Today, August 13, 2019 marks 5 years of having published the results of the so-called Round Zero, in which the Ministry of Energy (SENER), with the technical assistance of the National Hydrocarbons Commission (CNH), determined to grant to Petróleos Mexicanos (Pemex) 83% of the 2P reserves and 21% of the prospective resources available in Mexico

This Round would allow Pemex to integrate a balanced portfolio of projects that would materialize – according to estimates made at that time – a production of 2.5 million barrels per day for the next 20.5 years.

The deadline to complete the exploration period of some of these Asignaciones is to be concluded[1], therefore, SENER requested CNH’s opinion regarding the granting of 64 Asignaciones to Pemex that will be returned to the Mexican State the next August 27th. Said opinion was voted during the 47th Extraordinary Session of the CNH’s Government Body.

Type#Asignaciones requested
Deep waters 12
Shallow waters 22
Onshore 30
Total 64

SENER’s proposal to reallocate again these 64 Asignaciones to Pemex is sustained by its exceptionality. SENER considers some arguments that were commented and received suggestions by CNH according to the following:

SENER’s ProposalComments and suggestions from CNH
As there are no future bidding Round processes currently considered, Pemex is the only possible operator for said areas. Also, the grant of said Asignaciones could increase reserves’ incorporation and, if applicable, increase production of hydrocarbons and guarantee the supply of hydrocarbons.CNH suggests ranking the exploration projects with the aim of focusing in those with more probabilities of have results and, if applicable, postpone the request or amend of those Asignaciones that are not considered priority.
Pemex has extensive knowledge of the requested areas that could allow the State-Owned Enterprise (SPE) to manage risks efficiently. It is important for Pemex to consider that CNH will be monitoring that the activities included in the Exploration Plans must guarantee the supply of Hydrocarbons. Reaching the objectives of said plans is crucial given that there will be no new operators while no bidding process are foreseen.
Nearby fields and/or discovers in the onshore and shallow waters areas, give more probability of having commercial success. Also, taking advantage from the built infrastructure would help reducing costs and time of production.Pemex must submit an Exploration Plan that is consistent with the exploratory maturity of each area, according to the information reported by Pemex for the request. CNH emphasized that, according to the current regulation, will make meticulous review of the Plans and Programs.
Pemex set a goal of reserves restitution annual rate of 100% of produced hydrocarbons. E&P contracts signed to date are focused on the restitution of reserves as of their reclassification.Activities included in the Exploration Plans must be enough to fulfill the goals set in the Business Plan for Pemex: annual 3P reserves’ incorporation -as a result of a discovery-, greater or equal to 1,300 mmboe from 2019 to 2023.
Giving Pemex the opportunity to develop its abilities and experience in deepwater areas, as well as take advantage of its current knowledge, will help to increase the national capacity and eventually develop this type of resources.In the same line of increase National capacities in deepwater projects, it is recommended for Pemex to have associations with third parties, e.g. farmouts.

Commissioner Sergio Pimentel –who voted against the opinion– gave lecture to article 27 of the Political Constitution of the United Mexican States, making notice that it considers the possibility to carry out E&P activities in Mexico through E&P Contracts or Asignaciones, the latter being the exception and not the rule. In both cases, Pemex can participate and the SPE can associate with third parties for said activities. Regarding with these associations, CNH suggests to SENER and Pemex to consider the benefits that may arise from signing new Farmouts[2], among other schemes of associations. 

Majority of Commissioners considered the exceptionality scenario based on:

  • The fact that Mexico could not stop exploration activities, giving the decision of no Bidding Process in the agenda.
  • Pemex needs to reinforce its exploration activities. (It can happen with Farmouts or other kind of associations)

After the opinion granted by CNH, new questions are opened about the State’s expectations regarding Pemex and the SPE’s possibilities to reach them, among others: 

  • The validity of these new assignments. SENER may grant an exploration period consistent with the exploratory maturity of the areas and with what dictates the practice of the sector according to the particularities of each area.
  • The scope of the minimum work program. CNH emphasized it should be sufficient to conclude the exploration activities and continue to a development stage, thus confirming that this granting is the most adequate mechanism in terms of production and supply guarantee of hydrocarbons.
  • The financial capabilities of Pemex to comply in a timely manner with the Plans and Programs. According to the Hydrocarbons Law, assignments will be granted exceptionally when it is certain that the SPE has technical, financial and operative capacity to extract hydrocarbons in an efficient and competitive manner. 
  • The strengthening of Pemex through all the resources provided by the current legal framework. Grant service contracts is only one of different options that can bring benefits to the SPE. To request migrations and to obtain technical and financial capacities in association modalities such as Farmouts – especially for these areas where it has been difficult to reach the previous committed goals – are other options that SENER and Pemex should consider taking advantage of.

[1] Up to date, 89 Asignaciones are valid and currently have a Plan which means that Pemex is in possibility of developing exploration or extraction activities, as appropriate.

[2] To read more about farmouts, we suggest lecture of the infographic: What is Mexico missing after cancelling Pemex’s Farmouts and having no new Bidding Processes for E&P Contracts in the agenda?

By Génesis García, Senior Consultant at Muvoil Consulting

Muvoil Consulting is a group of specialists in the O&G sector: legal, fiscal, social and environmental. Our multidisciplinary approach allows us to design strategic solutions that can unravel the most complex regulatory and transactional challenges that a petroleum project can face. Do not hesitate to contact us for further details.