PEMEX Risk Management

David Ruelas

Managing Director Risk Management

May 20th, 2014

Contents

2

Risk Management Framework

Main Challenges facing the

Energy Reform

New Strategy & Action Plan

Contents

3

Risk Management Framework

Main Challenges facing the

Energy Reform

New Strategy & Action Plan

4

Evolution of Risk Management in PEMEX

Before

1990 2000 - 2010

After

2010 1991 - 2000

1993: Birth of Kot

Insurance

Company, Ltd.

(Bermuda)

2001: Risk Management Unit

Financial Risk

Insurance

2002: Internal Control

(Operational Risk)

Insurance Unit

reporting to the

Treasury

2004: Change of domicile

of Kot Insurance

Company, AG.

(Switzerland)

Reinsurance

placed by ceding

companies

Reinsurance placed

by PEMEX‘s captive

Financial Risk

Unit reporting to

the Treasury 2008: Corporate

Governance

2013: ERM

Strategy

5

Main risks insured by PEMEX

Bienes en

Mar

Physical Damage

Hurricane

Earthquake

Fire

Hull and Cargo

Electronic

Equipment

Robbery

Malicious Acts

Terrorism

Death

Third Party

Liability

Environmental

Liability

Average Paid Premiums (2013 – 2014)

100% = USD 493 million

6

Insurance in PEMEX

PEMEX covers 100% of its facilities, responsibilities and employees.

44%

18%

15%

11%

6% 6%

0.5% 0.2% Multiperil

Construction

Deep Water

Mobile Platforms

Life

Hull & Cargo

Auto

Fidelity

PEMEX acquires its insurance policies through public tenders

Only insurance companies established in Mexico can cover risk in the country*.

PEMEX invites all the insurance companies to participate, promoting competition.

Online public tenders with total transparency according to the legal framework.

Insurance company awarded based on best coverage and lower cost.

Insurance sector as part of GDP for some Latin American Countries

* Mutual and Insurance Institutions Act, Articles 3rd and 141st

USD

billion

7

PEMEX is looking for more market share

4.1%

2.4%

3.4%

2.8%

2.0%

4.0%

270

370

381

476

1,178

2,253

0 1,000 2,000 3,000

Insurance

GDP

Brazil

Mexico

Argentina

Venezuela

Colombia

Chile

Reinsurance Captive 3

Reinsurers

5

Reinsurance

brokers

4

Insured

1

Mexican Ceding

Companies

2

•Optimize Insurance

Program.

•Privileged access to

international insurance

capacities.

•Non-traditional risks’

coverage.

•Wider sources of capacity.

Benefits

8

Insurance and Reinsurance Scheme

• The percentage allocated to maintenance

has remained stable. Nevertheless, the

total investment budget has grown

Distribution of Maintenance

Budget 2014E

100% = 7.3 Billion USD

PEMEX Investment Program

(Billion USD)

• As in previous years, in 2014

more than 84% of the

maintenance budget will be

allocated to E&P and Refining

E = Expected

Note: CAPEX and OPEX excludes maintenance. 2014 figures are based on Mexican Expenditure Budget.

59.3% 24.1%

9.0%

7.2% 0.5%

E&P RefiningGas PetrochemicalCorporate

54% 55% 54% 54% 54% 55%

28% 28% 28% 27% 27% 27%

18% 17% 18% 19% 19% 18%

28.9 33.4

29.6

36.0 38.7 40.4

2009 2010 2011 2012 2013 2014E

CAPEX OPEX Maintenance Investment

Loss Prevention Program: Controlled risks

9

Contents

10

Risk Management Framework

Main Challenges facing the

Energy Reform

New Strategy & Action Plan

11

Placed capacity on international markets by Oil and Gas companies(1)

Deep water insurance capacity

350500

700

1,000

1,300 1,300

1,300

1,100

Marathon Oil Nexon Maersk PEMEX

Deep water coverage limit (well control, re-drilling, leaking,

cleanup and pollution)

USD million 2,400

Average = 858.3

Additional

capacity of

third party and

environmental

liabilities

(worst case

scenario)(2)

(1) Source: Aon

(2) Maximum value between capacity available in the market and mean value of the worst case

scenario analysis for high pressure oil well developed by GL Noble Denton.

12

Changes in the PEMEX’s risk profile

Refining

• Investment opportunity to

increase refining capacity.

• Infrastructure modernization

(v.gr., fuel quality projects).

E&P

• Deep water exploration.

• Deep water production (v.gr.,

Lakach project).

• E&P activities in shallow waters.

• E&P strategy for shale gas and

shale oil.

Petrochemical

• Transferring infrastructure to

third parties for the operation.

• Meeting Ethane demand (v.gr.,

Etileno XXI project).

Gas

• Construction and cargo operation

of gas pipelines (v.gr., Los

Ramones projects).

• Increase of transportation

capacity of National Pipeline

System and its monitoring

(SCADA).

Activities that will change PEMEX’s risk profile in the near future:

13

Challenges for insurance

• Achieving the Business Plan goals in competitive conditions

(e.g., knock-for-knock, responsibility limit, subrogation rights).

• Retain insurable risks.

• Risk transfer with efficient costs.

• Non-traditional insurance schemes (e.g., parametric coverage,

contingency funds).

• Risk sharing due to Energy Reform.

• Impact on public finance (approval of the Ministry of Finance).

• Adequate coverage limits, according to regulators rules (e.g.,

National Hydrocarbon Commission).

14

Business Risks

Input Process Product

Procurement Production

Marketing

Business

risks:

• Supply chain • Credit for

clients

• Implementation

of projects

Other operating risks:

• Business Interruption

• Cyber Risks

In the light of the Energy Reform PEMEX has to re-evaluate

the need of coverage for all insurable risks

Process:

Contents

15

Risk Management Framework

Main Challenges facing the

Energy Reform

New Strategy & Action Plan

16

Enterprise Risk Management Philosophy

Source: Lam, James (2003). Enterprise Risk Management.

From Incentives to Controls. Wiley, Finance.

PEMEX is embracing best practices of Risk Management: ERM

Risk Analysis Tools Integrated Data Systems 6 5

Corporate

Governance

• Top-down Risk Management approach.

• Risk policy and definition of risk appetite.

• Risk culture and corporate values.

1

Aligned

Administration

Portfolio

Management

Risk

Transference

• Alignment to business

strategy.

• Planning and performance

evaluation.

• New products and business

development.

• Thinking and acting as an

investment fund’s risk

manager.

• Isolation of origin, retention

and risk transference.

• Transversal aggregation of

risks.

• Transfer of inefficient

risks or risk clusters.

• Alternative mechanisms

(non-traditional

insurance, financial

coverage).

2 3 4

Management of the

involved parties

• Improve transparency risk to the involved parties.

• Effective communication with employees, clients, partners, etc. 7

Impact of the Energy Reform in Insurable Risks

17

Energy Reform New challenges

PEMEX is evolving

• New private operators,

participation will allow

strategic alliances and

achieve lower costs and more

efficiency.

• PEMEX will be able to retain

insurable risks.

• The Energy Regulatory

Commission and the

Mexican National

Hydrocarbons Commission

will have attributions to

transfer risks and liabilities

from PEMEX to other

entities.

Transferring assets Sharing risks

Innovating our insurance

strategy

Homogeneous, open and effective information and communication with insurance and reinsurance brokers.

Choosing the best participants through public tenders to obtain optimal risk coverage.

Continuous improvement on advice and service: hiring procedure, claims and settlement process.

Reducing insurance costs.

Transparency

Competitive-

ness

Quality

Cost

18

Innovating our insurance strategy

More

efficiency

Insu

rance s

trate

gy

PEMEX has started its transformation

19

Conclusions

Loss prevention programs and inspection insurance and reinsurance

practices contribute to maintain risk controlled and a trustworthy

operation.

Confidence

Experience Management of PEMEX’s reinsurance captive, Kot Insurance Company

AG, has been constantly improving since its creation.

Transparency Competition Quality Cost

Energy

Reform

An opportunity to:

• Share risks

• Mutualize costs

• Adopt best practices

• Take advantage of a more

efficient legal framework

• Establish clear rules for risk

placement

•Trust for insurance

and reinsurance

markets.

•Trigger for the

growth of Mexican

insurance market.

PEMEX Risk Management David Ruelas

Managing Director Risk Management

Q & A