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[Senate Prints 112-43]
[From the U.S. Government Publishing Office]

112th Congress 
 2d Session                 COMMITTEE PRINT                     S. Prt.
                                                                 112-43
_______________________________________________________________________

 
                          OIL, MEXICO, AND THE
                        TRANSBOUNDARY AGREEMENT

                               __________

                        A MINORITY STAFF REPORT

                      PREPARED FOR THE USE OF THE

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                      One Hundred Twelfth Congress

                             Second Session

                           December 21, 2012

                                     

                  U.S. GOVERNMENT PRINTING OFFICE
77-567                    WASHINGTON : 2012
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                COMMITTEE ON FOREIGN RELATIONS          

            JOHN F. KERRY, Massachusetts, Chairman          
BARBARA BOXER, California            RICHARD G. LUGAR, Indiana
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   MARCO RUBIO, Florida
JIM WEBB, Virginia                   JAMES M. INHOFE, Oklahoma
JEANNE SHAHEEN, New Hampshire        JIM DeMINT, South Carolina
CHRISTOPHER A. COONS, Delaware       JOHNNY ISAKSON, Georgia
RICHARD J. DURBIN, Illinois          JOHN BARRASSO, Wyoming
TOM UDALL, New Mexico                MIKE LEE, Utah
              William C. Danvers, Staff Director          
       Kenneth A. Myers, Jr., Republican Staff Director          

                             (ii)          
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Letter of Transmittal............................................     v
Oversight Study..................................................     1
Mexican Oil and Gas: Critical for Mexico's Prosperity, in 
  Critical Need of Reform........................................     2
Natural Gas: An Emerging Priority................................     5
Considerations in Oil Reform Policy and Politics.................     6
Transboundary Agreement..........................................     8
Why the TBA Matters..............................................
North American Energy Security...................................    12
Recommendations for Enhancing U.S.-Mexico Bilateral Cooperation..    13

                                Appendix

Appendix I.-- Text of the Agreement between the United States of 
  America and the United Mexican States Concerning Transboundary 
  Hydrocarbon Reservoirs in the Gulf of Mexico...................    17

                                 (iii)

                         LETTER OF TRANSMITTAL

                              ----------                              

                              United States Senate,
                            Committee on Foreign Relations,
                                 Washington, DC, December 21, 2012.
    Dear Colleagues: Energy security is a vital issue for 
United States foreign policy and economic growth. Increases in 
U.S. domestic oil production are helping relieve our import 
dependence, yet our nation will rely on oil imports for decades 
to come. Strengthening trade with reliable, friendly neighbors 
Canada and Mexico would make a valuable contribution to our 
future.
    I directed Senate Foreign Relations Committee Senior Staff 
Members Neil Brown and Carl Meacham to assess opportunities for 
enhancing the U.S.-Mexico oil and natural gas relationship. 
Mexico is a reliable trading partner. Yet it continues to 
struggle to maintain and increase its domestic oil production. 
Falling quantities of Mexican heavy oil available for U.S. Gulf 
Coast refineries have actually helped lead to increases in 
Middle Eastern imports to the U.S. even as our total imports 
have fallen.
    Congress needs to understand the obstacles--and 
opportunities--ahead in Mexico's oil production. Put bluntly, 
we know that we can rely on Mexico as a trading partner, but we 
do not know the quantity or the quality of oil to expect it to 
be able to export in the years ahead.
    Given domestic political sensitivities about oil within 
Mexico, the bilateral relationship on this topic has struggled. 
Yet, the newly elected President of Mexico has signaled a 
desire to work together on energy issues, and the largest 
opposition political party joins in that call.
    I urge my colleagues, and the Obama administration, to 
seize today's opportunity. My staff identified specific areas 
in shale gas, safety enhancement, transparency, and security 
that represent near-term opportunities for bilateral gain.
    I strongly encourage the Obama administration to send the 
U.S.-Mexico Transboundary Agreement, signed in February of this 
year, to Congress and urge my colleagues to pass the agreement. 
The Transboundary Agreement is good for energy security, good 
for the environment, good for U.S. commercial interests, and, 
most critically, can open the door to bilateral engagement on 
shared energy interests.
    This report provides useful insight on the need and 
prospects for domestic oil sector reforms in Mexico and 
important recommendations for the U.S. government to take in 
order to strengthen U.S.-Mexico energy cooperation. I hope that 
you find this report by Mr. Brown and Mr. Meacham helpful and 
look forward to working with you on these issues.
            Sincerely,
                                          Richard G. Lugar,
                                                    Ranking Member.

                                  (v)

                         OIL, MEXICO, AND THE 
                        TRANSBOUNDARY AGREEMENT

                              ----------                              

Oversight Study
    Senator Richard G. Lugar, Ranking Member of the Senate 
Foreign Relations Committee, requested senior professional 
staff members to review opportunities for enhanced U.S.-Mexico 
engagement on oil and gas issues including the U.S.-Mexico 
Transboundary Agreement, which requires Congressional action to 
take effect. As part of that review, members of Senator Lugar's 
staff traveled to Mexico City in October 2012 to meet with then 
President-elect Enrique Pena Nieto's transition team and 
leaders from the Mexican Congress, PEMEX, the Mexican energy 
regulator Comision Nacional de Hidrocarburos, U.S. industry, 
academic specialists, and U.S. officials at Embassy Mexico 
City.\1\ This report contains their public findings and 
recommendations.
    Congressional attention to the Mexican energy situation is 
critical for understanding bilateral issues between our 
countries and for consideration of U.S. energy security. The 
United States has a profound interest in economic prosperity 
and political stability in Mexico, and energy is foundational 
to both interests. Oil is vital for the Mexican federal budget, 
underwriting both social programs and law and order, and the 
oil industry is an important aspect of broader economic 
activity. Stability and growth, or lack thereof, in Mexico's 
oil and gas sector can directly impact issues of bilateral 
concern.
    Mexico is also important for U.S. energy security, 
providing a nearby and politically reliable source for oil 
imports. Recently overtaken by Saudi Arabia, Mexico has been 
the second largest source of oil imports to the United States, 
with Canada being the largest. However, falling Mexican oil 
production and rising demand led to increases in U.S. imports 
from the Middle East, and maintaining the current levels of 
Mexican oil production, let alone achieving rapid growth in 
production, have a dubious future without reforms.\2\ Thorough 
energy security policy in Washington requires constant 
assessment of the Mexican oil industry. If Mexico does not 
reform its domestic energy production situation, the U.S. 
cannot rely on current levels of imports.
    The SFRC staff's examination was timely because of recent 
Mexican elections for President and Congress. The newly elected 
Mexican President, Enrique Pena Nieto, campaigned promising to 
institute energy reforms and has continued that theme since 
taking office. Reform, or lack thereof, negotiated between the 
Mexican President and Congress will have consequences for the 
U.S. energy portfolio and commercial interests. The examination 
is also timely because the United States Congress is expected 
to review and act on the U.S.-Mexico Transboundary Agreement 
signed in February 2012, which was ratified in Mexico with a 
great deal of fanfare and also has support of major 
international oil companies operating in the United States.

Mexican Oil and Gas: Critical for Mexico's Prosperity, In Critical Need 
                               of Reform

    Mexican hydrocarbon resources belong to the Mexican people. 
Popular enthusiasm and national pride is attached to those 
resources, and many Mexicans directly depend on the existing 
oil industry for their livelihood and business interests. 
Crossing into the territory of energy sector reform requires 
political courage on behalf of Mexican politicians. The United 
States government emphatically recognizes the privileged 
position of oil in Mexico's politics.
    Nonetheless, the United States has direct interests in the 
future of oil and natural gas in Mexico. Most important among 
U.S. interests is enhancing the prosperity of the Mexican 
people. With strong cultural ties and a shared border, the U.S. 
benefits when Mexico grows. Petroleos Mexicanos (PEMEX) has 
successfully staved off years of decreasing oil production and 
discovered deep water resources, but it has not been able to 
meaningfully increase production beyond its zone of comfort in 
shallow water. Without reform, Mexico's oil resources will not 
be developed in a way that translates into a higher quality of 
life for Mexicans.
    Mexico is a reliable supplier of oil to the United States. 
The question for U.S. policymakers is what volumes Mexico will 
be able to export in the future. Mexican production dropped by 
more than a quarter in the last decade, leaving U.S. refiners 
on the Gulf Coast geared for heavy oil having to look 
elsewhere. Venezuelan heavy oil production has also collapsed. 
Canadian heavy crude production is increasing in the oil sands 
region, but pipeline infrastructure is insufficient. Therefore, 
in effect, the U.S. has had to increase imports of Middle East 
crudes in order to make up for shortfalls in Mexico.
    Understanding the likely trajectory of reform in Mexico is 
necessary to appropriately plan for future volumes and types of 
crude oil traded with the United States, which also will have 
broader implications for U.S. security and economic growth. 
Mexican energy reforms will determine to what extent Mexico 
will be part of future U.S., and North American, energy 
security.

Progress, but can it last? A snapshot of Mexico's oil sector
    Mexico has a long history of oil production and has 
prospects for a bright future as an oil power, but such an 
outcome is not guaranteed. Mexico sits atop significant amounts 
of oil estimated at 10.4 billion barrels of proven reserves, 
but that number could more than double when unconventional and 
deep offshore reserves are fully proven. The large 
unconventional Chicontopec area alone is estimated to hold up 
to 17.7 billion barrels.
    Turning Mexico's oil resources into prosperity for the 
Mexican people is a tremendous challenge for PEMEX, its 100% 
state-owned national oil company established in 1938 after 
international oil companies were expelled.\3\
    Mexican oil production relies primarily on a few major 
fields, the largest of which (Cantarell) is in steep decline. 
Oil production in Mexico peaked in 2003 at about 3.4 million 
barrels per day (mbd), falling to 2.6 mbd in 2010. That 
precipitous fall is due primarily to the estimated 75% decline 
in production from the massive Cantarell field from its peak. 
In recent years, Cantarell's decline has been compensated for 
by the Ku-Maloob-Zaap (KMZ) fields; however, many analysts 
doubt the longevity of current production in those fields.
    Large increases in direct and third-party investment in 
recent years has enabled PEMEX to halt net decreases in 
production, at least temporarily. Importantly, PEMEX also now 
reports achieving a 100% replacement rate for reserves, 
improving prospects for continued production. Increased 
investment also has led to discoveries of large new deep water 
resources at Trion, Supremos, and Maximino, achievements of 
which PEMEX officials are justifiably proud. Several 
interlocutors credited energy reforms passed in 2008 for 
enabling those finds by giving PEMEX more flexibility to 
partner with international companies on a service contract 
basis, building on the shift to reliance on contracting 
services to enable investments stretching from the late 1990s.
    PEMEX leaders plan to raise production to 2.7 mbd in 2013 
and 3 mbd by 2017, requiring up to $38 billion annually in 
investment. Near term growth is expected to come primarily from 
Chicontopec, a highly complex unconventional onshore project 
that is subject of great hope and scorn. Despite years of 
development and reportedly $5 billion in investment, the 
project is well behind expectations and currently only 70,000 
barrels per day are produced, which puts claims of near-term 
growth in serious doubt. Over the longer-term PEMEX has set a 
goal to increase production to 3.3 mbd by 2024. Achieving that 
goal will require significantly more new production than the 
difference between the 3.3 mbd goal and today's 2.6 mbd given 
expected large declines in KMZ.
    Field decline emphasizes the urgent need for Mexico to have 
several new projects in the pipeline in order to maintain and 
boost production. Skepticism of PEMEX's ability to compensate 
for declining fields has led to some dire forecasts. The U.S. 
Energy Information Administration has estimated that Mexico 
will be a net importer of oil by 2020,\4\ thus also raising 
concerns about impacts on its balance of trade. While not 
investigated on this StaffDel, that situation highlights the 
need for more attention to demand management policies and 
continued reform of fuel subsidies.\5\
    Mexico needs a diverse portfolio of future oil projects 
with staggered capacities over time. PEMEX leaders have 
identified such a set of oil development projects, including 
deep offshore and the Chicontopec unconventional area, each of 
which are complex undertakings with high potential, forming a 
growth strategy to complement conventional shallow offshore 
projects and investment in enhanced recovery at previous wells. 
Some observers point out that privatization of the sector would 
bring competition and private investment; however, that 
prospect is so remote as to be non-existent and not under even 
speculative consideration. Therefore, the question is what 
PEMEX can achieve on its own or in partnership with 
international companies.
    Most interlocutors are skeptical of PEMEX having the 
capital or expertise necessary to develop deep offshore fields, 
and, probably, the unconventional reserves at Chicontopec. 
Analysts point out that PEMEX took over 15 years and more than 
20 wells to discover the most recent deep water finds. 
Moreover, deep water requires massive investments over many 
years, and even the world's largest international oil companies 
(IOCs) partner with one another to generate capital and spread 
the risk of such investments. PEMEX's capital limitations are 
further complicated by the company's large debt burden. On the 
other side, proponents of PEMEX's ability argue that they have 
gained expertise and dramatically lessened the risks implicit 
in development.
    PEMEX likely could develop a deep offshore project by 
buying technology and expertise through very generous service 
contracts with many of the same companies with which the IOCs 
contract. However, under current capital and management 
constraints,\6\ PEMEX alone is extremely unlikely to have the 
resources necessary to undertake multiple massive deep offshore 
developments while also investing in conventional oil 
production. Moreover, while some technology can be purchased 
through service contracts, project management expertise to run 
that type of project is not easily acquired.
    Therefore, the decision on whether IOCs should be granted 
access individually or in partnership with PEMEX to develop oil 
in Mexico depends on how much oil the Mexican Government wants 
produced and over what span of time. Interlocutors did not 
indicate that the expectations of either of the largest 
political parties or the Mexican public are conducive to the 
long time horizons it would take for PEMEX under current 
conditions to fully develop Mexico's oil.
    Dealing with this challenge is complicated by the fact that 
PEMEX is as much a bureau of the government as it is a company. 
In defiance of conventional business sense (of both private 
companies and state oil companies), multiple Ministries and a 
politically-appointed Board of Directors make key decisions, 
including deciding the amount and direction of investment in 
exploration and development of future production. It is not 
clear that all board members put the interests of the company, 
and hence future finances for the Mexican state, at the 
forefront of decision making. Having politicians with multiple 
constituencies (including the petroleum worker's union and 
companies that thrive off the oil supply chain) and short-term 
political considerations often make essential decisions is 
incompatible with the long-term planning needed in the oil 
sector. However, precisely because PEMEX can be a useful tool 
for political goals, achieving fundamental structural change is 
very difficult.
    In sum, the authors agree that reform must happen to 
sustain and robustly grow Mexican oil production. The stakes of 
doing so are high for the Mexican Government. PEMEX directly 
provides 40% of government revenues, including significant 
resources transferred to the individual Mexican states. 
Decreased oil production has, thus far, been offset by higher 
than average global oil prices, but no government budget should 
rely so heavily on volatile commodity markets. While some 
commentators have argued that the budgetary pain of falling 
production would be useful to wean the budget from PEMEX, such 
a prospect could have wide repercussions on all programs funded 
in the Mexican budget, from poverty alleviation to the rule of 
law, let alone broader economic growth.

Natural Gas: An Emerging Priority
    While oil provides vital government revenue, lack of 
natural gas development threatens to stunt Mexican industry. It 
is reported that parts of Mexico could face natural gas 
shortages in the coming year. Meanwhile, Mexico sits on a sea 
of unconventional natural gas reserves.
    The current natural gas situation--which several 
interlocutors identified as a ``crisis''--results from Mexican 
natural gas being priced artificially low because it is linked 
to the U.S. price, which has fallen with the rapid expansion of 
shale gas supplies. Yet the impact of U.S. supply on Mexican 
prices exists despite the limited physical integration of the 
two countries' physical gas markets. When combined with gas 
shortages in Mexico, this indicates the need both for more 
pipeline connections to the United States and for building out 
Mexico's domestic gas infrastructure. Doing so is made 
difficult, however, by confusion in the Mexican market where 
the downstream natural gas sector has been relatively 
liberalized while the upstream remains under the monopoly 
control of PEMEX. The lack of an appropriate price signal 
drives up demand while, reportedly, causing PEMEX to ``shut-
in'' some conventional production due to lack of profitability.
    Several interlocutors pointed specifically to the need for 
expedited pipeline construction to connect with Texas. Quick 
U.S. federal and state actions to permit pipelines could 
helpfully reduce short-term supply pressures in Mexico and help 
open new market opportunities for U.S. gas. Long-term economic 
growth in Mexico, however, is believed to be better served by 
development of its abundant domestic resources. As an analyst 
said, ``You cannot build a future in Mexico based on cheap gas 
imports from the U.S.''
    The United States government estimates that Mexico has one 
of the largest shale gas reserves in the world at more than 680 
trillion cubic feet (tcf) of technically recoverable reserves, 
although Mexico itself uses estimates as low as 140 tcf. Much 
of that shale gas is thought to be contained in an extension of 
the Eagle Ford formation that is already producing in Texas. 
PEMEX reportedly has drilled just a handful of exploratory 
wells, and with prices being held down by the United States gas 
boom, it has little economic incentive to invest heavily in 
shale in its own right, let alone the opportunity cost of that 
capital compared to much more lucrative oil. Absent natural gas 
pricing reform, it is unlikely that PEMEX will choose to invest 
heavily into shale gas.
    Awareness of shale gas potential is growing in Mexico; at 
the time of the authors' visit, for example, the Mexican 
government was hosting a meeting of shale gas experts. Many 
interlocutors were carefully watching shale developments in the 
United States both in terms of direct job creation and in wider 
economic opportunities for power generation, chemicals, and 
manufacturing. Development of shale could be particularly 
helpful for economic growth in Mexico's northern border region.
    The authors found that developing Mexico's shale gas 
reserves, as with technologically challenging new oil 
frontiers, will require energy reform to galvanize private 
investment, technology, and expertise. At the same time, an 
additional level of government capacity building will be useful 
to aid official understanding in the geology, economics, and 
environmental protections necessary for shale production. The 
U.S. State Department's Unconventional Gas Technical Engagement 
Program is well positioned to enable access to needed 
information, if the Mexican Government chooses to participate.
    Most interlocutors were optimistic that gas reforms to 
allow private investment would come to fruition because natural 
gas is generally regarded to be less politically sensitive than 
oil. The most common fear of such a reform expressed by 
interlocutors was that if gas reform passed separately than oil 
reform, it could stunt momentum for the latter. Moreover, it is 
highly unlikely that a successful natural gas reform could be 
completely delinked from oil. Based on the U.S. experience, 
much of the profitability of shale gas comes from associated 
high-value liquids co-produced with the gas, so it seems 
unlikely that significant private capital will flow if liquids 
are not dealt with in reform.

Considerations in Oil Reform Policy and Politics \7\
    There is no shortage of ideas for possible reforms both 
within PEMEX, the Mexican Government, and outside. As U.S. 
Senate staff who have themselves been part of an unpredictable 
legislative process, the authors will not speculate on the 
exact nature of reforms. Rather, U.S. interest lies primarily 
in assessing whether reforms will be meaningful and whether 
U.S. companies will continue to have access to provide goods, 
services, and investments to the Mexican sector regardless of 
the nature of reform.
    The key marker for any reform capable of significantly 
improving Mexico's oil production horizon is whether that 
reform will produce IOC willingness to invest their capital and 
expertise. Interlocutors disagreed on the extent to which PEMEX 
acting alone or through service contracts can marginally 
increase production, but virtually none disagreed that multiple 
large-scale investments, particularly in deep water and 
Chicontopec onshore, will require external sources of capital 
and expertise.
    PEMEX itself had recently embraced reform under the 
leadership of Juan Jose Suarez Coppel, PEMEX's former head. The 
stance of Emilio Lozoya Austin, Suarez Coppel's recently 
announced successor as sitting head of PEMEX, will be vital to 
understanding what kind of reform the Pena Nieto government is 
considering.
    Under Suarez Coppel, PEMEX advocated a three step process 
by which PEMEX would gain financial autonomy, enable risk-
sharing with IOCs and recapitalize PEMEX (which suffers under 
heavy debt burden, including large unfunded employee benefits), 
and, eventually, open the sector to concessions putting PEMEX 
in direct competition with IOCs. In other words, to undertake 
reforms that would move PEMEX to ``run like a business'' rather 
than an ``economic development agency,'' as described by a 
senior official.
    President Pena Nieto has several times echoed the call for 
internal PEMEX reform by indicating it might be more like 
Brazil's PETROBRAS. While no specifics have been offered, 
presumably that refers to the ability of PETROBRAS to directly 
raise capital and ceding a portion of government ownership. 
However, the PETROBRAS example is a tricky one. On the one 
hand, the company has global reach and laudable expertise. On 
the other hand, large discoveries of domestic oil in Brazil 
have precipitated increased political influence on the 
company's affairs.
    Given the entrenched interests in keeping PEMEX itself 
viable, its key supply contracts in place, its union workers 
employed, and its funding for the government budget in place, 
it is unlikely that any reform option would significantly 
challenge PEMEX's dominance in its current areas of production 
onshore and shallow off-shore. However, PEMEX is not currently 
producing deep offshore and only marginally producing in 
Chicontopec. A frequently discussed legislative option would be 
to institute reforms for those two high growth potential areas, 
along with unconventional natural gas, so that PEMEX could 
concentrate in its zones of expertise.
    Any number of management, regulatory, and financial reforms 
could be beneficial to Mexico's energy future, but putting oil 
production on a sustainable growth path will require IOC 
investment and expertise. Many interlocutors expressed that 
another incremental reform would not be worth the political 
effort; as one observer stated, ``If there's anything we've 
learned on energy reforms in Mexico, it is that if reforms are 
incremental, they don't work.'' The 2008 reforms, for example, 
have received mixed reviews with some proponents pointing to 
subsequent deep offshore oil discoveries and opponents 
bemoaning politically-appointed but nominally independent board 
members lacking in accountability. Politically, however, most 
interlocutors credit the 2008 reform with helping to pave the 
path of public acceptance for bolder reforms now.
    Large-scale IOC investment is likely to come to Mexico if 
those companies are able to ``book'' reserves with the U.S. 
Securities and Exchange Commission, a financial accounting that 
increases the value of the company, which does not exclude 
joint ventures with PEMEX. In some jurisdictions, that means 
taking ownership and marketing the physical barrels of oil, but 
other options may be viable, such as selling the IOC share of 
oil to PEMEX at the wellhead so that IOCs never physically take 
possession of the oil.
    Mexico's need for oil and natural gas reform is widely 
acknowledged amongst leaders in Mexico. The primary question 
remains whether domestic political conditions will allow reform 
to advance. Oil has a privileged status in Mexican identity and 
politics akin to the third rail of Social Security in the 
United States: it basically works for now, is widely 
acknowledged to not work in the future, and any attempts to 
reform it may jeopardize a politician's future.
    Newly sworn-in President Enrique Pena Nieto campaigned on 
reforming the Mexican energy sector and his new administration 
appears committed to follow-through on that promise. The 
political will to reform is evident; it is less clear whether 
President Pena Nieto will garner sufficient support within his 
Institutional Revolutionary Party (PRI), including overcoming 
possible union opposition, to pass meaningful reform.
    Having achieved incremental energy reforms in 2008, the now 
opposition National Action Party (PAN) leadership appears 
poised to support broader oil and natural gas reform if offered 
by the PRI. Previously, some observers had raised concern that 
the PAN may hinder reform, as the PRI had done under the 
Calderon administration, to frustrate the new Presidential 
administration. In addition, some interlocutors indicated that 
the leftist Revolutionary Democratic Party (PRD) could attempt 
to undermine oil sector reform, including by staging public 
demonstrations against any initiative. While the general 
contours of political distinctions can be surmised even now, 
the exact lines of debate will be determined only when the 
government offers the actual scope of their proposed reform 
initiative.
    It is evident that the current government budgetary 
reliance on PEMEX makes it extremely difficult to leave more 
capital within the company to make necessary investments. That 
will be all the more difficult since President Pena Nieto has 
made several campaign promises related to expansion of the 
social safety net in Mexico. Reportedly, for example, President 
Pena Nieto will reduce PEMEX's 2013 budget by over a billion 
dollars compared to expectation. If it is to come, financial 
autonomy for PEMEX will likely have to be tied with government 
fiscal reform measures.
    It is extremely likely that President Pena Nieto will 
pursue oil sector reform. Enabling PEMEX to engage in joint, 
risking-sharing oil development operations is thought to be an 
essential goal of likely legislative proposals pursued by the 
Pena Nieto administration, and may be joined by liberalization 
in chemicals, refining, and related downstream activity. At the 
time of the authors' visit, opinion varied on whether the 
administration's reform goals could be accomplished 
legislatively or if constitutional amendment would be required, 
although the latter is conventional wisdom.\8\ That choice may 
ultimately be resolved by vote counting. As a senior PRI leader 
said: ``we have the will [for Constitutional amendment], but we 
are not sure if we have the votes.''

                        Transboundary Agreement

    The Transboundary Agreement (TBA) provides a bilateral 
basis upon which both countries can develop the legal framework 
necessary for joint production of oil and natural gas reserves 
that extend across our national maritime borders in the Gulf of 
Mexico.
    Secretary of State Hillary Clinton and Mexican Minister of 
Foreign Affairs Patricia Espinosa Cantellano signed the 
Transboundary Agreement (TBA), officially called the Agreement 
between the United States of America and the United Mexican 
States Concerning Transboundary Hydrocarbon Reservoirs in the 
Gulf of Mexico, on February 20, 2012, at Los Cabos, Mexico (see 
Appendix I for the text of the agreement). The Mexican Senate 
ratified the agreement on April 12, 2012, but the Obama 
administration has not formally submitted the agreement for 
passage in the U.S. Congress.
    The TBA was negotiated pursuant to the 2000 Treaty on the 
Continental Shelf, which called for the U.S. and Mexico to 
establish a mechanism that transboundary oil and gas reserves 
would be shared equitably. At the time, concern that companies 
would drain Mexican reserves from the U.S. side of the border 
was, reportedly, a hot button political issue in Mexico. Upon 
conclusion of the 2000 Treaty, the U.S. put a moratorium on oil 
and gas exploration on the U.S. side of the maritime border.
    It is widely acknowledged in both capitals that the TBA 
negotiations moved quickly in order to be completed in time for 
the ratification in Mexico prior to 2012 Congressional 
elections. Both PAN and PRI political leaders used their 
influence to gain support for the TBA, which the Mexican Senate 
ratified.
    In the United States, the TBA stalled within the Obama 
administration despite support by key officials in the 
Departments of State and Interior. Prior to completing the 
agreement, the Departments of State and Interior participated 
in Senate Foreign Relations Committee briefings to discuss 
status of the negotiations; however, there was no consultation 
on specific text. The SFRC Minority Staff appreciated candid 
assessments offered by lead U.S. negotiator Ambassador Richard 
Morningstar.
    The Obama administration has not taken a position on the 
key question of whether the TBA is a treaty or an executive 
agreement, although the latter seems the administration's more 
likely preference. A treaty would be reviewed by the Senate 
Foreign Relations Committee and require the advice and consent 
of the Senate, demanding a two-thirds vote, for approval. As 
part of the treaty process, the resolution of ratification 
would be reviewed and amended in order to provide Congressional 
understandings on issues left unclear by the text of the TBA 
itself. Additional implementing legislation affecting the 
Department of Interior would also be required and need review 
by its committees of oversight.
    An executive agreement would not require the two-thirds 
vote necessitated by a treaty, but instead it would be approved 
in the same form as a statute, requiring passage by majority in 
both the Senate and the House of Representatives. Legislation 
approving the agreement, necessary implementing authorities, 
and clarifications regarding certain provisions of the TBA 
could be subject to amendment, including by items unrelated to 
the TBA itself, thus possibly miring the TBA in other political 
fights.
    Regardless of whether Congress considers the TBA as a 
treaty or executive agreement, Congressional hearings and 
thorough examination of the TBA and its implementing 
legislative proposals are needed. So far the Obama 
administration has declined to officially submit its proposed 
implementing legislation to the committees of jurisdiction for 
action through regular order.
    Congress has a duty and interest in overseeing 
international agreements. That holds for the TBA since several 
provisions of the TBA invite scrutiny and clarification, even 
as the overall agreement is in the interests of the United 
States.\9\ For example, TBA Article 16 establishes an ``expert 
determination'' that is binding whereas Article 17 establishes 
an arbitration mechanism without specifying whether the 
arbitration is binding. Both provisions could impact U.S. 
federal revenues, among other issues. In another example, the 
TBA is intended to improve environmental and safety 
protections, but the plain language makes no such guarantee. 
Article 19, for example, instructs adoption of common 
standards, but that could mean effectively lowering U.S. 
standards in the border region if the Interior Secretary is 
given unrestricted authority to implement that section.

Why the TBA Matters
    The centerpiece of the TBA is the mandate to establish so-
called ``unitization'' agreements by which companies licensed 
by the United States and Mexico's state oil company PEMEX would 
jointly develop oil and gas reservoirs that have been 
discovered to extend across the maritime boundary. In effect, 
unitization agreements would work similarly to more well-known 
production sharing agreements (PSAs), whereby companies 
involved will jointly develop a project in order to spread risk 
given that deep water developments will cost billions of 
dollars each.
    Given PEMEX's lack of experience in deep water, the most 
likely outcome is that IOCs licensed by the United States would 
operate the developments and utilize infrastructure based on 
the United States side of the border, which is more extensive 
than that of Mexico near to the area of operation. However, the 
United States does have an interest in PEMEX gaining expertise 
in operation in deep water in order to improve the integrity of 
potential PEMEX operated developments exclusively in Mexican 
territory.
    A key difference between the unitization agreements 
envisioned under the TBA and traditional PSAs is that physical 
barrels produced will be allocated to the legal jurisdictions 
of the United States and Mexico, presumably in proportion to 
the amount of reserves found on their respective sides of the 
border. The Mexican barrels, presumably, will be property of 
PEMEX as a state entity and the U.S. barrels will be treated 
under standard terms of U.S. licensing in the Gulf of Mexico.
    It is unlikely that, from the U.S. perspective, the TBA 
will meaningfully increase U.S. domestic oil production in the 
near term. The maritime border area is deep water and would 
require massive investments. Such investments are possible and 
should be encouraged by the U.S. government, however, it will 
take years to get through regulatory hurdles and normal project 
development needs. However, the TBA would unlock the maritime 
border region from moratoria, thereby offering long-term 
opportunities to increase U.S. domestic production. The TBA 
should be seen as a net positive to helping reduce U.S. 
dependence on imports from troublesome regions and boosting 
domestic economic activity, and therefore the TBA should be 
viewed as a benefit for U.S. energy security.
    Benefits of physical barrels of oil produced are 
potentially much greater in relative importance on the Mexican 
side of the border, which is experiencing decline in key 
fields, and that would be substantially beneficial to U.S. 
interests in Mexican economic growth. As discussed above, 
Mexico needs new oil production. Developing deep offshore 
production would help diversify the Mexican oil portfolio, 
providing economic benefit to the Mexican state whether that 
oil is sold for export markets or used domestically. Moreover, 
having IOCs working with PEMEX to boost domestic Mexican 
production will provide useful commercial opportunities and, 
importantly, boost confidence that Mexico will have significant 
oil available to export to the United States. As a reliable, 
proximate, and friendly neighbor, Mexican oil imports support 
U.S. energy security.
    The TBA contains numerous provisions in anticipation of 
disputes on allocation of resources under a unitization 
agreement and implementation of those agreements. Legal 
analysis of these provisions is beyond the scope of this 
report. However, it is apparent that lack of clarity on the 
legal status of the dispute resolution mechanisms should be of 
concern to the U.S. Congress. The Obama administration contends 
that the agreement's arbitration mechanism is not intended to 
produce binding decisions, however, that is not specifically 
provided for in the text of the agreement and would be 
different from arbitration mechanisms in many other 
international agreements.
    The TBA further contains requirements of data sharing and 
notification of likely reserves between the United States and 
Mexico, opening the opportunity for increased government-to-
government collaboration on strategic energy policy choices. 
Mexico and the United States are relatively less advanced in 
effective communication and linkages of our energy systems than 
we are in less politically-controversial economic areas. 
Improved ties can improve understanding and galvanize 
cooperation in often unexpected ways. In the immediate term, 
closer oil sector communication will be beneficial in case of 
accidents in the Gulf of Mexico or in case of significant 
disruptions to global oil supplies.
    On issues of environmental protection and safety, the TBA 
envisions that the U.S. and Mexico in the geographic area under 
the agreement will have common standards and that regulators 
from both countries will have access to oil and gas development 
facilities with the ability to order shutdowns in both 
jurisdictions if necessary. The Obama administration contends 
that means that Mexican environmental and safety standards, and 
enforcement, will have to rise to U.S. levels. There is no 
guarantee that passage of the TBA will precipitate systemic 
improvement in Mexican environmental and safety enforcement, 
but any improvement is welcome by the Mexican safety regulator 
and should be welcomed in the United States given possible 
impacts of a spill on U.S. economic interests and quality of 
life.
    Perhaps the most important U.S.-specific benefits of the 
TBA are three-fold.
    First, the TBA will, for the first time, allow U.S.-listed 
IOCs to work in partnership with PEMEX, not including service 
contracts. Many observers are optimistic that the TBA is the 
metaphorical camel's nose under the tent, paving the way to 
broader reform in Mexico. There is no guarantee of such an 
outcome, however, failure for the U.S. to approve the TBA may 
put a drag on Mexican domestic energy reform momentum. The TBA 
helps demonstrate that Mexico's oil patrimony can be protected 
in a joint production regime with U.S. companies. It was 
suggested by some senior officials that passage of the TBA 
could help prompt broader domestic energy reform in Mexico.
    Second, it is unlikely that the U.S. maritime border areas 
would be developed without the TBA, whereas a PEMEX official 
indicated desire to begin exploration on the Mexican side of 
the border. Potential U.S. opponents of the TBA may argue that 
given PEMEX's limited ability to explore in deep water, the 
real effect of the TBA will be to reduce IOCs' competitive 
advantages. In other words, the opposition argument could 
state, the U.S. should simply move forward with exploration 
since our companies have the capital and technology to move 
more quickly than PEMEX. That criticism neglects the reality 
that, over the long-term, the IOCs have a greater interest in 
investing throughout Mexican territory than they do in a sliver 
of U.S. area along the maritime border. Therefore, those IOCs 
would not risk enraging the Mexican government by, potentially, 
draining Mexican resources from U.S. territory. Thus, U.S. 
interests in increased safe and secure domestic oil production 
along the border will be best met with the TBA.
    Finally, passage of the TBA would boost U.S.-Mexico 
relations on energy issues, which have traditionally lagged. 
Mexican officials roundly expressed support for the TBA and 
expectation for U.S. ratification in conversation with the 
authors. The political impact of not approving and implementing 
the TBA would set back U.S.-Mexican relations on energy 
specifically and more broadly. Each of our countries has hot 
button domestic political issues that take courage for 
political leaders to address. In Mexico, oil is one such issue, 
and members of both the PAN and PRI put their political weight 
behind ratification in Mexico. The U.S. not fulfilling its side 
of the agreement would, therefore, be seen as a violation of 
trust and could erode confidence. In the extreme, although 
unlikely, if Mexico proceeds with domestic energy reforms, U.S. 
companies could be shut out of certain opportunities until the 
TBA is ratified. However, bilateral benefits of approving the 
agreement do not require immediate passage; U.S. commitment can 
be demonstrated by the Obama administration formally submitting 
the TBA for Congressional approval and commencement of 
Congressional hearings.
    There is reason to believe that the TBA can receive broad 
bipartisan backing in Congress. It would benefit bilateral 
relations, promote domestic oil production, and improve 
environmental protections in the Gulf of Mexico. Following 
normal Congressional procedure to ensure the agreement is 
vetted and implementing legislation is reasoned will benefit 
each of those goals. External proponents of the TBA will need 
to increase communication and advocacy to improve the 
likelihood of Congressional leaders acting on the agreement in 
the 113th U.S. Congress.

North American Energy Security
    The United States and Canada are radically transforming 
global energy markets. Unconventional oil and natural gas has 
led to a renaissance in North American energy production. 
Alongside continued growth in renewable fuel and power sources 
and energy efficiency, the continent is poised to be 
functionally self-sufficient in energy. Mexico should be 
invited to join in the U.S.-Canada driven resurgence.
    The impacts of the North American oil and gas powerhouse 
reach beyond energy markets. Low-priced American natural gas is 
encouraging job creation, industrial growth, and new trade 
opportunities. Increasing U.S. domestic oil production and 
trade with Canada will keep more American dollars at home. 
Regimes that use their oil and natural gas riches for 
intimidation and coercion, such as Venezuela and Russia, are 
seeing their petro-fueled power eroded.
    Affordable and reliable energy supplies are critical to job 
creation and quality of life for citizens of the United States 
and for our allies Canada and Mexico. North America has long 
been a global leader in energy innovation, production, and 
market promotion. The geographical proximity of our industrial 
and population centers with our resource basins, integrated 
supply and transport chains across borders, and cultural 
closeness of our peoples has encouraged steadily increasing 
coordination and integration of North American energy, 
transport, and related infrastructure.
    Maximizing the potential for oil and natural gas to promote 
economic growth and security across the continent will require 
continual improvement in policy communication, infrastructure 
rationalization, and regulatory harmonization between the U.S., 
Canada, and Mexico. Canada and the U.S. have largely integrated 
energy systems, but fissures over the Keystone XL pipeline 
approval process is an example of the need for even greater 
regulatory coordination. Comparatively, U.S.-Mexico energy 
coordination and integration is well behind.
    Power sector reforms prompted by NAFTA demonstrate that a 
trilateral effort can have major results. Most importantly, key 
leaders from both the PRI and PAN in Mexico City are interested 
in making progress. Recently, President Pena Nieto wrote: 
``Together with the United States and Canada, [energy shifts] 
may well contribute to guaranteeing North American energy 
independence--something from which we would all greatly 
benefit.'' \10\

               Recommendations for Enhancing U.S.-Mexico
                         Bilateral Cooperation

    U.S.-Mexico bilateral cooperation has improved dramatically 
in the last 5 years. Mexican sensitivities regarding their 
sovereignty are still present in government dealings. But today 
they don't prevent bilateral cooperation, as they did in the 
recent past. As evidence in this regard, we have seen a 
significant increase in Mexico's efforts to institutionalize 
and even expand cooperation among both civilian and military 
officials.
    The willingness to improve Mexican cooperation with the 
United States is partly due to the trust developed through the 
successful partnership the U.S. and Mexican governments have 
built while working against drug trafficking organizations. The 
$1.9 billion Merida Initiative through which the United States 
provides equipment, training, and technical assistance to 
support the Mexican government's battle against the narcotics 
trade and transnational crime has created a platform for 
greater bilateral cooperation.
    Today, our two nations work closer than ever before. Yet, 
there are still new areas in which the bilateral relationship 
should improve. Interlocutors both from the then-existing 
Calderon administration and senior advisers to then-incoming 
Pena Nieto administration expressed a similar desire to expand 
cooperation in the bilateral relationship. One senior member of 
the then-incoming Pena Nieto administration expressed that it 
is time to move beyond tourism and drugs, issues which are so 
prominent in the bilateral agenda today.\11\ Of course, the 
development of a contemporary, comprehensive immigration policy 
ranks high when broadening the agenda is discussed.
    The U.S. is well positioned to increase dialogue and 
cooperation on energy security with Mexico (included in 
renewable power and efficiency, which were not part of this 
review, but which are areas where cooperation can move forward 
without significant political obstacles from the Mexican side). 
Key recommendations include:

 1. The U.S. should approve the Transboundary Agreement. The 
        Obama administration should formally submit to Congress 
        proposed implementing legislation and/or resolution of 
        ratification for the Transboundary Agreement and 
        request Congressional review through regular order. 
        Congress should then quickly establish a timetable for 
        consideration of that proposal and approval of the TBA.

 2. The State Department should integrate oil and natural gas 
        development into the bilateral agenda. U.S. Embassy 
        officials are well-versed in energy concerns. The 
        commercial service is already active in promoting 
        business relationships, and some agencies are building 
        technical relationships. The newly established Energy 
        and Natural Resources Bureau at the State Department is 
        ably led by a former Ambassador to Mexico, Carlos 
        Pascual, and the bureau is well-equipped to lead broad 
        U.S.G. cooperation in areas such as shale gas, 
        transparency, trade, supply emergency coordination, 
        demand management, and infrastructure integration 
        should the Government of Mexico wish to work with the 
        United States.

 3. The State Department should encourage Mexico to partner in 
        unconventional natural gas issues. Mexico's tremendous 
        shale gas potential offers it opportunity for local job 
        creation, economic growth, and gains in its balance of 
        trade. For the U.S., Mexican development of its shale 
        could offer valuable commercial opportunities, produce 
        additional valuable liquids, and strengthen North 
        America's position in global markets. The State 
        Department's Unconventional Gas Technical Engagement 
        Program is a ready vehicle for improved cooperation.

 4. The administration should encourage Mexican adoption of 
        international revenue transparency norms.  The Pena 
        Nieto administration has identified the need for 
        increased government transparency and anti-corruption 
        as a priority issue area across the government. The 
        energy sector is not immune from public suspicion, but 
        it is perhaps more complicated because any reform meant 
        to bring international oil company investment must also 
        overcome suspicion of the companies themselves, 
        ingrained since nationalization of the industry decades 
        ago.
          An opportunity to directly build confidence in both 
        the government and potential IOC investors would be for 
        the Mexican Government to institute strong oil and 
        natural gas revenue transparency measures. Public 
        disclosure of revenues received by the government from 
        IOCs and PEMEX allow citizens to better understand 
        budgetary pressures on the government and demonstrate 
        the value that Mexicans receive from IOC investment. 
        Some countries have also found that revenue disclosure 
        also presents useful checks and balances between 
        ministries and can help improve tax collection.
          Under the Cardin-Lugar Amendment, Section 1504 of the 
        2010 Dodd-Frank Act, IOCs would already have to 
        disclose payments with the U.S. SEC if they invest in 
        Mexico (PEMEX itself is not covered since it is 100% 
        state-owned and operating only within Mexico). 
        Internalizing that process domestically within Mexico 
        would compound benefits with essentially no additional 
        cost to IOCs. Additionally, Mexico could work with the 
        voluntary Extractive Industries Transparency Initiative 
        (of which PEMEX is a supporting company) to build 
        capacity and confidence with civil society and 
        industry.

 5. Further enhancing U.S.-Mexico offshore safety coordination 
        should be a priority for the Obama administration. An 
        oil spill in the Gulf of Mexico is not contained by 
        international boundaries, and the U.S. coast is 
        particularly at risk given circulation patterns.
          Mexico is poorly prepared to enforce offshore safety, 
        which would be of particular concern for U.S. coastal 
        communities if large scale oil operations are developed 
        in areas of Mexico close to the maritime border (as 
        have been recent deep water discoveries). Comision 
        Nacional de Hidrocarburos (CNH), a Mexican safety 
        regulator created in 2008, has only 60 employees and, 
        at the time of authors' visit, had not received 
        scheduled budget increases from the Finance Ministry. 
        Most troublingly, CNH has not conducted a single 
        offshore platform inspection. As a senior official 
        stated, ``We are running safety risks because of under 
        investment in this agency [CNH].''
          Mexico's CNH and the U.S. Department of Interior's 
        Bureau of Safety and Environmental Enforcement should 
        enhance cooperation, including U.S. technical and 
        logistical support for CNH-led inspections of Mexican 
        offshore facilities, with reciprocal visits to U.S. 
        facilities. Reciprocal visits will be particularly 
        beneficial to build relationships between CNH and IOCs. 
        The TBA offers one avenue to pursue such an 
        arrangement, but this could directly be accomplished on 
        an accelerated timeline given eagerness of CNH 
        leadership.

 6. The State Department should offer technical assistance in 
        pipeline security. Theft of oil is a growing concern 
        and can form a dangerous intersection with widespread 
        security concerns related to criminal networks. In 
        2011, PEMEX detected 1,324 illegal taps. Approximately 
        3.35 million barrels were stolen that year, up a third 
        from 2010, and costing PEMEX over a billion dollars.
 7. With Canada, invite Mexico to join a standing process for 
        North American energy security planning. Inevitable 
        changes in Mexico's oil portfolio are significant for 
        North American infrastructure planning. The most 
        obvious change is in volume of oil. Yet, the type of 
        oil is also likely to change. Large new deep offshore 
        discoveries contain lighter oil than Mexico's 
        conventional heavy Mayan product, whereas U.S. Gulf 
        Coast refinery capacity is equipped with coking 
        capacity for the heavier oil. If future Mexican exports 
        are likely to be lighter than they have been 
        previously, then investments in Gulf Coast refineries 
        and infrastructure to connect U.S. and Canadian 
        refineries will likely reflect that reality.
          Numerous trilateral initiatives have been focused on 
        energy or included energy as a component part. With 
        shifts already underway in U.S. and Canadian oil and 
        natural gas production, and the high potential of 
        Mexico, communication on energy security planning 
        should be enhanced and formalized in frequent 
        consultations. Consistent with each of their domestic 
        planning, the U.S., Canada, and Mexico could jointly 
        analyze resource availability, infrastructure needs, 
        and regulatory needs to pursue mutually-beneficial 
        strategic planning for North American energy.

    To conclude, the potential benefits of the United States 
and Mexico working more closely on their respective national 
energy goals has never been higher. For the United States, 
thoroughly understanding Mexico's oil prospects is also vital 
for our energy security outlook. Mexico's energy future is in 
the hands of Mexicans. The United States can and should talk 
plainly, as a friend, and offer our robust partnership.
--------------
Notes:

  \1\ The authors thank Clare Seelke, Curry Hagerty, Marc Humphries, 
        and Angeles Villarreal of the Congressional Research Service 
        for their background research. The authors also thank R. Chris 
        Davy at the U.S. Embassy in Mexico City for his support of the 
        staff delegation.

  \2\ Total U.S. imports have been trending downward since 2005, but 
        imports from some countries are rising. In 2011, the U.S. 
        consumed on average 18.8 million barrels of oil each day, down 
        2 million barrels from 2005. Despite that positive trend, the 
        U.S. oil trade balance continues to worsen given increased 
        global prices. U.S. Oil Imports and Exports, Neelesh Nerurkar, 
        Congressional Research Service, April 2012.

  \3\ Mexico's oil and natural gas challenges are the subject of 
        extensive commentary and scholarship. The authors recommend, 
        for example, work by Lourdes Melgar of the EGADE Business 
        School, Duncan Wood of ITAM, Miriam Grunstein of CIDE, and the 
        Oil in Mexico series led by Amy Myers Jaffe of Rice University 
        in partnership with the University of Oxford.

  \4\ Mexico Country Analysis Brief, United States Energy Information 
        Administration, July 2011.

  \5\ Gasoline subsidies were reduced during the Calderon 
        administration, but the overall cost of subsidy has risen given 
        increased global oil prices.

  \6\ U.S. energy service contract companies are already active in 
        Mexico.

  \7\ Given the political sensitivities of energy reform in Mexico, 
        this SFRC report is only characterizing prospects for reform, 
        not details. SFRC Members and staff wanting more detail should 
        consult with Neil Brown or Carl Meacham.

  \8\ Article 27 of Mexico's constitution limits upstream ownership of 
        hydrocarbons.

  \9\ The authors recommend that Committee Members and staff consult 
        with SFRC Minority Staff Chief Counsel Michael Mattler.

 \10\ ``U.S., Mexico should build on their economic ties,'' President 
        Enrique Pena Nieto The Washington Post, November 23, 2012.

 \11\ Often underappreciated is that Mexico is the second largest 
        trading partner of the United States with bilateral trade 
        totaling $460 billion in 2011, up 16% over the previous year.
   Appendix I.-- Text of the Agreement between the United States of 
    America and the United Mexican States Concerning Transboundary 
              Hydrocarbon Reservoirs in the Gulf of Mexico

    The United States of America and the United Mexican States 
(hereinafter, ``the Parties'');
    Considering that the maritime boundaries between the 
Parties were delimited by the Treaty to Resolve Pending 
Boundary Differences and Maintain the Rio Grande and Colorado 
River as the International Boundary signed on November 23rd, 
1970 (hereinafter, ``the 1970 Treaty'') and the Treaty on 
Maritime Boundaries between the United Mexican States and the 
United States of America signed on May 4th, 1978 
(hereinafter,'' the 1978 Treaty on Maritime Boundaries'');
    Recalling that the continental shelf in the Western Gulf of 
Mexico beyond 200 nautical miles was delimited by the Treaty 
between the Government of the United Mexican States and the 
Government of the United States of America signed on June 9th, 
2000 (hereinafter, ``the 2000 Treaty on the Continental 
Shelf'');
    Bearing In mind that the 2000 Treaty on the Continental 
Shelf recognizes the possible existence of hydrocarbon 
reservoirs that may extend across the continental shelf 
boundary established in that Treaty;
    Recalling also that Article 5, paragraph 1, subparagraph 
(b) of the 2000 Treaty on the Continental Shelf provides that 
the Parties shall seek to reach agreement for the efficient and 
equitable exploitation of such transboundary reservoirs;
    Desiring to establish a legal framework to achieve safe, 
efficient, equitable and environmentally responsible 
exploitation of transboundary hydrocarbon reservoirs that may 
exist along the maritime boundaries established between the 
United Mexican States and the United States of America in the 
Gulf of Mexico;
    Recognizing principles that promote equitable and 
reasonable utilization of transboundary resources, and desiring 
to maximize the long term benefits from their exploitation, as 
well as to protect the resources of both Parties; and
    Recognizing that this framework is intended to encourage 
the establishment of cooperative arrangements based primarily 
on principles of unitization, and further recognizing that 
additional cooperative arrangements may be developed outside of 
the framework of this Agreement and that such arrangements may 
also promote efficient, equitable, and environmentally 
responsible exploitation of transboundary reservoirs,
    Have agreed as follows:

                               CHAPTER 1

                           GENERAL PRINCIPLES

                               Article 1

                                 Scope

    This Agreement shall apply to cooperation between the 
Parties with regard to the joint Exploration and Exploitation 
of geological Hydrocarbon structures and Reservoirs that extend 
across the Delimitation Line, the entirety of which are located 
beyond 9 nautical miles from the coastline.
    If any provision in this Agreement would require a Party to 
alter the terms of any License existing as of the date of the 
last notification provided under Article 22, such provision 
shall not apply in such case. Notwithstanding the foregoing, 
the Parties recognize that It Is in their interest that such 
Licenses be subject to all terms of this Agreement, and shall 
undertake good faith efforts to bring those Licenses under this 
Agreement.

                               Article 2

                              Definitions

    For the purposes of this Agreement:
          ``Confidential Data'' means any information or data, 
        including Geological Information, of any type, kind or 
        character, whether written or oral, disclosed by one 
        Party to the other that Is not publicly available and 
        which Information or data has been identified by the 
        disclosing Party as confidentlaI;
          ``Construction and Operation'' means the fabrication, 
        Installation, laying, use, modification, maintenance, 
        repair and decommissioning of Facilities and/or 
        Pipelines;
          ``Delimitation Line'' means the maritime boundaries 
        In the Gulf of Mexico delimited in the 1970 Treaty, the 
        1978 Treaty on Maritime Boundaries and the 2000 Treaty 
        on the Continental Shelf, and any future maritime 
        boundary in the Gulf of Mexico delimited between the 
        Parties, as agreed;
          ``Development'' means those activities that take 
        place following discovery and delineation of commercial 
        quantities of Hydrocarbons, including, but not limited 
        to, geophysical activities, drilling, platform design, 
        fabrication and transportation, and installation of all 
        Facilities, whether onshore or offshore, surface or 
        subsea, and which are for the purpose of producing the 
        discovered Hydrocarbons, whether on or off the Unit 
        Area, excluding any activity related to Exploration or 
        Production;
          ``Executive Agency'' means the Agency of the Party 
        designated to carry out the functions specified in this 
        Agreement, as each Party may designate from time to 
        time;
          ``Expert Determination'' means the resolution of a 
        dispute by an expert in accordance with Article 16 of 
        this Agreement;
          ``Exploitation'' means Development, Production, and 
        all associated activities, including, but not limited 
        to, workover, servicing, completion, maintenance, and 
        decommissioning of wells in a Transboundary Unit, 
        including treatment and processing of gas or liquids 
        from and/or the injection, reinjection or storage of 
        any substance used for or derived from the 
        aforementioned processes;
          ``Exploration'' means the search for Hydrocarbons 
        Including, but not limited to, activities such as: (1) 
        geological and geophysical marine and airborne surveys 
        where magnetic, gravity, seismic reflection, seismic 
        refraction, gas sniffers, coring, or other systems are 
        used to detect or Imply the presence of Hydrocarbons; 
        and (2) any drilling conducted for the purpose of 
        searching for commercial quantities of Hydrocarbons or 
        needed to delineate any Reservoir to decide whether to 
        proceed with Development and Production;
          ``Facility'' means any equipment, infrastructure or 
        installation used for Exploration or Exploitation 
        including, but not limited to, drilling vessels, fixed 
        or floating platforms, platform installed drilling 
        rigs, floating production systems, storage units, 
        flotels, surface or seafloor well heads, Intra-field 
        gathering Pipelines, Intra-field cables, and all the 
        accessories necessary for well drilling, well logging, 
        well intervention, well repair and well testing and 
        includes any vessel used to transfer production from an 
        offshore facility while it Is physically attached to 
        the Facility;
          ``Facilities near the Delimitation Line'' means any 
        Facility under the jurisdiction of either Party within 
        a distance of 15 statute miles from the Delimitation . 
        Line or further for transboundary Pipelines, but 
        excluding supply and support vessels;
          ``Geological Information'' means geological, 
        geophysical or geochemical Information and data 
        resulting from Exploration or Exploitation, including, 
        but not limited to, Information from drilled wells and 
        interpretations derived from such data, and which, 
        subject to its national law, may be disclosed by a 
        Party.
          ``Hydrocarbon'' means all oil and natural gas, 
        regardless of form, including any mixture thereof, 
        existing in or derived from natural strata;
          ``Hydrocarbon Occurrence near the Delimitation Line'' 
        means a detection of Hydrocarbons during drilling 
        operations within 3 statute miles on either side of the 
        Delimitation Line;
          ``Inspector'' means any person authorized by the 
        competent authority of either Party to carry out 
        inspection activities relating to:
                  (a) the Construction and Operation of 
                Facilities related to a Transboundary Unit;
                  (b) any metering system relating to 
                production associated with a Transboundary 
                Unit;
                  (c) health and safety; or
                  (d) protection of the environment.
          ``License'' means the authorization issued by an 
        Executive Agency to carry out Exploitation or 
        Exploration In a given area, and for the Construction 
        and Operation of a Facility. The term License Includes 
        a ``lease'' issued by the U.S. Executive Agency;
          ``Licensee'' means any person or entity holding a 
        License;
          ``Permit'' means any permit, authorization, consent 
        or approval issued under the law of either Party, 
        relating to the Exploration or Exploitation of 
        Hydrocarbons and/or the Construction and Operation of 
        Facilities and/or Pipelines;
          ``Pipeline'' means a continuous conduit, complete 
        with such equipment as valves for flow control, 
        transmission platforms, compressor stations, and 
        communications systems, for transporting Hydrocarbons, 
        produced waters or other fluids and gases from one 
        point to another, usually from a point in the producing 
        field or processing plant to another Pipeline or to 
        points of utilization or storage;
          ``Production'' means those activities, excluding 
        Exploration and Development activities, for the removal 
        of Hydrocarbons from a Transboundary Reservoir, 
        including, but not limited to, treatment and processing 
        of Hydrocarbons or other substances, the injection, 
        reinjection or storage of any substance used for or 
        derived from such activities, enhanced Hydrocarbon 
        recovery activities, transfer and export of 
        Hydrocarbons to shore, and all operations associated 
        with well intervention, repair, maintenance, servicing, 
        re-completion, and workovers;
          ``Reservoir'' means a single continuous deposit of 
        Hydrocarbons in a porous and permeable medium, trapped 
        by a structural or stratigraphic feature;
          ``Transboundary Reservoir'' means any Reservoir which 
        extends across the Delimitation Line and the entirety 
        of which is located beyond 9 nautical miles from the 
        coastline, exploitable in whole or in part from both 
        sides of the Delimitation Line;
          ``Transboundary Unit'' means a single geological 
        Hydrocarbon structure or Reservoir which extends across 
        the Delimitation Line the entirety of which is located 
        beyond 9 nautical miles from the coastline, approved by 
        the Executive Agencies for joint Exploration and/or 
        Exploitation pursuant to the terms of a unitization 
        agreement;
          ``Unit Area'' means the geographical area described 
        in a Transboundary Unit, as set out in the unitization 
        agreement; and
          ``Unit Operating Agreement'' means an agreement made 
        between the Licensees and the unit operator that, among 
        other things, establishes the rights and obligations of 
        the Licensees and the unit operator including, but not 
        limited to, the allocation of costs and liabilities 
        incurred in and benefits derived from operations in the 
        Unit Area.

                               Article 3

                              Jurisdiction

          Nothing in this Agreement shall be interpreted as 
        affecting the sovereign rights and the jurisdiction 
        which each Party has under international law over the 
        continental shelf which appertains to it.

                               Article 4

                  Activity Near the Delimitation Line

          1. Within 90 days following the entry into force of 
        this Agreement and annually thereafter, the Parties 
        shall consult on Exploration and Exploitation 
        activities carried out within 3 statute miles of the 
        Delimitation Line. Such consultation shall include the 
        exchange of all relevant and available Geological 
        Information associated with and derived from such 
        activities.

          2. Notwithstanding the consultation set forth in 
        paragraph 1 of this Article, and subject to its 
        national law:
                  a. if either Party is aware of the likely 
                existence of a Transboundary Reservoir, that 
                Party shall provide written notice to the other 
                Party within 60 days of the date on which such 
                Party became aware of such likely existence;
                  b. if either Party has approved or its 
                Licensee has submitted for approval a plan for 
                the collection of seismic data in an area 
                within 3 statute miles of the Delimitation 
                Line, that Party shall provide written notice 
                of such plan to the other Party within 30 days 
                of the submission and, as applicable, approval 
                of such plan;
                  c. if either Party has approved or its 
                Licensee has submitted an exploration plan 
                applicable to an area within 3 statute miles of 
                the Delimitation Line, that Party shall provide 
                written notice to the other Party within 60 
                days of the submission and, as applicable, 
                approval of such plan;
                  d. if either Party is aware of a Hydrocarbon 
                Occurrence near the Delimitation Line, that 
                Party shall provide written notice to the other 
                Party within 60 days of the date such Party 
                becomes aware of such Hydrocarbon Occurrence;
                  e. if either' Party's Licensee has submitted 
                a plan to drill a well, the wellhead or 
                borehole any portion of which will be within 3 
                statute miles of the Delimitation Line, that 
                Party shall provide written notice of such fact 
                to the other Party within 30 days of the date 
                such Party becomes aware of such plan; and
                  f. if any Licensee has submitted a plan for 
                the Development or Production of an area within 
                3 statute miles of the Delimitation Line, the 
                receiving Party shall provide such plan to the 
                other Party within 30 days of the acceptance of 
                the submission by the receiving Party of such 
                plan.

                               Article 5

               Determination of Transboundary Reservoirs

          1. Within 30 days following receipt of a 
        communication under paragraph 2 subparagraphs a or d of 
        Article 4, the Parties, through their Executive 
        Agencies, shall initiate consultations with a view to 
        determine whether a Transboundary Reservoir exists. 
        ThExecutive Agencies shall request their Licensees to 
        provide all Geological Information relevant to such 
        determination and shall submit to each other all 
        available Geological Information in their possession.

          2. If the Parties have not reached a determination on 
        the existence of a Transboundary Reservoir within 60 
        days of the deadline for initiating consultations in 
        paragraph 1 of this Article, either Executive Agency 
        may submit the issue to the Joint Commission.

          3. During the consultations referred to in paragraph 
        1 of this Article and the pendency of further 
        proceedings under Articles 14 through 17 of this 
        Agreement, the relevant Executive Agency shall, subject 
        to its national law, deliver quarterly reports to the 
        other Executive Agency on Exploration and Exploitation 
        activities or operations carried out by Licensees 
        within its jurisdiction in relation to the potential 
        Transboundary Reservoir.

                               CHAPTER 2

                  EXPLORATION. AND EXPLOITATION OF A 
                    TRANSBOUNDARY RESERVOIR OR UNIT

                               Article 6

                         Unitization Agreement

          1. Any joint Exploration and/or Exploitation of a 
        Transboundary Reservoir or Unit Area pursuant to the 
        terms of a unitization agreement must be approved by 
        the Parties. Such joint Exploration and/or Exploitation 
        shall be conducted pursuant to the terms of a 
        unitization agreement negotiated and proposed by the 
        Licensees and approved by the Executive Agencies. The 
        Executive Agencies should develop one or more model 
        unitization agreements for use under this Agreement.

          2. The unitization agreement shall include, Inter 
        alia:
                  a. The identification of the limits of the 
                Unit Area and that of any Transboundary 
                Reservoir;
                  b. The Identity of the Licensees and their 
                respective participating interests;
                  c. The methodology used to calculate the 
                allocation of production;
                  d. A development plan for the Exploration or 
                Exploitation of the Unit Area, including the 
                estimated number and timing of wells, and a 
                mechanism for delivery and approval of 
                subsequent changes to such plan;
                  e. The effective date and term of the 
                unitization agreement;
                  f. The Identity and appointment of the unit 
                operator, the process for resignation and 
                removal of the unit operator, and the process 
                for appointment of a successor unit operator;
                  g. Provisions regarding the transfer of 
                interests;
                  h. Provisions for an accurate measurement of 
                production;
                  i. Procedures for ensuring accurate payments 
                of royalties and other proceeds;
                  j. Safety and environmental measures to be 
                taken under the national laws of each Party;
                  k. Provisions for appropriate information 
                sharing between the unit operator and each 
                Party;
                  l. Procedures for the redetermination of the 
                allocation of production, including a. 
                timetable or the events that trigger such 
                redetermination.

          3. Each Party shall require that, together with the 
        submission of a proposed unitization agreement, its 
        Licensee or the Licensees acting together through the 
        unit operator, shall provide all available data 
        required by a Party in order for it to review the 
        proposed unitization agreement, and each Party shall 
        ensure that such files and data are available to the 
        other Party.

          4. Each Executive Agency shall approve, approve with 
        modifications or reject the proposed unitization 
        agreement within 120 days of its receipt. Either 
        Executive Agency may extend this period, provided that 
        the total additional period for consideration shall not 
        exceed 120 days. If after the end of the latest period 
        applicable for consideration by an Executive Agency 
        either Executive Agency has not approved, approved with 
        modifications, or rejected the proposal, the 
        unitization agreement shall be deemed to be rejected. 
        At any point during the period contemplated under this 
        paragraph either Executive Agency may refer the issue 
        to the Joint Commission for its consideration within 
        the remaining portion of the period.

          5. Any amendment to an approved unitization agreement 
        shall be subject to approval by the Executive Agencies. 
        Each Executive Agency shall approve, approve with 
        modifications or reject any proposed amendment within 
        30 days of its receipt. Either Executive Agency may 
        extend this period provided that the total additional 
        period for consideration shall not exceed 30 days. If 
        after the end of the latest period applicable for 
        consideration by an Executive Agency either Executive 
        Agency has not approved, approved with modifications, 
        or rejected the proposal, the unitization agreement 
        shall be deemed to be rejected. At any point during the 
        period contemplated under this paragraph either 
        Executive Agency may refer the issue to the Joint 
        Commission for its consideration within the remaining 
        portion of the period.

                               Article 7

         Management of a Transboundary Reservoir Prior to the 
                   Formation of a Transboundary Unit

          1. If it is determined as a result of consultations 
        pursuant to paragraph 1 of Article 5 or following 
        further proceedings under Articles 14 to 17 of this 
        Agreement that a Transboundary Reservoir exists, and a 
        unitization agreement has not been approved by the 
        Parties, each Party shall take steps to facilitate 
        Exploitation of the Transboundary Reservoir as a 
        Transboundary Unit. Such facilitation shall include a 
        prohibition by each Party on the commencement of 
        production of such Transboundary Reservoir for a period 
        from the date of determination of the Transboundary 
        Reservoir to the end of the final period for 
        consideration contemplated in paragraphs 2 through 5 of 
        this Article, as applicable. If production of a 
        Transboundary Reservoir has already commenced, the 
        relevant Party shall take steps it deems appropriate 
        under national law to provide that ongoing production 
        does not unduly prejudice implementation of this 
        Agreement.

          2. If, six months following the date of determination 
        of a Transboundary Reservoir or, alternatively, an 
        earlier date on which the relevant Licensees have each 
        notified the Executive Agencies that they have decided 
        not to enter into a unitization agreement or a 
        subsequent date agreed by the Executive Agencies in 
        order to provide additional time for the Licensees to 
        pursue a unitization agreement, a unitization agreement 
        has not been approved:
                  a. each Party shall require its Licensee, 
                within 60 days, to submit a proposed 
                unitization agreement and associated Unit 
                Operating Agreement to each Executive Agency; 
                and
                  b. the Executive Agencies shall, within 30 
                days, jointly determine an estimate of the 
                recoverable Hydrocarbons in the Transboundary 
                Reservoir, under the original conditions of 
                such Reservoir, on each side of the 
                Delimitation Line, and jointly determine the 
                associated allocation of production.

          3. If the Executive Agencies are unable to reach the 
        determination set out in paragraph 2 subparagraph b of 
        this Article, such determination shall be referred to 
        Expert Determination.

          4. Following the receipt of both unitization 
        agreements and associated Unit Operating Agreements 
        under paragraph 2 subparagraph a of this Article, or 
        the expiration of such period without the receipt by 
        the Parties of both unitization agreements, and 
        determination of the allocation of production under 
        paragraph 2 subparagraph b or paragraph 3 of this 
        Article, the Executive Agencies shall have 90 days to 
        approve one of the submitted unitization agreements and 
        associated Unit Operating Agreement, or an alternative 
        unitization agreement and Unit Operating Agreement 
        developed by the Parties. If no unitization agreement 
        and associated Unit Operating Agreement has been 
        approved at the end of this 90-day period, the Issue 
        shall be referred to the Joint Commission for 
        consideration. If no unitization agreement and 
        associated Unit Operating Agreement has been approved 
        within 90 days of submission of the issue to the Joint 
        Commission, Exploitation of the Transboundary Reservoir 
        may proceed pursuant to paragraph 5 of this Article.

          5. Should any Party or Licensee fail to sign a 
        unitization agreement or Unit Operating Agreement, as 
        applicable, approved by the Executive Agencies or the 
        Joint Commission within 60 days of its approval, or 
        should the Executive Agencies or the Joint Commission 
        fail to approve a unitization agreement and an 
        associated Unit Operating Agreement, each Party may 
        authorize its Licensee to proceed with Exploitation of 
        the relevant Transboundary Reservoir subject to the 
        determination of the recoverable Hydrocarbons pursuant 
        to paragraph 2 subparagraph b or paragraph 3 of this 
        Article and any plan for joint management of the 
        Transboundary Reservoir,Including any provisions agreed 
        governing redetermination and metering, as may be 
        agreed between the Parties. Such plan may contain 
        provisions for the resolution of disputes pursuant to 
        Article 16. In the event ofsuch Exploitation, Parties 
        will exchange production data on a monthly basis.

          6. The Joint Commission shall endeavor to resolve 
        issues related to the allocation of production of a 
        Transboundary Reservoir not otherwise addressed in this 
        Article.

                               Article 8

                        Allocation of Production

          1. The Executive Agencies shall require the unit 
        operator, on behalf of the Licensees and 60 days prior 
        to the commencement of production from a Transboundary 
        Reservoir, to initiate consultations on the allocation 
        of production to each side of the Delimitation Line by 
        submitting a proposal for the allocation of production 
        for approval by the Executive Agencies to be applied 
        from first production. The Executive Agencies shall, 
        prior to any decision not in agreement with the 
        proposal, jointly consult with the unit operator.

          2. Each Executive Agency shall ensure that all 
        relevant and available information from the Unit Area 
        related to the proposal Is made available in a timely 
        manner to the other Executive Agency.

          3. If the Executive Agencies are unable to reach 
        agreement on this initial allocation of production 
        within 30 days from the date of the initiation of 
        consultations In accordance with paragraph 1 of this 
        Article, the matter shall be addressed by the Joint 
        Commission.

                               Article 9

            Redetermination of the Allocation of Production

          1. Any redetermination of the allocation of 
        production of a Transboundary Reservoir shall be 
        conducted pursuant to the unitization agreement or as 
        agreed pursuant to Article 7 paragraph 5. The Parties 
        shall endeavor to ensure that provisions for 
        redetermination shall provide for fair and equitable 
        allocation of production of each Transboundary 
        Reservoir. Such terms shall be contained in the 
        unitization agreement and shall be applicable over its 
        full term.

          2. Each Executive Agency shall ensure that, subject 
        to national law, all relevant and available Information 
        related to a redetermination of allocation of a 
        Transboundary Reservoir is made available in a timely 
        manner to the other Executive Agency. The Executive 
        Agencies shall, prior to any decision not in agreement 
        with a redetermination proposal from a unit operator, 
        jointly consult with the unit operator.

          3. If the Executive Agencies are unable to reach 
        agreement on any redetermination of the allocation of 
        production within 60 days following the initiation of a 
        process for redetermination as contemplated under 
        paragraph 1 of this Article, the matter shall be 
        addressed by the Joint Commission.

                               CHAPTER 3

                          OPERATING AGREEMENT

                               Article 10

                             Unit Operator

          1. The Executive Agencies shall ensure that a unit 
        operator for a Transboundary Unit Is designated by 
        agreement between the Licensees. The designation or 
        change of the unit operator shall be subject to the 
        approval of the Executive Agencies.

          2. The unit operator will act on behalf of the 
        Licensees.

                               Article 11

                        Unit Operating Agreement

          1. Each Executive Agency shall require its Licensees 
        to enter into a Unit Operating Agreement for the 
        Exploration or Exploitation of a Transboundary Unit In 
        accordance with this Agreement.

          2. The Executive Agencies shall require that the 
        Licensees submit an executed Unit Operating Agreement 
        prior to the approval of the unitization agreement.

          3. In case of a conflict between the Unit Operating 
        Agreement and the unitization agreement, the 
        unitization agreement shall prevail, or between the 
        unitization agreement and this Agreement, the 
        provisions of this Agreement shall prevail.

                               Article 12

                 Facilities near the Delimitation Line

          1. The Parties shall use their best efforts to 
        facilitate cooperation between Licensees In activities 
        related to the Exploration and Exploitation of a 
        Transboundary Unit, including the facilitation of 
        access to and use of Facilities near the Delimitation 
        Line, and shall not prevent or impede such cooperation 
        by unreasonably withholding necessary Permits.

          2. The use of Facilities near the Delimitation Line 
        may include, inter alia, access to and interconnection 
        with a Pipeline and physical access to Pipeline 
        capacity and, where appropriate, to Facilities 
        supplying technical services incidental to such access.

          3. The Parties shall facilitate, subject to their 
        respective national law, access to Facilities for 
        workers engaged in any activities related to a 
        Transboundary Unit.

                               Article 13

                              Fiscal Terms

    Income arising from the Exploitation of Transboundary 
Reservoirs shall be taxed in accordance with the legislation of 
the United Mexican States and the United States of America 
respectively, as well as the Convention between the Government 
of the United States of America and the Government of the 
United Mexican States for the Avoidance of Double Taxation and 
the Prevention of Fiscal Evasion with respect to Taxes on 
Income and Capital, signed on September 18th, 1992, as amended 
(and as may be amended in the future), or any Convention 
superseding that Convention as the Parties may enter into in 
the future.

                               CHAPTER 4

                       INSTITUTIONAL ARRANGEMENTS

                               Article 14

                            Joint Commission

          1. A Joint Commission shall be established no later 
        than 90 days after entry into force of this Agreement 
        to assist the Executive Agencies in administering this 
        Agreement.

          2. Each Party, through Its Executive Agency, shall 
        appoint one representative and one alternate 
        representative to the Joint Commission. Each Party may 
        provide assistance,Including experts, to its 
        representative as it deems necessary.

          3. In exercising Its functions, the Joint Commission 
        may establish working groups or expert groups, seek the 
        advice of non-governmental groups or Individuals, and 
        take such other actions as the Parties may agree.

          4. The Joint Commission should endeavour to adopt its 
        rules of procedure no later than 90 days after it Is 
        established.

          5. The Joint Commission shall be the competent body 
        to examine any dispute or other matter referred to it 
        by either Executive Agency relating to the 
        interpretation and Implementation of this Agreement, or 
        any unforeseen issues arising under this Agreement.

          6. If the Joint Commission is unable within 60 days 
        to resolve all differences concerning the allocation of 
        production pursuant to Article 8, or the reallocation 
        of production pursuant to Article 9,either Party may 
        submit the dispute for Expert Determination. If the 
        Joint Commission Is unable within 60 days to resolve 
        all differences related to the determination of a 
        Transboundary Reservoir pursuant to paragraph 2 of 
        Article 5, and relevant data Is available from a well 
        in the prospective Transboundary Reservoir on each side 
        of the Delimitation Line, either Party may submit the 
        dispute for Expert Determination.

          7. If the Joint Commission Is unable within 60 days 
        to resolve all differences concerning any dispute 
        referred to It by the Executive Agencies relating to 
        the interpretation and implementation of this Agreement 
        that is not addressed in paragraph 6 of this Article or 
        referred to It under paragraphs 4 or 5 of Article 6 or 
        paragraph 4 of Article 7,either Party may resort to the 
        dispute settlement provisions In Articles 15 or 17. The 
        Joint Commission will have 30 days in which to consider 
        the final recommendation in any arbitration Instituted 
        pursuant to Article 17. If the Joint Commission is 
        unable to resolve any remaining differences within that 
        time, the dispute will be returned to the Parties.

          8. The Parties will refrain from action with regard 
        to any dispute referred to the Joint Commission or to 
        Expert Determination or dispute resolution under this 
        Agreement where it is reasonably foreseeable that such 
        action would prejudice the Implementation of any 
        decision related to the dispute until the dispute 
        resolution procedures are complete.

                               CHAPTER 5

                         SETTLEMENT OF DISPUTES

                               Article 15

                      Consultations and Mediation

          1. The Parties shall make every effort to resolve any 
        disagreement relating to the Interpretation and 
        Implementation of this Agreement through consultations 
        as rapidly as possible. Either Party may initiate 
        consultations through a written request to the other 
        Party. Unless the Parties otherwise agree, the Parties 
        shall consult within 20 days of delivery of the 
        request.

          2. If the Parties do not resolve a disagreement that 
        is not subject to Expert Determination within 120 days 
        of the delivery of the request for consultations, 
        either Party may refer the disagreement to arbitration 
        pursuant to Article 17 within 30 days.

          3. The Parties may also agree to submit any 
        disagreement relating to the Interpretation and 
        Implementation of this Agreement to non-binding 
        mediation by a neutral third party In addition to, or 
        In lieu of, the procedures set out in this Article and 
        In Article 17.

                               Article 16

                          Expert Determination

          1. The Joint Commission shall, within 180 days of the 
        adoption of its rules of procedure, establish 
        arrangements for the appointment of the expert and 
        terms of engagement, including, in particular, 
        provisions governing compensation and the protection of 
        confidentiality.

          2. In the event a dispute is submitted to Expert 
        Determination and the Joint Commission has not 
        established the arrangements set out in paragraph 1 of 
        this Article:
                  a. each Party shall, within 30 days of the 
                date of submission of the dispute and at Its 
                own expense, choose an appointing expert.
                  b. the appointing experts shall, within 30 
                days, appoint the expert and determine the 
                terms of engagement of the expert, including 
                compensation, according to prevailing standards 
                and strict protections of Confidential Data.
                  c. In such circumstances the costs of Expert 
                Determination shall be shared equally by the 
                Parties.
          3. Each Party shall promptly provide all information 
        In its possession, or that it has the legal authority 
        to obtain from Its Licensees, that exists and is 
        required by the expert in order to reach a decision.

          4. The Parties shall ensure that the expert will 
        maintain the strictest Impartiality and transparency. 
        All communications between a Party and the expert, in 
        any form, other than Confidential Data, shall be 
        provided to the other Party.

          5. The Parties shall provide that, within 90 days of 
        the expert's appointment, the expert will provide a 
        preliminary decision to the Joint Commission together 
        with a detailed explanation of how the decision was 
        reached. Thereafter, there will be a period of 60 days, 
        or such other period as the Joint Commission may agree, 
        from the date that the preliminary decision is 
        communicated to the Joint Commission during which 
        either Party may seek clarification and/or make further 
        submissions to the expert for his consideration. The 
        final determination of the expert along with a detailed 
        explanation shall be communicated in writing to the 
        Joint Commission within 30 days of the end ofthis 
        period.

          6. Notwithstanding paragraph 5 of this Article, the 
        Parties shall provide that referrals to the expert 
        under Article 7 paragraph 3 shall be resolved within 30 
        days of their receipt by the expert and that the 
        expert's determination shall be provided directly to 
        the Executive Agencies.

          7. Expert Determination proceedings will be 
        confidential. Except as required by either Party's 
        domestic law,the Parties shall treat, and shall ensure 
        that the expert treats, any information provided for 
        the determination, any written and oral communications 
        related to the determination, and both the preliminary 
        decision and final decision as confidential.

          8. Notwithstanding paragraphs 4 and 7 of this 
        Article, upon any preliminary determination by the 
        expert that a Transboundary Reservoir exists, all 
        information used by the expert in reaching such 
        determination and all information provided to the 
        expert after such date with respect to such 
        Transboundary Reservoir shall be provided to both 
        Parties. Such information shall be maintained as 
        confidential by the Parties pursuant to the terms of 
        this Agreement, subject to national law.

          9. Determinations of the expert shall be final and 
        binding on the Parties.

                               Article 17

                              Arbitration

    If any dispute regarding the interpretation and 
Implementation of this Agreement that is not subject to Expert 
Determination cannot be resolved by the Joint Commission or 
through consultations, either Party may submit the dispute to 
arbitration.
    The Joint Commission shall, within 180 days of the adoption 
of its rules of procedure, establish an arbitration mechanism 
for the implementation of this Article.

                               CHAPTER 6

                       INSPECTIONS, SAFETY, AND 
                        ENVIRONMENTAL PROTECTION

                               Article 18

                              Inspections

          1. Subject to applicable national law, each Party 
        shall, under procedures to be developed and agreed 
        under this Agreement, have the right to inspect 
        Facilities in a Unit Area approved pursuant to this 
        Agreement.

          2. To enable Inspectors of each Party to safeguard 
        their respective interests with respect to safety, 
        environmental and fiscal matters, the Executive 
        Agencies shall develop specific procedures, subject to 
        national law, for:
                  (a) consultation among Inspectors of each 
                Party;
                  (b) timely access to Information relevant to 
                Inspection activities; and
                  (c) physical access to Unit Areas for the 
                purpose of inspecting activities therein under 
                a joint inspection regime, including access to 
                metering systems, wherever located.

          3. The Inspectors of each Party shall act In 
        cooperation and consult with Inspectors of the other 
        Party to achieve compliance with applicable safety and 
        environmental standards.

          4. An Inspector of one Party may, with regard to 
        Facilities located in the Unit Area, request an 
        Inspector of the other Party to exercise his or her 
        powers to ensure compliance with the applicable safety 
        and environmental standards and requirements whenever 
        It appears that circumstances so warrant. In the event 
        of any disagreement between the Inspectors of the 
        Parties, or the refusal of the Inspector of one Party 
        to take action at the request of the Inspector of the 
        other Party, the matter shall be referred to the 
        Executive Agencies.

          5. If it appears that it Is necessary for the purpose 
        of averting risk to life or serious personal injury or 
        significant damage to the environment, and that 
        circumstances do not permit the Inspectors to consult 
        with the Executive Agencies, the Inspector with 
        jurisdiction over the activities giving rise to such 
        risk shall, as authorized under national law, order the 
        immediate cessation of any or all operations upon the 
        request of the other Inspector. Immediately thereafter, 
        but not more than 4 hours following the ordered 
        cessation of activity, the Inspectors shall notify the 
        Executive Agencies of such action and the reasons 
        therefore, and the Executive Agencies shall Immediately 
        consult regarding actions necessary to address the 
        risk. Nothing in this paragraph shall prevent the right 
        of each Party to authorize the resumption of operations 
        of the relevant Facilities.

                               Article 19

                  Safety and Environmental Protection

          1. The Parties shall adopt, where appropriate, common 
        safety and environmental standards and requirements 
        applicable to activity contemplated under this 
        Agreement. In any event, the Parties shall strive to 
        ensure that their respective standards and requirements 
        are compatible where necessary for the safe, effective, 
        and environmentally responsible Implementation of 
        thisAgreement.

          2. The Executive Agencies shall develop procedures 
        for the implementation of this Article.

          3. The Parties recognize the Importance of their 
        existing international obligations with respect to oil 
        pollution preparedness, response, and cooperation, and 
        are to review their Implementation of such obligations 
        in light of the activity contemplated under this 
        Agreement In order to ensure an appropriate framework 
        for ongoing cooperation.

                               CHAPTER 7

                             FINAL CLAUSES

                               Article 20

                            Confidentiality

    To the extent consistent with their national laws, the 
Parties shall maintain confidential, and obligate their 
Licensees to maintain confidential, all Confidential Data and 
other Information obtained from the other Party or its 
Licensees in accordance with this Agreement.

                               Article 21

                               Amendments

          1. This Agreement may be amended at any time by 
        mutual written agreement of the Parties.

          2. Amendments shall enter into force in accordance 
        with the procedure established under Article 22 of this 
        Agreement.

                               Article 22

                            Entry into force

          The Parties shall so notify each other in writing 
        when the necessary internal procedures have been 
        completed to bring this Agreement into force. This 
        Agreement shall enter into force 60 days after the date 
        of the later notification.

                               Article 23

                              Termination

          1. This Agreement may be terminated by mutual written 
        agreement or by either Party at any time upon 180 days 
        written notice to the other Party.

          2. Notwithstanding termination of this Agreement, 
        unless otherwise agreed by the Parties:
                  a. the provisions of this Agreement shall 
                continue to apply to any unitization agreement, 
                Unit Operating Agreement, or other agreement 
                entered into under this Agreement and in effect 
                at the time of termination, for the duration of 
                such agreement, and to any such agreement 
                submitted to or otherwise under review by the 
                Parties pursuant to this Agreement at the time 
                of termination, for the duration of such 
                agreement;
                  b. the provisions of this Agreement shall 
                continue to govern the relationship between the 
                Parties with respect to any unitization 
                agreement,Unit Operating Agreement, or other 
                agreement entered into under this Agreement and 
                in effect at the time of termination for the 
                duration of suchagreements;
                  c. the provisions of this Agreement shall 
                continue to apply to any License issued by a 
                Party after entry into force and prior to 
                termination of this Agreement;
                  d. the provisions of this Agreement shall 
                continue to apply to the Exploitation of any 
                Transboundary Reservoir undertaken pursuant to 
                paragraph 5 of Article 7; and
                  e. the obligations of the Parties set forth 
                in Article 20 concerning confidentiality shall 
                continue to apply.

          3. Upon any notice provided under paragraph 1 of this 
        Article, the Parties shall initiate consultations for 
        the development of a new agreement to address the joint 
        exploration and exploitation of transboundary 
        reservoirs.

                               Article 24

 Termination of the Moratorium on Hydrocarbon Activity in the Boundary 
             Area in the Western Gap of the Gulf of Mexico

    Upon entry into force of this Agreement, the period of any 
moratorium on the authorization or permitting of petroleum or 
natural gas drilling or exploration of the continental shelf 
within the boundary ``Area'' as established by Article 4, 
paragraph 1, of the 2000 Treaty on the Continental Shelf and 
extended by any subsequent exchanges of notes shall be 
terminated.

                               Article 25

                   Relationship with other Agreements

    With the exception of Article 24, nothing in this Agreement 
shall affect the rights and obligations of the Parties with 
respect to other international agreements to which they are 
both party.
    Done at Los Cabos on the twentieth day of February of two 
thousand and twelve, in the English and Spanish languages, both 
texts being equally authentic.

    For the United States of America:

    Hillary Rodham Clinton
    Secretary of State

    For the United Mexican States:

    Patricia Espinosa Cantellano
    Minister of Foreign Affairs

                                  
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