ANNUAL REPORT 2002

4,000

3,500

3,000

2,500

2,000

1,500

500

0

Wet Gas processing(million cubic feet per day)

3,5683,5273,6373,6773,758

98

99

00

01

02

3,000

2,500

2,000

1,500

1,000

500

0

Dry Gas Production(million cubic feet per day)

2,8162,7092,7912,8042,916

98

99

00

01

02

250

200

150

100

500

LPG Production(thousands barrels per day)

196201204206205

98

99

00

01

02

3,000

2,500

2,000

1,500

1,000

500

0

Natural GasDomestic Sales(million cubic feet per day)

1,7891,8992,0611,9932,425

98

99

00

01

02

Within the Mexican petroleum industry, PEMEX GAS YPETROQUÍMICA BÁSICA occupies a strategic position.

This business unit of Petróleos Mexicanos is responsible for

the processing, transportation, marketing and storage of natu-

ral gas and natural gas liquids.

Pemex Gas is guided by the vision of Petróleos Mexicanos

in which safety and the care of the environment are integral

elements of the business, ones that are essential to the reliabil-

ity and reputation of its operations.

During 2002 Pemex Gas took steps to achieve the follow-

ing goals:

• To improve operating efficiency

• To carry out infrastructure improvements

• To meet market demand

• To enhance customer relations

• To improve its safety record

• To develop a strategic plan for medium and long term ad

dressing timeliness, reliability and cost.

p. 1

4,1

5 ANNUAL REPORT 2002

Na

tu

ra

l g

as

Natural gas processingFacilities for this central activity of Pemex Gas in-cludes the following:

• 25 treating plants, 19 of which handle sour gasand 6 handle sour condensate. Total capacity ineach activity is 4.2 billion cubic feet per day and144 thousand barrels per day of condensate.

• 16 gas processing plants, 14 of which are cryo-genic and 2 oil absorption type. Total capacityis greater than 5.0 billion cubic feet per day.

• Seven fractionating plants, wit a joint capacityof 563 thousand barrels per day.

Sulfur recovery. There are 12 plants with an aggregatecapacity of 3.2 thousand tonnes per day of sulfur.LPG storage. Total LPG storage capacity exceeds 2.8million barrels, and there are 16 wholesale distribu-tion terminals for this product.Pipelines. PGPB manages some 9, 511 kilometers ofpipelines for natural gas and nearly 3, 158 kilome-ters for liquid products.

ProductionIn 2002 Pemex Gas processed nearly 3.8 billioncubic feet per day of wet natural gas, 2.2% higherthan that of the previous year. Dry gas productionwas 2.9 billion cubic feet per day, a gain of 4.0%over 2001. Output in 2002 of liquids and conden-sates, at 417.6 thousand barrels per day, however,was 5.7% less than the previous year. LPG output

was 204.7 thousand barrels per day, slightly belowthe year before.

Ethane production was 127.0 thousand barrelsper day, and the recovery of natural gasoline was83.8 thousand barrels per day. These levels repre-sented a decline, of 13.7% and 5.2%, respectivelycompared to production levels observed in 2001.

Distribution and SalesThe commercial strategy of Pemex Gas in 2002 in-cludes steps such as the following:

• Long-term supply and transportation contracts.• Introduction of products and services with

greater added value.• Application of information technologies to

meet customer needs.• Consultations in relation to the development

of LPG regulations.In 2002, advances were seen in several areas:

• Greater operating flexibility in natural gas trans-portation between Mexico and the U.S. bymeans of four pipeline interconnections inSouth Texas, including lines of Kinder Mor-gan Pipeline Co. and Tennessee Pipeline Co.

• Natural gas was required to meet the demandof the Comisión Federal de Electricidad’s 9 In-dependent Power Producers.

• The Tetco line supplied the Comisión Federalde Electricidad generation plant at Río Bravo.

• The 3-year hedging program for natural gas,established in 2001, continued in force. As ofDec. 31, 2002, Pemex Gas hedging position,which was based on a fixed reference price of4.01 US dollars per million BTU, had earned 72.3million US dollars. (The program, participationin which was optional, offered the customer can-cellation options as well as flexibility in volumerequirements. In this program, Pemex Gas as-sumed the risk that the market price would beabove the reference price, while the customerassumed the opposite risk.)

• A Customer Relationship Management (CRM)program was installed to support the commer-cial strategies of the Company. Call Centers andInteraction Centers were established.

• A Supplier Relationship Management (SRM) pro-gram was established to permit better integra-tion of procurement to respond in a timely fash-ion to the necessities of the company.Through these steps Pemex Gas hopes to pro-

vide an efficient service using leading-edge infor-mation technologies and assist customers with ad-

Pemex Gas y

Petroquímica Básica

achieved sales of 2 425

million cubic feet per

day, an increase of 21.7%

compared to the

previous year.

ANNUAL REPORT 2002

p. 1

6,17 ANNUAL REPORT 2002

vanced tools to simplify processes and have access totimely and sufficient information for sound decisions.

Transportation. In 2002, the average volume of gastransported by Pemex Gas through pipelines wasnearly 3.4 billion cubic feet per day, a volume thatrepresented an increase of 379 million cubic feetper day compared to the previous year. In March, anew compression station was put into operation thatincreased pipeline transportation capacity in west-ern markets within Mexico.

As for Liquefied Petroleum Gas (LPG), total vol-ume shipped by internal transportation systemsreached, 254 thousand barrels per day, a level 42.9%less than that of 2001 (at present, Pemex Gas doesnot itself use tank cars for LPG transportation).

Demand. In 2002 the internal demand for drygas increased 21.7% in comparison to the level of2001. Sales reached 2.4 billion cubic feet per day.Of this volume, the industrial sector consumed 36.1%,the electric sector 53.3% with the remaining sharegoing to distributors and the residential sector.

In relation to the electric sector, an historic growthrate was observed in 2002 with an increase demand of28.1%. During the period August-September the de-mand of this sector alone exceeded, for the first time,the level of 1.4 billion cubic feet per day. The dynamicgrowth of natural gas demand by the electric sector isexplained by the intensive use of natural gas in severalof the generation stations of the Comisión Federal deElectricidad, principally ones located in the northernareas of the country.

The industrial sector also increased its use ofnatural gas, and reduced significantly its use of high-sulfur fuel oil.

Pricing. Comparing 2002 against that of 2001,the average price of natural gas fell to 3.03 US dol-lars per million BTU compared to 4.03 US dollars permillion BTU in the earlier period. This price changewas of the order of nearly 25%.

Imports. In 2002 gas imports reached a level of592 million cubic feet per day, a level 102.7% higherthan those of 2001. Two-thirds of these imports werethrough Reynosa. As for exports, realized only inJanuary and February were some 4.4 million cubicfeet per day of gas shipped to U.S. markets.

LPG. The LPG market in Mexico is among the topfour worldwide, and LPG is the principal source ofenergy for residential use. In terms of per capital con-sumption, the Mexican residential customer ranks firstworldwide. These market conditions require that

Pemex Gas serve the market with supplies that areadequate and timely, and that offer the best value interms of quality, safety and price for the end-user.

In 2002, the domestic sale of LPG reached 331.9thousand barrels per day, a volume 2.2% higher thanthat of 2001 which relects the increased demand ofthe residential sector.

Infrastructure upgradingIn 2002, Pemex Gas continued its effort to improveits ability to capture value and reduce costs. Severalsystems were implemented: The Uptime Systemimproves operating efficiency and helps to reducecosts. The utilization capacity increased. The SCADA

system to measure and control pipelines was ex-tended to a larger number of installations.

Energy services and programs such as cogenera-tion, self-supply and internal transfers were undertaken.

The program SSPA-Uptime is used by Pemex Gasto increase its operating efficiency. The programmeasures the percentage of time of operation at maxi-mum safe capacity a given installation, piece ofequipment or system is operating at its maximumsafe capacity. The objective of the system is to in-crease the production capacity of the installationsand to achieve the goal of Zero Operational De-fects. The program SSPA-Uptime considers the areas

Pemex Gas y Petroquímica Básica

follows the management philosophy

of Petróleos Mexicanos: workplace

safety and environmental protection

are core business values that must be

respected. In this way we can guaran-

tee the reliability of operations.

of production, pipelines and distribution termifor each for these there are the following modules:

• Safety, Health and Environment (SSPA)• Process Auditing (ASP)• Administration and Occupational Health (SASO)• Environmental Administration (SSA)• Distribution Protocol.

The process of implementing these modules in eachof the areas takes place in 5 stages:

1. Evaluating the system2. Developing the system3. Establishing the system4. Operating the system5. Monitoring the system for continuous im-

provement.

InvestmentDuring 2002 Pemex Gas invested some 201 millionUS dollars in capital projects. These funds were di-rected principally towards) the central processingplant at Poza Rica, b) the amortization of long-termproductive infraestructure projects (Pidiregas) andc) projects related to safety, environmental protec-tion and infrastructure.

Priority was given to the following projects:Poza Rica. Sulfur recovery plant in Poza Rica. It

is expected that this 64 tonnes per day facility at

the Poza Rica central gas processing facility will becompleted in October 2003. When in operation thefacility will help reduce contaminating emissions.

Altamira. Gas treatment plants at the new gasprocessing facility in Altamira known as Arenque.The project, to be in operation in 2003, consists ofa sweetening plant of 34 million cubic feet per day,a liquids processing plant of the cryogenic type witha capacity of 33 million cubic feet per day, and asulfur recovery plant of 13 tonnes per day.

Reynosa. At the end of 2002 construction beganon 2 skid-mounted cryogenic plants of 200 millioncubic feet per day. The project includes a condensatestabilizer of 6 thousand barrels per day, and two frac-tionating towers with a combined capacity of 17 thou-sand barrels per day. The facilities are expected toenter into operation at the beginning of 2004.

San Fernando. In October 2002 construction be-gan on the 36" gas line that willbe extended fromStation 19 to San Fernando. There will be two com-pression stations at El Caracol and Los Indios. Withthese facilities in operation, the natural gas trans-portation capacity of the northern region of thecountry will rise to 1.0 billion cubic feet per day. Inthis context, Pemex Gas will be better equipped tomeet the demands of the Comisión Federal deElectricidad and of new clients in the region.

Santa Catarina. In September 2002, the mod-ernization of the Santa Catarina Compression Sta-tion began with the replacement of existing com-pression units by two compressors with a capacityof 9,400 HP. As a result transportation capacity inthe pipeline section Santa Catarina-Chihuahua willincrease to 350 million cubic feet per day, from 250million cubic feet per day currently. Gas supply willthereby be increased to Comisión Federal deElectricidad power plants as well as to industrial cus-tomers in the region.

MEGAS. In 2002 the modernization project knownas MEGAS was begun. The objective is to increase thereliability of measurements in the pipeline system.Variations in the measurements of natural gas injec-tions and deliveries will be reduced, and in this waymeasurements will meet the international standard.

With these investments Pemex Gas maintains anactive position in the marketplace as part of a strat-egy that visualizes, for the coming years, meetingcustomer requirements by continued investments incompression capacity as well as in gas transportation.

of production, pipelines and distribution terminals

ANNUAL REPORT 2002

p. 1

8,1

9

Safety and environmental protectionDuring 2002 the accident frequency index was 1.01accidents per million man-hours worked, a levelhigher than that observed in the previous year of0.50. The severity index was 114 days lost per mil-lion man-hours, 26 days higher than that of 2001.

In 2002 there was the highest accident rate since1997. There were 26 accidents during the year, oneof which was fatal. The outstanding record of PemexGas during the previous years shows this year’s acci-dent frequency rate to be highly unusual. The factthat the operation of LPG terminals had gone for fiveyears without an accident suggests that it is possibleto reach the goal of zero accidents. The attainmentof this goal will be assisted in the measure that thesafety guidelines of the SSPA program are known andfollowed. The discipline of industrial safety is onewhich Pemex Gas will have strengthened in the fu-ture to create a safety consciousness that results in azero accident record.

In relation to environmental protection, the re-sults for 2002 were outstanding. The management ofthe environmental impact of the operations of PemexGas were focused in three areas: air emissions, waterdischarges and toxic wastes.

As part of the Program for SO2 Reduction, inJanuary 2002 a new sulfur recovery plant went into

operation at the natural gas processing facility atCiudad Pemex. With this unit, there were 9 plantsthat utilized the technology Super Claus-Stork. Thenew plant recorded an efficiency rate above 99%.

The conclusion of the project at Ciudad Pemexmarked the completion of the first phase of the SO2Reduction Program. All three gas processing facili-ties in the Southeast of the country have reducedemissions to levels for sulfur lower than that estab-lished by the U.S. Environmental Protection Agencyof 50 kilograms of SO2 per tonne. In three centers ofCactus, Nuevo Pemex and Ciudad Pemex the SO2emissions were, respectively, 19, 25 and 30 kilo-grams per tonne of sulfur produced.

In 2002 Pemex Gas generated nearly 1.5 thou-sand tonnes of toxic residues. The program for thedestruction of toxic materials reached 2.8 thousandtonnes, achieving a 77.0 % reduction of the totalinventory.

As of Dec. 31, 2002 Pemex Gas had earnedawards at 31 facilities for Clean Industry. Addition-ally, 23 centers had earned the award ISO 14001.Finally, 44 facilities have earned the classificationISO 9002.