01-06-04 Part I: Pemex overview
Brief history of Pemex
In 1938, Mexico's President Lázaro Cárdenas del Rio nationalized the foreign-owned oil companies then operating in Mexico. The Mexican Congress later established Petróleos Mexicanos (Pemex) by a decree effective on Jul.20.1938, and on July 17, 1992 split the operational management into four subsidiaries:
Pemex-Refinación (Pemex Refining), Pemex-Gas y Petroquímica Basica (Pemex Gas and Basic Petrochemicals), Pemex-Petroquímica (Pemex Petrochemicals), and Pemex-Exploración y Producción (Pemex Exploration and Production), which collectively make up Pemex, Mexico's state oil and gas company. Each subsidiary operates as a separate entity of the Mexican government and has the legal authority to own assets and run its business under its own name.

Pemex Refining converts crude oil into gasoline, jet fuel, diesel, fuel oil, asphalts and lubricants. It also distributes and markets most of these products throughout Mexico, where it experiences a significant demand for its refined products. Pemex-Refining's atmospheric distillation refining capacity was approximately 1,540 mm bpd during 2002. Pemex-Refining produced 1,276 mm bpd of refined products in 2002 compared to 1,267 mm bpd in 2001.
Pemex Gas and Basic Petrochemicals (PGBP) processes natural gas and natural gas liquids (NGLs), transports, distributes and sells natural gas and LPG throughout Mexico and produces and sells several basic petrochemical feedstocks. PGBPs total sour natural gas processing capacity increased from 3,923 mm cfpd in 2001 to 4,173 mm cfpd in 2002. PGBP processed 3,260 mm cfpd of sour natural gas in 2002, a 1 % increase from the 3,227 mm cfpd produced in 2001. It produced 418 mm bpd of NGLs in 2002, 5.6 % less than the 443 mm bpd of NGLs produced in 2001.

Pemex Petrochemicals manufactures different petrochemical products, including: (1) methane derivatives, such as ammonia and methanol; (2) ethane, such as polyethylenes, as well as other olefins; (3) aromatics and their derivatives; (4) propylene and its derivatives; and (5) oxygen, nitrogen and other products. Pemex-Petrochemicals' total annual production (excluding ethane and butane gases) decreased by 1.8 % in 2002, from 5,994 thousand tons in 2001 to 5,889 thousand tons in 2002.
In 2002, Pemex sold 1,702 mm bpd of crude oil through its subsidiary P.M.I. Comercio Internacional. Pemex is a major supplier of crude oil to the US. PMI, PMI Trading and their affiliates (collectively, the PMI Group) provide Pemex and a number of independent customers with international trading, distribution and related services. PMI and PMI Trading sell, buy and transport crude oil, refined products and petrochemicals in world markets. The PMI Group also provides related risk management, insurance, transportation and storage services to Pemex. The PMI Group's trading volume of sales and imports totaled $ 19.4 bn in 2002, including $ 13.3 bn in crude oil sales.

Pemex Exploration and Production (PEP) is responsible for the discovery, development, production and transportation of hydrocarbon reserves in Mexico. The main goal of PEP is to achieve the highest possible long-term economic value through its exploration and production (E&P) activities in Mexico.
To better achieve its goal, PEP was divided into four geographic operating regions: Marina Noreste (Offshore Northeast), Marina Suroeste (Offshore Southwest), Sur (South) and Norte (North).

Mission of PEP
In order to achieve the mission of the vision set out by PEP, three strategic targets were defined, including:
1) to grow and place the company on a par with the best global practices,
2) to increase competitiveness to assure PEPs long-term viability, and
3) to turn PEP into a leading international corporation.

PEP was set out to fulfil its mission by
1) strengthening the assets as business units,
2) visualizing the company as matrix in regards to growth,
3) strengthening the decision making process,
4) strengthening the technical and administrative capabilities, and
5) capturing operational and administrative synergies.

In 2001, PEP initiated the Strategic Gas Program (PEG), a 9-year $ 120 bn investment plan aimed at increasing Mexico's supply of natural gas and developing a significant reserve base that would satisfy the domestic demand for gas, thereby reducing the nation's reliance on imports, primarily from the US. Under the plan, $ 68 bn has been allotted to E&P activities to expand Mexico's reserves, to enhance the reliability of the production and transportation infrastructure and to improve the restoration rate of oil wells, mainly in the highest-quality, most economically attractive oil fields.
PEP plans to spend $ 7 bn-$ 9 bn per annum on E&P activities, and expansion plans include the proposed construction of more than 40 offshore platforms and nearly as many new pipelines. Exploration expenses are expected to surpass $ 1.5 bn per annum and plans include the drilling of 110 exploration wells (70 onshoreand 40 offshore).

As of Dec.31.2002, PEP had 1,711 producing wells and 1,834 prospective locations in those oil fields containing over 85 % of Mexico's proven reserves. Offshore, PEP had 346 producing wells and 20 fields in production.
Due to increased reliance on gas-fired power generation and the privatization of gas distribution systems in Mexico's largest cities, the demand for gas continues to increase, while industrial developments planned along the Pacific Coast will only further increase the demand. Although Mexico envisions an aggressive development program geared at increasing the supply of gas by 9-10 % per annum through 2010, the nation will still only be able to satisfy about 80 % of its growing domestic demand.

Organizational laws
The activities of Pemex and its subsidiary are regulated primarily by:
-- the Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo (the Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs; and
-- the Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petróleos Mexicanos and Subsidiary Entities).

The Organic Law and related regulations grant Pemex and certain of its subsidiaries the exclusive right to:
-- explore, exploit, refine, transport, store, distribute and sell (first-hand) crude oil;
-- explore, exploit, produce and sell (first-hand) natural gas and transport and store natural gas, to the extent the transportation and storage activities are inextricably linked with such exploitation and production; and
-- produce, store, transport, distribute and sell (first-hand) the derivatives of petroleum (including petroleum products) and natural gas used as basic industrial raw materials that constitute basic petrochemicals, which include ethane, propane, butanes, pentanes, hexanes, heptanes, naphthas, carbon black feedstocks and methane, but in the case of methane, only if obtained from hydrocarbons used as basic raw materials by the petrochemical industry and obtained from deposits located in Mexico. The Organic Law allocates the operating functions of Pemex among its four subsidiaries.

In 1995, the Mexican Congress amended the Regulatory Law to allow private and social sector companies, which include labor-controlled organizations and industries, to participate, with the Mexican Government's approval, in the storage, distribution and transportation of natural gas. The new regulation allows these types of companies to construct, own and operate pipelines, installations and equipment. Since 1997, the Mexican Government has required Pemex to divest its existing natural gas distribution assets but has allowed Pemex to retain exclusive authority over the exploration, exploitation, production and first-hand sale of natural gas, as well as the transportation and storage inextricably linked with this type of exploitation and production.

Directors and key management
Pemex is governed by an 11-member Board of Directors. The President of Mexico appoints 6 directors, including the Chairman of the Board. A recent amendment to the Organic Law requires members of the Board of Pemex also include the Secretary of the Ministry of the Environment and Natural Resources. The President of Mexico also appoints the Director General of Pemex. On Dec.2.2000, upon the inauguration of Mr Vicente Fox Quesada as President of Mexico, Mr Raúl Muñoz Leos was appointed Director General of Pemex, effective on such date.
The Petroleum Workers' Union selects the remaining 5 directors from amongst Pemex employees. Alternate directors are authorized to serve on the Board in place of directors who are unable to attend meetings or otherwise participate in the activities of the Board. Board members are not appointed for a specific term. Board members, except for those members selected by the Union, serve subject to the discretion of the President of Mexico.

Pemex's subsidiaries are governed by an 8-member Board. Each of these Boards consists of the Director General of Pemex, the Director General of each of the other three subsidiary entities and four additional directors, who are each appointed by the President of Mexico. The Director General of Pemex serves as Chairman of the board of each subsidiary entity. Neither the members of the Boards nor the executive officers are appointed for a specific term. The members of the Boards and the Directors General serve subject to the discretion of the President of Mexico.
At an extraordinary session on May.7.2001, the Board approved the creation of, and confirmed the appointments for, five new executive offices: Corporate Director of Strategic Planning, Corporate Director of Operations, Corporate Director of Engineering and Project Development, Corporate Director for Competitiveness and Innovation and Executive Coordinator.

PEP employment levels
In 2002, the number of employees totaled 44,658, of which 35,153 where designated as technical (79 % of the total) with the remaining 9,505 designated as administrative (21 %).
The bulk of the employees are located in the Onshore Southern region (34 % of total), followed by the Onshore Northern region (26 %), the Offshore North-eastern region (23 %), the Offshore South-western region (11 %) with the remaining being located at the company's headquarters (6 %) in Mexico City.

Seismic
PEP acquired 16,069 sq km of 3-D seismic in 2002, more than five times the amount covered in 2001.
Likewise, PEP acquired 17,986 sq km of 2-D seismic, up by 14,525 sq km in 2001 due to the company restarting its exploration activities in the Deep GofM.

Industrial safety
PEP reported record low accident levels in 2002 at 139, this compares to record high levels of 967 accidents achieved in 1996.
PEP has been able to keep the number of accidents down at a time when it is increasing its exploration activities, well drilling, and construction of infrastructure.

Environmental protection
The amount of industrial waste produced by PEP in 2002 was 246,735 tons. Of this amount, the well drilling and maintenance units generated 224,447 tons, representing 91 % of the full amount. By means of multi-annual contracts, PEP has been able to maximize disposal thus achieving the total removal during the year of 247,025 tons.
Another result derived from comprehensive audits is the detection and correction of abnormal situations. Some 285 abnormal events were identified in 2002, of which 406 were corrected. Abnormal situations decreased from 324 at YE:01 to 203 by YE:02, which is the lowest reported level by PEP in 8-years.
Land surface contamination is mainly due to accidental hydrocarbon spills while in the process of handling and transport materials. Regarding soil remediation, PEP achieved 97.7 hectares of previously contaminated soils, therefore, total extension of areas still to be worked on declined from 279.2 hectares in 2001 to 236.3 hectares by YE:02. The contaminated soils reduction rate was 16 % in 2002, compared to the average annual rate of 10 % for the 7 previous years.

Well maintenance
In 2002, 1,355 well interventions (1,209 workovers and 146 stimulations) were performed, up by 135 compared to 2001.
In order to slow field declines in the Northern, Southern and Offshore South-western regions, 914, 318 and 71 well interventions were performed, respectively.

Reserves
Under the Political Constitution of the United Mexican States and the Regulatory Law, all oil and other hydrocarbon reserves within Mexico are owned by the Mexican nation and not by Pemex. Under the Organic Law, Pemex and is subsidiaries, except for Pemex-Petrochemicals, have the exclusive right to produce, not own, these reserves, and sell the production. The exploration and development activities of Pemex and the subsidiary entities are limited to reserves located in Mexico. Mexico's proved reserves are estimated by PEP's technical staff.
PEP estimates Mexico's reserves using standard geological and engineering methods generally accepted by the petroleum industry.

As of Jan.1.2003, Mexico's 34 hydrocarbon basins contained 50 bn barrels of crude oil equivalent, consisting of 20 bn barrels of proven reserves (40 % of total reserves), 17 bn barrels of probable reserves (34 %) and 13 bn barrels of possible reserves (26 %).
The Offshore Southwest and Northeast regions contain 9 % and 34 % respectively of Mexico's total reserves, while the Onshore Southern and Northern regions contain 15 % and 42 % respectively of the total reserves.

Hydrocarbon reserves, mm boe
As of Jan.1.2003
Region -- Proven -- Probable -- Posible -- Total
Southwest -- 1,844.6 -- 1,230.9 -- 1,499.8 -- 4,575.4
Northeast -- 10,505.3 t -- 4,866.5 -- 1,575.2 -- 16,947.0
Total offshore -- 12,349.9 -- 6,097.4 -- 3,075 -- 21,522.4
Southern -- 6,099.1 -- 1,042.5 -- 578.5 -- 7,720.1
Northern -- 1,628.2 -- 9,825.0 -- 9,336.5 -- 20,789.7
Total onshore -- 7,727.3 -- 10,867.5 -- 9,915 -- 28,509.8
Total -- 20,077.3 -- 16,965.0 -- 12,990.0 -- 50,032.2

Mexico's four types of crude oil
Crude oil can be classified by sulphur content. "Sour" crudes contain 3.4 % or greater sulphur content by weight and "sweet" crudes contain less than 1.0 % sulphur content by weight. Most of PEP's production is classified as sour crudes.
PEP produces four types of crude oil:
-- Altamira, a heavy crude oil;
-- Maya, a heavy crude oil;
-- Isthmus, a light crude oil; and
-- Olmeca, a very light crude oil.

Most of PEP's production consists of Isthmus and Maya crude oil. In 2002, 68.2 % of PEP's total production of crude oil consisted of heavy crudes and 31.8 % consisted of light and very light crudes. The Offshore region yields mostly heavy crude oil (67.0 % of overall production), although significant volumes of light crude oil are also produced (15.0 % of overall production).
The Southern region yields mainly light and very light crudes (together, 15.7 % of overall production), whereas the Northern region yields mostly heavy crude oil (2.4 % of overall production).

Pipelines
The hydrocarbon pipeline network owned by PEP connects the producing hydrocarbon centers with refineries and petrochemical plants. At YE:02, this network consisted of approximately 28,558 km of pipe, of which 2,810 km were located in Offshore Mexico with 12,085 km and 13,663 km located in the Onshore Southern and Northern regions, respectively.
Because of its higher sulphur content, Maya crude oil requires extra processing and has lower refining yields than do more valuable sweet crudes, and thus requires extra investment by the purchaser to refine. Because of this, Pemex receives a lower price for Maya crude oil than for sweeter crude oils that cost less to refine. In addition, because of this price difference, Pemex must continue to support the export value of sour crude oil such as Maya crude oil in relation to other grades of crude oil by creating incentives for refiners to invest in high-conversion refineries capable of upgrading the relatively large proportion of residue produced from processing sour crude oil in less efficient refining complex configurations. Pemex does this by entering into long-term Maya crude oil supply agreements pursuant to which purchasers agree to undertake projects to expand the capacity of their respective refineries to upgrade residue from Maya crude oil.

Growth plan
Under Mexico's growth plan, the nation plans to develop 20 non-associated gas fields to help PEP increase its gas production from 4.5 bn cfpd in 2001 to 7 bn cfpd by 2007, and 9 bn cfpd by 2010. PEP also plans to increase oil production from 3.1 mm bpd in 2001 to 4 mm bpd by 2007 and production products from 1.3 mm bpd to 1.6 mm bpd, respectively.
Although imports of LNG will help to meet rising gas demand in Mexico, the nation plans to be completely self-sufficient in the long-term, and hence the decision by PEP to further explore offshore Mexico to satisfy future demand.

Natural gas production by major region
Of the total 4.4 bn cfpd of gas produced in 2002 (slightly lowered than 2001 levels), the Offshore Northeast region produced 831 mm cfpd (19 % of total gas production), the Offshore Southwest region produced 621 mm cfpd (14 %), the Onshore Northern region produced 1,704 mm cfpd (39 %) and the Onshore Southern region produced 1,268 mm cfpd (29 %).
In the Offshore Northeast region, the bulk of gas production came from the Cantarell field which produced 688 mm cfpd (83 % of the region's total gas production and 16 % of the nation's total gas production), the Ku-Maloob-Zaap field with 124.9 mm cfpd (15 % and 3 %) and the Ek-Balam field with 18.3 mm cfpd (2 % and 0 %).

In the Offshore Southwest region, the bulk of the gas production came from the Abkatun field which produced 342.9 mm cfpd (55 %and 8 %), the Pol-Chuc field with 177.4 mm cfpd (29 % and 4 %), the Litoral Tabasco field with 100.3 mm cfpd (16 % and 2 %).
In the Onshore Northern region, the bulk of the gas production came from the Altamira field which produced 1,006.9 mm cfpd (79 % and 23 %), the Poza Rica field with 153.9 mm cfpd (12 % and 3 %), the Veracruz field with 62.1 mm cfpd (5 % and 1 %) and the Burgos field with 45 mm cfpd (4 % and 1 %).
In the Onshore Southern region, the bulk of the gas production came from the Samaria-Sitio Grande field which produced 686.2 mm cfpd (40 % and 16 %), the Jujo Tecominocan field with 285.9 mm cfpd (17 % and 6 %), the Bellota Chinchorro with 250.6 mm cfpd (15 % and 6 %), the Luna with 179.8 mm cfpd (11 % and 4 %), the Muspac field with 132.4 mm cfpd (8 % and 3 %), the Cinco Presidentes field with 112.5 mm cfpd (7 % and 3 %) and the Chilapilla-Jose Colomo field with 56.4 mm cfpd (3 % and 1 %).

Crude oil production by major region
Of the total 3.177 mm bpd of oil production in 2002, the Offshore Northeast region produced 2.151 mm bpd (68 % of total oil production), the Offshore Southwest region produced 452.2 mm bpd (14 %), the Onshore Northern region produced 74.9 mm bpd (2 %) and Onshore Southern region produced 498.4 mm bpd (16 %).
In the Offshore Northeast region, the bulk of oil production again came from the Cantarell field, which produced 1.879 mm bpd (87 % of the region's total production and 59 % of the nation's total production), followed by the Ku-Maloob-Zaap fields with 242 mm bpd (11.3 % and 8 %) and the Ek-Balam fields with 31 mm bpd (1.4 % and 1 %).

In the Offshore Southwest region, the bulk of the oil production came from the Abkatun field which produced 252.7 mm bpd (56 % and 8 %), the Pol-Chuc field with 154.1 mm bpd (34 % and 5 %) and the Litoral Tabasco field with 45.4 mm bpd (10 % and 1 %). In the Onshore Northern region, the bulk of the oil production came from the Altamira field which produced 39.4 mm bpd (53 % and 1 %), the Poza Rica field with 34 mm bpd (45 % and 1 %) and the Veracruz field with 1.5 mm bpd (2 % and 0 %).
In the Onshore Southern region, the bulk of the oil production came from the Samaria-Sitio Grande field which produced 161.9 mm bpd (32 % and 5 %), the Jujo Tecominocan field with 111.6 mm bpd (22 % and 4 %), the Bellota Chinchorro with 90.2 mm bpd (18 % and 3 %), the Luna with 69.5 mm bpd (14 % and 2 %), the Muspac field with 29.1 mm bpd (6 % and 1 %), the Cinco Presidentes field with 34.3 mm bpd (7 % and 1 %) and the Chilapilla-Jose Colomo field with 1.6 mm bpd (0 % and 0 %).

Property and field descriptions
Offshore northeast and southwest regions
Geology
The two offshore regions contain reservoirs that range in age from Tertiary to Jurassic. Most of the potential reservoirs are said to lie in stratigraphic and structural traps within the Cretaceous and Jurassic strata at depths of 14,000-21,500 t. The primary source rock in both regions is from the Jurassic era.
Production from both onshore regions comes from Jurassic and Cretaceous reservoirs. Anticlines, faults, pillowlike structures and domal salt swells and carbonate reefs represent the most likely traps in the region.