Our World. Tuesday September 16, Mexico. reserves, estimated at 10 billion barrels of crude oil and

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1 See thi s re po rt a tw orl dfo lio. co. uk Distributed by USA TODAY 1 #Mexico #EnergyReform Our World Mexico A powerful game changer The most relevant event in the energy industry, Mexico s groundbreaking Energy Reform, will thrust the country into the investment limelight and change the North American energy landscape as we know it This supplement to USA TODAY was produced by United World Ltd., Suite 179, 34 Buckingham Palace Road, London SW1W 0RH Tel: ourworld@unitedworld-usa.com President Enrique Peña Nieto, after the promulgation of the Energy Reform Bill s Secondary Laws M e x i c a n President Enrique Peña Nieto believes that solving the greatest challenges of our time requires big ideas. With this in mind, Mexico s Head of State forged a broad consensus to carry out a package of urgently needed reforms. This is a symbolic and transcendental moment for the country, the President said recently. All Mexicans should feel a sense of pride, because our democracy has brought about real results. Thanks to this common purpose, in a few months we overcame decades of gridlock, destroying barriers that prevented Mexico from achieving strong and sustainable growth. The reform agenda came about through an unprecedented accord among the country s major political factions, known as the Pact for Mexico. Together, they drafted a series of groundbreaking new laws and constitutional amendments that encompass 11 critical areas, including the energy sector, labor markets, education and social security, to name just a few. For the first time in history, we forged a broad agreement that did not originate from the need to address an emergency situation, but from an explicit determination to profoundly transform the country, President Peña Nieto explained on his website. The watershed deal prompted International Monetary Fund (IMF) Managing Director Chris- On August 11, 2014, the Mexican Congress approved the secondary laws of the historic Energy Reform tine Lagarde to declare Mexico the only emerging market that has passed such number of sweeping reforms, in such a short time, and with such broad political support. President Barack Obama also praised the Pact for Mexico, saying as Mexico works to become more competitive, you ve got a strong partner in the United States, because our success is shared. When one of us prospers, both of us prosper. The Energy Reform On August 11, 2014, the Mexican Congress approved the secondary laws of Mexico s ambitious Energy Reform, completing the historic legislation that will contribute to a North American energy boom, while improving the lives of Mexican citizens. As President Peña Nieto has explained, over the last three decades, Mexico has successfully modernized its democracy and opened its economy to the world, resulting in the creation of competitive industries. Despite this progress, Mexico s energy sector stagnated, largely due to a drop in production, even though its territory holds some of the world s largest oil and gas reserves, estimated at 10 billion barrels of crude oil and close to 17 trillion cubic feet of natural gas, according to the Energy Information Administration (EIA). The Energy Reform addresses these challenges with a number of decisive measures, all of which share the goal of attracting investment and modernizing the sector. The new laws maintain state ownership over hydrocarbon resources, while opening up the industry for the first time in 75 years, to private investment through service contracts, licenses, profitsharing, and productionsharing contracts. President Peña Nieto has made it clear that transparency and accountability will be fundamental in the transformation of the energy sector. He has pointed out, for example, that in oil and natural gas exploration and extraction, any contract awarded by the government must be made public and can be audited. The enabling laws also mandate that all the contributions, compensations, and payments related to the contracts must be publicly disclosed. Moreover, the secondary legislation governing the energy sector includes mechanisms for clear and mandatory checks and balances for the process of bidding, drawing up, and the management of contracts. The Energy Reform also overhauls the sector s regulatory framework, giving its governing institutions the necessary flexibility and autonomy to operate more effi- President Peña Nieto has made it very clear that transparency and accountability will be fundamental in the transformation of the energy sector ciently. Once the new legislation is fully implemented, the state oil company Petróleos Mexicanos (Pemex) and the national electricity company, Comisión Federal de Electricidad (CFE), will be managed as Productive State Enterprises. This new legal status will allow them to become more market-oriented and to operate under an autonomous budget. Among other responsibilities, they will be required to publish their financial results, even if they are not listed as publicly-traded companies. The goal is to make these companies comply with international best practices, while increasing their investment capital and technological capabilities. Moreover, the presence of new operators in the retail energy industry and the estimated increase of oil and natural gas production will reduce utility bills. This Reform will ensure the energy sector again becomes an engine for economic growth, by guaranteeing the supply of oil, gas and elec- tricity at competitive prices, President Peña Nieto wrote in the Financial Times. It creates opportunities for private companies to invest and improve and expand the sector s infrastructure. A tangible transformation Echoing the Mexican government s statements, private sector analysts forecast that the Energy Reform will help lift the Mexican economy in the coming months and years. Earlier this year, Moody s upgraded Mexico s government bond rating to A3, making it the second country in Latin America to receive an A rating, after Chile. According to Nomura Securities economist Benito Berber the new framework will increase foreign direct investment by $10 billion annually, starting in 2016; while Gabriel Casillas, chief economist at Grupo Financiero Banorte SAB, estimates that annual private investment made possible under the Energy Reform will reach $50 billion by Meanwhile, the Mexican government forecasts that accelerated activity in the energy sector will boost the country s overall economic output by an additional 1% and create close to half-amillion jobs by 2018, on the way to generating 2.5 mil- THE LEGAL FRAMEWORK AND INSTITUTIONAL STRUCTURE ARE NOW IN PLACE TO START BUILDING A NEW MEXICO WHERE EACH ONE OF US WILL HAVE THE NECESSARY OPPORTUNITIES, TOOLS AND ABILITIES TO MAKE IT A SUCCESS STORY Enrique Peña Nieto, President of Mexico lion jobs and adding an additional 2% to the country s Gross Domestic Product (GDP) by President Peña Nieto and his administration have not downplayed the challenges that this reform entails, stressing all along the important benefits that it will bring. Our goal is to make Mexico more open, productive and competitive, with sound public finances and skilled human resources; so we can play a more active role in the global economy and provide our people with a better quality of life, the President has said. Together we are building a new Mexico. A UNITED WORLD SUPPLEMENT PRODUCED BY: José Ramón Inguanzo, Editorial Director Livia Mirón, Country Director Marina Carracedo, Country Coordinator Fátima Ruiz-Moreno, Regional Director

2 2 Distributed by USA TODAY Implications of the Energy Reform: a transformation for Mexico and the world The Energy Reform will bring new life to Mexico s energy sector, opening it up to private companies who can complement Pemex and CFE s activities T he day after the signing of the Energy Reform s secondary laws, President Enrique Peña Nieto underscored his intention to transform the country. When I started my term in office, I made it very clear that my government did not come here to manage the country, we came to transform it, he wrote in a personal message on the Presidency s official website. The obstacles were of such magnitude that it was impossible to overcome them with merely a more efficient administration. The change had to be radical, he declared. The radical change the President advocates has become a reality in the unprecedented Energy Reform. Among other things, the new legislation will allow private capital from inside and outside Mexico to take part in this transformation, while the State retains ownership of its natural resources. Investment opportunities: refining and natural gas Although investments by stateowned oil company Petróleos Mexicanos (Pemex) tripled over the past 13 years, from $9 billion in 2001 to the current $28 billion, crude oil production has fallen by one-third in the past decade, according to Energy Information Administration (EIA) statistics. President Peña Nieto assures the Reform will allow Mexico to turn this situation around by attracting private investors who will not only provide financing, but will also share the costs and risks of developing new projects. Pemex and the power utility company, Comisión Federal de Electricidad (CFE), will remain under government ownership, but will be given greater autonomy in their management. Their structure will be strengthened, transforming them into ProducThe reform opens a window of opportunity for private sector companies, which have the adequate technology and know-how to develop the deepwater wells in joint ventures and partnerships tive State Enterprises with incentives to partner or compete with private sector companies (more about this on page 6). The Reform also supports an increased production of natural gas, fertilizers (the latter will receive an injection of $1.15 billion), and oil refining. Currently, Mexico is a net importer of refined products, obtaining abroad about 50% of its gasoline and 65% of its petrochemicals. In 2013, Mexico s refineries processed 1.69 million barrels per day (bpd), compared to Brazil s 2.1 million bpd or Venezuela s 1.86 million bpd. Nonetheless, Pemex continues to rank high in the global refining industry and is currently positioned among the top 12 companies in capacity. With the Energy Reform, Pemex will attract new investments, transfer of technology and know-how. Pemex expects to upgrade its six refineries and enable them to process heavier grades of crude, which account for 80% of its output from the Gulf of Mexico. While refining holds enormous potential for foreign direct investment, exploration and development of natural gas are also attractive. Growing demand, especially from Mexico s industrial and electric power sectors, has raised consumption to 2.3 trillion cubic feet in 2013 from just 1.4 trillion in Although natural gas production in Mexico has grown by 50% since 2000, greater investment in the sector will still be needed. Under the new legislation, private companies will be able to produce natural gas and retail it in Mexico a huge turnaround from the traditional system. As President Peña Nieto himself has pointed out, We did not allow private companies to take natural gas out of Mexico, but we did buy natural gas from private companies in the U.S. and elsewhere, and resell it at a higher price than if we had produced it ourselves. Investment opportunities: deepwater and shale oil exploration Mexico joined the league of the world s top 10 oil producers thanks to the underwater deposits located in the relatively shallow waters of the Gulf of Mexico, such as the Cantarell field. At its peak, in 2004, Cantarell acsourcing oil and gas from a stable democratic country in the same region will mean for U.S. consumers and companies lower costs and more stability of hydrocarbon inflows BENEFITS Mexico will retain ownership of its hydrocarbons and Pemex and CFE will continue to be state-owned companies. However, the new legal framework permits ownership of hydrocarbons by private companies at the wellhead through licenses, profit-sharing, and production-sharing contracts. 1 An estimated half a million additional jobs will be created in Mexico during the current presidential term. This will translate into increased demand for U.S. goods and services and a higher level of education for workers in the energy industry. 2 hydrocarbons industry will 3 The strengthen its role as a driver of economic growth in Mexico, through an investment boom in new areas. This, in turn, will kick-start the development of the entire industrial sector, promoting economic growth in different regions of the country and creating multiple job opportunities. The expected benefits of the Energy Reform, in terms of investment, jobs, production and technology will boost Mexico s GDP growth by an additional 1% in 2018 and 2% through This will contribute to the sustainable growth of the power sector at all levels, since there will be new companies involved in petrochemicals, refining, transport and storage. 5 The new business in the power sector will bring an increase in revenues for the national budget and for social programs. The government s revenue from hydrocarbons will grow as a result of greater production of oil and natural gas. All this additional wealth will be used to foster high quality schools and social programs to build hospitals and highways, and to offer water-supply services. 6 There will be transparency regarding the operations and the revenues derived from new oil and gas contracts, which will be open to public inspection by citizens at any time. In addition, there will be annual audits of all contracts in force throughout the country. 7 CFE and Pemex will be strengthened, thereby enhancing national competitiveness. The two state-owned companies will achieve greater autonomy, efficiency and will be able to reinvest their profits as they deem best. They will also be better organized, more transparent and better equipped to improve their corporate governance and work with their partners. 8 The Energy Reform will lead to lower consumer prices of electricity and gas. The utility bills of families, businesses and industries will be reduced, while an increased supply of natural gas will make more fertilizer available at lower prices. Consequently, food prices will also decline. 4 electricity industry will be 9 The restructured so as to guarantee competitive rates to homes, industry and commerce. The performance of all activities comprised within the electricity industry will improve, while the CFE will continue as the operator of its present infrastructure. counted for 63% of Mexico s total crude production, as compared to less than 20% to date, according to Pemex. However, years of productive life in some of these wells are dwindling. To meet its increased production targets (3.5 million bpd in 2025, compared to the current 2.5 million bpd), the country will have to develop its deepwater and shale oil deposits. Mexico holds enormous reserves in both these areas. Deepwater exploration is likely to be most appealing to integrated oil companies that can handle all aspects of the process, from exploration to production and refining. These companies already account for 88% of the crude output in the U.S. territorial waters of the Gulf of Mexico. On the other hand, companies specializing in one or another area of the process will be most attracted to shale oil exploration and production, as will the major international companies. Deepwater exploration is already underway; at present, in the Bay of Campeche, over 100 drilling platforms are in operation. There are prospects of discovering major deposits of gas or oil located below both U.S. and Mexican territorial waters. The Transboundary Hydrocarbon Agreement (signed by U.S. lawmakers in December 2013 and subsequently included in the package of enabling legislation approved by Mexico in August 2014) dictates that both countries can exploit the deposits in question through a proportional spilt: if 40% of the deposit lies on the Mexican side of the boundary, Mexico gets 40% of the net revenues, and vice versa. Likewise, potential investors will be looking at opportunities for joint exploitation of Mexico s unconventional assets shale oil and gas. According to the EIA, Mexico has technically recoverable reserves of 545 trillion cubic feet of shale gas and 13 billion barrels of shale oil. In fact, the Mexican state of Coahuila is home to one of the world s largest deposits of shale gas, contiguous with the Eagle Ford formation across the border in Texas. Investment opportunities: electricity The transformation that comes with the Energy Reform goes beyond oil and gas. The electricity sector has also undergone a fundamental change that opens a huge investment opportunity for private companies. Mexico s Ministry of Energy estimates that electricity demand in Mexico will increase by 4.7% annually through This will require an additional 37.5 Gigawatts (GW) of generation capacity, up from the current 62 GW. The cost of this added capacity is estimated at $57 billion, with another $36 billion forecast for investments in electricity transmission and distribution. This expansion in the power sector will capitalize on Mexico s plentiful reserves of natural gas, in order to replace its expensive and outdated fossil-fuel generation system. With various independent power producers already present in Latin America and the U.S., the electricity sector, like oil and gas, will have a lot of appeal for private partners in the near future. The opening of the Mexican energy sector is set to resonate in positive ways north and south of the Río Grande. Sourcing oil and gas from a stable, democratic country and a next-door neighbor will translate into lower fuel costs and a more reliable supply for U.S. consumers. In terms of business, the transparent legal regime, a business-friendly environment, and lower energy costs will increase the interest of current and potential North American entrepreneurs active south of the border in industries such as maquiladoras and the automotive and aerospace sectors. As President Enrique Peña Nieto has said, Now is the time to put this Energy Reform into action, a Reform which will strengthen Mexico s national identity as an emerging power and enhance the benefits for the country s partners and its citizens. MYTHS Pemex will be privatized : Pemex will remain under state ownership and control. The purpose of the Reform is to turn Pemex into a productive entity that generates wealth, not only for Mexico, but also for its potential international partners. The positive effects of the Reform will not be felt in U.S. for many years : In the U.S., Mexico s reforms will accelerate growth, helping to narrow the socio-economic disparities between Texas border cities and metropolitan areas such as Houston, Dallas and Austin. The Reform will bring only one-sided benefits : The Reform was designed to add value to the activities of both Mexican and international companies. Among its many benefits, it is estimated that about $1.2 trillion will be invested in the Texas-Mexico border region over the next decade. The financial benefits of Mexico s modernized energy sector will not be used transparently : One of the Energy Reform s fundamental goals is to make the energy industry s activities transparent. To this end, seven transparency and anti-corruption mechanisms have been established. These will comply with international best practices. 1 2 Infrastructure problems will arise : It is not true that international companies will face security and infrastructure challenges. With the National Infrastructure Plan , nearly $590 billion will be invested in infrastructure development, which will help ensure quality energy at competitive prices. 3 The surge in shale gas exploration in the U.S. has created a supply surplus that puts into question whether Mexico s shale exploration projects would attract U.S. investors : By 2035, an estimated 60% of total natural gas production will come from shale, which is currently one of the most important sources the U.S. is exploring to satisfy its growing energy demand. Moreover, increased production could mean that one day Mexico will no longer need to import gas Pemex does not require the help of the private sector to make needed investments : Pemex needs to partner and collaborate with the private sector to improve efficiency. For example, in 2012, the participation of different companies in North American deep-sea projects brought in well over $20 billion in investment. 7 Mexico s oil reserves are being depleted : As of January 2014, total 3P hydrocarbon reserves in Mexico surpassed 42 billion barrels of crude oil equivalent. Experts predict that the country still has major, unexplored deep-sea and ultra-deep deposits in the Gulf of Mexico, as well as in the Gulf of Chicontepec in Veracruz and in the country s Northeastern region. Private investment is required to fully develop all these deposits. 8 No energy reform of this kind has been successful elsewhere : Brazil and Colombia are two success stories. Thanks to their energy reforms, these countries have allowed private participation and investment in the oil industry. As a result, they have dramatically increased their oil production and their overall economic growth. 9

3 Distributed by USA TODAY 3 A shift in power Mexico emerges as a global energy leader. Worldwide, it ranks 19th in terms of proved oil reserves and is among the top 10 oil producers, according to the EIA M exico and the U.S. have been l o n g standing partners in many areas, and both countries are set to benefit from the Mexican Energy Reform. The two have long relied on one another for critical energy supplies, with the U.S. currently purchasing over 70% of Mexico s oil exports. It is a common misconception that the U.S. relies on the Middle East for most of its oil; Canada and Mexico, together, provide nearly 40% of U.S. oil imports, and Mexico consistently ranks among its top three suppliers. According to the Energy Information Administration (EIA), only Canada and Saudi Arabia supply more crude to the U.S. than Mexico, exporting million and million barrels per year, respectively, in Nevertheless, Mexico s oil exports to the U.S., amounting to million barrels per year, are remark- ably higher than Venezuela s million barrels; they also more than double or triple those of other major oil producers, such as Iraq (124.4 million) and Nigeria (87.4 million). A safe and reliable source A stable democratic system, reliable judiciary, new clear and transparent processes, friendly and diverse diplomatic relations, and geographical proximity, all help to position Mexico as the I want to congratulate President Peña Nieto on the outstanding efforts that he s made during the course of this year on a whole range of reforms that promise to make Mexico more competitive and increase opportunity for the people of Mexico It s not a matter of optimism or pessimism, it is an objective matter. The trend will change because of the reforms Ángel GURRÍA, Secretary General of the OECD To conduct the reforms, President Peña Nieto has worked with enthusiasm and great commitment. I would like to express my sincere respect for the President Shinzō Abe, Japanese Prime Minister I think the reform down there could lead to opportunities for Mexico to develop its own gas resources, maybe even joining the U.S. in becoming an exporter, which would be another remarkable event Adam Sieminski, Administrator of the Energy Information Administration Barack OBAMA, U.S. President U.S. hydrocarbons supplier of choice. The legal certainty that Mexico offers North American investors thanks to its Energy Reform, will give the country an advantage over other oil producers. Moreover, because it is not a member of the Organization of Petroleum Exporting Countries (OPEC), Mexico enjoys a greater degree of flexibility and competitiveness to meet the needs of consuming countries. Over the past five years, the U.S. has cut down significantly on net oil imports, favoring non-opec exporting countries. While the U.S. reduced its OPEC-sourced imports from 2.2 billion barrels in 2008 to 1.3 billion last year, non-opec oil imports only dropped from 2.5 billion barrels to 2.2 billion. The new energy landscape Since the 1920 s when Mexico became a global energy power, ranking second in oil production worldwide the country has served as a critical partner to the growing American economy. Today, despite a decade of declining production, Mexico remains an indispensable furnisher of the world s energy supplies. According to Petróleos Mexicanos (Pemex), it ranks 10th globally in terms of oil production, at nearly 2.5 million barrels per day (bpd) down from 3.4 million bpd in Additionally, Mexico s total proved reserves rank 19th in the world, es- timated by the EIA at over 10 billion barrels and worth nearly $1 trillion at today s prices. Furthermore, Pemex cites a figure of 42.1 billion barrels of 3P reserves, referring to proven, probable and possible reserves. Interestingly, the move towards opening Mexico s energy sector coincides with the U.S. resurgence as a major oil and gas producer. As a result of heavy investment and the development of innovative technology for extracting unconventional oil and gas resources, the so called shale revolution has put the U.S. on track to challenge Saudi Arabia as the world s leading oil producer. The new available techniques have also placed the U.S. within reach of achieving energy independence. One of the expected results of the Energy Reform is the transfer of this knowledge and technology to spur innovation and investment in Mexico, allowing it to achieve its full potential as a true energy giant. There are also good reasons to be optimistic about Mexico s shale oil and gas prospects. Its territory holds the world s eighth largest technically recoverable shale oil reserves and the sixth largest shale gas reserves, according to estimates published by the EIA. In terms of oil alone, bringing in the required investment and technology to exploit these resources would add 13 billion barrels, which would more than double the country s current proven reserves. With the historic constitutional reform comes a renewed engagement with leading international oil companies. American firms will be natural partners in this development, as they have largely pioneered shale oil and gas extraction world- wide and possess the critical tools and experience derived from working in neighboring and geographically similar areas along the border and the Gulf of Mexico. The Energy Reform, arguably the most groundbreaking legislation in Latin America of the last decade, will not only boost Mexico s economy and the prospects of its citizens, but it will also change the energy landscape as we know it today. An energy power has emerged.

4 4 Distributed by USA TODAY In 2013, 10% of U.S. oil imports came from Mexico Total trade of oil products between Mexico and the U.S. generates $60 billion annually Total bilateral trade between Mexico and the U.S. amounts to more than $500 billion every year TAMAULIPAS INVESTMENT GUIDE WHY: 1. To allow free competition and partnerships between state-owned and private companies under equal conditions. 2. To develop infrastructure that will address the growing demand for natural gas and ensure that all the states in Mexico have access to the transportation network, avoiding future supply crises. 3. To ensure that all tenders are subject to rules of transparency, competitiveness and accountability. 4. To promote the use of cleaner and cheaper fuels like natural gas that will lower electricity rates and develop a less polluting fuel mix. There will also be greater incentives to use clean energies. HOW: 1. Oil and Gas: a. The Ministry of Energy will design contracts and technical guidelines for tenders and will award licenses. b. Contracts will be awarded to the company that offers the best economic proposal to the government. c. The economic and fiscal terms of licenses and contracts will be verified by the Ministry of Finance. d. The Comisión Nacional de Hidrocarburos (the National Hydrocarbons Commission, CNH) will evaluate and select the bids that are in Mexico s best interest, using technical and economic criteria. VERACRUZ 2. Electricity: The Ministry of Energy, along with other regulatory institutions, will plan the expansion of the national electricity system, oversee the sector s efficient operation, and determine the needed requirements to increase the share of clean energies. 3. CNH and the Comisión Reguladora de Energía (Energy Regulatory Commission, CRE) will be strengthened with greater transparency, as well as technical and managerial autonomy. Their board meetings will be public. 4. Both Petróleos Mexicanos (Pemex) and private companies will be able to process natural gas and will have the capacity to participate in the entire petrochemical productive chain. WHERE: Mexico s Round One tender will allow private oil companies from around the world to bid on the rights to more than 150 fields, holding nearly 15 billion barrels oil equivalent (boe) of possible reserves in addition to nearly 4 billion boe of proven and probable (2P) reserves in different oilproducing areas of the country, including: -2.7 billion boe of 2P reserves and 9 billion possible boe in the Chicontepec Basin and nearby onshore unconventional fields, -142 million boe of possible resources in shale gas fields in the Sabinas Basin, -Deepwater acreage in the Gulf of Mexico holding an estimated 3.2 billion boe, -An additional 1.2 billion boe of 2P reserves and 724 million boe of possible reserves in onshore, shallow water and heavy oil fields in various areas. WHEN: 1. Round Zero: determines the areas where Pemex will have exclusivity over hydrocarbon exploration and exploitation rights. Round Zero was announced on August 14, The secondary laws of the Energy Reform lay out a process for establishing a new electricity market, with a new independent State operator, as well as new market rules and regulations to be completed within 12 months. 3. Round One offers oil and gas resources for private investment. Guidelines will be published in the first quarter of 2015 and the projects will be awarded between May and September of 2015.

5 Distributed by USA TODAY 5 THE NEW ENERGY LANDSCAPE With the Energy Reform in place, the Ministry of Energy has defined the areas where Pemex and O&G companies will be able to operate and cooperate On August 13, Round Zero of bidding concluded, in which Pemex was awarded 83% of Mexico s probable reserves (2P) and 21% of possible reserves (3P); this represents 100% of the 2P and 67% of the 3P that the state-owned company had bid for. In total, Pemex s allocation equals 20.6 billion barrels of oil equivalent and covers approximately 90,000 square kilometers. YUCATÁN TABASCO Source: Ministry of Energy and Pemex Infographics: El Financiero Adapted by United World Ltd.

6 6 Distributed by USA TODAY PEMEX AND CFE Not only the biggest, Thanks to the Energy Reform, state-owned companies Pemex and CFE will be re-vamped and the door will be open for them to participate in joint ventures with international oil majors U nder the Energy Reform, two of Mexico s iconic state institutions Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE), the electric utility will become Productive State Enterprises operating as private businesses with a new set of rules regarding their administration, procurement practices, and tax regime. This landmark initiative strengthens each company s independence and efficiency while widening its scope of With this reform, we will be able to extract petroleum from deep waters and to take advantage of our vast deposits of shale to generate electricity at a lower cost. As a result, the country will reduce its external dependence and guarantee its energy security Enrique Peña Nieto, President of Mexico activities, with the ultimate goal of reducing energy costs for all Mexicans. The most important thing is that this transformation translates into concrete benefits for all families, President Peña Nieto has said. Having more gas at a lower cost for electricity generation, as well as more competition in the power sector, will bring down the prices that homes currently pay for electricity and gas. Pemex and CFE s new status will give them greater autonomy, not only in terms of projects but also of budgetary planning and recruitment. Pemex and CFE will each have a Board of Directors that will operate in compliance with the best international practices of corporate governance and will include independent advisory members, said Energy Minister Pedro Joaquín Coldwell. The role of the Mexican federal government in the two companies will be limited to appointing the board members and the Chief Executive Officers, evaluating the overall performance of the companies and their management, and proposing to Congress the sum of dividends that Pemex and CFE should pay to the State. Furthermore, each company will have an examiner chosen by Congress, who will evaluate its performance. While the Productive State Enterprise status is intended to boost the company s administrative and overall efficiency, the paramount issue of transparency will be addressed by the proposed monitoring, auditing and regulatory scheme. The first two will be under the supervision of the board of directors special auditing committees, made up exclusively of independent advisors and the internal auditing department. The third, related to the internal regulation, will be under the responsibility of the CEOs. However, the pursuit of transparency and accountability does not stop there. Pemex and CFE will be required to disclose certified information under the Mexican Equity Markets Law, just as if they were publicly listed companies. Pemex sets forth to find partners Pemex s modernization aims to create value throughout its operations and management, which will translate into a culture that emphasizes competition and performance, as the company refocuses its business portfolio and looks to enter into productive relationships with third parties. Pemex s new paradigm will put it in line with the bestrun global firms in the industry, while maintaining its position as the most important oil company in Mexico. Moving forward, Pemex The new tax regime for Pemex represents a paradigm change. At the end of five years, there will be a historical reduction in the tax charges paid by Pemex, which currently total $6.8 billion Luis Videgaray, Minister of Finance will collaborate with industry-leading firms from all over the world, drawing on their capital, experience and knowledge in order to explore its unconventional and deepwater reserves, which require the type of large investments and technology that had been difficult to muster under the previous regulatory framework. Mexican Petroleum Fund Using oil wealth to create sustainable economic growth The Mexican Petroleum Fund for Stabilization and Development is an integral part of the country s program for stable and sustained economic and social growth and development M exico s oil and gas resources are crucial to both present-day economic stability and to the wellbeing and prosperity of future generations. With this in mind, the Energy Reform created the Mexican Petroleum Fund for Stabilization and Development, a sovereign wealth fund which will invest the revenues from oil and gas in projects that will guarantee the country s economic growth well into the future, long after finite oil and gas reserves are used up. Several other major oilproducing countries, notably Norway, Saudi Arabia, the United Arab Emirates, Kuwait, Angola and Qatar, have created sovereign wealth funds (SWFs). Mexico s new Petroleum Fund is fashioned after Norway s Oljefondet, the world s largest fund and a global role model, which has a total portfolio of $884 billion. Like its Scandinavian counterpart, Mexico s new sovereign wealth fund is designed to be effective in saving and building on oil wealth, through responsible investments and transparency, in order to create a sustainable future. This Fund ( ) will aim to ensure that present and future generations of Mexicans, who are the owners of the oil revenue, receive the income for the good of the country, said Luis Videgaray, Mexico s Finance Minister. According to the Ministry of Energy, the Fund will receive and manage the public revenues derived from entitlements and contracts, other than taxes. The Fund will be a trust within Mexico s Central Bank, contributing to its accountability and transparency. The Trust itself will have a Technical Committee with three members from the State and four independent members. In line with the Energy Mexico s oil resources are recognized as being crucial to both present economic stability and to ensuring the wellbeing and prosperity of future generations Reform s focus on transparency, the Fund s accounting will be published in the quarterly reports of Public Finances and Public Debt, available online. Revenues of up to 4.7% of Mexico s GDP will be paid out of the Fund to the Treasury for use in the national budget. Any excess of revenues derived from the hydrocar- bons industry will be retained as long-term savings within the Fund. When they exceed 3% of GDP, these revenues will be divided into two streams. At least 40% will be added to the long-term savings capital within the Fund. The other 60% will be divided as follows: up to 10% each for the universal pension system and for science and technology and renewable energy projects; up to 30% to oil and gas project investment vehicles and infrastructure development; and up to 10% will go towards scholarships, connectivity enhancement projects, and regional industrial development. The Fund is thus constituted with safeguards to encourage national budgetary discipline and to ensure that the present use of national resources has a long-term social impact. Additionally, it contains a mechanism that will contribute, through investment in research and development programs, to the generation of increased national wealth. For its part, the Electrical Industry Law proposes the creation of a similar institution, the Universal Electricity Service Fund. According to the Ministry of Energy, it will be financed by the surplus from the energy losses management in the electric- THE FUND IS CONSTITUTED WITH SAFEGUARDS TO ENCOURAGE NATIONAL BUDGETARY DISCIPLINE AND TO ENSURE THAT THE PRESENT USE OF NATIONAL RESOURCES HAS A LONG-TERM SOCIAL IMPACT ity market and will ensure the availability of resources to fund electrification projects. This Fund will mostly benefit the rural communities and marginal urban areas, although it will also provide financing for the supply of energy-efficient lighting. Finance Minister Mr. Videgaray highlighted how critical the creation of these two funds is to Mexico, stating that there has never been an instrument of this magnitude to enable national public finances to safeguard macroeconomic stability and the wellbeing of future generations. Through the Mexican Petroleum Fund for Stabilization and Development, the Energy Reform has created a mechanism that will transform oil and gas revenues into true national assets that will guarantee sustainable economic growth and social development.

7 Distributed by USA TODAY 7 but the BEST Today, thanks to global technological innovations and exploration projects developed by Pemex, we know that Mexico has the opportunity for new energy growth. We have vast resources in non-conventional deposits, in other words, deepwater fields and shale formations, the President explained. These energy resources, which were previously technically and economically unviable, are the key to the country s new opportunity, the President added One of the government s main goals is to increase crude oil production, from 2.5 million barrels per day (bpd) in 2013 to 3 million bpd in 2018 and 3.5 million in Natural gas output, meanwhile, is expected to rise from last year s 5.7 billion cubic feet per day to 8 billion in 2018 and 10.4 billion in PEMEX AND CFE WILL HAVE BOARDS OF DIRECTORS THAT WILL OPERATE IN COMPLIANCE WITH THE BEST INTERNATIONAL PRACTICES OF CORPORATE GOVERNANCE AND WILL include INDEPENDENT DIRECTORS PEdro Joaquín Coldwell, Minister of Energy This will be achieved with the collaboration of new actors in the industry nationwide. Pemex which so far has focused primarily on exploring and developing shallow water oil reserves has already signed various cooperation agreements and memorandums of understanding with oil majors like GDF Suez, Total, Statoil, Mitsui, CNOOC, and Lukoil. Moreover, Pemex has planned dozens of major projects to be developed in the coming years in different areas within the company, and has already published its forecast regarding the facilities needed to carry out these ventures (see chart). Electrifying prices The Energy Reform will also revamp the power sector, bringing numerous benefits to both private and commercial customers. According to the Energy Ministry, CFE will look to partnerships with qualified private firms, who will contribute their technology and experience to the improvement and expansion of the country s network of power transmission and distribution, providing an important tool to address energy losses and improve the efficiency of power distribution. All of this will ultimately translate into reduced energy costs. Earlier this year, Dr. Enrique Ochoa Reza, CEO of CFE, pointed out that the average cost of electricity generation in Mexico was 63% higher than in Texas. Dr. Ochoa also highlighted the fact that while distribution losses in OECD countries fell from 9% in 1990 to 6% in 2013 on average, in Mexico they have risen from 12% to 15% over the past two decades. While new private participation in the power generation sector will expand investment in infrastructure development to help lower costs, it will also step up measures to switch over to less contaminating and less expensive sources. With construction of new infrastructure that will allow us to substitute fuel oil with natural gas, we hope to see concrete benefits within two years said Dr. Ochoa in an interview in August with Notimex, Mexico s news agency. One-fifth of Mexico s installed electricity capacity is fuel oil-based, which is four times more expensive than natural gas and emits 93% more carbon dioxide and more than 1,000 times as much sulfur dioxide. The Energy Reform will favor greater investment in renewable sources such as wind, solar, and geothermal power. Overall, the Reform envisions that, while the State maintains exclusive control over transmission and distribution networks, as well as the operation of the national electric system, private sector players can freely enter the competitive business of power generation and marketing. Wholesale energy prices will be negotiated freely between the generators, retailers and qualified users, while the State will maintain its authority to establish the rates applicable to basic supply users as well as the corresponding subsidies. Furthermore, an independent system regulator will be created to ensure the transparency and efficiency of the electric power market. The new model for oil, gas and electricity industries will help Mexico cement its position as a regional and global energy leader with the help of the private sector, while maintaining ownership of hydrocarbon resources and 2015 will be years of tremendous historical significance for Pemex and CFE. The oil giant s CEO, Emilio Lozoya, emphasizes that under the new legislation, Pemex will not only continue to be the biggest company in the country it will also be the best. Mexico s shale revolution When enormous shale gas and oil fields were discovered in the U.S. less than a decade ago, industry experts hailed the dawn of a new era for North America s energy sector. According to the Energy Information Administration (EIA), between 2007 and 2013, the U.S. crude oil output rose by 2.7 million barrels per day, with more than nine-tenths of this increase coming from shale deposits. Mexico, which holds the world s fifth largest reserves of unconventional oil and the sixth largest reserves of unconventional natural gas, is now looking at these resources as part of its energy future. Shale oil and gas are less profitable than shallowwater fields, says Emilio Lozoya, CEO of Petróleos Mexicanos (Pemex). However, production in shallow-water fields will one day decline, so Pemex must prepare itself for the future and learn how to develop shale deposits. One of such deposits lies just north of the Mexican border, on the Eagle Ford shale formation, which has been extensively developed in Texas. This deposit now produces more than 1 million barrels of oil per day, in addition to significant quantities of natural gas, and has unleashed an energy boom unseen in the U.S. in decades. Eagle Ford s deposit may also extend hundreds of miles into Mexico. To date, there are a total of 175 shale wells in Mexico, including 10 announced in early The fact that 13,000 wells have been drilled in Texas alone, underscores the exploration and production possibilities on the Mexican side of the border. Even more remarkable, this turnaround took place in the span of just six years and it continues to pick up pace. The effects of the shale revolution are still being felt across the U.S. It has already created more than 2 million jobs and will reach nearly 4 million by 2025, according to business information and analytics software company IHS. In terms of the economy as a whole, unconventional oil generated about $300 billion in total economic output last year, IHS estimates. Given its huge stores of unconventional resources, Mexico could benefit from a similar impact on its economy. The Energy Reform will be a key factor, as it will facilitate the participation of foreign firms with expertise in shale oil drilling, allowing them to exploit these resources, while guaranteeing a secure and legal environment. As a result, analysts and industry executives expect a robust unconventional exploration activity in coming years. The techniques recently developed north of the border can now be applied in Mexico to provide a steady, secure and readily accessible stream to global energy markets. As the shale revolution spreads, leaders in both Mexico and the U.S. foresee a future of shared prosperity, made possible by the geographic, economic and political relationship that both countries share. For the first time in more than 75 years, American companies will be allowed to bring their expertise and capital to help tap Mexico s vast resources. Under a revamped, modern legal framework, they will be guaranteed a stake in each venture s success, while providing fair and equitable returns to Mexico. The Energy Reform is also a green reform The Energy Reform puts Mexico on a path towards energy sustainability, thanks to a focus on developing renewable sources and environmental protection When Congress approved the Energy Reform, one of its main goals was to promote a sustainable, environmentally friendly and productive sector. This Reform created the National Agency for Industrial Security and Environmental Protection of the Hydrocarbons Sector, which will regulate safety and oversee environmental protection, using global standards and best international practices. In addition to this new agency, the government will take environmental protection a step further by promoting the production and use of clean energy sources. The Energy Reform is also a green reform because it promotes the use of cleaner fuels such as gas, which pollutes 70% less than oil. It will also allow the production of energy based on renewable sources like solar, wind power, and geothermal energy, said President Enrique Peña Nieto at the enactment ceremony of the secondary laws of the Energy Reform on August 11th. According to Mexico s Ministry of Energy, the Reform establishes five priorities regarding renewable energy: to eliminate the barriers to clean energy development through the creation of a regulated energy market; to grant renewable energy producers better access to consumers; to promote networks for the distribution of clean energy; to establish sources of financing for new projects; and to create mechanisms to evaluate the social impact of energy use. The power of renewables The Ministry of Energy estimates the country s clean energy generation potential at 57 Gigawatts (GW) annually. Thanks to the Reform, private companies now have the opportunity to help Mexico harness its potential. Moreover, the secondary laws establish a transparent process to define the conditions and ownership rights required to participate in renewable energy projects. In order to reach this potential, the Reform establishes funding programs such as Clean Energy Certificates to attract new investments and spur activity in the sector. The government will also work to establish a clean energy distribution network, and promote the use of cutting-edge green technology such as so-called smart grids that cut down on waste and reduce costs. Earlier this year, the government helped to further stimulate innovation by allocating $126 million for the launch of three renewable energy centers for the advanced research and development of wind, thermal and solar energy projects. Mexico currently ranks third worldwide in geothermal energy production and is home to the planet s largest geothermal power stations; however its potential an estimated 10 GW annually exceeds, by a factor of 12, the current installed capacity. Among renewable energy sources, wind power has attracted the largest amount of foreign investment to date. With an estimated wind power potential of up to 40 GW each year, Mexico aims to increase its installed capacity by 2 GW annually up to According to the government s trade and investment agency, ProMéxico, the regions that hold most of Mexico s wind resources can be found on the Isthmus of Tehuantepec, the Gulf of Mexico s coastline, and the Yucatan Peninsula, as well as in the northern and central parts of the country. The state of Oaxaca, for example, possesses one of the world s best climates for wind energy generation. Harnessing Mexico s wind power potential will allow the government to increase the electrical system s reserve capacity to more than 10% by 2020, enhancing energy selfsufficiency and security. Mexico s unique climate and geographical attributes favor the use of these clean power sources. ProMéxico estimates that given the solar energy that Mexico receives, the country could generate about 5 Kilowatt-hours (kwh) of power per square meter of territory, on an average day. This makes Mexico one of the countries with highest solar power potential in the world nearly twice that of Germany, for example while it also ranks third globally in terms of its potential for wind energy generation. Working together, the public and private sectors can transform Mexico s power industry, meet the government s targets to reduce greenhouse gas emissions by 30% by 2020, and generate 35% of its energy from clean sources by Consequently, the Energy Reform will not just boost clean energy production, it will also encourage all actors in the sector to make a stronger commitment to protecting the environment.

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