Mexico Hydrocarbons Commission Issues Criteria for Approving Farmouts of E&P Contracts

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According to Mexico's Hydrocarbons Law, the National Hydrocarbons Commission, or Comisión Nacional de Hidrocarburos (CNH), has the authority to previously approve alliances or associations that assign corporate control or management of the contractor, or assign the control of operations in the area, total or partial.

Assigning without having previous CNH approval constitutes a material breach to exploration and production (E&P) contracts and is a cause for termination. The same applies to the sale, transfer or liens upon the rights or obligations arisen from the contracts.

On Jan. 30, 2017, CNH issued criteria, requirements and terms for approving farmouts of E&P contracts. Criteria highlights include the following:

  • corporate, technical and financial information must be delivered meeting the original requirements of the tender
  • drafts of the agreement must document the farmout type (joint venture, business combination, purchase sale, etc.)
  • comply with all government approvals; while a specific checklist is not included in the criteria, it is advisable to review, on a case-by-case basis, the approvals that might be needed from government and third parties
  • Mexico's Ministry of Energy must present farmout inconformity within 22 business days from the filing, and in a term no longer than 10 business days thereafter, CNH must approve or deny the authorization for completing the farmout; if the Ministry of Energy or CNH do not answer the filing within the terms, the authorizations will be granted
  • contractors must notify CNH of changes to capital structure that do not assign control or management within the following 30 labor days

This provision will provide increased legal certainty and flexibility to E&P projects in an industry that requires intense collaboration among peers and investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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