Slide Package Update for Operating and Service Companies. Mexico City & Houston

Slide Package Update for Operating and Service Companies Mexico City & Houston March 2014

Executive summary Introduction & methodology Pemex E&P and CNH standing on shale play development: 1. Mexican Government position on shale basins 2. Mexican Eagle Ford basin development Legal Issues & Business Opportunities 1. U.S. Mexico trans-boundary agreements on water & hydrocarbons 2. Imminent Mexican Government opening of leases for private companies 3. Legal conflict between shale gas and coal-bed methane resulting from overlapping basins Shale rocks: 1. Availability of technically recoverable O&G from shale rocks 2. Shale O&G geology & basins in Mexico extending from Eagle Ford in the U.S. 3. Overlapping shale & coal basins in the Sabinas Basin Fracturing chemicals & water management 1. What is fracturing? 2. Fracturing chemicals for O&G 3. use of water in fracturing 4. Water use financials Superficial and/or underground water 1.Availability of water supplies in large quantities 2. Availability of state-of-the-art water treatment systems Eagle Ford drilling financials 1. Well development costs 2. Production costs & break-even point 3. Henry Hub futures prices 4. U.S. DOC natural gas forecast to 2035 Human factors and regional development: benefits & hazards Conclusions Abbreviations Conversion factors 3

Although the title of this document refers to the Eagle Ford Formation, there are many other overlapping shale formations in the area containing technically recoverable hydrocarbons over and under this Formation. This sourcebook is an update of a prior study intended to bring investors into Mexico under the legal frame existing in mid-2012 to develop shale gas fields. The changes in the Mexican Constitution and its secondary laws brought about by the Energy Reform gave rise to a number of stand-alone business opportunities without the need to be obliged to participate in oil and gas (O&G) exploration and production (E&P) with Pemex. The December 20 th, 2013 Reform opened up new possibilities for private investors national and foreign- to explore, develop, produce, process and trade conventional and/or unconventional hydrocarbon resources in Mexico, both onshore and offshore. The Energy Reform privileged Pemex for the first choice of E&P areas throughout all of Mexico in the so-called Round Zero during a ninety-day period after December 20 th, 2013. Private companies are entitled to develop the areas left out by Pemex under the new regulations defined in the new secondary laws derived from the Energy Reform. The purpose of this document is to serve as a guideline to make better use of the new legal frame to produce oil, gas and condensates in the most promising areas of northern Mexico, where most of the unconventional resources are found. All the original slides from the former study were left intentionally in this document to serve as reference. The development of shale gas fields in Mexico is a new activity that will be complementary to existing well drilling operations at the Burgos and Sabinas Basins, as well as throughout all of Mexico. In 2011 Mexico drilled its first shale rock well and had quite aggressive plans to develop new sites. By May 2013, Pemex had drilled seven shale wells, of which three are producing dry gas, two gas and condensate, one oil and gas and one was unsuccessful. 4

Pemex does not have technology, expertise or manpower to exploit shale resources including offshore shale- and somehow this is already leading to new areas of opportunity for private investors. Pemex recognizes the need to delegate shale, mature fields and deep water developments to private companies with expertise and technological knowledge to do massive drilling. By Law, in Mexico, gas, oil and liquids had to be handed out to Pemex and until December 2013, the real business opportunity was only under the Integral E&P Contracts (CIEP) program, which has been benefiting services companies like Schlumberger, Halliburton and Weatherford. Pemex had a program to drill 175 wells between 2012 and 2015 to evaluate prospective reserves, and it is quite probable that they will still be developed under the CIEP program. Since shale deposits intermingle with coal basins, there is a potential conflict on coal-bed gas (CBM) proprietorship since the Petroleum and Mining Laws grant coal-mining companies rights of use for self consumption and gathering of CBM. By the end of November 2013, the agreements reached between the different political parties regarding the Mexican Energy Reform concurred with the imminent opening to private investors for upstream activities that Pemex is incapable to perform such as shale O&G development, deep water and Chicontepec E&P. 5

The schemes discussed and approved in the Energy Reform include different types of contracting, joint ventures with Pemex and block leasing independently from Pemex. One of the issues still pending to solve during 2014 is the subject of vertical business integration. In the case of natural gas regulations before the Reform, it was forbidden for a single company to perform transportation and distribution operations to prevent vertical monopolies. Under the new Reform, companies wishing to invest in Mexico must be aware of the possible restrictions that will be set forth for a single company to do E&P, transportation, distribution and processing of hydrocarbons. Another pending issue that will be enforced is the national content component that will be required to operate under the new legal frame. The National Hydrocarbons Commission (CNH) is considering a Double Zero Round for Mexican companies before opening the door to foreign investors. Given the former legal frame, this will reduce the choice to very few Mexican companies with international expertise in shale development. There will also be a liberalization in midstream activities in favor of private investors in refining, LPG, gas-to-liquid (GTL) technologies, O&G transportation and the monopoly of Pemex will be over. In any case, Pemex will be forced to operate and compete against international players in the oil business in equal commercial, efficiency and technological terms. The details concerning the new business structures will depend on the secondary laws, guidelines and standards approved after the Energy Reform. 6

The average cost for drilling and completion per well in the Eagle Ford area is between 5 to 7 million dollars and the break-even point for shale gas production in Mexico ranges between 5.75 and 7.00 US$/MMBTU. However, the real profit-maker, especially in the Eagle Ford basin is the availability of liquids and oil, which in combination of at least 15% with natural gas are driving break even points down to 1.50 US$/MMBTU as in the case of Talisman Energy. Eagle Ford Shale structures in Mexico are more complex, narrower and discontinuous than their counterparts in the U.S. (Texas and Louisiana). The targets in Mexico are sandstone reservoirs of Miocene and Pliocene age sourced from Jurassic (Tithonian) and Cretaceousage shales. Due to the amounts of risked recoverable resources, the Eagle Ford and Tithonian shales at the Burgos Basin, hold the most important shale gas potential in Mexico, followed by the Tampico Misantla and Veracruz basins. Since new drilling and production technologies have been developed in shale reservoirs throughout the U.S., the production of shale gas and oil is now economically feasible. In 2011 the estimated amount of technically recoverable shale gas in Mexico was 681 TCF with 8 shale gas formations, against 862 TCF in the U.S. and 388 TCF in Canada. A June 2013 update for these figures now indicates that the amount of technically recoverable shale gas in Mexico is 545 TCF and 13 Billion barrels of oil. The shale gas at Eagle Ford in Mexico is estimated to be 416.9 TCF, which represents 76.5% of the total technically recoverable shale gas in Mexico; however, all numbers provided in this study are preliminary since a thorough resource valuation has to be developed with the aid of state-of-the-art geological surveillance techniques. 7

Slide 2 Table of contents Slide 3 EXECUTIVE SUMMARY Slide 6 Index. Slide 2 INTRODUCTION & METHODOLOGY Slide 2 PEMEX E&P & CNH STANDING ON SHALE PLAY DEVELOPMENT 1. Mexican Government position on shale basins Slide Potential shale resources Slide Emergente-1 the first shale gas well in Mexico Slide Emergente-1 Drilling details Slide Geological analogy of the Emergente-1 well and the Eagle Ford stratigraphy Slide PEP exploration of the shale oil & gas potential in Mexico Stratigraphy Slide PEP exploration of the shale oil & gas potential in Mexico Regional Structural Sections Slide Identification, mapping of key parameters and prioritization of Provinces 9

Slide PEP Exploration of the shale oil & gas potential in Mexico Pemex tasks Slide CNH Regional perspectives for shale oil and gas plays in Mexico Slide PEP exploration of the shale oil & gas potential in Mexico Pemex task flowchart Slide PEP exploration of the shale oil & gas potential in Mexico Preliminary results Slide PEP advances in the Sabinas Burro-Picachos Burgos area strategy Slide CNH Exploration document to bring certainty (Stage-1) Slide Pemex has made geological and geochemical update works Slide PEP shale gas drilling program 2012 2015 Slide CNH Advances in the Sabinas Burro-Picachos Burgos basins (1) Slide CNH Advances in the Sabinas Burro-Picachos Burgos basins (2) Slide CNH Seismic studies at the Burro-Picachos and southern Burgos areas Slide PEP Stage I Tasks Performed by 2012 Slide IMP Pemex comprehensive drilling activity 2011 2045 of 27,000 wells 10

Slide The natural gas and oil production scenario post-reform (2014 2028) Slide CNH Shale potential in Mexico Slide PEMEX E&P & CNH STANDING ON SHALE PLAY DEVELOPMENT Mexican Eagle Ford Basin Development Slide Pemex started producing non-associated natural gas at Burgos Slide Location of gas wells at the Burgos basin Slide Gas wells at the Burgos basin identified through SPOT satellite images Slide Optimization of artificial lifting systems in Burgos Slide Optimization areas for the artificial lifting system for 750 wells in Burgos Slide Landscape of the new areas of shale gas development 11

Slide LEGAL ISSUES & BUSINESS OPPORTUNITIES: 1. U.S. Mexico trans-boundary agreements on water and hydrocarbons Slide Legal frame for hydrocarbons Slide NAFTA trans-border area for environmental protection Slide U.S. Mexico trans-border negotiations intermingle environmental, water and hydrocarbon issues Slide Full text of the U.S. Mexico Trans-boundary Agreement Hydrocarbon Reservoirs Slide U.S. Mexico environmental legislations to be Considered for Hydrocarbons Slide LEGAL ISSUES & BUSINESS OPPORTUNITIES: 2. Imminent Mexican Government opening of leases for private companies Slide The National Energy Strategy recognizes the need for leasing Slide Legal issues and business opportunities 12

Slide Legal frame as per the National Energy Strategy 2012 2026 Slide Legal frame as per the National Energy Strategy 2012 2026 and Post-Reform changes Slide Shale Resources in Mexico as per the National Energy Strategy 2013 2027 Slide 84 Shale resources in Mexico as per the Pemex Business Plan 2014 2018 Slide Mexican Foreign Investment Law, August 20 th, 2008 Slide Mexican Energy Reform December 20 th, 2013 Highlights Multiple companies are entitled to operate in the national energy industry Slide Reform Highlights Private investment and promotion of national contents Slide Reform Highlights Contractual modalities for exploration and extraction activities Slide Reform Highlights Property of the Nation of subsoil hydrocarbons, concessions and contracts / The energy sector is priority 13

Slide Reform Highlights Transparency in hydrocarbon exploration and extraction contracts / Attributions of the authorities in the subject of hydrocarbon exploration and extraction contracts Slide Reform Highlights Round Zero for Pemex first choice of the most attractive areas and fields / Mexican Oil Fund Slide Reform Highlights Round Zero details Slide Reform Highlights National Center to Control Natural Gas (CENAGAS) and the natural gas market / National Center to Control Power (CENACE) and the electricity market Slide Reform Highlights Strengthening of the regulatory Commissions of the energy sector: CNH and CRE Slide Reform Highlights Creation of the National Agency for Industrial Safety and Protection to the Environment / Promotion of sustainable development and environmental protection Slide Reform Highlights Subsidies focused on energy supplies / Private participation in the electricity sector 14

Slide Reform Highlights Transformation of Pemex and CFE in state productive enterprises / Fighting corruption in the energy sector / Respectfulness for worker labor rights Slide Highlights from Article 27 from the Mexican Constitution before the Energy Reform Slide Highlights from Articles 26, 27 and 28 from the Mexican Constitution after the Energy Reform Slide Quantitative results expected from the Energy Reform Slide LEGAL ISSUES & BUSINESS OPPORTUNITIES: 3.Legal conflict between shale gas and coal-bed methane (CBM) resulting from overlapping basins Slide Controversies are foreseen due to the legal frame for shale gas and CBM Slide Shale gas and coal-bed methane (CBM) legislation mining branch before the Energy Reform 15

Slide Shale gas and coal-bed methane legislation petroleum branch before the Energy Reform Slide CBM and shale gas extraction ownership conflicts are foreseen Slide SHALE ROCKS: 1. Availability of technically recoverable gas and/or oil from existing shale rocks Slide Definition of shale (lutite) Slide Characterization of shale Slide Sequence stratigraphy of the Eagle Ford (Boquillas) Formation Slide Type of rock at the Boquillas Fm Slide Landscape at the Boquillas Fm Slide Characteristics of the Eagle Ford basin in Mexico Slide Characteristics of the Eagle Ford basin in Mexico Update Slide Makeup of productive shale formations Slide SHALE ROCKS: Shale O&G geology and basins in Mexico extending from Eagle Ford in the U.S. 16

Slide Eagle Ford shale play Slide The Southwest Texas Heavy Oil Province is located in the Maverick basin Slide Time stratigraphic chart of the Upper Cretaceous units of the maverick basin and San Marcos arch. Slide The Anacacho and San Miguel formations in the Maverick basin Slide Stratigraphic setting of the San Miguel formation and a series of marine dominated shorelines and wave dominated deltas Slide The Olmos & Escondido formations in the Maverick basin Slide Stratigraphic setting of the Olmos formation as a fluvial deltaic system and associated shorelines Slide North south cross section through eastern maverick county Slide Identified gas resources in Mexico Slide O&G basins in Mexico Slide Regional structures affecting the continental crust of Mexico Slide Shale basins at the Gulf of Mexico Slide Trans-border regional paleography of the Upper Cretaceous 17

Slide Geologic structure of Burgos Slide The Eagle Ford basin is trans-border between Mexico and USA Slide The Eagle Ford basin gets into Mexico as part of the Maverick basin Slide Maverick basin stratigraphy Slide Maverick basin stratigraphy and focus in O&G Slide 123 Northwest southwest cross section through the Maverick basin Slide Jurassic and Cretaceous stratigraphic units in southern and eastern Texas Slide Definition of the Burgos Integral Asset Slide Burgos basin boundaries Slide Definition of the Burgos Integral Asset Slide Burgos basin boundaries Slide Geology of the Burgos basin within the Burgos Asset Slide Geology of the Burgos basin Slide Burgos basin boundaries Slide Geological origin of the Eagle Ford and Burgos basins Slide Cross section of the stratigraphy of the western border of the Burgos basin 18

Slide The Eagle Ford basin in northeastern Mexico Slide Stratigraphy of the Burgos basin Slide Geology of the Burgos basin Slide A A transversal view of the Burgos basin geology Slide The Sabinas basin in northeastern Mexico Slide Landscape of Sabinas Slide Geology of La Casita formation Slide Geology of La Casita formation Cross section Slide Geology of La Casita formation La Popa basin Slide Sabinas basin boundaries Burgos province Slide Profile of the Forastero 1 well Slide 1 Sabinas basin boundaries Peninsula de Tamaulipas and Isla de Coahuila Slide 1 Correlation between the Cuatro Cienegas and El Oro blocks Slide 1 Coahuila state geology Slide 1 Location of towns and mountain ranges in Coahuila Slide 1 State of Coahuila geologic profile 19

Slide 1 Tamaulipas state geology Slide 1 Location of towns and mountain ranges in Tamaulipas Slide 1 State of Tamaulipas geologic profile Slide 1 Types of soil at the Zone II from the Burgos basin Slide 1 Nuevo Leon state Geology Slide 1 Landscape of the Aramberri area in the state of Nuevo Leon Slide 1 Location of towns and mountain ranges in Nuevo Leon Slide 1 State of Nuevo Leon geologic profile Slide 1 SHALE ROCKS: Overlap of shale and coal basins in the Sabinas basin Slide 1 The origin of the Maverick basin explains coal deposit structures in Coahuila Slide 1 Maverick basin geology 115 million years ago Slide 1 Location of the main coal deposits in Mexico Slide 1 The Eagle Ford basin runs towards northeastern Mexico 20

Slide 1 Location of the main coal deposits in Mexico Slide 1 Coahuila coal deposits Slide 1 Geologic characteristics of coal deposits in Coahuila Slide 1 Coal deposits in Sabinas Monclova Slide 1 FRACTURING CHEMICALS & WATER MANAGEMENT: 1. What is fracturing? Slide 1 Eagle Ford shale well boring Slide 1 Eagle Ford hydraulic fracturing Slide 1 Fracturing process in the production of shale gas Slide 1 Types of fracturing guns Slide 1 Use of fracturing guns Slide 1 CT Express Rig Up Slide 1 Well drilling through Multiple Service Contracts at the Burgos basin Slide 1 Well drilling and natural gas processing by Pemex 21

Slide 1 FRACTURING CHEMICALS & WATER MANAGEMENT: 2. Fracturing chemicals for oil and gas Slide 1 Typical Eagle Ford fracturing fluid makeup Slide 1 Fracturing chemicals cocktail composition Slide 1 Typical Eagle Ford fracturing fluid makeup Slide 1 Common Fracturing chemicals used at Eagle Ford (shale gas) Slide 1 Common Fracturing chemicals used at Eagle Ford (shale oil) Slide 1 FRACTURING CHEMICALS & WATER MANAGEMENT: 3. Use of water in fracturing Slide 1 Water use in deep shale gas exploration 22

Slide 1 Water is needed in the production of shale gas Slide 1 Water management economics in the development and production of shale resources Slide 1 Hydraulic fracturing and groundwater protection Slide 1 The use of water for shale gas is lower against other fuels Slide 1 FRACTURING CHEMICALS & WATER MANAGEMENT: 4. Water use financials Slide 1 Key factors involved in water management at Eagle Ford Slide 1 Water management segments in the development and production of shale resources involved in costing 23

Slide 1 SUPERFICIAL AND/OR GROUNDWATER: 1. Availability of water supplies in large quantities Slide 1 Eagle Ford field development needs are well covered by water flows at the Rio Grande Slide 1 Intermontane water basins in the Trans Pecos region of western Texas and northern Chihuahua Slide 1 Water basins in western Texas and northern Chihuahua Slide 1 U.S. Mexico shared trans-border aquifers Slide 1 Water basins in western Texas and northern Chihuahua Slide 1 U.S. Mexico shared trans-border aquifers Slide 1 U.S. Mexico bi-national water bodies Slide 1 U.S. Mexico shared trans-border aquifers and legal issues Slide 1 U.S. Mexico trans-boundary aquifers under international law 24

Slide 1 Characteristics of dams on the Mexican side of the Rio Grande Slide 1 Mexican groundwater in the Eagle Ford area Slide 1 Coahuila state rivers and water bodies Slide 1 Hydrologic regions in Coahuila and Nuevo Leon Slide 1 Hydrologic regions in Tamaulipas Slide 1 SUPERFICIAL AND/OR GROUNDWATER: 2. Availability of state-of-the-art water treatment systems Slide Water treatment issues Slide Schlumberger aquifer storage and recovery in fracturing operations 25

Slide Chesapeake s Aqua Renew program Slide Intervras Technologies Slide Ecologix integrated treatment systems for oil drilling and fracturing operations Slide EAGLE FORD DRILLING FINANCIALS: 1. Well development costs Slide 2 Financial provisions in Mexico will use analogies with the U.S. Slide 2 Eagle Ford drilling and completion impact (2010) Slide 2 Costs for drilling at Eagle Ford Slide 2 EAGLE FORD DRILLING FINANCIALS : 2. Production costs and break-even point 26

Slide 2 Eagle Ford shale extraction of oil and gas impact (2010) Slide 2 Break even point for Eagle Ford shale wells Slide 2 Break even point considerations for Talisman Energy Eagle Ford shale wells Slide 2 The break even point for Talisman Energy turned out to be lower Slide 2 Baker Institute break even point for shale gas Slide 2 Eagle Ford shale impact outlook in Texas 2020 Slide 2 EAGLE FORD DRILLING FINANCIALS: 3. Henry Hub futures prices Slide 2 Henry hub natural gas prices are the reference in the Mexican price formula 27

Slide 2 Henry Hub natural gas prices tend to remain low in 2014 2015 Slide 2 Henry Hub natural gas price probabilities to increase or decrease from certain levels Slide 2 Fuel price differentials were closing in July 2008; with the availability of shale gas these differences became larger Slide 2 Natural gas price differentials against LPG, diesel and heavy fuel oil are the key drivers to switch fuels in Mexico Slide 2 EAGLE FORD DRILLING FINANCIALS: 4. U.S. DOE natural gas price forecasts to 2040 Slide 2 Natural gas prices depend on availability Slide 2 Oil and natural gas price ratios will narrow from 7.1 in 2013 to 3.4 in 2017 Slide 2 HUMAN FACTORS & REGIONAL DEVELOPMENT: benefits and hazards 28

Slide 2 Human factors and regional development Slide 2 The impact of Eagle Ford is reflected in the creation of jobs and increased salaries Slide 2 The impact of Eagle Ford is reflected in the creation of jobs and increased salaries Slide 2 Permanent and temporary indirect jobs associated with drilling operations Slide 2 The payment of leases on the Mexican side can be compared to acquisition of Rights-of-Way Slide 2 Managing risks of shale basin development Slide 2 CONCLUSIONS Slide 2 ABBREVIATIONS Slide 2 CONVERSION FACTORS 29

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