) production sharing agreements (PSAs) allowing the contractor to receive compensation on the basis of an algebraic formula based on production at the site under the assumption that the contractor may retain the ownership of the hydrocarbons produced. The above arrangements are quite common in international practice outside Mexico, however, they are still prohibited by the recently enacted Law of Pemex (Ley de Petróleos Mexicanos) and as a matter of Mexican law, regulations may not abolish prohibitions contained in any law. However, the regulations, within their limited scope, recognise that procurement in respect of the hydrocarbons industry is different from other types of procurement requirement by government. Therefore they incorporate provisions allowing Pemex to draft provisions into its contracts that attempt to replicate, subject to prohibitions in Mexican law, certain consideration mechanisms and formulas accepted and used by the industry world wide, albeit without granting rights to the hydrocarbons produced or infrastructure used in connection with a specific project.
Model contracts adopting the new procurement rules have not been drafted and made available to potential contractors. It remains to be seen whether the regulations will draw additional interest by potential contractors in Pemex in the future bidding processes in respect of substantive activities. Also, only time will tell if the regulations will allow Pemex to, among others, increase its exploration activities in order to maintain its decreasing production capacity.
Federico Santacruz and Jorge Oria