MEXICO’S ENERGY REFORM

WHY DOES MEXICO NEED AN ENERGY REFORM?

WEAKNESSES AND THREATS Oil production in Mexico has dropped, hence the importance of increasing investment in exploration and production Millions of pesos Dollars per Barrel

WEAKNESSES AND THREATS Production in the Cantarell field at one time represented 63% of the country’s total production; today the figure stands at 18% The Cantarell field has experienced a drop in production of 835 thousand daily barrels since 2004 Millions of barrels per day (MBD)

WEAKNESSES AND THREATS Millions of cubic feet per day The demand for gas has risen while at the same time its production has dropped; this has led to imports reaching 34% of national consumption in 2013. Millions of cubic feet per day

MEXICO’S ENERGY POTENTIAL The country’s exploration potential is based on the resources yet to be discovered, known as prospective resources. Total prospective resources rose to 114,812 million barrels of crude oil equivalent (MMBPCE) Documented Resources Additional Resources Total Cuenca MMB Oil MMMOC Gas Total MMBPCE MMBPCE Southeast 12,094 5,250 13,146 6,937 20,083 Tampico-Misantla 931 4,257 1,783 742 2,525 Burgos Y Sabinas 327 11,633 2,654 673 3,327 Veracruz 139 5,335 1,206 383 1,589 Yucatan 447 94 541 13,938 26,475 19,236 8,829 28,065 Conventional

MEXICO’S ENERGY POTENTIAL 75% of all prospective resources are NON-CONVENTIONAL Interior MMB Oil MMMPC Gas Additional MMMPCE Total MMBPCE Deep water 10,429 29,700 10,178 26,547 Lutite 31,900 141,500 - 60,200 Tampico-Misantla 30,700 20,700 34,800 Burgos 53,800 10,800 Burro-Picachos 600 18,000 4,200 Sabinas 49,000 9,800 Veracruz Total 42,329 171,200 86,747 Non - Conventional

OBJECTIVES OF THE REFORM Economic Greater investment Increase Production Greater competitiveness Public Policy Independent Regulators Stronger Institutions New Production Companies Social Energy Security Reducing Costs Transparency Environment Sustainability and improvement of the environment Energy Efficiency Better Use of Resources

Background of the Energy Reform

History of Reforms 1995 Energy Reform Amendment to the exclusivity of the State regarding the development of activities related to hydrocarbons. Activities relevant to the transportation, storage and distribution of gas are permitted; these can be carried out through contracts, without PEMEX losing any ownership of said hydrocarbons. The Ministry of Energy and the−then−new Energy Regulatory Commission were granted powers to enforce the Law for the Oil Sector. The Energy Minister was authorized as the institution responsible for confers the permits to individuals. 1995 Energy Reform

RULES FOR UNDERSIGNING CONTRACTS 2008 Energy Reform PEMEX maintains control of exploration activities and the development of oil resources The Nation exercises the direct and inalienabe dominion of hydrocarbons in Mexican territory and its sea extensions Strengthen the Commission to Regulate Energy Creation of the National Hydrocarbon Commission for the regulation and supervision of the exploration and utilization of hydrocarbons PEMEX given corporate regime status Possible contracts in areas not reserved in the Constitution Changes in the way the Board of Administration is set up Ensure that the income generated from oil during periods of high oil prices benefits the nation and that PEMEX might have sufficient resources to operate during moderate−price−level periods. TAX ASPECTS NEW PEMEX LAW RULES FOR UNDERSIGNING CONTRACTS NEW REGULATORS 2008 Energy Reform Undersigning shared production contracts or those that compromise the value of the sales stands forbidden

THE 2012 REFORM Lines of this reform: Line Six: Miscelaneus Line One: New Rules Line Two: Regulator Line Three: Fiscal Line Four: State-Owned Production Companies Line Five: Green Line Six: Miscelaneus

Highlights of Line One Reduction of market concentration New Rules Liberalization of the Electric and Hydrocarbon Sectors New Contract Models Payment of profit−sharing for the use of land and subsoil Reduction of market concentration

Highlights Regarding Allocations and Contracts LINE ONE Highlights Regarding Allocations and Contracts ALLOCATIONS PEMEX received, through Round Zero, 71% of the domestic oil production and 73% of domestic gas production in order to compete at the same levels with all companies. For strategic projects, allocations will be directly. In the case of crossborder fields, the mandatory PEMEX participation shall stand at at least 20%. CONTRACTS The State undersigns contracts with: PEMEX PEMEX + private entities Private Entities (Whosever offers the best conditions for the State secures the contract) Oil from underground fields always belongs to the Nation; the expected financial benefit is recorded solely for bookkeeping purposes.

Highlights Regarding Natural Gas LINE ONE Highlights Regarding Natural Gas Natural gas is crucial if we are to reduce the cost of electricity and for industry to prosper. OFFER MORE COMPETITIVE PRICING REDUCE THE COST OF ELECTRICITY OBJECTIVE: EXPAND THE PIPELINE NETWORK Open access, subject to CRE (Energy Regulatory Commission) certifiction and regulation. Reserve capacity not used shall be made available to the market through open season. CHARACTERISTICS: CENAGAS To be created 12 months after the Law enters into force. PEMEX shall transfer its infrastructure and contracts. Shall fall under the responsibility of the National Pipeline System. To be supervised by the Energy Regulatory Commission ABATING MARKET CONCENTRATION 100% 50% 20% The Law on Hydrocarbons only applies to hydrocarbons requiring pipelines for their transportation.

Highlights for the New Electrical Industry LINE ONE Highlights for the New Electrical Industry STATE CONTROL TRANSPORTATION AND DISTRIBUTION CENACE operates the Wholesale Electrical Market (SPOT market and auctions) Obligated to interconnect networks Can establish partnerships Can suspend services PLANNING AND CONTROL OF NATIONAL ELECTRICAL SYSTEM TRANSMISSION DISTRIBUTION GENERATION COMMERCE The CFE builds and operates networks, with the possiblity of hiring third parties. BUSINESS DEALINGS SENER can separate or break up companies and COFECE can penalize antitrust practices Over 1.5 MW requieres permission. Entry barriers are eliminated. Can commercialize. In an emergency, the State can request the generation of electrical power. Basic users Skilled Users Wholesale Electricity Market

+ + + Line Two: Regulators COORDINATED REGULATORY BODIES COORDINATION BOARD FOR THE ENERGY SECTOR ENERGY REGULATORY COMMISSION NATIONAL COMMISSION FOR HYDROCARBONS Evaluates the development of work programs carried out by the coordinated bodies. Issues recommendations and approves coordination mechanisms. Regulates, supervises and sanctions. Contributes technical elements to draft energy policies. Approves the draft project for the budget and carries out technical studies. + HEAD OF SENER+ 3 UNDERSECRETARIES + COMMISIONERS PRESIDENTS FOR CNH AND CRE + DIRECTORS GENERAL FOR CENEGAS AND CENACE 7 COMMISSIONERS EACH, 7−YEAR PERIODS (STAGGERED)

Contracts for public tender except for strategic areas Line Three: Fiscal Contracts for public tender except for strategic areas Attributes – Functions regarding monitoring and supervision Institutions responsible Origin of capital Contracts Mexican Oil Fund Collect information on contractors Recieve payment of royalties; Contract quotas in favor of the State as established in the Contracts. Calculate and pay considerations (based on contracts) Ministry of Finance and Public Credit / Tax Authority Determine the basis and rules for registering costs, expenses and investment for contract Determine the basis and rules for procurement of goods and services for activities carried out pursuant to each Contract Verify the correct payment of Royalties and Contractual Fees for the Exploratory phase and other Considerations

1 2 3 4 Oil income flowing into the budget LINE THREE Every year the definitive amount in pesos is determined in the General Criteria for Economic Policy 2 The amount is subtracted from the estimated Income Tax to be collected on the contracts 3 The missing amount is secured from the Mexican Oil Fund 4 The resources that the Fund obtains above this amount are allocated for long−term savings

Approved by the Senate of Mexico Mexican Oil Fund LINE THREE FUNCTIONS Receive Pay Manage Recommend Contractors and transfer the funds so that income from oil will be maintained at a steady 4.7% of PIB. Income assigned to the State through allocations and contracts (less Income Tax, VAT, etc.) Long−term savings. To the Lower Chamber amount for expenditure pursuant to the Constitution when savings surpasses 3% of GDP. Technical Committee Governor BANXICO Members of the Federal Government Approved by the Senate of Mexico Independent Members

TAXATION ON CONTRACTS LINE THREE For oil exploration Monthly payment for the right to explore hydrocarbons, not in the production phase, on behalf of the Allocation Department, pursuant to the following fees: During the first 60 months while the Allocation of 1,150 pesos per square kilometer is in force. As of month 61 of the in-force period of the Allocation, and thereafter 2,750 pesos per square kilometer. These fees shall be updated every year in the month of January, pursuant to the variation established in the National Consumer Price Index for the immediately preceding year. For oil exploration Calculated on a monthly basis, applying to each square kilometer that the Contractual Department or Allocation Department comprises, based on the following fees: During the exploration phase 1,500 pesos, and during the mining phase 6,000 pesos. Tax on exploration and mining of hydrocarbons Contractors shall deliver the full Contractual Production to the State; the State, in turn,delivers the considerations agreed on in the contract(s). For Services A 65% rate is applied to the difference resulting from reducing the value of the hydrocarbons extracted during the fiscal period in question, including the consumption of products by the Assignee, as well as any shrinkage owed to spills or burning off of said products. For Shared Profits Differentiated rates as determined by type and price of hydrocarbons in dollars per unit. On mining of Hydrocarbons

Line Four: State−Owned Production Companies OVERSIGHT AND AUDITING PEMEX and CFE become State−Owned Production Companies, adhering to their own legislation and NOT to the Law for Acquisitions fo the Public Sector Law. SPECIAL REGIME Information standards, such as any other company listed on the Stock Exchange The State goes from being an administrator to a proprietor. The investers: the Mexican people. TRANSPARENCY STATE AS PROPRIETOR Design pursuant to international best practices. The objective: to drive economic value. CORPORATE GOVERNMENT System for tracking and auditing results, management and responsibility to avoid corruption. OVERSIGHT AND AUDITING FLEXIBILITY Flexible Legal Framework. Respective legislations shall be the main regulation, with civil and mercantile law supplementing the foregoing (no longer the administrative framework).

Line Five : Sustainability Reduce emissions and comply with the goals committed to in the General Law on Climate Change. Increase Energy Efficiency Use clean fuels : reduce emissions of critical pollutants, increase the ue of new vehicle technologies, and bring down costs linked to respiratory diseases. Add large−scale renewable energy capabilities through creating a competitive production environment, managed by the State through an independent operator and establishing the use of clean energy certificates. In the coming months there will be discussion on the Law for Energy Transition at Congress

Proposed Bill for Law on Energy Transition (LTE) Line Five Submitted by Congressmen/women and Senators of the PAN party It is expected that in coming weeks the Federal Government will send its proposal to Congress It is expected that the “green package” for the energy reform will be passed before the end of the year Aspects related to LTE with regard to the develoment of renewable energy Establishment of goals for the use of clean energy Underscores the modalities and requierments for electricity generators Specifies the attributes of SENER, CRE, CONUEE and SEMARNAT in terms of planning instruments Institutional Strengthening Turns the Institute for Electrical Investigation for the National Institute for Electricity and Clean Energy (INEEL) into an APF decentralized public agency Creates and defines the attributes and organization of the Advisory Board for Clean Energy and for the Advisory Boad for the Sustainable Use of Energy. Conditions for private and mixed investment The SHCP (Tax Authority) guarantees the availability of the necessary public resources to ensure the investment needed to meet goals Creates funds: a) for the Energy and Sustainable Utilization of Energy; b) Energy Sustainability; and c) for renewable energy sources Encourages private investment to generate electrical power through clean energy sources (wind, photovoltaic, and hydraulic) Stipulates that the CRE will create a program for providing monthly certificates as proof of generation of clean energy Promotes applied research and the development of technologies in the matter through SENER and the participation of CONACYT. Transparency Establishes the National Subsystem of Information on the Utilization of Energy within the framework of the National System for Statistical Information and Geography, whose objective is to register, organize, update and disseminate information on energy; Specifies that the CRE (Commission for the Regulation of Energy) and PROFEPA (Federal Bureau for the Protection of the Environment), will inspect and monitor all those involved in the National Electricity Industry.

COMMITMENT TO GENERATE CLEAN ENERGY Form 2008, our country —in order to contribute to the conservation of the environment— self-imposed specific dates by which to produce clean energy. Year 2020 Reduce greenhouse gas emissions by 30% Year 2024 Generate 35% of electricity through clean energy Year 2035 Generate 40% of electricity through clean energy Year 2050 Generate 50% of electricity through clean energy

Line Six: Miscellaneous Transparency New Rights New Institutional Design Rounds Zero and One

LINE SIX ROUND ZERO Round Zero refers to areas that PEMEX may retain for exploitation; Round One refers to zones that will be set out to tender for private initiative. ROUND ZERO In terms of proven and probable reserves (1P) Pemex is assigned a volume of 20,589 million barrels of crude oil equivalent, that is, practically 100% of the volume requested as concerns reserves. Petróleos Mexicanos was given 120 allocations, covering 71% of national oil production and 73% of national gas production. In terms of prospective resources, Pemex is assigned 23,447 million barels of crude oil equivalent, which is only 68% of the requested amount. PEMEX COULD PRODUCE UP TO 2.5 MILLION BARRELS PER DAY IN THE COMING 20.5 YEARS.

To be made known before November 14 of this year LINE SIX Round One ROUND ONE To be made known before November 14 of this year The tender will include 169 blocks, of which 109 belong to areas for exploration and 60 for drilling fields. 2P reserves and prospective resources represent a volume of 3,882 and 14,606 million barrels of crude oil equivalent, (MMbpce), respectively. It is expected that these projects represent annual investment in approx. $8,525 million dollars between 2015 and 2018.

WHAT WE EXPECT FROM THE REFORM

WHAT WE EXPECT FROM THE REFORM Between 2015 and 2018, a total investment of up to 50 Billion US Dollars, per year. The 10−year goal is 700 Billion US Dollars for the electricity sector and 600 Billion US Dollars for hydrocarbons. INCREASED INVESTMENT Half a million more formal jobs by 2018, and 2.5 million by 2025. Increase oil income, which is the difference between the sales price of oil and/or natural gas and the cost of extracting it. It is forecast that GDP in Mexico will grow 1 additional percentile point by 2025. ECONOMIC DEVELOPMENT It is estimated that oil production will increase by 2.5 million barrels per day at present to 3 million in 2018 and 3.5 million by 2025. 3.9 billion pesos to be invested in the energy sector, thus contributing to quaity energy at competitive prices. COMPETITIVE ENERGY INDUSTRY

WHAT WE EXPECT FROM THE REFORM In a Constitutional law and secondary level, it is guaranteed that the exploitation of natural resources is carried in a sustainable manner. The National Agency of Industrial Safety and Environmental Protection of Oil Sector will be created to monitor the activities of oil companies. PROTECTING THE ENVIRONMENT This reaffirms that the nation owns all natural resources of the subsoil, including hydrocarbons . Reduce imports of Hydrocarbons. The Reformation also ensures that Pemex and CFE will remain public companies, under the guise of "state-owned production companies.” PROTECTING THE SOVEREIGNTY OF MEXICO The Mexican Oil Fund will manage the incomes from oil in an impartial and transparent manner. It shall report the money transferred to the investing companies and other funds. YIELD AND TRANSPARENCY OF INCOME FROM OIL

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