Oil & Gas Sector Mexico

Transcription

1 Oil & Gas Sector Mexico July 2015 Produced by: MX_211_0001_Jul'2015_HA_SM

2 Table of Contents I. Sector Overview 1. Sector Highlights 2. Economic Importance 3. Sector Forecast 4. Oil & Gas Reserves 5. Oil & Gas Reserves (cont d) 6. Oil & Gas Production 7. Oil & Gas Consumption 8. Oil & Gas Infrastructure 9. Employment 10.Pension Liabilities 11.Government Policy 12.Government Policy: Energy Reform 13.Government Policy: Energy Reform (cont d) 14.Government Policy: Energy Reform (cont d) 15.Government Policy: Bidding Rounds Timetable 16.SWOT Analysis II. Oil 1. Mexico in Global Oil Market 2. Drilling Activity 3. Drilling Activity (cont d) 4. Oil Production 5. Oil Production (cont d) 6. Oil Production (cont d) 7. Production Costs 8. Oil Export 9. Oil Export Price 10.Oil Refining 11.Petrochemicals Production 12.Petrochemicals External Trade 13.Petrochemicals Price III. Natural Gas 1. Mexico in Global Natural Gas Market 2. Natural Gas Reserves 3. Natural Gas Production 4. Natural Gas Production (cont d) 5. Natural Gas Sales 6. Natural Gas Apparent Consumption 7. Natural Gas External Trade 8. Shale Oil & Gas - 2 -

3 Table of Contents IV. Main Players 1. Top M&A Deals 2. M&A Activity, Petróleos Mexicanos PEMEX 4. Petróleos Mexicanos PEMEX (cont d) 5. Pemex Exploración y Producción 6. Pemex Refinación 7. Pemex Gas y Petroquímica Básica 8. Pemex Petroquímica 9. PMI Comercio Internacional - 3 -

4 I. Sector Overview - 4 -

5 Sector Highlights Monopolistic Structure For more than 75 years the oil & gas industry in Mexico has been dominated by one single state-owned company Petroleos Mexicanos (Pemex), which controlled the entire value chain from exploration, drilling and refining to transportation, sales and export. As a result, foreign company activity in the sector was practically non-existent. Over the years, the participation of private companies was limited and aimed at compensating for the immediate limitations of Pemex: the latter partnered with Anglo-Dutch peer Royal Dutch Shell to refine oil in 1993 and created a joint venture (JV) with domestic gas transportation company Gasoductos de Chihuahua in 1997 to build pipelines. Energy Reform In an effort to promote the development of the domestic energy sector, the government launched a far-reaching Energy Reform at the end of 2013 to allow the participation of foreign companies in all activities in the oil & gas chain, hitherto performed exclusively by Pemex. However, the results of the first auction held in July 2015, out of five aimed to open the oil & gas industry to private and foreign investment, fell below expectations, with only two out of 14 blocks receiving qualifying bids, as several oil majors decided not to participate, while the bulk of price bids remained below the established minimum in line with the global scenario of low oil prices and the stagnation in Mexican oil output in the recent years. Petrochemicals Deficit Although Mexico is one of the world s largest oil producers (ranked 10 th in 2014), the country has a serious deficit in terms of refining capacity and manufacture of petrochemicals. The country has only six refineries, which cannot meet domestic demand. As a result, imports of refined products such as petrol (gasoline), jet fuel, liquefied petroleum gas and diesel vastly surpass exports, by a ratio of 3 to 1. In June 2015, Refinerias Unidas de Mexico, a U.S.-Mexican JV, unveiled plans to invest USD 6bn in the construction of six new refineries, with a combined production capacity of 360,000 bpd (barrels per day), once the Energy Reform allows foreign direct investment (FDI) in the sector. Forecast The sizeable proved oil reserves of the country (the 18 th largest in the world as of December 2014), coupled with recent discoveries of vast oil fields and the entry of FDI into the sector as a consequence of the Energy Reform, are expected to boost the development of the oil & gas industry in the short term. Oxford Economics has estimated that oil & gas output will increase by nearly 20% over the years One notable development is the Pemex announcement, in June 2015, of the discovery of a new oil field with estimated reserves of 350mn barrels and an expected production rate of 200,000 bpd

6 Economic Importance Oil and Gas Sector Key Indicators GDP Value (MXN bn) 11,375 11,965 12,425 12,913 13,938 14,307 GDP (yoy change, %) GDP Oil & Gas Sector (MXN bn) , GDP Oil & Gas Sector (yoy change, %) Oil & Gas Sector (share in total GDP, %) Oil & Gas Sector (share in government revenues, %) Total Foreign Direct Investment (USD mn) 17,679 26,083 23,376 18,951 44,627 22,795 Comments Mexico s oil & gas industry has a paramount importance in the domestic economy. In 2014, the industry accounted for 7.2% of Mexico s GDP, more than any other industry in the country. This figure has been stable at slightly over 7% during the past five years despite the poor performance of the economy, which registered a large decline during the financial crisis of The oil & gas industry is also a large contributor to the Mexican treasury, providing roughly one third of all government revenues, proportionately far more than other industries. It is important to note that, since the oil & gas sector is a state-controlled monopoly, there has been no FDI in the sector, despite the significant increase of foreign investor interest in Mexico during the last few years. Source: National Institute of Statistics and Geography (INEGI), Petroleos Mexicanos (Pemex) - 6 -

7 Sector Forecast Oil & Gas Extraction, Value Added Output Index (2005=100) Estimated Investments in Oil & Gas Extraction, USD bn F 2016F 2017F 2018F 2019F 2015F 2016F 2017F 2018F Comments Oil & gas extraction is expected to witness a robust growth in the coming years, boosted by the exploration and discovery of new oil fields and by the entry of large foreign multinational companies into the sector. According to Oxford Economics, Mexico is expected to increase its oil & gas output by nearly 20% over the period Further, the sector is forecast to see investments of USD 30bn per year, both by Pemex and by private companies. It is important to note that, of this estimated investment total, up to 85% is expected to be in exploration, drilling and production activities and just 11% in refining activities figures that are in line with the historical distribution by sub-sector of investments made by Pemex. Source: Oxford Economics, Petroleos Mexicanos (Pemex) - 7 -

8 Oil & Gas Reserves Oil & Gas Reserves, December 2014 (bn barrels of oil equivalent) Geographic Area Reserves Probability of Extraction Prospective Resources 1P - 90% certainty 2P - 50% certainty 3P - 10% certainty Conventional Non Conventional Southeastern Tampico-Misantla Burgos Veracruz Sabinas Deepwater TOTAL Comments Mexico ranks among the 20 countries with the largest proved oil & gas reserves. The proved reserves of the country (those with a probability of extraction of 90%) stood at nearly 12.4bn barrels of oil equivalent (boe) at the end of 2014, mostly located in the offshore area of the southern state of Tabasco. In addition, the country had estimated prospective resources of nearly 26bn boe, of which 80% were from conventional sources, much easier to extract than the non-conventional ones. The largest portion of the prospective reserves (48.2%) was located in the southern area of the country, mainly offshore. Source: Petroleos Mexicanos (Pemex) - 8 -

9 Oil & Gas Reserves (cont d) Oil & Gas Reserves by Geographic Area, December 2014 Source: Petroleos Mexicanos (Pemex) - 9 -

10 Oil & Gas Production Oil & Gas Production Index (yoy change, %) Jan 2012 Jan 2013 Jan 2014 Jan 2015 Apr 2015 Mining Oil & Gas Extraction Capacity Utilisation Rate (%) Jan 2012 Jan 2013 Jan 2014 Jan 2015 Apr 2015 Manufacturing Petroleum Products and Coal Manufacturing Source: CEIC

11 Oil & Gas Consumption Oil Consumption Breakdown by Sector, 2014 Industry 10.2% Electricity 10.2% Residential 8.4% Commercial & Public Services 1.9% Natural Gas Consumption Breakdown by Sector, 2014 Industry 23.2% Residential 1.4% Commercial & Public Services 0.4% Transport 51.9% Other 17.3% Electricity 45.4% Other 29.6% Oil Products Domestic Sales* (thou bpd) Natural Gas Domestic Sales* (mn cu ft/d) 1,841 3,464 3,451 1,763 1,788 1,786 3,383 3,388 1,709 3, Source: INEGI, Economist Intelligence Unit, Petroleos Mexicanos (Pemex), - * Sales to domestic market by Petroleos Mexicanos (Pemex)

12 Oil & Gas Infrastructure Breakdown of Pipeline Network, December 2014 Maintenance Budget for Pipeline Natural Gas & LPG (MXN mn) Natural gas 22.0% Oil & Petrochemical products 17.5% Crude oil 14.2% Production lines 37.2% Liquefied petroleum gas 3.4% Other 2.9% Basic petrochemicals 2.7% 2015F 2016F 2017F 2018F Comments At end-2014, Mexico had a pipeline network of 50,679 km, of which some 22% (11,162 km) was used for transportation of natural gas and another 1,728 km for transportation of liquefied petroleum gas (LPG). The country s Northern region was home to some 62% of the existing pipelines, while the Southern region accounted for 21%. Only 5% of the pipeline network was located in offshore areas as of December The remaining 13% were attributable to distribution and commercial pipelines. Expansion Plans: Los Ramones Gas Pipeline Los Ramones is currently the most important gas infrastructure project in the country, as it envisages the construction of a 859 km pipeline to supply natural gas from the United States (Agua Dulce, Texas) to Mexico. In December 2014, the projects first phase was completed: this involved construction of a km pipeline between Texas and Los Ramones, Nuevo Leon state. The pipeline is 48 inches in diameter and has the capacity to transport 1bn cubic feet/day (1bcfd). The second phase includes a 743-km pipeline, 42 inches in diameter, starting at Nuevo Leon and going through the states of San Luis Potosi, Queretaro and Guanajuato. The project, valued at USD 2.75bn, is forecast to begin operations in Source: Petroleos Mexicanos (Pemex)

13 Employment Number of Employed People in the Oil & Gas Sector (year-end) Comments 151, , ,398 46,236 47,980 47, ,785 26,727 26,961 12,191 12,905 12,669 13,487 13,758 13,476 51,998 53,404 52,403 Refining PMI Int. Commerce Pemex Corporate Gas & Basic Petrochemicals Petrochemicals Exploration & Production Total Petroleos Mexicanos (Pemex), the only company active in the oil & gas sector in Mexico in 2014, had a workforce of 153,398 people at end-year. About 34% of them were employed in the exploration and production divisions, which accounted for the bulk of the company s capital expenditures (nearly 80%). As of December 2014, the Petroleum Workers Union of Mexico represented approximately 79.4% of those employed in Pemex. Since the Union was officially established in 1938, the company has not experienced labour strikes. The industrial organisation successfully pressed back in 1942 for the adoption of a generous legislation, according to which workers could retire at age 55, or after only 25 years of service, with a pension equivalent to 80% of their last salary. These retirement conditions are still in force as of mid-2015 and have resulted in a increasingly large burden of pension liabilities on Pemex Source: Petroleos Mexicanos (Pemex)

14 Pension Liabilities Life Expectancy in Mexico Comments Addressing its mounting pension liabilities has become an urgent problem for Pemex. When Pemex was created in 1938, the life expectancy of the average worker was 38 years. In 1942, generous legislation was put in place: employees could retire at age 55, or after only 25 years of service, with a pension equivalent to up to 80% of their last wage. These retirement conditions, which are still in force, combined with the growing life expectancy of the population, have led to a surge in the pension liabilities of Pemex which stood at MXN 1,494bn as of December Reducing these liabilities by 42% is one of the objectives of the Energy Reform: to achieve this, new employees will enter into a new accountability regime and the age of retirement will gradually increase to meet the new demographic conditions. Source: Petroleos Mexicanos (Pemex)

15 Government Policy Historical Background Key Bodies Fiscal Policy The oil & gas industry in Mexico has been controlled by a state-owned monopoly since 1938, when all assets of foreign oil companies operating in the country were nationalised. At the same time, the government created Petroleos Mexicanos (Pemex), which until 2013 was the only company authorised to operate in the extraction, exploration, refining, storage, transport, logistics and sale of oil & gas related products. The few private companies that actually had some minor role in the industry were under contract to and control of Pemex. These included a 50/50 partnership with Anglo-Dutch oil company Royal Dutch Shell formed in 1993 to refine oil and increase the supply of petrol (gasoline) to the domestic market; a 50/50 JV with Mexican gas transportation company Gasoductos de Chihuahua, formed in 1997 to build pipelines; and a JV with Mexican petrochemical company Mexichem, formed in 2012 to manufacture vinyl chloride (Pemex had a 44% stake). The Secretariat of Energy (SENER) effectively the country s energy ministry is the main body that regulates the energy sector in Mexico, with a mission to conduct the energy policy of the country and secure the continuous supply of energy. SENER regulates two state-owned entities: Pemex, which produces oil, gas and petrochemicals, and the Federal Electricity Commission (Comisión Federal de Electricidad, CFE), the national power utility. Other government bodies include the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE), which regulates the transportation and storage of oil & gas products and protects the interests of Mexican consumers in regard to energy consumption. The National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH) regulates and supervises oil & gas exploration and extraction, conducting bidding processes and granting concession contracts to private companies. Under the current fiscal regime, Pemex is governed by the Federal Fiscal Revenue Law, which imposes excessive taxes on the company: in 2014 some 47% of Pemex revenues were taken by the government by means of taxes and duties. In fact, Pemex contributes an estimated 33% of the Federal budget, a figure unparallelled by any other company, public or private. This situation significantly limits the investment capacity of the company. Apart from the excessive tax burden, mounting pension liabilities and frequent allegations of corruption among high-ranking executives and members of the Petroleum Workers Union have adversely affected the company financially. In an effort to alleviate these constraints, the country s Secretariat of Finance and Public Credit announced in May 2015 a new fiscal policy that envisages an income tax rate of 30% for Pemex and other companies in the oil & gas sector the same rate as is applicable to other industries in the country. Source: SENER, Petroleos Mexicanos (Pemex)

16 Government Policy: Energy Reform Regulatory Changes Pemex was created in 1938 under the Decree Decreto que crea la Institución Petróleos Mexicanos, which was incorporated in the Constitution under Regulatory Law to Article 27 of the Mexican Constitution Concerning Petroleum Affairs, commonly referred as the Regulatory Law. In July 1992, Pemex was restructured with the adoption of the Organic Law of Petroleos Mexicanos and Subsidiary Entities, which created the five subsidiaries that now constitute the company Pemex Exploracion y Produccion, Pemex Refinacion, Pemex Gas y Petroquimica Basica, Pemex Petroquimica and PMI Comercio International as decentralised public entities of the Mexican government with the legal authority to own property and conduct business under their own names. In December 2013, a new law was adopted that envisaged the restructuring of the entire oil & gas industry with unprecedented amendments to Articles 25, 27 and 28 of the Mexican Constitution. The latter, also known as the Energy Reform, is highly controversial as it opens the oil & gas sector to foreign companies for the first time in 75 years. Energy Reform In December 2013, the Mexican Congress sanctioned the reform of the country s energy sector proposed by President Peña Nieto. The reform removed Article 27 of the Constitution, which regulated the monopoly of Pemex over the development of activities related to the oil & gas sector in Mexico. The new legal provisions enabled the granting of concessions to domestic and foreign companies for oil & gas exploration, drilling, and extraction, and refining and transportation of oil and gas products. Under the new regulation, the concessions would be granted via a bidding process, in which Pemex would not only be allowed to participate, but would have a preferential right to choose fields and zones for exploration and exploitation. Moreover, Pemex would have the right to enter into alliances with other companies to exploit oil & gas resources. The Energy Reform encountered strong opposition from left-wing political parties, which described it as privatisation of Pemex and of the oil & gas reserves of Mexico. The right-wing parties controlling the Congress defended the legal amendments by stating that all solid, liquid and gaseous hydrocarbons located in the subsoil and deep waters of Mexico would remain the property of the Mexican nation, since private companies would not have property rights, but only the rights to exploit and transform these resources. Source: SENER, Petroleos Mexicanos (Pemex)

17 Government Policy: Energy Reform (cont d) Round Zero Mar-Aug 2014 The opening of Mexico s oil & gas industry to foreign companies is being implemented in two main steps. Under the first step, known as Round Zero, the Mexican government, via SENER and the National Hydrocarbons Commission (CNH), awarded Pemex the rights to operate a number of fields in order to assure adequate and sustainable investments in exploration, development and extraction of oil & gas. Pemex received fields with estimated reserves of 20.6bn boe, accounting for 87% of the country s 2P proved reserves and for 21% of its prospective resources, including fields in the main offshore producing areas of the Gulf of Mexico. The latter were equivalent to 95.9% of the reserves initially requested by Pemex and represent approximately 15.5 years of production at the production rate of The remaining areas will be subject to a process of competitive bidding among domestic and foreign companies under Round One. Round One Nov 2014 Dec 2015 Under Round One, the oil & gas areas that were not assigned in the previous round will be granted to private domestic and foreign companies through a bidding process. Round One is expected to include a total of 169 blocks 109 exploration blocks and 60 producing blocks covering an aggregate area of approximately 28,500 km 2, located in the offshore area of the Gulf of Mexico and the southern state of Tabasco. The required minimum investments in these blocks are valued at USD 50bn over the period In Round One, SENER and CNH will also select which companies will enter into JVs with Pemex for the development of ten specific projects. The bidding process was launched in the first quarter of In May 2015, CNH announced that 26 companies (including Pemex, U.S. energy giant ExxonMobil and Anglo-Australian mining and oil company BHP Billiton) had passed the first pre-qualification and would continue with the bidding process, while others had been rejected (this included Brazilian oil major Petrobras and Anglo-Dutch peer Royal Dutch Shell). The first portion of blocks under Round One, with a combined potential to generate USD 16.8bn in FDI, was auctioned in July However, only two blocks were awarded to a consortium between Mexican start-up Sierra Oil & Gas, U.S. peer Talos Energy and U.K.-based oil group Premier Oil, as only nine out of 24 registered companies bid in the auction and the offered prices fell below the established minimum by the government. The next auction will be held on 30 September Source: SENER, Petroleos Mexicanos (Pemex), CNN Expansion

18 Government Policy: Energy Reform (cont d) Legislation Corporate Reorganisation New Fiscal Regime & Anticorruption Measures The Energy Reform transformed Pemex into a corporation whose purpose is to generate economic value, without ending its status as a state-owned company. The company will be subject to strict accountability and transparency with regard to its operations, debt, acquisitions and assets. The new legislation introduced a framework for private and public companies to operate in the industry via bidding processes and assignment of exploration and production rights. The Energy Reform imposed a corporate reorganisation of Pemex, with the creation of five new subsidiaries: Pemex Drilling and Services (drilling activities), Pemex Logistics (pipeline transportation), Pemex Cogeneration and Services (energy), Pemex Ammonia Fertilisers (production of fertilisers) and Pemex Ethylene. Moreover, two decentralised public entities of the Mexican government were created: CENAGAS to manage the pipeline network of the natural gas division of Pemex, and the Mexican Oil Fund, which will manage the government revenues from the oil & gas industry. In May 2015, SENER and the Secretariat of Finance and Public Credit Mexico s finance ministry announced a new fiscal regime that levies taxes from the oil & gas sector at rates comparable to those applicable to other industries (30% of income), taking into account the investment activities of the industry. The Energy Reform will also introduce anticorruption measures aimed at preventing and sanctioning corruption among entities, individuals and public officials participating in the Mexican energy sector. The reform of the energy sector and of the iconic company Pemex goes well beyond oil bidding rounds and requires profound changes in the structure, laws and corporate governance of Pemex and the entire oil & gas industry in Mexico. Here are some of the most important changes enacted in the Energy Reform. Source: Petroleos Mexicanos (Pemex)

19 Government Policy: Bidding Rounds Timetable 22 Existing Contracts Farm-outs Phase 1 Phase 2 Shallow waters Onshore Extra heavy oil Deepwater gas Deepwater oil Total 2P Reserves CAPEX (mn boe) (USD bn) Fields Poza Rica - Atamira and Burgos 1, ATG and Burgos Bolontiku, Sinan and Ek Rodador, Ogarrio and Cardenas-Mora Ayatsil-Tekel-Utsil Kunah-Pikis 539* 11.2 Trion and Exploratus 4, Aug 2014 / Dec 2015 Migration to exploration and extraction contracts (first phase) Jan / Dec 2015 Migration to exploration and extraction contracts (second phase) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Petroleos Mexicanos (Pemex), - * 3P reserves Nov 2014 / Dec Farm-outs

20 SWOT Analysis Strengths Mexico has vast oil & natural gas reserves with high growth potential. The country is highly competitive in terms of exploration, drilling and production costs. The country offers a renewed playing field with ample investment opportunities and a new fiscal regime that assesses every investment project to determine the right contract model and fiscal conditions.. Opportunities The country has a large number of unexplored and underdeveloped areas with good opportunities for finding oil and gas. For the first time in the past 75 years, the Energy Reform offers private domestic and foreign companies the opportunity to operate in the entire oil & gas industry value chain: exploration, drilling, extraction, transportation, refining and manufacture of petrochemicals. SWOT Anaysis Mexico has structural problems with violence and organised crime that still represent important threats to industrial safety and security. The oil & gas industry also faces the burden of large pension liabilities, outdated infrastructure, insufficient refining capacity and dependence on import of petrochemicals. Corruption and inefficient allocation of financial resources remain crucial hurdles for the sector. Weaknesses At present, the most important threat to the industry is the sharp drop of international oil prices from the second half of 2014 and the subsequent decrease of export revenues and investment capacity. Another risk comes from left-wing political parties, which threaten to rescind the Energy Reform of December 2013 if they come to power. Threats Source: Petroleos Mexicanos (Pemex)

21 II. Oil

22 Mexico in Global Oil Market Proved Oil Reserves by Country, December 2014 Oil Production by Country, 2014 Country mn barrels 1 Venezuela 298,350 2 Saudi Arabia 267,000 3 Canada 172,917 4 Iran 157,800 5 Iraq 150,000 6 Russian Federation 103,164 7 Kuwait 101,500 8 United Arab Emirates 97,800 9 United States 48, Libya 48, Nigeria 37, Kazakhstan 30, Qatar 25, Brazil 16, China 18, Angola 12, Algeria 12, Mexico 11,079 Country mn bpd 1 United States 11,644 2 Saudi Arabia 11,505 3 Russian Federation 10,838 4 Canada 4,292 5 China 4,246 6 United Arab Emirates 3,712 7 Iran 3,614 8 Iraq 3,285 9 Kuwait 3, Mexico 2, Venezuela 2, Nigeria 2, Brazil 2, Qatar 1, Norway 1, Angola 1, Kazakhstan 1,701 Source: BP Statistical Review of World Energy

23 Drilling Activity Producing Wells & Wells Under Development 4,942 5,286 5,683 6,080 6,280 6,382 6,890 7,476 8,315 9,439 9,836 9, ,075 1,264 1,001 1, Producing wells Wells under development Wells Drilled & Wells Under Development 3,770 1,763 2,106 2,004 1,858 1, , ,490 2,589 2, ,000 3,007 1,290 1, , Wells drilled Kilometres drilled Source: Petroleos Mexicanos (Pemex)

24 Drilling Activity (cont d) Exploration & Drilling Teams Total Exploration & Drilling Teams Exploration Development Oil & Gas Discovered Fields Oil fields Gas fields Total discovered fields Source: Petroleos Mexicanos (Pemex)

25 Oil Production Crude Oil Production, 2014 (%) Crude Oil Production by Region, 2014 (%) Onshore 23.8% Southern Region 18.6% Offshore 76.2% Offshore 76.2% Northern Region 5.1% Evolution of Crude Oil Production by Region (thou bpd) Comments 2,548 2,522 2, ,895 1,896 1, Northern Region Southern Region Offshore Total The offshore region, the largest oil producing area in Mexico, comprises the continental shelf and its slope in the Gulf of Mexico along the coasts of the states of Veracruz, Tabasco, Campeche, Yucatan and Quintana Roo, covering an area of 550,000 km 2. The Southern region covers an area of 392,000 km 2, located in the states of Guerrero, Oaxaca, Chiapas, Tabasco, Yucatan, Quintana Roo, Campeche and the southern area of Veracruz. The Northern region, with an area of 1.8mn km 2, includes the northern area of the state of Veracruz, and the states of Tamaulipas (Burgos region) and Coahuila (Sabinas region). Source: Petroleos Mexicanos (Pemex)

26 Oil Production (cont d) Crude Oil Production by Type (thou bpd) Crude Oil Production by Type, 2014 (%) 2,577 2,553 2,548 2,522 2,429 Light crude Oil 47.9% 1,464 1,417 1,385 1,365 1,266 1,113 1,136 1,163 1,157 1, Heavy crude oil Light crude oil Total Oil Production Heavy crude oil 52.1% Evolution of Crude Oil Production by Region 2,577 2,553 2,548 2,522 2,429 1,942 1,903 1,895 1,896 1, Offshore Southern Region Northern Region Total Production Comments Mexico produces two types of heavy crude oil (Altamira and Maya) and two varieties of light crude oil (Istmo and Olmeca). In 2014, heavy crude oil accounted for 52% of the output, down from 54% in The offshore region yields mostly heavy crude oil (62.7% of total output), while the Southern region produces mainly light crude oil with a share of 92.3%. The Northern regions have a relatively balanced production of heavy and light crude oil. In 2014, oil production dropped by 3.7% y/y, as a result of lower output in mature fields such as Cantarell, ATG and IxtalManik. Source: Petroleos Mexicanos (Pemex)

27 Oil Production (cont d) Crude Oil Production by Region (thou bpd) 3,000 2,500 2,000 1,500 1, Total Oil Production Offshore Southern Region Northern Region Crude Oil Production by Type (thou bpd) 3,000 2,500 2,000 1,500 1, Total Oil Production Heavy crude oil Light crude oil Source: CEIC

28 Production Costs Production Costs (USD per boe, 2013) Pemex: Production Costs Evolution (USD per boe) Petrobras Chevron ENI ExxonMobil Statoil PEMEX Exploration & Drilling Costs (USD per boe, 2013) Pemex: Exploration & Drilling Costs Evolution (USD per boe) Total ENI Conoco Philips ExxonMobil BP PEMEX Source: Petroleos Mexicanos (Pemex)

29 4,888 2,745 6,612 3,191 6,475 4,122 8,132 3,850 7,754 3,904 3,884 3,929 3,125 4,564 28,169 37,399 35,192 34,910 41,746 37,050 32,126 26,188 6,736 2,932 35,856 35,856 49,380 46,853 42,724 49,380 46,853 42,724 Oil Export Oil Export Revenues by Region, USD mn Oil Export Revenues by Type, USD mn Total Exports Americas Europe Far East Total Sales Maya Olmeca Istmo Crude Oil Exports by Country, 2014 Comments United States 69.4% Spain 14.2% India 7.0% Canada 1.8% China 1.2% Others 6.3% The heavy crude Maya oil type is the one most in demand on international markets, accounting for 78.6% of exports, with light crude oil Olmeca and Istmo making up for the remaining 21.4% of Mexico s crude oil exports in Historically, the United States has been the biggest export destination for Mexican oil. In 2014, the country received nearly 70% of Mexican oil exports, down from 72.1% in 2013 and from 83.8% in 2010, mainly due to increased competition on the U.S. market. Source: CEIC, Petroleos Mexicanos (Pemex)

30 Oil Export Price Average Oil Export Price (USD per barrel) Apr Mexican Mix Istmo Maya Olmeca Comments International oil prices favoured Pemex after they broke the ceiling of USD 100 per barrel in High-price conditions continued through to the second half of 2014, with an eventual decline occurring in late In the first four months of 2015, the export price continued to decrease, falling below USD 50 per barrel. This situation puts significant pressure on the country s finances, as oil revenues are a huge component of the Federal budget (around 33%); hence a reduction in oil price means that the government is forced to increase taxes on households and businesses as well as to make cuts in spending on health, education and culture to compensate this drop. The 2015 Federal budget of Mexico was based on an oil price of USD 81 per barrel, but potential budget revisions have not been proposed so far. Source: Petroleos Mexicanos (Pemex)

31 Oil Refining Production of Selected Refined Products (thou bpd) Product Liquefied petroleum gas Gasoline Pemex Magna Ultra Low sulfur magna Pemex Premium Base Gasoline Other Gasoline Kerosene (jet fuel) Diesel Pemex Diesel Ultra low sulfur diesel Other diesel Fuel oil Other refined products Asphalts Lubricants Parafins Still gas Others Total Refined Products 1, , , , ,206.0 Source: Petroleos Mexicanos (Pemex)

32 Petrochemicals Production Petrochemicals Production (thou tonnes) Product Liquids Hexanes Heptanes Other inputs Oxygen Nitrogen Hydrogen Petrochemicals 7,942 7,236 5,604 6,548 6,492 Methane derivatives 2,282 2,306 2,473 2,460 2,362 Ethane derivatives 2,831 2,750 2,775 2,473 2,089 Aromatics & derivatives 1, ,017 Propylene & derivatives Petroleum derivatives Others 1, Other products Hydrochloric acid Muriatic acid Total Petrochemical Production 8,942 8,154 6,367 7,338 7,238 Source: Petroleos Mexicanos (Pemex)

33 Petrochemicals External Trade Petrochemicals External Trade (thou bpd) Product Export Gasoline Liquefied petroleum gas Jet fuel Fuel oil Other products Import Gasoline Fuel oil Liquefied petroleum gas Diesel Other products Trade Balance Comments Mexico is a net importer of petrochemicals, as the country lacks comprehensive refining capacity able to cover domestic demand. At end-2014, Mexico had only six refineries with a combined production capacity of 4.5mn barrels per day, which covered only 53% of domestic demand for petrol (gasoline). As a result, the country needs to import large quantities of petrol and other fuels to meet increasing domestic demand. Notably, regular petrol for cars in Mexico is between 10% and 15% more expensive than that in the United States, the major import source country for petrol. The price difference is attributable to the fact that petrol prices are used as additional source of revenue for the government in an effort to compensate for the recent drop in oil export prices. According to the Energy Reform, Pemex will cease to be the only company allowed to engage in wholesale and retail sales of petrol in the country. Starting from 2017, petrol under other brands will be available, while from 2018 the first petrol stations owned by private companies are expected to operate in Mexico. Source: Petroleos Mexicanos (Pemex)

34 Petrochemicals Price Prices of Selected Oil Products and Petrochemicals in Mexico and the United States (USD) Product Oil Products Unit Mexico United States Mexico United States Mexico United States Mexico United States Mexico United States Unleaded gasoline Premium gasoline barrel barrel Diesel barrel Jet fuel barrel Kerosene barrel Natural gas (industrial) Natural gas (residential) thou cu ft thou cu ft Selected Petrochemicals Ammonia tonne Polyethlene LD tonne 1, , , , , , , , , ,632.5 Polyethlene HD tonne 1, , , , , , , , , ,570.9 Styrene tonne 1, , , , , , , , , ,678.0 Source: Petroleos Mexicanos (Pemex)

35 III. Natural Gas

36 Mexico in Global Natural Gas Market Proved Natural Gas Reserves by Country, December 2014 Natural Gas Production by Country, 2014 Country trn cu ft 1 Iran 1, Russian Federation 1, Qatar Turkmenistan United States Saudi Arabia United Arab Emirates Venezuela Nigeria Algeria Australia Iraq China Indonesia Canada Norway Egypt Mexico Country bn cu ft/d 1 United States Russian Federation Qatar Iran Canada China Norway Saudi Arabia Algeria Indonesia Turkmenistan Malaysia Mexico United Arab Emirates Uzbekistan Netherlands Australia Egypt 4.71 Source: BP Statistical Review of World Energy

37 -1,691-1,601-1,560-1,539-1,511 4,553 4,776 4,762 4,811 4,119 1, , , ,010 7,941 7,958 7,951 7,461 6,740 11,966 12,494 12,734 12,713 12,273 Natural Gas Reserves Proved Natural Gas Reserves Evolution (trn cu ft) Proved Natural Gas Reserves Breakdown (trn cu ft) Developed & Undeveloped Gas Reserves (trn cu ft) Total Reserves Revisions Discoveries Production Proved developed reserves Proved undeveloped reserves Source: BP Statistical Review of World Energy 2015, Petroleos Mexicanos (Pemex)

38 Natural Gas Production Natural Gas Production Evolution (mn cu ft/d) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Total Production Offshore Onshore Natural Gas Production, 2014 (%) Natural Gas Production by Area, 2014 (%) Associated 73.8% Non Associated 26.2% Offshore 47.3% Onshore 52.7% Source: CEIC

39 Natural Gas Production (cont d) Natural Gas Production by Region (mn cu ft/d) Products from Natural Gas (mn cu ft/d) Area Offshore Region 2, , , , ,087.9 Southern Region 1, , , , ,515.4 Northern Region 2, , , , , ,000 4,500 4, Sulfur Naphta Total 7, , , , , ,500 Ethane Natural Gas Processing Capacity, 2014 (%) 3,000 Cryogenics 52.0% 2,500 3,628 3,693 3,640 Liquified petroleum gas Sour natural gas 39.8% Liquids fractioning 5.0% Hydrosulfuric acid 1.9% Sour condensates 1.3% 2,000 1,500 1, Natural liquid gas Dry gas Source: Petroleos Mexicanos (Pemex)

40 53,386 67,141 64,466 57,981 50,233 64,967 68,129 71,729 78,666 78,259 Natural Gas Sales Natural Gas Sales Evolution* (MXN mn) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Natural gas Petroliferous Petrochemicals Natural Gas Domestic Sales Volume* (mn cu ft/d) Natural Gas Domestic Sales Value* (MXN mn) 3,464 3,451 3,383 3,388 3, Natural Gas Liquefied petroleum gas Source: CEIC, Petroleos Mexicanos (Pemex), - * Sales to domestic market by Petroleos Mexicanos (Pemex)

41 Natural Gas Apparent Consumption Natural Gas Production, Export, Import and Apparent Consumption (mn cu ft/d) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Production Exports Imports Domestic Consumption Comments Mexico has a large natural gas production that nearly covers domestic consumption, with imports accounting for some 17% of internal demand in The export of natural gas is extremely low in fact, almost negligible with the United States being the largest export destination. Over the period , the import of natural gas expanded at a CAGR of 26.3%, driven by the robust growth of domestic demand, which outpaced national production. On the other hand, gas production recorded an average decrease of 1.5% per year, mainly explained by the decline in output from the mature Cantarell field. Export has also followed a downward trend due to higher internal demand for gas and increased competition on the U.S. market. Source: Petroleos Mexicanos (Pemex)

42 Natural Gas External Trade Natural Gas External Trade in Value (USD mn) Natural Gas External Trade in Volume (mn cu ft/d) 1,729 2,197 1,089 1,175 1, ,272 1, Imports Exports Liquefied Natural Gas Import by Volume (mn cu ft/d) Imports Exports Comments The export of natural gas is negligible, accounting for only 0.3% of total national exports. Imports, on the other hand, more than doubled in volume terms between 2010 and The United States remains the main supplier of natural gas, responsible for more than 95% of gas imports in the past five years. In 2013, Pemex started to import liquefied natural gas (LNG) through the Manzanillo port terminal in order to meet growing domestic demand. According to the Energy Regulatory Commission (CRE), Mexico will continue to rely on import of LNG until 2017, when the Los Ramones gas pipeline is expected to reach full capacity. Source: Petroleos Mexicanos (Pemex)

43 Shale Oil & Gas Top 10 Countries with Technically Recoverable Shale Oil, 2014 Top 10 Countries with Technically Recoverable Shale Gas, 2014 Country bn barrels 1 Russian Federation 75 2 United States 58 3 China 32 4 Argentina 27 5 Lybia 26 6 Australia 18 7 Venezuela 13 8 Mexico 13 9 Pakistan 9 10 Canada 9 Other countries 65 World Total 345 Country trn cu ft 1 China 1,115 2 Argentina Algeria United States Canada Mexico Australia South Africa Russian Federation Brazil 245 Other countries 1,535 World Total 7,299 Comments Although Mexico is one of the ten largest holders of shale oil & gas reserves in the world, the country has a negligible production of shale gas. Extraction of shale gas began in 2013, but by end-2014 its production was negligible, at just 0.14% of total gas output, with only four wells being exploited. The segment faces strong opposition from a number of environmental groups and opposition parties, which advocate a total ban on shale gas extraction. Their main concerns are that shale gas extraction has environmental side-effects which have yet to be defined, that the process is 60% costlier than the extraction of regular gas, that it requires large quantities of water and that it can affect seismic activity in areas of extraction. The Energy Reform envisages the development of shale gas fields in the northern area of Burgos. Source: U.S. Energy Information Administration (EIA), El Economista, Petroleos Mexicanos (Pemex)

44 IV. Main Players

45 Top M&A Deals Top M&A Deals in the Oil & Gas Sector* in Mexico (2012-Q2 2015) Date Target Company Deal Type Buyer Country of Buyer Deal Value USD (mn) Stake (%) Sep-14 Sierra Oil & Gas S de RL de CV Acquisition Riverstone Holdings LLC; Infraestructura Institucional S de RL de CV; EnCap Investments LP United States; Mexico n.a. Nov-13 Monclova Pirineos Gas SA Acquisition Actividades de Construccion y Servicios SA (Grupo ACS) Spain Mar-13 Integradora de Servicios Petroleros; Oro Negro SAPI de CV Acquisition Axis Asset Management S de RL de CV Mexico Aug-12 Platform Rig 3; Todco Mexico Inc; Servicios Todco S de RL de CV Acquisition Integradora de Servicios Petroleros; Oro NegroSAPI de CV Mexico Dec-12 Zacatecas self-elevating oil drilling platform Acquisition Grupo Mexico SAB de CV Mexico n.a Source: EMIS DealWatch, - * NAICS Code

46 M&A Activity, Number and Value of Deals in Mexico s Oil & Gas Sector* Number of Deals by Deal Type (%) Acquisition 100.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Total value of deals (USD mn) Number of Deals Number of Deals by Region of Investors (%) Number of Deals by Deal Value, USD (%) Spain 25.0% Mexico 50.0% United States 25.0% mn; 66.7% ; 33.3% Source: EMIS DealWatch, - * NAICS Code

47 ,024 2, ,128 1, , ,647 1,608 1,587 Petróleos Mexicanos PEMEX Income Statement (Consolidated, MXN bn) Highlights 63.4% 54.5% 47.9% Petroleos Mexicanos Pemex was founded in 1938 when the then Mexican president Lazaro Cardenas nationalised the assets of foreign oil companies operating in the country. Pemex has for many decades been the largest company in Mexico and by far the biggest contributor to the Mexican treasury Net Revenues EBITDA Net Profit EBITDA margin 0.87 Balance Sheet (Consolidated, MXN bn) Total Assets Shareholders' Equity Net Debt Net Debt/EBITDA The precarious financial situation of the company, which makes chronic net losses, stems from the fact that Pemex surrenders a large portion of its revenues to the Mexican treasury, accounting for roughly one third of the national budget. Until December 2013, Pemex had been the only company allowed to work in the oil & gas industry in Mexico. However, the Energy Reform of 2013 opened the sector to foreign companies for the first time in 75 years. By end-2015, several multinational companies are expected to receive concession rights for exploration, drilling and extraction of oil & gas in Mexico, which will change the growth fundamentals of Pemex significantly. Source: Petroleos Mexicanos (Pemex), own calculations

48 Petróleos Mexicanos PEMEX (cont d) Debt by Currency, 2014 Debt by Interest Rate, 2014 Euros 7.0% UDIS 4.0% British Pounds 1.0% Yens 1.0% Floating 27.0% US Dollar 66.0% Mexican Pesos 21.0% Fixed 73.0% Debt by Instrument, 2014 Capital Expenditure & Investments (MXN Mn) Cebures 18.0% ECAs 6.0% Others Intl. Bank Loans 11.0% 150 Refining Intl. Bonds 59.0% Domestic Bank Loans 4.0% Other 2.0% Exploration & Production Source: Petroleos Mexicanos (Pemex)

49 ,290 1, ,230 1,340 1,420 7,672 7,937 7, ,333 1,251 1, ,108 Pemex Exploración y Producción Income Statement (carve-out, MXN bn) Highlights 83.1% 77.5% 75.1% Pemex Exploracion and Produccion is in charge of oil & gas drilling, exploration and production Net Revenues EBITDA Net Profit EBITDA margin The three main oil-producing areas of this Pemex division are located in the Northeast and Southeast regions of the country and in the offshore area of the Gulf of Mexico. Production Activity (number of wells) As of December 2014, Pemex had production at more than 9,500 wells, 80% of which were located in the Northeast region of the country. Around 62% of all active wells produced oil, with the remaining 38% producing natural gas. In 2014, the average success rate for exploratory wells was 33.0%, compared to 61% in 2013 and 57% in Wells Initiated Wells Drilled Producing Wells Offshore Producing Wells Southeast Source: Petroleos Mexicanos (Pemex), own calculations

50 Pemex Refinación Income Statement (carve-out, MXN bn) Highlights Pemex Refinacion is the division of Pemex specialising in oil refining and production of petrol (gasoline), diesel, fuel oil, jet fuel, asphalt and lubricants. This subsidiary also distributes and markets most of these products throughout Mexico Net Revenues EBITDA Net Profit Cracking 9.3% Vaccum distillation 16.9% Refining Capacity by Process Visbreaking 2.0% Reforming 6.2% Hydrotreatmen t 23.5% As of December 2014, the company operated six refineries with a combined capacity of 4.5mn barrels per day. Atmospheric distillation and hydro-treatment are the most used refining processes, accounting for nearly 60% of total output. In 1993, to address the structural gap between domestic demand and existing refining capacity, Pemex created a joint venture with Anglo-Dutch peer Royal Dutch Shell to operate a refinery in Deer Park, Texas (the United States) with the capacity to process 340,000 barrels of crude oil per day and the purpose of increasing gasoline supply to Mexico. Atmospheric distillation 35.3% Alkylation / Isomerization 3.4% Coking 3.4% In recent years, Pemex officials have been discussing the options for increasing refining capacity by building a new refinery or expanding the existing ones. However, no final decision has been taken on the subject. Source: Petroleos Mexicanos (Pemex), own calculations

51 Pemex Gas y Petroquímica Básica Income Statement (carve-out, MXN bn) Highlights 3.9% Pemex Gas y Petroquimica Basica is the division of Pemex in charge of processing wet natural gas into dry natural gas, LPG and other natural gas liquids. 1.9% Net Revenues EBITDA Net Profit EBITDA margin This subsidiary also transports, distributes and sells natural gas and LPG throughout Mexico, as well as producing several basic petrochemicals used as raw materials by Pemex Refinacion and Pemex Petroquimica Domestic Sales Volume (MXN mn) 2,052 78,259 78,666 1,327 71,729 68,129 2,763 64,967 50,233 4,832 57,981 64,466 3,274 53,386 67,141 Petrochemicals Liquified petroleum gas Natural Gas Since 2010, sales of LPG on the domestic market have followed an upward trend. Indeed, in 2014 domestic sales of LPG amounted to nearly half of the total sales of the division, a similar share to that of natural gas. Petrochemicals (hexane, ethane, sulphur, propane, butane, etc.) accounted for only 1.2% of total sales. As of December 2014, the division operated nine manufacturing facilities with a total capacity for processing nearly 5bcf of natural gas per day. Source: Petroleos Mexicanos (Pemex), own calculations

52 Pemex Petroquímica Income Statement (carve-out, MXN bn) Highlights Pemex Petroquimica is the division of Pemex that produces complex chemicals including methane, ammonia, methanol, ethane, ethylene oxide, glycols, aromatics, and propylene and their derivatives as well as certain energy-related products (octane base gasoline and heavy naphtha) Net Revenues EBITDA Net Profit As of December 2014, the division operated seven manufacturing facilities with a production capacity of 9,100 tonnes of petrochemical products per year. Domestic Sales Value (MXN mn) 24,490 23,616 20,326 4,652 2,987 2,367 3,245 3,982 2,341 3,452 3,786 4,211 5,544 5,298 4,777 4,536 5,634 5, Others Propylene & Deriv. Methane & Deriv. Aromatics & Deriv. Ethane & Deriv. Total In September 2013, Pemex Petroquimica entered into a joint venture with Mexican chemical company Mexichem for production of vinyl chloride. Pemex invested MXN 3bn in the acquisition of a 44% stake in a new entity created by both companies, called Petroquimica Mexicana de Vinilo. In January 2014, the division invested USD 475mn in the acquisition of local fertiliser producer Agro Nitrogenados and in the increase of the production capacity of its plant to 990,000 tonnes of urea per year. Source: Petroleos Mexicanos (Pemex), own calculations, EMIS DealWatch

53 ,222 1,096 1,065 PMI Comercio Internacional Income Statement (carve-out, MXN bn) Highlights 0.7% 0.7% 0.3% PMI Comercio Internacional is the subsidiary of Pemex that handles international trade operations, with a focus on import and export of crude oil, petrochemicals and refined products. 1,400 1,200 1, Net Revenues EBITDA Net Profit EBITDA margin Crude Oil Exports by Type (thou bpd) Altamira Olmeca Isthmus Maya The company has offices in Mexico City, Houston, Amsterdam, Singapore and Madrid. PMI purchases crude oil from Pemex Exploracion and Produccion and sells it to final consumers. PMI exported on average 1.14mn barrels of crude oil per day in 2014, which represented 47.0% of total crude oil production. In 2015, expectations are for a daily export of 1.1mn barrels of oil per day. The division has 36 active clients from 14 countries. In national terms, the United States is by far the largest customer of PMI Comercio Internacional, accounting for 69.4% of total sales during Other important markets are Spain, India, China and Canada. Source: Petroleos Mexicanos (Pemex), own calculations

54 Contact: Corporate Headquarters 6-8 Bouverie Street London EC4Y 8DD UK Voice: Fax: Americas Headquarters 225 Park Avenue South New York, New York US Voice: Fax: Asia Headquarters Eucharistic Congress Bldg. No. III 4th Floor, 5 Convent Street Mumbai India Voice: Fax: Disclaimer: The material is based on sources which we believe are reliable, but no warranty, either expressed or implied, is provided in relation to the accuracy or completeness of the information. The views expressed are our best judgment as of the date of issue and are subject to change without notice. EMIS and Euromoney Institutional Investor PLC take no responsibility for decisions made on the basis of these opinions. A Euromoney Institutional Investor company. About EMIS Insight EMIS Insight is a unit of EMIS that produces proprietary strategic research and analysis. The service features market overviews, industry trend analysis, legislation and profiles of the leading sector companies provided by locally-based analysts. About EMIS Founded in 1994, EMIS (formerly known as ISI Emerging Markets) was acquired by Euromoney Institutional Investor PLC in EMIS works from over 15 offices around the world to deliver electronic information products, by subscription, to institutional customers globally. EMIS provides hard-to-get information covering more than 100 emerging markets. Its flagship products are EMIS Intelligence and EMIS Professional. EMIS clients include top investment banks, corporations, law firms, consultants, investment and insurance companies, universities and libraries, multilateral organisations, and others