Mexico: Publication Of The General Contracting Provisions For Petróleos Mexicanos And Its Subsidiary Productive Enterprises

• The General Contracting Provisions for Petróleos Mexicanos and its Subsidiary Productive Enterprises entered into force on June 11, 2015.
• The Administrative Contracting Provisions on Substantive Productive Activities of Petróleos Mexicanos and its Subsidiaries are repealed.

On June 10, 2015 the General Contracting Provisions for Petróleos Mexicanos ("Pemex") and its Subsidiary Productive Enterprises ("SPE") (the "General Provisions" or "DISC") were published in the Federal Official Gazette ("DOF"). Such General Provisions were approved by the Board of Directors of Pemex on November 18, 2014 and entered into force on June 11, 2015. Herein we present a brief summary of such publication.

I. General Provisions

According to the General Provisions, all contracts executed by Pemex or its SPEs are subject to the new Pemex Law (published in the DOF on August 11, 2014), its Regulations and the General Provisions. The contracts executed between Pemex and a SPE or between SPEs are subject to common civil law. The contracts executed by Pemex' or its SPEs affiliates are subject to the provisions issued to that effect by Pemex' Board of Directors.

Contracts executed by Pemex or its SPEs shall privilege the purposes and objectives of the same these.

As of June 11, 2015 the Administrative Contracting Provisions on Substantive Productive Activities of Petróleos Mexicanos and its Subsidiaries, (commonly referred to as "DAC"), as well as any other provisions that contravene the General Provisions, are repealed. However, these provisions shall continue to apply to contracts of Pemex Subsidiary Entities which have not yet transformed into a SPE.

Contracting procedures initiated according to the old Pemex Law (published in the DOF on November 10, 2008) shall continue to be governed by such law; however, in case no obligations before third parties are outstanding, the project manager may cancel such procedure and apply the General Provisions.

Contracts, agreements and other acts executed by Pemex and its subsidiaries that were valid on the date of entry into force of the General Provisions, shall continue to be governed by the provisions under which they were initiated. Such instruments may be modified to be adjusted to the new Pemex Law, its Regulations and the General Provisions.

II. Contracting planning, programming and budgeting

According to the General Provisions, the contracting planning, programming and budgeting shall be aligned to Pemex's business plan. The annual program of acquisitions, leases, works and services of Pemex and the SPEs shall be issued no later than November 15 of the year previous to its contracting. It may be updated each quarter and it will be only indicative.

Each contracting shall be based in a model document ("Contracting Model") that shall contain a justification and the project risk analysis, as well as risk prevention and mitigation measures, among other aspects.

III. Contracting authorizations

The contracts shall be authorized by the same area that authorizes the projects. Notwithstanding, the following contracts shall be authorized by Pemex' Board of Directors: (i) those related to major investments in terms of Article 13, section IV, of the new Pemex Law; and (ii) the ones determined by the Board of Directors, proposed by its Chairman, two board members or the General Director.

IV. Strategic procurement and management by categories

The procurement and supply area (the "Procurement and Supply Department" or "APA") shall conduct all contracting activities through a comprehensive process that allows implementing contracting strategies, which should result in identifying opportunities on expenditure efficiency and may consist in preliminary reference agreements, without budgetary commitments and without previous requirements from project managers. However, there must be a requirement from the SPE, budgetary availability and the execution of specific contracts previously approved by the strategic procurement group ("GAE").

V. Contracting procedures

The General Provisions set forth three types of contracting procedures: (i) public bidding (ii) invitation to tender and (iii) direct award. Such procedures shall have clear requirements and objectives. Contracting procedures may require a percentage of national content, such minimum percentages shall be set in accordance to provisions of applicable international treaties signed and approved by Mexico.

Open bids

The open public biddings shall be the general rule for contracting and shall begin with the publishing of the invitation on the APA website (http://www.pemex.com/procura/Paginas/default.aspx) or other media. The period for submitting and opening of proposals cannot be less than 10 calendar days and will depend on the contract's nature and complexity. The APA shall conduct the economic assessment while the project manager shall do the technical assessment, both shall be done in writing. Submitted proposals cannot be rejected due to errors in form and not substance, provided that said error does not affect the price, the purpose and the contract term. The APA is in charge for issuing the award of the contract, which shall be published through its website or other recognized media. An open public bidding may be declared null if no proposals are submitted or, if any, they do not comply with the economic requirements.

Exceptions to public bidding may be carried out in case of (i) unanimous decision of the authorization for open bid exceptions working group, (ii) strategic procurement or (iii) smaller amounts (which will be updated annually). A market analysis shall define those cases in which it is more convenient to implement an exception to an open bidding process.

Restricted invitations

Restricted invitations are an exception to open bids. The APA shall invite at least three people who have the financial, technical, operational and other necessary capabilities to comply with the contracts, and who have experience in the activities or works to be done. The invitation shall be published on the APA website where the requirements, the terms, the general description of the contract, mechanism to submit proposals and the evaluation and award criteria shall be announced. Contract procedures for projects between 3 million pesos and 650 thousand pesos may also be pursued.

Direct awards

The APA shall establish the stages, mechanism and criteria for direct award procedures. In the event of small amounts, the amount of the transaction may not exceed six hundred fifty thousand pesos.

Both restricted invitation and direct award procedures shall comply with Article 78 of Pemex Law and be reviewed and decided by an authorization for open bidding exceptions working group.

VI. Contracts

Contracts must be executed by the winning bidder within the period granted to that effect in the contracting procedure. In case a special purpose vehicle has been incorporated, the contract shall be executed by said vehicle as contractor and by the bidder as joint obligor.

Alternate dispute resolution mechanisms may be agreed upon.

Collection rights may be assigned previous authorization from Pemex or the SPE, with the participation of the legal counseling department.

The rights and obligations of contracts may be assigned prior authorization from Pemex's or its SPE's CEO, based on the opinions of the project manager and the APA. The assignee shall have to evidence its technical and financial capacity to comply with the original requirements applicable under the contracting procedure and the contract.

Amendments to contracts may be agreed upon, providing that the scope of the contract and/or the project is not affected and shall need to be justified by Pemex or the relevant SPE, and be authorized by the project manager, its supervisor or the CEO of Pemex or the SPE, accordingly.

Contracts shall include cost adjustment mechanism due to changes in the price of the goods.

Pemex and its SPEs may include, in the invitations and contracts, clauses for suppliers and contractors to establish community and environmental support programs, as well as social responsibility and sustainable development programs.

Services contracts related to hydrocarbons exploration and extraction derived from entitlements shall always provide that the contractor's payment will be in cash.

Comprehensive services exploration and extraction contracts (contratos de servicios integrales de exploración y extracción) should provide for the mechanisms, terms and conditions that ensure that the revenue from said contracts is used firstly to cover the expenses arising therefrom.

Comprehensive services exploration and extraction contracts shall provide: (i) that the payment is subject to the condition precedent of the delivery of hydrocarbons by the contractor; (ii) that the financing is the sole responsibility of the contractor; (iii) for mechanisms and incentives that encourage productivity; (iv) for commonly used accounting procedures, and (v) that the contractor may not subcontract the management of the activities of the contract.

VII. Reconsideration appeal and transparency

The award issued in a contracting procedure may be appealed through a reconsideration appeal.

The APA is in charge of publishing in its website all the information related to contracts executed by Pemex and its SPEs. The Accountability Department shall receive complaints and reports, carry out investigations and impose penalties for acts that may compromise the integrity of the contracting procedures

Contractors shall have mechanisms to prevent and detect corruption practices.

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.