MEXICO’S ENERGY REFORM

March 8th, 20156 Austin, Texas

1 CCN-LAW.COM The legislative energy reform: Articles 26, 27 and 28, and 21 transitory articles to provide framework

Key aspects: • Allow private participation in areas reserved to the State in hydrocarbons and electricity • Free market access and direct and fair Constitution competition between state and private December 2013 companies • New energy institutional framework

“Secondary” Laws New Federal Statutes (implementing legislation) 9 12 Amended Laws August 2014

Regulations (over 100) Regulations Started in October 2014 (over 5000 provisions)

2 CCN-LAW.COM New institutional framework

National Energy Environmental Hydrocarbons Regulatory and Industrial Regulatory Commission Commission Safety Agency Agencies

Energy Gas Grid Electric Grid System CENAGAS CENACE sector Operators coordinator: Department of Energy PEMEX CFE State Productive Enterprises

Petroleum, Electricity and Nuclear

Research

Institutes

Department of National Sovereign Budget and Finance Petroleum Fund Wealth Fund3 Financing CCN-LAW.COM

UPSTREAM

4 CCN-LAW.COM 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 CCN-LAW.COM 6 CCN-LAW.COM Important legal distinctions

SurfaceSurface rightsrights

In Negotiation process with the energy landowners sector is regulated only by Federal law Bidding process for E&P contracts with Mexican Federal Government

In the USA transfer, mining and Mineral rights drilling is regulated by State law

7 CCN-LAW.COM E&P contracts: fiscal and financial terms

MATURE FIELDS + SHALLOW WATERS DEEP WATERS E&P

Production Profit Service Licenses Sharing Sharing Contracts Contracts Contracts How do In kind In kind Cash Cash contractors Hydrocarbons Hydrocarbons get paid?

Signing Bonus How the government Contractual fee for exploratory phase (km) $1,150 / $2,750 month 61 (km2) gets paid?

Royalties

Compensation based Compensation based on operating income hydrocarbon value MPF

ISR Taxes

Fee for Exploration and Production $1500 E / $6,000 P(km2) 8 CCN-LAW.COM Round Zero: areas and highlights 489 direct entitlements 22 contractsPEMEX to be migrated got 10 farm-outs August 2014 83% 2P Sabinas reserves 21% Burgos PEMEX Resources by Type (Billion BOE) Prospective Fields (489) Reserves Prospective CinturonResources 2P Resources Unconventionals Plegado Perdido Deepwaters Conventional 20.7 18.2 Faja de Oro Shallow Waters 11.4 Ebano Chicontepec 3.6 - Chicontepec Han and Holok Deepwaters Extra heavy Onshore 5.3 5.9 oils Deepwater 0.4 4.8 Unconventionals - 5.2 Shallow waters TOTAL 20.7 72,897 83% of 2P 18% of Extraction reserves prospective Onshore Exploration resourcesSource: SENER

9 CCN-LAW.COM E&P Five Year Plan 2015 / 2019 (Oct-15)

Four bidding rounds Total surface area: 235,000 km2

10 CCN-LAW.COM Round One: Aug-14 announcement

Extraction

Exploration

183 blocks: 109 exploration 60 extraction 14 farm-outs

Resources: 19,945 Mmboe

29,112 km2 Fuente: SENER 11 CCN-LAW.COM Round One: Timeline

Launch Date: Production 7 Contracts 2 Contracts ROUND Shallow Waters December 11, 2014 Sharing Offered Awarded Award Date: 1.1 Exploration Contract July 15, 2015 7 blocks 2 blocks

Launch date: Production 5 Contracts 3 Contracts ROUND Shallow Waters February 27, 2015 Sharing Offered Awarded Award Date: 1.2 Extraction Contract September 30, 2015 8 blocks 6 blocks

Launch date: 25 Contracts 25 Contracts ROUND Onshore May 12, 2015 Licenses Offered Awarded 1.3 Mature Fields Award Date: December 15, 2015 25 blocks 25 blocks

Launch date: 10 Contracts ROUND December 17, 2015 Deep Waters Licenses Offered N/A 1.4 Award Date: December 5th, 2016 10 blocks

TBD Launch date: ROUND (Unconventionals, TBD TBD NA N/A 1.5 Heavy Oils and Award Date: Chicontepec) TBD 12 CCN-LAW.COM Round One, First Tender (1.1): 14 exploration blocks (shallow waters)

Exploration y Shallow Waters Contract Model: Shared Production 2nd block: 7th block:

-Launch: December 11th 2014 -Award Date: July 15th, 2015 68.99%, minimum 40%

Winner (blocks 2-7) Talos Energy (operator) Sierra Oil & Gas Premier Oil

Estimated Investment: $2.7 billion USD

55.99%, minimum 40% Range of Minimum Values for State Pre-Tax Profits: 25-40%

Companies submitting Proposals (Including Consortiums): 9 Source:Ronda1.gob.mx * Production Sharing Agreements 13 CCN-LAW.COM Round One, Second tender (1.2): 5 exploration Contracts (shallow waters) Coasts of and Tabasco Launch date: February 27th Presentation of Proposals: September 30th, 2015

Winners: Contractual area 1: 74%, minimum Eni International 33.7%

Contractual area 2: Pan American Energy

Contractual area 4: Fielwood LLC & Petrobal 83.75%, minimum 34.8% Companies presenting proposals (Including 83.75%, minimum 34.8% Consortiums: 9

Range of Minimum Values for Source:Ronda1.gob.mx State Pre-Tax Profits: 30.2% - * Production Sharing Agreements 35.9% 14

CCN-LAW.COM Round One, Third Tender(1.3): 25 onshore (mature) fields Launch date: May 12th, 2015 Presentation of Proposals: December 15th, 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

Source:Ronda1.gob.mx • License Contracts 15 CCN-LAW.COM Round One, Fourth Tender(1.4): 10 Deep Water fields in the Perdido and Salina Areas Launch date: December 17th, 2015 Presentation of Proposals: December 5th, 2016

Range of Minimum Values for State Pre-Tax Profits: N/A

License Contracts

Companies that are currently in the pre-qualification stage:

16 CCN-LAW.COM US and Mexico oil and gas activity in the Gulf of Mexico

Source: US Congressional Research Service 17 CCN-LAW.COM Round One, Fifth Tender (1.5): Unconventionals and other onshore blocks

18 CCN-LAW.COM PEMEX E&P Activities - Perspective

Source: PEMEX, December 2015 19 CCN-LAW.COM 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 short- term 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 CCN-LAW.COM 21 CCN-LAW.COM Companies authorized for E&P in Mexico

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

• That goal will be gradually increased until reaching 35% in 2025.

24

CCN-LAW.COM Land use – Process

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

25 CCN-LAW.COM 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:

Presence of Social conflicts Type of land and violence property Indigenous Communities index

26 CCN-LAW.COM 27 CCN-LAW.COM MIDSTREAM AND DOWNSTREAM

28 CCN-LAW.COM In 2012, The US National 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 CCN-LAW.COM Regulated Activities (via permits) SENER CRE (Ministry of Energy) (Energy Regulatory Commission) • Oil refining • Sales • Natural gas treatment • Transportation • Refined products • Storage imports/exports • 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 CCN-LAW.COM Mexico’s New Natural Gas Market Models:

31 CCN-LAW.COM Gas Perspective Mexico: 6th largest gas reserves. Demand has increased. Imports: 30% of consumption in 2013.

Source: CNH 32 CCN-LAW.COM Connecting Mexico with the best Natural Gas Market

CCN-LAW.COM Natural Gas: US Exports to Mexico have increased 60% in 2015 only

CCN-LAW.COM EIA Projections: Growing Demand of Natural Gas in Mexico

CCN-LAW.COM Gas infrastructure:

2012 2018 (projected)

. 18 new projects . New total: 21,428 Kms. 11,342 Kms. . More imports from TX . Expected investment of $15bn

Source: SENER 36 CCN-LAW.COM Regasification LNG terminals

Operating gas pipelines Los Algodones Gas pipelines operating in 2014 San Luis Río Colorado Sásabe Gas pipelines in construction Waha San Isidro Gas pipelines tenders (CFE) Samalayuca Ojinaga Gas pipelines projected

Lasalle

Colombia Webb Laredo Sur de Texas

La Laguna Los Ramones Escobedo

Durango

Aguascalientes Naranjos V. Reyes Cancún Mérida

Guadalajara Tuxpan Tula

Cempoala

Lázaro Cárdenas Jáltipan

Acapulco

Salina Cruz Tapachula 37 CCN-LAW.COM Natural Gas Pipelines: currently under construction:

Some developers:

38 CCN-LAW.COM Current refining infrastructure, natural gas processing and petrochemical

In recent years Mexican refineries have operated under capacity

Source: SENER 39 CCN-LAW.COM 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.

CCN-LAW.COM Petrochemicals and refined products’ sales

• Commercialization permits

OPENING MARKETS Gasoline & diesel LPG

2016: CRE starts issuing permits to 2016: Regulation transferred to CRE; independent service stations SENER starts issuing import (no Pemex franchise) permits to private companies

2017: SENER begins issuing import 2017: Prices determined by the April permits to private companies market (with focused 2016 subsidies: still 35% of 2018: Prices determined by the residential energy consumption) market

41 CCN-LAW.COM ELECTRICITY SECTOR

COMMERCIALIZATION POWER TRANSMISSION DISTRIBUTION GENERATION AND SUPPLY

National Electric Grid Qualified Consumers Power rd Generation is no Reserved as 1

Permits OPERATE Basic Consumers NATIONAL Subsidized TRANSMISSION GRID

Contracts and associations Qualified users will agree Power demand will on rates with generators. grow +/-4% anually CFE will be able to contract private companies to The CRE will set rates for in the next 15 years. standard users and CFE The government can’t finance, operate, build and maintain the afford to meet it. transmission and distribution networks will provide the service CCN-LAW.COM 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.

CCN-LAW.COM 44 CCN-LAW.COM

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

CCN-LAW.COM 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 CCN-LAW.COM 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-LAW.COM CCN MEXICAN ENERGY PRACTICE

Thank you! Alejandra Bueno [email protected] (210)244-0203

SAN ANTONIO | AUSTIN | MCALLEN | | GUADALAJARA | MONTERREY QUERÉTARO | TIJUANA | JUÁREZ | | MATAMOROS

Copyright © 2016, All Rights Reserved 48 CCN-LAW.COM ASEA: regulation

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

CCN-LAW.COM 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)

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