Deep Waters in Perspective

• PEP is one of the most dynamic oil companies operating offshore with more than 100 drilling contracts, running approximately 80 drilling units and more than 150 ships

• Golfo de México Sur, Area Perdido and Golfo de México B, the 3 main Deep Waters projects, in addition to other offshore developments, will require an investment of more than US$30B. In Mexico, levels from deep 500m are considered to be Deep Waters.

• During the next 15 years more than 25,000 wells will be needed, the equivalent of all the wells developed in the history of PEMEX.

Opportunities for foreign investment and challenges for marine contractors

·         An impressive demand of more than 160 drilling units and 300 specialized vessels is foreseen.

·         Nowadays, approximately a quarter of the wells in Mexico is directly run by PEP, and there is a clear trend towards subcontracting with foreign companies.

·         Deep Water technical challenges imply DP2 & DP3 systems, telecommunication requirements extended to GPS and the European Galileo System and compliance with the International Marine Contractors Association standards (IMCA).

Multiple Services Contracts (CSMs) have been tested for the first time in natural gas in the Burgos Bassin. They contemplate a wide range of services to be provided by a sole or a limited number of contractors.

There was some political reaction to the CSMs, and unsuccessful annulment claims were filed. Consequently, the Federal Superior Comptroller issued a recommendation in 2003 differentiating between “strategic” and “none strategic” activities, the first ones being reserved to PEMEX. This recommendation resulted in the drafting of a new CSM: the New Execution Models (NEMs).

The NEMs, like the CSMs, shall comply with the Public Works Law and are modelled according to unit prices and predetermined duration. There are normally divided in three stages: development, reactivation and maximum recovery.

NEM SERVICES

• Geophysical data acquisition and modelling
• Production engineering
• Drilling and stimulation of wells
• Analysis of well data
• Design and installation of facilities
• Permitting and Environmental impact studies
• Maintenance and operation of wells and facilities
• Measurement of production
• Related Services

Potential scenarios for implementing the NEMs

·         A Master NEM. One large contractor and subsequent private contractors

·         A set of NEMs divided according to functions and Regions. Various large contractors for specific blocks or groups of services

·         The contractual status quo. Numerous contractors as currently, depending on restricted services.

Corporate Integration when contracting with PEP

Three different schemes may be planned, each one

triggering different contractual and corporate responsibility

Price is no longer relevant in maritime permit proceedings

However, under the new PEMEX will not be impeded from considering the lowest price possible. Indeed it will simply call for another bid, until finding the right price, when the rates offered are higher than in international market.

Two year temporary permit for ordinary foreign vessels, no limit for unique ones

Ordinary foreign vessels that are awarded a coastal trade permit will be entitled to work in Mexican waters for a term of two years, unless there are considered as ‘unique vessels’. The criterion of a ‘unique vessel’ will most probably rely on a case by case basis that will be resolved by a technical commission.

An additional hot topic is the discrepancy between the five years contractual term provided by PEP in its contracts with ordinary vessels, and the two year temporary permits granted to the latter. This point will probably be brought to the Federal Courts to be clarified.

Requirements for Mexican flagging

A Mexican flag will be necessary for ordinary foreign vessels planning to stay more than two years in Mexican waters. Vessels under ownership or under an authentic financial lease contract are eligible for flagging. Concerning the latter, the leasing company may be located in Mexico or abroad and should be authorized to act as such in its country of origin.

Fiscal considerations

 ▪The Income Tax Law provides for a 10% withholding of charter hire payments to ship owners that are foreign tax residents, and their vessels are operated by Mexican charteres in Mexican waters.

 ▪Should the ship-owning company be incorporated in Mexico, the ordinary income tax rate will apply; and the same would have its right to authorized deductions.