Mexico Market Entry Strategies for Canadian Oil & Gas Service Companies

A Report Prepared for the Canadian Embassy in Mexico and the Government of Alberta

April 5, 2010

TABLE OF CONTENTS EXECUTIVE SUMMARY INTRODUCTION I. NEW COMPETITIVE ENVIRONMENT IN THE OIL & GAS SERVICE INDUSTRY IN MEXICO
1.1 Declining Production: Opportunities for AB companies 1.2 Mexican Energy Reform: More Flexibility & Incentives 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 Corporate governance and reorganization New Procurement and Contracting Arrangements Flexible Financial Rules Autonomous Debt Management Alignment of Fiscal Incentives Enhanced Transparency and Accountability Strengthening of Policy Formulation and Regulation Pemexs medium and long-term goals 3 4

5 5 8 9 9 9 9 10 10 10 10 11 11 11 11 12 12

1.3 Albertas Oil & Gas Service Companies in Mexico: Rising Presence 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 Companies Subsectors Start of Operations in Mexico Location Exports

II. MARKET ENTRY STRATEGIES

2.1 General Framework 2.2 Agents and Representatives / Agents and Distributors 2.3 Joint Venture (General) 2.4 Joint Venture (Project Specific) 2.5 Mexican subsidiary 2.6 Subcontracting & Licensing 14 16 18 20 20 21 24 54 55 62 69 71 73 76

III. COMMENTS FROM INTERVIEWS APPENDICES

Appendix Appendix Appendix Appendix Appendix Appendix A BCDEFTerms and Conditions of the New E&P Contracts Legal IssuesIncorporation and Import-Export Questionnaire List of interviewees References Americompass SC

EXECUTIVE SUMMARY
In 2002, Americompass prepared a Study on Market Entry Strategies in Mexicos Energy Sector for the Government of Alberta. This study prepared for the Embassy of Canada, Mexico City, and the Government of Alberta updates the original Study, based on a research of current secondary sources and interviews with key players. It contains three sections. In Section I, we analyze the new competitive environment facing companies that are already present in the Mexican energy sector or that are considering entering. This environment is defined by three main elements: o An ailing oil industry characterized by an observed and expected decline in production which could fall to 1.8 million barrels per day (MMBD) in 2021, and by increasing imports of gasoline and other oil-based products. A new Pemex operating regime derived from changes to the Pemex Law and to Regulatory Law of Article 27 of the Mexican Constitution in the oil sector, also known as the Petroleum Law. A doubling of Pemexs capital expenditure budget resulting in the largest ever number of Canadian companies over 40, either as equipment suppliers or as service companies operating directly with Pemex or as subcontractors. This Report provides information on names, activities, locations and entry strategies of this group of companies.

Section II is devoted to the analysis of alternative entry strategies and presents illustrative examples of each mode of entry with information obtained from public sources. Section III offers a compilation of valuable insight resulting from interviews on 14 topics, from which we can draw the following conclusions and recommendations: o Five entry strategies: agents and representatives / agents and distributors, joint venture (general), joint venture (project specific), Mexican subsidiary, subcontracting and licensing Nature of companies: contrast/complementarity between local and Canadian service companies Market access best choice: JV with local partner that lacks technology and subcontracting with large integrated companies Business expectations: moderate satisfaction with results Keys to success: high-end technology, ingrained in local culture, knowledge of Pemex needs, hiring of local personnel Time horizon for investments: medium-long term Barriers to entry: regulatory, bureaucratic, cultural, labor, corruption Impact of energy reform: service companies will be main beneficiaries Changes with energy reform implementation: more flexible contracting, lower overheard cost, more direct interaction with Pemexs management Main challenge ahead: reverse decline in production through technologies applied in enhanced oil recovery in Chicontepec and deepwater exploration Profitabity: below expectations in short term, good in medium term

o o o o o o o o o o

o o

Lessons from past experience: Expect a shift toward projects directly controlled by Pemex rather than contracting for integrated project management Business conditions: Difficult economic environment expected in 2010 Recommendations: 4 Ps patience, perseverance, presence, pace.

INTRODUCTION
In 2002, Alberta Economic Development retained AmeriCompass S.C., consulting company dedicated to assisting foreign companies enter the Mexican marketplace, to evaluate and formulate entry strategies for companies targeting the Mexican energy sector. The study outlined and analyzed a variety of market entry vehicles available to Canadian exporters and investors in Mexico. To help the reader in reaching conclusions as to the most effective vehicles for the varying business types and models, AmeriCompass interviewed over 20 individuals, companies and foreign investors active in Mexicos energy sector. These interlocutors were involved in a cross-section of activitiesincluding executives of small, medium-sized, and large companies, small equipment and service providers, public officials, and academics. Those interviewed shared their views, as well as their successes and challenges, enabling the writers to enriching the study with practical tips and useful insight on the dos and donts of doing business in Mexicos energy sector. The Study concluded that a common thread through any of the viable market entry strategies was the need to budget for costly legal expenses and bureaucratic delays. Tax issues also needed to be carefully addressed, and understanding Mexican business culture was a must. According to the Study, these issues tend to be particularly relevant during the initial phases of market penetration, which may last up from 1-3 years, during which trial and error will often be the rule rather than the exception. The Study also highlighted the fact that, if the business proved successful during these initial phases, to ensure know-how stays in-house and to guarantee acceptable profit margins, companies should seriously consider establishing a full-time office, which may be lead by a local or by an expatriate manager. The biggest challenge for companies was the need for patience and a commitment. Companies must possess both, as there are many failed examples of ones who did not. Since the Study was performed, the Mexican oil sector came to face three main challenges: a) Declining production: oil production decreased from 3.4 MMbd in 2004 to 2.8 MMbd in 2008; 37% of total production came from one single offshore field in 2008; 92% of production came from mature and declining fields. b) Increasing production costs: production cost rose by nearly 40% from 2000 to 2008. Pemex had a limited access to new technologies through joint ventures to explore mature fields. c) Low replacement rate: proved plus probable plus possible reserves (3P) declined from 58.2 to 43.6 billion barrels of crude oil equivalent in the period 2000 to 2009. In 2008, replacement ratio was 72%, the highest in the last

15 years, but still below long term sustainability. Proven reserves/production ratio declined from 11.9 years in 2004 to 9.9 years in 20081. To face these challenges and mitigate their impacts on public finances, in October 2008 Mexico passed a historic energy reform bill. Under the new law, for the first time, Pemex third-party contracts may include bonuses for early completion and for the transfer of technology to the State company. To date, contractors have been waiting for a new model of incentive-based contracts that were made legal by the reform. The new contracts are expected at some point in 2010. These and other new circumstances in the Mexican energy sector and public finances represent modifications in the scene where the Canadian energy companies have traditionally moved, and offer new opportunities for those wishing to enter the Mexican marketplace and/or to consolidate the position that they may already have. Therefore, it made a lot of business sense to conduct an update of the Study on Mexico Market Entry Strategies for Canadian Energy companies that reflects such changes, and assist them with advice on how to approach the new scenario and how to better face the challenges it poses to foreign investment and trade in the oil sector in Mexico. The present update contains three sections. First, we analyze the new competitive environment as determined by the declining oil reserves and production, the energy reform of 2008 and the doubling of Pemex capital expenditure budget. This chapter summarizes the new conditions in which Canadian companies are evolving in Mexico and the challenges and opportunities that those wishing to enter Mexico will have to face and/or explore. Secondly, we revised the five entry strategies that are open to Canadian companies that are exploring Mexico as a place to do business, including concrete examples of each one of them. Third, we summarize the views expressed by key players, mostly Mexican and Canadian oil & gas service companies, who were interviewed for this new Study. This compilation is key to gain a better understanding, from the perspective of knowledgeable and experienced people, of the pros and cons as well as the challenges and rewards of entering the Mexican energy sector for Canadian companies. Lastly, in the appendixes we present an analysis of the new Pemex contracts and provide an update of the legal framework that rules the incorporation of a Mexican company as well as import/export operations.

I. NEW COMPETITIVE ENVIRONMENT IN THE OIL & GAS SERVICE INDUSTRY IN MEXICO
1.1 Declining Production: Opportunities for Canadian companies

CSIS Conference, April 6, 2009, available at beta.csis.org/files/attachments/CSIS_Conference_6_04_09%20(2).pdf

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In 2008, Mexico was the sixth largest producer of crude oil in the world, at 3.0 million barrels per day (MMBD), more than 80% from offshore fields, and most of it heavy oil. In 2009, production fell for the 7th consecutive year to 2.601 MMBD, a decline of 15.3% over the previous year. Output peaked in December 2003 at about 3.5 MMBD. Mexico's production is expected to continue to fall to as much as 2.3 MMBD in 2010. Cantarell - the giant offshore field which accounted for about two-thirds of the oil Mexico produced at the peak of production in December 2003 fell by 35 percent in November 2009 from the year earlier. New resources are not being developed apace. The decline in oil production had an estimated cost for Pemex of US$23.4 billion in revenue and forced the government, which depends on oil revenue to fund about a third of its budget, to raise taxes to narrow a budget deficit.

Figure 1
Mexico: Production of Crude Oil (2006-2009) 3500 3000 2500 MMBD 2000 1500 1000 500 0 2006 2007 2008 2009 Heavy Light Ultralight

Source: Pemex, Memoria de Labores

The country's proven oil reserves are 14.3 billion barrels. Most analysts believe that Mexico has much more oil but this oil remains undeveloped because of underinvestment by PEMEX. For instance, PEMEX has only drilled 6 exploratory wells to date in the deep water on the Mexican side of the Gulf of Mexico, while a robust industry exists on the American side. Half of Mexico's crude oil is exported, primarily to the United States. In turn, due to underinvestment in the refining sector Mexico imports half of its refined oil products, notably gasoline, principally from the United States; ie Mexican oil exports returned as imported US gasoline. In order to reverse declining oil production, the 2009 PEMEX investment budget was US$19.3 billion and is proposed to reach US$20.2 billion for 2010. Almost 85 percent of the budget for 2010 is allocated to the E&P division since it is the most profitable business line.

Figure 2
Mexico: Production of Natural Gas (2006-2009)

8000 7000 6000 5000 4000 3000 2000 1000 0 2006 2007 2008 2009

MMCFD

Non associated Associated

Source: Pemex, Memoria de Labores

Mexico has an estimated 14.6 trillion cubic feet (Tcf) of proven natural gas reserves. Average annual production in 2009 was 6.7 billion cubic feet (Bcf) per day. Production has been increasing for several years. The country has significant untapped gas potential, but the investment emphasis of PEMEX has been on oil. The country is a net importer of natural gas. Imports consist of piped natural gas from the United States, and liquified natural gas (LNG). Mexico currently has two LNG import terminals and a third under construction. All feed, or will feed, power plants. Given their technological competitive advantage, the major opportunities for Canadian companies in the oil and gas sector will be in providing drilling and exploration services to PEMEX. Technologies most in need are shown below: Table 1 Mexico: Main Technologies in E&P Investment Program Area
Exploration

Goal
Higher probability of success; Lower finding costs

Technologies
Seismic processing & reprocessing to improve imaging Wide azimuth shooting for sub-saline structures Data loaded 3D models including geochemical, facies, flow units, reservoir geometry, petrphysics and others Combined methods to reduce prospect uncertainty Extended reach wells New subsea equipment risers, flowlines, umbilicals and subsea connections Subsea high integrity pipeline protection systems Intelligent completion control & instrumentation

Development Optimal development cost; Efficient project execution

Production Lower production cost: Sound environmental performance

Subsea controls Subsea separation & injection system Oil and water monitoring and level detection Early production systems, e.g. (foalting production storage and offloading FPSO) Subsea artificial lift system (gas lift and ESP)

Source: Pemex, Pemex Exploracin y Produccin: An Overview of 2009-2010

Companies from Canada have a strong competitive advantage with respect to both technology and logistics and they should be very competitive in supplying services in the following areas: 1) Offshore: PEMEX is most active in offshore, shallow water exploration and production. Important fields include Cantarell and Ku-Maloob-Zaap. There is demand for products and services related to inspection and repair, pipeline laying, and safety products and services. There is also significant demand for marine services related to offshore oil and gas production - e.g. supply ships, dynamic positioning vessels and shipyards for new ship construction. 2) Offshore Deepwater: PEMEX does not have any significant deepwater exploration and production experience, or technologies. Deepwater opportunities are limited, but are supposed to improve with the incentive-based contracts set up by the Energy Reform of 2008. 3) Pipelines: PEMEX has an estimated 60,000 km of oil and gas pipelines, of which 3,000 km are offshore and the remainder onshore. All offshore pipelines, and half of onshore pipelines, fall under the exploration and production portion of PEMEX. The balance of onshore pipelines correspond roughly half and half to Refining and Gas/Basic Petrochemicals. Offshore pipelines have an estimated average age of 20 years and onshore pipelines of 35 years. Pipeline accidents are common in Mexico and PEMEX is under constant pressure to improve pipeline maintenance and repair practices. 4) Enhanced Oil Recovery (EOR): In light of declining production since 2004, PEMEX will bring mature and declining wells back into production through access to foreign technologies for drilling unconventional wells, technologies for secondary and enhanced oil recovery processes, and technology for monitoring, controlling and automation of wells and facilities. In 2010, Pemex is expected to drill a total of 2040 wells, mainly at the on-shore Chicontepec field.

1.2 Mexican Energy Reform: More Flexiblity and Incentives

On October 28, 2008 the Mexican Congress passed a bill to amend the existing regulatory framework of the energy industry in order to strengthen Pemex and thereby increase Mexicos hydrocarbon reserves and production in a competitive and efficient manner. The Energy Reform consists of amendments to three federal laws and statutes (Regulatory statute of Article 27 of the Constitution Concerning Oil Affairs, Energy Regulatory Commission Act, and Federal Public Administration Act) as well as the enactment of four new statutes: Law of Petroleos Mexicanos, Law for the Sustainable Use of Energy, Law for the Use of Renewable Energies and the Financing of the Energy Transition, and National Hydrocarbon Commission Act.

The energy reform introduced changes in regulation in the following areas:

1.2.1 Corporate Governance and Reorganization

New powers were given to the Board of Directors to determine the organizational structure of Pemex, propose to the Executive the creation of subsidiary entities and engage in institutional programming, coordination, evaluation of activities, debt, acquisitions, leases and services. Four new independent, professional directors were appointed for a 6 year term by the Federal Executive and ratified by the Senate. Seven specialized committees are created to enhance the Boards functions: (auditing and performance evaluation; strategy and investment; compensations, acquisitions, leases; construction and services procurement; environment and sustainable development; transparency and accountability; technological R&D.)

1.2.2 New Procurement and Contracting Arrangements

A special regime is created tailored to the fundamental activities of the oil & gas industry, whereby Pemex tendering is subject to its internal regulations and the provisions issued by its Board of Directors. The general legally established regime continues for all other activities, with the following clarifications: Prohibited contracts are those that grant rights to oil production or reserves, involve the sharing of production or proceeds of sales or grant preferential rights for the acquisition of oil. Permitted contracts include fixed schemes of predetermined formulas for which a certain price is obtained, multi-year price reviews to accommodate use of advanced technology or price variations of raw materials, additional compensation when savings are realized as a result of decreased execution times, Pemex benefits form technology transfers or contractors contributing to higher profit.

1.2.3 Flexible Financial Rules

As part of its strategic business plan, Pemex will propose every year to the Finance Ministry and Congress a five-year financial program. A seven year transition period is established to gain budgetary autonomy whereby Pemex may use its excess income, approve adjustments to its budget without prior authorization by the Ministry of Finance when the financial balance goals are met, and simplify the registration process of its investment program.

1.2.4 Autonomous Debt Management

PIDIREGAS financing is eliminated and substituted by budgetary resources. Pemex investment expense will no longer be part of public sector financial balance (more flexible investment ceiling, tied to Pemexs resource availability). Pemex will be able to issue debt according to the companys priorities and consistent with the public sectors financing program. Pemex does not require prior approvals by the Ministry of Finance; only under exceptional circumstances can transactions be suspended.

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Pemex may use the resources accumulated until 2008 in the Stabilization Fund for Investment in Infrastructure (1 billion USD). This will enable startup for the construction of new refining capacity, among other projects. Pemex will be able to issue a special series of securities called Citizen Bonds acquired by Mexican nationals that do not grant corporate or property rights. Their yield will reflect Pemexs economic performance, will boost transparency and accountability in Pemexs operations and finances.

1.2.5 Alignment of Fiscal Incentives

Acknowledging the higher complexity and cost of new fields, fiscal incentives are aligned as follows: Chicontepec: 71.5% rate and cost-deduction cap of USD $11/bl, compared to 74.5% and USD $6.5/bl in general regime; Deepwaters: 71.5% rate (depending on oil price level) and cost-deduction cap of USD $16/bl; Abandoned fields: Minimum additional production requirement is eliminated to grant more favorable fiscal regime.

1.2.6 Enhanced Transparency and Accountability

A new surveillance and supervision strategy will be based on: Internal Control Body, Audit and Performance Evaluation Committee, External Auditor and Federal Audit Agency (Auditora Superior de la Federacin). Pemex shall submit an annual report to Congress including an explanation and declaration of the main accounting policies and criteria which shall be disclosed on the Pemex webpage, quarterly reports to Congress disclosing, by business line and operational area, Pemex results, based on indicators and parameters acceptable at an international level, as well as an annual report to the Ministry of Finance with respect to the use of debt. The corporate commissioner will deliver an annual report to bondholders on the state of the economic performance of Pemex.

1.2.7 Strengthening of Policy Formulation and Regulation

SENER (Energy Ministry): Pemex will be subject to the energy policy defined by the Energy Ministry, in terms of reserve replacement and production rates. CNH (National Hydrocarbon Commission New upstream regulator): Pemex will obtain from this Commission a formal opinion for the technical aspects of its exploration and production projects, and will subject itself to the technical rules established by it. CRE (Energy Regulatory Commission Existing downstream regulator): New authority in regulating prices for first-hand sales, pipeline transportation and storage for fuel-oil and basic petrochemicals. National Energy Council: Will establish the National Energy Strategy, with a 15 year horizon, subject to approval by Congress.

1.2.8 Pemexs medium and long-term goals may be summarized as:

Maintain crude production platform within 2.7-2.8 mmbd, and seek new opportunities to increase production to 3.0 mmbd, by 2015.

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Maintain natural gas production above 6.0 bcf per day. Increase reserve-replacement ratios to at least 100% towards 2012. Re-establish reserve/production ratio to 10 years (after 2012). Reduce gasoline imports, by investing in conversion of residuals at existing refineries, as well as in additional refining capacity. Close maintenance gaps to improve security and facilities integrity. Reduce environmental liabilities. Reduce project-execution gaps.

1.3 Canadian Oil & Gas Service Companies in Mexico

At the beginning of 2010, there were around 40 Canadian companies, all from Alberta, in the oil and gas sector established in Mexico, as shown in Table 2. 1.3.1 Companies. Some of the major players working in Mexico today include: TransCanada Pipelines, Tarco International, AGAT Labs, Tesco, QMax, Enerflex, Kudu Pumps, TTS Sense, Ensign and Trinidad Drilling. The largest oil & gas service company in Alberta, Precision Drilling, used to be one of the most important contractors of Pemex but its Energy Services and International Drilling division was sold to Weatherford in 2005. 1.3.2 Subsectors. Companies are operating in the following areas: 1) 2) 3) 4) 5) Geophysical service & mapping Drilling and support services Pipelines Information Communication Technologies Oil & Gas Field Machinery & Equiment

Clearly, most companies are in the drilling and support services area. Mexico has become an important market for Canadian companies expertise in unconventional drilling, artificial lift and enhanced recovery. It has also gained importance as a market for oil and gas processing, equipment and fracturing technologies and services. 1.3.3 Start of Operations in Mexico. Most oil & gas service companies from Canada have entered the Mexican marketplace in the last 10 years. A first wave of companies came to Mexico in the middle of the 2000s. During this period, Albertan companies were able to secure good, long-term contacts with Pemex. Pemex liked the Canadian oilfield service companies because they tended to be smaller, and the service they offered was a little more hands-on and personal compared with large multinational firms. In this period, the rigs heading south were the cream, top of the line, brand new with the latest technology. Although the Canadian Association of Oilwell Drilling Contractors (CAODC) has no numbers for the southward migration, it recognizes that its member firms tend to scour the market in order to keep their best crews and rigs working: They tend to bring new stuff and best crews when they head south." A second wave of companies came to Mexico in 2008-2009 as a result of two push factors: the low price of oil and gas and the high number of idle rigs in Canada, which made new drilling rig construction uneconomic. In this period, virtually no rigs were being built in Canada and the U.S. and there was very stiff competition, so all rig manufacturers in Canada started to look outside for business.

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For many firms, going international and in particular to Mexico, became a business panacea. On the Mexican side, the pull factors were the reforms to Mexico's hydrocarbon laws and Pemex's intention to invest US$240 billion on exploration and production by 2023. As Pemex started to move into deep water to try and shore up plummeting output, specialized firms lined up for contract work with the state oil company, particularly seismic research firms. The latest wave of Canadian companies came as a result of Pemex relaunching the Chicontepec Project in 2009. Companies with experience in the handling of heavy oils and enhanced oil recovery technologies offered themselves to help with the development of the project, now called Tertiary Gulf Oil (Aceite Terciario del Golfo, ATG) and set up services centers in the area. 1.3.4 Location. Canadian oil & gas service companies have settled mostly in the states of Veracruz (Poza Rica, Burgos, Tuxpan), Tabasco (Villahermosa, Cd. Del Carmen) and to a less extent in Tampico (Tamaulipas) and Mexico City. 1.3.5 Exports. Albertan companies exports of boring & sinking machinery were worth USD$212.8 million in 2009, 188.9% growth over previous year. Mexican imports of parts for this type of machinery were worth USD$99,2 in 2009, 32% growth over previous year. These two items were among the top 10 exports of Canada to Mexico in 2009. Mexico has become one of the three top markets (together with Russia and India) for machinery, conventional exploration, production and pipelines from Canada. Table 2 Canadian Oil & Gas Service Companies in Mexico, 2010 Area/Company
1. Geophysical service & mapping 1. 2. 3. 4. 5. AGAT Labs Concentra Tek Core Labs ION Geophysical Terra Energy

Primary Activity
Services

Start in Mexico

Location Mexico

Soil, air, water & environmental 2002 analysis and monitoring 2009 Underground scientific studies Reservoir management services n.a. 3D seismic studies on land 2009 Geosciences services 3D seismic work 2006 1996

Villahermosa, Cd. del Carmen, Tamp. Mxico D.F. Reynosa n.a. Mxico D.F. Tampico

6. Petroleum Geo Services 2. Drilling and support services 7. 8. Blackwatch Energy Services Calfrac Well Services

Sales drilling equipment and services Hydraulic fracturing services Drilling and service rigs Drilling fluids Engineering services Drilling services Energy transportation, distribution and services

2009 2007 2009 n.a. n.a. 2004 1999

Poza Rica Poza Rica, Reynosa Cd. del Carmen n.a. Cd. del Carmen Tampico Naucalpan

9. CanElson Drilling 10. Canadian Energy Services Alliance 11. C-FER 12. Drillers Technology 13. Enbridge

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Continued Table 2 (above) 14. Ensign Energy Services 15. Entech Energy Group 16. Hyduke Energy Services 17. Invensys systems 18. Katch Kan Ltd. 19. Leader Energy Services 20. MI Drilling Fluids 21. Mullen Group 22. Nabors 23. Nexen 24. Oyo Geo Space Canada 25. Pantera Drilling Income Trust 26. Qmax Solutions South Mexico 27. Sanjel 28. Saxon Energy Services 29. Savanna Energy Services Corp. 30. Strata Energy Services 31. Tesco Drilling Innovation 32. Xtreme Coil Drilling 33. Wavefront Technology Solutions 3. Pipelines 34. TransCanada 35. ShawCor Ltd 4. ITC, Consultancy 36. AspenTech 37. Enerflex Systems Income Fund 38. VMC 5. Oil & Gas Field Machinery & Equiment 39. Baroid Surface Solutions 40. Kudu Pumps 41. Tarco International 42. Top-Co LP 43. TTS Sense Source: Own research Gas Pipeline construction Pipe Coating Software to optimize process manufacturing Hydrocarbon production, engineering and equipment optimization Advise MSC Project; Contractor for new fiscal law Pemex Manufacturers Drilling products Progressive cavity pumps for heavy oil appl. Enhanced oil recovery Cementing equipment Equipment for rigs and vessels n.a. n.a. 2006 2008 2009 Mxico D.F. Mxico D.F. Poza Rica Cd. del Carmen 1998 2004 Mexico D.F. San Nicols de los Garza, Villahermosa Drilling services Conventional oil well stimulation Drilling services Monitor, control and automation processes 2009 2009 n.a. 2001 Mxico D.F. Cd. del Carmen Poza Rica Villahermosa, Poza Rica Houston Mxico D.F.

n.a. Rig safety systems Wholly-Owned Subsidiary (Key 2007 Energy Services de Mexico) Drilling services Drilling rig relocation oilfield support services Drilling services Upstream Manufacturing seismic instruments Drilling services Drilling fluids, solids control management Drilling services Drilling services Drilling contractor Drilling Services 2009 n.a. n.a. and n.a. 2002 2007 2004 2009 engineering, and waste 2000 2009

Cd. del Carmen

Houston Poza Rica Reynosa, Poza Rica, Villahermosa, Cd. del Carmen, Ver. Reynosa, Poza Rica Poza Rica Villahermosa Burgos, Poza Rica Poza Rica Poza Rica

Drilling technology and services 2005 2008 Drilling services Well stimulation work 2009

n.a. n.a.

Mxico D.F. n.a.

2003

n.a.

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II. MARKET ENTRY STRATEGIES 2.1 General Framework

As shown in Figure 3 below, the Energy Reform opens new avenues of business for Albertan oil & gas service companies that are already positioned in Mexico or are targeting to do so, and that belong to any of the following categories: equipment suppliers, specialized technology service providers, subcontractors and/or business services providers. Figure 3 Impact of Energy Reform on Entry strategies

Pemex operating regime offers the following benefits: 1. New models of contract. Contracts will be subject to the rules established in the Pemex Law, its regulations and the directives issued by the Pemex Board of Directors, rather than to the general government procurement framework applicable to other public entities. Public bids shall include stages in which companies will be able to negotiate contract prices. Contracts may include clauses that will allow amendments in order to include price adjustments as a result of the application of new technologies, changes in market prices of supplies and equipment and new information that may increase project efficiencies. Also, price clauses may establish additional compensation when contractors save time in the performance of the works and as a result of Pemex benefiting from better technologies or other project efficiencies introduced by the firms.

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2. Lower administrative overhead. Once the contracting areas of Pemex adopt simpler and more objective and transparent procedures for contracting, small and medium service companies will benefit from a lower administrative overhead. 3. A Governing Board will be responsible for the projects, instead of the works resident (residente de obra). This will make decisions much less bureaucratic and allow a better interaction between Pemex and companies to seek ways of making decision-making about processes more efficient and transparent. To this date, AB oil & gas service companies have recurred to many different entry strategies into the Mexican market, as shown in Table 2. Following is a description of the main avenues of entry into the Mexican marketplace, together with some relevant examples of companies currently operating under each one of the schemes. Table 3 Entry Strategies of Canadian Oil & Gas Service Companies
Area/Company 1. Geophysical service & mapping AGAT Laboratories Concentra Tek Core Labs ION Geophysical Terra Energy Petroleum Geo Services 2. Drilling and support services Blackwatch Energy Services Calfrac Well Services C-FER CanElson Drilling Canadian Energy Services Alliance Drillers Technology Enbridge Ensign Energy Services Entech Energy Group Invensys systems Katch Kan Ltd. Leader Energy Services MI Drilling Fluids Mullen Group Subcontractor Wholly-Owned Subsidiary Representative JV with Grupo Diavaz (Diavaz CanElson de Mexico) JV (Project specific) CICSA JV with Schlumberger Wholly-owned subsidiary Acquired Foxxee Services Holdings Inc., private Houston-based company that owns and operates six drilling rigs in Mexico, with 2 subcontracts with Weatherford JV with Marcos y Asociados and Terra Energy Wholly-Owned Subsidiary (Invensys Systems de Mexico) Agent / Materiales y Equipo Petrolero Wholly-Owned Subsidiary (Key Energy Services de Mexico) Wholly-Owned Subsidiary (MI Drilling Fluids de Mexico) Interline agreements w/Mexican carriers Wholly-Owned Subsidiary (AGAT Labs Mexicana) Wholly-Owned Subsidiary Wholly-Owned Subsidiary (Core Lab Operations) Agreement with COMESA Wholly-Owned Subsidiary Wholly-Owned Subsidiaries Entry Strategy/ Name of Mexican Subsidiary

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Continued Table 3 (above) Nabors Nexen Nisku-based Hyduke Energy Services Oyo Geo Space Canada Pantera Drilling Trust Qmax Solutions South Mexico Sanjel Saxon Energy Services Savanna Energy Services Corp. Strata Energy Services Tesco Drilling Innovation Top-Co LP Xtreme Coil Wavefront Technology Solutions 3. Pipelines TransCanada Shaw Pipe 4. Information Communication Technologies Aspentech Enerflex 5. Oil & Gas Field Machinery & Equipment Baroid Kudu Pumps Tarco International TTS Sense Source: Own research Sales office Distributor Wholly-Owned Subsidiary Pemex contractor Wholly-Owned Subsidiary Sales office Wholly-Owned Subsidiary (Aspentech de Mxico) Commercial agreement with Mexican companies Wholly-Owned Subsidiary Wholly-Owned Subsidiary (Shaw Mexican Holdings) Wholly-Owned Subsidiaries (Nabors Perforaciones de Mexico) Collaboration agreement with Pemex Subcontractor Mexican drilling firm Commercial arrangement Subcontractor Wholly-Owned Subsidiary (Qmax Mexico) JV with Industrial Perforadora de Campeche Wholly-Owned Subsidiary JV con Schlumberger Subcontractor Halliburton Wholly-Owned Subsidiary (Strata Energy Services de Mxico) Wholly-Owned Subsidiary (Tesco Oil Field Services de Mxico) Distribution Office Wholly-Owned Subsidiary Letter of Intent with Pemex

2.2 Agents, Representatives and Distributors

For purposes of this report, agents are defined as representatives who primarily rely on commissions for compensation, but who receive a retainer as well and who have as their primary responsibility developing business and servicing clients. This category appeals primarily to equipment manufacturers who cannot afford the cost to set up an independent marketing organization and who require near-term cash flow. Equipment suppliers will often rely on agents, but agents are not commonly used in the service sector because services are not easily exported without a local base. Agents usually receive commissions and/or success fees only but occasionally will receive a monthly retainer. The most common alternative to an agent is

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establishing an independent marketing company, but this can be expensive and takes time to achieve results. The results from using agents have been mixed. Finding a good agent dedicated to building your business can be a challenge. Although finding one with the right business connections can be achieved, many agents are spread too thin representing various lines and applicationsand thus are unable to give enough attention to marketing a particular product. Others may not have sufficient technical knowledge to effectively sell or service the product. The financial relationship with agents should also be carefully managed, as cases of agents failing to pay debts or committing illegal acts have been reported. The criticism most often heard is that the agent has too many diverse interests, and the agent not always understands the product and therefore cannot effectively market it. Thus, some of the most important criteria in selecting an agent are: technical knowledge and capability, marketing and sales ability and reputation and relationships with target customer base. In some industries, having a national presence is essential. In Mexicos oil & gas sector, however, this may or may not be relevant. Most PEMEX subsidiaries and operations tend to procure from the local field offices (which may be diffuse) more than headquarters. For instance, most of PEMEX Exploration & Production (PEP) procurement is done out of the five regional offices. However, large, integrated projects are more likely procured from headquarters in Mexico City, and relationships within PEMEX tend to be built top down. Therefore, having an agent with a presence or at least relationships in not only Mexico City but also each of these offices may be advantageous. Another option is employing a field agent in a particular targeted region, such as Villahermosa, Ciudad del Carmen, or Burgos, and employing more of a marketing agent in Mexico City. In any event, companies should avoid relying too heavily on the ability of the agent to single-handedly develop business. Agents/representatives can act as facilitators but cannot drive the business. The agent/representative must be managed and international sales support must be provided from corporate or regional headquarters. At some point, it is important for Canadian company officials to interface with the Mexican client. An agent, representative or distributor can assist the supplier develop the market, prepare public and private bids, gather project intelligence, build relationships, and increase brand recognition among PEMEX officials and contractors. Unlike distributors, who actually buy and resell equipment and merchandise and may keep inventory, agents and representatives only facilitate the sale. As such, commissions for agents and representatives tend to be relatively lower than the profit margins of distributors for a similar product. Moreover, Mexican distributors usually seek exclusivity for a specified sales territory and generally represent the manufacturer in many aspects of sales and servicing in that territory. The exclusivity, therefore, is in return for the substantial capital investment that may be required in handling and selling equipment. On the other hand, manufacturers representatives and independent agents will often work in conjunction with the suppliers in-house business development and sales team.

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To achieve the best results, companies should carefully screen potential agent candidates. Ask the candidate for client references and interview some of them. In addition, consider retaining a reputable firm to conduct a confidential evaluation, and watch for any potential conflict of interest. The concept of a conflict of interest in Mexico can be sometimes loosely interpreted. Terms of the agreement are also important, and Mexican law varies significantly from Canadian law. As such, Canadian companies are advised to seek the assistance of local counsel before entering into binding agreements in Mexico. Former PEMEX employees could be considered for the role of an agent or representative, but they should be checked out independently of the recommendation from PEMEX or a third party. Indeed, it is common in Mexico to recommend friends who may not have the necessary expertise for the task at hand. Table 4 Example of Company entering the Mexican Oil Market through a Distributor
An Edmonton-based company that specializes in providing equipment used in the cementing of wells has more than doubled revenue in three years, thanks to international expansion. Top-Co does nothing but design, manufacture and distribution of casing cement equipment. Were specialists. There is only a handful of companies that do this in the world and we dont want to move outside our niche, says a well-traveled Gerald McLaughlan, president and CEO, who spends at least half of his time outside Canada. Youve got to go where the business is. McLaughlan says. Being international has been the key to Top-Cos success. Now active in 62 countries worldwide and working with the Canadian Trade Commissioner Service in several of them, Top-Co has expanded by consistently being an innovator and enhancing its product lines into technology-intensive applications for horizontal and directional drilling and heavy oil. The company has been designing and manufacturing float and mechanical cementing products since 1963. It has 275 employees working from a 165,000-square-foot facility in Edmonton and a 25,000-square-foot plant in Weatherford, Texas. It is opening a third facility, in the Persian Gulf, in 2010. Top-Co has distribution and customer support centers in Edmonton, Calgary, Houston and Weatherford, as well as Mexico, Russia, Azerbaijan and the United Arab Emirates. Independent sales agents and distributors are in more than 40 countries. Virtually all design, manufacturing and testing of its products is performed in-house using electronic design media and three-dimensional modeling before release, so the company is not relying on sub-contractors, who can create delays and lead to loss of quality control. This vertically integrated structure provides maximum flexibility. Speed is critical in this time-sensitive industry. McLaughlan says 99%, if not 100%, of the time Top-Co ships out domestic orders within 24 hours of receiving a customer request. In addition, its $3-million computerized flow-loop test facility enables the company to test new products and conduct failure analysis before they go to the field, or to conduct failure analysis on problematic equipment. There is nothing like it in the industry, and its sitting here in little old Edmonton, says McLaughlan. Based on Lynda Harrison, Albertan companys extensive reach provides recession protection, New Technology Magazine, December 1, 2009

2.3 Joint Venture (General)

Partnering with a local Mexican company can be a very desirable market entry strategy. The advantages include: o o o Political clout The sharing of expensive administrative costs Earlier cash flow and market penetration

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o o o o

The knowledge of doing business in Mexico: permitting, labor, PEMEX relations and community relations Instant name recognition A statement that the foreign company is committed to the market Cultural sensitivity

Issues to be addressed include: o o o o o o o o o o o Due diligence Reputation and goodwill Financial standing Assets (including existing contracts and clients) Obligations and liabilities (contracts, debts, employees) Legal structure Access to books and full disclosure (presumably the local partner will be responsible for day-to-day administration) Finding a suitable local partner Complementary value added skills Ensuring the Mexican partner can pay his share of the costs Scope of partnership and exclusivity (whether you or your partner will be able to conduct other business not related to the partnership independent of each other) Agree on goals and objectives (important to ensure you are on the same page as your potential partner, especially considering that cultural and linguistic barriers to communication often cloud this understanding) Corporate governance and dispute resolution

Potential local partners have particular strength in undertaking the local EPC (Exploration Project Components) of large infrastructure projects, as well as consulting and project development. However, because of an inability to meet financial guarantees, in most cases they cannot take the EPC lead. Indeed, PEMEXs monopoly on the rights to explore, produce and refine hydrocarbons and primary petrochemicals, and the States virtual monopoly in electric power generation and gas transportation has retarded the development of local private sector know-how in these essential areas. Accordingly, the foreign partner will be expected to provide the technology and the local partner is typically chosen more on reputation and ability to sell and manage. Table 5 Example of a JV between a Canadian and a Mexican Oil&Gas Service Company
On October 5, 2009 Randy Hawkings, President of CanElson Drilling Inc. announced today that CanElson had formed a Mexican joint venture company, Diavaz CanElson de Mexico, S.A. de C.V., with D&S Petroleum, S.A. de C.V., a wholly owned subsidiary of Grupo Diavaz, S.A. de C.V. ("Grupo Diavaz"). Both companies have a 50% interest in the Mexican joint venture company. The business of the joint venture company will be the purchase and/or construction, and operation of, one or more drilling rigs in Mexico and the ownership and operation of service rigs. In January 2010, CanElson Drilling Inc. announced that its Mexican joint venture company, Diavaz CanElson de Mexico, S.A. de C.V. ("DCM"), had started up service rig operations for DS Servicios Petroleros, S.A. de C.V. ("DS"). The service rig will continue working for DS in the Ebano-Panuco-Cacalilao fields of Misantla-Tampico basin of Mexico. This service rig was

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contributed by DCM's Mexican partner as a non-cash contribution. CanElson is currently retrofitting its recently acquired service rig for deployment to Mexico under similar terms. CanElson will provide the management and expertise for the service rig operations of DCM. As previously announced, CanElson has a 50% ownership interest in DCM, with D&S Petroleum Services, S.A. de C.V. (a wholly owned subsidiary of Grupo Diavaz, S.A. de C.V.) holding the other 50% ownership interest. The business of DCM is the purchase and operation of drilling and service rigs in Mexico. "With the commencement of service rig operations in Mexico, CanElson will look to capitalize on further opportunities in Mexico through its interest in DCM as well as its growth platforms in Canada and the United States", stated Randy Hawkings, President of CanElson. Sources: http://www.marketwire.com/mw/rel_ca_print.jsp?id=1100453&lang=E1 http://www.highbeam.com/doc/1G1-209031456.html

2.4 Project Joint Venture with a Mexican Company

The mechanics or project-specific joint ventures are similar to local partnering. This strategy is usually attractive for large single projects involving public bids. Examples include power plants, gas distribution or cross-country pipelines, and other infrastructure development. Foreign investors usually seek joint venture partners with expertise focused on the specific project with no commitment to collaborate on future projects. As such, an advantage of project-specific joint ventures is that the foreign investor may check out its new partner before considering more encompassing collaboration. From a legal perspective, it is important to include a detailed joint venture or shareholders agreement that addresses key issues such as decision-making, voting and veto rights, and dispute resolution. Because the joint venture company will be Mexican and therefore Mexican company law will govern, the joint venture agreement must also be subject to Mexican law, otherwise there is a risk it will be unenforceable in Mexico.

2.5 Mexican Subsidiary

Companies may also opt for a subsidiary (greenfield or through acquisition) or open a subsidiary sales office. Going it alone is attractive especially to large corporations with a sufficient start-up budget, international name-recognition, a long-term view, and patience. The advantages of this strategy are that it: o o o o o Eliminates the need for agents or representatives Puts the company directly in contact with the Mexican client Shows corporate commitment to the market Preserves corporate culture and helps ensure action taken is consistent with corporate objectives interests Facilitates integration of services with home office

Disadvantages are that it: o o o Usually requires more patience before profits can be achieved (3+ years is not unusual in Mexico) May require expatriates, which is expensive Takes more time to build a network of contacts and learn how to do business under local conditions

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o o

May make access to senior decision-makers (especially in government) more difficult until the company is considered to be a serious player May make access to market intelligence more difficult.

Acquiring as opposed to establishing a Mexican subsidiary provides for more immediate results. Once the transition to new management is complete, the home office can rely more heavily on local staff while overseeing operations from Canada with occasional travel. Table 6 Example of a Canadian Oil & Gas Service Company with Wholly-Owned Subsidiary in Mexico
In July 2007, Calfrac Well Services Ltd. through its wholly owned subsidiary, Calfrac de Mexico S.A. de C.V., was awarded a three-year contract with Pemex Exploracin y Produccin for the provision of hydraulic fracturing services in the Burgos field of northern Mexico. The Burgos field borders the United States along the Rio Grande River, running from Laredo through McAllen, Texas. Calfrac plans to set up a district base in Reynosa, Mexico. Equipment required to fulfill the contractual commitments will be supplied from Calfrac's existing North American operating fleet and fracturing operations are anticipated to commence early in the fourth quarter of this year. Over the term of the contract, estimated gross revenue is expected to be approximately US$75 million, including subcontracted services. Calfrac believes that entry into the Mexican well service market provides an exciting opportunity for the company to expand in a major international fracturing market, which has substantial potential for future growth. Entry into this market is a continuation of Calfrac's strategy of diversifying geographically into new markets that are not dependent on natural gas drilling in the United States and Canadian markets. The Company's fracturing activity in the Chicontepec region increased significantly from the second quarter of 2009 due to the deployment of a second fracturing spread and the impact of a full quarter of operations offsetting a decline in fracturing activity in the Burgos field. The Company also deployed six cementing units from Canada into Mexico during the third quarter and early in the fourth quarter and commenced cementing operations in Chicontepec in mid- September. Calfrac's common shares are publicly traded on the Toronto Stock Exchange under the trading symbol "CFW". Calfrac provides specialized oilfield services to exploration and production companies designed to increase the production of hydrocarbons from wells drilled throughout western Canada, the United States, Mexico and western Siberia in Russia. Sources: http://www.rigzone.com/NEWS/article.asp?a_id=47917, http://www.istockanalyst.com/article/viewiStockNews/articleid/3609019

2.6 Subcontracting & Licensing

There may also be occasions when a Canadian energy company prefers to enter the Mexican market by subcontracting a local firm to carry out certain aspects of a larger project or by licensing know-how, technology or other intellectual property to the Mexican counterpart. The advantage of licensing and subcontracting agreements is that they allow the foreign company to generate significant profits while minimizing in-country risk. Subcontracting is particularly common among lead bidders on large infrastructure projects such as IPPs (Independent Power Producers), drilling contracts, integrated service contracts, and productive infrastructure projects in general. Before agreeing to subcontract Mexican content for a bid situation, however, one must closely review the tender conditions to ensure subcontracting is allowed. In many bids,

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PEMEX or CFE will expressly prohibit bidders from subcontracting, instead requiring that all work be done by either the lead bidder or a bidding consortium. Licensing, on the other hand, may be applicable not only to bid situations (e.g., when a bidder requires a specific technology such as computer software or other intellectual property) but also for local manufacturing. Sometimes an equipment manufacturer may wish to establish a permanent, on-the-ground presence in Mexico but prefers not to run the risk of starting up a manufacturing facility in a foreign jurisdiction. In this case, the Canadian manufacturer may choose to license specific technology and know-how (patents, trademarks, patented molds, design and manufacturing processes, etc.). This can be done through transfer of technology and license agreements, whereby the licensee pays the licensor a royalty equal to a certain percentage of sales of product produced by the licensors technology, as well as technical assistance agreements and service contracts. Table 7 Example of a Subcontract Venture between a Drilling Firm and a U.S. Multinational
At the end of 2009, Savanna entered into a contract with a large U.S. based, multi-service provider to deploy four existing rigs from its Canadian/U.S. fleet into the Chicontepec region in central eastern Mexico. The rigs are contracted to work at a utilization rate of 100% for an initial term of 18 months, with an extension option. The rigs to be supplied under this agreement are mid-depth telescoping double drilling rigs, representing the core conventional platform within Savanna. The rigs will require minor modifications to allow them to work effectively in the Chicontepec region, such modifications and additional equipment expected to total less than $6 Million. The rigs are expected to be operational in Mexico by midAugust, 2009. All costs relating to mobilization of the rigs into Mexico from the U.S./Mexico border will be borne by the operator. Similarly, demobilization of the rigs, if any, will result in delivery of the rigs to the U.S. as well. Given Savanna's intention to expand both its U.S. and international operations, this flexibility will be advantageous. This represents the first expansion of Savanna's drilling operations beyond Canada and the United States, however it is anticipated by the Company that we will continue to expand our international presence moving forward. Of the four rigs that are mobilizing to Mexico, two will be relocated from the current U.S. fleet, and two will be delivered from the previously announced four rig new-build program. With the execution of this contract, Savanna now operates four rigs in Mexico, 14 in the U.S., 87 in Canada, and will be accepting delivery of two additional new-builds by Q3, 2009, resulting in a total fleet of 107 drilling rigs. Savanna is a leading North American contract drilling and oilfield services company providing a broad range of drilling, well servicing and related services with a focus on fit for purpose technologies for key drilling markets and industry-leading aboriginal relationships. Source: http://www.tradingmarkets.com/.site/news/Stock%20News/2399752/

Table 8 Example of a Canadian Subcontracting Venture to an Integrated Service Company in Chicontepec

In February 2009 Xtreme Coil Drilling Corp. announced the expansion of existing operations in Mexico, following execution of a new drilling contract with a Weatherford International subsidiary. This new commitment in Mexico required two XTC 400 drilling rigs to operate in the Chicontepec oil development project near Poza Rica. Since mid 2008, Xtreme Coil initiated the company's first international project in Mexico with six newly built COTDTM drilling rigs. The company has now established a fully staffed Mexico office as an operational base near Poza Rica. Its drilling operations personnel have achieved significant success by

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recording a very high rate of rig productive time at approximately 95 percent. In September 2009, Xtreme Coil's wholly owned subsidiary, Xtreme Coil Drilling Mxico, S.A. de C.V., entered into eight new long term day rate contracts for Coil Over Top Drive ("COTDTM") drilling rigs with Weatherford. The long term contracts cover a term of 18 months of 100 percent utilization at day rates substantially similar to expiring contracts and include options for three six month extension periods. Xtreme Coil now has all ten rigs in Mxico contracted into the 2011 fiscal year. Under these contracts, the ten drilling rigs in Mexico will continue to operate in Chicontepec. Based on Xtreme Coil Inks Contract with Weatherford: Adds 2 Rigs in Mexico, March 2, 2009, available at www.rigzone.com/news/article.asp?a_id=73555

Table 9 Example of AB Sales Operation linked to a Service Contract with an Integrated Multinational
In January 2010, BlackWatch announced that it had finalized a drilling services contract with a major international energy services company in connection with the Company's previously announced acquisition of six drilling rigs in Mexico. The acquired rigs are three diesel-electric triples and three "super single" style rigs, with maximum depth capacities ranging from 3,500 metres to 4,500 metres. The super single rigs are newly commissioned, state of the art, flexible and capable of operating in deeper applications. The triples have a mixture of self-moving, top drive and pipe handling systems. The drilling services contract is pursuant to the customer's integrated project management contract with Pemex. Source: http://www.marketwire.com/mw/rel_ca_print.jsp?id=1102970&lang=E1

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III. COMMENTS FROM INTERVIEWS

This section summarizes the information collected through the face-to-face and telephone interviews. The presentation follows the order of the Questionnaire that was applied to representatives of the following entities: consultancy group (1), law firm (1), Canadian utility (1) and local and foreign oil and gas service companies (14). Each point includes general comments and the highlights of the interviews. To preserve confidentiality, the names of interviewees are presented with the following acronyms: Consultant (C), Law Firm (LF), Local Service Company (LSC), Canadian Service Company (CSC), American Service Company (ASC), European Oil Service Company (ESC). The main benefit of this section lies on the selection and compilation of statements from interviewees. Its richness derives not only of the wide range and diversity of opinions that result from the many perspectives covered by the various people interviewed, but also from the fact that most of the opinions appear as they were expressed. The editing work was kept to a minimum in order to reproduce (to the extent possible considering the obligatory translation process) statements with all their conversational nuances. 1. Is there another entry strategy to the energy market in Mexico you would add to the list above? With no exceptions, companies interviewed considered that there are five possible entry strategies into Mexico: agent, local partner, go-it-alone-, JV and subcontracting. Some companies opt for one of the strategies: We have used local partnering only. (LSC) Others prefer to combine strategies: We actually have two of those. We have a direct business relationship with Mexican companies and we also subcontract. (CSC) The strategy to be adopted depends on the type of activity. Integrated service companies require a presence but equipment suppliers can start by having a person in Mexico to make contacts and take the first steps with Pemex. As companies grow, they would have to have a sporadic presence and eventually set up shop here. However to set up shop I do not think that by flying in a bunch of expats you can do the work. People in Mexico are more capable to do the business in a directed fashion. (CSC) Mexican companies with experience in dealing with Canadian partners have worked well with them under the scheme of an associated agent who performs as the Canadian companys local people, either on a single project or as a JV. This is particularly helpful to open doors in Pemex for Canadian companies to present their technologies, have them tested and eventually arrange the contracting. (LSC) A representative can present a project to Pemex. Pemex can argue that it might be better to integrate several services in a single contract. Then you can operate more efficiently and have a strategic advantage. You can get that contract and administer the subcontractors. Otherwise, if you wait until the bid comes out, you do not get that benefit. (LF) The main disadvantage of an agent is the lack of control over the institutional face that this person has with Pemex or over what he does with Pemex. Canadian

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companies are subject to the laws on Foreign Corrupt Practices and sometimes agents have an interest because they are paid based on a commission on a project and they can take commitments that create problems for companies. It could be that the foreign company is happy because it got the contract but then finds out that the agent promised to pay 10% to people in Pemex. Agent schemes are good whenever there is a good monitoring and communication and very clear directions on limits that the company is willing to accept with regard to corruption and other issues. (LF) Foreign companies often mistakenly think that by going alone and winning a bid with Pemex, they have succeeded. It is only then that the real work starts, because Pemex demands a lot of presence and you need someone to deal with problems such as when Pemex decides to cancel with anticipated payments. Canadian companies can not have their main partners or executives in Mexico one or two weeks per month. They should be here all the time as well as in the field. (LSC) The main advantage of a JV is that you can share the expenses and mitigate the amount of capital that has to be invested, but the downside is that you run the risk of staying tied to a partner for the entire duration of the contract. For small companies that have equipment but do not have a large capital or the people that can come down and run it, a JV can work well. If each side has something to provide during the entire life of the contract it can make sense. Subcontracting works particularly well for companies in the area of construction of pipelines because you only need subcontractors during the construction phase; after construction, the operation becomes very small and it is something you can easily maintain in your own operations. Any company that can make a subcontract is in their best interest to do that. (CU) The best way to start operations is to set up a subsidiary in Mexico for fiscal reasons and because, according to Mexican Laws, all the risks that are taken in Mexico are limited to the Mexican company and are not extended to the foreign partner company. The disadvantage of this type of entry is the cost implied of having a company in Mexico and the administrative overhead implied in having to pay taxes and comply with local regulations. (LF) The main advantage of subcontracting is that companies that opt for it do not have to go through all the learning curve of how to do business with Pemex. Typically they are contractors who have worked for the integrated service company in other parts of the world. However, the disadvantage is that the subcontractor suffers the same result as the main contractor. The schemes are set up in such a way that I pay the subcontractor as long as Pemex pays me. If the subcontractor works well, but another 14 do not and Pemex does not pay, the contractor will suffer the consequences. There is also the possibility that, due to bad works of other contractors, the reputation of a company is damaged. Companies that subcontract do not have control of the project as a whole. The main risk is that payment is subject to the work of others, something one can not control. But in general, subcontracting has more advantages than disadvantages. (LF) The bottom line is that, no matter what entry strategy a company chooses, its success will be determined by how good its technology is. The company that has the most competitive technology will be the most successful. Precision Drilling proved it. (LSC)

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There will be good opportunities for all types of entrants mainly in deepwater, in Chicontepec and in mature fields since Pemex is going to become an administrator of small, medium and mature fields. Canada has many small fields that yield between 50 and 200 barrels and the companies that exploit them can come and adapt their technologies to the local formations. In Canada they drill six months and stop drilling six months. During the six months that they do not drill at home they can come to work here, earn and save cash flow to have money for the time when production starts again in Canada. (ASC) Canadian companies will have more opportunities because Pemex needs to increase its production and will be able to grant blocks to contractors and they will have the opportunity of bringing all kinds of companies, and it is likely that they will put several companies to work together with a few rigs each. There will be good opportunities not only of working with Pemex but with the largest contractors. (LF) One of the interviewees made a very important point, applicable no matter what entry strategy a company decides to take, related to the need to know the local culture: Any start-up of a business in Latin America needs to consider the cultural issue. Canadians need to understand that there is a fundamental difference between the business model of the oil industry in Canada and the one that exists in Mexico. In Canada, oil is produced by private companies guided by a profitability principle. In Mexico, as in other Latin American countries, national oil companies are closely linked to political, economic and social changes in each country; they exist not only to produce energy and provide efficient services, but to respond to social needs. Foreign business models should be adapted to the local environment. (CSC) 2. Could you please describe your business under one of the following categories? Consultants; service companies and subcontractors; integrated service companies; engineering and construction companies; equipment suppliers; exploration and production companies; utility service; other. The main attributes of Mexican oil service companies are: a) High degree of diversification. Mexican companies started in the drilling business and diversified into other areas of the industry, mainly, into the manufacturing of equipment. Swecomex does engineering and construction, supplies equipment and does E&P. Today it is mainly a drilling company but its origin is the manufacturing of equipment and drilling platforms. We are in charge of detail engineering for PEMEX plants and platforms. We also manufacture and install the pipelines. (LSC) We are an integrated service company, subcontractors, an E&P service company and utility service provider (natural gas). (LSC) b) Deep knowledge of the bidding process with Pemex. We provide services to PEMEX as CSM (Contrato de Servicios Mltiples). (LSC) We entered into Mexico as a shareholder of PEMEX under the new scheme of the Multiple Service Contracts. (ESC) AB companies already established in Mexico have sought associations with Mexican companies because they recognized the value of experience and knowledge of the market of their Mexican counterparts. Canadians saw in us many years of experience in the market which gave us good chance of entering the Mexican market in the next three years, which is the duration of the contract. By forming a JV with a well-recognized Mexican company, the Canadian company was

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able to overcome the two main entry barriers into Mexico: distance and the type of contracts applied in Mexico, which are very complex. (LSC) c) Experience in the marketplace. Mexican counterparts offer themselves to do many things, all the way from knowing what door should be tapped to present a bid, which is very complicated to overcoming day-to-day difficulties. People do not know how to write a bid correctly. Pemex has its own language. You have to write the bidding papers in a certain way. We are very good at writing bids and this helps to not being disqualified due to a certain technicality or a certain notary requirement or a simple matter. Pemex has very complex and bureaucratic questionnaires. Foreign companies do not understand them and look for an agent that has done many bids like us, because we present one every week. We have 2-3 people that do only that. We have heard of clients that [] are going to be cancelled beforehand, and the client calls us to see what can be done in order for Pemex not to cancel the contract. What we do is go and have a chat with them, understand why they are planning to cancel, understand their needs, open options, and negotiate an exit strategy. (LSC) In contrast, most AB companies already established in Mexico are usually specialized in one area of the industry, either on the side of drilling services or on the manufacturing of equipment. Our boss has always wanted that the company be in sales, not services, and sell only the equipment in which we specialize. (CSC) We are a manufacturer of oil drilling equipment and we provide service and support to that equipment. (CSC) With the exception of integrated companies that have been in Mexico for a decade or so, the new arrivals are generally unfamiliar with Pemex bidding processes: They told me that we would have a meeting with the engineers in Villahermosa. I was ready. But they told me that I had to fill in a questionnaire, mail it, and wait. I came with the mentality of getting the job done right away. But here things are different. (CSC) In the past, companies from AB preferred to stay away. Now they are taking a wait & see attitude. They are interested and many of them are playing a gaming of positioning themselves in the Mexican marketplace. They consider that they should be here, understand what is happening and wait until the real thing occurs. A significant increase in the number of companies coming may occur in the next six months because by then we will have the new models of contract. (LF)

3. How long has your company worked in Mexico? Most Mexican oil service companies have been in the industry for a long time. Almost 30 years. (C) We have been in the industry for 50 years. We started as South West Engineering when it opened its plant in Guadalajara to provide services to the Mazatlan refinery. PEMEX is our client since then. (LSC) We are in the business since the 70s. We started as a diving company and then grew with the development of Cantarell and the Sonda de Campeche. (LSC) We started with project financing 15 years ago. Now we mainly do business development. (LSC) In contrast, the first AB service companies came to Mexico in the beginning of the 90s. TC had two pipelines that we built in the 90s. One was Mayacn, 700 km in the Yucatn peninsula, and El Bajo with 200 km. They sold those two assets to Gaz de France when TC merged with Nova because they needed to sell some of their

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international assets in order to consolidate the two companies. This merge was the largest in Canadian history at the time. When things got better for the company financially, they came back into Mexico in 2005 with the Tamazunchale pipeline. (CU) Latest AB service companies that arrived to Mexico have been here from a year and a half (CSC) to almost a decade (CSC). Together with the large integrated companies, these small ones drill two-thirds of Pemex's wells and conduct nearly all of the seismic work needed to locate oil reservoirs. 4. Please describe your market strategy and mention if it was the correct one. Successful entry strategies were described as follows: - Go directly to clients, without agents not intermediaries. (LSC) - We deal directly with Pemex. We do not have an agent or anyone that helps us with invoicing. We do it all ourselves. It was tough in the beginning. (CSC) - We participated in CSM bidding with local partnership and consider the approach very successful. (LSC) - We have a commercial relationship with a company from Calgary. We work jointly very well but we do not have anything signed nor have any mutual commitment. We buy them equipments. They did not even open a representative office in Mexico. When Pemex also wants to buy these equipments we have acted as intermediaries, as front-end, but we do not have a representation or exclusivity contract or anything. (LSC) - The contract we signed the first time was not attractive from the standpoint of profitability but it was our way of starting to work with Pemex. The value that the company gave to it was the chance to learn how to work in Mexico. (ESC) - We have had a go it alone (greenfields) strategy that has worked for us. Our company does not like JV because they find it complicated, it dilutes your revenues and increases the administration significantly. But this is something only a big company can do. In the case of a smaller company, I would strongly recommend that they have a local partner, a representative that works with them. (CU) - At the beginning we did not target Mexico with a specific business development strategy. We were targeted by our customers who are international companies who want to expand their business with Pemex when they expanded their contracting from us in Canada to build equipment. We considered Mexico once we realized that we needed to service that client locally. As we became more familiar with the market, as the market was growing, the decision was made to become a Mexican company in order to grow with the market. We decided to set up a wholly-owned subsidiary. (CSC) - We do not use agents. We set up shop. We put in the time and the money to have the facilities in order to work. I think our strategy was the correct one. We have not changed it since we started operating here. The only thing is that we got bigger. (CSC) Successful entry strategies have evolved overtime: - First we had small contracts, then larger contracts, then an alliance with a foreign company. This route has been imposed on us because there has not been any other way. (LSC)

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- In a first stage, we entered the Mexican market alone. Then we left the country and reentered in 2005 in association with a legal firm that helped us set up the Mexican subsidiary, took care of taxes, etc. (CSC) - Before we had small isolated contracts and now we have bigger contracts of integral services where we act as general contractors. Now Pemex integrates five to ten contracts in a single contract, deals with a sole supplier and we are free to look for best practices and best prices. Once we pass the filter of the bid we are authorized to subcontract whatever we want. There is no other way in Mexico at the moment. (ASC) - Canadians initially started going directly to PEMEX but they got desperate because of the long wait times. They then recurred to the large integrated companies who did in fact responded quickly but with bad and low payments. Now they are saying that they want again to go direct to Pemex. The problem is that there is a price to pay for the time to reach Pemex under the new contracts and that is what they are seeing right now. (LSC) Determinant factors of successful entry strategies include: 1) Good understanding of Pemex needs. We need to adapt to the needs of the client (Pemex), rather than being committed to a specific strategy. (C) We have grown according to the market and to the extent that our client (PEMEX) has allowed us to. (ASC) In the beginning Pemex did everything. Then it released some activities little by little and left more activities to be done by private companies. We are constantly moving in a territory which belongs to Mexican oilmen. We act according to what the client allows us to do and with the limits he imposes. (LSC) Pemex is difficult, it is a challenge, it is one of the hardest companies I have ever done business with anywhere in the world. There are a lot of reasons for why it is how it is and it is not going to change. We have to adapt and be flexible. Pemex does not adapt. You do not get paid for 9-10 months. This is how it is. You have to give them 100% alignment, not 95%. When we do that, things happen very good. (CSC) 2) Technology. We have an alliance with an AB company that emerged from the need of a service that we had to give. We did not have that experience so we looked for a strategic partner who knew this field well. We found a Canadian drilling company. The alliance was set up by us to gain experience and develop capabilities. They did the JV to partner with a company with a large experience in Mexico. At the same time, we shared risks with regard to investments and in bidding for contracts. (LSC) 3) Hiring of local personnel. Our success may be attributed to our technologies together with the recourse to local personnel trained to use them correctly. We have 500 people working in Latin America and almost 100% Latin personnel. In each country we set up teams with local personnel. We have come to Mexico to transfer technologies and train Mexican people to use them efficiently. This explains our success and our very important growth in the last three years. (CSC) Some entry strategies are being avoided because of local regulation. Such is the case of joint bidding: According to the Contract Law (Ley Mercantil) the risk is borne at 100% by all of the participants in a joint association. If I have 10% of the contract I am responsible for 100% of the contract. That is a concept that we never use. Either we make a JV and bear 100% of the risk, or we subcontract. (LSC)

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Medium-sized foreign service companies are also avoiding subcontracting for two main reasons: (1) delay in payments. They do not pay until 30 days after they get paid. If you need cash you are in trouble because you are eight months behind. Our company has sometimes being paid 200 days later. We are negotiating with them to get payment within 60 days; and (2) idle capacity. We are a fill-in so that might mean that we are working 50% of the time because they might have similar equipment to us and they might use us to fill-in. (CSC) Some companies who took incorrect routes had to change strategy along the way: We started worst than zero because the agent that we used to have left a very bad image of our company. But a year a half ago, I was not neither prepared nor ready to set up an office. What we did was the correct way. First we had to set up the foundations, establish what we had to do. (CSC) Success is not recognized locally. We have been working with PEMEX for 36 years and we never finish to understand them. It is very difficult. Congress and the Secretariats always take a very defensive posture. They continue to look at the private sector as an enemy, as if we were invading their territory. For Pemex people it is very difficult to recognize the achievements of a company. When something goes well it is due to Pemex, and when things go wrong it is the contractors fault. (LSC) No matter what entry strategy a company takes, it must respond to Pemex current needs. The main problem now is to terminate the well which is what interests Pemex. In Chicontepec, 800 wells were drilled in 2009, of which 400 have not been terminated and are not producing. Each one is producing 80 barrels. In Canada they have artificial systems and in Chicontepec all the wells need artificial liftings. (LSC) Any entry strategy should be flexible and patient. The amount of effort and time to keep the business running is 120%. That is where a lot of Canadian companies will fail. They might win a contract but their sustainability record is not very good, because they do not understand, they do not get paid, [] mostly they do not address Pemexs needs. We spent a lot of time understanding how to do business with Pemex. (CSC)

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5. Has business met your expectations? Exceeded expectations? Not met expectations? Why? Companies expressing that business has exceeded expectations are the exception. PEMEX never stops paying, even for works not included in the contract through agreements. The only thing that one should not be is a bad supplier. Under the new regulations Pemex is going to pay for the technology testing, which before were not paid for. A company that brings in a new technology will be paid for testing it. If the tests do not result, the company will be paid at minimum cost to cover the tests and if it passes the test and gives results according to expectations, Pemex will sign a contract. The other important change is that there are adjustments to prices based on the market. (ASC) Most of the comments about the extent to which business has met expectations are equally divided between the affirmative and the negative. The responses on the Yes side say that it is mainly because of good business planning. Typically we do a lot of analysis before we bid on a pipeline; the Tamazunchale pipeline has been very positive. It has met and slightly exceeded our expectations in terms of revenue. We are very happy with that asset. (CU) We always felt that it was a very good market, very attractive.(CSC) In the rest of the world nobody gives a car for free, you first pay for it and then you receive the vehicle. But here, because of the needs of the market and how things work out, everything is different. We have adapted and achieved our goals. It has costed us a lot of work. We have swum against the current but this is normal in every company. And we have learnt and have good results. (CSC) The responses on the No side have various explanations. PEMEX is not very flexible in processing changes to existing contracts. (LSC) The policy of our company is to never meet expectations. (LSC) The new scheme has not given our company new businesses, partly because multiple service contracts are not an investment, they are merely a list of prices. The expectations in terms of profitability at the start of the business were not good. [] Although our expectations were met, they were not that ambitious. (ESC) Those companies that are not satisfied with results so far are making adjustments and are now slightly more optimistic. The business has not met our expectations because of our own problems. Initially we planned to develop our business as a subcontractor but you can not grow the business with that. All we can do is to maintain what we have. So we took a more direct approach and increased our staffing levels of direct employment in Mexico by Mexicans. I am optimistic that this will improve the results. We have just undertaken it three weeks ago. (CSC) Business is slow right now. Ask me a year from now and I will say we are ahead of expectations. We are going to have good activity in 2010 and 2011. What was most helpful was to make a presentation to Pemex about the problems that exist in reservoir formation, what the limitations there are, how things are being done now, with a high level of confidence and technical capability. They listened very carefully and plan to implement some of our suggestions on enhanced recovery. (CSC) Among the secrets for success the following were cited by interviewees: Understand how Pemex works with the professional staff and be very aware of how the union operates. If you do not consider them, they will just shut you down and can make life extremely difficult. You need to understand why Pemex was

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formed and live and abide by that, not come across as being a threat or challenge as to how Pemex operates. We want to fine tune it and make it better. We can live within the current mandate and how it is now. We can live and operate within the current statutes quite easily. But we have learnt them and it took us a long time. We made mistakes but we learnt from them. (CSC) 6. To what do you attribute your companys success in Mexico? An interviewee summarized the keys to success referring to the four Ps: presence, patience, perseverance and pesos. (CU) Other described keys to success as follows: Presence: Hard work, constant presence in the market. (C) Companies may ensure success by way of a permanent presence. (LSC) The fact that we have a constant presence here makes a huge difference in terms of hearing about things in a timely fashion, knowing about changes to the projects, being appraised about what is happening in the energy sector. A local presence is extremely important for all these aspects. (CU) Personnel: The question of people is also very important. You have to have people who know how the situation is, so that when there is a problem they know who and where to go to fix it. Somebody you can trust. (LSC) The most difficult part was to get the proper people, people who we could trust. My most important asset right now is my people. I always give the chance to my workers of teaching me. It would be useless to hire an A+ engineer from Mexico City and send him to Poza Rica or viceversa. (CSC) We hire the most Mexicans we can. We have an executive team with my three other partners and three staff. Six of us make decisions that drive our company in Mexico. We rely on our staffs team of lawyers, accountants, taxation, import and export people. They have a tremendous amount of knowledge that helps us to succeed. If we tried to do it ourselves we would fail. We can not comprehend how it is done. We rely on them and it has worked. (CSC) I do not think a small company can come and do it on its own. That has not changed with the energy reform. You still need a local presence. You need to find good contacts and have certain amount of knowledge about how the culture works because there are people who are not legitimate. AB needs to bear in mind that they need to be selective in who they choose. They have to get someone they trust. And they have to commit to spend a certain amount of time here to understand how the culture works here. If they do not have to rely too much on their local partner, they can get off track sometime. I always recommend for the small company to have a certain amount of independence and not rely entirely on the local partner. (CU) Perseverance and patience: You must be perseverant and tenacious because you will probably go through very difficult times. It is very difficult to plan for growth. Since all contracts are through public bids, the market share that one may have may be totally different from the one that has the following year depending on the bids and results. (LSC) The issue with Canadian companies is that they do not understand international business whether it is Mexico, Colombia, anywhere; it is different. You have to be patient and you have to adapt to the local culture. It takes two to three years to get the respect and earn the right to win business here. (CSC) Technology: We provide what we believe is best technology, but we are not a manufacturer. We pick the best products that we feel will work. We are not red

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(Halliburton) or blue (Schlumberger). They have specific products that they want to sell. It might not be the best fit, it is what they have. We take a different approach. We look at what is best for the reservoir and what is best for the formation, and then we pick the best technology. The technology is not ours. We are an enabler. We know how to make complimentary technologies work together. (CSC) I strongly recommend that people do not come under a technology contract because it is not a good idea. You bring it in, it is tested for six months and then it is taken out, then it is assessed and then if it is good it goes to bid and your innovation becomes public even though it has a patent. We spent a lot of time learning that. We went down that path and we tried it because that is what we were told by Pemex Corporativo. We had technologies and patents that gave us an advantage. It was very painful and we lost $300,000 dollars going with that approach. (CSC) Interaction with client: One does not notice the division between who is from Pemex and who is from our company. Both interact and are closely linked. If something hurts Pemex, it also hurts us. Many companies make the mistake of coming, making business, but they do not interact with Pemex. There are not responsible partners. One should be a responsible partner. (ASC) We are more worried about them than about us in some ways. If they do well, they will probably want to continue working with us in future projects. But that is because of the way we have treated them. (CSC) Our key to success was to join Pemex in the baptism of fire of the Multiple Service Contracts. (ESC) It is always good to have a good relationship with the operator, because he can turn the business upside down. If you do not have a good relationship with the operator, and you need workers at such and such time and in such and such place, the operator will send them before or later, or will send them to a wrong place. Also, if the relationship with the operator is not good and you need some fluid to be sent, he will send a different one, etc. Canadians should be in very good terms with the operators, take, have lunch together. In any type of work, the local people are extremely important. We started a project to take away the water from the crude. It is a complex process. If you do not know the characteristics of the crude that you are going to receive, they send a different quality, the procedure that you have is useless, PEMEX will impose a penalty and there is going to be a big problem. It is very important to be in touch and meet the people in the field, even if one is used to deal with the boss and the one underneath. Canadians have to have Mexican personnel who know about these things. A company that has not worked in Mexico does not understand this type of things. (LSC) Strong contacts backed by professionalism and good information: We have strong contacts with our clients. But no matter how good your contacts are in Mexico, if you do not have the professional skills that they need for the projects that are evolving they are not going to hire you anyway. You have to back your contacts with a very strong product or service and give them results. Pemex needs to see results in their projects because they have to answer for them. So to the degree that you comply with your contractual obligations, that works in your favor for future projects. We do not ever give them excuses. If we are going to miss a timeline we let them know and tell them in advance. We are very open and there is a lot of trust between us and our Mexican client. It is mutual. I do not think that it is a trust that other energy companies enjoy. (CU) Next week we will take a class on how to look at the new reform and what it is going to do and how it will impact us. Four of our employees are going to attend this session and it was developed by a lawyer that understands how to do business with Pemex. We spend a lot of time trying to stay ahead of the curve. Now I am very happy where we are. But our

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approach might not work now because things are changing. But I know the reform, I know the changes, I know how long it is going to take, I spent hundreds of hours reading and understanding, I know public works contracts, direct assignments, and we know what works and does not work. (CSC) Plan to deal with the issue of local content: All foreign companies will have to find the right formulas to meet the requirement of local content, through an association or by means of subcontracting or the search of Mexican suppliers. Even if the technology is foreign, you can set up a company owned by Mexicans and Canadians and keep the patents on the technology. It is still unclear how they will implement the local content provisions. Perhaps in the beginning they are going to start by asking 35% of local content in the bid, with an emphasis on the transfer of technology. (LSC) We already manufacture in Mexico. Our content is above 25%. We assemble. Our intent is to use as much products and services from Mexico as possible even if there is a premium and we pay a little bit more money. I used that strategy every time I went to a new country. (CSC) Long term commitment to Mexico: Business here is not for a year. Work is for 1020-30 years. (ASC) We decided to make Mexico our last business effort. We will not chase business in other countries. We have no shortage of demand working in seven or eight countries but we have made a concentrated effort to be in Mexico. We love the people here. We contribute a lot back. We have a foundation. The strategy that I have used anywhere is the more you give the more you get. We bring essential needs. We have a long term plan to do more on the health care side with immunization shots. My wife is a nurse and she wants to come here and start some programs. Our intent is to move to Mexico 50-60% of our time. We are not here to rape and pillage. We are here to help the country, We want to grow together with Mexico. If we are just here to make money we would fail. In the short term, we will do OK, but on a sustained basis we will not. We want to be here for 25-30 years. We want this to be a long term sustained business. With that in mind we operate with a high level of integrity and values. So it is difficult at times. The work is difficult but the rewards are paying off. (CSC) And last, but not least, understand the culture: First thing we do is engrain ourselves and we try to understand the culture. We always make sure that we understand the culture and we do not offend anybody. In this country, relationship is first and business is second. Canada is not like that: it is business first and maybe you have a relationship. People tend to be too aggressive and push too hard. And when they get a no, they just turn off. So that is why most people try to go with agents. (CSC) 7. What are the main difficulties (legal, regulatory, bureaucratic, etc.) faced by your company so far? For AB oil & gas service companies, the most important difficulty to make business in Mexico is that they are unable to plan growth and they have to adapt to an environment full of uncertainties. Other difficulties they see are: Legal. Bad design of the contract because it does not align the interest of PEMEX with the interests of the companies. For Pemex the intent is to comply with a contract, not to produce more. (ESC) Legal requirements in Mexico are onerous just because there are lots of documents that you have to certify, provide copies of absolutely everything. The legal burden of doing business here is significant. Also,

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since we are dealing with are government contracts, you have to deal with changes of administration, changes of personnel that can change directions of projects. Those are large burdens. (CU) Companies face a very competitive environment to get the contracts from Pemex. They need to be aware that in Mexico bidding for a contract is a very complicated, quasi litigious legal procedure, where very often lawyers have to be involved. A company will face the need to get environmental and other kinds of permits and deal with labour isses (collective contracts, unionized workers, etc.) because in Mexico we do not have a regime of employment at will. (LF) Regulatory. Canadians get desperate very quickly because there are changes of directions and personnel in Pemex. Sometimes we are making progress, they change the rules and there is nothing we can do. (LSC) PEMEX has its hands tied. Many times although officials want to do something they can not. Nobody signs because there is a tremendous fear of the Secretara de la Funcin Pblica. In five or ten years, this Secretariat can come and ask them why they signed a paper. This accusation of patrimonial damage is a federal felony and people can go to jail. The lack of flexibility in contracts is particularly negative during emergencies. What happened was that in Mexico there was a time when everybody abused because Pemex officials could do what they wanted, so chains were put everywhere. We went from a discretionality of 100% to a total lack of mobility. (LSC) We need to know how to reach Pemex, how can we succeed in a bid, how can they publish a bid that allows us to win. But they tell me: Bid only for this. Their bids are extremely complex packages and I can not participate in them. We are being forced to make an alliance with other companies to be able to participate. (CSC) I do not understand why you have to be analyzed for every single bid for pages and pages and books and books of data. They ought to simplify the system and get to the point where they have qualified suppliers. But sometimes I send in a diagram in English and because it was not sent in Spanish I lose the bid. It is bizarre. The bids are so complicated that you end up losing them although you are perfectly capable of doing the business. They keep saying that the nails have to be four inches long, galvanized and there needs to be three in each intersection of lumber. That becomes very cumbersome. (CSC) Before the energy reform of 2008, Pemex contracts were designed in accordance to the Public Works Law. They were extremely rigid and not adaptable to the development of an oil field. That was one of the reasons for the failure of Chicontepec: multiple service contracts seek to drill wells but not to increase production. Incentive-based contracts will give a new dynamic to Chicontepec and the results here will be much better in the coming years. I applaud Pemex new focus of linking contracts to productivity, on payment based on results. It is a first step to force service companies to take risks, to make them link the service they provide to productivity. (CSC) Bureaucratic. The paperwork here is complicated and very slow. There is no one in charge of anything. You need a signature from everybody. If you do not, you are basically paralyzed. (CSC) The most important difficulty we have found so far is registering the company and getting the fiscal issues properly set up. I just received a note that we owe a penalty for a payment we did a year ago. Registering the employees with the IMSS has been the most important nightmare. We have been trying that since a year ago without succeeding. Every time we go they want a new paper. (CSC) When faced with the bureaucracy and Pemexs way of operating, Canadians feel that they are not fair and they get mad. But that is the way Pemex works. They want to rent a Ferrari, they want to drive it but if they crash it is ones responsability not theirs, that is the Pemex way. But Canadians

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think it is unfair. If you want fairness, do not come to operate with PEMEX. You are not going to find fairness. If you look at contracts you will find them abusive (leoninos), but that is the contract that Pemex is going to sign. If you do not sign you will not work. That is the way it has worked for 50 years, all its life. (LSC) The main difficulty is the bureaucratic procedure to get paid for additional works done in contracts. The one who authorizes and signs the contracts is the residente de obra, who is generally is a low level official, who does not want to take responsibility. (LSC) We need to know who we should meet with in PEMEX. My boss, the owner of the company, wants a meeting with the officials who make the decisions. I have tried but they do not even answer the phone and the executives even less so. I have studied the basis on the technical side, but I have been able to reach only the directors of engineers. I know that they decide in the base but we want all the package. The Canadian mentality is to work with the whole package. Here things are very different. (CSC) The invoicing at Pemex is extremely cumbersome. Some of our invoices need 100 signatures and then there would be a change and the invoice would be rejected and then you have to go back and get 100 signatures again. So we have three people that are pretty much dedicated to doing that. Without the help of our administrative office we would be broke. In Canada what could be done with someone part time it takes three people here and I have to spend 100% of my time to make sure that things flow properly mostly to keep our bank online. We go past our governance because of the 90 days terms and things like that. (CSC) Corruption. The way of doing contracts in Mexico is very peculiar; there are still a lot of obscure things one does not know about. In order to overcome the inertia one needs to do a lot of things, not necessarily recur to corruption but look for legal ways to overcome that type of bad ways that PEMEX has of doing things. (LSC) Many people have gone to Canada to tell my boss that they can get him to PEMEX. But I have to tell them that we prefer to do it the hard way, from the bottom up. I know my competitor and if we start to speak about prices, he undercuts me. He probably has given money in Pemex. To reach Pemex, we have been told to go to the Internet, fill in the form and wait. But we know that if you know someone or know how to reach, you do not have to wait. We want to reach the people who take the decisions but there are a lot of people in the middle who say: you have come here but if you want for me to allow you in, you have to give me such and such. I have to answer that we do not do that and that we act as we should. But we have found that in Mexico nobody cares if the equipment is well or badly installed, only when there is a problem. Here in Mexico people prefer to look for who is responsible for what happened instead of fixing the problem. When people face a problem, I tell them that I will go, but they do not want me to go, they prefer only that I tell them what to do. In the contacts that I have had with the engineering departments they say that they are interested in our products, but sometimes they have asked for absurd certifications. I do not know if it is because of ignorance or if this is a form of corruption. I have a competitor that wins because he accepts corruption. (CSC) Labour issues. The big problem in Mexico are the employment contracts because you have to set up them in such a way that nobody wants to hire people. If you hire a person for a day and you do not like them, you have to pay them 90 days salary, and if you dispute, then it goes on. If this happens, then you owe him another day until there is a judgment and you can end up with a court case. But then you find out that he is working somewhere else and he is receiving a salary. You hire a trucker, but then one day a driver decides he is not happy or gets fired

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or whatever, he sues the trucking company and we can not work with them anymore. Then you find out that the guy is working for some other company but his boss is responsible for paying lost wages. If the trucking company does not agree, the problem goes on for five or six months. Then the trucking company disappears. If the dispute goes to court, the lawyers have the control and things become irrational. In a lot of cases nobody knows what the judges are doing since they act behind closed doors. When there is a ruling you do not know how they came up with that decision. It is behind closed doors. There is a potential for corruption or for arrangements. (CSC) Bad planning. Canadians are even more rigid than Americans. They want everything by the book. They are used to work with clear procedures. They are not audacious. They do not understand why Pemex can have a very expensive machinery idle part of the time. But they are going to have to bear this because Pemex plans things very badly. Sometimes they say: We are going to drill here. The contract starts and Pemex says: No. we have to stop and drill 10 km from here. This is extremely costly and happens a lot. It is never clear how things will be done. Especially now that they are under pressure to extract crude. They have the studies but they do not know if that is the place where things should be done. New information arrives and they change the place. The movement of the equipment is very expensive. And perhaps the drilling is not being done at the appropriate deepness. All this affects the type of equipment that is used. (LSC) Security. It is a growing concern. We have tried to mitigate it by trying to be in a safe building. We train all of our staff in security measures. We send them to boot camps to instruct them on practical things such as not to take taxis. We look after our personnel. We think that security will become more of a concern than it is now. It does not look good right now. We are certainly monitoring it very closely. (CU) 8. What is your perception of the energy reform of 2008 and of the main changes it will bring to the way Pemex conducts its business? Most of the interviewees considered that the reform was implemented too little too late. It was a shallow reform. Changes have been more cosmetic than real. It is a complex reform but so far it has not opened up any significant opportunities to energy industry players. So far, there has been only progress in implementing the bureaucratic parts of the reform, not in the operational aspects. It has been an exercise in creating new bodies, new programs and new laws but it has not translated into any significant change in the way in which the industry operates. (C) It is a badly conceived reform. It looked for efficiency but they multiplied the levels of approval in Pemex. The corporate layer was increased instead of being simplified. It is the most important reform since 1938, but not the one we needed. It has not made Pemex competitive by international standards. The reform per se is not going to bring about changes. Another reform will be needed. International companies want a good form of association with Pemex in risk contracts, but it seems that this is not going to happen. (ESC) They have divided the responsibilities between the Hydrocarbons Commission, the CRE, etc. but have not given them the budget to carry out the tasks that they have assigned to do and that is not going to benefit anyone. There is a terrible lack of planning in some of the proposals. It will not make a huge difference for Pemex. I do not anticipate that it is going to solve the problem posed by the decline of Cantarell. I think it is going to lead to a major financial crisis in Mexico in the very short term. (CU) If you do not change the people in the structure, you can implement a different contracting

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system but all that is mechanics, there is no fundamental change in the way Pemex conducts its business. (CSC) It is an important change but it is not going to be easy to change the way of thinking of people that all their lives have worked in a certain way and that now are being told that PEMEX should be more efficient. In Pemex they are working very hard to eliminate the traditional practice of fighting with contractors since this reduces production. PEMEX exists to produce and not to make money through contractors. We would like for Pemex to have a way of operating which is closer to that of the private sector than to the one of the parastate sector. (LSC) The reform does nothing to deal with the R&D issue. They do not have a R&D group so they do not do any R&D. They depend on big companies to provide innovation and technology. I am not sure that works that good. (CSC) An important point was made in reference to the labor issues: The Unions remained untouched. There are ships that are no longer operating because they do not have the correct specs, the ship is stuck and the unionized crew that used to work there is still there and receives a salary. There are petrochemical plants that have been shut down and the employees that used to work in the plant are still there. This can not continue. (LSC) One of the top 5% of desired jobs in Mexico is to work for Pemex because it is a very good job. You are secure, you have good medical service, your pension, as soon as you leave your job you are paid the same, your benefits continue until you die and then your wife takes 35%. I would protect that at all cost. I am not going to let this go without a fight. If the government decided to let companies come in and book the reserves, there would be a revolt. (CSC) On the other hand, a few of the interviewees considered that the reform is a positive step forward. The reform is a step forward to make Pemex processes more efficient, to have access to more resources and be able to reach the goal of increasing reserves and production. This reform will help to a certain extent. If it does not achieve all, more changes will be needed eventually. (LSC) The creation of the National Hydrocarbon Commission (CNH) and of the professional advisors was good because now we will be able to have a regulatory framework for the oil sector which we did not have before. (ASC) The energy reform is positive in three aspects: first, Pemex stops being a manager of regulations and becomes a manager of oil assets based on imaginative schemes, not longer subject to the old Public Works Law and designed to increase production and efficiency. Under the old scheme, Pemex existed to generate benefits for the population; now Pemex has the clear mandate of creating economic value for the company. Secondly, Pemex has new rules of corporate governance, including the appointment of professional advisors. Third, it sets up a regulatory agency, the CNH, which will define which projects will be undertaken and under what conditions, what levels of production, recovery and replacement of reserves should be achieved, and based on technical criteria. All contracts that Pemex sign in the future will have to be registered at the CNH. The agency will verify that contracts meet all the guidelines specified to exploit a specific field and monitor their implementation. (LF) Still there was almost unanimity in considering that the reform will be good for service companies: The reform is good for the Halliburtons and the Schlumbergers because they are fee for service companies. Their cash model, how they borrow and how their stock is rated is determined by how they perform services. The reform fits their business model. That is why those companies do very well in Mexico. Large integrated service companies will probably do better since they will

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have bonuses and contracts will be more flexible. (CSC) The reform may make things easier for the small service companies that are out in the field. The concept of a bonus is positive for them but I do not think it is enough. (CU) For us the main advantage of the new bids is the fact that they are multi-year and for different projects. The new contracts are an opportunity to bring equipments for a longer period of time depending on the type of contract that is won. Pemex will subcontract services that it can not provide and will receive a service at the lowest possible price, with the best technology and in the less possible time. If the company complies, it will obtain the proper compensation. (LSC) The most important change is flexibility. Before, it was not possible to bid for blocks. Now this is allowed and payments will be made in cash. Pemex is slowly becoming an administrator of small and medium mature fields. (ASC) By the same token, the reform is considered to be not enough for operators: The reform is directed to service companies not to operating companies because the law does not admit the booking of reserves.(LF) I do not see any incentive to participate. I do not see that a company like Petrobras is going to be interested in coming to explore in deep waters in Mexico as a service provider because the reform does not have an incentive to take the risk. Operators will take the risk only if they are allowed to book the reserves that they find. (LSC) Those who argue that it was a shallow reform are those that were expecting a regime of concessions or production sharing. They do not understand how difficult it is to change anything in Pemex. (LF) Perhaps for companies that are in secondary production, the reform is good. It is not enough to attract large companies that would make a difference in the country in terms of increasing production. It is not going to drag companies into offshore fields, whether they are deep waters or shallow waters. It is not enough. The constitutional limits determine the way in which a company can do a business in Mexico; you have to get around these issues in such strange ways that companies are not interested in doing them. I think it is tragic because when they brought the multiple service contracts in 2002, they had a meeting to explain how this was going to work with 2000 people in that conference. Today, when you get a meeting to explain how the new contracts are going to work, you will get 4050 people. The interest is not there anymore. Nobody believes them and until something big happens they are not going to be interested. Companies are tired of waiting. In a sense that is positive because if people are banging in the door waiting to get in, they will not change anything. We will have to hit a wall before something happens. (CU) Do not expect the BPs to come here because it does not fit their business model. There is nothing wrong with that. No one would ever want to come here if their assets are the reserves they have and what they borrow against. Here they can not book that asset and it is very difficult for them to get financing for these projects. Until these changes, I do not see how they are going to be able to attract companies to come here. I do not see that happening for at least three years. In Canada the government owns the reserves but allows the companies to book them. I do not see that ever happening here. There might be some subtle changes but not enough. The concessions whereby a producing company comes and works, that is going to take some time. (CSC) Most importantly, the reform is considered insufficient to reverse the decline of oil production. The increase of drilling activity in Mexico is the result of two factors: on the one hand, the lack of activity at home. Companies want to keep crews busy even if work here is not as lucrative as in AB. But overall the impact is not going to be huge. You are talking of a production per well of 30 barrels, not of hundreds of thousands of barrels which is what Mexico needs. You are not going to get that until

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you have large companies working on large projects and paying significant revenues to the government. They will not be able to make up with this program for the decline in Cantarell. That is my biggest concern. Year over year we are seeing less and less production in oil and now in gas. They are going to have to import more and more crude, refined products and natural gas. They have to pay for that and if they do not have the revenues that come from selling the crude because they are not producing it anymore, they will not have the revenues to import them either. (CSC) However, to measure the full impact of the reform, we will have to wait some time. We will see the real reform when its implementation is done. The law specifies that contracts will no longer be ruled by the old Public Work scheme and this is very good for all those contractors that have suffered from it. The new rules on contracts say that Pemex contracts will contain whatever clauses exist in common law, in the normal regime of contracts. This means that contracts are no longer part of an administrative regime, full of regulatory restrictions, and become strictly commercial contracts. For us this is a major step forward because we have left behind many tabus or restrictions that we had before. (LF) Another important change is how E&P payments will be agreed upon. The previous law said that payment could only be in cash. That is kept. But it said that under no circumstance could it be related to the results in production. Pemex managed this very conservatively as a restriction to agree on any type of concession that had to deal with efficiency. The new law links the results of production to payment. As a compensation formula, there will be sort of fee per barrel or bonus when a certain level of production is reached. This is a very important step forward. (LF) They are all trying to get that piece about how to deal with JV with producing companies but it is extremely confusing. Since December they have changed it four times. In January, Pemex was supposed to award contracts based upon production. We have two contracts that are going that path. We are a month or six weeks from signing them. They are non-bid, based on our technology, our innovation, how we approach things. So we do not know. It is too early to tell. (CSC) I do not believe anyone has understood what is included in the scope of the reform. It is still not understood. The new Pemex Law says a series of things but they have to transcend into concrete acts. Before, I used to sign contracts in a certain way and now things will change I do not know how. The guidelines of last January the 6th are not enough to design the new contracts because they are not sufficiently clear. And, besides, the guidelines, there has to be a series of policies dictated by the Board of Directors and by the professional advisors. Before, the Secretariat of the Comptroller intervened but now Pemex has to do it internally and it is still unclear how they should do it. They are just starting to understand the reform. For service companies, the reform is very good if it is implemented as it is designed. But we will not know it for sure until we see the contracts. (LSC) I think it allows big companies to transfer technology but I am not really sure how it is going to be applied in the end. The old Public Works Law was set up in order to get rid of the perception that you could make deals that did not work in the best interest of the state, and now it is not clear if they are not allowing them again. It depends on how it comes down. The reform has not affected my business so far in any way. (CSC) If the reform is applied as it has been designed, it will be good. But they are having to deal with a constitutional controversy and there are several interpretations of the new regulations already. I consider that the reform is good in spirit, but its results will depend on factors that have nothing to do with the extraction of oil. It is a limited reform but it was a step in the right direction. The problem is to have it implemented as it is designed, and that everybody voices their

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opinion. Even adelitas started making rallies. It is a very complex industry. (LSC) I do not think there is any difference until the new contracts and rules of domestic content are defined. Before, all the downstream was handled in an engineering department within Pemex that just disappeared a month and a half ago. Now every operating unit is going to have its engineering area. The changes have been a result of the hard work of the Secretariat of Energy and the Senate to try to change things because they have a bad perception about Pemex. But the first ones that do not want things to change are the Pemex people because they already had a way to operate. (CSC) The reform is stuck in the implementation phase. Pemex is currently working on the new contracts. (LSC) The new measures have not landed yet. In deep waters we will get results in five years or more, even if the most capable company comes and it is given all the freedoms it wants. (LSC) Right now we will have like about a third of the impact of the reform. The full impact of the reform will not be felt until at least three years from now. It is being challenged in the Supreme Court. It is going to get struck down because it was not well done. Things did not work out for the PAN party in the last term elections, so they never got the majority to pass it through. The PRI is not going to vote for it the way it is. So, I do not see things changing until the next President. (CSC) Insiders will probably oppose the reform. If you do not get rid of the people that have the old mindset, even if you implement these new contracts, they are not going to use them, or they will stop them to the degree possible. Pemex people will always believe that they will do it themselves. Engineers were brought up in that environment and you can understand why they feel that way. They are the only company, they went to Pemex schools probably, they live in this culture, it is part of their identity and, of course, they see it as a threat. They will say that they can do it more efficiently or cheaply because they have a very strong connection to that company. It is almost Japanese in a way. It is a very personal threat to have foreign companies coming in. (CU) The problem at the moment is to define who is responsible. SENER or CNH: they have five contracts pending in Chicontepec with five major companies. Pemex is trying to write these incentive-based contracts but they are not done yet. These five companies are supposed to start in April but no contracts are yet signed. We are negotiating and providing our services to them and getting commitments from them, but I do not see the contracts being ready for April. Pemex does not know how to proceed because this is a new animal. It is extremely difficult to move forward on this. The service companies are at a huge risk. There are five contracts of two years duration. Two for sure are not going to work. Three will do well. The one contract that works the best is going to have a 10 year contract so there is quite a good prize at the end of the day. (CSC) 9. In which ways will the energy reform affect the traditional entry strategies mentioned above? Most of the interviewees consider that the energy reform does not have any major impact on the traditional entry strategies. It does not affect the strategies, they remain the same. None of the strategies will be affected. (LSC) It will not affect them, and this in itself is a bad sign. (ESC) It has not opened up new opportunities for direct foreign investment. It has not allowed foreign companies, for example, to participate in joint ventures, to share in projects or in the results of projects. It has not changed contracting or subcontracting so far although it may make contracting easier and more flexible for some companies when new

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performance-based contracts are available and are tendered. But these contracts have not yet been made public. They have not been awarded, they have not been tendered. So really we can not know if there will be any improvement in contracting conditions that may make them more attractive for international companies. At this point, it is not clear that new contracting rules will make contracts more attractive as it is not clear if they will provide greater legal certainty for companies coming into Mexico. The contracting process is still an unknown factor. I believe there will be changes but I am not optimistic that the changes will be very significant. (C) An important element to bear in mind in terms of timing for the implementation of the reform is that there will be a lot of opposition and resistance inside PEMEX to implement the new scheme because the company is used to act as a mere applicator of regulations, not to act under the pretext that the Secretariat of the Comptroller will disapprove. Pemex officials were used to have a kind of doberman watching over; now they will have to be reassured that they will be able to take prudent business decisions like in any private company. Officials are being told: starting tomorrow, here is your project and you have to build a business case with it because that is what the law says and you have to develop a contract. Then you have to bid it and set the parameters under which you will select the winner, based not only on lowest prices but on efficiency and many other elements. Since the process has changed very much, results will take a lot of time. Pemex idea is to start with the big projects and then begin trickling down to the contracting areas of Pemex. Pemex area of New Models of Contract has a titanic task ahead of it. They will have to swim against the current, much as Canadians salmons do. A sign that Pemex is still afraid to implement the reform and remains undecided is that it was announced that the new regime will not be applied until the Board of Directors approves the restructuring of Pemex Exploracin and Produccin. This is weird because the rules on contracts have already been published in the Official Register. There needs to be a cultural change inside Pemex. (LF) The most important change for service companies is that they will be forced to be part of some integrated package in the service business. In the last year or so, Pemex has gone away from individual contracting. Things that used to be bought by themselves are bought through associated services. You would have to find those integrated services guys. But it is going to be a thing of selling to someone else. That is really the big change. (CSC) The only real change so far is that companies that operate with Pemex are starting to get familiar with what they will be able to do and with the great benefits that the reform will mean for them. Many of the new contracts say that as soon as the new rules on contracts enter into force, companies will be able to migrate the contract and make the changes that benefit both parties. This will benefit many contractors. Also, the new contracts will no longer contain all the restrictions that used to exist before with regard to adjustment of prices, agreements on remunerations, anticipated unilateral termination. The old Law of Public Works had two very rigid schemes: lump sum and price per unit. The regulation on price per unit was extremely complicated. Each price per unit had to be justified and it was extremely difficult to adjust a price because the seller had to demonstrate changes in the cost of financing, indirect costs, etc., and this was practically impossible. The new regulation has nothing of this sort. It only sets general parameters to set up the payments: there should be a formula in order to determine them and it should be internationally acceptable. (LF)

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In some cases, there will also be an increase in local manufacturing. Canadians pay a lot in taxes so the cost of manufacturing in Canada is among the highest in the world and there is not a lot of tax benefit for us. It is essential for us to manufacture abroad in order to reduce our costs. We have already become as efficient as we can here, so the only way to reduce costs is simply facilities management and labor costs. In fact we already purchased the land. We have not built the facility yet because it all depends on how we market ourselves locally and position ourselves for immediate and future sales. We have several opportunities but in the last two years we have not converted them into actual orders. We have done a significant investment and taking all the necessary steps to begin increasing our revenue. Once we can achieve results, the next step will be to start local manufacturing. (CSC) In the medium term, some changes are expected. Also, the new regulation is more flexible with regard to subcontracting and on how a group of companies may be able to work on a project. The old scheme was extremely rigid. If one company started the project with another company, it was forced to finish it with it, with no changes allowed. This caused a lot of problems, for example, when one of the companies involved went bankrupt. Now this is going to change in order to make it more flexible. The new scheme could open opportunities for companies from Alberta whenever there are ongoing projects and the companies involved have difficulties to continue working on them or can not comply with the terms of the contract. (LF) We are hoping for a greater private participation in the up and downstream business. (LSC) The fact that Pemex recognizes explicitly the good contractors is a 180 degree change. Pemex is saying: if you do a good job for me you are going to have an economic reward that will make it more interesting. (LSC) Over time, Pemex will deregulate activities that are not exclusive to the company such as gas transportation. Until now Pemex does not subcontract, unless it is in trucks, which is absurd. It is something that PEMEX has not wanted to release. But it will end up doing it and this will open new business opportunities. (CU) Over the long term, the expected changes are: more use of enhanced recovery offshore and onshore; more demand for alternative fuels and new efficiency standards, with a strong impact on consumption and the construction of new refineries; and, most importantly, a revision of the approach toward the lowest possible price in bids. This became evident after the cases of the refineries of Madero and Cadereyta. They were a national tragedy. The Koreans built two turnkey refineries. They put in second class materials and did not finish on time. Pemex ended up having to invest money to finish and they even countersued but we lost in the Paris Court and paid US$800 million. The refineries have never operated efficiently because Pemex got what was least expensive. This has to change because it becomes very expensive in the long run. (LSC) 10.What are the main challenges ahead in the energy sector? Practically all interviewees considered that the first and foremost challenge ahead for Mexico is resolving the production issue. Domestic oil demand will grow and Pemex will have less to sell outside. Mexico needs to find more reserves to replace the production that is in decline and because the country itself is growing. Mexico has to do more production and more exploration. They need to get a little bit luckier. (CSC) The most important challenge is to stop the decline of production and reestablish a sustainable production. Pemex will need foreign partnering and it

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is still uncertain if the new law will be able to allow it. (ESC) Pemex has not made any significant discoveries of new wells and needs to do so very badly. I do not think that incentives are in place for discoveries to be made. So there is a risk that oil production will continue to decline. (C) Remaining a net exporter and meeting the energy demand with the declining reservoirs of oil are the biggest challenges ahead. (CSC) The main challenges are to increase production onshore and in deep waters, make Chicontepec production more efficient, and develop gas fields in Veracruz. To develop this potential, Pemex has to have freer hands to perform as a descentralized agency. Its potential is fantastic: before taxes, Pemex is the company with the largest revenue in Latin America. The problem is the fiscal charge it has. (CSC) Another no less important challenge is to reform and restruct Pemex in a more profound way. I do not think that this is something that will happen in the short term. It will probably be medium to long term before it happens because I think there is no political interest in doing more changes. Pemex needs reforms in many different ways: it needs more refining capacity, to offer its employees more incentives to achieve better results. I do not think that this will happen very easily if Pemex remains a government-owned company. (C) The operation of PEMEX needs not to depend so much on Congress and allow it to start operating as a private company. (LSC) I do not know how Pemex can adapt to the reform right now. There is no indication that the reform is coming forward in the assets. The incentive aspect of the new contracts is only one of about 40 different things, it is just a small piece of the reform. To change how Pemex does business will be tough. We have no problem adapting. But for the Pemex administrator group it is extremely difficult because the resistance to change is high. Pemex people will not know how to deal with the new reform. (CSC) No less important is the technological challenge. There is a need to increase the recovery factor of the wells. Now that factor is around 20-30%. In Canada they achieve 40-60%. There are many mature fields that have been abandoned and that have a recovery factor of 10-15%. That is where the opportunities are for service companies. (LSC) In the short term, there are many small systems in Chicontepec that could be productive with the proper technology. (LSC) CNH has just signed a mandate by which by the end of 2011 Mexico is supposed to recover all the gas. The goal is realistic but it needs that someone does something about it. Nobody takes it seriously. The recovery of that gas is probable worth $2 billion dollars a year, not counting all the carbon credits and all the offsets, just in net revenue. If at the end of 2011 Mexico does not comply, Pemex credit rating will be downgraded. (CSC) To the degree that you allow the energy sector to evolve more independently without having to support the country, you will be able to invest in better technology and bring more experts from abroad. (CU) Mexico lags behind in terms of the development of national companies with access to state-ofthe-art technologies. The government has not helped them with incentives to look for these technologies abroad, to bring them, to support them, in order to create a domestic pool of companies that could compete with foreign companies. In the last 20 years, the spectrum of services in Mexico has been dominated by international companies. There are no companies in Mexico that have developed Mexican technologies or that have bought patents or have made associations to bring technologies into Mexico and be the front-end of the business. There are some companies in the drilling, transportation, logisltics areas, but none in the heart of the business where technologies are. (CSC)

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The resources to face these challenges exist: In 2009, in the middle of the recession, Mexico was the country where there was the highest investment in drilling worldwide. Rigs stopped operating even in the Middle East and here they kept on working. Mexico is still among the top five countries in the world in terms of oil resources. In the maps of the Department of Energy, one can see how on the U.S. there is an enormous amount of red dots marking drilling points, and on the Mexican side there is practically nothing. This just can not be. The potential that one can see is impressive. (LSC) A final mention was made of the need for a fiscal and labor reform. To implement a fiscal reform is just as important to the energy sector as it is to everything else. Labor reform is also something Mexico has to look at. Until they start confronting the unions, the burden that they have to deal with is so heavy that it weighs down the possibilities of success. The unions are far too powerful. They have to do a lot of things, organize them in a better fashion in order to see the energy sector improved. I do not think that they should look at the energy sector on its own because so much is tied into it. The energy reform is not going to work if we do not have these other reforms in place. (CU) 11.Was your company expecting to be profitable in the short term, say one year, or over the longer term, say 2-3 years? Companies recognize that their Mexican operations either have not been profitable or have been hardly so in the short term: In our first year of operations, we were barely profitable. We just covered expenses. Our earnings were all spent. (CSC) We did not think we would be profitable right away. That did not happen. It took us about two years to start making some money and it has taken us 10 years to become reasonably profitable. There is a long tortuous way ahead. It is not reasonable to expect a quick return. (CSC) The company did not expect to be profitable in the beginning due to the conditions of the business in which they entered. The logic thing to do was what the companies not entering the Mexican market did. (ESC) The main reason for this lack of short term profitability is mainly Pemex payments system. Companies that come from AB should mitigate their expectations because they will not get here a return on their capital as quickly as they would in AB. Most companies understand that business in Mexico is more complex than in AB. They should understand that when dealing with Pemex they will face long credit terms because they pay at 60 or 90 days, which is a long time for a small company to wait for their money. They need to have good financing in place in order to get to the point when they have cash flow and start getting returns on their investments. Some companies have done very well though. (CSC) Another problem for AB companies is higher overhead costs than in Canada. The problem is that if companies are not working already in Mexico they will not get in. It is very difficult to get in. The barriers to entry are too high. Companies come here, bid and lose money because they do not understand the cost. Our overhead is considerably higher here, between 7-8% higher than business in Canada. Very few companies net 8%. They may lose a lot of money. That is a consideration that many companies should make. (CSC) For most of companies, short-term profitability may increase going forward due to, among other factors, multi-year contracts. Before, the contracts were for a year

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tied to the federal budget and in that term we had to get returns. Now there are multi-year contracts and we can program investments with a longer horizon (LSC) Our current forecast indicates that we will be cash flow positive in 2014. (LSC) Companies with very good niche products will be able to do very well because they can get their technology cited as spec. Just be sure that the company has all its patent protections before they come in. Pemex will include in the bid basis that you have to use that product. (CU) Another approach to achieve medium term profitability will probably be diversification. We are not just oil & gas company. We have diversified into wind power which I think is going to be very important for the future, and shipment by sea and everything that goes along with that. We will be there for many years. I see it to be very profitable and also good for Mexico. Within 5-6 months, we will begin to analyze shipping opportunities. We are in the process of hiring an individual who does know that market. With his expertise we will create a business plan in that area. (CSC) An interviewee summarized this point very well: To succeed in Mexico a Canadian company needs: (1) To have a proven technology to make Pemexs production processes more efficient; (2) Long term commitment. There is no place for compaas golondrinas under the new model of contract. Companies should come to bet for Mexico, for the growth of the industry, to help Pemex with technologies that improve the exploitation of oil. (CSC) 12.If you had the benefit of your current experience when you first started, would your strategy be different than it is now? A few companies would have definitely changed their strategy: we would have continued to support our international partner as a subcontractor but we would have immediately started linking ourselves directly with Pemex. It would have positioned us for revenues today instead of 5 or 6 months from today which is critical today because in the last 18-24 months the global market has been terrible. We desperately need revenues today. Waiting 6 months is just too long. We need to position ourselves to be a part of the current rise in the market. (CSC) We used an agent for the first year and a half and it was a failure. He misled us: what he did and what he told us he was doing were two different things. But we did not have enough knowledge or understanding of the Mexican market to challenge him and say otherwise. It costed us a lot of time and money. He did not know how to do business in Mexico. He may be in the construction area but does not know how to work with Pemex. The agent did not think that I needed to integrate. He wanted to be the front person and that is unacceptable. (CSC) We might have put a Canadian underground a little earlier to run the first year or two keeping in touch with him. The ideal is to have a presence early because the culture is very different. In our case there are not a lot of Canadians who speak Spanish. You think you understood a bunch of words but that is not really what they said. But if you hear it three different times you start having a better idea. In the beginning you think you understand because you think they used the right words but they can have different connotations. But you get better with time and experience. (CSC) Still, most companies consider that their entry strategy was the correct one: there has not been any other way to do business outside of the framework of the Public Works Law. (LSC) It has been useful for the company to say that they entered the first bid, that they were pioneers, that they are committed with Mexico. In that

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sense, they would have done the same. (ESC) In my experience, it is very difficult to convince Canadians of starting a business because they see risks. But once they are in, they are very good partners. (LSC) We could not have done things differently because we were restricted by the contracting model imposed by the Public Works Law. We moved inside the margins that existed and brought the experience that we had. (CSC) With the benefit of their experience, some companies would have done some finetuning in their entry strategy: I would have invested less in order to reduce any negative impact on cash flow. (LSC) I would perhaps seek more automation, getting as far as possible that I could from labor intensive. (LSC) I would have entered in a more aggressive manner with regard to the terms and conditions of contracts. (CSC) There are some things that we did in the first project that we decided that we are never going to repeat. For example, community support programs. (CU) Experience shows that, of all the adjustments to entry strategies, by far the most important is to plan ahead for the lack of cash flow. Typically when we sign a contract we do not see money for six months. We are trying to borrow from local banks against that contract because we can go to US$5 or $6 million of expenses without any revenue. That is where we want to work more with EDC. (CSC) 13.How do you envision business conditions in the Mexican oil and gas service sector in the coming years? There were optimists among interviewees who see good investment and business conditions in Mexico in the near future: things are going to improve. We can not continue like this. We have passed the downturn and we are starting to have growth again. Next 10 months look good. (LSC) PEMEX has an average investment grade, which is good for a company of such a high risk. (ASC) Many of the baby boomers who came from the US during the crisis are already going back or will go back because things are improving in the US. That will give more opportunities to those of us who decide to stay. (CSC) If Pemex continues with the investment that was announced to us last year in November, our investment will triple over the next year in Mexico. But it has to be according to Pemex plan. We can not make an investment otherwise because in any other way there is not enough market for us at this time. We currently operate in 23 countries around the world. Mexico is one the places that offers the best opportunities for us. That has to do with NAFTA, time zone, and the fact that our cultures are closely linked in terms of how we conduct business. The attitude of most companies is not of positioning themselves. I do not think that anybody is taking a wait and see approach. We are basing all our decisions on what Pemex is telling us. Anyone that wants to do business in Mexico for the long run, they better make their investments today if they have not already done so. There is no wait and see at this point. It is either already done or it is too late. (CSC) Further changes of the legal and fiscal regimes will come as a result of diminishing reserves and production. This will encourage companies to make more onshore and offshore investments. (LSC) I am optimistic about the relationship between AB and Mexico. Very conservatively speaking, 90% of all equipments in Mexico come from AB. Exports of equipment from Alberta to Mexico have increased by about 180% in recent years. We estimate that there are around 30 companies in Mexico. In the last two months, there have two more companies coming into Mexico and that is after the boom. We are not going to see a dramatic increase in the number of companies coming into Mexico at

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this point because we have very good coverage throughout the sector. It will not decline but we will not see a great increase. (LSC) Gas prices are starting to go up again so we will continue to have the combination of push and pull factors through the fall of this year when the drilling for gas starts in AB. Drilling happens in November and then we will see what happens with the rigs because the prices are going up. With oil there will continue to be more of a push factor because production in AB has also fallen significantly so oil producing companies will have more opportunities here than they would in AB because the reserves are not there anymore. (CU) Business conditions may not be ideal but that does not mean that there will not be opportunities. There will be opportunities in different ways and in different times. (C) There are very good expectations for the oil service business in Mexico because the country needs to restore a production level of 3 MMBD and use incentive-based contracts to improve technological support. (CSC) But on balance, most comments were on the pessimistic side. I think business conditions in Mexico in the next three years are going to be extremely tough. Rigs are starting to leave and going to other countries for a lot of reasons: bureaucracy, lack of coordination, a lot of little things that add up to not making any money. (CSC) 2010 is going to be difficult because of the economic situation in the U.S. The years after that are also going to be difficult because of our own internal situation. I recognize that things are going to be difficult before they start getting better. (CU) Now they want to increase local content but they have not allowed us to participate in anything more than as suppliers of services. Domestic content is limited to labor and some metal mechanics and civil works. (LSC) Things look complicated because of international competition. There are countries with better conditions in the oil sector. The worst would be for Pemex to open up without a strong regulatory agency. The status quo, not doing anything, is going to take us to an unsustainable situation. The expected result is not for companies to get in, but to increase production. Pemex invests in E&P a similar amount to what Exxon does in the whole world. The problem is not lack of budget but lack of management. The lack of security and reforms will not take us through the good road. (CSC) Business conditions will not be especially attractive as the energy industry will continue to be controlled by state-owned monopolies and these monopolies are not efficient at organizing the industry. They do not respond to market conditions and are not very competitive in their ways of working. So I am not optimistic about business conditions in Mexico in the coming years. (C) For more oil & gas services companies from AB to come to Mexico will depend on the energy reforms and the other reforms that have to happen. I think that until there is an opening up of the industry things will continue to stay static. You will not see a huge influx of anything. The smaller companies may see opportunities. But I do not see how you can expand these opportunities until there is more momentum. Companies that are already here will stay to the degree possible unless things get really bad but they will not grow as fast as they are in Brazil. If they have to choose between Mexico and Brazil they will take that into account. I would say that things will stay fairly flat until there is change or something happens in AB that pushes them to come down. (CU) 14.If you were advising foreign companies wishing to target Mexico, what would you recommend as a strategy? What would you advise them in terms of expectations? Study the needs of the market. Define what is the best entry strategy. It can change from one kind of business to another. The market will demand different

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kinds of works and will provide different kinds of opportunities at different times. So companies have to study the market and the opportunities. If Pemex and CFE continue to be state-owned monopolies they will be defining where the opportunities are. Companies will have to watch very carefully the tenders that are being offered and decide if it is best to enter into them directly or as subcontractors for the winners of the contracts in order to be competitive. (CSC) Breaking entry barriers through technological advantages. In Mexico, there are many opportunities for companies that have their own technological developments. This is a good way to break the entry barriers. Sometimes companies overlook the importance of going to Pemex and try to convince them that certain kinds of services or products are required, because if Pemex can be convinced of a kind of service or product then it will probably carry out a tender to seek to purchase that kind of product. It is important not to forget about the possibility of convincing Pemex of a specific need. A company that does so will be in a good position to do business. (CSC) Be present, look for low risk investment, and be ready for the true (required) opening. (LSC) This is the moment to be present in Mexico, but with low expectations. The business might be profitable in 10 more years, but that is another problem. If the company is able to keep its presence, that will be good, but not because it obtains immediate results. If the companies are small, they must be very capable. What is more in their interest is to become suppliers of Halliburton and Schlumberger. (ESC) Look for a good local partner, somebody who knows the market, with a work system that is consistent with yours. Some foreigners look for companies that have influences, but this has a risk. They should look for a good representative that gives them assurance that things will go O.K. An important topic for foreign companies is liabilities. To incur in liabilities drives them out of competition. Whenever a local subsidiary is set up, it should include private agreements by which the partners agree to exclude them reciprocally from any liabilities in which they could incur. (LSC) Do not enter alone because three years are going to pass without anything happens. It is advisable to look for partners who already know the way because they have already taken it. In the future, companies will be forced to look for partners. (LSC) I have not looked at a Mexican company yet. I would have to become more familiar with what is available. Everything there that is modern is coming from outside of Mexico. The only time I would partner with a Mexican company would be in the future because Pemex is going to buy from the integrated companies that are operating in the country. Once there are changes in the way Mexican companies are operating and they begin purchasing this equipment and managing it themselves, our company will need a local partnership. If we want to start local manufacturing we would have to look at capable manufacturing facilities. I do not rule that out at this stage if we do begin to manufacture in Mexico, which is something we are seriously looking at, we can partner with a capable manufacturer there or we can start with a Mexican company. (CSC) AB companies should not come alone. A Canadian problem is that their products and services are very expensive and they have little flexibility. Their quality is good but their prices are high. Some bids with Canadian equipment are lost because of high prices. (LSC) Listen first. Do not come with a catalogue of products or services. First you have to listen and then select the product. Companies should work as HP: one selects its computer the way one wants it to be. You have to listen to the needs of the

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consumer. If you are a good person and you listen and you gave the person what he needed, he is not going to buy from you just for a year, he will buy during 10 years. (ASC) Seek good legal advice. Structure the business well in order to avoid legal contingencies. (LF) Invest for the medium-long term. They should be very aware that contracts in this industry in Mexico should be medium or long term. They have to consider if it is worth investing for five years, see if they can cover their costs once they bid and win the first contract, and generate a certain cash flow, and if they are willing to stay and bid for other contracts. They have to define for how long they want to tap doors, how long they are willing to wait until the doors are opened, and when to decide that if doors are not open they will return home. (LSC) It would be good to have an agent or a local partner to serve as an entrance point, someone who understands the market. Then decide if they want to stay. Accept that in Mexico you have to invest two years to develop relationships, etc., and see if it works. To come all of a sudden and think that there is going to be a business in six months does not work. Canadian companies need to understand that it is a long term business. For those who decide to stay it is for the long run. To get a contract for a year has no sense. It is too much of an effort. One must say: I am interested, I think there are posibilities, I have the technology that is good enough, I enter for the long run. First, I get to know the environment, I familiarize and, then, I invest to open a formal office or hire more people. I would not enter by way of bring all my capacity or invest too much until I understand it. (LSC) Have a good knowledge of the business culture. If you are not engrained in the culture, you will not succeed. (CSC) AB companies who are impatient have a difficult time in Mexico. People who are inclined to study the culture and to study how this market works at a more fundamental level, and are more patient to adapt in an easier way to how things work here. Culturally, Mexicans and AB have a lot in common. Mexicans are very entrepreneurial. AB are interested in getting the work done so that they can go on a nice vacation, take a week and fly somewhere. They work hard but like to have their own time. Mexicans work different hours that they do in AB, longer hours but they also they take to relax. The frustrations that AB have in doing business in Mexico are more personality-related than cultural. (CU) When one understands local culture, it is possible to consolidate big business. If not, we may make business, but we could do much more if we commit ourselves, if we absorb the local culture. Canadians are used to work for 20-30 different independent private companies. Here they have to understand that we have a single monster called Pemex who is the big client. If one does not understand how that monster works and reasons, and to what times does he respond, it will be very difficult to make business in Mexico. Pemex is a very demanding client. Be prepared to respond with large scales of production. Also be prepared to the fact that business in Mexico is done more through local relationships than through technologies. I have seen companies that fail but have a good relationship and therefore are given a second chance. In general, Canadians are much more conservative and have less knowledge of Latin culture than Americans. (CSC) Be surrounded by people you can trust. Meet people who know how everything runs. Have local people because each location is different. Seek advise to solve all the menial problems (banks and so forth). I was given this job because of my training as engineer. But I had to learn many things that were not taught in school.

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You have to learn the culture and know that Mexico goes by its cultures and one can not change many things. One must be very patient. My situation is very different from the one of big companies who come with everything solved. Expectations should be for the long term. Companies should have a very close assistance for basic things which help and always take you by the hand to learn the local rules (you can not fire people, you can only invoice certain days, you have to present your IFE as I.D., your Internet connection may take one week, etc.). The most insignificant things may alter your work plan. If you are able to get all those things set up correctly, you will be able to be efficient and work under pressure. Otherwise you will lose a lot of time. Companies should know beforehand the things that they will be exposed to. (CSC) Hire local personnel. The work done by people here is better than Canadians. Maybe they are not physically as strong but their desire to work is very good and we really have good workers from Mexico. The problem is that they have no initiative. They are waiting for instructions and we want leaders, we reward leaders. We prefer to hire someone that knows English because we can communicate. That is bad because we might not be giving people who do not speak English a fair chance. We are leaning toward hiring Spanish speaking people and be led by people who speak English. Another strategy that we use is that we give people a career, not a job. (CSC) They should not send a Canadian here because that does not work. Here only we, Mexicans, know how to run the business. That is what they have to understand. Then they come here, open a representative office, appoint a Canadian as director general or send in a Colombian because he speaks Spanish, but they do not hire people here. They create boards and all the decisions are taken in Calgary. The local representative does not have any power. If they work this way they are not going to make any progress. Companies should create local structures with local people. They should not leave the whole business to the Mexicans because somebody has to supervise. But the business side should be left to Mexicans. (LSC) Build strong relationship with clients and plan for long lead times. They have to build strong relationships with their clients. They can not use a parachute approach. They have to get to know their clients personally. They have to be accepting of the Mexican people and accepting of the local culture. You can not come in and tell them what to do because it is not received well. You have to be not aggressive. You have to be more conciliatory and work on a strategy where you explain the benefits of your product that can bring to their situation. But not by telling them you have this thing wrong and I can tell you how to do it right. You have to be very sensitive culturally with the clients in Mexico and recognize that Mexico has a lot of historical issues that feed into this sensitivity. You should know some Mexican history before you come in and try to understand the culture. That is very important to succeed. (LP) The challenge will be how to integrate with Pemex. Pemex is a bureaucracy, it is an elephant. To be able to navigate through that organization and work with the decision makers to develop strategies and implement procedures is going to be a very big challenge; I would say it is the biggest one any small or medium AB company will have in the world. (CSC) Study local needs and trends. If they are a competitor, do not come to Mexico. If they are a complementary business, I would recommend that they come to Mexico as a partner. We have already done the investment, we can easily grow from where we are today and we offer a very good opportunity for an international company on the back of us and we can grow together in unison with Pemex. As to expectations,

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it would depend on what the company is offering. I would expect that they would be able to grow their business at a corporate level. In our sector there is opportunity depending upon their offering. There is a saturation of oil & gas equipment provider coming from North America. There are certainly a lot of companies operating there today. It would have to be a service that I perceive going forward. We need to increase the amount of extraction from the wells in Chicontepec, so if you can introduce a technology that can provide that to Pemex, you would have a tremendous growth opportunity. Other than that it would be very difficult to make a goal. The horizon does not look good. There is a lot of competition. As a company we continue to see Chicontepec as an opportunity. Our company has technology and processes that are complementary to Pemex strategy to increase the extraction. I would seriously recommend to any company that unless they have a technology that is already in place, that has a useful purpose, they have to find a company where they complement each other. Otherwise, I think we are overly saturated in terms of equipment offering. We do not want any more competition. (CSC) Study the positioning of the large Mexican conglomerates in the energy sector. Foreign companies that enter the market will have to have local content and Canadians will be forced to partner. This will become almost a barrier to entry. (ESC) Study the good and bad of subcontracting. Our primary contracts are with integrated service companies. To this date we have not had any single transaction directly with Pemex. We just set up our registration with Pemex. As an equipment supplier we sell a piece of equipment to an integrated service provider and then they are the owner and our reputation rests on how well they manage and maintain that equipment. That is good and bad. It is good internationally because we can work with that client as a partner to increase overall performance, but in Mexico it has not been working for use because those companies are running our equipment and have had trouble training the local people to run the rigs and have had problems hiring people to come and run the equipment because there were no skilled people available. They were all working with the boom here. So, what happens is you bring the new equipment in with incompetent personnel managing it, and then that incompetent person trains the new people. So you develop this culture of incompetence and that is what we have to grow away from. And the only way to do it is directly link to Pemex: we sell to them, we train them to run the equipment to our specifications and standards and that will be the secret to success. (CSC) Perseverance. Be patient and expect to spend a lot of money before you make money. Relationships should be first and business second. That is a tough one because people say that they do that, but they do not take the time and effort. I do not believe that people will give the level of commitment and dedication required to be successful here. (CSC) Many companies get desperate because they bid on a project, get rejected and decide to leave. They have to be persistent. (LF) There is no one-size-fits-all entry strategy. Companies need to come and see what their competitors are doing, what has worked and what has not worked and find a person with whom they can work. Not because someone says that they have a brother or a friend to do the business, things can work out. That may or may not be useful to you. You need to understand how work is done, how you bid, how you present your goods, how you penetrate to high level people. There is no clear cutting strategy that applies to everybody. Companies coming should know that it is a tough market with lots of competition. Youve got to make up your mind that it

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is going to take some time, youve got to be able to know that you are going to lose money in the first year or two, but that you have decided to stay because you have good products, good services and that you have something that Pemex can benefit from. You not just show up there and then all of a sudden make money. I do not think that it is different from other places, it just is more tedious. Things are pretty cumbersome too. It is hard to give direct assignments to people, the technology transfer or some way, because someone jumps and say: See how corrupt they are. The fact that there have been corrupt people inside Pemex has caused so much bureaucracy now. I do not know if the change in the energy reform is really a regression to the old days or a move to get access to technology in a better way. It can go either way. There is a lot of bureaucracy that makes things go very slow. (CSC)

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APPENDICES

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Appendix A TERMS AND CONDITIONS OF THE NEW E&P2

Following is a summary of Pemexs E&P current proposed terms and conditions for new contracts under the Pemex Law. These terms and conditions reflect the general model; specific parameters for each of the projects and contractual areas will be determined considering the characteristics of each project and contractual area.

1. Legal framework
Constitution Art. 27 and 134, without changes Pemex Law & Regulatory Law Art.27: Approved by Congress on November 28, 2008 Regulations for Pemex Law: Issued September 4th , 2009 Board Contracting Provisions: Submitted for approval on November 4th, 2009 Pemexs Tax Regime: Amendments to deepwater and Chicontepec projects. There are no concessions, no production sharing contracts All payments are made in cash, not in kind Award through public bidding Payment will be related to performance and results

2. Main features
Exploration/appraisal, development and production activities in a contractual area Fee per barrel plus partial reimbursement of contractors costs Payments subject to the projects available income Award to pre-qualified companies: bid on a fee per barrel Reserves and production are owned by Mexico

3. Objective
The objective of the new contracts is to obtain services for the exploration, development and production of hydrocarbon accumulations in the work area. All oil, gas and any other hydrocarbons to be produced will be owned by PEP on behalf of the Mexican nation. The contractor will perform the services in exchange for the remuneration. The contract is not a production sharing contract, nor a concession, and, therefore, it does not grant any rights to the contractor over the reservoirs and/or hydrocarbons. Ownership of fixed assets associated with petroleum operations will be vested with Pemex, who may approve leasing of certain movable assets and buildings under conditions established in the contract.

4. Duration and phases

Based on a PPT presentation by Pemexs Subdireccin de Nuevos Modelos de Ejecucin, December, 2009
2

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In deepwater and in Chicontepec, the duration of contracts will consider two phases, as follows:

5. Termination, suspension and extension

Early termination of contracts will be made if no discovery is made during the exploration phase and/or if conditions make the project unviable or under material breach. The contractor will have the right to surrender the contract, provided work commitment has been fulfilled.

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Suspension will be applicable in cases of force majeure, v.g. hurricanes, riots, strikes, etc. Contracts may be extended if deemed convenient by the Parties, prior to the extinction of the term. The Contract might be revised to consider an extension to the duration along changes in other contractual conditions such as fees.

6. Work program and budget

For each year, the contractor will prepare and submit to Pemex a work program and budget for approval. For the first phase, the work program should include the minimum work commitment. Pemex will review the work program and budget and propose changes, but will not unreasonably withhold approval where the work program meets sound technical and economic standards and the budget is in range of benchmarked costs. Pemex will approve leases over a certain minimum financial threshold. Presentation, review and approval of work programs and budgets will be based on pre-established procedures.

7. Payments

8. Service fees
o o o o Service fees = 0.75 Expenses + Fee per barrel*Q For each period, the payment will be the minimum between the available cash flow and the service fees Payment = min(ACF, 0.75 Expenses + Fee per barrel * Q) Where: i. ACF= Contracts available cash flow

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o o

ii. Expenses = expenses to be reimbursed (predefined concepts, under pre-defined accounting and cost verification procedures) Fee per barrel= covers the non-reimbursable expenditures plus the margin, includes adjustments for inflation and sliding scale based on cumulative production Q = Production, measured at delivery point Any difference between accrued service fees and payment will be carried forward without interest, subject to ACF

9. Contracts available cash flow

The contracts available cash flow is the cash amount available for making payments to the contractor. Pending payments will be carried forward

10.

Fee per barrel adjustment

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11.

Cash flow

12.

Other financial terms

Carry-forward and debt extinction: If programmed payments exceed the available income, the excess will be carried forward. Any subsisting carried forward amounts will extinguish at termination of contract. Exploration expenses: Contractors exploration expenses will be adjusted by PPI until reimbursement according to the mechanism established for this purpose. Financial interest: No interests will be considered for purposes of service fees carry-forward. Currency: All payment will be made in US dollars. Payments frequency: Monthly. Taxes: Each party is responsible for corporate income tax an all other general taxes and duties applicable to its activities.

13.

Operational provisions
Measurement and delivery points: procedures for measurement of hydrocarbons and delivery points will be established. Pipelines and infrastructure: they may be constructed by the contractor, subject to Pemex approval, or by Pemex. If it results economic, facilities in the area may also be used to handle production from other areas; the mechanisms to handle such productions follow the principles of a hub. Technical Standards: the contract will contain references to technical international standards of operation and specifications.

14.

Governance
Governance mechanisms will be established to align the parties interests and rule their interaction; therefore, making the projects execution viable.

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Different levels of groups will be conformed. Members of both parties will make the relevant decisions of the project. Steering committee: Strategic. Six members. Technical sub-committee. Depending on the problems characteristics. Accounting sub-committee. Four permanent members, supported by specialists.

15.

Other provisions
Consortia: The contract can be entered into by a company or by a consortium of companies with a joint venture agreement. Change of control: Only to companies technical and financially qualified. Should be approved by Pemex. Confidentiality: The contract will not be confidential. Accesses to data: All information created under the contract shall be Pemexs. Technology: The contract shall include training, transfer of technology and R&D provisions. National content: Provisions will be included in order to maximize local employment and business opportunities for Mexican companies. Secondment: For on-the job training and technology transfer purposes. Arbitration: Under ICC Rules. Force majeure: Appropriate force majeure provisions. Applicable law: Mexican laws.

16.

Bidding process
Promotion and feedback process Pre- qualification of participants considering technical and financial capabilities

The bid will consist of a discount to a maximum fee per barrel.

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17.

Preliminary Calendar

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Appendix B - LEGAL ISSUES INCORPORATION IMPORT EXPORT

Companies wishing to enter the Mexican market may choose to incorporate a Mexican subsidiary or joint venture company. If a local office is opened, or if the buyer expects merchandise to be delivered directly to its plant or warehouse, the foreign exporter will be confronted with a variety of import requirements under Mexican law. a. Start-up Operations Incorporation Canadian companies may choose from several types of Mexican companies that may serve as a vehicle for conducting business in Mexico; namely: 1. 2. 3. 4. 5. limited liability stock corporation or sociedad anonima; limited liability company or sociedad de responsabilidad limitada; general partnership or sociedad en nombre colectivo; limited partnership or sociedad en comandita simple; limited partnership with shares or sociedad en comandita por acciones; and 6. cooperative association or sociedad cooperativa,

Each of these entities may be organized as a variable capital company or sociedad de capital variable. The common practice for Canadian investors is to organize their wholly owned Mexican operation by creating a limited liability stock corporation or sociedad annima with variable capital (S.A. de C.V.), parallel to a typical closely held Canadian corporation. In some instances, however, foreign investorsparticularly U.S. ones able to take advantage of favorable U.S. tax laws with respect to partnershipschoose to organize a limited liability company or sociedad de responsabilidad limitada with variable capital (S. de R.L. de C.V.). Another manner in which a Canadian company may establish an on-the-ground presence in Mexico is by establishing a branch office of the Canadian entity in Mexico. However, a branch does not have a separate legal existence from the foreign company and therefore may expose it to liability for acts performed by the branch in Mexico. Accordingly, as a general rule, it is not typically the preferred vehicle for a foreign firm in Mexico. Limited Liability Corporations

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Assuming a S.A. de C.V. is the chosen vehicle, a minimum of two shareholders is required for the incorporation of the company. The shareholders may be foreigners or Mexicans and either companies or individuals. If the entity is a wholly owned subsidiary, the common practice is to appoint the parent company as the majority shareholder holding 99 percent of the capital stock and another affiliate company or individual as holder of the remaining 1 percent. The companys initial subscription must be at least $50,000.00 pesos (US$5,208.33 at an exchange rate of $9.60 pesos to the dollar). The initial capital must be at least 20 percent subscribed and paid-in, the remainder to be paid as resolved by the shareholders or the board of directors. The company may be administered by a single individual or a board of directors made up of at least two individuals. Foreigners, residents or non-residents of Mexico may be members of the board. The directors are responsible for acts inherently within the scope of their authority and for obligations imposed upon them by law and the Articles of Incorporation. Steps to incorporate a S.A. de C.V. are as follows: 1. A permit from the Secretariat of Foreign Affairs must be obtained for the use of the corporate name. Three names are provided to the Secretariat in order of preference, and the name is authorized on that basis. If all the three choices are taken, a new list must be submitted. The name authorization takes about two or three days to process. Once authorized, the interested party has 90 business days to incorporate or the authorization expires. 2. A special power of attorney must be granted by each shareholder to members of a law firm, authorizing it to carry out the incorporation tasks. The powers must be notarized by a local notary public, and consularized by a Mexican consulate in Canada. Thereafter, these powers must be translated into Spanish by an official translator in Mexico. 3. The Articles of Incorporation of the company must be formalized before a Mexican notary public. Permitting Requirements Once the vehicle of choice is incorporated, several other permits, notices and/or registrations must be obtained/processed: 1. The company must be recorded in the Public Registry of Commerce of the companys domicile. 2. The Company must obtain a Federal taxpayers number (Registro Federal de Contribuyentes) from the Mexican tax authority, Hacienda. 3. The foreign shareholders in the company must notify Hacienda that they hold shares in a Mexican company. 4. The company must be registered before the National Registry of Foreign Investment. Depending on the nature of the activity, federal, state and/or local environmental and use permits may be required.

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Importing Goods If the Mexican company needs to import components, equipment or other goods, it must obtain a Mexican importers license from Hacienda. Before importing goods, it is necessary to check to see if there are any other tariff and non-tariff import restrictions, such as Official Mexican Standards, or NOMs. Office of Foreign Investment of the Economy Secretariat In accordance with the Mexican Foreign Investment Law (the Law), all Mexican companies with foreign investment and all foreign companies operating in Mexico must register before the Mexican Department of Foreign Investment. A Mexican company has foreign investment (1) when any of its shareholders are foreign companies or individuals or (2) when all its shareholders are Mexican but the percentage of foreign capital in any one shareholder company exceeds 49% of such shareholders common shares in the company.3 The Foreign Investment Law restricts or prohibits foreign or private investment in many sectors. Although foreign investment in the electronics sector has no restrictions, many other sectors do, including telephone, satellites, airports, radio and television, oil & gas and electric power. b. Import/Export Exporting Procedure and Logistics Before shipping any merchandise to Mexico, it is advisable to secure the services of a licensed customs broker. Customs brokers are able to provide information on applicable duties and non-tariff regulations. More importantly, they are able to guide products through Mexico's sometimes convoluted and confusing customs process in a timely and relatively hassle free manner. The first thing that a company must do before exporting to Mexico is make sure that the buyer is registered with the Importers Registry. This registry is filed with the Treasury Secretariat (Secretara de Hacienda y Crdito Pblico, Hacienda). As an exporter, it is also important to ensure that the Mexican importer has submitted all the necessary information regarding packing, labeling, and quality standards certification (Mexican Official Standards or NOMs) to the appropriate Mexican Customs officials. Customs brokers are limited in what they can do. Mexican import laws contain a number of restrictions and disclaimers that are unavoidable. Certain classes of merchandise are restricted or prohibited altogether if Mexico feels it must protect its economy and security, safeguard consumer health and well being, or preserve domestic plant and animal life. Most vehicles are subject to import quotas or restraint under bilateral trade agreements, though quotas rarely apply to automotive aftermarket parts and accessories per se.
3 Foreign Investment Law (FIL), Art. 2, par. II; Foreign Investment Regulation (FIL Regulation), Art. 1, Par. III.

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In addition to customs restrictions under Hacienda, many other Mexican federal government enforcement agencies and departments impose import restrictions, such as Health Secretariat (Secretara de Salud), the Commerce Secretariat (Secretara de Economa, SE), the Communications and Transportation Secretariat (Secretara de Comunicaciones y Transportes), and the Secretariat of the Environment, Natural Resources and Fisheries (Secretara de Medio Ambiente, Recursos Naturales, y Pesca, SEMARNAP). For example, SE requires a special permit before used machinery can enter Mexico and fixes the import quotas discussed above. Likewise, environmental permits must be obtained in order to handle or transport hazardous materials including paints, oils, lubricants and other substances used in automotive parts and accessories. In turn, the Health Secretariat requires certification prior to import for all products designed to have physical contact with the human body. Finally, Mexico has an elaborate system of mandatory federal standards that must be complied with prior to import. Importation Paperwork/Customs Declaration One of the most important services that a customs broker can provide is the handling of paperwork, especially the all-important customs declaration. Customs declarations are not required for imports and exports related to foreign embassies and consulates, electricity, crude oil, natural gas and personal effects. However, all other imports require the importer to present a declaration in writing and under oath to customs officials and provide documentation that verifies the customs value of the merchandise. A copy of this declaration must also be provided to the customs broker or attorney-in-fact. The customs broker prepares the import documentation based on the information provided and pays any monies owing at a private bank located within Customs. The customs broker then presents the merchandise in the presence of customs official accompanied by the previously paid customs declaration. Commercial Invoice In addition to the above, customs declaration, a commercial invoice or Pro-forma must be presented when the customs value exceeds US$1,000. The invoice should be prepared in Spanish; otherwise, a translation may be prepared on the reverse or inside of the invoice. The importing company must also provide the bill of lading or airway bill of lading, endorsed by the transport company. In addition, documents showing compliance with applicable regulations and proof of the country of origin and if appropriate, country of export, must also be provided. Lastly, a payment guarantee for additional amounts that may apply if the declared value is less than the estimated price of the merchandise established by Hacienda must be provided. Special regulations also exist that govern the import of samples, demonstration and promotional material. When these goods are to be used in fairs, conferences, exhibitions, trade shows and conventions, they can be temporarily imported dutyfree according to Article 106 of the Mexican Customs law for up to a period of one year, as long as they are returned in the same state they arrived. The goods must be marked or otherwise identified for the exclusive use during the event, and must be distributed free of charge. However, if the promotional material is to be sold at the event, it must be imported indefinitely. This means that all duties must be paid

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and that all applicable regulations and non-tariff restrictions are fulfilled. Only when goods are imported definitely can they be sold. Likewise, if the items are not marked to indicate that they are for the specific purpose of promotion, they must be or returned once the event is over. Packing slip/list A packing list/slip must always accompany the shipment. This document allows the exporter, the transport agency, the insurance company, customs and the buyer to identify the goods to be imported. The information shown on the packing list/slip must support the description on the commercial invoice. This guaranties strict control, allows for the identification of the complete shipment at any point, and provides a basis for registering complaints with insurance agencies should the merchandise be damaged or missing. Six copies of the packing list/slip must be issued by the exporter to the transport agency. The packing list/slip must include: 1. 2. 3. 4. Description of merchandise, Value of merchandise, Weight, and Volume.

It is also advisable to include on the packing list/slip the box, parcel or pallet dimensions as it aids in obtaining transport costs within Mexico. Certificate of Origin The Certificate of Origin certifies that the goods being imported have been substantially manufactured or produced in a country that is party to a treaty or trade agreement with Mexico, such as NAFTA. If the certificate is obtained, the goods receive preferential tariff treatment. It must be presented without exception with the shipment at the point of entry before goods can receive preferential tariff treatment and avoid payment of compensatory quotas. There exist various types of certificates of origin, depending on the origin and type of commodity. "Soft" certificates provide tariff preferences under free trade agreements and do not require a visa from the government agency responsible for issuing these types of documents in the originating country. "Hard" certificates of origin are those that must be verified by the authorities of the originating country. Free Sale Certificate The importation of some types of goods involves the presentation of yet another certificate at the point of customs clearance. A free sale certificate must be issued in the country of origin of the merchandise to be imported into Mexico. This certificate consists of a written statement made by the appropriate authorities wherein it is declared that, in the country of origin, the goods may be sold and consumed freely without exception, and that its sale does not require a special permit.

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Customs Valuation Process In general, the customs value of goods is their transaction cost, except when this value cannot be determined. The transaction value of imported merchandise is equal to the price paid or payable for the merchandise, plus additional amounts for any of the following:4 1. Any commissions incurred by the buyer with respect to the imported merchandise. 2. The packing costs incurred by the buyer with respect to the imported merchandise. 3. Transportation and insurance expenses and any other related expenses such as merchandise handling. 4. Royalty or license fees related to the imported merchandise that the buyer is required to pay - directly or indirectly - as a condition of the sale of the imported merchandise for exportation to Mexico. 5. Proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue - directly of indirectly - to the seller. The price actually paid or payable for the imported merchandise shall be increased by the amounts attributable to the above-mentioned items, however only to the extent that each amount is not otherwise included within the actual purchase price and is based on sufficient information. If for any reason sufficient information is unavailable, the transaction value shall be treated as one that cannot be determined. It must also be noted that Mexican customs has the authority to declare that the customs value has been determined incorrectly during or after customs clearance. It is advisable to request from Hacienda a confirmation that the value of the goods was correctly calculated to ensure legal certainty and avoid future valuation problems. General Import Tax Law NAFTA has eliminated the majority of the tariffs on products likely to be sold in the Mexican automotive parts and accessories aftermarket. There are very few dutiable products remaining and they will be practically eliminated by the year 2003. The second phase of NAFTA began in 2001, thereby preventing non-NAFTA raw materials or other materials to be used in the manufacturing process from enjoying the same tariff rates as the materials originating in NAFTA countries. Customs Clearance This is the final stage of the process. During customs clearance, products are prepared for examination by the authorities. This process is as follows:

4 "A guide to clearing Customs in Mexico", The Guide to Mexico for Business, 8th Annual Edition, American Chamber Mexico, page 68.

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Deconsolidation Merchandise is off-loaded from the pallet or taken out of the container in which it arrived for preliminary revision by the contracted transporter, parcel service or customs broker. These agents verify that the packing materials have not been broken and that the merchandise has not suffered any alterations or accidents. Preliminary Examination
The customs broker or parcel service company examines the goods and documents to determine, among other things, the value of the goods for customs purposes and their dutiable status, whether the goods must be marked with the country of their origin or require special marking or labeling and whether the shipment contains articles that must comply with non-tariff restrictions. Also the customs brokers determine if the shipment contains articles that are prohibited in Mexico, whether the goods are correctly invoiced and whether the goods are in excess of the invoiced quantities. If the merchandise passes all of these tests, it is prepared for customs clearance. All required documents are annexed to the shipment at this point.

Automated Manifest System Once the corresponding import duties are paid, if applicable, the merchandise is presented, with an entry summary, to customs officials. The entry summary is scanned into the Automated Manifest System to define whether or not the authorities will examine the merchandise or whether it will clear customs without first being reviewed. A red light requires examination, while a green light means the goods have cleared customs without examination. Customs Examination If it is determined by the Automated Customs system -- red light -- that the goods must be examined, the shipment is carefully verified. Customs officials ensure that: 1. Goods declared on the invoice in fact are the same as those presented physically before customs, 2. Declared customs value was correctly calculated, 3. Harmonized Tariff Schedule (HTS) number is correct, and 4. Regulations and non-tariff restrictions have been observed. Should customs officials detect any discrepancies, the authorities will levy the shipment and begin the PAMA process (Administrative Procedure in Customs Matters). If no problems are detected, the merchandise has cleared customs. Second Examination All merchandise must pass through the Automated Manifest System a second time, regardless of the outcome of the first pass through the system. Shipments may be examined again if a second red light occurs or they may pass without being examined in the event of a second green light.
If a shipment is designated for review, the examination will take place within three hours. This may take longer if discrepancies are detected. If the shipment is not designated for review, it will be released immediately so that it can proceed to its final destination.

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Appendix C QUESTIONNAIRE
The following questionnaire was developed and used in conducting the interviews. Preamble: Americompass has been retained to formulate and evaluate market entry strategies for companies targeting the Mexican energy sector. We are interviewing you because of your experience working in Mexico. The intention is to interview a large number of people because of the make up of the sector, which is not homogeneous. The information will be used to prepare a public document but the contributors will not be identified to respect confidentiality. Strategy Examples: 1. Agents a. Sales agents b. Marketing representatives 2. Local partnering a. Politically connected (value of connected players such as former PEMEX/CFE employees) b. With complimentary expertise (value of engineering or contracting firms with experience doing business with PEMEX/CFE) 3. Project joint venture 4. Going it alone a. Green fields b. Local sales/business development office c. Acquisitions 5. Subcontracting or licensing Questions: 1. Is there another strategy you would add to the list above? 2. Would you please describe your business under one of the following categories? Consultants (including technical training, engineering and studies) Service companies and subcontractors Integrated service companies Engineering and construction companies Equipment suppliers Exploration and production companies Utility service providers (including pipeline transportation, storage and local distribution) Other

3. How long has your company worked in Mexico?

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4. Please describe your market strategy and mention if it was the correct one 5. Has business met your expectations? Exceeded expectations? Not met expectations? Why? 6. To what do you attribute to your companies success in Mexico? 7. What are the main difficulties (legal, regulatory, bureaucratic, etc.) faced by your company so far? 8. What is your perception of the energy reform of 2008 and of the main changes it will bring to the way Pemex conducts its business? 9. In which ways will the energy reform affect the traditional entry strategies mentioned above? 10. What are the main challenges ahead in the energy sector? 11. Was your company expecting to be profitable in the short term, say 1 year, or over the longer term, say 2-3 years? 12. If you had the benefit of your current experience when you first started, would your strategy be different than it is now? 13. How do you envision investment and business conditions in Mexico in the coming years? 14. If you were advising foreign companies wishing to target Mexico, what would you recommend as a strategy? What would you advise them in terms of expectations?

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Appendix D LIST OF INTERVIEWEES

1. CARSO Armando Rimoldi Rentera, Director General Email: arimoldi@cicsa.com.mx Website: www.cicsa.com.mx 2. ENERGIA A DEBATE David Shields, Director Email: dshields@energiaadebate.com Website: www.energiaadebate.com 3. GRUPO DIAVAZ Ildefonso Aguilar Bueno, New Ventures & Negotiations Email: iaguilar@diavaz.com Website: www.diavaz.com 4. GRUPO R / INDUSTRIAL PERFORADORA DE CAMPECHE Abel Vargas, CFO Email: avargas@grupor.com Website: www.grupor.com.mx 5. HALLIBURTON Ramses Pech, Principal Market & Business Analyst Mexico Email: pech.ramses@halliburton.com Website: www.halliburton.com 6. LOPEZ VELARDO, HEFTYE Y SORIA Jorge Jimnez, Parner Email: Jimnez@lvhs.com.mx Website: www.lvha.com.mx 7. MARCOS Y ASOCIADOS Daniel A. Marcos y Antonio Jurez, Partners Email: daniel@marcos.com.mx and jajuarez@marcos.com.mx 8. PEMEX, Subdireccin de Nuevos Modelos de Ejecucin Sergio Guaso, Subdirector Email: guaso@pemex.com Website: www.pemex.gov.mx 9. QMAX Garrett Brown, General Manager Mexico Email: gbrown@qmax.com.mx Website: www.qmax.com.mx 10. REPSOL Pablo Espresate, President Mxico Email: pespresate@repsol.com Website: www.repsol.com

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11. TESCO Hugo Alberto Morn, Vicepresident & General Manager Unidad de Negocios para Latinoamrica Email: hugo_moran@tescocorp.com Website: www.tescocorpt.com 12. TOPCO Gerardo Franco, Managing Director Latin America Email: gerardo.franco@top-co.ca Website: www.top-co.ca 13. TARCO Jim Lysyk, CEO Email: jim.lysyk@tarco.com Website: www.tarco.com 14. TRANSCANADA Lorena Patterson, Representative Mexico Email: lorena_patterson@transcanada.com Website: www.transcanada.com 15. TTS SENSE Vince Fortier, Marketing Manager Y Laura San Romn Oate, Administrative Coordinator Email: vince.fortier@tts-sense.com and laura.sanromanonate@tts-sense.com

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Appendix E REFERENCES
Alberta Employment and Immigration, Oil & Gas Equipment and Services: Investment Opportunity Analysis, May, 2006. Baker George, Update of Energy Reform in Mexico, in, Office of the Governor of Texas, State of Texas NAFTA Office Mexico, Texas Energy Trade Mission 2008, August 2008, http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2008/presentations/GBak erUpdateonEnergyReforminMexico_Rev%202-Sep-08.pdf. CanElson Drilling Joint Venture Signs Second Drilling Rig Contract for Mexico and Starts Drilling Operations in Mexico, News Finance, November 30, 2009, in http://ca.news.finance.yahoo.com/s/30112009/28/link-f-ccnmatthews-canelsondrilling-joint-venture-signs-second-drilling-rig.html. Diario Oficial de la Federacin, Disposiciones administrativas de contratacin en materia de adquisiciones, arrendamientos, obras y servicios de las actividades sustantivas de carcter productivo de Petrleos Mexicanos y Organismos Subsidiarios January 6, 2010. Greig C. Walter, Doing Business with Pemex: A Small Companys Perspective, Pemex Presentation, 2009 in, http://www.buyusa.gov/houston/enduresmeppt2009.pdf. Guaso Sergio, PEMEX New E&P Contracts, August 29, 2006 in http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2006/E&P__LIC__GUASO .pdf. Guaso, Sergio, Oil & Gas Contracts Under the New Pemex Law, 2008. Industry Canada, Oil and Gas Equipment and Services Industry Report, October 2006, in http://www.ic.gc.ca/eic/site/ogt-ipg.nsf/eng/og00187.html#International. Jimenez David, The Mexican Energy Reform: A Step Forward, 2008, in http://www.energy-profile.com/files/JRA.pdf. Lopez Velarde Rogelio and Valdez Amanda Mexico, in Warner Waide and Skene R. Gavin eds., Project Finance in 38 Jurisdictions Worldwide, 2010, pp. 125-131. Martinez, Insights & Observations of Doing Business in the Mexican Energy Sector, Presentation of Bay-Inelectra and Constructora Bay de Mxico, 2006, in http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2006/MIKE_MARTINEZ.p df. Martnez Medina Mayra, "Alberta: lo que Pemex no pudo ser" en Energa Hpy, May 2007, pp. 36-51 Mexican Expansion: Whittaker Engineering Case Study, U.K. Trade and Investment, 2009 in https://www.uktradeinvest.gov.uk/ukti/fileDownload/Whittaker.pdf?cid=436338.

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Olsen, Robert Mexican energy reforms a start, but not enough to halt declining output, Petroleum Economist, 2008, in www.petroleum-economist.com Olsen, Robert, How many Mexicans does it take to drill an oil well? Petroleum Economist, 2009, in www.petroleum-economist.com Olsen, Robert, Back to square one for Pemex's challenging Chicontepec oil project, Petroleum Economist, January 4, 2010, in www.petroleum-economist.com. Pascal B. Larry and Paramo Marcelo, The Pemex Law and Related Measures What Energy Reform Means for Mexico, in North American Free Trade & Investment Report, July 31, 2009, in http://www.haynesboone.com/files/Publication/735d4a90c39e-48d7-b7f5-b219b9d3f5ae/Presentation/PublicationAttachment/1c20c81be06d-4417-9fa9-b4fb1fa0c969/Pemex_Law_and_Related_Measures.pdf. Pech, Ramses, Analisis del Mercado de Hidrocarburos, Presentation at the Institute of the Americas Meeting on Mexico Energy Reform, February 2009, in http://www.iamericas.org/presentations/energy/Mexico09/Ramses%20Pech.pdf. Pemex to Utilize Wavefront's EOR Solution at Samaria-Luna Asset, The RigZone, December 15, 2009, in http://www.rigzone.com/NEWS/article.asp?a_id=84165. PEMEX, A New Starting Point, June 2009, in http://www.ri.pemex.com/files/content/Presentacion%20inversionistas%20ingles% 20090622%20AMERI.pdf. PEMEX, Sustentabilidad de las Finanzas Pblicas, October 2009. PEMEX, Estrategia de PEMEX para Desarrollo de Proveedores Nacionales, May 2009, in http://www.pemex.com/files/content/desarrollo_proveedores_0907101.pdf. PEMEX, Ramos Luis, Strategies for future hydrocarbons production in Mexico, October 2009, in http://www.energy.ca/users/getdownload.asp?DownloadID=429 Stojanovski, Ornen, The Void of Governance: An Assessment of Pemexs Performance and Strategy, Program on Energy and Sustainable Development at Stanford University , Working Paper #73, April 12, 2008, in http://iisdb.stanford.edu/pubs/22156/WP_73,_Stojanovski,_Pemex,_12_Apr_08.pdf. Shearman & Sterling, Cases and Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977, October 2009, in http://www.shearman.com/files/upload/fcpa_digest.pdf. Trebat, Thomas, Energy Reform in Mexico: If it Happens, Will It Really Matter? Roubini Global Economics, August 3, 2008, in http://www.roubini.com/latammonitor/253246/energy_reform_in_mexico__if_it_happens_will_it_really_matter. Weatherford International, Q3 2009 Earnings Call Transcript, October 19, 2009, in http://seekingalpha.com/article/167357-weatherford-international-ltd-q3-2009earnings-call-transcript?source=bnet&page=10.

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Word Duncan ed., Oil in Mexico: Pozo de Pasiones, The Energy Reform Debate in Mexico, Woodrow Wilson International Center for Scholars, 2008, in http://www.wilsoncenter.org/topics/pubs/Oil%20in%20Mexico.%20Pozo%20de%2 0Pasiones.pdf. Xtreme secures 18 month oil drilling contract Mexico, Marketwire, September 2009, in http://www.marketwire.com/press-release/Xtreme-Coil-Drilling-Corp-TSX-XDC1038568.html.

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Appendix F - AMERICOMPASS
AmeriCompass is an international consulting group made up of a unique blend of Mexican, Canadian and US principals offering over 50 years of combined experience in assisting international companies to do business in the NAFTA marketplace. Representing various academic and professional backgrounds, AmeriCompass consultants have extensive experience in a wide range of sectors and disciplines. Focusing on the Mexican market, AmeriCompass offers expertise in the following sectors: Energy (oil & gas and electric power) Telecommunications & ICT Transportation Infrastructure Manufacturing (autoparts, maquiladoras, electronics, etc.) Housing & Construction

In each of these areas, AmeriCompass assists foreign companies in identifying and implementing trade and investment opportunities in Mexico through a range of value added services. SERVICES Project Development o o Energy and infrastructure project development Manufacturing start-ups Government Relations Monitoring Access Advocacy

Market Intelligence Market assessments Feasibility studies Political and regulatory scans

Trade Promotion & Development Representation services Matchmaking

Legal Services

Through its affiliated law firm, RosenLaw, S.C., AmeriCompass is also able to assist its clients with the legal aspects of doing business in Mexico. AmeriCompass in Canada and the United States Through full-time offices in Calgary and affiliated offices in Seattle, Denver, and Washington, D.C., AmeriCompass is also able to link Mexican companies and governmental bodies to trade and investment in Canada and the United States.