Capturing The Opportunity Mexicos Energy Reform 112869

Capturing the opportunity Mexico's
energy reform legislation: A

multidisciplinary review
Fulbright & Jaworski LLP
February 11, 2014
The new rules for Mexicos upstream

business
Elisabeth Eljuri
Head of Latin America, Partner
Norton Rose Fulbright
Mexico: the past, the present and the future

The Not too Distant Past
Private participation from 2002-2013
The Immediate Present
December 2013 Constitutional Reform
Secondary legislation and administrative regulations pending
Key Government Actors
The hopefully Not too Distant Future
Types of contracts and remuneration
Booking
The Grantor and Bidding Rules
Oilfield service companies
Neftegaz

Early 2000s: Multiple Service Contracts (MSCs)
MSCs were first announced in Mexico at the end of 2001.
Designed by PEMEX, MSCs were viable without the need to reform the Constitution
and allowed for firms to build and finance infrastructure. They were intended for
maintenance services and other works that would help increase gas production.
Under MSCs , PEMEX mantained control of production at all times and expressly
established that all assets built by private companies and hydrocarbons exploited
remained the property of PEMEX.
There was no private participation in the risks or benefits of the areas or in the
production of hydrocarbons.
MSCs were granted through public bidding and companies were required to fulfill
technical and financial standards. MSCs had a term of 20 years.

2011-2013: Integrated Service Contracts (ISCs)
ISCs were part of the 2008 Energy Reform which included the Law of Petrleos
Mexicanos, its Regulations and a series of Procurement Guidelines, which
altogether created a set of incentive-based contracts. ISCs were first drafted in
2010 for the oilfields in southern Mexico.
ISC participants received performance incentives in the form of fee per barrel and
recovery costs. Naturally, however, the property of the hydrocarbons remained with
the State and consequently, the structure did not grant rights over resources.
The intent behind ISCs was to regulate the provision of services for exploration,
development and production of hydrocarbons, mainly directed at reducing capital
expenditures and technology costs. They were a step forward from MSCs regarding
private participation.

2013: Constitutional reform approved
The decline in production from the Cantarell field marked an end to the era of easy
and accessible oil for Mexico.
EIA

New and alternative resources present important technical and financial challenges
which require the resources and expertise of IOCs and private investors which had
been constitutionally banned from truly participating in the upstream sector since
1938.
Just financially, for optimal performance, the industry in Mexico currently demands
$60 Billion per year in investments for E&P, of which PEMEX only can count on
about $20 Billion.
Since hydrocarbons are of strategic importance to the economy of Mexico, these
issues became relevant in public discourse and channeled political will towards
reforming the Constitution.

The amendments to the Political Constitution of the United Mexican States
providing for reforms to the energy sector were first approved by the Senate on
December 11 and then by the House of Deputies on December 12.
They became constitutional on December 16 as the majority of the Mexican state
legislatures approved the decree and entered into force the day after publication in
the Official Federal Gazette on December 21.
El Pas

The intent behind this amendment is to reform the energy sector in the country,
namely with regard to hydrocarbons and electric power.
To this end, both PEMEX and the Comisin Federal de Electricidad are mandated
to become, in accordance with applicable Mexican law, State Productive
Companies (SPCs) within a period of two years.
Specifically regarding hydrocarbons, the amendments allow for investors whether
national or foreign- to participate in the upstream, midstream and downstream
sectors, thus ending the monopoly that PEMEX has enjoyed in the sector for 75
years.
Notably, the exploration and production of hydrocarbons is declared of social
interest and public order and will henceforth be prioritized for land use purposes.

The amendment also provides for the creation of several government agencies
which are mandated to oversee, control and regulate the energy sector, including:
The National Agency for Industrial Security and Protection of the Hydrocarbons
Sector, which will regulate and oversee the installment and abandonment of
facilities and the overall control of waste products from operations; and
The National Centre of Natural Gas Control, which shall be responsible for the
transportation and storage of natural gas and the operation of the national gas
pipeline system.
Additionally, the Stabilization and Development Fund of Mexico (Fondo Mexicano
del Petrleo para la Estabilizacin y el Desarrollo) will be established with the
Mexican Central Bank, which will be entrusted with receiving, managing and
distributing the profits resulting from the hydrocarbon exploration and production
contracts with the exclusion of taxes.
10

Secondary legislation and administrative regulations pending
The energy reform contains several provisions which mandate the need for
secondary legislation and administrative regulations that will be designed later on
and within certain deadlines.
Congress is mandated to make all adjustments to the legal framework required to
effectively enforce the decree, within 120 days.
Secondary legislation will also have to regulate the migration process from existing
allocations to PEMEX (asignaciones) into the new contracts.
11 George Washington University

Secondary legislation and administrative regulations will cover:
The technical and contractual and fiscal terms for the new contract structures and
agreements for the exploitation of hydrocarbons, as well as the payment modalities
in which the State will choose to pay its SPCs or private investors
The bidding process for the granting of new contracts.
Minimum local content and other measures for promoting national participation
under such new contracts as well as for asignaciones.
Clean energy requirements and mandate reductions of polluting emissions and the
regulation of geothermal resources
12

Key Government Actors
The amendments to the Constitution allow for the State to contract with SPCs such
as PEMEX, and with private investors, for the exploration, production and refining of
hydrocarbons.
These contracts will be granted by the Secretary of Energy (SENER) / National
Hydrocarbons Commission (CNH) with the support of Hacienda.
While the National Hydrocarbon Commission (CNH) will be responsible for
conducting the bidding processes and entering into and administering the related
E&P contracts with private parties; the Ministry of Finance will be responsible for
establishing the economic terms for such contracts, such as the relevant royalty
rates, tax levels and other aspects.
13

Key Government Actors in E&P
SENER, CNH and

HACIENDA
HACIEDA
PEMEX/
SPCs
Investors /
IOCs
14

There are four types of contracts envisioned at this time. When choosing a type of
contract, Mexico must seek to maximize the long term development of the State.
Profit Sharing
Contracts
Production Sharing
Contracts
15
Service Contracts
Licenses
16
Contract
type
Exploration
Rights
Title to
Production
Remuneration Basics State

Control
Service
Contracts
State
State
cash
High
Profit
Sharing
Contracts
State
State
a percentage of
revenue
Medium
Production
Sharing
Contracts
State
Shared
a percentage of
production
Medium
Licenses
Shared?
State - at the
wellhead
onerous transfer of
hydrocarbons
produced
Medium
to low
Booking
SPCs and private investors will be able to report such contracts, and expected
economic benefits, for accounting and financial purposes as long as the
contracts explicitly stipulate that all hydrocarbons within the subsoil remain the
property of the State.
17
The Grantor and Bidding Rules

The new contracts will be granted by SENER/CNH and Hacienda. However,
details on the bidding rules are yet to be defined by subsequent legislation.
18
What it can mean for oilfield service companies?

In the long run, Mexico has faced declines in production. This trend has remained
unchanged in spite of recent efforts to notoriously increase capital investments. The
country has even become a net importer of refined petroleum products and natural gas.
The reform will demand creative restructuring efforts in order to materialize the
benefits. However, it is expected to benefit the industry and all stakeholders involved.
Oilfield service companies will be able to take advantage of the new opportunities for
investments as well as a potential increase in the complexity of E&P activities as they
move towards deepwater and shale.
19
Key features of international production

& profit sharing contracts
Michael P. Irvin
Head of Energy Transactional, US
Norton Rose Fulbright
Key Fiscal Provisions

Government Royalty Percentages
Production Sharing (Profit Oil) Between Government and
Contractor
Cost Petroleum
Definition of Recoverable Costs
Percentage of Production Allocable to Cost Petroleum
Profit Splits
21
Key Fiscal Provisions

Tax on Contractors Income
Income Tax Rate Imposed
Tax Deductibility of Costs and Expenditures
Ring Fencing Development and Production Areas
Other Taxes, Duties (Export/Import), Fees or Imposts

Bonus Payments
Signing Bonus
Production Bonus(es)
22
Other Key Provisions

Term (Duration) of Contract
Exploration Period(s)
Commerciality
Relinquishment of Areas
Development Period
Production Period
Work Program Requirements

Minimum Work
Minimum Expenditure
Domestic Supply Requirement

Volume
Price
23
Other Key Provisions

Investment in Scholarship or Educational Programs
Local Content ProvisionsPurchasing, Hiring and Training
Governing Law/Contract Stability
Waiver of Sovereign Immunity
Dispute Resolution Procedure
24
THE ENERGY REFORM IN MEXICO AND

THE FUTURE OF PEMEX
CAPTURING THE OPPORTUNITY MEXICO'S ENERGY REFORM
LEGISLATION: A MULTIDISCIPLINARY REVIEW
THE HOUSTONIAN HOTEL, HOUSTON
February 11, 2014
By: Jorge Cervantes
TABLE OF CONTENTS
I. Key Elements of the Constitutional Reform
II. Changes to Articles 25, 27 and 28 of the
Mexican Constitution
III. New Structure of the Mexican Energy Sector
IV. PEMEX as a State-Owned Productive Entity
V. Round Zero for PEMEX
VI. Following Round Zero
VII. What Comes Next?
I.
KEY ELEMENTS OF THE

CONSTITUTIONAL REFORM
The energy reform was published on December 20,
2013.
It modified articles 25, 27 and 28 of the Mexican
Constitution, and included 21 Transitory Articles with
details regarding the secondary legislation and next
steps
The key changes which are the basis for the new
Mexican energy framework are the following:
1
I.
KEY ELEMENTS OF THE

The Mexican nation will continue to own
all oil, gas and other hydrocarbons in its
subsoil
There will be a significant strengthening
of PEMEX and CFE, which shall be
converted into State-Owned Productive
Entities
The reforms end the PEMEX monopoly in
exploration, production and refining of oil,
gas and hydrocarbons, as well as in
production of basic petrochemicals
I.
KEY ELEMENTS OF THE

The energy and power sectors are now
open to private investment through
different kinds of new contracts (services,
profit sharing, production sharing,
licenses or others), and permits
New autonomous, independently funded
regulators are created, and existing
regulators are strengthened
A new Mexican Petroleum Fund is created
to collect, invest and manage all
hydrocarbon revenue
3
I.
KEY ELEMENTS OF THE

New measures of transparency, best
practices, environmental protection and
sustainability are put in place
II. CHANGES TO ARTICLES 25,

27 AND 28 OF THE CONSTITUTION
Exploration and production of oil, gas
and hydrocarbons is designated as a
strategic area of the Mexican
Government
Article 25
PEMEX and CFE to be converted into

State-Owned
Productive
Entities
(Empresas Productivas del Estado)
The State-Owned Productive Entities

shall be 100% owned and controlled by
the Mexican Government
5

Article 27
The Mexican nation maintains

owernship of all oil, gas and
hydrocarbons in its subsoil
Provides for asignaciones to be

granted to PEMEX under Round Zero
Allows for contracting with PEMEX or

private investors to carry out all
strategic activities
6

Eliminates
PEMEX monopoly on
production,
sales
of
basic
petrochemicals
Protects PEMEXs and CFEs abilities to

be dominant market players, but not
monopolies
Creates Mexican Petroleum Fund
Strengthens and broadens the powers

of existing regulators CRE and CNH
Article 28
III. NEW STRUCTURE OF THE

MEXICAN ENERGY SECTOR
SENER
MEXICAN STATE
SEMARNAT
SHCP
CNH
NATIONAL CENTER FOR

GAS CONTROL
CRE
NATIONAL CENTER FOR

ELECTRIC
POWER CONTROL
STATE-OWNED
PRODUCTIVE ENTITIES
PEMEX
Transfer
Transfer
CFE
PRIVATE SECTOR

Establishes and
policy
conducts energy
Awards Round Zero asignaciones

SENER
Designs forms of contracts to be used

and public bid guidelines
Grants permits for refining
processing of petroleum
and

Establishes economic (fiscal)
conditions for public bids and
contracts
SHCP
Forms the Mexican Petroleum Fund
Environmental regulator
SEMARNAT
Controls new National Agency for

Health,
Industrial
Safety
and
Environmental Protection of the Oil
Sector
10

Technical opinions and assistance to SENER
Gathering surveying and geological information
Carries out public bids
CNH
Executes and manages E&P agreements

Grants permits for storage, transport and
distribution by pipelines of oil, gas,
hydrocarbons, petrochemicals
11

Guarantees open access to pipeline
network and storage
Regulation of first-hand sales
CRE
Grants permits for power generation

and regulates same
Grants permits for storage, transport
and distribution of natural gas and
manages same
12

NATIONAL CENTER
FOR GAS CONTROL
NATIONAL CENTER
FOR ELECTRIC
POWER CONTROL
Controls and operates natural

gas transportation and
storage infrastructure
Controls and operates national
electric power distribution
network
Manages wholesale electric
market
Guarantees open access
13
IV. PEMEX AS A STATE-OWNED

PRODUCTIVE ENTITY
Within 2 years of the energy reform, PEMEX will be
transformed into a State-Owned Productive Entity
PEMEXs new purpose shall be to create economic
value and increase revenue for the Mexican nation
PEMEX will have budgetary autonomy and its
corporate organization, management and operating
structure shall reflect international best practices
PEMEX will operate with a special and more flexible
contracting regime
14

PRODUCTIVE ENTITY
PEMEXs CEO will continue to be appointed by the
Mexican President, but its Board of Directors will be
more independent
The new PEMEX Board of Directors will be composed
of 10 members - 5 will be appointed by the
government and 5 will be independent board
members
The head of SENER will be president of the BoD and
shall hold the tie-breaking vote. The 5 labor union
representatives have been removed
15

PRODUCTIVE ENTITY
It is expected that PEMEX will be reorganized into 2
principal divisions common in the industry, which will
be independently competitive with no cross-subsidies:
The Exploration and Production Division, which

will focus on upstream and midstream operations
The Industrial Operations Division, which will be

responsible for downstream activities
16

PRODUCTIVE ENTITY
Within 18 months, PEMEX will divest of its natural gas
transportation and storage infrastructure by
transfering all (PGPB) pipelines and assets to the new
National Center for Gas Control
The National Center for Gas Control shall also be
assigned all existing PEMEX natural gas contracts
PEMEX will now specialize in what it does best and its
financial situation should emerge stronger from
reforms in the energy and fiscal areas
17

PRODUCTIVE ENTITY
Consolidation of procurement and operating units will
also likely provide important savings
With the new regime PEMEX will be on very similar
operational, tax and royalty footing with international
energy companies entering in Mexico
18
V. ROUND ZERO FOR PEMEX

There will be a 9-month Round Zero process where
PEMEX will have the opportunity and preference to
retain some or all of its existing exploration and
production areas to form its asset base, BEFORE any
other public bids take place
Within 90 days of publication of the energy reform
(i.e., March 20, 2014), regardless of the passage of
implementing legislation, PEMEX will propose to
SENER which of its current E&P blocks and projects it
wishes to keep
19

PEMEX must justify to the regulators that it has the
expertise, technical ability and resources to efficiently
and competitively operate the E&P areas it proposes
to keep
SENER, with the technical assistance of the CNH, will
have 180 days to grant or deny the PEMEX requests
(i.e., by August 20, 2014) and make the asignaciones
In the blocks assigned to it, PEMEX will continue to be
able to contract out to services companies under
service contracts or performance-based contracts
20

If PEMEX does not prove it has the required
capabilities to continue exploring or developing such
fields, SENER will release same for public bidding
In the asignaciones granted to PEMEX, SENER shall
establish the technical details including geographic
area, depth, terms, etc.
For exploration blocks in areas in which PEMEX has
already made discoveries or investments, it shall be
possible for
PEMEX to continue its works
21

for a term of 3 years, extendable for 2 more years. If
PEMEX does not meet its plans and obligations, such
blocks would be reverted back to the Mexican State
For production blocks, PEMEX shall maintain fields
currently under production, subject to presentation to
the regulator of efficient, competitive and detailed
works and investment plans
22
VI. FOLLOWING ROUND ZERO
Round Zero also includes the possibility of awarding

blocks to new operators that overlap with PEMEX
geographically, if they develop other formations in the
same area and do not affect PEMEX
If PEMEX is affected with the overlap, SENER may

determine the compensation payment to be made to
PEMEX
23
The Mexican State may request the payment of a

consideration when making asignaciones
The earliest openings for private capital will likely be in

partnership with PEMEX as it migrates its existing
fields retained in Round Zero to joint ventures
The asignaciones may not be transferred without the

prior approval of SENER
24
The CNH shall carry out a public bid to designate and

approve the partners which shall be able to contract
with PEMEX as a result of any migration of
asignaciones to joint ventures
Furthermore, the SHCP shall approve the fiscal terms

of any such contracts
As part of implementing legislation, Congress is

expected to pass minimum national content
requirements for PEMEX and private operators, to
promote expansion of Mexicos oilfield services
industries and the creation of jobs
25

Following Round Zero, SENER and CNH will lead the
process through which new E&P blocks, areas, assets
and projects will be identified, put up for bid and
awarded
Blocks will be awarded by CNH principally on the basis
of consideration offered to be paid to the Mexican
State
Having CNH issuing international bids and awarding
and supervising contracts is a major departure from
the existing legal framework, where PEMEX was the
entity granting same
26

PEMEX may participate in any future bids on equal
footing with private companies
PEMEX and private investors shall be allowed to book
the awards given or contracts executed, and expected
benefits, for accounting and financial purposes only,
so long as they confirm that all oil, gas and
hydrocarbons found underground shall remain the
property of the Mexican State
27
VII. WHAT COMES NEXT?

MARCH 2014
PEMEX Round Zero deadline
APRIL 2014
Deadline for Congress to make
adjustments to secondary laws
90
120
SEPTEMBER 2014
Deadline for SENERs asignaciones of E&P
blocks and assets to Pemex
days
days
270
DECEMBER 2014
Deadline for Congress adjustments to legal framework
on environmental / clean energy matters
days
365
APRIL 2015
Time limit for President to create the National Center for Gas
Control and National Center for Electric Power Control
DECEMBER 2015
Pemex and CFE deadline transition to become State-Owned
Productive Entities (Empresas Productivas del Estado)
days
485
days
730
days
SOURCES AND REFERENCES
Decreto por el que se reforman y adicionan diversas disposiciones de la Constitucin Poltica de los Estados
Unidos Mexicanos, en Matera de Energa (Bill of Decree to Reform and Amend Several Provisions of the
Political Constitution of the United Mexican States in Energy Matters), Diario Oficial de la Federacin, 20 de
diciembre de 2013, Tomo DCCXXXIII No. 17, Edicin Vespertina.
Mexican Presidency. White Paper: Reforma Energtica aprobada por el Congreso de la Unin, Mxico, 2013
(Energy Reform passed by Mexican Congress (2013))
Presentation: PEMEX: Constitutional Reform of the Energy Sector; Relevant Aspects, December 2013,
prepared and made available by PEMEX.
Presentation: Energy Reform, by Senator (PRI) David Penchyna Grub, delivered during the Economic
Perspectives
Seminar
held
at
ITAM
on
January
10,
2014,
available
at
http://exalumnos.itam.mx/noticias/docs/perspectivas14/David-Penchyna.pdf
Presentation: Energy Reform, by D. Lourdes Melgar, Undersecretary of Electricity, delivered during the
Economic Perspectives Seminar held at ITAM on January 10, 2014, available at
http://exalumnos.itam.mx/noticias/docs/perspectivas14/Lourdes-Melgar.pdf
David L. Goldwing, Mexico Rising: Energy Reform at Last?, published by the Atlantic Council, USA, 2013,
available at www.atlanticcouncil.org
29
Dictmen de las Comisiones Unidas de Puntos Constitucionales; de Energa, y Estudios Legislativos,

Primera, con Proyecto de Decreto por el que se Reforman y Adicionan Diversas Disposiciones de la
Constitucin Poltica de los Estados Unidos Mexicanos en Matera de Energa. Published by Senado de la
Repblica, LXII Legislatura.
Article: Mexicos Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States,
CRS Report, Prepared for Members and Committees of Congress, Clare Ribando Seelke, Coordinator,
Specialist in Latin American Affairs; Michael Ratner, Specialist in Energy Policy; Ms. Angeles Villarreal,
Specialist in International Trade and Finance; Curry L. Hagerty, Specialist in Energy and Natural Resources.
Congressional Research Service, November 18, 2013. www.crs.gov.
Article: Mexico Energy Bill to End PEMEXs Monopoly on Oil, by Juan Montes, Latin America News,
December 7, 2013. Wall Street Journal, available at
http://online.wsj.com/news/articles/SB10001424052702303497804579244503254132812
Article: Mexico Just Made a Historic Change to Its Energy Policy Heres Why it Might Not Matter, by Rob
Wile, December 14, 2013. Business Insider, available at: http://www.businessinsider.com/mexico-energyreform-reaction-2013-12#ixzz2nYABpOn7
Article: Behind Mexicos Oil Revolution, by Daniel Yergin, Opinion, December 18, 2013, Wall Street Journal,
available at
http://online.wsj.com/news/articles/SB10001424052702304403804579261903190690252
Article: Petroleo y Energa: Las Preguntas que Exigen Respuestas en Leyes Secundarias by Ricardo
Becerra, President of Instituto de Estudios para la Transicin Democrtica, available at
http://www.ietd.org.mx/wp-content/uploads/2014/02/IETD-Reforma-Energtica_FINAL2.pdf
30
Reforma Energtica, Cuadro Comparativo, by Fundacin Desarrollo Humano Sustentable, December 11,
2013; CIDAC.
Reforma Energtica. Los 25 puntos ms importantes del proyecto de dictamen aprobado en lo general en
comisiones del Senado. Available at http://cidac.org/esp/uploads/1/25_puntos_dictamen_energia91213.pdf
Article: Mexicos President Signs Energy Overhaul Into Law, by Juan Montes, Latin America News,
December 20, 2013. Wall Street Journal, available at
http://online.wsj.com/news/article_email/SB100014240527023047731045792705405969
Reforma Energtica Aprobada: Estimaciones en Torno a su Impacto (PEMEX), by Fundacin Desarrollo

Humano Sustentable, December 23, 2013.
Article: Mexicos Economic Reform Breakout; Opinion by Pierpaolo Barbieri and Niall Ferguson, December
26, 2013. Wall Street Journal, available at
http://online.wsj.com/news/article_email/SB100014240527023043672045792687420464
Energy Sector Overhaul Now in Effect, by Lpez Velarde, Heftye y Soria, January 20, 2014, International Law
Office - www.internationallawoffice.com/Newsletters/details.aepx
Mexicos Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States;
Congressional Research Service Report 7-5700, Clare Ribando Seelke (coordinator); found at www.CRS.gov
31
CONTACT AND BIO

JORGE CERVANTES
Partner
Gonzlez Calvillo, S.C.
Tel: 011 (52-55) 5202-7622
Email: jcervantes@gcsc.com.mx
Webpage: www.gcsc.com.mx
Jorge Cervantes is a partner in the Gonzalez Calvillo, S.C. law firm in Mexico City. Mr. Cervantes has extensive
experience providing legal and business advice to multinational and Mexican companies and developers in all
kinds of energy, infrastructure and project finance projects, including, oil; gas distribution, transportation and
storage; power generation, transmission and distribution; pipeline projects; LNG; gasoline distribution; EPCs;
gas, carbon, wind, solar and hydro power projects; water; as well as strategic alliances and M&A transactions in
these areas. He has worked with international oil & gas companies, regulated national companies like PEMEX,
and the Federal Electricity Commission (CFE), Mexican regulators including the Ministry of Energy, the Ministry of
Communications and Transportation and the Energy Regulatory Commission (CRE), banks, financial institutions,
sponsors, developers and companies in all kinds of energy infrastructure investments and transactions and
assisted them in the development of projects; negotiations and drafting of complex agreements; participations in
national and international public bids; regulatory issues and authorizations, including antitrust clearance;
financings of all kinds of energy projects; mergers & acquisitions, etc. His work encompasses cross-border joint
ventures, strategic alliances, acquisitions, spin-offs, leveraged buyouts, privatizations, financings, corporate
restructurings, divestitures, sales and purchases of all kinds of energy assets, stock, equities, and equity-type
securities. His experience includes participation in different projects and international public bids involving the
Ministry of Energy,
32
CONTACT AND BIO

PEMEX, PEMEX Exploracin y Produccin, PEMEX Refinacin, PEMEX Petroqumica, PEMEX Gas y Petroqumica
Bsica, CFE, the CRE and also in the privatizations of public entities. He has also represented entities of the
Mexican government in diverse energy strategic projects.
Representative clients with which Mr. Cervantes has worked with include: KEPCO, Samsung, Techint, Abengoa,
Repsol, Alstom, Grupo Mexico, Hidrosina, Sempra Energy, Perforadora Mxico, Mitsubishi, PEMEX, Ministry of
Energy, PEMEX Gas y Petroquimica Bsica, Mizuho, Vopak, ENEGAS, State of Veracruz, Gasoductos de
Chihuahua, Unin Fenosa, ITOCHU Corporation, Promotora Ambiental, ING, Credit Agricole, Banorte, Diavaz,
Greystar, Penspen, Quanta Services, Pacific Rubiales, Mexslub, ExxonMobil, Weatherford International, JBIC,
McDermott, Fertinal, etc.
Mr. Cervantes has been recommended and listed in a wide variety of international publications for his work in the
areas of energy, corporate, mergers & acquisitions, project finance, telecommunications, real estate, and crossborder transactions in general. Such publications include Chambers Global List of The Worlds Leading Lawyers
for Business; Euromoneys Guide to the Worlds Leading Lawyers; Whos Who Legal Mexico; Global Law Experts;
Chambers Global as Leaders in their Field; Chambers Latin America; IFLR 1000; Best Lawyers in Mexico;
Mexicos Top 40 Lawyers under 40-Latin Lawyer; The International Whos Who of Business Lawyers; Latin
American Corporate Counsel Association (LACCA).
Mr. Cervantes obtained his law degree from the Escuela Libre de Derecho in Mexico City and a Masters of Law
(LLM) degree from the Georgetown University Law School in Washington, D.C. He worked as a Foreign Associate
with Curtis, Mallet-Prevost, Colt & Mosle, LLP, in New York City.
33
Lessons Learned
An Investment Bankers Perspective
Joe Amador
February 2014
Agenda
Who is TPH?
Mexico: Whats the size of the prize?
What can we learn from the US?
A case study, or Qu pas en Colombia?
Investors wish list
Myth: I can get better returns by investing in US unconventionals
Actionable items to consider
61
Our Team
TPH today: 150 people in

4 cities, on 2 continents
62
Industry Leading Investment Banking Practice

Top Energy Advisor(1)
Advisory
($ in millions)
2010 - 2014 YTD
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2010 - 2014 YTD

# Deals
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Firm
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$195,224
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Director
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6
Senior execution expertise in M&A,

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Capital Markets
Industry/engineering expertise
integrated into IB effort across all
sectors
Three-year old team achieved >25%

market share(1) in 2010
Vice President
6
Total Team:
54 Professionals
Coverage of Midstream/MLP, OFS,

Power, Upstream and Downstream
sectors
Senior Advisor
1
Associate
11
Midstream/MLP
Power
Upstream Downstream
TPH combines banking expertise with engineering talent to deliver

high quality advice to energy clients
Analyst
15
OFS
Banking Expertise
___________________________________
(1)
Source: Dealogic: United States Oil & Gas Exploration & Development/Field Equipment & Services/Diversified/Pipeline and
Utility & Energy Gas, pending and completed M&A transactions announced 1/1/2010 to 2/4/2014.
Technical Talent
63
Mexico in a North American Context
Historical Underdevelopment Implies Remaining Potential

Mexico today has 5% of the oil reserves and 4% of
the gas reserves in NAM
but it has not always been that way (1984)

Oil Proved Reserves (Bbbl)
Gas Proved Reserves (Tcf)
Oil Proved Reserves (Bbbl)
10
5%
56
42%
77
58%
297
79%
201
95%
Mexico
Mexico
77
21%
US & Canada
Mexico
US & Canada
US & Canada
Theres also shale potential

Gas Proved Reserves (Tcf)
Shale Oil Resource (Bbbl)
17
4%
395
96%
Mexico
___________________________________
Source: EIA, CIA.
US & Canada
Shale Gas Resource (Tcf)
13
16%
1,238
69%
67
84%
Mexico
545
31%
US & Canada
Mexico
US & Canada
64
Sizeable Energy Market Potential

Room for Growth Across Subsectors
Significant Offshore Opportunities
Underexploited Shale Resources

7,000 +
200 +
US
Eagle
Ford
US
Eagle
Ford
Mexico
Shale
Mexico
Shale
5
Total Wells
Current Rig Count
Growing Demand for Power in Mexico
Oil Wells
Oil/Gas Wells
Net Consumption (BkWh)
250
200
150
Gas Wells
100
1993
___________________________________
Source: EIA, HPDI, Oilfield Review.
1998
2003
2008
2013
65
Oil Production Comparison

After declining for decades, US oil production has grown by 2 MMbopd since 2006
10,000
US
9,000
Mexico
8,000
Production (MBopd)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1988
___________________________________
Source: EIA, TPH.
1994
2000
2006
2012
66
US Change in Production Profile

The shale revolution has exploded US oil production, primarily driven by the Eagle Ford (Texas) and Bakken (N. Dakota) shale plays
United States
7.0
Production (MMbbl/d)
6.5
6.0
~2 MMbbl/d
5.5
5.0
4.5
4.0
2005
2006
2010
800
Oct. 2008 Petrohawk

announces first commercial
discovery in the Eagle Ford
650
1.75
~1 MMbbl/d
1.50
1.25
1.00
2005
2009
Production (Mbbl/d)
Production (MMbbl/d)
2008
Texas
2.25
2.00
2007
2011
2012
N. Dakota
May 2006 EOG discovers
the Parshall Field
500
~1 MMbbl/d
350
200
2006
___________________________________
Source: EIA, TPH.
2007
2008
2009
2010
2011
2012
50
2005
2006
2007
2008
2009
2010
2011
2012
67
Key Factors Propelling US Energy Growth

Access to Acreage
Geology
TOC, Ro, Brittleness
Infrastructure
NAM abundant oil and gas
infrastructure
Market Access & Pricing
Mature hydrocarbons market and
pricing mechanisms
Economic Incentives
Both producers and landowners
need to be rewarded for risks
Access to Capital
Between 2007 and 2012, US
drilling & completion capex (TPH
universe of 37 E&P companies)
more than doubled to $90B
Regulatory & Environmental
Acceptance
Adequate frameworks in place
Service Availability & Efficiencies
Service availability
NAM abundance of service
capacity and expertise
Attractive commodity prices

68
Oil Field Services
The Drive for Performance Induces Demand for Services

Dropping prices and improved efficiencies have been critical to the continued development of shales
20
50
Capital Equipment
Total
18
45
Drilling Rigs
16
40
Fracturing Services
14
35
12
30
10
25
20
15
Trucks and Railcars
10
Facilities
Warehouses
# Companies
2003
2004
2005
2006
2007
___________________________________
Source: Spears & Associates, Baker Hughes, TPH Estimates.
2008
2009
2010
2011
2012
Consumables
Number of Companies
Horsepower
Millions
US & Canada Fracking Capacity
Proppants
Fluids
Logistics/Transportation
Infrastructure
Human Resources
2013
69
US Gulf of Mexico Well Progression

Decades of Development
It takes years to develop the infrastructure and expertise required to tap deepwater resources
MS
AL
LA
TX
Pre-1970s
1980s
1990s
2000s+
___________________________________
Source: HPDI.
70
US Gulf of Mexico Infrastructure
Deepwater Success Was Leveraged Off Shallow Water Infrastructure

What you often dont see is key
71
Colombia as a Case Study on Industry Reform

The combination of improving security conditions and structural reforms in the energy sector created significant growth
Significant Growth in Investment and Production

1,200
Ramp Up in Drilling
Wells Drilled
140
8,000
Oil Production
Success Rate
Foreign Direct Investment

(Oil Sector)
120
1,000
112
6,000
99
100
600
4,000
US$MM
800
MBopd
70%
130
80
50%
40%
75
70
56
60
60%
30%
400
2,000
40
20%
35
200
28
21
20
0
2000
2002
2004
2006
2008
2010
10%
10
0
2012
0
Security
improvements
___________________________________
Source: EIA, ANH, Banco Central de Colombia.
Contractual changes
and talent influx
0%
2002
2004
2006
2008
2010
72
Investors Wish List

Balanced contracts
Risk / Reward /Obligations
Fair state take
Legal and fiscal stability
Ability to
Market crude / natural gas at international prices
Repatriate profits
Book reserves
Leverage assets
Acquire / dispose of assets
Availability of infrastructure and services
Availability of qualified personnel
Streamlined & efficient permitting process
73
Indexed Stock Performance

EOG Resources vs. Gran Tierra
Santos Assumes
Presidency
350%
Indexed Stock Price Performance
300%
169%
250%
146%
200%
83%
150%
100%
01-Jan-09
01-Jul-09
01-Jan-10
01-Jul-10
GTE
___________________________________
Source: FactSet as of 2/1/2014.
03-Jan-11
01-Jul-11
EOG
02-Jan-12
02-Jul-12
01-Jan-13
01-Jul-13
S&P E&P
74
Pioneer Natural Resources vs. Pacific Rubiales
2,500%
Santos Assumes
Presidency
2,000%
1,500%
956%
1,000%
734%
500%
83%
0%
01-Jan-09
01-Jul-09
01-Jan-10
01-Jul-10
PRE
___________________________________
03-Jan-11
01-Jul-11
PXD
02-Jan-12
02-Jul-12
01-Jan-13
01-Jul-13
S&P E&P
75
Goodrich Petroleum vs. Apco Oil and Gas
400%
350%
Impact of YPF
Expropriation
300%
250%
200%
83%
150%
100%
(39%)
(39%)
50%
01-Jan-09
01-Jul-09
01-Jan-10
01-Jul-10
APCO
___________________________________
03-Jan-11
01-Jul-11
GDP
02-Jan-12
02-Jul-12
01-Jan-13
01-Jul-13
S&P E&P
76

Amerisur Resources vs
Despite the wayward swings of the political whim pendulum, Latin America still offers investors remarkable opportunities
3,000%
2485%
2,500%
2,000%
1,500%
1,000%
500%
83%
0%
01-Jan-09
01-Jul-09
01-Jan-10
01-Jul-10
03-Jan-11
01-Jul-11
AMER
___________________________________
02-Jan-12
02-Jul-12
01-Jan-13
01-Jul-13
S&P E&P
77
Actionable Items to Consider

Upstream
Understand the geology
Select your targets characteristics
Get to know local service providers
Get to know Pemex, CNH
Service Companies
Look for local partners / acquisition targets
Search for personnel
Midstream, Power
Look for local partners / potential customers
Get to know CRE, CFE, CENACE, Centro Nacional de Control de Gas Natural
All
Get to know SENER and Agencia Nacional de Seguridad Industrial y de Proteccion al Medio
Ambiente del Sector de Hidrocaburos
Stay abreast of the new laws and announcements
78
Disclosure Statement
About The Firm

Tudor, Pickering, Holt & Co., LLC is an integrated energy investment
and merchant bank, providing high quality advice and services to
institutional and corporate clients. Through the companys two brokerdealer units, Tudor, Pickering, Holt & Co. Securities, Inc. (TPHCSI) and
Tudor, Pickering, Holt & Co. Advisors, LLC (TPHCA), the company offers
securities and investment banking services to the energy community.
TPH Asset Management, LLC (TPHAM) is an SEC registered investment
adviser that delivers a suite of energy investment strategies. TPH
Partners Management, LLC is a relying advisor of TPHAM. Certain
employees of TPHAM are also employees of TPHCSI.
The firm, headquartered in Houston, Texas, has approximately
150 employees and offices in Denver, Colorado; and in New York, New
York. Its affiliate, Tudor, Pickering Holt & Co. International, LLP, is
located in London, England.
Contact Us
Houston (Research, Sales and Trading): 713-333-2960
Houston (Investment Banking): 713-333-7100
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Denver (Investment Banking): 303-300-1900
New York (Investment Banking): 212-610-1660
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London: +011 44(0) 20 3008 6428
www.TPHco.com
Tudor, Pickering, Holt & Co. does not provide accounting, tax or legal
advice. In addition, we mutually agree that, subject to applicable law, you
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aspects of any potential transaction or structure described herein that are
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Copyright 2014 Tudor, Pickering, Holt & Co.
79
Sharing Production & Reserves

Alan Cunningham
2014 Gaffney, Cline & Associates. All Rights Reserved.
Capturing the Opportunity: Mexicos Energy Reform
80
2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline &
Associates valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries.
The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be
used directly or indirectly in any way detrimental to Gaffney, Clines & Associates interest.
Not everything that counts can be counted,

And not everything that can be counted counts.
Albert Einstein
81
Resource Entitlement and Recognition
Reservoir
(in-place volumes)
Net
Recoverable
Resource
Project
(production & cash flow
schedules)
Property
(ownership/contract terms)
Minerals, including hydrocarbons in the ground are owned by

the host government (or by private mineral rights holders)
Entities may acquire the right to explore for, extract, and market
all, or a portion, of the recoverable hydrocarbon quantities
Entities may claim entitlement to future marketable volumes
based on the contract terms
Entities may claim Reserves . subject to accounting and
disclosure rules on reserves recognition
82
82
Entitlement
Entities may claim entitlement to future marketable
volumes based on the contract terms
Fourth Transnational
Congress to make necessary adjustments in the legal
framework to regulate the contract modalities, which will be
among others, Service Agreements, Profit or Production
Sharing or Licenses to explore or exploit oil and hydrocarbons
Contract details are not yet available

Contract details are required:
To establish the nature of the Contractors compensation
To calculate the size of the Contractors compensation
83
General Characteristics of Contracts

Contemplated Under Reform Provisions
Licenses (Concessions)
Licensee entitled to production subject to royalty and tax
payments due to the owner of mineral resources
Profit & Production-Sharing Contracts (PSCs)
Net entitlement or net economic interest is estimated using
a formula based on the contract terms incorporating return of
project costs (cost oil) and project profits (profit oil)
Risked-Service Contracts
Contractors exposed to market and/or technical risks and are
paid in cash rather than in production
Pure Service Contracts
Contractors are paid fixed fees
84
Factors in Reserve Recognition
Increasing Degree of Ownership
Spectrum of Petroleum Fiscal Systems
85
Concessions
Can I book
Reserves?
Right to extract and
market oil and gas
Production Sharing
Contracts
Revenue Sharing
Contracts
RiskService
Contracts
Pure Service Contract
Purchase Agreements
Exposure to market
and technical risk
Opportunity for
reward through
participation in
producing activities
Booking Reserves
Entities may claim Reserves subject to accounting and
disclosure rules on reserves recognition
Fifth Transnational
Companies may participate in oil or hydrocarbon exploration

and extraction can report their contracts or assignments for
financial or accounting purposes, as well as their expected
benefits
86
Entities with Reserve Reporting Regulations or

Definitions
Security Disclosures:
USA SEC
EU ESMA
Canada CSA (NI51-101/COGEH)
Norway Oslo Bors
International Technical Standard

Petroleum Resources Management System (PRMS)
Sponsored by:
87
SPE
AAPG
WPC
SPEE
SEG
Resources Classification
Reserves
Discovered, recoverable,
commercial, remaining
Petroleum Resources
Management System
Proved, Probable, Possible

1P, 2P, 3P
Classification
Contingent Resources
Discovered, potentially recoverable,
not yet commercial, remaining
1C, 2C, 3C
Prospective Resources
Undiscovered, potentially
recoverable, potentially commercial,
remaining
Low, Best and High Estimates
Unrecoverable
88
Discovered or undiscovered, not

recoverable
Categorization
On the Road to Reserve Booking

The foundation has been laid:
No Constitutional roadblock
Established industry standards will apply
There is still work to be done:

Details of specific contracts will be required
Upstream sector still politically controversial
Others have successfully completed the journey
89
Occurrences in this domain are beyond

the reach of exact prediction because of the
variety of factors in operation, not because
of any lack of order in nature.
Albert Einstein
90
Thank you!
Sharing Production & Reserves

Alan Cunningham
Capturing the Opportunity: Mexicos Energy Reform
91
Oil and Gas Mexican taxation

Houston
February 11, 2014
Mexican taxation at a glance
Corporate income tax 30%
Dividend WHT 10%

Foreign residents taxed if:
VAT 16%
Permanent establishment, only on income attributable thereto

Mexican source income
Temporary importation regimes available, including custom duties
Employees profit sharing 10%

OECD transfer pricing
Broad treaty network +50 treaties
Page 93
OECD standards
Repatriation issues: overview
No exchange controls
No financial transaction taxes
Withholding taxes:
Dividends
Interest
Royalties
Capital gains
Qualifying for treaty benefits

Limits on deductibility of certain types of expenses to tax
haven or transparent entities
Page 94
Inbound investments through treaty

jurisdictions
Holding Co.
Foreign
Multinational
Group
Reduced WHT on dividends up to 0%

Access to tax-free reorganizations
Capital gains planning
Financing Co.
Holding Co.
Financing Co.
IP/Leasing Co.
Reduced WHT on interest usually 10%

Thin cap 3:1 ratio
Inflation adjustment
FX fluctuations
IP/Leasing Co.
Mexican
Subsidiaries
Reduced WHT on royalties usually

10%
Rental payments are deemed royalties
Other considerations
Dividends
Interest
Royalties
Page 95
Mexican BEPS
Economic substance beneficial
ownership
Broadening of income tax base
Denial of deduction for payments of interest, royalties or

technical assistance to certain related parties when:
a)
b)
a)
The payment is made to a foreign entity that is fiscally

transparent, unless the shareholders or partners are subject
to tax on the income of this entity.
The payment is not deemed to exist for tax purposes in the
country or territory where the entity is resident.
or
The foreign entity does not recognize the payment as
taxable income under the applicable tax rules.
Definition of controlled or controlling related parties
Page 96
Treaty benefits
Taxpayers that document their residence in the applicable country

and comply with the provisions of the treaty and the additional
requirements provided by this law, including to present the
informational returns for their tax position in terms of article 32-H of
the Federal Tax Code or file a tax audit report and to appoint a legal
representative.
With respect to related-party transactions, the tax authorities may
request that the foreign resident document the existence of legal
double taxation through a sworn oath signed by the legal
representative that expressly states that the income subject to tax in
Mexico to which the treaty benefit is being sought is also subject to
tax in the country of residence.
Page 97
Employee taxation
Mexican Operating Co.
Foreign
Multinational
Group
Global
Employment
Holding Co.
Mexican Services Co.
Mexican
Operating Co.
Mexican
Services Co.
Rotators
Branch
Page 98
Mexican employees
Employees profit-sharing based, costplus markup
Rotators Branch
Personnel
Services
No employees
No payroll-related expenditures
Subcontracts personnel services from
Mexican Services Co. and Rotators
Branch
Non-Mexican employees
Mitigates risk of permanent
establishment
Flexibility with employee profit sharing
and social security contributions
Tax issues on Contratos Incentivados
Profits from operating efficiencies shared with Pemex
Intercompany transaction needs to comply with OECD transfer

pricing standards
Distortions in the deduction of fixed assets

NOLs carryforward limited to 10 years
Comparable transactions from other contracts with Pemex do not

necessarily reflect market prices
Pemex lacks transfer pricing knowledge
Ring fencing not applicable to taxes
Certain mismatches between reimbursable expenditures

and deductions
Page 99
For example, financing expense, certain royalties, management

fees, pre-operating expenses
Tax issues on Contratos Incentivados
Pemex GAAP in USD no functional currency election

available for legal, tax and accounting purposes
Distortions in the deduction of fixed assets
IT and documentation requirements may create temporary
or permanent, collection issues
Pemexs different approaches North vs South
Page 100
Other relevant tax issues and non-tax issues
Mexico lacks an efficient partnership or joint venture regime
Depreciation rates applicable to machinery and equipment used in

exploration activities, including rigs, platforms, etc.
Alternatives: Mexican trust or fideicomiso, SAPI (per se corporation),

foreign vehicles with Mexican tax residence
Joint venture regulation in the secondary legislation of the Energy
Reform?
Straight-line depreciation 7% or 25% discussion at the Supreme Court

Tax rules not in line with financial accounting rules
Lack of a specific regime for the new contracts intangible drilling costs
WHT rate applicable to leasing of certain offshore equipment

Nondeductibility of indemnity payments or penalties
Permanent establishment on services rendered in Mexican territory
Tax controversy management for audits by the Mexican tax authorities
Page 101
Mexico federal budget
Taxes and fees paid by PEMEX represent approximately

47% of Mexicos federal budget.
Mexicos revenue vs GDP
Total revenue
PEMEX revenue
Tax revenue
0.0%
5.0%
* Source: INEGI
* Stats as of FY2012
Page 102
10.0%
15.0%
20.0%
What could a royalty tax look like?
License agreements royalty would be paid in exchange

for the Oil and Gas
Challenges:
Define royalty within Mexican tax system
Tax vs fee
PEMEX financial and accounting information
Constitutionality of other royalties
Page 103
For example, mining royalty has been challenged before the

Supreme Court
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Capturing the opportunity Mexico's

energy reform legislation: A

The new rules for Mexicos upstream

Mexico: the past, the present and the future

The Not too Distant Past

The Not too Distant Past

The Immediate Present

The Immediate Present

The Immediate Present

The Immediate Present

The Immediate Present

The Immediate Present

11 George Washington University

The Immediate Present

The Immediate Present

The Immediate Present

SENER, CNH and

The hopefully Not too Distant Future

The hopefully Not too Distant Future

Remuneration Basics State

The Grantor and Bidding Rules

What it can mean for oilfield service companies?

Key features of international production

Key Fiscal Provisions

Key Fiscal Provisions

Other Taxes, Duties (Export/Import), Fees or Imposts

Other Key Provisions

Work Program Requirements

Domestic Supply Requirement

Other Key Provisions

THE ENERGY REFORM IN MEXICO AND

By: Jorge Cervantes

KEY ELEMENTS OF THE

KEY ELEMENTS OF THE

KEY ELEMENTS OF THE

KEY ELEMENTS OF THE

II. CHANGES TO ARTICLES 25,

PEMEX and CFE to be converted into

The State-Owned Productive Entities

II. CHANGES TO ARTICLES 25,

The Mexican nation maintains

Provides for asignaciones to be

Allows for contracting with PEMEX or

II. CHANGES TO ARTICLES 25,

Protects PEMEXs and CFEs abilities to

Creates Mexican Petroleum Fund

Strengthens and broadens the powers

III. NEW STRUCTURE OF THE

NATIONAL CENTER FOR

NATIONAL CENTER FOR

III. NEW STRUCTURE OF THE

Awards Round Zero asignaciones

Designs forms of contracts to be used

III. NEW STRUCTURE OF THE

Controls new National Agency for

III. NEW STRUCTURE OF THE

Executes and manages E&P agreements

III. NEW STRUCTURE OF THE

Grants permits for power generation

III. NEW STRUCTURE OF THE

Controls and operates natural

IV. PEMEX AS A STATE-OWNED

IV. PEMEX AS A STATE-OWNED