; DIRECCION CORPORATIVA DE OPERACIONES Price setting mechanisms for gasoline and diesel in Mexico GERENCIA DE EVALUACION DE OPERACIONES
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DIRECCION CORPORATIVA DE OPERACIONES Price setting mechanisms for gasoline and diesel in Mexico GERENCIA DE EVALUACION DE OPERACIONES

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									                 DIRECCION CORPORATIVA
                     DE OPERACIONES




Price setting mechanisms for
gasoline and diesel in Mexico


    GERENCIA DE EVALUACION DE OPERACIONES

               April 12, 2004

                                            0
Refined products balance, 2003
(Thousands of barrels per day)

  Total                                            Gasoline                                   Diesel
  Net                                               Net                                      Net
                                1,249                                      437                            289
  production                                        production                               production
  (1)                                                  (1)                                   (1)
  Net                                                  Net                             143
                                                                                             Net                6
                                             143
  Imports (2)                                          Imports                               Imports

                                                                                 602                      295
  Sales (3)                      1,377                 Sales (3)                             Sales (3)


                            Jet fuel                               Fuel oil
                          Net                                       Net
                          production
                                                  60                production           370
                                                                   (1)

                          Exports             8                    Exports (2)                     1


                          Sales                54                  Sales (3)             356


1. Includes self consumption
2. Excludes naphtha, v irgin stock and VGO
3. Includes sales to Pemex Organisms
                                                                                                                    1
Relative Apparent Consumption


                                               Gasoline                              Diesel


                         USA                                    70%                    30%    15.3

                      Japan              40%                            60%          2.7

                  Germany               37%                       63%          2.4

                     France       24%             76%                    1.6

                    Canada             58%            42%               1.5

        United Kingdom               50%         50%              1.3

                         Italy     41%         59%          1.1

                     Mexico          65%        35%       1.0

                       Spain 30%          70%         0.9

                  Australia        58% 42%         0.7

             South Corea          34%     66%      0.7



Source: Oil and Energy Trends. December 2000
                                                                                                     2
Pemex Refinación: National Refining System



                                                                      Cadereyta
                                                                      • 275 TBD
                                                                      • Supplies fuels for northern area



                                                                          Madero
                                                                         • 195 TBD
                                              Cadereyta                  • Supplies fuels for
                                                                           Central and Gulf Areas
 Salamanca
 • 245 TBD
 • Supplies fuels for                                                  Minatitlán
   central and western                                       Madero    • 200 TBD
   areas                                       GUANAJ UATO
                                                                       • Supplies fuels for
 • Base lubricant                                                        southern area and
   production                          Salamanca                         Yucatán Peninsula
                                                             Tula
                Tula
                • 320 TBD                                             Minatitlán
                • Supplies fuels for
                  MCMA, Morelos and                                                Salina Cruz
                  Guerrero
                                            Salina Cruz
                                            • 330 TBD
                                            • Supplies fuels for Pacific Coast
                                                                                                           3
Pemex Refinación: oil pipelines




                                                                 Length: 4,113 Km

                                     Monterrey




                                                        Madero

                                  Salamanca               Poza Rica
                                                             Veracruz
                                             Tula
                                      Valle de México                 Nuevo Teapa
                                                                      Minatitlán


                                                        Salina Cruz



                                                                                    4
Pemex Refinación: Storage and distribution terminals
 Rosarito

            Mexicali


      Ensenada

                                   Nogales              Cd. Juárez
                                  Magdalena
                                                                                                                                                                    Storage and
                                  Hermosillo                                                                                                                   distribution terminals
                                                                                                                                                                   in Mexico City
                                                                     Chihuahua
                                 Guaymas
                                                                                                                                                                 Metropolitan Area
                                                                                                          Sabinas
                                     Cd. Obregón
                                                                                                                      Nuevo
                                                                                                                      Laredo
                                                                                                                                                                      (MCMA)
                                              Navojoa                     Hidalgo                    Monclova                                                              Tula
                                                                          del Parral
                                                                                                                   Santa              Reynosa
                                     Topolobampo                                                                                                                                              San Juan
                                                                                                                  Catarina
                                                                                                                                                                                             Ixhuatepec

                                                    Guamuchil                     Gómez                                   Cadereyta                              Azcapotzalco
                                                                                  Palacios
                                                                     Durango                          Saltillo                                                                                Añil
                                                        Culiacán

                                La Paz                                                                        Matehuala                  Cd. Victoria                           Barranca
                                                             Mazatlán
                                                                                              Zacatecas       San Luis           Cd. Mante
                                                                                                               Potosí                        Cd. Madero


                                                                                             Aguascalientes                Cd. Valles                                                                               Progreso
                                                                        Tepic                      León       Salamanca                                                                                               Mérida
                                                                                                                             Querétaro             Poza Rica
                       Center                 16                                       Zapopan
                                                                                                                                         Pachuca
                                                                                                      Irapuato
                                                                               El Castillo
                       North                  20                                   Colima       Zamora
                                                                                                                 Celaya
                                                                                                                                                     Jalapa                                              Campeche
                                                                                                          Morelia                Cuautla        Perote Bajos de la
                                                                                                Uruapan              Toluca                              Gallega
                       West                   20                         Manzanillo
                                                                                          Lázaro
                                                                                                                    Cuernavaca
                                                                                                                                Puebla
                                                                                                                                         Escamela
                                                                                                                                                  Veracruz    Pajaritos
                                                                                         Cárdenas
                                                                                                                                   Tehuacan
                                                                                                                                             Tierra Blanca
                       South                  17                                                                         Iguala                             Minatitlán               Villahermosa

                                                                                                                              Acapulco                  Oaxaca                             Tuxtla Gtz.
                       MCMA                     5                                                                                                                    Salina Cruz

                                                                                                                                                                                       Tapachula
                       TOTAL                  78

                                                                                                                                                                                                                               5
Pemex Refinación: product pipelines
Rosarito
           Mexicali
                                                                                                               Marine terminals (15)
                                        Cd. Juárez
  Ensenada                                                                                                      Product pipeline network
                                                                                                                length: 8,768 Km
                      Hermosillo


                                                 Chihuahua
                           Guaymas
                                                                   Sabinas
                                 Cd. Obregón
                                                                               Monclov a

                                   Topolobampo            Torreón
                                                                                         Cadereyta
                                                                                   NUEVOLEON




                                                               Saltillo
                        La Paz
                                         Culiacán                  Monterrey
                                                                                                              Cd. Victoria
                                                        Zacatecas
                                      Mazatlán
                                                                               San Luis                            Madero
                                                                                   Madero
                                                                                Potosí                                                                           Progreso
                                                 Aguascalientes
                                                                                 Querétaro
                                                                                                                        Tuxpan                                     Mérida
                                                     El Castillo                       Pachuca
                                                                                      Tula
                                                                                         Tuxpan                              Poza Rica
                                                                                                                                                            Campeche
                                                     Zamora                                                                    Veracruz                    Lerma
                                                       Salamanca                                                  Puebla                  Dos Bocas
                                                            Morelia Toluca
                                                                   MI HOACAN
                                                                    C
                                                                                                        F
                                                                                                       D. .

                                                                                                                 Veracruz
                                                                                                    MORELOS
                                                                                                                                 Paj aritos
                                                 Manzanillo Valle de México                                                                       Villahermosa
                                                                                                               Cd. Mendoza                    Paj aritos
                                                                                Cuernav aca
                                                                                         GUERRERO



                                                            Lázaro                                                                       MinatitlánA
                                                                                                                                                 CHI PAS




                                                           Cárdenas                                                                  Cosoleacaque
                                                                               Acapulco
                                                                                                                                Salina
                                                                                                                                 Cruz

                                                                                                                                                                            6
Pemex Franchise

                              Total Number of Service Stations


                                            TACC 8%
                                                                               6,017   7,000
                                                                 5,566
                                                   5,139
                                     4,725
                       4,552
       3,808




       1996            1999          2000          2001          2002          2003    2010




        Incremental
  Service Statations           173           414           427           451




                                                                                               7
Current Price Policy

 • All prices, public or recognized by the government as income or raw
   material prices for Pemex, are based on international opportunity
   costs with logistics and quality adjustments

 • Except, public prices for gasoline, diesel and LPG. This prices are
   set by the government and managed according to fiscal economic
   policy

 • The income price of gasoline, diesel and LPG for Pemex are also
   based on international quotations with logistics and quality
   adjustments. For gasoline and Diesel, the government receives a
   variable tax income (20-80% of public price)

 • Crude Oil prices for mexican refineries are the export prices with
   the logistics cost.

 • Prices are adjusted every week. Some prices every month

 • This means that Pemex is valued as a producer competing in the
   international market and that gasoline and diesel sales are used as
   a fiscal revenue tool by the government.                              8
 Structure and Behavior of Refining Industry

        Industrial Structure              Competitive behavior                 Economic Performance


    • Supply:                             • Pricing is a function of the       • High volatility in margins
      - Highly fragmented                   variable cash cost for the
      - High Capital expenditure            marginal producer                  • Marginal configuration is
      - Smooth cost curves (known                                                becoming more complex
        technologies)                     • High margins cause excess of
      - Limited entrance (mature            capacity because attractive ROI    • Cyclic revenues
      market)                               (cyclic market)
                                                                               • ROI close or lower to
    • Demand:                             • Tendency to integrate vertically     capital cost
      - Limited product differentiation
      - Growth at similar rates as        • High cost out barriers, shutting
      economic growth                       down production is difficult
      - Higher environmental product        implying slow adjustments and
      quality                               extended oversupply periods

    • Highly Competitive Market
      - Deep and efficient spot
      markets




USGC: US Gulf Coast
ROI: return on inv estment
                                                                                                              9
World Refined Products Market: Net Volume Transactions , 1994 -1999 (1)
(Thousand Barrels per Day)
                                                                                   423
                                                   316                     311
                                                                  266
                                                           174




                                                   1994   1995    1996    1997    1998

                                  North                                                    Western
                                 America(2)                                                Europe
                                                            Gasoline
                                                                                                                  Asia/Pacific
                                 624
                   537    557
     525
            421
                                                                                                  • Diesel
                                        Gasoline                                         Diesel   • LPG
                                                                                                  • Fuel Oil
     1994   1995   1996   1997   1998           379                              356
                                                                         291
                                                          235
                                                                 208
                                  Rest of                                                                                      1,863
                                                                                                                       1,735           1,821
                                  America                                                                                                      1,496
                                                                                                               1,036

                                                1994      1995   1996    1997    1998
                                                                                             Middle
                                                                                           East/Africa         1994    1995    1996    1997    1998




(1)   Volume transactions include the total sum of products. The main product is described
(2)   Includes Canada, United States and Mexico.
Source: Blackw ell's, “World Oil Trade: An Annual Analysis and Statistical Rev iew and International Oil Mov ements, 1999”.
                                                                                                                                                       10
Opportunity Costs of Refined Products
Main Factors that Determine Value in International Markets

                                Crude Oil Price

  Supply and Demand
  Balance of crude oil        Marginal Refiner          “Commodity” price in
  and refined products         Configuration            regional / intl market
    (Regional Trade)

                          Product Price Differentials




                                Product quality
     Product Specs                                                               Cost of opportunity
                                                        Quality Adjustment
                                                                                   in intl markets
                               Commodity spec




                             Transport Availability


  Geographical location
   of supply, demand      Taxes and other trade costs      Logistic Costs
   and main markets


                                 Trade Flows

                                                                                                       11
Price Setting Mechanism: Logistics
           Export netback                                 Value at refinery gate
     Los Angeles                                                                                      Example


                      Houston




                                      Pajaritos
                                                  Spot      Quality       Im port    Transport   Transport    Value at
                                                  Price    Adjustm et   Taxes (US)    Mexico -   refinery -   refinery
                                x                                                       USA         port        gate
                                x
                                        Salina
                                         Cruz

         Import displacement                              Value at refinery gate


      Los Angeles


                      Houston

                                                  Spot      Quality        Im port               Transport    Value at
                                                  Price   Adjustm ent                Transpor
                                    Pajaritos                               Taxes     t USA -      port -     refinery
                                                                          (Mexico)    Mexico      refinery      gate


                                x
                                x
                                    Salina Cruz


                                                                                                                         12
Structure of Public Prices – Automotive Fuels
                                                                                                                  Example:
                                                                                                                Pemex Magna
                                                                                                                (Pesos / liter)


                                                                                                                0.35       5.90
                                                                                                      N/A
                                                                                  0.75     0.06
     Opportuny Cost for Mexican Refiners                                  0.75
                                                               1.87




               0.00    0.19      2.86       N/A      2.86
     2.67




       Intl Quality             Netback Distribution Producer Excise      VAT    Terminal Trans-        Dis-     Serv ice Price at
                      Net
    market Adj ustm logistic     price at   margin    price at     tax    (IVA) price after port to    counts    margin serv ice
   referenc  ent               distribution         distribution (IEPS)            taxes    serv ic                        station
                      cost
    e price                     terminal              terminal                                 e
     (spot)                                            before                               station
                                                       Taxes
 Intl market
  reference
    price*




                                                                                                                                     13
Pemex Magna Gasoline Prices
                     7

  Pesos per liter    6
                                                    Public Prices
                     5

                     4
                                                                 Pemex income price
                     3

                     2

                     1                                              USGC spot price
                     0
                         94

                                95

                                     96

                                          97

                                               98

                                                     99

                                                           00

                                                                    01

                                                                          02

                                                                                  03

                                                                                       04
Dollars per gallon   2.5

                      2                         Public Prices


                     1.5
                                                            Pemex income price
                      1

                     0.5
                                                                USGC spot price

                      0
                           94

                                95

                                     96

                                          97

                                               98

                                                     99

                                                           00

                                                                    01

                                                                         02

                                                                               03

                                                                                       04
                                                                                            14
Relative Pricing
                    100%

                    80%
  Pemex income                                  Pemex Diesel
   price / Public   60%
       price
                    40%
                                 Pemex Magna

                    20%

                     0%

                     94

                            95

                                 96

                                      97

                                           98

                                                 99

                                                      00

                                                           01

                                                                02

                                                                      03

                                                                           04
                     1.2
  Pemex Diesel /                 Pemex income price (intl market)
  Pemex Magna        1.1

                      1

                     0.9

                     0.8

                     0.7                              Public price

                     0.6
                           94

                                95

                                     96

                                          97

                                               98

                                                    99

                                                         00

                                                               01

                                                                     02

                                                                          03

                                                                                04
                                                                                     15
Pricing mechanisms for gasoline and diesel in relation to fuel efficiency
strategies

    •   The current pricing scheme for gasoline and diesel allows a 120
        billion pesos of fiscal revenue. This represents between 10 to 20%
        of total fiscal revenues for the government.
    •   The implementation of a fuel efficiency program can save
        investment requirements to fulfill the future gasoline and diesel
        demands and will help maintain a less vulnerable position in the
        event of a shortage of volume in the international market.
    •   Nevertheless, in terms of fiscal revenues this could mean direct
        loss. For every 5% of savings nearly 6 billion pesos of taxes per
        year will not be perceived, regardless of its origin (import o
        internal production)
    •   Changes to the fiscal revenue schemes should be considered as
        an important factor in the definition of gasoline/diesel fuel
        efficiency programs




                                                                             16
Annex
        17
Ventas de combustibles automotrices
(MBD)                                                          68
                                                             12.8%
       Gasolinas
                                                      552            566    601
                                               533
                                    Magna(1)


                                               11%    13%            16%    17%
                                    Premium
                                               2000   2001           2002   2003

                   Importación neta (2)        164    180            185    142



                                                               8
   Destilados Intermedios                                    2.3%
                                               341    331            324    349
                                      Diesel


                                   Turbosina   16%    17%            16%    15%

                                               2000   2001           2002   2003

                   Importación neta (2)         38     9             15      -2
 (1)     Incluye otras gasolinas
 (2)     Incluye maquila                                                           18
 Producción de petrolíferos
 (MBD)                                                                                                                                                           Real
                                                                                          Proceso de crudo                                                       Programa   (3)




                                                  1,227                     1,286                    1,319                     1,306                     1,385




                                                   2000                      2003                     2004                      2005                     2006

              Producción de
                                                    699                       804                      849                       895                     914
                destilados (2)



                                                                                  Importación de gasolina (4)

                                                    159                       143                      152                       156                     154




                                                   2000                      2003                     2004                      2005                     2006

         Ventas internas                             533                      601                      618                       624                      640


(1) Incluye crudo reconstituido    (3) 2004 metas presidenciales, 2005-2006 Programas Financieros Presupuestales, máximo potencial y Plan de Negocios.
(2) Gasolina, diesel y turbosina   (4) Incluye componentes y retorno de maquila
                                                                                                                                                                            19
Pricing Scheme for Products: Pemex – Government – General Public




                       Pemex Refinación

                                                                 PPr     Fiscal        PPub
                  Refineries             Distribution                   Network                    Final
                               PT                                                               Consumers
                       PT                  PT

                            Commercial

             PI                                         PI                     Taxes
                                    PI


      Pemex Gas y    PI      Pemex           PI      Pemex
      Petroquímica         Exploración                                            Government
                                                  Petroquímica
         Básica           y Producción



                               PI                                                      Transaction


                                                                       Note:   PT –Transfer Price
                                                                               PI – Intercompany price
                                                                               PPr – Productor Price
                                                                               PPub – Public Price

                                                                                                            20
Pemex Diesel Prices
                     6

  Pesos per liter    5                              Public Prices

                     4

                     3                                           Pemex income price

                     2

                     1
                                                                    USGC spot price
                     0
                         94

                                95

                                     96

                                          97

                                               98

                                                     99

                                                           00

                                                                    01

                                                                          02

                                                                                  03

                                                                                       04
Dollars per gallon   2.5

                      2                         Public Prices


                     1.5
                                                            Pemex income price
                      1

                     0.5
                                                                USGC spot price

                      0
                           94

                                95

                                     96

                                          97

                                               98

                                                     99

                                                           00

                                                                    01

                                                                         02

                                                                               03

                                                                                       04
                                                                                            21
Pemex: productive framework
(thousands barrels per day)
                   Light
                   15%     Heavy
      Superlight            72% 1,955
        13%                                    Exportation

                    Crude oil                                Gasoline and destilates
                      3,771           1,509
                                                Refining     Asphalt and
 Exploration
    and                                                      lubricants
                   Not associate                             Coke
 Production             31%
                                   Associate
                                     69%
                                                             Gas and            Petrochemical
                   Natural gas                               liquids               process
                                        Sweetening and
                   and                   fractionation
                   condensates                               LPG and
                                                             dry gas            Industrial and
                    4.498 Bcfd                                                    domestic
                                          Dry gas                                  demand
                                         1.191 Bcfd




                                                                                                 22
 Typical complex refinery

                                                                                             Product             Final Product
                       Lights
                                                                                             Methane             Dry gas
                                                                                             Propane             LPG
                                                                                             C4 (butane)         LPG / Butanes / Gasoline
                A                                                                            Alkylate       T    Gasoline
                                                                   Alkylation
                t      Pentane / Hexanes                                                                    r
                m                            Isomerization                                   Isomers        e    Gasoline
                o      Naphtha                                                                              a
                s                                                                                           t
Crude           p      Hydro treatment       Reforming                                       Reformate           Gasoline
                                                                                                            i
 Oil            h                                                          Hydro treatment
                                                                                             Jet / Diesel   n    Jet / Kerosine / Diesel
                e
                r                                   Propylene                    Methanol                   g
                i      Atmospheric gas oil
                c                                                               Oxygenates   MTBE           &    Gasoline
                                                             C4 / C5 olefins
                                              Cat
  Atmospheric                              cracking                                          FCC Gasoline b      Gasoline
                      Hydro treatment
    residual
                                                                                             FCC Distillates l   Diesel / Fuel Oil
                     Vac.
                    gas oil                                                                                  e
                                    Coker gas oil                                            Coker Naphtha n     Gasoline
                                                                                                             d
          Vaccum                                                                                             i
                                                                                             Coker Distillaten   Diesel / Fuel Oil
                                           Vaccum residual         Coker                                     g

                                                                                             Coke                Coke
                                                                                             Vaccum              Asphalt / Fuel Oil
                                                                                             residual
                                  Hydrogen
                                  Vapor
          Services                Water
                                  Pow er
                                                                                                                                           23
Refinery Configurations
Illustrative


                              Complex with         Coker                             FCC        Hydroskimming
          Process             hydrocraking                        FCC/ Alky

      Primary Distillation
                                   X                 X               X                X                  X
      Vaccum Distillation
                                   X                 X               X                X                  X
      Catalytic Reforming
                                   X                 X               X                X                  X
 Fluid Catalytic Cracking
                                   X                 X               X                X
                Alkyilation
                                   X                 X               X
Thermal Cracking (Coker)
                                   X                 X


                                                                                                        32
                Gasoline           62                57              52               51

                                                                                                        24

                                                                     26               26
               Distillates         29                34                                                 41
                                                                     18               19
               Residuals           7                 7

         Relative Vale of
                                  1.00              0.98            0.95             0.93               0.84
                Products

                                         Heavy - Sour Crude Oil               Light - Sweet Crude Oil

                                                                                                                24
 Market Supply Curve

  Variable Margin
    per barrel
       (USD)

       4                                              Refinery configuration
              Complex                                  close to cero is the               • In efficient market
            Configurations                            marginal configuration
       3                                                                                    product prices are in
                                                          on the market
                                                                                            equilibrium with the
                        Coking                                                              barrel that generates a
       2
                3.0                                                                         cero variable margin:
                                                                                                Higher product
       1                  1.8
                                                                               Process           demand results in
                                 FCC*                                          Capacity          higher product prices
       0                              0                                         (MBD)
              100        200           500          900       500                                and crude runs which
                                             -1.0                                                in turn lower product
      -1                                              -1.8
                                             HSK                                                 prices

      -2                                            Topping

               Capacity Utilization
      -3



                                Crude process /
                              product supply is in
                             balance with demand
* Refinería marginal
                                                                                                                         25
Economic Cycle of Marginal Refiner

  Illustrative


                                                                              0


                                   Demand                      Supply     Margin



                                                               m
                                                      r   iu
                                               i li b




                                                                        D e c re
                                           u
                                      Eq




                                                                           In
                                                                           m as
                                                                              an
                                                                                 d
                                   Su xce


  Demand         Supply   Margin                                                     Demand   Supply   Margin
                                     pp ss
                                     e




                                                                             ry
                                       ly


                                                                       f in e s e
                                          in


                                                                    R e pon
                                                                        s
                                                                    Re




                                   Demand                      Supply     Margin


                                                                                                                26

								
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