Oil & Gas Industry in Mexico

February 2018

Page 2

Update Oil & Gas Industry

Page 3

Asignaciones

ROUND

1. Migration to Farmout

2. Migration of CIEP´s, COPF´s and Asignaciones Titles

PEP’s fiscal regime(Title III HRL)

CEE

PEP as operator (i.e. Ek –Balam)

PSC

License

Service Contract

PEP operator

Fee per barrel

No CR

Bidding Rounds

LFD

Old Regime

3. Private Farmouts

Update Oil & Gas IndustryMexico´s Oil & Gas Reform – Contract Regimes

Page 4

December 2016

• Round 1.4 – Deepwater

• Pemex’s first Farm Out - Deepwater

1938

to 2013

Round Zero “Pemex” -

Asignaciones

Monopoly

2013

December 2013

Energy Reform

2015

July 2015

• Round 1.1 – Shallow water

September 2015

• Round 1.2 – Shallow water

December 2015

• Round 1.3 – Onshore

2017Round 1:

Electricity Auctions:

Completed Bids

Current Bids

June 2017

• Round 2.1 – Shallow

waters

July 2017

• Rounds 2.2 & 2.3 –

Onshore

October 2017

• 2nd Pemex Farm Out – Shallow

water,

• 3rd Pemex Farm Out - Onshore

• 4th Pemex Farm Out - Onshore

January 2018

• Round 2.4 – Deepwater

March 2018

• Round 3.1 – Shallow

water

July 2018

• Round 3.2 - Onshore

Round 2:

2018

Farmouts:

March 2016

• 1st Long term Auction

2016

September 2016

• 2nd Long term

Auction

November 2017

• 3rd Long term Energy

Auction

• Gas Price Liberalization

Electricity Auctions:

Update Oil & Gas IndustryMexico´s Energy Reform timeline

Storage and Pipeline

Transportation

Auctions:

Round 3:

March 2018

• Stage 1.2 – Northern

System (Border Zone)

April 2018

• Stage 2.1 – Pacific

System

(Topolobampo Zone)

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Deepwater

Shallow Water

Round 1 Round 2 Round 3

Onshore

Update Oil & Gas IndustrySummary of Bidding Rounds

Unconventional

Round 1.1

PSC

14 blocks

2 blocks awarded

Round 1.3

License - 25 BlocksAll awarded

Round 1.4

License - 10 blocks8 blocks awarded

TBD

TBD

Round 1.2

PSC

5 Blocks

3 blocks awarded

Round 2.1

PSC - 15 blocks10 blocks awarded

Round 2.2

License

10 blocks7 blocks

awarded

Round 2.4

License

29 blocks

19 blocks

awarded

Farmouts

TBD

TBD

Ayin-Batsil

No bids submitted

TrionLicense

Contract

signed–

March 3 17

Current Bids Future Bids

NA

TBD

OgarrioLicense- Contract

awarded on

October 6 17

Cardenas –

MoraLicense- Contract

awarded on

October 6 17

Maximino

NobilisBid cancelled

Round 3.1

PSC

35 blocks

March 27,

2018

TBD

Round 2.5

TBD

Contracts Awarded

Round 2.3

License

14 blocks14 blocks

awarded

Round 3.2

License

37 blocks

July 25, 2018

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Update Oil & Gas IndustrySummary of first and second rounds

9

35

3

2

1

1

1

2

1

1

12

5

2

1

1

1

2

106 Committed wells

37 Wildcat wells

39 Development wells

72 Companies

20 Countries

Awarded Contracts7416 PSC

2 Migrations

57 License3 Farm-Outs

$736 MMUSD of “signing bonus”

23 Consortiums

19 Individual Bidders

12 Bid Procedures

8 rounds

4 Farm – outs

4 Shallow water rounds

4 Onshore rounds

2 Deep Water rounds

Unconventional

onshore?

2 Biddings in process• Round 3.1 (SW)

• Round 3.2 (OS)

1

1

Round 2.4 19 License contracts to

be signed

23 Committed Wells

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Modernization of the upstream / midstream

infrastructure

New Service Contracts with Pemex

Migration of CIEPS

Rounds 3 & 4

Future Pemex farm outs / Unconventional fields

Increased certainty for Investments

Downstream Sector

Full market liberalization

Improvement of energy policies

Continuous Legislative Reforms

Market prices for fuel Imports and Retail

Update Oil & Gas IndustryWhat to expect?

Page 8

Contractual Regimes

Page 9

Contractual RegimesPSC

Regalía Base

% Utilidad Operativapara el Estado

Factor R

Total Contractista (%Utilidad Operativa + CostRecovery)

Tax Profit

Cost Recovery

Exp

Fee.

(**)

E&E

Tax

(**)

R

Factor

Contractual Value of Hydrocarbons

(*) In case of a consortium, these concepts are divided in proportion to the Working Interest

(**) Payments based on Surface area of the Contractual Area (payment by km2)

Go

vern

men

t Take /

Co

ntr

acto

r Take

Government take

Contractor take

Dividends

Operating Profit Royalty

Payments in cash from the

Contractor to the Government

Considerations forThe Government

• Exploration Fee

• E&E Tax

• Income Tax

Hydrocarbons

Extracted

Payment in kind Considerations for The Contractor

Pa

ym

en

t in

ca

sh

IT DividendsPTU Other Concepts

Operating Profit for

the GovernmentOperating Profit for the Contractor

$

CAPEX & OPEX

Page 10

Contractual RegimesLicense

Tax Profit

Contractor (*)Real Costs (*)

Exp.

Fee

(**)

E&E

Tax(**)

R Factor

Contractual Value of Hydrocarbons

(*) In case of a consortium, these concepts are divided in proportion to the Working Interest

(**) Payments based on Surface area of the Contractual Area (payment by km2)(

Go

vern

men

t Take /

Co

ntr

acto

r Take

Government take

Contractor take

Contractor´s profit net of tax

Over Royalty Base Royalty

Capex & Opex

Cash Payment by Contractor

to Government

Estado

Payment in Kind

To the Contractor

Contractor (*)

• Base Royalty (USD)

• Over Royalty (USD)

• R Factor (USD)

• Contractual Fee for

exploration phase (MXP)

• Exploration and Production

Tax (MXP)

• IT (MXP)

Hydrocarbons

Extracted

100% Hydrocarbons

Production

Others

IT DividendsPTU

$

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Private Farm-Outs

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Private Farm-OutsSecondary market

Contractor shall notify the CNH of any

change in the capital structure that does

not result in a change of Control; or to

request for authorization if there is a

change of Control.

Tax implications shall be different between the different alternatives that exist in order to

carry out a transfer of a portion of Working Interest, which mainly consist in the following:

Reimbursement of expenses already

incurred

► A reimbursement of the expenses that were

already incurred through an up-front payment

should be paid.

► This route is not efficient from a tax perspective

since it represents a cost of 30% over the

amount that is reimbursed, also because, re-

invoicing the expenses that were already paid

may create some practical issues for both

parties

Sale of Fixed Assets and Rights of

Participation

► Some farm-outs also agree a consideration for

the transfer of fixed assets or rights of

participation.

► In general terms, the gain obtained from the sale

of fixed assets and intangible assets (rights of

participation) should be taxable for income tax

purposes.

Carry

► The Assignor shall “carry” an amount equivalent

to the percentage of the expenses that were

already incurred after the Contract was awarded

instead of an up-front consideration.

► The Farmee should undertake to pay the

expenses that are necessary for the project

(from the moment of transfer of rights) and could

be agreed as follows:

► Up to an amount that represents certain

percentage historical expenses; or

► An agreed amount higher than historical

expenses.

► This alternative should be more tax-efficient

since the Farmer should not receive any

reimbursement.

► Also, this alternative will allow the parties to

deduct/credit the expenses that are effectively

paid per entity.

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Open Tax Items

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Open Tax ItemsOverview

PTU Tax stability clauseVAT

(Tax Reform)

Tax depreciation rates

Shadow invoices/ operator’s self

invoicing

Abandonment funding

Social expenses income tax

deductibility

Permanent Establishment

Exploration and Extraction tax

Mexican bank account (operator)

Payments abroad (self - invoice)

Pre-contract expenses income tax deductibility

Page 15 Presentation title

Compliance

Compliance

Compliance

HEALTH INSPECTION

MARITIME DOCUMENTATION

CUSTOMS INSPECTION

►Compliance requirements that needprecise planning and study ofregulations.

►Increased deployment time that canimpact business plans and operations.

►Associated costs from administrativework and time to deploy.

Open Tax ItemsImmigration

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General Tax Considerations

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Distributions

Debt

Other

Capital Gains (Exit strategies)

Taxation

► 10% dividend WHT

► Corporate tax paid if distributions in excess of net after tax profits

► Thin cap 3:1 ratio, exception applies to E&P projects

► Back to back provisions.

► Withholding tax on interests (Double Tax Treaties may offer reduced tax rates)

► Inflationary adjustment

► No exchange controls

► No financial or stamp taxes

► Administrative burden

► Transfer pricing requirements

► Domestic Law - 25% on gross proceeds or 35% on net gain.

► Double Tax Treaties may offer reduced tax rates as well as tax free reorganization provisions.

► 30% Income Tax

► 16% VAT (0% for transactions with Government)

General Tax Considerations

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Income Tax Law

• 10% depreciation for fixed assets used for:

• Hydrocarbon transportation, storage and processing

• Platform, rigs and drill ships.

• Processing and storage vessels (i.e. FPSO)

• Transfer pricing reports are now required for E&P companies regardless of their annual income

Value Added Tax Law

• New rules to recover VAT on preoperating period.

• Clarification on the VAT treatment applicable to assets that are being leased by non-Mexican residents and imported by the Mexican lessee.

• Services rendered abroad are deemed as imported into Mexican territory when they are effectively paid.

Hydrocarbons Revenue Law

• Financial certainty on tax incentive applicable to Pemex (Asignaciones) regarding cost deductibility limit and profit sharing fees.

• Changes in the R Factor in order to not loose its current progressive nature.

• Consortium rules.

General Tax ConsiderationsMain Tax Amendments 2017

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Other ConsiderationsTransfer Pricing

• The Hydrocarbons commission of the Mexican Tax Authorities (“SHCP” for its acronym in

Spanish) requires that all entities involved with Hydrocarbons business report all and any

intercompany dealings, not necessarily just those that accrue a taxable income or relate to a

tax deduction.

• Such transactions may include intercompany provisions for which a deduction has not been

taken, non-interest bearing loans, or even capital contributions.

Page 20

Local Content

Page 21

Methodology to compute

the local content in

projects and contracts

Energy

Reform

Hydrocarbon

Law

Local Content

%

Local ContentStructure

Page 22

►The contractor will include in its exploration / evaluation and development plans, a

national content compliance program.

►The plans will be reviewed by the National Hydrocarbons Commission (CNH) with the

opinion of the Ministry of Economy (SE), and if approved, will be considered part of the

terms of the contract

►The obligations of local content will come into force at the time of authorization of the

plans.

►Local content will be verified annually by the Ministry of Economy.

►Ministry of Economy may assign an independent third party for verification.

►This indicator will allow to know the compliance of the minimum percentage of national

content per year, as approved in the plans of exploration and evaluation, and

development for the extraction

Local ContentProduction Sharing Contract – Local Content provisions

Page 23

The formula for calculating the national content considers the value in pesos of the following concepts:

CNB. Contracted goods,

considering their origin

CNMO. National workforce

TT. Transfer of

technology

CNC. Training of

national workforce

For each of the concepts already mentioned, there are formulas and provisions

that specify how to calculate the national content in pesos.

CNS. Contracted services,

considering their origin

I. Investment in infrastructure

taje de contenido nacional.B: Value invoice in Mexican pesos of the

final goodMO: Value of workforce used.

S: Value of the contracted services

C: Value of the training services contracted

NOTA: The calculations will be made in

Mexican pesos

Local Content

Local ContentComputation - Factors

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Business Tax Advisory

Rodrigo OchoaTax Partner

Tel +52 (55) 5283 1493Mobile +52 (1) 55 3722 8265Email: Rodrigo.ochoa@mx.ey.com

Professional background

Rodrigo is an International Tax Partner based in Mexico City

Prior joining EY Rodrigo was a partner at the Tax department for Deloitte in Mexico City and was part of the Latin America Business Center based in Chicago from 2006 until 2008.

Rodrigo is a Mexican licensed public accountant with over 15 years of experience advising clients on international tax issues arising on Latin America.

Areas of Expertise

Rodrigo is particularly active in the oil & gas and manufacturing industries.

Rodrigo advises major audit and non-audit clients on the reorganization of the Mexican operations related to acquisitions, mergers, leveraged buyouts, spin-offs, carve outs and joint ventures.

Rodrigo also advises all type of companies of the oil & gas industry providing advice on the startup process of doing business in Mexico.

Professional experience.

During the last year, Rodrigo has been the Mexican tax advisor for BHP Billiton, Chevron, CNOOC, Repsol, Seadrill, Bimbo Bakeries Food, Trinity, Yum.

Rodrigo spends a lot of his time in the oil & gas services sector. He has advised AMS, Østensjø, EMGS, Trinidad , Halliburton, among others, in different domestic and international transactions.

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