Round 1. Invitations to bid for hydrocarbon exploration and extraction contracts in Mexico

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1 Round 1 Invitations to bid for hydrocarbon exploration and extraction contracts in Mexico

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3 Invitations to bid for hydrocarbon exploration and extraction contracts in Mexico Reforms made in the energy sector by the Mexican government since the constitutional changes of December 2013 allow private companies, domestic and foreign, to explore for and extract hydrocarbons, which was previously reserved for the State. Following are certain of the salient points concerning the bases for bidding for Round 1 and the first version of the contract model, as per information issued on the National Hydrocarbon Commission web page in December 2014: 1 The contract is for 25 years as from the date of signature, and can be extended for a further 10 years. The contractor is the sole responsible party and is required to cover all costs and provide all personnel, technology, materials and financing necessary to carry out the oil operations. 2 3 All necessary considerations must be taken into account when drawing up the action plan for taking part in Round 1, and the contract model must be adhered to. PwC México and ZLM Abogados have put together a specialized team that will help you understand the new energy context and evaluate and execute concrete actions that will benefit your company. 4 The first summons for the Round 1CNH-R01-L01/2014 International Public Bidding Process (with expected investment of 14 billion dollars) was published on December 10, 2014 in the Official Gazette by the National Hydrocarbon Commission (NHC). The NCH approved the terms of the bidding process for 14 shallow-water exploration contracts, to be awarded by July 15, The description and analysis of the bases, the contract model and the exhibits require more space than we have here. Therefore, the intention behind these notes (taken from public information available on is to point out some of the proposals made at different forums by interested parties. The pre-qualification phase of this first package of bidding processes is open only to parties that comply with the following requirements, among others: I) Experience as operator in at least three exploration and extraction projects and holding. II) Investments in CAPEX amounting to at least a billion dollars in the period. III) Operating a deep-water project or acting as partner in two such projects. IV) Holding assets worth 10 billion dollars; having a certain credit rating. V) Showing stockholders' equity of a billion or six hundred is part of a consortium or joint venture. In this latter case, if the operator fails to comply with the total-asset requirement of its own accord, the consortium must show 1 billion dollars of stockholders' equity.

4 The phases covered by the call for proposals December January February March April May June July August Invitation to bids and bases Publication of the invitation to bids and bases. Updating of bases and contract. Updating of bases and final contract Data room Period for requesting access. Access to the data room Explanations of bases and contracts First Stage. Receiving questions. Second Stage. Third Stage Registration payment. 16 Preclassification Receipt of documents by the Committee. Review of documents by the Committee Pre-calssification decision. 27 Change of bidders Limits to requests to include possible financial partners. 20 Limit for requesting structural changes of associate bidders. 10 Resolution of the request. 15 Presentation and opening of bids Presentation and opening of bids and statements of winning bidders. Resolution of the government agency handling the award, the decision and the request for publication in the Official Gazette Contract signature Deadline. 21

5 Shared-Production Contract The purpose of the shared-production contract is for the contractor to engage in oil operations within the contractual area at its entire expense and risk as per applicable regulations, best practices and contract terms, in exchange for the considerations established in the Hydrocarbon Revenue Law. The contract is for 25 years as from the date of signature, and can be extended for a further 10 years. Among others, some of the assumptions which can deny interested companies to participate on Round 1 are: 1. Be disqualified by the competent authority to contract with the federal Mexican government. 2. To submit more than one proposal for the same contractual area, either individually or in partnership. 3. Consortia consider where more than one company of "Large Scale" (one which produces more than 1.6 million barrels of oil equivalent). 4. Have obtained inside information or fail to comply with the confidentiality agreement. The consideration will be detailed in Exhibit 3 of the contract and signed by the NHC President. The contractor Is the sole responsible party Is required to cover all costs Provide all personnel, technology, materials and financing necessary to carry out the oil operations. One of the clauses provides that the contractor may not assign ownership rights; the contract also mentions that the NHC is free to grant any concession, license or contract to third parties to exploit or make use of resources other than hydrocarbons in the contractual area.

6 Matters to be considered Accounting report on benefits: For accounting and financial purposes, the contractor may report the benefits expected from the contract, as established in article 5 of the Decree containing Constitutional Reforms. Exploration period: Once the contract has been awarded and the contractual area has been assigned, the contractor has 45 calendar days to submit its Exploration Plan to the NHC for approval, which must contemplate all the activities contained in the Minimum Work Schedule, including the three-year Risk Management Program. Two one-year extensions will be available, provided that one additional well is drilled per requested term., The contractor may waive all or part of the contractual area, in which case, it will be subject to conventional penalties of up to the Initial Compliance Guarantee (to be specified in the final contract). Contract 25 years Stage Exploration period Evaluation period Program Exploration plan Work Term Extension 45 days N/A 3 years 1 year First extension Second extension 2 years 1 year First extension 10-year extension Report Development period Regular commercial production Development plan 60 days N/A Documentation Contract signed Exploration plan Request for an extension Request for an extension Discovery notification(s) Evaluation report Development plan Reports Percentage of completion report-quarterly Financial statements issued by an Independent External Auditor-Annual

7 Matters to be considered Budget of costs to be incurred The budget must be authorized by the NHC. Budget drafts must be reasonable, commercially feasible and consistent with contract requirements and best industry practices. Additionally, the contractor must provide documentation supporting its cost estimates. National content In the exploration phase, a minimum of 13% of national content is required, as well as 25% in the development phase, increasing annually until it reaches 35% in The Department of the Economy will provide supervision. Accounting Accounting must comply with the requirements of the Federal Tax Code, the Regulations thereto and current Financial Reporting Standards (Mexican NIF). The accounting records must be kept in Spanish in Mexican pesos, regardless of the functional currency of the contractor. The accounting records must comply with the catalog of accounts established by the Mexican Oil Stabilization and Development Fund (FMP). The accounting records must be kept for at least five years following termination of the contract, regardless of the provisions of the Federal Tax Code. Reports All reports related to eligible costs prepared by the contractor must be handled via the electronic system established for that purpose by the FMP and signed with the Advanced Electronic Signature (FIEL). Reports must be submitted no later than 10 calendar days following the month pertaining to the report. Recoverable costs The guidelines established by the Department of Finance must be applied. There must be documentation demonstrating that transactions are carried out at market values, including operations conducted with third parties. Expenses or investments not strictly indispensable for carrying out the operations subject to the contract, lacking supporting documentation, not registered in the operating account or not contemplated in the budgets and programs authorized by the NHC will be considered to qualify as recoverable costs. Likewise, financial costs, costs raising the overall originally budgeted margin by 5% or by 10% as concerns the individual budgeted portion; the cost of easements, rights-of-way, temporary or permanent occupations, leasing or acquisition of land; legal or consulting service expenses, unless related to geological studies; the payment of royalties, fines and sanctions are not considered to qualify as recoverable costs. Accounting information systems An information system must be in place that will allow for the transfer of information to institutional systems of the FMP, including: Quarterly comparisons of the exercised budget and the scheduled budget. Exercise per activity expense, cost center and category. Cash handling and analysis of obsolescence. Effective auditing and transparency mechanism, with special emphasis on recoverable and nonrecoverable costs. External Audits No later than April 15 of each year, the independent external auditor, which must be the certified public accountant, must submit the following information to the Department of Finance: 1. Auditor s report. 2. Financial statements (statements of financial position, statements of income, statements of changes in stockholders' equity and statements of cash flows). 3. Notes to the Financial Statements. 4. A letter of recommendations concerning internal control, as per International Auditing Practices. 5. The contractor's reply concerning steps to be taken in connection with the internal control recommendations proposed by the independent external auditor. The Department of Finance may conduct additional audits, either directly or through third parties.

8 Factors that should be kept in mind: Administrative rescission Situations considered to qualify as serious operator noncompliance or where operators are unable to continue performing as per regulations and stipulations. The NHC is required to notify the contractor of the cause and the contractor is entitled to make any statements it sees fit. Assignment of rights and change in control NHC authorization is required in order for private parties to assign rights to third parties, including "participation interest", as well as for any change in operator control. Applicable law and resolution of controversies Mexican law is applicable. Controversies must be settled via a conciliatory process involving direct consultations between the parties over a three-month period. Unsettled differences will be subject to arbitration as agreed and as per the United Nations Regulations (UNR) as determined by the Head of the Court of international Justice. The federal courts must handle cases involving the rescission of contracts. The structure, contents, orientation and scope of this bidding process are generally clear and in line with constitutional and legal requirements. However, this being the first Mexican experience, once the explanatory process is completed, the final versions of the bases and contracts can be expected to undergo certain adjustments. Guarantees, security and indemnities The Contractor must provide letters of credit guaranteeing compliance with minimum work programs during the exploration phase and additional periods, and each participating company must provide a corporate guarantee. Insurance contemplated in best practices must be contracted to cover risks. Global policies may be employed. A number of reasons are provided for the payment of indemnities and neither of the parties will be responsible for indirect or consequential damage, loss of profits or loss of business opportunities.

9 Trailblazing together The PwC México Energy practice and its specialized allies (such as, in this case, Zenteno-Lira Mora Abogados -ZLM Abogados y Consultores), offer a wide selection of services, which include: The design and implementation of the bidding process (legal advice on requirements, advance payments, guarantees and insurance, the contents of the call for proposals and during the process - explanatory meetings, submitting and opening proposals, evaluation and awards). Proposing your comments on bases and contracts as the "general public" for preparation of subsequent participation. Adjusting bases and the contract by means of explanatory procedures. Consulting and advisory services designed to assist your company or organization to become a forger of projects and an integrator of efforts. Assisting with the management of awarded contracts, with special emphasis on compliance with obligations and financial ratios. Negotiating and complying with environmental conditions and regulations. Consulting and advice on taking part in bidding processes for: Phase 1: Round 1 of the bidding process Advisory services and assistance: Information and analysis of new awarding and contracting processes The legal and regulatory framework applicable to these operations. Contracts: tax model, financial model and securing criteria from the competent authorities. Analysis of the accounting, tax and legal implications of the new exploration and production contracts. We provide advisory services and assistance to Mexican companies in putting together the lead company and arranging contacts with financial groups an companies and groups specializing in operations, geology, seismic matters and technology, among others. These services are provided to foreign companies wishing to associate with Mexican companies and operate within the Mexican market and requiring the services and goods necessary to take part in bidding processes and execute awarded contracts. We assist companies in forming consortia to take part in bidding processes and in the subsequent creation of special purpose entities or joint ventures. We also design/review corporate structures and strategies for linking, putting together, restructuring and/or acquiring enterprises.

10 Phase 2: Advise on executing the contract Important- The following requirements must be complied with as from the award date (August 21, 2015) by operators to whom contracts are awarded: Compliance with contract-related: Tax compliance services (monthly and annual calculations, preparing tax returns, arranging for favorable tax refunds, etc.). Accounting services, including recording recoverable costs and reports to be filed at the NHC. Assistance in complying with official audits and requests for information by the SAT, the Department of Finance. the FMP and the NHC. Permanent tax advisory services focused on exploration activities and the requirements of the company and its officers. National content requirements: During the exploratory phase, a minimum of 13% national content is required. The percentages 25% during the development stage. F Evaluation of compliance Risk Management Program A Accounting and tax obligations Phase 2: Advise on executing the contract B Oil Stabilization and Development Internal control C Entering the information in the institutional systems of the Mexican Fund for OIL Stabilization and Development (FMP). Strategic systems and technology for effective management of regulatory reports: Applying technology and managing the contract. Technical risk, including information security and technical privacy. Automating processes and streamlining control. Delivering business information. Focus in: Evaluation of principal risks concerning compliance with the risk management program as per industry best practices. E Recoverable costs D Analysis from a financial and tax viewpoint: Evaluation of recoverable costs from a financial and tax viewpoint, as per current legislation. Attestation statement to the effect that recoverable costs comply with current regulations. Letter of recommendations: Evaluation of the IC structure design in order to determine whether controls are properly designed in order to promptly prevent or detect significant error in accounts and significant disclosures.

11 Phase 2: Advise on executing the contract Recoverable costs Preparing and transfer pricing study of recoverable cost transactions (Including related and unrelated parties). Anti-corruption practices in accordance with the FCPA or existing regulations Implementation of the internal controls required by anti-corruption regulations. Anticorruption practices G Transfer pricing study H Deferred taxes Analyzing the impact of recoverable costs on deferred tax. L Environmental responsibility Phase 2: Advise on executing the contract I Contract data room Environmental and industrial security responsibility Evaluation of the principal environmental sustainability indicators for oil activities as per industry best practices. K Implicit derivatives J Implementation and management for compliance with all obligations (covenants and implicit derivatives). Implicit derivatives Identifying implicit derivatives in existing contracts.

12 PwC Mexico offers a range of services to help face the goals and objectives of your company, taking advantage of an opportunity that changes in the country are being generated. Contacts Leader Guillermo Pineda Lead Partner - Energy Sector [email protected] (+52) Core Team Francisco Ibañez Business advisory services [email protected] (+52) Irene Hernández Tax and legal services [email protected] (+52) Fabian Mateos A Other audit services [email protected] (+52) Advisory Juan Manuel Ferron Latin American advisory services [email protected] (+52) Pablo Guzmán Business Consulting [email protected] (+52) Out-of-town Felipe Córdova Auditing - Northeast [email protected] (+52) Diana Pereda Auditing- Southeast [email protected] (+52) Zenteno - Lira Mora Abogados, A.C Javier Zenteno Barrios Founding partner ZLM [email protected] (55) Horacio Montoya Key ZLM Partner [email protected] (55) Huberto Lira Mora Founder Partner ZLM [email protected] Andrés Martín Escobar Associate, ZLM Abogados [email protected] Mario Arteaga Tax and legal services [email protected] (+52) Follow us: 2015 PricewaterhouseCoopers, S.C. All rights reserved. PwC refers to the Mexico member firm, and may sometimes efer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Made by MPC: 0516_MS_FolletoEnergia_Ronda1_ing