MEXICO S ENERGY REFORM

MEXICO S ENERGY REFORM March 8th, 20156 Austin, Texas 1

The legislative energy reform: Articles 26, 27 and 28, and 21 transitory articles to provide framework Constitution December 2013 Key aspects: Allow private participation in areas reserved to the State in hydrocarbons and electricity Free market access and direct and fair competition between state and private companies New energy institutional framework Secondary Laws (implementing legislation) August 2014 9 New Federal Statutes 12 Amended Laws Regulations (over 100) Started in October 2014 Regulations (over 5000 provisions) 2

New institutional framework Regulatory Agencies National Hydrocarbons Commission Energy Regulatory Commission Environmental and Industrial Safety Agency Energy sector coordinator: Department of Energy System Operators State Productive Enterprises Gas Grid CENAGAS PEMEX Electric Grid CENACE CFE Research Institutes Petroleum, Electricity and Nuclear Budget and Financing Department of Finance National Petroleum Fund Sovereign Petroleum Wealth Fund 3

UPSTREAM 4

Oil perspective Hydrocarbons revenues represented 32% of the federal budget in 2013. Investment has increased and production has declined. Source: Department of Energy (SENER) 5

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Important legal distinctions Surface rights In Mexico the energy sector is regulated only by Federal law Negotiation process with landowners Bidding process for E&P contracts with Mexican Federal Government In the USA transfer, mining and drilling is regulated by State law Mineral rights 7

E&P contracts: fiscal and financial terms MATURE FIELDS + DEEP WATERS SHALLOW WATERS E&P Licenses In kind Hydrocarbons Production Sharing Contracts In kind Hydrocarbons Profit Sharing Contracts Cash Service Contracts Cash How do contractors get paid? Signing Bonus Contractual fee for exploratory phase (km) Royalties $1,150 / $2,750 month 61 (km 2 ) How the government gets paid? Compensation based hydrocarbon value Compensation based on operating income MPF ISR Fee for Exploration and Production $1500 E / $6,000 P(km 2 ) Taxes 8

Round Zero: areas and highlights Sabinas PEMEX Resources by Type (Billion BOE) Fields (489) Reserves 2P Prospective Resources Conventional 20.7 18.2 Shallow Waters 11.4 Chicontepec 3.6 - Onshore 5.3 5.9 Deepwater 0.4 4.8 Unconventionals - 5.2 TOTAL 20.7 72,897 83% of 2P reserves 18% of prospective resources Source: SENER Burgos Unconventionals Onshore August 2014 489 direct entitlements 22 contracts to be migrated 10 farm-outs Faja de Oro Ebano Chicontepec PEMEX got 83% 2P reserves 21% Prospective Resources Cinturon Plegado Perdido Deepwaters Han and Holok Deepwaters Extra heavy oils Shallow waters Extraction Exploration 9

E&P Five Year Plan 2015 / 2019 (Oct-15) Four bidding rounds Total surface area: 235,000 km 2 10

Round One: Aug-14 announcement Extraction Exploration 183 blocks: 109 exploration 60 extraction 14 farm-outs Resources: 19,945 Mmboe 29,112 km 2 Fuente: SENER 11

Round One: Timeline ROUND 1.1 Shallow Waters Exploration Launch Date: December 11, 2014 Award Date: July 15, 2015 Production Sharing Contract 7 Contracts Offered 7 blocks 2 Contracts Awarded 2 blocks ROUND 1.2 Shallow Waters Extraction Launch date: February 27, 2015 Award Date: September 30, 2015 Production Sharing Contract 5 Contracts Offered 8 blocks 3 Contracts Awarded 6 blocks ROUND 1.3 Onshore Mature Fields Launch date: May 12, 2015 Award Date: December 15, 2015 Licenses 25 Contracts Offered 25 blocks 25 Contracts Awarded 25 blocks ROUND 1.4 Deep Waters Launch date: December 17, 2015 Award Date: December 5 th, 2016 Licenses 10 Contracts Offered 10 blocks N/A ROUND 1.5 TBD (Unconventionals, Heavy Oils and Chicontepec) Launch date: TBD Award Date: TBD TBD NA N/A 12

Round One, First Tender (1.1): 14 exploration blocks (shallow waters) Exploration y Shallow Waters Contract Model: Shared Production 2 nd block: Veracruz 7 th block: Tabasco -Launch: December 11 th 2014 -Award Date: July 15 th, 2015 68.99%, minimum 40% Winner (blocks 2-7) Talos Energy (operator) Sierra Oil & Gas Premier Oil Estimated Investment: $2.7 billion USD Range of Minimum Values for State Pre-Tax Profits: 25-40% Companies submitting Proposals (Including Consortiums): 9 Source:Ronda1.gob.mx 13 55.99%, minimum 40% * Production Sharing Agreements

Round One, Second tender (1.2): 5 exploration Contracts (shallow waters) Launch date: February 27th Presentation of Proposals: September 30 th, 2015 Coasts of Campeche and Tabasco Winners: Contractual area 1: Eni International 74%, minimum 33.7% Contractual area 2: Pan American Energy Contractual area 4: Fielwood LLC & Petrobal Companies presenting proposals (Including Consortiums: 9 Range of Minimum Values for State Pre-Tax Profits: 30.2% - 35.9% Source:Ronda1.gob.mx * Production Sharing Agreements 83.75%, minimum 34.8% 83.75%, minimum 34.8% 14

Round One, Third Tender(1.3): 25 onshore (mature) fields Launch date: May 12 th, 2015 Presentation of Proposals: December 15 th, 2015 Companies prequalified: 79 Companies presenting Proposals: 40 Winning Companies: 14 (Including Consortiums) Blocks / Contracts Awarded: 26 (100%) Range of Minimum Values for State Pre-Tax Profits: 30.2% - 35.9% Type 1 areas: contractual area with volume of liquid hydrocarbons below 100 million barrels Type 2 areas: contractual area with volume of liquid hydrocarbons above100 million barrels License Contracts Source:Ronda1.gob.mx 15

Round One, Fourth Tender(1.4): 10 Deep Water fields in the Perdido and Salina Areas Launch date: December 17 th, 2015 Presentation of Proposals: December 5 th, 2016 Range of Minimum Values for State Pre-Tax Profits: N/A License Contracts Companies that are currently in the pre-qualification stage: 16

US and Mexico oil and gas activity in the Gulf of Mexico Source: US Congressional Research Service 17

Round One, Fifth Tender (1.5): Unconventionals and other onshore blocks 18

PEMEX E&P Activities - Perspective Source: PEMEX, December 2015 19

PEMEX Crisis: On February 29, new PEMEX CEO, José Antonio González Anaya announced in a conference call to investors: The company is not facing a solvency crisis, it is facing shortterm financial difficulties PEMEX announced in February a net annual loss of $32 Billion, announced also important cuts to CAPEX Spending to preserve cash. Pemex also pledged to meet the government s request to trim its 2016 budget by 100 billion pesos ($5.5 billion). the company is now looking for alternative ways to fund refining operations 20

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Companies authorized for E&P in Mexico 22

US E&P Companies that have participated In Tenders 1-4 of Round One. Casa Exploration L.P. Cobalt Energía de México, S. de R.L. de C.V. Energía Americas II LLC ExxonMobil Exploración y Producción México, S. de R.L. de C.V. Fieldwood Energy LLC GX Geoscience Corporation S. de R.L. de C.V. Hess México Oil and Gas S. de R.L. de C.V. Hunt Overseas Oil Company Lewis Energy Mexico S de R.L. de C.V. Marathon Offshore Investment Limited Max Energy Holdings LLC Mexport Equipment Inc. Murphy Worldwide, Inc. NBL Mexico, Inc. Northcote Energy Mexico S. de R.L. de C.V. Pan American Energy LLC PetroSouth Properties, LLC Plains Acquisition Corporation Roma Energy Holdings LLC Sanchez Oil & Gas Corporation Sanchez-Olium S de R.L. de C.V. Talos Energy LLC 23

Local Content National content requirements are established to promote the participation of national and local suppliers to promote the growth of national industry. The general rule is that hydrocarbons projects should have at least 25% of domestic content coming from goods, labor, services, training, technology transfer and or infrastructure development That goal will be gradually increased until reaching 35% in 2025. National Content in each Tender: TENDER And length of contract Shallow Waters Exploration [40] 4 + 26 + 5 + 5 Years Shallow Waters Production [35] 2+ 23 + 5 + 5 Years Onshore (Mature Fields) [35] 1 + 24 + 5 + 5 Years [50] Deep Waters [Exp 4+3+3] [Assessment 3] [Production 22 + 10 + 5] Exploration Stage Production Stage 13% 25% - 35% 17% (Evaluation) 22% (Evaluation) 3%, 6%, 8% in each exploration stage 25% - 35% 27% - 38 % 4% and 10% once production begins 24

Land use Process Negotiation process will consider the following: Values of reference (market value, property rights) Professional appraisal(s) (INDABIN, others) Fiscal and financial terms included in the E&P contracts Advisory from Agrarian Attorney General (Federal) Testimony or statements of social witnesses Other payments to the landowner: rent, compensation, and a portion of commercial revenues (oil 0.5-2% gas 0.5 3%) Release of land and vacation of premises and remediation of land NEGOTIATION (180 Days) Process to be validated A contract will be signed for land use Y E S By Judge or Agrarian Tribunal MEDIATION (30 Days) A contract will be signed for land use Y E S CONTRACT/ ASSIGNMENT SIGNING Contractor will notify SEDATU and SENER. The negotiation process will begin between landowners and contractors SENER: Department of Energy SEDATU: Department of Land Development AGREEMENT N O Legal easement is formed through judicial resolution? Contractor will request a mediation to SEDATU 2 appraisals will be compared if the difference is -<15% the payment will be the average of the 2 appraisal values. If the difference is <15% a third appraisal will determine the value AGREEMENT N O SENER may request to SEDATU the administrative creation of a legal easement 25

Protection of human rights related to surface use SOCIAL IMPACT STUDY The Social Impact Study prepared by the Ministry of Energy (SENER) will include the following information: Type of land property Presence of Indigenous Communities Social conflicts and violence index 26

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MIDSTREAM AND DOWNSTREAM 28

In 2012, The US National Natural gas Pipeline System was 43 times larger than the Mexican System. The State of Texas gas pipeline is 8 times larger than the Mexican System. Fuente: CFE 29

Regulated Activities (via permits) SENER (Ministry of Energy) Oil refining Natural gas treatment Refined products imports/exports CRE (Energy Regulatory Commission) Sales Transportation Storage Distribution and retail of hydrocarbons and its derivatives Duty of CRE and SENER: Oversight To create and facilitate conditions for open market access with integrated systems provisions. 30

Mexico s New Natural Gas Market Models: 31

Gas Perspective Mexico: 6 th largest gas reserves. Demand has increased. Imports: 30% of consumption in 2013. Source: CNH 32

Connecting Mexico with the best Natural Gas Market

Natural Gas: US Exports to Mexico have increased 60% in 2015 only

EIA Projections: Growing Demand of Natural Gas in Mexico

Gas infrastructure: 2012 2018 (projected) 11,342 Kms. 18 new projects New total: 21,428 Kms. More imports from TX Expected investment of $15bn Source: SENER 36

Regasification LNG terminals Los Algodones San Luis Río Colorado Sásabe San Isidro Samalayuca Ojinaga Waha Operating gas pipelines Gas pipelines operating in 2014 Gas pipelines in construction Gas pipelines tenders (CFE) Gas pipelines projected Lasalle Colombia Webb Laredo Sur de Texas La Laguna Escobedo Los Ramones Durango Aguascalientes V. Reyes Naranjos Mérida Cancún Guadalajara Tula Tuxpan Cempoala Lázaro Cárdenas Jáltipan Acapulco Salina Cruz Tapachula 37

Natural Gas Pipelines: currently under construction: Some developers: 38

Current refining infrastructure, natural gas processing and petrochemical In recent years Mexican refineries have operated under capacity Source: SENER 39

Petrochemicals and refined products New regulated activities (via permits*): CRE issued specific regulations for obtaining permits in January and May 2015. CRE issued open access rules for transportation and storage in January 2016 (private storage deregulated ). Pemex applied for the corresponding permits from the CRE no later than December 31, 2015.

Petrochemicals and refined products sales Commercialization permits Gasoline & diesel OPENING MARKETS LPG 2016: CRE starts issuing permits to independent service stations (no Pemex franchise) 2017: SENER begins issuing import April permits to private companies 2016 2018: Prices determined by the market 2016: Regulation transferred to CRE; SENER starts issuing import permits to private companies 2017: Prices determined by the market (with focused subsidies: still 35% of residential energy consumption) 41

ELECTRICITY SECTOR POWER GENERATION TRANSMISSION DISTRIBUTION COMMERCIALIZATION AND SUPPLY Power Generation is no longer a Public service Permits Power demand will grow +/-4% anually in the next 15 years. The government can t afford to meet it. National Electric Grid Reserved as public service OPERATE NATIONAL TRANSMISSION GRID Contracts and associations CFE will be able to contract private companies to finance, operate, build and maintain the transmission and distribution networks Qualified Consumers 1<MW 3 rd year Permits Basic Consumers Subsidized Qualified users will agree on rates with generators. The CRE will set rates for standard users and CFE will provide the service

Electricity cross-border trade Most visible projects: Blackstone 524 MW Frontera plant in Mission, TX Blackstone Group LP has obtained permission to export all of the electricity from a power plant it owns in Texas, Sempra 155 MW Energia Sierra Juarez plant in Tecate, BC Through a 20-year power purchase agreement with San Diego Gas & Electric (SDG&E), the project will interconnect with a new cross-border transmission line. Energía Sierra Juárez is the first cross-border wind generation project between Mexico and the U.S.

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ECONOMIC IMPACT AND LEGAL ANALYSIS OF THE SHALE OIL AND GAS ACTIVITIES IN MEXICO - PRELIMINARY REPORT - PROJECTS UNDER DEVELOPMENT BY THE CONSORTIUM: - Shale Final Report - The New Mexican Natural Gas Market Study http://www.aem-energy.org/mxshale.pdf

CONCLUSIONS: The Mexican Energy Reform had very ambitious goals in terms of scope, ending one of the closest energy regimes in the world concluding with it a state monopoly of 76 years over the entire sector. The vast legislative and regulatory production has been generated in a very short period of time and there are still important implementing regulations under development like the fracking regulation in which collaboration with Texas regulatory bodies will be key. Growing market-driven cross border business opportunities will be evolving in the entire value chain of the hydrocarbon sector (Texas production of natural gas and expertise & Mexico s projected demanding market). In the upstream more Texas and US E&P companies will be interested in expanding operations in Mexico. E&P companies with contracts awarded will precipitate expansions of service companies generating jobs on both sides of the border. 46

CONCLUSIONS: cont d In the midstream: investments and development of natural gas infrastructure projects will have an immediate impact in growing demand of natural gas production from Texas and in particular from the Eagle Ford Shale. In the downstream: Alliances with PEMEX and others, to invest in refineries and oil pipelines from production to plant processing. There is a huge market with recent acceleration of permit imports for gasoline and diesel. (Mexico imports from US over 50% of its gasoline consumption, such demand is expected to continue to grow within the next years). Prices will be liberalized until 2018. It is key that policymakers, regulators, business leaders and other stakeholders work together to transform the region s economy and enter into a new era of energy security. 47

CCN MEXICAN ENERGY PRACTICE Thank you! Alejandra Bueno abueno@ccn-law.com (210)244-0203 SAN ANTONIO AUSTIN MCALLEN MEXICO CITY GUADALAJARA MONTERREY QUERÉTARO TIJUANA JUÁREZ REYNOSA MATAMOROS Copyright 2016, All Rights Reserved 48

ASEA: regulation Purpose: Industrial and operative safety. Facilities dismantling and abandonment. Comprehensive control of waste and emissions. Authority in force since 03-02-15 Key regulatory concept: risk management system. Issuance of general administrative regulations. Environmental authorizations. Inspection and surveillance (with external auditors ). Safety measures and sanctions.

Natural Gas Pipeline System: New decentralized public organism (executive decree of September 14): National Center for Natural Gas Control: open access is its core mission Inherits from PEMEX pipelines and transportation contracts Integrated system operator. Proposes five-year planning to the SENER, with the opinion of the CRE. Bids strategic projects. (Also CFE and PEMEX may bid projects)