This is great !!!
The Steps after Letter of Intent.
It is my understanding, based on my discussions with management, Pemex will have the responsibility to have the service contract migrated to a licence agreement and then a new Licence agreement will be between Pemex and ROE and its partners. Pemex will deal with CNH for this step of the process. Once migrated to a Licence, then the licence agreement between Pemex and ROE will not need CNH approval.
Purpose of Letter of Intent (Term Sheet) - is to set out the terms agreed upon for the drafters of the contract. One of the terms will be that Pemex migrates the contract.The Letter of Intent is a key to the contract as it sets out the terms of the deal.
The contract terms will follow what has been set out in the Letter of Intent (the term sheet) and the contract will be prepared by the Pemex lawyers in conjunction with ROE’s team of lawyers. This will likely be a 60 to 80 page contract and it will be drafted by Pemex lawyers in conjunction with the ROE legal team.
The contract will be a Licence/ working interest type of contract. A working interest is better than a revenue sharing contract, however, I will describe the proposed contract as being a working interest /revenue sharing contract.
The structure is designed as a license/working interest in order for Pemex to be able to maintain all of the reserves as being that of Pemex and based on the working interest, for financing purposes allows ROE and its partners to claim the Reserves on their respective working interest.
The partners in the working interest / revenue sharing will be Pemex and the ROE Partners.
ROE and its partners, Lukoil and Marak Financial will provide all of the risk capital and financing to develop the field. Pemex will put no money into the development.
The royalty structure will have the usual base rate of about 7.0% which will increase on a sliding scale depending on the price of oil. There will an additional royalty to the Government,likely on the order of 12-15% and then Pemex and the partners will share the revenue on an agreed upon percentage based on their respective working interest. This percentage was not disclosed to me, but likely on the order of 10% to Pemex. The Division between ROE and its partners will depend on how much ROE is able to buy into depending on the financing arrangements. ROE has a 25% interest in the partnership with Lukoil and Marak and can extend this up to 62.5%. This part has not been finalized as it depends on how all of the financing comes together.
I am guessing that when you add the Pemex Revenue share to the royalty structure for the Government you will end up between 21 -24% in royalties depending on the price of oil and about 9-10% of the Revenue after Royalties to Pemex for total of about 1/3 to Pemex and Government and the balance to ROE and its partners.
This is not an unusual type of contract or Royalty structure. In Texas, the landowner often gets a 25% royalty or percentage. On state owned lands the royalty is 25%. So if I am correct on what is being agreed upon, it is a good deal for all of the parties involved.
Since ROE and its partners will finance all of the risk and development costs there will be no cap on revenues they can earn, which means if they have outstanding success, there is no cap on what the partnership can earn.
Chincontepec oil is part of the production from the whole block.
Pemex will not be paying out the $45.0 million or so it owes to ROE and its partners. The Revenue from the 17 Chincontepec wells will be included as part of the overall production under the contract. That oil production will be part of the production from the block and ROE will get its share depending on its final working interest.
ROE will be the operator on the project.
