On July 15, 2016, the Mexico's National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) ("CNH") approved to officially engage P.M.I. Comercio Internacional, S.A. de C.V., ("PMI") – a subsidiary of our national oil company, Petróleos Mexicanos ("Pemex") – through a direct award procedure in order to provide the service of hydrocarbons commercialization for the Mexican State.

We understand PMI has never carried out this activity in the national market before. PMI is used to carry out international transactions. In our opinion, another challenge that PMI will have is to properly "negotiate" with Pemex the tariffs, responsibilities and liabilities in connection with logistics activities (such as transportation, storage, blending, conditioning, etc.).

I. Context.

Due to the Energy Reform different types of hydrocarbons Exploration & Extraction Contracts were created: (i) service agreements; (ii) production/profit sharing agreements ("PSA"); and (iii) license agreements. In all these types of agreements (with the exception of the licenses which have a different mechanism to deliver the Government take) the Government, through CNH, receives a remuneration consistent in a part of the extracted hydrocarbons, which will have to be commercialized; in this sense, the first hydrocarbons that CNH will receive will be those derived from the first and second bids of Round 1, in which the following five PSAs were awarded:

(i) Shallow waters – contractual area #2 of Round 1, bid 1 (where Talos Offshore Mexico 2 is the operator)

(ii) Shallow waters – contractual area #7 of Round 1, bid 1 (where Talos Energy Offshore Mexico 7 is the operator)

(iii) Shallow waters – fields Amoca, Mizton & Teocalli of Round 1, bid 2 (where Eni Mexico is the operator)

(iv) Shallow waters – fields Ichalkil & Pokoch of Round 1, bid 2 (where Fieldwood Energy E&P Mexico is the operator)

(v) Shallow waters – field Hokchi of Round 1, bid 2 (where Hokchi Energy is the operator)

In terms of the Mexico's Hydrocarbons Law (Ley de Hidrocarburos), the CNH shall engage a marketer for the commercialization of the hydrocarbons that it will receive from the E&E Contracts (the "Marketer"), prior request of the Mexican Petroleum Fund for the Stabilization and Development (Fondo Mexicano del Petróleo para la Establización y Desarrollo) ("FMP"), which recently made such request.

In terms of the Eight Transitory Article of the HL, the CNH may award directly to Pemex (or to one of its subsidiaries) a hydrocarbons commercialization contract (the "Contract"), which term cannot exceed December 31, 2017, and the same cannot be extended or renewed; the Mexico's Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) ("SHCP") will fix the corresponding compensation for the commercialization services, which shall be in accordance with the existing market conditions. Nevertheless, such article provides that as of January 1, 2018 the CNH shall engage another Marketer through a public bid.

In this sense it was decided by the CNH that the Marketer up to December 31, 2017, will be PMI.

II. T&C of the PMI's Commercialization Contract would be the following.

(a) The purpose of the Contract is the provision of the hydrocarbons commercialization services, with two possible modalities:

(i) Simple commercialization, in which the hydrocarbons are delivered by the relevant operator to the Marketer and in that same place of delivery it is sold to a third party; or

(ii) Commercialization with logistic services, in which the operator shall deliver the hydrocarbons to the Marketer in a determined custody transfer point, and the Marketer has to subcontract other kind of services (such as, transportation, storage or blending) to take it to another point in which it will be sold.

(b) The Contract will be aframework agreement, establishing the general conditions of the contracting with the Marketer, but due to the existence of different contractual areas with several types of hydrocarbons, it will be necessary to produce a specific document for each of the contractual areas. Each document shall be attached as an exhibit to said framework agreement, and the same will be known as commercialization protocols (protocolos de comercialización).

(c) Each commercialization protocol, shall specify the following concepts, among others:

(i) Description of thecontractual area;

(ii) The hydrocarbons type and quality;

(iii) The total expected volume of hydrocarbons to be produced;

(iv) Margin of tolerance for the reception of the hydrocarbons;

(v) The type of the commercialization services;

(vi) The expenses associated with the contracting of the logistic services, if any;

(vii) Deliver and selling point of the hydrocarbons;

(viii) Rules to submit the nominations (forecast of hydrocarbons productions to be delivered);

(ix) Volume of hydrocarbons to be commercialized;

(x) Logistic and conditioning of the Hydrocarbons;

(xi) Sale price rules;

(xii) Compensation an adjustment mechanism between CNH and the Marketer;

(xiii) Hydrocarbons delivery and reception mechanisms;

(xv) Guarantees, etc.

(d) The Contract also includes that the full custody of the hydrocarbons (and the risks thereof) are passed through Marketer once the same are delivered to it by the relevant contractor, both in the simple and logistic commercialization modalities (in this latter the Marketer may negotiate the assumption of the custody with its subcontractors).

(e) No assignment. The Contract cannot be assigned by PMI without the express consent of the CNH.

Finally, CNH informed that the T&C of the Contract were in the final negotiation stage with PMI; once they agreed on a final version, the definitive Contract will be submitted to CNH for approval of its Board of Commissioners.

III. Fiscal aspects.

In terms of article 27 of the Hydrocarbons Revenue Law (Ley de Ingresos sobre Hidrocarburos) the Marketer shall transfer the funds obtained from the sold hydrocarbons to the FMP. This obligation will subsist even in case of force majeure, once the commercialization is made.

SENER and SHCP will determine the compensation per each commercialization protocol, depending on the specifics characteristics of each contractual area.

IV. Question for our readers:

In your opinion, is PMI capable of taking this role?

Are Pemex/PMI prepared to negotiate tariffs, T&C, etc. under commercial and competitive standards, for the usual logistics services associated with commercialization activity?

Hope this information is useful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.