Mexico's Energy Reform - New Legal Framework

8/22/2019 Mexico's Energy Reform - New Legal Framework

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Unidad de Asuntos Internacionales y Promocin de Inversiones


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Unidad de Asuntos Internacionales y Promocin de Inversiones2

Forward-looking statements

and cautionary notes

This national energy sector presentation contains forward-looking statements. Statements that are not historicalfacts, including statements about our beliefs and expectations, are forward looking-statements. These are good faith

statements based on current plans, estimates and projections and therefore you should not place undue reliance

on them. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to

update publicly any of them in light of new information or future events. Forward-looking statements involve inherent

risks and uncertainties. These risks and uncertainties include crude oil price volatility; production, equipment, and

transportation risks inherent in the oil industry; environmental regulations in Mexico; actions of the Mexican government

with respect to our operations, budget, taxation, commercial activities, control of hydrocarbon reserves, or debt service

payments; any limitations on exports resulting from agreements of the Mexican government; and economic, political,

and foreign exchange risks affecting Mexico. These risks and uncertainties are more fully detailed in Pemex most

recent Form 20-F filing with the US Securities and Exchange Commission and the Pemex Prospectus filed with the

National Banking and Securities Commission (CNBV) and available through the Mexican Stock Exchange. These

factors could cause actual results to differ materially from those contained in any forward-looking statement.

The US Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to

disclose only proved reserves that a company has demonstrated by actual production or conclusive formation teststo be economically and legally producible under existing economic and operating conditions. We use certain terms in

this presentation, such as total national reserves, probable reserves and possible reserves, that the SEC's guidelines

for individual companies strictly prohibit from including in filings with the SEC. Investors are urged to consider closely

the disclosure in the Mexican state owned company Pemex Form 20-F, File No. 0-99, available from them at

www.pemex.com or Marina Nacional 329 Floor 38 Col. Huasteca, Mexico City 11311 or at (+52 55) 1944 9700. You

can also obtain this Form from the SEC by calling 1-800-SEC-0330.


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I. The road to Mexicos energy reform

II. The reform in brief

1. The reforms two pillars

2. Affected energy laws and bills3. New provisions in the energy laws

III. Expected results

IV. Conclusions


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IV. Conclusions


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Unidad de Asuntos Internacionales y Promocin de Inversiones 5

The Office of the President requested in 2007 a diagnose of Pemexsoperations.

The diagnose, prepared by the Secretariat of Energy, identified two main

areas of concern:

1. Challenges internal to Pemex

2. Challenges associated with recent trends in the global

oil industry

Pemex has operated under a legal framework which has

not been revised since the end of the 1970s.

Source: Sener with data from the approved reform initiatives


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1. Challenges internal to Pemex

Production drop

Reserves decrease

Reduced restitution rate

Low field recovery rate

Growth in imports of refined products

Insufficient transport, storage and distribution infrastructure 6


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2. Challenges associated with recent trends in the

global oil industry

Lack of oil fields with low complexity easy oil is no longer available

Rise in production costs

Insufficient human capital

Transformation in the infrastructure industry

The need to advance in the process of energy transition, taking advantage

of renewable sources of energy and energy efficiency

7


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Reform initiatives discussions at Congress

May

Mar 2008

Jun

Jul

Aug

Sep

Oct

Nov

Apr

Senate forums

May 13th through July 22nd: The Senates discussion forums

take place

2007 President Calderon requests a Pemex diagnose

March 31st: Senerpublishes the Diagnose of the national oil

industry

April 8th: The Executive Power delivers the Senate reform

proposals associated to the oil industry

May 19th: The Executive Power sends a proposal to the Senate

with a new fiscal regime for Pemex for complex oil fields

July 23rd: The PRI presents its proposal for an energy reform

August 13th: The PVEM presents its proposal on renewable

sources of energy

August 25th

: The FAP presents its reform initiative

October 23rd through 28th: THE CONGRESS APROVES THE

LAW AND REFORM INITIAVIVES

April 9th: The Senate initiates the discussion to celebrate a

national debate with the topic of an energy reform

June 23rd through 27th: The National University (UNAM)

organized forums on the energy reform

August 20th: The PRI modifies its Party Statements on energy

matters

September 2nd: Senators from the PAN present an initiative

for a new law on sustainable use of energy

October 9th through 23rd: The Congress discusses the

different reform proposals


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IV. Conclusions


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Regulator strengthening and

change in Fiscal Regime

To increase

investment

capacities

To incorporate

State of the Art

technology

Oil pillarCHALLENGES

To increase

execution capacities

and efficiency

Flexible contracts

Management autonomy Transparency and

accountability

Pemex

strengthening

CHANGES

National content

promotion

To achieve

the Energy

Transition

Transition

pillar

Renewables

Sustainable energy


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IV. Conclusions


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Eight energy laws and bills new or reformed-

constitute the essence of the reform

Promotion of renewable sources of energy and thesustainable use of energy:

1. New Law for the Sustainable Use of Energy

2. New Law for the Use of Renewable Energy and the Financing of the Energy

Transition

Better strategic planning and control capacities:3. Article 33rd of the Federal Public Administration Organic Law (new attributions to

SENER)

4. Law of the Energy Regulatory Commission (CRE)

5. New Law of the National Hydrocarbons Commission (CNH)

Pemex strengthening:6.-New Law of Pemex

7. Regulatory Law of the Constitutional Article 27 relating to Oil Matters

8. Law of Federal Rights



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IV. Conclusions


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Created with the purpose ofpromoting the use of sustainable energy

and energy efficient processes and activities, from exploitation to

consumption

Creates the National Commission for the Efficient Use of Energy

(CNUEE, previously Conae) and mandates government institutions into

energy efficiency

Gives CNUEE regulator attributions

1. Law for the Sustainable Use of Energy



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Created to promote the use of the renewable energy sources

and clean technologies to generate electric power with purposes other

than providing the public service of electric power, as well as to establish

the national strategy and the instruments for the financing of the energy

transition

Gives the Secretariat of Energy and the Energy Regulatory Commission

new attributions to make rules and strategies to include more

renewable energy in the national portfolio

Creates the Energy Transition and Sustainable Energy Use

Fund, with 3,000 million pesos per year from 2009 to 2011, to achieve the

energy transition

2. Law for the Use of Renewable Energy and the

Financing of the Energy Transition



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Extends the capacity of the Ministry of Energy to promote private

participationin areas permitted under the Constitution, as well as to

grant, refuse, modify and, if applicable, to cancel the allocations for the

exploration and exploitation of hydrocarbons

Provides tools to develop long-term planning, energy efficiency and

renewable energy strategies,and to set the oil production platform and

the reserves policy

Supported by a new technical arm - the National Hydrocarbons

Commission

3. Amendment to Article 33rd of the Organic Law

of the Federal Public Administration



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Expanded role and mandate of the Energy Regulatory Commission

Presentsandapproves terms and conditions

Regulation offuel oil, refined products and basic petrochemicals

First hand sale prices for fuel oil and basic petrochemicals

Improved guidelines for the alignment of market incentives in the

industrialization of hydrocarbons

When terms and conditions for first hand sales are in place, the seller

will have no discretion

Efficiency-based pricing

More certainty to participants and buyers

4. Amendment to the Law of the Energy

Regulatory Commission



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Creates the National Hydrocarbons Commission (CNH)

Promotes the optimal use of oil wealth

The new entity will regulate and supervise the exploratory and

extractive activities associated with hydrocarbons (except for coal

bed methane)

It will also regulate transport and storage of hydrocarbons related

with exploration and extraction projects

The CNH will support Senerin defining the oil production platform

and the reserves policy

5. Law of the National Hydrocarbons Commission



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Replaces the old Pemex Organic Law

Pemex transforms into a real company

New and explicit mandate: to add value

Freedom to adjust or redesign its organizational structure

Elimination of the requirement that the Finance Ministry approves investment

projects and debt, and greater flexibility in the setting of budgetary priorities

Rewards linked with results

Procurement and work schemes determined by the company

Independent Counselors

The Director General has freedom to appoint Directors of subsidiary firms

The Board may recommend the removal of the DG to the Executive Power

6. Law of Pemex (1/5)



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Transparency and accountability

Internal Control:

Auditing Committee (Independent Professionals)

Internal Control Organ to review the law obeying

Interaction between entities

External Control :

Citizen Bonds

Commissary

DG reports to Congress/Council/Commissary

Improved Transparency and EfficiencySource: Sener with data from the approved reform initiatives


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Contracts

Efficiency focus

Contractors now have incentives to show their full capacity and skills

Pemex will use, when appriopriate, services support

Pemex will use, in other cases, contractors subjected to performance

payments

Increased execution capacity (operational and financial)

Third parties allowed in exploratoryworks

Additional investment capacity attracted by third parties

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Equal conditions

comparison

Pressure to improve and

raise efficiency



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Change-oriented continuity and economical spill

Technological Research and Training funds

Banobras-CONACYT Fund with $4,000 Mdp per year (2012)

Research resources for:

v Hydrocarbons

v Renewable energy

National Content policy

Nafin Fund with $5,000 Mdp

Diagnose and Plan with goals of improving the national content

v Points in tenders that contemplate domestic content

v To reach a minimum 25% domestic content

Plan to incorporate small and medium companies

22



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Additional provisions

Pemex will offer a stable supply and feedstock to the national fertilizer

industry, as well as long term contracts with fixed prices

Secondary petrochemical producers are granted permission to sell basic

petrochemicals only when they do not exceed 25% of the companyssales

23


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Strengthens the definitions of the oil industry, refining,

petrochemicals, transboundary oil fields and hydrocarbon sovereignty

Allows the exploitation of transboundary oil fields under the

rules defined by international treaties signed by Mexico and sanctioned by

the Senate

Redefines the characteristics of works and services contracts and

excludes any property over hydrocarbons, shared

production nor revenues over sales

Defines that specific regulation shall be elaborated and sanctioned

by the Energy Regulatory Commission and the National

Hydrocarbons Commission

7. Amendment to the Regulatory Law of

Constitutional Article 27 relating to Oil Matters



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Modified in 2005, 2007 and 2008.

Base shifts from gross to net

Efficiency

Recognizes differences in oil returns:

Gas vs. oil

Chicontepec vs. deep waters

Follows international practices

8. Amendment to the Law of Federal Rights



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IV. Conclusions


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Additional economic growth due to the reform might add one percentage pointto projected annual economic growth

D.F. Mex Jal N.L. Mich Ver Tam Coah Chia Tab Cam Otros Nacional0

1,000

2,000

602

334259

193118

191121 110 98 63 33

1575

3697

3,697

Selected States

Employment

(thousand jobs accumulated by 2025)

Strengthening of economic

growth

(GDP additional points, %)

Net exports

Investmen

t

Public

spending

Total

The reform will provide an estimated 218 thousand new job

openings per year, reaching a total of 3.6 by 2025.

Source: Sener with prospective data**

The reform has the potential to generate additional


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2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

The Government and Pemex might receive 194 and 83 thousand million pesoseach of additional resources in the same period.

Additional investments with the reform

(thousand million pesos)

Government resources by origin

(thousand million pesos)

Average

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

100

200

300

400

500

600

700

800

900

1,000

The reform has the potential to generate additional

investments, averaging 70 thousand million pesos from

2010 to 2025.



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2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Tasas

05-15

0

1

2

3

4

5

6

7

8

9

10

11

Crude oil production

(thousand barrels per day)

Crude oil production per capita

(barrels)

Pemexs new tools and control mechanisms will help

increase production levels and oil returns

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0

500

1,000

1,500

2,000

2,500

3,000

3,5004,000


Inertial

Inertial

With reform

With reform


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Production from new projects with thereform


2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

150

300

450

600

750

Aguas Profundas

Chicontepec

Cuencas del Sureste y otros campos

Production value from new

projects with the reform

(millions of pesos)

2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

50,000

100,000

150,000

200,000

250,000

*MME: 75 d/b and exchange rate of 13 pesos per dollar

The reform will help in replacing declining fields with

prospective resources


The reserve restitution rate is also expected to increase


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3P reserves discoveries with the reform

(million barrels of oil equivalent)

3P reserves restitution rates with the

reform

(percentage)

2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

400

800

1,200

1,600

2,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180%

20%

40%

60%

80%

100%

120%

140%

0.740.7910.812

0.9

1.0821.0891.0981.0811.0931.114

1.142

The reserve restitution rate is also expected to increase

due to the reform


Additional energy infrastructure will contribute to energy


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An increase in the refining, transport and storage activities will contributeto energy security by guaranteeing the timely supply and quality of refined

products.

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

200

400

600

800

1,000

1,200

1,400

1,600

Produccin con reforma Demanda interna

Reconfiguration of

existing refineries

New

refinery

New

refinery

New

refinery

New

refinery

Production and internal demand of

gasoline


This will allow to maintain

a positive trade balance for

the sector.

Additional energy infrastructure will contribute to energy

security


Due to the additional refining capacity the reform will allow


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Feedstock for the

petrochemical industry with

reform

(thousand million US dollars)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Feedstock includes light naphtha and propane.

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

20

40

60

80

100

120

140

Feedstock for the

petrochemical industry with

the reform


Due to the additional refining capacity, the reform will allow

the provision of more feedstock for the petrochemical

industry.



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On October 28th, 2008, the Mexican Congress passed several amendments toMexican laws related to the energy sector.

1. Four law decrees

2. Four law amendment decrees

These amendments will enter into force as soon as they are published in the

Official Gazette

The amendments provide the necessary mechanisms to allow Mexico's state-

owned oil company (Pemex), and other Mexican energy authorities, to face thenew technological, economic and environmental realities of the world.

Their aim is to increase the production of oil, gas, byproducts, refined products

and reserves restitution rates, as well as to encourage the sustainable use of

energy and of renewable sources.

Executive summary

Source: Sener


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IV. Conclusions


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Conclusions

Pemex faces a drop in the production rate, a drop in the reserves restitutionrate and the effects of a limited refining, transport, storage and

distribution infrastructure.

The world is facing several challenges derived from the lack of low complexity

oil fields, the need to change the sectors industrial organization to

embrace technological development and to move towards a sustainable energy

transition.

After a process that almost took a year, the different political forces in Mexico agreed

on a reform that allows the strengthening of Pemex and promotes energy

efficiency and renewable sources of energy:

Regulators strengthening to improve the sector planning and private investors

certainty Mechanisms to help Pemex evolve into a better company

Better internal and external control as well as transparency within Pemex

Efficiency-oriented flexible contractual schemes

A new Fiscal Regime for Pemex

Change continuity and economic spill


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Conclusions


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Ethylene XXI is a 100% private project to produce


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It is estimated that the Ethylene XXI project will generate between 2,400 and6,500 jobs during its construction and 3,000 permanent jobs.

The resulting production will reduce de petrochemical imports to have local

supply of 75% in high density polyethylene, 87% in low density polyethylene

and 11% in polypropylene.

Etileno Polietileno AD

y BD

Otros

productos

Polipropileno Total

13200

44002585

1650

21835

Ethylene XXI investment per line

(million pesos)

This equals 53% of the total investments

executed by the state and private investors

in the sector between 2000-2006.

Imports covered with Ethylene XXI

production(percentage from 2006 imports)

Polietilenos alta densidad Polietilenos baja densidad Polipropileno

0.75 0.87 0.11

Ethylene XXI is a 100% private project to produce

polyethylene.

Source: Sener

The new contractual schemes protect sovereignty


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Pemex payments addressed in contracts with physical or moral people willalways be in cash and will never transfer the hydrocarbon property, nor

production or profit shares.

Contractors may not register oil reserves as their own.

Contractual payments will follow a predetermined formula or scheme that will

allow performance incentives.

There will not be any contracts that include shared productionschemes nor strategic alliances in the exclusive and strategic sectors.

Signing contracts with a single contractor that unite exploration

and production activities in a determined area will be possible.

The new contractual schemes protect sovereignty

and give Pemex flexibility.


Pemex will establish a strategy to support local


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Pemex will establish a strategy to support local

suppliers and contractor's development.

Pemex will establish a strategy to support national suppliers within theIntegral Strategic Business Plan. This strategy will include a diagnose

of the current scenario of local supply and yearly goals. Local content will

be, at least, 25%.

The strategy shall emphasize small and medium companys (PyMES)development. Pemex will present an annual purchase plan from this

sector.

Pemex will promote the strategy and propose policies and actions to

accomplish the goals.

The Federal Government, through SHCP, will create a Fund within Nafin to

support and finance Pemex suppliers and national contractors.

The Fund will receive 5 thousand million pesos in 2009 and 2.5thousand million pesos in 2010.


The new law allows Pemex to use the excess


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The new law allows Pemex to use the excess

revenues from oil sales.

This law allows Pemex to gradually use the excess revenues from oilsales (in 6 years) and gives them the autonomy to manage their budget and

debt. 1st year: 20% of the excess revenues will be returned to Pemex (at least, 10 thousand million

pesos) and budgetary autonomy will be executed as long as Pemex respects the financial and

primary balances and there is no budget increase in personal services nor pensions.

2nd& 3rd years: 35% (at least, 11 thousand Mdp) from the excess revenues, budgetary

autonomy and the mandate to meet the Pemex Business Plan goals. From the 2nd year

on, Pemex has freedom to allocate debt, under the budgetary roof authorized by Congress.

During the 3rd year, Pemex shall put out bonds that represent 3% of the total debt and the primary

balance restriction is released.

4th& 5th years: 62.5% (at least, 14 thousand Mdp) and 75% (at least,15 thousand Mdp) from

the excess revenues and budgetary freedom, while meeting the restrictions for the previous

years. During the 5th year Pemex shall put out bonds that represent 5% of the total debt and the

pensions restriction is released.

6th year: 87.5% (at least, 15 thousand Mdp) from the excess revenues and 100% during the 7th

year; both years with budgetary freedom. Pemex must use the revenues to meet the Business

Plan goals (except in the 6th year), the financial balance and to avoid increase the personalSource: Sener with data from the approved reform initiatives

Mexico's Energy Reform - New Legal Framework

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