In general, this framework corresponds to international expectations, and shows that the Energy Ministry continues to benefit from the discussions held in 2010-11 in connection with the Transboundary Hydrocarbon Agreement of 2012. The purpose of unitization is to maximize "the economic recovery of the Hydrocarbons" (Art. 26.v), not the creation of "adequate profitability" (Def. XV) TERMS: 1) Campo compartido. In global practice, a “field” has existing infrastructure. What is shared is the reservoir, not the field. 2) Descubrimiento. In global practice, a “discovery” means that the volume is commercial under current prices and technology. 3) Materiales. Missing is an explicit reference to pipelines (ductos). 4) Padrón. “de la Nación” is a pleonasm. 5) Participación. Participation is defined as a percent of the equity share held by a party (not clear in the current text). As mentioned, the purpose is not “adequate profitability” but “maximum economic recovery of hydrocarbons.”) 6) Redeterminación. The rationale for "redetermination" is not specified in the text (Art. 21.X and Arts. 36-37) or in the definitions. A minimal explanation is required for transparency; otherwise, the economic meaning of a key provision is hidden in the text of a Joint Operating Agreement. The scope of redetermination should be limited to future operations (going forward), and should not be applied retroactively. Only one redetermination should be allowed. The elements that would support a “redetermination proposal” are not specified (Art. 36). 7) The meanings of "sustancia ajena" and "sustancias unificadas" could be made much clearer. The first refers to non-taxable volumes used in secondary or tertiary recovery such as water, nitrogen and CO2). The second refers to all hydrocarbons subject to royalty payments. 8) Acuerdo de Operación Conjunta (“Joint operating agreement”) should be included in the list of definitions. 9) Acuerdo de Unificación Modelo (“Model Unitization Agreement”) should be included in the list of definitions (Art. 22.VII). 10) Unlicensed areas. Art. 25 imagines the situation of a reservoir extending beyond the boundary of the leases of the parties to a Unitized Areas, suggesting that the unlicensed area could be the subject of a new lease auction. Such a procedure is not advisable, as it would create excessive administrative costs in a redetermination between three parties. Instead, the boundary of the Unitized Area should be extended to incorporate the presently unlicensed area, allocating participation interest according to the same percentages as before or by some other equitable arrangement. 11) Infracciones (Art. 47). The Guideliness do not specify the process for establishing a violation. Is it discretionary authority? If who, by whom? Is there an opportunity to challenge the imputation of violation? Is there a process of appeal? ROYALTY RELIEF. Projects within the portfolio of an oil company are in competition with each other for capital commitments. Other things being equal, a project with lower costs and/or royalty obligations will receive priority in the allocation of capital. Unintentionally, by the misguided use of “additional royalty” as a biddable variable, some of the awarded leases, especially those in Round 1.3, with very high royalty rates (>80%), will be uncompetitive in a company with multiple projects in its portfolio. This situation is likely to slow down the allocation of capital to leases in Mexico. To motivate capital allocation, the Government should consider some form of royalty relief, as in the situation in which there is a great difference exists between the royalty rates of two parties of a unitization agreement. The State could offer royalty relief to the party with the higher rate, which is not presently allowed (Art.26.I, III). Offering a unitized fiscal the unitized block, or at least royalty relief for the party with the much higher royalty obligation, would correct the mistake in 2015-16 of having made "additional royalty" a biddable variable. (No oil company can pay for high-quality personnel, training, materiel, safety and local content if >80% of its revenue are given to the State as royalty payments.) George Baker Houston g.baker@energia.com (832) 434-3928 cell