Propuesta proceso contable a través de las etapas de la

Mexico Upstream Industry.

1. Industry Background

Pursuant with Article 27 of the Mexican Constitution, the direct domain over oil and hydrocarbons must be held at all times exclusively by the Mexican State. Further, it is mandated by its Regulatory Law that the activities related to exploration, exploitation and production of petroleum and other hydrocarbons are reserved exclusively to the Mexican State and no concessions or similar agreements can be given under any circumstance in favor of any individuals or private entities. Such activities are carried out by the Mexican State through its state owned company, Petroleos Mexicanos (“PEMEX”) and its subsidiaries, which is the only entity allowed to perform exploration and exploitation activities in Mexico of the oil and gas sectors. Among many other activities, the main activity of PEMEX is to centrally conduct and strategically lead all activities related to petroleum industry.

1.1 Exclusive Activities of the State Petroleum Industry

The state petroleum industry is managed exclusively by PEMEX and its subsidiaries. Its exclusive activities encompass the following activities:

1.1.1 Exploration, exploitation, refining, transportation, storage, distribution and first sale of oil and its by-products obtained from refining;

1.1.2 Exploration, exploitation, processing and first sale of gas and the transportation and storage required and necessary to interconnect its exploitation and processing activities; 1.1.3 Processing, transportation, storage, distribution and first sale

industrial raw materials and that constitute basic petrochemicals;1

For the performance of the above mentioned activities, PEMEX and its subsidiaries are permitted contract with or hire individuals or private companies for the performance of works and services. However, to comply with the constitutional mandate, under these contracts, the Mexican state must always maintain direct domain over hydrocarbons and the consideration for contractors must be paid only in a cash basis.

During the last decade, there have been several attempts and proposals to initiate or promote partial or total privatization of the Mexican oil industry, aiming to allow private participation in the upstream

activities in Mexico beyond the simple performance of specific works or services for PEMEX. Up to this date, such proposals have not succeeded, due to strong opposition of several political and social sectors and groups within Mexico.

Notwithstanding the foregoing, during the years of 2008, 2009 and 2010, a mild energy legal reform package was approved and enacted by the Mexican Congress. The reform package included the formation of an upstream regulatory agency, the National Hydrocarbons

Commission. As well it strengthened the corporate governance, institutional design and best industry practices for PEMEX, and amended and enacted laws and regulatory provisions related with the upstream industry in Mexico.

PEMEX’s inability to accumulate funds internally to carry out its purpose has resulted in an urgent need for private investment in exploration and production of oil and gas. In addition, lack of reinvestment by the public sector in the existing infrastructure has

1 _{Ethane; propane; butane; pentane; hexane; heptane; raw material for}

lampblack; naphtha; and methane when derived from hydrocarbons, taken from deposits located within Mexico and used as raw material in

derived in labor, environmental and safety issues. PEMEX requires new technologies and new forms of logistics before the

commencement of the different major industry projects related to deep water and upstream challenging surfaces, contemplated in its

forecasted business and production pipelines. 2. Legal Framework

Under Mexican legislation, there are several provisions and laws that govern and control the development of the hydrocarbons upstream industry.

2.1 The Mexican Constitution

Article 27: Provides that the Mexican Nation holds the exclusive direct domain over petroleum and all other hydrocarbons, whether solid, liquid or gas and expressly prohibits granting concessions or other exploitation rights to individuals or private entities.

Article 25: Provides that the Mexican state shall guide, lead and coordinate the nation’s economic activity, and will be in charge of the regulation and promotion of activities in accordance with the public’s demands, to foster the development of the national economy. It also provides that the public sector shall exclusively control the strategic areas listed in Article 28 of the Mexican Constitution.

Article 28: Includes as a strategic areas, among others, the activities related to exploitation and production of oil and other hydrocarbons. The exclusive exploitation and production by the Mexican state of strategic economic areas included in this Article 28 shall not be deemed to be a monopoly.

These provisions of the Mexican Constitution are further regulated under many related laws and other regulatory instruments which together govern the oil and gas sectors, including the Mexican Foreign Investment Law (the “Foreign Law”) and North American Free Trade Agreement (“NAFTA”).

2.2 The Regulatory Law of Article 27 of the Mexican Constitution in Connection with Oil Matters (the “Regulatory Law”) Regulatory Law provides in more detail the manner in which the Mexican state shall perform all the activities related to the upstream industry in Mexico and also defines the activities encompassing the state petroleum industry (as provided in its Articles 3 and 4, listed in section 1.1 above).

In accordance with Regulatory Law, only the Mexican state can carry out activities that correspond to the state petroleum industry. The Mexican state carries out these activities through PEMEX and its subsidiaries. PEMEX has the exclusive rights over the exploration and production of petroleum and other hydrocarbons. That means that PEMEX is the only company with the right to explore, exploit, transport and process petroleum within Mexican territory. In addition, PEMEX is obligated to supply fuels and liquefied petroleum gas in Mexico.

2.3 The Law of the National Hydrocarbons Commission The Law of the National Hydrocarbons Commission provides the formation of the National Hydrocarbons Commission, to regulate and supervise the exploration and production of hydrocarbons, and the processes, transportation and storage activities related to projects of exploration and production of the hydrocarbons.

2.4 The Natural Gas Regulations (“NGR”)

NGR aims to provide an efficient mechanism for the supply of natural gas, including provisions fundamentally designed to promote the development of the industry, while protecting users and regulating trade. In addition, NGR regulates the activities allowed to be carried out by private persons, such as transportation, storage and distribution of natural gas.

2.5 The PEMEX Law

PEMEX law’s main purpose is to regulate the organization, operation, control and accountability of PEMEX. PEMEX law, expands its autonomy to enter into contracts with private parties, and allows for more flexibility of its organization and operations. PEMEX law provides payment mechanisms for PEMEX contractors and applicable incentives.

2.6 The Regulations of the PEMEX Law (the “Regulations”) The Regulations detail corporate governance matters of PEMEX, originally provided in the PEMEX Law. It also establishes the authority and obligations of the directors of PEMEX and its General Director, providing also compensation levels and removal procedures from their respective positions.

The Regulations expands on payment and consideration mechanisms provided under PEMEX Law. Consideration and manner of payment must be included in any contract entered into by PEMEX, and such consideration may be agreed based on achievement of goals, or based on explicit and measurable indicators (productivity, capacity,

incorporated reserve, reserves recovery, performance schedule, incurred costs or savings on such, or any other indicators that increase profits for PEMEX).

2.7 Administrative Procurement Provisions for Acquisitions, Leases, Works and Services of Substantial Production Activities of PEMEX and its Subsidiaries (known in Mexico as the “DAC”)

DAC contains provisions governing public tenders in connection with the substantive production activities identified in Articles 3 and 4 of the Regulatory Law (also listed in section 1.1 above) as well as petrochemical activities different from basic activities (the “Substantive Activities”).

DAC in fact addresses more specific and relevant aspects of the new contracting framework of the petroleum and hydrocarbon business in

Mexico. DAC also provides procurement guidelines for contracting with PEMEX and its subsidiaries, exclusively with respect to Substantive Activities. Although a clear cut definition or exhaustive list for Substantive Activities do not exist, these Substantive Activities may be defined as those activities and industrial processes necessary for the creation and preservation of value, including but not limited to those activities listed in section 1.1 above.

3. Major Industry Players in Mexico

3.1 Ministry of Energy “Secretaria de Energia” (“SENER”) SENER is responsible for managing the country’s energy policy by planning short and long term energy supply in accordance with economic and social forecasts and parameters. SENER manages the activities of state-owned enterprises in the energy sector, such as PEMEX. SENER is also responsible for promoting private sector participation in those areas in which the private sector is permitted to invest.

3.2 PEMEX

As we mentioned above, PEMEX is a state owned entity created specifically to manage oil and hydrocarbon resources owned by the Mexican state, with legal standing and independent authority, and with its own patrimony. PEMEX is the largest company in Mexico and the largest tax contributor to the treasury of Mexico. PEMEX is one of the few oil companies in the world that carries out and manages all the productive chain of the industry, upstream, downstream and final commercialization of oil related products. As mentioned at the beginning of this article, PEMEX is the company in Mexico with the exclusive right to explore, exploit, transport and process petroleum within the Mexican territory. PEMEX business plan includes future growth, strengthen production and operation of infrastructure; improve in its operative performance; coordinate and harmonize the efforts from its different lines of business to maximize its economic value.

PEMEX operates through a principal legal entity and its subsidiaries, which are:

3.2.1 PEMEX Exploracion y Produccion (“PEP”). Responsible for oil & gas exploration and exploitation.

3.2.2 PEMEX Refinacion. Produces, distributes and trades fuels and other petroleum products. PEMEX Refinacion carries out refining industrial processes, production of fuels and other petroleum by-products, such as gasoline, diesel, fuel oil, jet fuel, asphalt and lubricant, and its storage, transportation, distribution and trading.

3.2.3 PEMEX Gas y Petroquimica Basica. Processes natural gas and natural gas liquids, distributes and trades in natural gas and LPG (Liquefied Petroleum Gas); produces and trades basic petrochemical products.

3.2.4 PEMEX Petroquimica. Through the works centers of Camargo, La Cangrejera, Cosoleacaque, Escolin, Morelos, Pajaritos and Tula, it manufactures, distributes and trades a wide range of secondary petrochemical products.

3.2.5 P.M.I. Comercio Internacional (“PMI”). Performs foreign trade activities of PEMEX.

3.3 National Hydrocarbons Commission “Comision Nacional de Hidrocarburos”

The National Hydrocarbons Commission regulates and supervises the exploration and production of hydrocarbons, as well as the process, transportation and storage activities related with projects of

exploration and production of hydrocarbons.

3.4 Mexican Petroleum Institute “Instituto Mexicano del Petroleo” The Mexican Petroleum Institute is a decentralized entity of public interest, created mainly to perform technical, educational and cultural activities with legal standing, independent authority, and its own

patrimony. The Institute carries out investigation and technological development activities for the petroleum, petrochemical and chemical industry, furnishing technical services to said industry, the trading of products and technological services resulting from the investigation, as well as the formation of highly specialized human resources to perform such activities.

3.5 Relationship among the Government, NOC and IOCs PEMEX is the only oil company in Mexico, with the exclusive right and responsibility over the exploration, exploitation and production of oil and gas, which rights and responsibilities cannot be given or delegated to any other person. Consequently, the role of international oil companies is limited to providing services to PEMEX by entering into public contracts awarded through public procurement procedures, in accordance with the restrictions set forth in Article 6 of Regulatory Law and Article 60 of PEMEX Law.

Pemex

Mexican State Owned Company

Holds exclusive rights and obligations related to petroleum and hydrocarbons exploration, exploitation and production

IOCs cannot have any rights over hydrocarbons in Mexico. IOCs can only provide its services or works to PEMEX by

entering into public contracts with PEMEX PEMEX is a State Owned Entity.

PEMEX is the largest tax contributor in Mexico Mexican Government International Oil Companies (“IOCs”) Relationships

Internationally, PEMEX manages its business through one of its subsidiaries, PMI. This subsidiary trades, exports and imports

products, either raw, natural, or processed products, trades with crude oil and products derived from its refineries and industrialization processes. PMI also trades with petrochemicals and other liquid hydrocarbons. PMI may provide consulting, management,

distribution, mediation, storage and representation services related to the oil industry.

PEMEX has a foreign affiliate company by the name of Integrated Trade Systems, Inc. (“ITS”), which main purpose is to facilitate out- sourced procurement by PEMEX and its subsidiaries for international goods and services. ITS is under specific mandate of PEMEX to providing it with direct and indirect services. Some of the goods and services typically sourced through ITS are electrical, drilling, pumps or telecommunications equipment as well as spare parts, consulting, catalysts and chemical or information technology products and services. ITS operates through frameworks agreements which are executed initially between ITS and the suppliers, negotiating the terms and conditions of the same and once the agreement is signed, PEMEX enters as a legal party through a notice of accession an directly issues orders to the suppliers.

4. Acquiring E&P Rights 4.1 Licensing Rounds

These types of rounds are not applicable in Mexico. As we mentioned before, PEMEX has the exclusive non-transferable right over the exploration, exploitation and production of hydrocarbons and cannot under any event, delegate such right or grant license rights in favor of any person.

4.2 Granting Instruments

The Constitutional mandate that the Mexican State maintains at all time the direct ownership over hydrocarbons and that PEMEX holds the exclusive non- transferable rights to carry out direct exploration and exploitation activities of hydrocarbons, set the basis under which

PEMEX is allowed to enter into agreements and contracts. According to Article 6 of the Regulatory Law and Article 60 of the PEMEX Law, PEMEX and its subsidiaries may enter into works and services

contracts with individuals or private entities to improve the

performance of its activities. The consideration under such contracts shall always be in cash. Such contracts cannot contain any provisions granting rights over oil reserves, property or title to assets, property or products of PEMEX. Sharing production agreements are prohibited. DAC contains additional provisions for exploration and production contracts. Some particular aspects of these contracts include that the direction of contracted activities cannot be subcontracted; it is prohibited to guaranty a profit to the supplier or contractor. Said contracts should not include the obligation to extend conditions of a specific contract to other suppliers or contractors. DAC identifies various types of services agreements related to exploration and production contracts, including:

4.2.1 Exploration Contracts, for exploration, localization and delimitation services for possible commercially viable reserves (payment to the contractor may be agreed to be contingent on the declaration of a commercially viable reserve);

4.2.2 Oil Fields Development Contracts, performance of services for the extraction of hydrocarbons from the subsoil;

4.2.3 Exploration and Production Integrated contracts, the purpose of these contracts shall be exclusively the performance of services of exploration and production of hydrocarbons, never giving any rights over title or ownership of such hydrocarbons to the contractor; and

4.2.4 Any other contract required by PEMEX, in accordance with other possible necessities of PEMEX that may arise. Exploration and Production Integrated Contracts (“E&P Contracts”) are relatively new in Mexico. The first E&P Contracts were awarded

on August 2011. E&P Contracts may be characterized by the following:

(i) They are entered into by and between PEP and any individual, public or private company acting as a contractor awarded through a public procurement procedure;

(ii) The term of this type of contracts shall be from 20 to 30 years, which may be extended through an amendment agreement, pursuant to the extension of the contracted area or economic convenience of PEP;

(iii) As we mentioned before, this type of contracts awarded by PEMEX through a public procurement procedure, cannot grant any type of title to oil or assignment to the area of work, on the grounds that the Mexican State must maintain total domain over hydrocarbons.

(iv) The minimum work program is measured each year by a specific formula which main purpose is to provide a dynamic mechanism to determine each year’s amount of investment as well as to ensure that the production of the reserves is

performed in proportion to the volume of the reserves. When the area under contract is extended in accordance to an agreement, the minimum work obligation will increase in the same proportion. If the Contractor defaults on the minimum work obligation, it shall pay to PEP a penalty of 100% of the value over the non-performed minimum work obligation. (v) The contractor shall be responsible for complying with all its

fiscal obligations in connection with the contract.

(vi) In these type of contracts, the work must include a minimum local content of forty percent (40%), which shall be proven by the contractor each year under the terms of the contract. (vii) The contractor at any time, may relinquish its right to perform

PEP, at least 3 (three) months prior to the effective date of the termination. Before the relinquishment is effective, the Contractor must complete the Initial Work Program (for the first year) or the Minimum Work Obligation of the

corresponding year.

(viii) In the event that any field is part of any structure or deposit that extends beyond the contracted area, or is part of a group of oil fields that may be considered as a field, and extends beyond the limit of the contracted area, PEP may require the contractor (or the contractor may have such initiative) to develop such field jointly with PEP or a third contracting party. In such event, the contractor shall collaborate with PEP or the third party contractor to prepare a program and

agreement of unitization for the development of the field. The contractor shall submit the program and agreement of

unitization to PEP for its approval. The unitized portion of the field on the contractor shall be considered as a field of the contracted area. No unitization approved by PEP shall be considered as an assignment according to the exploration and production contract.

(ix) The contract shall be governed and interpreted pursuant the laws of Mexico. Under the contract, the parties must agree that in the event of any dispute, they will attempt to solve it through a mechanism of mutual direct consulting, to achieve a negotiated understanding between the parties. When the parties are unable to reach an agreement on their differences