Think Tank- Oil and Gas Industry - EY

1 Think Tank- Oil and Gas Industry Panel 1. Energy reform and the new tax regime for hydrocarbon producers. Panel 2. Financing & Structuring Investment in Mexico Panel 3. Energy Tax Hot Topics July 10, 2014 Energy reform and the new tax regime for hydrocarbon producers. 10 July 1014 Think Tank- Oil and Gas Industry Page 3 Presenters Iv n Sandrea CEO Sierra Energy Stephen Landry EY s America Oil & Gas Tax Leader Richard Overton EY ITS Partner Moderator: Oscar L pez Velarde EY ITS Partner Page 4 E&P contracts for public and private companies Independent regulators Permits for midstream and downstream Pemex and CFE modernization Oil and gas reform Highlights of the reform Page 5 ? Flexibility, risk or opportunity?

2 UNKNOWN BOX Cost recovery and cost deductibility limits + 10 year carry-forward R Factor Windfall Profits Surtax REGRESIVE PROGRESIVE Bonus Royalties % of Value of Hydrocarbons Contractual Quota Exploration Phase % of Operating Profit Corporate Income Tax Contractual terms will define Mexican take, but % shared will define winning bidder Page 6 Ring-fencing Rules yet to be defined JOA not available Lack of consolidation Government take Contract Mexican Tax Local Content Legal Entity Ring-fencing Page 7 Operating Profit Relevant to determine government share under license contracts and production/profit sharing contracts Contractual Price of Hydrocarbons (Gross revenue) (-) Royalties* Non deductible for PSCs (-) Costs, expenses and DD&A eligible for deduction OPERATING PROFIT Deductibility limitations, among others: Financing expense Expenses for the use of owned technology unless proven to be arm s length Page 8 Capex depreciation New rates: Might be used also for income tax Upon election of the taxpayer Lack of clear definitions Tax or accounting rules?

3 Only applicable to contractor Depreciation Rate Capex Item 100% Exploratory phase Secondary recovery and improvement Non-capitalizable maintenance or IDC 25% Development and production phase 10% Storage and transport infrastructure Page 9 Arm s length principle Cost oil + mark-up or margin = Contractor s Take Deductible and recoverable Cost Oil? Operating Co. SPV Contractor Cost Plus Mark-up Operating Co. SPV Contractor Arm s length compensation Royalties, Procurement, Financing Eligible and not eligible costs Page 10 License Profit Share Take* $101 FMV Hydrocarbons $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Profit Oil $25 - 50% Government Share $ - 30% CIT $ Contractor s Take Operating Profit $100 Contractual Price $10 - Royalty $40 - Allowed Cost Oil $50 Operating Profit $25 50% Government Share * Bonus and dividend WHT not included Corporate Income Tax $101 FMV Hydrocarbons $10 - Royalty $ - CQEP $45 - Total Cost Oil $25 - 50% Government Share $ Taxable Profit $ 30% CIT Page 11 License Value of Hydrocarbons Share Additional royalty Take $101 FMV Hydrocarbons $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Profit Oil $25 - 25% Government Share $ - 30% CIT $ Contractor s

4 Take Value of Hydrocarbons Share $100 Contractual Price $25 25% Government Share * Bonus and dividend WHT not included Corporate Income Tax $101 FMV Hydrocarbons $10 - Royalty $ - CQEP $45 - Total Cost Oil $25 - 25% Government Share $ Taxable Profit $ 30% CIT Page 12 Profit Sharing Contract Take* $101 FMV Hydrocarbons $1 +/- Dif. FMV and Contractual Price $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Profit Oil $30 - 50% Government Share $ - 30% CIT $ Contractor s Take Operating Profit $100 Contractual Price $0 - Royalty $40 - Allowed Cost Oil $60 Operating Profit $30 50% Government Share * Dividend WHT not included Corporate Income Tax $30 50% Contractor s Share $40 + Cost Oil Recovery $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Taxable Profit $ 30% CIT Page 13 Production Sharing Contract Take* $101 FMV Hydrocarbons $.

5 3 +/- Dif. FMV and Contractual Price $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Profit Oil $30 - 50% Government Share $ - 30% CIT $ Contractor s Take Operating Profit $100 Contractual Price $0 - Royalty $40 - Allowed Cost Oil $60 Operating Profit $30 50% Government Share * Dividend WHT not included Corporate Income Tax $30 50% Contractor s Share $40 + Cost Oil Recovery $.7 +/- Dif. FMV and Contractual Price $10 - Royalty $ - CQEP $45 - Total Cost Oil $ Taxable Profit $ 30% CIT Financing & Structuring Investment in Mexico Think Tank- Oil and Gas Industry Page 15 Presenters Deborah Byers EY TAS Partner Carlos Vargas Rodriguez BBVA Oil & Gas Adolfo Osorio Hern ndez BBVA Oil & Gas Moderator: Alfredo Alvarez Laparte EY ITS Partner Page 16 Oil & Gas Investment Opportunities Find Get it Turn it into something Sell Upstream Midstream Downstream Transportation and Storage Services & Local Supply / Construction.

6 Page 17 Investment Needed in 10 years 350 bn usd Energy & GasPEMEXM idestreamRefiningUpstreamSource: Texas A&M International University Page 18 Oil & Gas Wells US vs Mexico Eagle Ford Texas Drilling Permits in 2012 US 4,143 Mexico 3 Page 19 Oil & Gas Wells US Eagle Ford Texas 030060090012001500180021002400 Eagle FordBakkenPermianNet otherTotal USproduction gains (000 b/d) US crude oil production gains: last three years (Dec 2010 production vs. Dec 2013 production) 1,088 97 437 656 2,278 Page 20 Pipelines System US vs Mexico US 490,000 km Mexico 13,000 km Page 21 Refineries US vs Mexico US 143 vs Mexico 6 Page 22 Resources Feeders National & Foreign Corporations Private Equity Banking System Government Resources Stock Exchanges (MSE, NYSE.)

7 Page 23 US Market Cap on Real Estate and Energy Oil & Gas ProductionMidstreamOthersMLPs 620 b Real EstateInfraestructureREITs 790 b Page 24 Mexican Market Real Estate and Infrastructure FIBRASCKDsCKDs / FIBRAs 23 b FIBRAS & CKDsOthersAFORES 168 b Page 25 MLPs for the Mexican resources need Mexican Subsidiary Mexican Subsidiary 30% Income Tax Profits 10% dividend withholding MLP Holding Co MLP FIBRA Ideal Structure* MLP 30% Income Tax Profits 0 - 10% dividend withholding Financing 30% on distributions Treaties? * Regulations need to be adapted Infrastructure RIETS? Regulatory? Mexican Stock Ex Oil & Gas Hot Topics Think Tank- Oil and Gas Industry Page 27 Presenters Rodrigo Ochoa EY ITS Partner Jorge Libreros EY Controversy Partner Moderator: Koen Vant Hek Koot EY ITS Partner Page 28 Bareboat Charter (BBA) Main Considerations Income Tax Law Use or enjoyment of goods Royalties Chartering (Fletamiento) Tax Treaties: Royalties?

8 Industrial Equipment? Deductibility for Income tax purposes Overview Requirements 2. Fee 1. Bareboat (BBA) Treaty Co. Mex Co. Page 29 Bareboat Charter (BBA) Main Considerations Double Income tax withholding? Beneficial ownership 3. Fee 2. Bareboat (BBA) Treaty Co. Mex Co. REFIPRE (*) (*) Owner of the equipment 4. Fee 1. Bareboat (BBA) Page 30 Time Charter 2. Fee 1. Time Charter Treaty Co. Mex Co. Main Considerations Business Profits Permanent Establishment Page 31 Financial Lease Agreement (FLA) Temas actuales de la Industria Petrolera Hot Topics 2. Interest + principal payment 1. Financial Lease Treaty Co. Mex Co. Main Considerations Characterization for tax purposes Tax Depreciation Construction equipment? Vessel / Boat ?

9 Other kind of asset? Accelerated depreciation Temporary importation FLA vs. BBA Page 32 Mexican tax authorities (SAT) Audits Deductibility of services Service entities (employees) Permanent establishment Prorate expenses Beneficial ownership Base Erosion and Profit Sharing (BEPS) Page 33 Thank you Ernst & Young Auditor a | Asesor a de Negocios | Fiscal-Legal | Fusiones y Adquisiciones Acerca de Ernst & Young Ernst & Young es l der global en servicios de auditor a, asesor a de negocios, fiscal-legal y fusiones y adquisiciones. A nivel mundial, nuestros 152,000 profesionales est n unidos por los mismos valores y un compromiso s lido con la calidad. Marcamos la diferencia al ayudar a nuestra gente, clientes y comunidades a lograr su potencial.

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