Energy Reform Analysis, Implementation and Compliance

Energy Reform Analysis, Implementation and Compliance

Reform s key aspects Pemex and CFE will be granted with greater autonomy an a new character as State Productive Enterprises (Empresas Productivas del Estado). Hydrocarbons in the subsoil will remain as property of the Mexican Nation. 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 2

Reform s Key Aspects The State will control the following: Hydrocarbons exploration and extraction Planning and control of the National Electricity System Electric Power transmission and distribution The private companies will be able to participate in activities such as: Hydrocarbons exploration and extraction, by means of 4 contract modalities. Refining, gas processing, transportation, storage and distribution, having the appropriate permits. Electric Power generation, having the appropriate permits. Electric Power transmission and distribution under contracts with CFE/ State. The State Productive Enterprises and the private companies will be able to report, for financial and accounting purposes, the assignments and contracts, as well as their expected benefits. 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 3

Mexican Energy Industry Under the New Constitutional Amendments 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 4

Electricity

Electricity Industry Constitutional amendments in terms of electricity Previous Model CHANGES IN THE LAWS REFORM CFE is responsible for Power Generation, either directly or by purchases to third parties. Power Generation is subject to free competition. The private companies are allowed to participate in power generation and sale of electricity in the Wholesale Market, just as the CFE. The CENACE belongs to the CFE s Operations Department. The CENACE becomes a body of the Federal Public Administration. There are modalities of Public Service and Self Supply. Self Suppliers operational restrictions disappear, allowing the sale to third parties. Operation and construction of the transmission and distribution network belongs to the CFE. The operation of the transmission and distribution network is reserved to the Mexican State. CFE is a decentralized public entity subject to the federal budget. CFE will be transformed into a State Productive Enterprise. 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 6

Oil and Gas 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 7

Oil and Gas Constitutional amendments in terms of hydrocarbons PREVIOUS MODEL CHANGES IN THE LAWS REFORM PEMEX administers the hydrocarbon resources (+) service and performance contracts with private companies. The Federal Executive administers the hydrocarbon resources. Assignments to PEMEX (+) 4 different types of contracts with private companies. Refining and basic petrochemical activities are exclusive of PEMEX. Transportation, storage and sale of refined products is exclusive of PEMEX. Private companies can perform distribution activities. Tax regime structured as a fixed rights scheme. Private companies participate in refining and basic petrochemical activities. Private companies are allowed to participate in transportation, storage and sale of refined products. New tax regime for exploration and production of hydrocarbons. Balanced and more flexible. SEMARNAT, SENER and CNH are responsible in terms of environmental protection and industrial safety. The National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector strengthens the State s regulation and supervision capabilities. 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 8

Entities Involved in the Energy Reform Regulatory and operational (Acronyms in Spanish) SHCP Secretaría de Hacienda y Crédito Público (Ministry of Finance) CNH Comisión Nacional de Hidrocarburos (National Hydrocarbons Commission) CENACE SENER Secretaría de Energía (Ministry of Energy) CRE Comisión Reguladora de Energía (Energy Regulatory Commission) CENAGAS ANSIPMASH National Agency for Industrial Safety and Environmental Protection (Hydrocarbons Sector) FMPED Centro Nacional de Control de Energía (National Center of Energy Control) Centro Nacional de Control de Gas Natural (National Center for Natural Gas Control) Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo (Mexican Petroleum Fund for the Stabilization and Development) 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 9

Energy Reform Estimated Timeline 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 10

2015 December 20, 2013 2014 Reform Timeline Responsible party/ Topic ROUND ZERO Natural days established by law 90 Deadline March Amendments to secondary laws (Congress) 120 April Resolution on the assignments requested by PEMEX 270 September Legal framework adjustments regarding environmental protection and transition strategy to use cleaner technologies and fuels (Congress) 365 December Creation of the National Center for Natural Gas Control and the National Center of Energy Control (Executive) Transition to become State Productive Enterprises 485 730 April December 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 11

Global Players Potential Interest in Mexico 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 12

Mexico s Oil and Gas Potential (Estimated CAPEX) Billion USD 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total AGR Pemex CAPEX 23 25 25 29 30 30 31 31 31 254 3.6 Private investment Mature fields 1 1 2 2 2 3 5 6 22 Deep 1 2 5 6 8 9 22 Shale gas 2 3 6 9 12 17 New refining capacity 2 3 5 6 18 Gas processing and fractionation 1 1 2 2 2 Gas pipelines 1 2 2 3 4 5 5 16 Cogeneration projects 1 1 1 1 1 1 5 Petrochemicals 1 1 1 1 1 2 3 4 13 Midstream 1 2 2 3 4 5 16 Total private investment 1 2 3 7 12 20 29 40 50 130 Pemex + private investment 24 27 28 35 41 49 60 71 80 384 16.2 GDP current prices (Billion USD) 1,207 1,220 1,269 1,320 1,433 1,491 1,550 1,612 1,677 12,966 4.2 Pemex CAPEX/ GDP (%) 1.92 2.05 1.97 2.18 2.07 1.99 1.98 1.93 1.83 1.96 Pemex + PI/ GDP (%) 2.01 2.19 2.20 2.69 2.88 3.31 3.84 4.38 4.79 2.96 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 13 Source: Marcos y Asociados

Billion USD GDP Mexico s Oil and Gas Potential (Estimated CAPEX) 90 80 70 60 50 40 30 20 10 0 2.01 1 2 3 1.92 Pemex CAPEX Total private investment Pemex CAPEX/GDP Pemex+PI /GDP 2.19 2.20 2.05 1.97 2.69 2.88 7 12 20 29 40 50 2.18 2.07 1.99 1.98 1.93 1.83 23 25 25 29 30 30 31 31 31 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 14 3.31 3.84 4.38 4.79 2012 2013 2014 2015 2016 2017 2018 2019 2020 % Source: Marcos y Asociados 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Interest from Companies around the World Asian firms expect to participate mainly in upstream activities, as they pursue long term supply security to meet the growing demand in their countries. The International Oil Companies IOCs across Europe and America look to expand and diversify their reserves, while, most O&G service companies seek to expand their business in key O&G Shale plays across the border. 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 15

America Upstream Downstream Integrated Operations O&G Equipment and Services O&G Equipment and Services O&G E&P Integrated O&G Infrastructure and Transportation 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 16

Europe Upstream Downstream Integrated Operations O&G Equipment and Services O&G Equipment and Services O&G E&P Integrated O&G Infrastructure and Transportation 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 17

Asia Upstream Downstream Integrated Operations O&G Equipment and Services Upstream Trading 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. O&G Equipment and Services O&G E&P Integrated O&G Infrastructure and Transportation 18

Oil, Gas, Refining and Petrochemical Industry Industry Players Oil Exploration: Petrobras, Repsol, Sinopec, Petronas Builders and Infrastructure: Carso, Oro Negro Water Treatment Plants: EPM Integrated Operators: EXXON, Chevron, BP, Shell Gas Equipment and Services: GE, Tubacero Integrated Operators: Gazprom, GDF SUEZ Builders and Operators: Enagas, Sempra Energy Power Plants: PEMEX Gas / State Governments 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 19

Oil, Gas, Refining and Petrochemical Industry Industry Players Refining Industry Integrated Operators: Shell, Amoco, Texaco, Penzoil Independent Producers and Distributors: Bardahl, Hidrosina, Oxxo Biofuel: Honeywell, BASF, Petrobras Builders: ICA, ODERBRETCH Petrochemical Industry Integrated Operators: Mexichem Derivatives and Raw Materials: Tigre, INEOS, Dupont Equipment and Services: Honeywell, SIEMENS 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 20

Preliminary Analysis Opportunities 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 21

SENER s View Hydrocarbons Exploration and Production Equipment Drilling, seismic Valves, pumping, etc. Infrastructure Sector Pipelines, ports Roads, bridges, etc. Associated Services Offices, administration Education, accommodation, etc. Energy Efficiency Research and Tecnological Innovation Processing Refining Gasoline, diesel Kerosene, jet fuel, and others Petrochemical Methane Ethane (light olefin) Naphtha (aromatic) Derivatives Ammonia, ethylene, methanol, propylene, toluene, and others Downstream Transportation Pipelines, tanker trucks, railroad, ships Storage Port management, terminals Centers, tanks Underground Distribution Pipelines, wheels, cylinders Gas stations, ports Electricity Generation Combined cycles Gas, diesel Renewable Hydraulic, wind, solar, biomass, geothermal energy, and others Alternate Technologies Re- pumping and storage Capture, storage and use of CO2 Electrical Coverage Transmission Equipment, right-way, infrastructure Low and medium voltage Intelligent networks Distributed generation Administration Commerce, centers, load balancing Environmental Protection and Water Use Regional Development Industrial parks Education, training Finances and marketing Property tax, rights, etc. Clusters (Several municipalities) Centers/ poles of development (Several States) 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 22

Challenges and Specific Opportunities 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 23

Oil Challenges and Specific Opportunities Analysis and Understanding of the Energy Reform Publication of Secondary Laws (April 2014) Implementation of the Energy Reform Compliance with the Reform and the Secondary Laws Alliances to compete Use of resources, land and -Alliances to compete -Equity, debt -Joint Venture -Analysis of tax regime -Infrastructure management and control -Secondary laws analysis -Equity, debt -Joint Venture --Alliances to compete - Infrastructure management and control -Tax regime implementation -Reserves valuation -Secondary laws design and application -Equity, debt -Joint Venture -Alliances to compete -Infrastructure management and control -Reserves valuation -Compliance with tax regime -Contractual disclosures -Request of permits for assignment transfer to private parties -Compliance with secondary laws Challenges and Cross-Cutting Opportunities State Productive Enterprises New technologies Internal and external transparence Reorganization of Pemex and Subsidiaries Improve the financial reports Lack of qualified HR Regulatory external audits High dependency on CNH in bidding Revenue Assurance Sustainability Corporate Governance 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 24

Gas Analysis and Understanding of the Energy Reform Alliances to compete Use of resources, land and Challenges and Specific Opportunities Publication of Secondary Laws (April 2014) -Alliances to compete -Equity, debt - Joint Ventures -Analysis of the tax regime -Infrastructure management and control -Water treatment plants -Reserves evaluation -Secondary laws analysis Implementation of the Energy Reform -Equity, debt - Joint Ventures -Alliances to compete -Water treatment plants -Infrastructure management and control -Tax regime implementation -Reserves valuation -Secondary laws design and application Challenges and Cross-Cutting Opportunities Compliance with the Reform and the Secondary Laws -Equity, debt -Joint Ventures -Alliances to compete -Compliance with the secondary laws -Infrastructure management and control -Reserves valuation -Compliance with tax regime -Contractual disclosures -Request of permits for assignment transfer to private parties -Compliance with secondary laws State Productive Enterprise New technologies Internal and external transparency Reorganization of Pemex and Subsidiaries Improve financial reports Lack of qualified HR 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. Regulatory external audits High dependency on CNH in biddings Revenue Assurance Sustainability Corporate Governance CRE grants storage and transportation permits Supply assurance CENEGAS receives assets transfers Need to create the strategic reserves for the country Eliminate gas deficit Access control regulation 25

Petrochemical Challenges and Specific Opportunities Analysis and Understanding of the Energy Reform Publication of Secondary Laws (April 2014) Implementation of the Energy Reform Compliance with the Reform and the Secondary Laws Alliances to compete Use of resources, land and Alliances to compete -Capital, debt - Joint Venture -Analysis of the tax regime -Infrastructure management and control -Water treatment plants -Site location -M&As -Secondary laws analysis -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Water treatment plants -Tax regime implementation -Secondary laws design and application -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Water treatment plants --Compliance with tax regime -Several contractual disclosures -Compliance with the secondary laws Challenges and Cross-Cutting Opportunities State Productive Enterprises New technologies Internal and external transparency Reorganization of Pemex and Subsidiaries Improve the financial reports Lack of qualified HR Regulatory external audits Supply Assurance Revenue Assurance Sustainability Corporate Governance The CRE grants storage and transportation permits Customs Eliminate raw materials deficit and decrease imports Access control regulation 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 26

Refining Challenges and Specific Opportunities Analysis and Understanding of the Energy Reform Publication of Secondary Laws (April 2014) Implementation of the Energy Reform Compliance with the Reform and the Secondary Laws Alliances to compete Use of resources, land and Alliances to compete -Equity, debt - Joint Ventures -Analysis of tax regime -Infrastructure management and control -Water treatment plants -Site location -M&As -Secondary laws analysis -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Water treatment plants -Tax regime implementation -Secondary laws design and application -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Water treatment plants --Compliance with tax regime -Contractual disclosures -Compliance with secondary laws Challenges and Cross-Cutting Opportunities State Productive Enterprises New technologies Internal and external transparence Reorganization of Pemex and Subsidiaries Improve financial reports Supply Assurance Revenue Assurance Sustainability Corporate Governance The CRE grants storage and transportation permits Customs Eliminate the gasoline and derivatives deficit Access regulation control Lack of qualified HR 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 27

Electricity Challenges and Specific Opportunities Analysis and Understanding of the Energy Reform Publication of Secondary Laws (April 2014) Implementation of the Energy Reform Compliance with the Reform and the Secondary Laws Alliances to compete Use of resources, land and Alliances to compete -Analysis of the tax regime -Equity, debt -Joint Ventures -Infrastructure management and control -Water treatment plants -Site location -M&As -Secondary laws analysis -Privatization of systems -PEMEX and the State governments could participate in Power generation -CENACE regulations analysis -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Water treatment plants -Tax regime implementation -PEMEX and the State governments could participate in Power generation -Design and application of the CENACE regulations -Secondary laws design and application Challenges and Cross-Cutting Opportunities -Equity, debt -Joint Ventures -Alliances to compete -Infrastructure management and control -Compliance with the tax regime -Contractual disclosures - PEMEX and the State governments could participate in Power generation -Compliance with CENACE regulations -Compliance with secondary laws State Productive Enterprises New technologies Internal and external transparency CFE reorganization Improve the financial reports 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. Supply Assurance Revenue Assurance Sustainability Corporate Governance Energy costs reduction to privates Customs Eliminate periodic energy reserves deficit s Access control regulation Lack of qualified HR 28

Contacts: Gonzalo Gómez, Partner of Tax and Legal Services +52 66 46227950 gogomez@deloittemx.com David Chen Chung, Partner of Chinese Services Group +52 65 66886568 davidchen@deloittemx.com Amy Liang, Manager of Chinese Services Group +52 55 50807659 amyliang@deloittemx.com Xiao Cheng, Senior Specialist of Chinese Services Group +52 55 50807338 xcheng@deloittemx.com Deloitte refers to Deloitte Touche Tohmatsu Limited, a private company limited by guarantee ( DTTL ) in the United Kingdom, and it also refers to its network of member firms, each of them as a unique and independent legal entity. Know in www.deloitte.com/mx/conozcanos, the detailed description of the legal structure of Deloitte Touche Tohmatsu Limited, and its member firms. Deloitte provides professional audit, tax, consulting, financial advisory, risk management and related services to public and private clients of different industries. With a global network of member firms in more than 150 countries, Deloitte provides world class capacities and high quality services to its clients, giving the necessary experience to face the most complex challenges in business. It has approximately 200,000 professionals, all committed to be excellence models. As it is used in this document, Deloitte means Galaz, Yamazaki, Ruiz Urquiza, S.C., which has the exclusive legal right of getting involved in, and that limits its business to, the provision of audit, tax, consulting, financial advisory and other related professional services in Mexico under the name of Deloitte. This publication contains only general information and neither Deloitte Touche Tohmatsu Limited, nor its member firms or any of its respective affiliates (together the Deloitte Network ), provides advisory or services by means of this publication. Before making any decision or taking any measures that may affect your finances or business, you must consult a qualified professional advisor. None of the entities of Deloitte Networks will be responsible for the losses that any person or entity that consults this publication might suffer. 29