Oil and Gas Exploration and Production Contracts in Mexico – COVID-19 and Force Majeure

I. Situation

The global rise of the COVID-19 pandemic is likely to impact the performance of petroleum activities under oil and gas exploration and production contracts in Mexico.  In certain countries there are strict quarantine measures and in others, there are stay-at-home or lockdown orders.  The situation in Mexico is fluid because initially there were recommendations that were subsequently transformed into formal instructions to limit and suspend activities and administrative acts but which do not necessarily cover all individuals and could be subject to interpretation. Additionally, the decrees and orders issued by the Mexican government have been ambiguous.  As a result, it is important to determine how Mexican oil and gas exploration and production  contracts executed as a result of the 2013 Energy Reform (the “CNH Contracts”) address the concept of force majeure and situations arising out of the COVID-19 pandemic.

II. Analysis

In Mexico the general concept is that a party is not liable in the case of force majeure or fortuitous events, provided that such force majeure or fortuitous events are not attributable to such party.¹  Additionally, the parties to a contract may establish the reasons and conditions that will be considered force majeure or fortuitous events to avoid having to prove that a specific act or circumstance is a force majeure event or not.  All CNH Contracts contain similar force majeure provisions which establish the concept of “Fortuitous Event” or “Force Majeure” and include examples of situations that are to be considered Force Majeure events.²

In general terms, the Force Majeure provisions of the CNH Contracts state that a party may be excused from non-performance or delay in the compliance of its obligations under the contract if such delay or non-compliance is a result of a Force Majeure event. Force Majeure is defined as any fact or circumstance that prevents the affected party from performing its obligations under the contracts if such event or circumstance is beyond the control of the affected party and is not a result of its intentional conduct or fault, provided that such affected party has not been able to avoid or overcome such fact or circumstance by the exercise of due diligence. As per the CNH Contracts, subject to the foregoing conditions, certain acts or events will be considered Force Majeure including, natural phenomena such as storms, hurricanes, floods, mudslides, lightning and earthquakes, fires, acts of war (whether or not declared), civil disturbances, riots, insurrections, sabotage and terrorism, disasters in the transportation of materials, restrictions due to quarantines, epidemics, strikes or other labor disputes not resulting from a breach of any labor agreement by the affected party.  Finally, the definition of Force Majeure specifically excludes economic hardship or change in market conditions (including difficulties in obtaining funds or financing).

At first glance, it seems that circumstances resulting from or related to the COVID-19 pandemic seem to be covered by the typical definition of Force Majeure because quarantines and epidemics are specifically listed.  Additionally to being listed as a potential Force Majeure event, other conditions must be met, including that such circumstances (i) prevent the affected party from performing its obligations under the contracts, (ii) are beyond the control of the affected party, (iii) are not a result of its intentional conduct or fault, and (iv) such affected party has not been able to avoid or overcome such fact or circumstance by the exercise of due diligence.

CNH Contracts require notification of Force Majeure to CNH and CNH acknowledgment of Force Majeure. Force Majeure may result in the extension of the exploration, appraisal or development plant then in effect and the eventual early termination of the CNH Contract, if the activities are interrupted for more than two (2) continuous years.  The chart below explains timing and implications of the Force Majeure procedure under CNH Contracts.

III. Conclusions and Recommendations

Contractors under CNH Contracts must continuously monitor the situation to determine if the COVID-19 pandemic and restrictions on movement of individuals, sickness and other circumstances may result in an acknowledgment of Force Majeure and whether there is a direct impact on the performance of petroleum activities that could merit the triggering of the Force Majeure provisions and eventually, the extension of the exploration, appraisal or development plans.  In most cases, it will be the activities of oil field service contractors that will be directly impacted by the situation. Hence, those contracts need to be analyzed on a case by case basis to determine whether such oil field service contractors are able to comply with their obligations or will need to request the acknowledgment of a Force Majeure under those contracts.  Contractors need to document and cause their subcontractors to document how all official orders on restrictions imposed on the movement of personnel, other restrictions, and practical situations affect their operations to support any notice of Force Majeure to be presented to CNH. A contractor will have to evidence that such fact or circumstance is beyond its control and it has not been able to avoid or overcome such event or circumstance by the exercise of due diligence.

If contractors determine that the COVID-19 pandemic prevents the timely compliance of their obligations under the CNH Contracts, they must notify CNH that the effects of COVID-19 constitute an event of Force Majeure and CNH should acknowledge it accordingly.  This notice has to be accompanied by supporting documentation, as described in the previous paragraph. Since CNH has not previously dealt with this situation, it is important to document how similar situations have been dealt with in other jurisdictions to help CNH understand the impact of the situation on the petroleum activities under the CNH Contract and why they should be accepted as events of force majeure.

The recommendation is for contractors to monitor and document all situations that could be used to sustain a possible suspension of the performance of obligations under the CNH Contracts due to COVID-19.  At this point, there is no clarity as to the duration of the COVID-19 pandemic and the extent to which it may affect operations under the CNH Contracts; therefore, contractors should prepare for all potential outcomes.