MEXICO OIL AND GAS MARKET, NEWS AND UPDATED FOR AUGUST 2011 HOW TO DO BUSINESS WITH PEMEX

Report prepared by Mr. Sergio Rivas F. INTSOK Local Advisor, Mexico | July 30, 2011 |

All rights reserved. Strict license restrictions apply. Distribution to third parties requires prior written
consent from INTSOK.

Table of Content

Page

Introduction

Background on internal procedures in Pemex for bids, vendors and suppliers

Contracting Procedures Schemes

Technological & Pilot Tests, a way for direct assignments

CONACYT-SENER-HYDROCARBONS Fund. Niche market for technology studies

Pemex Chart Organization

Key Contacts in Pemex

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Conclusions

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1. - Introduction

To do business in Mexico in the Oil and Gas market is quite important to know how Pemex operates its contracts. This report presents some guidelines for companies interested in Mexican market. PEMEX as public company has more and different responsabilities as in private sector. Most of its commercial operations should be developed through open bids, local and internationals. PEMEXs bid system is an open and transparent one: Anouncements, calls for bids, results, monitoring, should be under public access. One of the key issues in the commercial arena with PEMEX is into the Asset, who has the main responsibility for exploration and production. Once the Asset is convinced to implement any technological solution or any technical proposal, and having authorized budget, the rest will be under the concept business as usual. Most of the contracts with PEMEX are based on local or international and open bid. To have a direct assignment is not an easy way. However, there is an important way, mainly for new and advanced technologuies: through a pilot or testing new technologies. Networking should be concentrated into each one of the Assets in the four Regions as PEMEX E & P is divided: North, South and two Marines. This working paper has been prepared in order to provide certain key information to our INTSOK Partners, looking and promoting more and active participation in the Mexican Oil & Gas market.

2. Background on internal procedures in Pemex for bids, vendors and suppliers

On November 2008, it has been released the Law of Petrleos Mexicanos and the amended implementing Law to Article 27 of the Constitution regarding Petroleum matters. In accordance with relevant provisions of the Oil Laws, President of Mexico had published the Pemex Law Regulations (September 4, 2009) and Regulations for Implementing Law (September 22, 2009)

How to do business with Pemex

National (restricted to local suppliers & vendors) Bids International (under commercial treaties or open)

Due to existing patent Direct Assignment Due to a success testing new technology Due to emergency conditions

Technology studies & essays

Through CONACYT-SENERPEMEX Fund

3. Contracting Procedures Schemes

Article 50 of Pemex Law defines that contracts in order to carry out the Acquisitions, Leasing, Works and Services related to the Core Activities of a Productive Character will be awarded in accordance with any of the following procedures: I. Public bidding, which should start with publication of the invitation and concludes with the issuance of the decision or, if applicable, with the cancellation of the respective procedure; Restricted invitation to at least three parties, which commences with the delivery of the first invitation, and concludes with the issuance of the decision or, if applicable, with the cancellation of the respective procedure; and Direct assignment, this starts under the estimate request and concludes with the acceptance of the proposal.

II.

III.

Regarding Public bidding, these can be: National, in which only Mexican bidders participate. International under the application of an international treaty, in which only Mexican bidders and foreign bidders of countries with which Mexico has entered into a free trade agreement can participate, with provisions related to public sector purchases. Open-international, in which Mexican and foreign bidders can participate under any of the following conditions: a) After the prior market research done by the inviting entity, supply or competitive conditions are lacking in the national market in respect of the required goods, works or services. b) It is convenient in terms of price or quality. c) After a public bidding procedure of national character or international character under treaty coverage has taken place, no solvent proposal has been submitted. d) It is established in such manner for contracts financed with external credit granted to the Federal Government or with its guaranty.

Participation of foreign bidders may be denied in open-international biddings, when the country in which they are nationals does not grant reciprocal treatment to Mexican bidders, contractors, goods or services. When there were no any agreement or treaty, goods and services vendors from foreign origin could participate in contracting procedures and under same applicable requirements to those national, if and when, in their respective countries, goods and services vendors from Mexican origin would have equal opportunities. For each contract or group of contracts to be bid upon, Pemex or the corresponding Subsidiary Entity will publish in the Official Gazette a respective public bidding invitation. This will include information regarding nature of the Acquisitions, Leasing, Works and Services related to the Core Activities of a Productive Character to be contracted for, as well as the scope of the contract or group of contracts. In order that potential suppliers and contractors could have key information to make a decision, regarding their participation. Invitation will indicate place, cost and payment method to obtain bidding guidelines. In each one of invitations, vendors and suppliers could participate individually or through a joint proposal. In the latter case, to conduct technical and economical evaluation, capacities and experience from consortium companies as a whole will be taken into consideration.

Steps for a Public Bidding

Asset defines a need

Existing budget

Feedback from stakeholders

To define technical bases

To share draft on technical bases

To release technical bases into Official Gazzet

Bidding guidelines include:

Participation requirements If applicable, pre-qualification requirements with the purpose of ensuring the experience and legal, technical, financial and commercial capacity of bidders for compliance with established contractual obligations, as well as documentation required to support them. Contractual conditions Terms and conditions sheets or the model contract to be entered into with the winning bidder, characteristics of required guaranties, time limits for signing and other pertinent requirements Bidding procedure calendar Including phases needed to integrate stages, in the understanding that terms and dates shall allow bidders the proper preparation of their offers. Evaluation mechanisms of bidders in pre-qualification stage If applicable, as well as the indication of the method for offers evaluation, which may allow processes for negotiation on pricing procedures, evaluation by points and percentages, subsequent discount offers or any other means that promote competition among bidders and result in better contracting conditions. Procedures for modifying guidelines Receiving comments and suggestions from potential bidders and interested parties All other requirements deemed necessary for the development of the project.

Regarding Restricted invitation or Direct Assignment, procedure shall be justified, among other aspects and depending on the circumstances that occur in each case, by the reasons that public bidding is not convenient to ensure the best available conditions as to the price, quality, financing and opportunity criteria and other pertinent circumstances. Reasoning for the aforementioned criteria shall always be in writing and signed by a public official holding at least the position of responsible area manager for the execution of corresponding agreement, contract or order.

4. - Technological & Pilot Tests Pemex STE (Technical Exploitation Vice-presidency) defines as follows: Technological test: set of activities carried out in an orderly and systematic way to evaluate a specific technology that will be applied intensive and timely, which could result in technical and financial benefits. Pilot Test: Involves modify rock-fluid system conditions. For its characteristics and extension, it is developed on a long period. Pemex has defined three requirements for companies presenting their proposals for a technological or pilot test: Company must be owner of technology, non intermediary. It would be better if there were patents. Company should demonstrate. Technology must be presented to Pemex for first time or if it's second time, technology must be improved or innovative. Technology must be oriented to solve a specific problem for Pemex. If a company requests a technological test, it should first provide detailed information on expected results then, Pemex shall be informed what is expected from this technology. It is crucial that companies be clear what they offer, because this will be used for Pemex as evaluation criteria for testing. Technological test is appropriate when its not a macro project. If test requires more than 90 days, numerous procedures and complexity will be involved and then it should be considered as a pilot test. A company should consider investment requirement to develop and implement this procedure test, as its promotion expenditures. If technology solves a real problem for Pemex, company can recover those expenditures with signing one or more contracts with Pemex. Pemex will approve a technological test, if this could add value to their process. It is possible to request and to have a technology test, if: a) It has been requested from an Exploration or Exploitation Asset. b) A company has been invited from PEMEX. c) A proposal from owner of a specific technology

Once request had been received PEMEX will take 15 days to define if a technology proposed has enough characteristics to be considered as a potential technological test or not. PEMEX will revert with conclusions and proposal to technology owner company, regarding how to continue or not, into this process.
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Steps for test

MOU signature between Pemex and the company

Deliver of technical-financial Proposal

Agreement formalization to execute test

Test development under established program and monitoring of the STE

5. - CONACYT-SENER-HYDROCARBONS Fund CONACYT-SENER Fund is focus on scientific and technological research applied to exploration, exploitation and refining of hydrocarbons, as well as the chemical production, also including adoption, assimilation and innovation and technological development in specific areas. Participants must have infrastructure capability to develop R & D activities, expertise in hydrocarbons, knowledge of technical operation and research on hydrocarbons sector; experience in development of bibliographic research projects and databases related to scientific and technological research, as well. Based on the Fiscal reform for Pemex on 2005, was created the Fund for Scientific and Technological Research, under the aim to allocate economic resources to those areas to encourage oil development. Under 2007 reform, it has been allocated economic resources and settled different funds, as follows: CONACYT-SENER-Hydrocarbons Fund Human Resources Research & Technology Development of the Mexican Petroleum Institute CONACYT-SENER-Sustainability

On 2012, the government has calculated to allocate 530 to 650 million dollars, to R & D, through this mechanism. Steps for a CONACYT-SENER-HYDROCARBONS Fund Call

Technology need is defined

Committee

To call

To define local partner

To present proposal to CONACYT

6.- Pemex Chart Organization To focus a promotion and development commercial work into PEMEX, it is important to know who is who. Regions, Assets, Drilling, Pipelines, Technology area would be considered as the key line to develop networking.

Regions

Assets

Regional Management

North

Chicontepec
Poza Rica Altamira Burgos

South Cinco Presidentes Samaria-Luna Muspac Macuspana Belota-Jujo

North East Marine Cantarell Ku Maloob Zaap

South West Marine Litoral de Tabasco Abkatun Pol Chuc

Planning

Administration

Veracruz

HSE

Construction

Pipelines

Drilling

7. - Key Contacts in Pemex

Pemex Exploration and Production

Planning Gustavo Hernndez Drilling Javier Hinojosa Pipelines Jess Hernndez San Juan

New Business Models

Finances Ernesto Estrada

HSE Rodolfo Morando

Sergio Guaso Exploration Technology

Antonio Escalera North Region Juan Arturo Hernndez

Exploitation Technology
Pedro Silva South Region Vinicio Suro

Logistic Mario Abreu North East Marine Region

Jos Serrano

South West Marine Region Jos Luis Fong

8. Conclusions As many companies, Pemex has its own rules to do business. In order to have best opportunities to work with it, this report has presented some guidelines to do it. Mexican market has potential, however, it is important develop a deep and permanent work, promoting and doing networking. We could recommend to be present with PEMEX promoting new solutions, technologies, business win to win concept, into the following areas: in each one of the four regions, depending on the product or service, including their Assets, for Exploration and Exploitation, specific for reservoir studies, field developments, infrastructure and facilities construction, water separation, among others. On Pipelines VP, when compressor systems, pipelines, valves, pumps. In drilling, for wells construction, maintenance and repairs, waste deposit.
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The New Business Model in HQ could be considered as an horizontal line looking for innovative and new business model, including assigments for blocks, economic incentives and new ways to have business, under the win to win philosophy. To have a good presence with Planing VP, it could contribute to have a permante and comprehensive panorama on trends, business opportuinities into PEMEX E & P. Once a business opportunity would be identified, the follow up should be done into regions and assets.

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This report was prepared by: Sergio Rivas F. Office: +52 55 10 56 08 05 Mobile: +52 1 55 18 00 14 16 Mobile: +52 1 55 59 09 68 15 Please feel welcome to contact Sergio Rivas F. (E-mail: sergio@primerenfoque.com.mx) for any questions concerning this report.

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