On January 15th, 2020, the Ministry of Finance (SHCP, by its Spanish Acronym) published its Annual Report to Establish the Ranks of Values of Economic Terms of E&P Contracts 2020, according to that established in the article 5 of the Hydrocarbons Revenues Law (LISH) and article 4 of its regulation.
Below is a summary of the variables that underwent changes with this update. Also, included as a reference, there are those that remained as in 2019.
1. Contractual Fee for the Exploratory Phase
This consideration presents an increment of 2.88% compared to the previous year, that results from the application of a factor of 1.0297, – according to the Consumer Price Index (INPC, by its Spanish acronym) variation – to the value provided in article 23 of the LISH.
For instance, in terms of considerations payment, the adjustment in the Contractual Fee for the Exploratory Phase for the areas awarded in Round 2.4, will represent a monthly additional cost of $USD 93.6M, on average per Contractual Area.
2. Parameters to calculate royalties
In the case of the formulas to calculate the royalties’ payment, the values of the parameters should be annually adjusted according to the Producer Price Index (IPP, by its Spanish acronym). The updating for 2020 considers an IPP value of 0.9910, resulting in the following:
3. Formulas to determine oil and condensates’ prices
According to Annex 3 of the E&P Contracts, when the oil and condensates are not sold under market rules, the Contractual Price may be calculated through a formula. The updated values for 2020, and compared to 2019 values are the following:
As the report shows, the updated values are those that changed because of variations on indexes and price levels, in compliance with the Applicable Regulation.
For the other variables, until now, the authority has not identified the necessity of applying amendments. However, in accordance with Article 5 of the LISH, SHCP may consider values outside the ranges published in the report in case that, in its opinion, the economic conditions of the market and industry have changed substantially.
The economic terms that SHCP determined that must remain the same as in 2019 are:
1. The Limits for Cost Recovery.
2. The value of the parameters for calculating the adjustment mechanism for Production Sharing Contracts.
3. The value of the parameters for calculating the adjustment mechanism for onshore projects and mature oilfields under a License Contract.
4. The value of the parameters for calculating the adjustment mechanism for offshore projects under a License Contract.
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.