MEXICO’S ENERGY REFORM

1. MEXICO’S ENERGY REFORM

2. WHY DOES MEXICO NEED AN ENERGY REFORM?

3. 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

4. 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)

5. WEAKNESSES AND THREATS 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

6. 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)

7. MEXICO’S ENERGY POTENTIAL Non - Conventional 75% of all prospective resources are NON-CONVENTIONAL

8. OBJECTIVES OF THE REFORM Sustainability and improvement of the environment Energy Efficiency Better Use of Resources

9. Background of the Energy Reform

10. History of Reforms

11. 2008 Energy Reform 2008 Energy Reform • Undersigning shared production contracts or those that compromise the value of the sales stands forbidden

12. Lines of this reform: THE 2012 REFORM

13. Highlights of Line One

14. 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 Private Entities PEMEX + 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.

15. LINE ONE Highlights Regarding Natural Gas Natural gas is crucial if we are to reduce the cost of electricity and for industry to prosper. REDUCE THE COST OF ELECTRICITY OFFER MORE COMPETITIVE PRICING OBJECTIVE: EXPAND THE PIPELINE NETWORK CENAGAS • 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: • 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 50% 100% 20% The Law on Hydrocarbons only applies to hydrocarbons requiring pipelines for their transportation.

16. LINE ONE Highlights for the New Electrical Industry TRANSPORTATION AND DISTRIBUTION STATE CONTROL 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 DISTRIBUTION TRANSMISSION COMMERCE GENERATION 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

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

18. Line Three: Fiscal Contracts for public tender except for strategic areas

19. Oil income flowing into the budget LINE THREE 1 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

20. Mexican Oil Fund LINE THREE FUNCTIONS Receive Recommend Manage Pay 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.) To the Lower Chamber amount for expenditure pursuant to the Constitution when savings surpasses 3% of GDP. Long−term savings. Technical Committee Governor BANXICO Members of the Federal Government Approved by the Senate of Mexico Independent Members

21. TAXATION ON CONTRACTS LINE THREE

22. Line Four: State−Owned Production Companies 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 The State goes from being an administrator to a proprietor. The investers: the Mexican people. Information standards, such as any other company listed on the Stock Exchange 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).

23. Line Five : Sustainability

24. 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 Proposed Bill for Law on Energy Transition (LTE)

25. 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 2024Generate 35% of electricity through clean energy Year 2035 Generate 40% of electricity through clean energy Year 2050Generate 50% of electricity through clean energy Year 2020 Reduce greenhouse gas emissions by 30% COMMITMENT TO GENERATE CLEAN ENERGY

26. Line Six: Miscellaneous

27. 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. In terms of prospective resources, Pemex is assigned 23,447 million barels of crude oil equivalent, which is only 68% of the requested amount.

28. LINE SIX Round One

29. WHAT WE EXPECT FROM THE REFORM

30. WHAT WE EXPECT FROM THE REFORM

31. WHAT WE EXPECT FROM THE REFORM

32. THANK YOU