Integrated EP Contracts 3rd Round:...

Preliminary

October 18, 2012

Integrated EP Contracts 3rd Round: Chicontepec

www.pemex.com/contratos

Preliminary Disclaimer

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The preliminary model hereby presented has been approved by the Board of Pemex E&P (PEP); however, it is subject to the approval of the Board of Pemex. PEP may call for a bidding process and, in its case, award a contract under the terms proposed in this document, once all required approvals are met as well as any other procedures required by the applicable regulatory framework.

The information made available here is property of PEP. It is presented for promotional, informational, and for reference purposes, with the objective of sharing with the energy industry and other interested parties some preliminary ideas and considerations regarding certain technical, economic, legal and/or commercial aspects of hidrocarbons production service contracts for a possible award; in addition, it may be used, in its case, to obtain feedback from industry sources or intersted parties.

The information is provided “as is” and does not imply any kind of obligation on behalf of PEP. PEP does not take responsibility regard the certainty or reliability of the information, which has been elaborated only as a reference. PEP does not guarantee that the information is exact, complete or useful; therefore, PEP will not be responsible for damages, perjury or any other loss of any nature, derived from the information contained or refered to in this document. The information contained in this document and all the refered maps, graphs, and material are only provided as illustrative sources for the convenience of the interested parties.

This information is subject to modification, at any given moment, at PEP’s sole discretion, without incurring in any responsibility as a consequence of such modifications.

The publication of this information does not constitute an commitment to call for bids nor to accept any suggestions.


Preliminary Contents

v  Background

v  Blocks

v  Model

v  Bidding process

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Preliminary Pemex Exploration & Production

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13 in oil reserves, a substantial position given the strong growth of the company

14 in revenues, with more than US$100 billion in sales

4 largest oil producers worldwide since 2008

3 largest exporter of oil to the United States


Preliminary First Round, August 2011

129$ 142$168$

2012$ 2013$ 2014$

§  3 blocks: Magallanes, Santuario y Carrizo

§  53 packages sold

§  27 bidding companies

§  Contracts awarded to Petrofac y Schlumberger

MAGALLANES

SANTUARIO

CARRIZO

Production forecast MBD

Investment forecast Million dollars

Estimated investment of one billion dollares in the first six years

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Preliminary Second Round, July 2012


Blocks Company

Altamira Cheiron (Pico Petroleum)

Pánuco Petrofac and Schlumberger

Tierra Blanca Monclova Pirineos Gas and Alfasid

San Andrés Monclova Pirineos Gas and Alfasid

Arenque Petrofac

Investment forecast Million dollars

83 bidding packages sold to 31 companies

Estimated investment of 3.3 billion dollars in the first six years

6

0

20

40

60

80

100

120

2013 2017 2021 2025

0

100

200

300

400

500

600

700

800

2013 2017 2021 2025

Pánuco

San Andrés

Tierra Blanca

Altamira

Arenque

Pánuco

San Andrés Tierra Blanca

Altamira

Arenque


Preliminary Content

v  Background

v  Blocks

v  Model


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Preliminary Execution Strategy for Chicontepec

CIEP

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Amatitlán

Humapa

Soledad

Miquetla

Miahuapan

Pitepec

0

100

200

300

400

500

2013 2020 2027 2034 2041 2048 2055


CIEP


Preliminary Blocks’ Characterisitics

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Block

Area Cummulative production 3P Reserves Prospective

resources Type of

hydrocarbon

(sq.km) (mboe) (mmboe) (mmboe) °API

Amatitlán 128 103 403 74 44

Soledad 125 40,376 134 128 32 – 37

Humapa 128 588 341 157 27

Miquetla 112 11,084 248 86 35

Miahuapan 128 43 431 101 33

Pitepec 128 94 648 74 32 - 38

§  Reserves are related to the Terciary

§  Prospective resources refer to the Mesozoic

§  The six areas show high materiality



v  Background

v  Blocks

v  Model


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Preliminary Main Contractual Characteristics

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§  Hydrocarbon ownership. Pemex

§  Reseves ownership. Nation

§  Payment. Is subject to delivering production to PEP. Payments are in cash only, not in kind. Remuneration acknowledges the contractor’s costs and profits

§  Infrastructure. PEP will be the sole owner of all infrastructure; the contractor will have the rights to use all infrastructure to provide the services

§  Block. Extension or relinquishment according to existing resources

§  Term, periods, and investment. Based on the block’s economic limit

§  Work obligation. In relation to undeveloped 2P reserves


Preliminary Scope

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§  The contractor invests, executes and delivers production

§  Work obligation is predetermined for each of the two phases; warranties for 100% of the work value

§  Payment subject to delivery of production

§  The contractor submitts a development plan, budgets, and annual programs

§  The contractor should execute all services abbiding to common and prudent industry practices

Comprises all required activites for hydrocarbon production in the block


Preliminary Governance

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§  Steering group: integrated by two PEP membes and two company representatives

§  Revision of the development plan, work programs, and budgets

§  Participate on unitization, joint infrastructure, and other relevant issues

§  Resolution of technical and administrative differences

§  Creation of subcommittes: technical, financial procedures, subcontracting, among others

§  Resolution by unanimity

§  Possible participation of indepenent experts to support in technical differences

§  Arbitration


Preliminary

Premises of the Economic Model

§  Alignment of the contractor’s and PEP’s interests through mechanisms that provide incentives to increase production and execution efficiency

§  Positive net cash flow for Pemex each year

§  Profits based on performance; mechanisms to limit windfall profits

§  Development and use of technology for the project

§  Lessons learned from the first two rounds

§  Vision of a globally competitive model

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Preliminary Chicontepec is a Different Kind Project

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§  Requires constant investments

§  The production profile has high decline rate in the first months and a lower rate in the second phase

§  Practically no base production

§  Payout approximately 10 years

§  Tax regime: royalties rate as a function of oil prices (front-end loaded)

§  Possibility of increasing the recovery factor from 7 to 15%

-200

-100

0

100

200

300

400

500

1 6 11 16 21 26 31

MMdls

Year

Cash flow @ 12%

Amatitlán Soledad Payout promedio CM-RS Payout promedio CM-RN

0

5

10

15

2013 2018 2023 2028 2033 2038 2043

mmmdls Cummulative net cash flow

Capex Opex Ingresos Ingresos menos impuestos

Illustrative

Income Income minus taxes

Average payout Average payout


Preliminary Model: Key Components

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§  Payment based on a percentage of cost recovery plus profit

§  Payment subject production delivery and limited by available income (after taxes)

§  Adjustment based on NPV/b:

§  Allows for a simple application and follow-up

§  Acknowledges the time value of money

§  Does not inhbit additional investments

§  More production or lower costs, yield greater return and investment value

§  Provides a bidding variable other than a fee per barrel


Preliminary

qt = production, barrels

Model

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rt = adjustment factor in function of a NPV/b; Maximum value 1; or percentage neccesary to get to or maintain the maximum NPV/b

st = estimate of available income in $/b (after taxes)

Remunerationt = qt rt st


Preliminary Fiscal Regime for Chicontepec

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Royalties

Tax based results and deductions Cost cap Additional tax Ring

fencing

Extraction: 15%

Special: 30% or 36%

if q cum > 240 mmboe

Minimum: §  36.53 dls/boe §  60% price

Additional 52%

(p - 67.45) Yes

11 14 19 28

38 47

56 66

75

0

20

40

60

80

100

50 60 70 80 90 100 110 120 130

Oil price, dollars/b

Pemex tax burden, dollars per barrel

39 46 51 52 52 53 54 54 55

Available income (variable s)


Preliminary

Note: The parameters 41.00 and 39.13 will be updated in January of each year based on the U.S. PPI.

Variable s

Available Cash Flow: s Variable

; Q ≤ 240 mmboe

; Q > 240 mmboe

Q = Cummulative production in the block starting January 1, 2011

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st = min [39.13 + 0.059p, 0.654p]

st = min [41.00 + 0.016p, 0.642p]

20

30

40

50

50 54 58 62 66 70 74 78 82 86 90 94 98

$/b

Price USD/b

Note: This example applies only to cummulative production below 240 mmboe

p=(0.00838 ×(°API+h)+0.68)×WTS+0.1607×(°API+h)-‐7.03

°API Average weighted value of °API WTS Spot, reference price

h =

⎩⎪⎨

⎪⎧1, si °API<34

-‐1, si °API>34

0, si °API=34

�


Preliminary Variable s and r Adjustment Factor

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sq

sqr

Cummulative cash flows @ 0% Million dollars NPV/PVq

$/b, @4%

Year

1

r adjustment factor

§  r adjustment factor = algebraic expression, which determines the monthly available income neccesary to reach or maintain the bid NPV/b

§  Considers a percentage of eligible costs, revenues, the bid NPV/b, and a discount rate


Preliminary

Tarifa = fee per barrel in present value

VPQ = present value of production (cummulative and discounted volumes)

VPE = present value of cost recovery

VPP = present value of the payments to contractor

i = monthly discount rate

r Adjustment Factor

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Cost recovery

Years

VPEt =

Cost recoveryt = λteligible costst

λ

Cost recovery


Preliminary

§  Eligible costs: directly related to activities approved in the work programs and budgets

§  Cost recovery: a percentage of the eligible costs incurred by the contractor and approved by PEP, which are based on established accounting procedures

§  Does not include: interests, costs that exceed their market value, items not considered in the work programs, some corporate expenses, expenses related to fines, penalties, etc.

§  All transactions are subject to audits

Eligible Costs and Cost Recovery

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Preliminary

§  Term of 35 years divided in three periods:

§  Transition. 3 months

§  Initial. 24 months for evaluation and technological solutions, with the option of 12 additional months. Investment commitment

§  Development. The work commitment is determined by the undeveloped 2P reserves

§  Extension and relinquishment of block area. Determined by potential and development plan

§  Abandonment. Obligation to abandon and fund

§  Sustainable Development. Commitmment according to defined program

§  Training of PEP employees

§  National Content. Minimum 25%

§  Warranties. Corporate (per contract) and deliverables (100% of the anual commitment)

Other Economic Terms

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v  Background

v  Blocks

v  Model


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Preliminary

§  The bidder must prove experience as an operator, preferably in unconventionals* fields

§ Minimum production: 5 mbd

§ Minimum investment: 15 million dollars in E&P projects

§  HSE certification

§  Two credit ratings of the company or consortium, issued by credit agencies that are certified under the Mexico’s CNBV

Companies that appear in the Petroleum Intelligence Weekly Ranks World´s Top 50 Oil Companies are exempted from presenting documentation on production, investment, and HSE

Qualification

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Note: investment and production requirements subject to revision


Preliminary

w = weighted fee per barrel in present value

Tarifamenor = bidding proposal that has the lowest fee per barrel in present value

Factormayor = bidding proposal that has the maximum work commitment increase factor for the initial and development periods

Where: Tarifa > 0.00 ; Factor >1.000

Award to bidder that obtains the highest index

Award

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Índice= !w"Tarifamenor

Tarifapropuesta#+(1-w) "

Factorpropuesta

Factormayor#& ×100


Preliminary

Cummulative production

Investment

Award Example

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wMinimum

fee

Maximum

factor

Bidding

proposal

Factor

proposedIndex

0.55 3.41 2.320 3.41 1.521 84.5

0.55 3.41 2.320 3.87 1.950 86.3

0.55 3.41 2.320 4.15 2.320 90.2

0.55 3.41 2.320 5.23 1.900 72.7

0.55 3.41 2.320 6.50 1.521 58.4

Investment

Tarifa ($/b) Illustrative Index C

Index A

Index B

Index A > Index B > Index C

Note: w is pending

C

B

A


Preliminary Preliminary Calendar

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Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Preliminary model

Bidding process

Bid and award

§  Workshops

§  Field tour

§  Q&A events

§  Qualification

The calendar is subject to approvals and modifications

Preliminary

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