The document summarizes Mexico's recent energy reform which overhauled the country's energy sector for the first time in over half a century. Key aspects of the reform include: allowing private investment in oil, gas and electricity exploration and production through service contracts, licenses, and profit/production sharing agreements; establishing an independent system operator for electricity; converting Pemex and CFE into autonomous state companies; and strengthening regulators. The reform aims to reverse declines in Mexican oil/gas production and reduce growing imports by attracting private capital to the energy sector.

1. Mexico’s Energy Reform
Lourdes Melgar, Ph.D.
Undersecretary of Hydrocarbons
Ministry of Energy
February 7, 2014

2. CONSTITUTIONAL AMENDMENT
A historic constitutional energy reform was approved in Mexico in December 2013. This is the
most significant overhaul of the energy sector in this country in more than half a century: a
truly major, better-than-expected reform.
Article 25.- Government will:
• Continue to be in charge of
strategic areas. Maintain
property and control of
entities and new State
Productive
Enterprises
(SPEs).
• Provide the right conditions
to include the private sector
in the national economic
development.
• To be in charge of energy
planning. Social equity,
productivity
and
sustainability.
Article 27. –
• Hydrocarbon resources will remain
Mexico’s. Petroleum exploration and
extraction activities will be carried out
by the State through SPE leases and
contracts
• SPEs may work with the private
sector. Subsoil hydrocarbons belong to
the nation and this should be stated
explicitly in leases and contracts.
• Planning and control of the electric
system will be carried by the state. In
the case of transmission and
distribution of electricity the state will
be able to contract the private sector.
Article 28.–
• The Mexican Petroleum
Fund (a public trust) is
established
• The
National
Hydrocarbon
Commission (CNH) and
Energy
Regulatory
Commission (CRE) are
considerably
strengthened, becoming
Constitutionally
Coordinated Entities.
Transitory provisions through twenty one articles define the way that secondary laws should be drafted to
implement the Constitutional Reform.

3. Oil and Gas

4. REFORM TO ARTICLES 25, 27 AND 28, WITH 21 TRANSITORY
ARTICLES ALLOW PRIVATE INVESTMENT IN UP, MID AND
DOWNSTREAM.
Oil and Gas
Reserves
Exploration and
Production
Refining and Natural
Gas Processing
Transportation, Storage,
Distribution and
Commercialization
The Mexican State,
through SENER,
manages the
country’s oil and gas
reserves (selection of
bidding areas)
Entitlements granted
by SENER to Pemex
(Round Zero)
Permits for
refining and natural
gas processing
(including
petrochemicals),
granted by SENER
to Pemex and/or the
private sector5
Permits for all
transportation,
storage, distribution
and
commercialization
activities through
pipelines, granted by
the Energy
Regulatory
Commission (CRE)
to Pemex and/or the
private sector6
Service,
profit/production
sharing and license
contracts, awarded by
the National
Hydrocarbons
Commission (CNH) to
Pemex and/or the
private sector
5. Constitutional Article 28 and Transitory Article 10
6. Constitutional Article 28 and Transitory Article 10

5. OVERVIEW OF THE OIL AND GAS REFORM
 E&P contracts for public and private companies: license contracts,
production sharing contracts, profit sharing contracts, service contracts or a
combination thereof.
 Round Zero.
 Permit schemes for midstream and downstream.
 Conversion of PEMEX into a company with freedom to form partnerships,
financial and operational autonomy, and freedom to establish its
employees’ wages.
 New Tax Regime for PEMEX and private companies.
 Open market for Gas Stations.
 Independent System Operator for Natural Gas.
 Strengthening of the Regulators.
 Mexican Petroleum Fund for Stabilization and Development.
 Financial Transparency in every contract and bidding round.

6. NEW CONTRACTUAL FRAMEWORK FOR OIL AND
GAS EXPLORATION AND PRODUCTION
 A flexible contracting framework with standard, well-known-by-industry models
was established to enable better use of Mexico´s resources in order to maximize
revenue for the nation:
i.
Service: Fixed or variable payment where the operator is the responsible
for the operations.
ii.
Profit sharing: % of profits
iii. Production sharing: % of production
iv. License: Onerous transmission of the hydrocarbons once they have been
extracted from the subsoil
v. A combination thereof.
 The approved reform allows companies to report, for accounting and financial
purposes, the extent of the contract signed with the Mexican State as well as the
expected benefits, as long as it is clearly stated on those leases or contracts that
all solid, liquid or gaseous hydrocarbons in the subsoil are Mexico’s property.
1. Constitutional Article 27.
2. Transitory Article 4

7. EXPLORATION AND EXTRACTION LEGAL FRAMEWORKS IN
THE TOP 20 OIL PRODUCING COUNTRIES
Ranking
2012
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Country
Russia
Saudi Arabia
United States of America
China
Canada
Iran
Iraq
Kuwait
United Arab Emirates
Mexico (Before the Reform)
Mexico (With the Reform)
Venezuela
Nigeria
Brazil
Angola
Norway
Kazakhstan
Libya
Algeria
United Kingdom
Qatar
Production
(2012)
mmbd
10,427
9,813
6,401
4,122
3,127
3,000
2,918
2,754
2,653
2,548
2,548
2,479
2,092
2,061
1,756
1,618
1,583
1,402
1,165
890
741
Concessionary/Contractual Framework
Concessions and production sharing contracts
Concessions
Concessions
Production sharing contracts
Concessions
Profit sharing contracts
Profit and production sharing contracts
Service contracts
Concessions
Service contracts
Service, profit or production sharing contacts and licenses
Concessions
Concessions and production sharing contracts
Concessions and production sharing contracts
Concessions, profit and production sharing contracts
Concessions
Concessions and production sharing contracts
Production sharing contracts
Concessions
Concessions
Production sharing contracts
Source: World Rating of Oil and Gas Terms; PFC Energy, Van Meurs Corporation and Roger Oil & Gas Consulting. Production: Oil and Gas Journal
(crude oil).

8. STRENGTHENING OF PEMEX
 Pemex will be transformed into a “State Productive Enterprise”, with budgetary,
technical and operational autonomy (2-year transition).7
 There will be a “Round Zero” to ensure Pemex’s exploration and production
investment portfolio.8
 Associations in exploration and production of oil and gas, refining and
petrochemicals.
 Pemex will have a new corporate governance structure, in line with international
best practices.9
 Pemex’s new Board of Directors will be composed of 5 board members
representing the Federal Government (including the Energy Minister who will
chair the Board), and 5 independent board members.
 Pemex will have a more flexible and competitive fiscal regime, so it can retain a
larger share of its profits for reinvestment.10
7. Constitutional Article 25
8. Transitory Article 6
9. Transitory Article 20
10. Secondary Legislation

9. ROUND ZERO FOR PEMEX1
1
Pemex will submit to the
Ministry of Energy, the
entitlement applications
for the exploration areas
and the production fields
that it is able to operate
through entitlements.
2
(90 days)
The Ministry of
Energy, with
technical assistance
from the National
Hydrocarbons
Commission (CNH),
shall review
Pemex’s request,
and issue the
corresponding
resolution.
3
Pemex will maintain
exploration entitlements
in those areas where it
has made commercial
discoveries or
exploration investments.
(3-5 year period)
(180 days)
6
The Ministry of Energy shall
determine the technical and
contractual guidelines of the
bidding round, the Ministry of
Finance will establish the fiscal
terms, and the CNH shall
conduct the bidding round to
select the contractor.
1. Transitory Article 6
5
Pemex may
propose to the
Ministry of Energy
for its approval, the
migration of the
allocated
entitlements into
new contracts.
4
Pemex will
maintain extraction
entitlements in
fields in production.

10. OIL AND GAS EXPLORATION AND PRODUCTION
CONTRACTUAL FRAMEWORK2
2
• Technical guidelines of the
bidding rounds.
• Technical design of contracts.
1
• Block selection, with
technical assistance
of the CNH.
3
4
• Conducts the bidding rounds.
• Decides on the winning bids.
• Fiscal terms of contracts.
7
6
• Mexican Petroleum
Fund for Stabilization
and Development makes
payments and manages
government cash flows.
• Technical management
of contracts.
5
• Awards and signs the
contracts on behalf of the
Mexican State.
Source: World Rating of Oil and Gas Terms; PFC Energy, Van Meurs Corporation and Roger Oil & Gas Consulting. Production: Oil and Gas Journal
(crude oil).

11. TRANSPARENCY AND ANTI-CORRUPTION POLICIES IN OIL
AND GAS CONTRACTS5
1
3
2
Bidding rounds
and their
guidelines will
be public.
Transparency
clauses will be
included in oil
and gas
contracts.
4
Full disclosure
of all payments
associated to
oil and gas
contracts.
External audits
to supervise
cost recovery
and accounting
aspects.
The reform mandates the establishment of legal mechanisms to prevent,
investigate, identify and punish actions or omissions against the law, as
well as acts of corruption in general in the energy sector.6
5. Transitory Article 9
6. Transitory Article 21

12. MEXICAN PETROLEUM FUND FOR STABILIZATION AND
DEVELOPMENT
1
Payments
established in oil and
gas exploration and
production
entitlements and
contracts
2
At least 40%
3
Expenditure
Federal Budget PEF
(Constant at 4.7%
of GDP)
4
Long-term
savings
(Up to 3% of
GDP)
Long-term savings (until savings reach 10% of
GDP).
Up to 10%
Universal Pension System
Up to 10%
Science & technology and renewable energy
projects
Up to 30%
Oil and gas project investment vehicle and
infrastructure development
Up to 10%
Scholarships, connectivity enhancement projects
and regional industrial development
9. Constitutional Article 28 and Transitory Article 14
When long-term
savings surpass 3%
of GDP, the excess
balance will be
allocated as follows:

13. Electricity

14. OVERVIEW OF THE ELECTRICITY REFORM
 Private investment in Generation will be allowed.
 An independent system operator (CENACE)
implement a Competitive Electricity Market.
will
 Joint ventures in Transmission and Distribution between
CFE and private companies.
 CFE will be converted into an energy company with
freedom to form partnerships, financial and operational
autonomy, and freedom to establish its employees
wages.
 Regulators will be strengthened.

15. OVERVIEW OF THE ELECTRICITY REFORM
Generation
Marketing
•
Generators can sign long term contracts
to reduce their market exposure.
•
•
The spot market will be based on the
short-term optimal dispatch.
Standard Users will receive their service
from CFE-Retail, which will buy energy in
the spot market and under contract.
•
Qualified Users will be able to buy energy
directly or through a retailer.
•
The threshold to be a Qualified User will
decrease over time.
•
CFE will operate its generation
independently from its other activities,
and will compete on a level playing field.
Power Market
•
Generators and marketers will make their supply and demand offers each day.
•
CENACE will establish the optimal dispatch and will calculate the equilibrium prices.
•
Long term contracts will cover the majority of demand; a relatively small volume will be
purchased on the spot market.
•
Capacity markets will be implemented to ensure resource adequacy.
Transmission and Distribution
•
The T&D companies will not buy or sell energy; they will only operate the wires.
•
They will charge rates established by the CRE, under incentive-based regulation.
•
CENACE will process payments between market participants and the T&D companies.

16. Further actions

17. FURTHER ACTIONS
Resolution
for round
zero
Secondary
law
March
Pemex
proposal
Round
zero
April
Aug
Regulation
exploration
Kick off of the
Electricity Market
Sept
2014
Dec
Creation of CENAGAS
and CENACE
2015
June
Kick off First
Bidding Round
CFE and PEMEX
as State
Productive
Companies

18. Mexico’s Energy Reform
Lourdes Melgar, Ph.D.
Undersecretary of Hydrocarbons
Ministry of Energy
February 7, 2014

19. DESPITE AN INCREASE IN INVESTMENT IN EXPLORATION AND
PRODUCTION, MEXICAN OIL PRODUCTION HAS DECLINED FROM 3.4
MILLION BARRELS PER DAY IN 2004 TO 2.5 MILLION IN 2012.
Investment in exploration and extraction
(Billions of dollars)
25
20.7
3.4
20
3.0
15
11.7
2.5
10
Oil Production
(Million of barrels per day)
4.7
5
103
1.5
0
31
Price of Mexican Crude Export Mix
(Dollars per barrel)
13
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: Average price of the Mexican Crude Export Mix, PMI Comercio Internacional 1997 – 2012. Production: Pemex Institutional
Database, 1997– 2012. Investment: Pemex Annual Statistics, 1997-2012.
2012
19

20. BETWEEN 1997 AND 2012, NATURAL GAS IMPORTS INCREASED FROM 3% TO
30% AS A PERCENTAGE OF NATIONAL CONSUMPTION; THIS TREND HAS
DEEPENED SINCE 2008, DUE TO THE DECREASE OF THE PRICE OF NATURAL
GAS IN NORTH AMERICA.
9,000
8,007
7,792
Million cubic feet per day
8,000
(100%)
Natural Gas
Consumption
7,000
6,534
6,000
5,651
(70%)
4,576
5,000
(100%)
4,000
4,467
(97%)
Natural Gas
Production
2,356
3,000
(30%)
Natural Gas
Imports
2,000
1,000
1,258
109
(3%)
-
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
* January – July, 2013.
The “Natural Gas Consumption” line reflects the addition of Pemex’s gas production and total imports. The
“Natural Gas Production” line reflects Pemex’s total natural gas production, including the gas it uses in its
industrial processes and the supply to final consumers.
Source: Mexican Energy Ministry, Energy Information System, 2013.
20

21. GASOLINE IMPORTS REPRESENTED 25% OF TOTAL CONSUMPTION IN
1997; BY 2012, THAT PERCENTAGE HAD INCREASED TO 49%.
900
Gasoline
Consumption
Thousands of barrels per day
800
811
(100%)
752
700
600
503
Gasoline
Production
(100%)
500
455
416
(51%)
400
376
300
200
395
(75%)
(49%)
Gasoline
Imports
127
(25%)
100
54
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Pemex, annual average 1997-2012.
21

22. IN 1997, MEXICO IMPORTED 41% OF THE PETROCHEMICALS IT
CONSUMED; IN 2012, 66% OF DEMAND WAS MET WITH IMPORTED
PETROCHEMICALS.
22.09
21
(100%)
19.36
18
Billions of dollars
14.47
Demand
15
(66%)
12.72
12
Net Imports
7.62
9
(34%)
6.09
6.64
(100%)
6
Production
3.62
(59%)
3
2.47
(41%)
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Mexican Energy Ministry, with data provided by Pemex-Petrochemicals and the Mexican Central Bank.
2012
22

23. THE AVERAGE CFE RATE IS 25% HIGHER THAN IN THE US.
WITHOUT SUBSIDIES, THE AVERAGE DIFFERENCE IS 73%
AVERAGE ELECTRICITY RATES AT
FISRST QUARTER OF
2013 (MEX CENTS/ KWH)
Subsidio
México
400
+149%
EE.UU.
350
+123%
+135%
300
250
+69%
+73%
200
+25%
+84%
150
-24%
100
50
0
Domestic High
Residencial
Consumption
Alto Consumo
Comercial
Commercial
Servicios
Public Service
Industrial
Industrial
Source: Sener. SIE. DOE, EIA.
Rates converted to Mexican pesos with an exchange rate of 12.64 pesos/dollar, 1Q2013.
Residencial
Domestic
Agrícola
Farming
Promedio
Average

24. Mexico’s Energy Reform
Lourdes Melgar, Ph.D.
Undersecretary of Hydrocarbons
Ministry of Energy
February 7, 2014