On July 15, Mexico auctioned 14 shallow-water exploration blocks. The auction marked the first time in nearly eight decades that private and foreign investors could directly participate in Mexico's exploration and production of oil reserves since the industry was nationalized in 1938. Despite Mexico's high expectations for this first round of bids, only two of the 14 Blocks were successfully tendered. A consortium of Mexico's newly formed Mexican Sierra Oil & Gas, Houston-based Talos Energy LLC, and United Kingdom's Premier Oil PKC successfully bid on both tendered Blocks.
Industry experts have provided various reasons for why the auctions fell well short of Mexico's expectations to tender at least a third of the Blocks in the first round of auctions. Not surprisingly, some cite plummeting oil prices. In December 2013, when Mexico amended its Constitution to allow for private investment in the oil sector, oil was trading at over US $100 a barrel. Eighteen months later, oil prices were less than half.
But falling oil prices are not the only hurdle to foreign investment. The model contract posted on Mexico's website1 contains numerous provisions that that should give pause to foreign investors, even in a landscape of rising oil prices. Of particular concern are the harsh rescission provisions, which entitle Mexico's National Hydrocarbons Commission (CNH) to unilaterally terminate the contract if certain enumerated events occur. While some provisions are more standard—such as the failure to submit exploration plans or the failure to develop the fields in accordance with such plans—the model contract goes beyond international norms with regards to potential accidents or environmental incidents. According to Article 23.1(d), the CNH may administratively rescind contracts if "a serious accident occurs as result of the Contractor's willful misconduct or fault which causes damage to the facilities, loss of life or loss of production."2 This broad provision arguably entitles the CNH to rescind a contract in the event of an environmental incident such as a spill or blowout, if such an incident causes damages to the facilities or a loss of production.
In response to criticism regarding this provision, Mexico's Deputy Energy Minister Lourdes Melgar emphasized that rescission would only be possible in the event of a "serious accident."3 But such words should provide potential investors little comfort, especially in light of the Model Contract's provision that carves out "disputes . . . in any way arising from or related to the events of administrative rescission" from the UNCITRAL arbitration clause.4 In other words, disputes regarding improper administrative rescission are to be litigated not through international arbitration, but exclusively by the Federal Courts of Mexico pursuant to Model Contract Article 26.4.
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Jamie Miller
Houston
+1 713 276 7445
jamiller@kslaw.com
