Unidad de Asuntos Internacionales y Promoción de Inversiones.

Unidad de Asuntos Internacionales y Promoción de Inversiones

Mexico´s Energy Reform: The New Legal Framework

for Oil, Renewables, and Energy Efficiency

October, 2008

Unidad de Asuntos Internacionales y Promoción de Inversiones 2

Forward-looking statements and cautionary notes

• This national energy sector presentation contains forward-looking statements. Statements that are not historical facts, 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 tests to 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.

http://www.sec.gov/

http://www.bmv.com.mx/

http://www.pemex.com/


I. The road to Mexico’s energy reform

II. The reform in brief1. The reform’s two pillars2. Affected energy laws and bills3. New provisions in the energy

laws

III. Expected results

IV. Conclusions

Index


The Office of the President requested in 2007 a diagnose of Pemex’s operations.

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


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


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


Reform initiatives discussions at Congress

May

Mar 2008

Jun

Jul

Aug

Sep

Oct

Nov

Apr

Senate forums

The Mexican Congress approved a set of reform initiatives between October 23rd and 28th.

May 13th through July 22nd: The Senate’s discussion

forums take place

2007 – President Calderon requests a Pemex

diagnose

March 31st: Senerpublishes the Diagnose of the

national oil industryApril 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 reformAugust 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




laws


IV. Conclusions

Index


Regulator strengthening and change in Fiscal

Regime

To increaseinvestmentcapacities

To incorporate State of the Art

technology

Oil pillarCHALLENGES

To increase execution capacities

and efficiency

Flexible contracts

Management autonomy Transparency andaccountability

Pemexstrengthening

CHANGES

National contentpromotion

To achievethe EnergyTransition

Transition pillar

Renewables

Sustainable energy

Mexico´s energy reform –it´s new legal framework and strategy- rests on two main pillars




laws


IV. Conclusions

Index


Eight energy laws and bills –new or reformed-constitute the essence of the reform

Promotion of renewable sources of energy and the sustainable use of energy:

1. New Law for the Sustainable Use of Energy2. 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 Pemex7. Regulatory Law of the Constitutional Article 27 relating to Oil Matters8. Law of Federal Rights





laws


IV. Conclusions

Index


• Created with the purpose of promoting 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



• 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



• Extends the capacity of the Ministry of Energy to promote private participation in 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



• Expanded role and mandate of the Energy Regulatory Commission

• Presentsandapproves terms and conditions Regulation of fuel 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



• 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 Sener in defining the oil production platform and the reserves policy

5. Law of the National Hydrocarbons Commission



• 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)




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 Efficiency




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

21

Equal conditions comparison

Pressure to improve and raise efficiency




Change-oriented continuity and economical spill

• Technological Research and Training funds Banobras-CONACYT Fund with $4,000 Mdp per year (2012) Research resources for:

Hydrocarbons Renewable energy

• National Content policy• Nafin Fund with $5,000 Mdp• Diagnose and Plan with goals of improving the national content

Points in tenders that contemplate domestic content To reach a minimum 25% domestic content

• Plan to incorporate small and medium companies

22




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 company’s sales

23


• 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



• 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





laws


IV. Conclusions

Index


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

D.F.

Mex Ja

lN.L

.Mich Ver

Tam

Coah

Chia

Tab

CamOtro

s

Naciona

l0

1,000

2,000

60

2

33

4

25

9

19

3

11

8

19

1

12

1

11

0

98

63

33

1,5

75

3,6

97

3,6

97

Selected States

Employment(thousand jobs accumulated by 2025)

Strengthening of economic growth(GDP additional points, %)

0.48 0.370.48

0.75

0.16

0.12Net exports

Investment

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**


Se

rie

s1

0

50,000

100,000

150,000

200,000

250,000

300,000

Additional investment in

E&P

Inversión adicional en

exploración y explotación

































Additional investment in

refining

Inversión adicional en refinación

















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

Additional investments with the reform(thousand million pesos)

Government resources by origin (thousand million pesos)

Average

2008

2010

2012

2014

2016

2018

2020

2022

2024

0

100

200

300

400

500

600

700

800

900

Pemex without reforma Pemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reformaPemex sin reforma

Pemex withreforma

Pemex adicional por la reforma

















Federal, State and Municipal

Governments without reform

Gobierno Federal, Estados y

Municipios sin reforma

































Federal, State and Municipal Governments with reform

Gobierno Federal, Estados y Municipios

adicional por la reforma

































The reform has the potential to generate additional investments, averaging 70 thousand million pesos from 2010 to 2025.



20

08

20

10

20

12

20

14

20

16

20

18

0

2

4

6

8

10

Crude oil production(thousand barrels per day)

Crude oil production per capita(barrels)

Pemex’s new tools and control mechanisms will help increase production levels and oil returns

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

180

5001,0001,5002,0002,5003,0003,5004,000


Inertial

Inertial

With reform

With reform


Production from new projects with the reform(thousand barrels per day)

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0

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

2018

0

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



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

2018

0

400

800

1,200

1,600

2,000

0%

20%

40%

60%

80%

100%

120%

74%81%

90%

108% 110% 109%114%

The reserve restitution rate is also expected to increase due to the reform



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

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

0

200

400

600

800

1,000

1,200

1,400

1,600Producción con reforma

Producción sin reforma

Demanda interna

Reconfiguration of existing re-

fineries

New refin-ery

New refin-ery

New refin-ery

New refin-ery

Production and internal demand of gasoline(thousand barrels per day)

This will allow to maintain a positive trade balance for the

sector.

Additional energy infrastructure will contribute to energy security



Feedstock for the petrochemical industry with reform (thousand million US dollars)

20

0

20

1

20

1

20

1

20

1

20

1

20

2

20

2

20

2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Materias primas por

reforma

Feedstock includes light naphtha and propane.

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

0

20

40

60

80

100

120

140

Feedstock for the petrochemical industry with the reform(thousand barrels per day)

Due to the additional refining capacity, the reform will allow the provision of more feedstock for the petrochemical industry.





laws


IV. Conclusions

Index


Conclusions

• Pemex faces a drop in the production rate, a drop in the reserves restitution rate 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 sector’s 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


The reform will allow to build an energy sector that becomes a

development tool for Mexico and protects the environment while

embracing the future generation requirements.

Conclusions


Mexico´s Energy Reform: The New Legal Framework

for Oil, Renewables, and Energy Efficiency

October, 2008


Pemex payments addressed in contracts with physical or moral people will always 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 production schemes 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 suppliers and contractor's development.

Pemex will establish a strategy to support national suppliers within the Integral 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 company’s (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 2.5 thousand million pesos in 2010.Source: Sener with data from the approved reform initiatives


The new law allows Pemex to use the excess revenues from oil sales.

This law allows Pemex to gradually use the excess revenues from oil sales (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 personal expenses budget.


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