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Mexican Petroleum

Filed: 30 Apr 17, 8:00pm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM20-F

 

    

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2016

Commission File Number0-99

PETRÓLEOS MEXICANOS

(Exact name of registrant as specified in its charter)

 

Mexican Petroleum United Mexican States
(Translation of registrant’s name into English) (Jurisdiction of incorporation or organization)

 

Avenida Marina Nacional No. 329

Colonia Verónica Anzures

11300 Ciudad de México, México

(Address of principal executive offices)

Jaime José del Río Castillo

(5255) 1944 9700

ri@pemex.com

Avenida Marina Nacional No. 329

Torre Ejecutiva, Piso 38 Colonia Verónica Anzures

11300 Ciudad de México, México

(Name, telephone,e-mail and/or facsimile number

and address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.None

Securities registered or to be registered pursuant to Section 12(g) of the Act.None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Title of Each Class

 

3.500% Notes due 2018
Floating Rate Notes due 2018
9 14% Guaranteed Bonds due 2018
8.00% Guaranteed Notes due 2019
3.500% Notes due 2020
6.375% Notes due 2021
4.875% Notes due 2022
3.500% Notes due 2023
4.625% Notes due 2023
4.250% Notes due 2025
4.500% Notes due 2026
9.50% Guaranteed Bonds due 2027
6.625% Guaranteed Bonds due 2038
5.50% Bonds due 2044
5.625% Bonds due 2046
9 14% Global Guaranteed Bonds due 2018
5.75% Guaranteed Notes due 2018
3.125% Notes due 2019
5.500% Notes due 2019
6.000% Notes due 2020
5.50% Notes due 2021
8.625% Bonds due 2022
8.625% Guaranteed Bonds due 2023
4.875% Notes due 2024
6.875% Notes due 2026
9.50% Global Guaranteed Bonds due 2027
6.625% Guaranteed Bonds due 2035
6.500% Bonds due 2041
6.375% Bonds due 2045
6.750% Bonds due 2047

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ☐    No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ☐    No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

 Large accelerated filer   Accelerated filer ☐                         
 Non-accelerated filer   Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☐                IFRS as issued by the IASB                  Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐                Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes  ☐    No  

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item 1.

  Identity of Directors, Senior Management and Advisers   5 

Item 2.

  Offer Statistics and Expected Timetable   5 

Item 3.

  Key Information   5 

Item 4.

  Information on the Company   18 

Item 4A.

  Unresolved Staff Comments   132 

Item 5.

  Operating and Financial Review and Prospects   132 

Item 6.

  Directors, Senior Management and Employees   173 

Item 7.

  Major Shareholders and Related Party Transactions   201 

Item 8.

  Financial Information   203 

Item 9.

  The Offer and Listing   207 

Item 10.

  Additional Information   207 

Item 11.

  Quantitative and Qualitative Disclosures About Market Risk   216 

Item 12.

  Description of Securities Other than Equity Securities   228 

Item 13.

  Defaults, Dividend Arrearages and Delinquencies   229 

Item 14.

  Material Modifications to the Rights of Security Holders and Use of Proceeds   229 

Item 15.

  Controls and Procedures   229 

Item 16A.

  Audit Committee Financial Expert   232 

Item 16B.

  Code of Ethics   232 

Item 16C.

  Principal Accountant Fees and Services   232 

Item 16D.

  Exemptions from the Listing Standards for Audit Committees   233 

Item 16E.

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers   233 

Item 16F.

  Change in Registrant’s Certifying Accountant   233 

Item 16G.

  Corporate Governance   233 

Item 16H.

  Mine Safety Disclosure   233 

Item 17.

  Financial Statements   234 

Item 18.

  Financial Statements   234 

Item 19.

  Exhibits   234 

 

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Petróleos Mexicanos and its seven subsidiary entities, which we refer to as the subsidiary entities,Pemex Exploración y Producción (Pemex Exploration and Production),Pemex Transformación Industrial (Pemex Industrial Transformation),Pemex Perforación y Servicios (Pemex Drilling and Services),Pemex Logística (Pemex Logistics),Pemex Cogeneración y Servicios (Pemex Cogeneration and Services),Pemex Fertilizantes (Pemex Fertilizers) andPemex Etileno (Pemex Ethylene), comprise the state oil and gas company of the United Mexican States, which we refer to as Mexico. Petróleos Mexicanos is a productivestate-owned company of the Federal Government of Mexico, which we refer to as the Mexican Government, and each of the subsidiary entities is a productivestate-owned subsidiary of Mexico. Each of Petróleos Mexicanos and the subsidiary entities is a legal entity empowered to own property and carry on business in its own name. In addition, a number of subsidiary companies that are defined in Note 1 and listed in Note 4 to our consolidated financial statements incorporated in Item 18, which we refer to as our subsidiary companies, are incorporated into the consolidated financial statements; these subsidiary companies are also identified with their corresponding ownership percentages in “—Consolidated Structure of PEMEX” on page 4. As further described under “Item 4—Information on the Company—History and Development—Corporate Reorganization,” the seven new subsidiary entities assumed, on or prior to, November 1, 2015, all of the rights and obligations of the prior subsidiary entities of Petróleos Mexicanos—Pemex-Exploración y Producción(Pemex-Exploration and Production),Pemex-Refinación(Pemex-Refining),Pemex-Gas y Petroquímica Básica(Pemex-Gas and Basic Petrochemicals) andPemex-Petroquímica(Pemex-Petrochemicals). References to the subsidiary entities prior to this corporate reorganization refer toPemex-Exploration and Production,Pemex-Refining,Pemex-Gas and Basic Petrochemicals andPemex-Petrochemicals. Petróleos Mexicanos, the subsidiary entities and the subsidiary companies are collectively referred to as “PEMEX” or “we.” See “Item 4—Information on the Company—History and Development—Energy Reform” for more details.

References herein to “U.S. $,” “$,” “U.S. dollars” or “dollars” are to United States dollars. References herein to “pesos” or “Ps.” are to the legal currency of Mexico. References herein to “euros” or “€” are to the legal currency of the European Economic and Monetary Union. References herein to “pounds” or “£” are to the legal currency of the United Kingdom. References herein to “Swiss francs” or “CHF” are to the legal currency of the Swiss Confederation. References herein to “Japanese yen” or “¥” are to the legal currency of Japan. References herein to “Australian dollars” or “AUD” are to the legal currency of Australia. The term “billion” as used herein means one thousand million.

Our consolidated financial statements included in this annual report were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. We refer in this report to “International Financial Reporting Standards as issued by the International Accounting Standards Board” as IFRS. In addition, these financial statements were audited in accordance with the International Standards on Auditing, as required by theLey del Mercado de Valores (Securities Market Law) and theDisposiciones de carácter general aplicables a las emisoras de valores y a otros participantes del mercado de valores(General Provisions applicable to issuers of securities and other participants in the securities market) in each case, of Mexico, for purposes of filing with theComisiónNacional Bancaria y de Valores (National Banking and Securities Commission, or the CNBV) and theBolsa Mexicana de Valores, S.A.B. de C.V.(Mexican Stock Exchange, or the BMV), and in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB, for purposes of filings with the U.S. Securities and Exchange Commission, or the SEC.

The regulations of the SEC do not require foreign private issuers that prepare their financial statements on the basis of IFRS to reconcile such financial statements to United States Generally Accepted Accounting Principles, which we refer to as U.S. GAAP. Accordingly, while we have in the past reconciled our consolidated financial statements prepared in accordance withNormas de Información Financiera Mexicanas(Mexican Financial Reporting Standards, or Mexican FRS) to U.S. GAAP, those reconciliations are no longer presented in our filings with the SEC. We do, however, continue to provide the disclosure required under the U.S. Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 932 “Extractive Activities—Oil and Gas” (which we refer to as ASC Topic 932), as this is required regardless of the basis of accounting on which we prepare our financial statements.


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We maintain our consolidated financial statements and accounting records in pesos. Unless otherwise indicated, we have translated all peso amounts to U.S. dollars in this Form20-F, including all convenience translations of our consolidated financial statements included herein, at an exchange rate of Ps. 20.6640 = U.S. $1.00, which is the exchange rate that the Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) instructed us to use on December 31, 2016. You should not construe these translations from pesos into dollars as actually representing such U.S. dollar amounts or meaning that you could convert such amounts into U.S. dollars at the rates indicated. Mexico has a free market for foreign exchange, and the Mexican Government allows the peso to float freely against the U.S. dollar. There can be no assurance that the Mexican Government will maintain its current policies with regard to the peso or that the peso will not depreciate or appreciate significantly in the future. Due to the volatility of the peso/U.S. dollar exchange rate, the exchange rate on any date subsequent to the date hereof could be materially different from the rate indicated above. See “Item 3—Key Information—Exchange Rates” for information regarding the rates of exchange between pesos and U.S. dollars.

PRESENTATION OF INFORMATION CONCERNING RESERVES

The proved hydrocarbon reserves included in this report for the year ended December 31, 2016 are those that we have the right to extract and sell based on assignments granted by the Mexican Government to us in August 2014 through the process commonly referred to as Round Zero. See “Item 4—Information on the Company—History and Development—Energy Reform” for a description of the Round Zero process.

The estimates of our proved reserves of crude oil and natural gas for the five years ended December 31, 2016 included in this report have been calculated according to the technical definitions required by the SEC. DeGolyer and MacNaughton, Netherland, Sewell International, S. de R.L. de C.V. (which we refer to as Netherland Sewell) and Ryder Scott Company, L.P. (which we refer to as Ryder Scott) conducted reserves audits of our estimates of our proved hydrocarbon reserves as of December 31, 2016 or January 1, 2017, as applicable. All reserves estimates involve some degree of uncertainty. For a description of the risks relating to reserves and reserves estimates, see “Item 3—Key Information—Risk Factors—Risk Factors Related to our Relationship with the Mexican Government—Information on Mexico’s hydrocarbon reserves is based on estimates, which are uncertain and subject to revisions,” “—We must make significant capital expenditures to maintain our current production levels, and to maintain, as well as increase, the proved hydrocarbon reserves assigned to us by the Mexican Government. Reductions in our income, adjustments to our capital expenditures budget and our inability to obtain financing may limit our ability to make capital investments” and “—The Mexican nation, not us, owns the hydrocarbon reserves located in the subsoil in Mexico and our right to continue to extract these reserves is subject to the approval of the Ministry of Energy.”

FORWARD-LOOKING STATEMENTS

This Form20-F contains words, such as “believe,” “expect,” “anticipate” and similar expressions that identifyforward-looking statements, which reflect our views about future events and financial performance. We have madeforward-looking statements that address, among other things, our:

 

  exploration and production activities, including drilling;

 

  activities relating to import, export, refining, petrochemicals and transportation, storage and distribution of petroleum, natural gas and oil products;

 

  activities relating to our lines of business, including the generation of electricity;

 

  projected and targeted capital expenditures and other costs, commitments and revenues;

 

  trends in international crude oil and natural gas prices;

 

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  liquidity and sources of funding, including our ability to continue operating as a going concern;

 

  strategic alliances with other companies; and

 

  the monetization of certain of our assets.

Actual results could differ materially from those projected in suchforward-looking statements as a result of various factors that may be beyond our control. These factors include, but are not limited to:

 

  changes in international crude oil and natural gas prices;

 

  effects on us from competition, including on our ability to hire and retain skilled personnel;

 

  limitations on our access to sources of financing on competitive terms;

 

  our ability to find, acquire or gain access to additional reserves and to develop, either on our own or with our strategic partners, the reserves that we obtain successfully;

 

  uncertainties inherent in making estimates of oil and gas reserves, including recently discovered oil and gas reserves;

 

  technical difficulties;

 

  significant developments in the global economy;

 

  significant economic or political developments in Mexico, including fluctuations in thepeso-U.S. dollar exchange rate or in the rate of inflation;

 

  developments affecting the energy sector; and

 

  changes in our legal regime or regulatory environment, including tax and environmental regulations.

Accordingly, you should not place undue reliance on theseforward-looking statements. In any event, these statements speak only as of their dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

For a discussion of important factors that could cause actual results to differ materially from those contained in anyforward-looking statement, see “Item 3—Key Information—Risk Factors.”

 

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LOGO

 

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PART I

 

Item 1.Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2.Offer Statistics and Expected Timetable

Not applicable.

 

Item 3.Key Information

SELECTED FINANCIAL DATA

The selected statement of comprehensive income (loss), statement of financial position and cash flows data set forth below as of and for the five years ended December 31, 2016 have been derived from, and should be read in conjunction with, our consolidated financial statements as of December 31, 2015 and 2016 and for the years ended December 31, 2014, 2015 and 2016, which are included in Item 18 of this report. Our consolidated financial statements for the fiscal year ended December 31, 2012 were audited by KPMG Cárdenas Dosal, S.C., an independent registered public accounting firm. Our consolidated financial statements for each of the fiscal years ended December 31, 2013, 2014, 2015 and 2016 were audited by Castillo Miranda y Compañía, S.C. (which we refer to as BDO Mexico), an independent registered public accounting firm. Certain amounts in the consolidated financial statements for the years ended December 31, 2012, 2013, 2014 and 2015 have been reclassified to conform the presentation of the amounts in the consolidated financial statements for the year ended December 31, 2016. These reclassifications are not significant to the consolidated financial statements and had no impact on our consolidated net income (loss).

As detailed below, for the years ended December 31, 2016 and 2015, we recognized net losses of Ps. 191.1 billion and Ps. 712.6 billion, respectively. In addition, we had negative equity as of December 31, 2016 and 2015 of Ps. 1,233.0 billion and Ps. 1,331.7 billion, respectively, which resulted in a negative working capital of Ps. 70.8 billion and Ps. 176.2 billion, respectively, and negative cash flows from operating activities of Ps. 41.5 billion for the year ended December 31, 2016. This has led our independent auditors to state in their most recent audit report that there is important uncertainty and significant doubt about our ability to continue as a going concern. We have disclosed the circumstances that have caused these negative trends and the actions we are taking to face them and have concluded that we continue to operate as a going concern. Accordingly, we have prepared our consolidated financial statements on a going concern basis, which assumes that we can meet our payment obligations. For more information on the actions that we are taking to face these negative trends, see “Item 5—Operating and Financial Review and Prospects—Overview” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

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Selected Financial Data of PEMEX

 

  Year ended December 31, (1) 
  2012  2013  2014  2015  2016  2016(2) 
  (in millions of pesos, except ratios)  (in millions of
U.S. dollars)
 

Statement of Comprehensive Income (Loss) Data

      

Net sales

  Ps. 1,646,912   Ps. 1,608,205   Ps. 1,586,728   Ps. 1,166,362   Ps. 1,079,546  U.S.$ 52,243 

Operating income

  905,339   727,622   615,480   (154,387  424,350   20,536 

Financing income

  2,532   8,736   3,014   14,991   13,749   665 

Financing cost

  (46,011  (39,586  (51,559  (67,774  (98,844  (4,783

Derivative financial instruments (cost) income—Net

  (6,258  1,311   (9,439  (21,450  (14,000  (678

Exchange (loss) gain—Net

  44,846   (3,951  (76,999  (154,766  (254,012  (12,292

Net (loss) income for the period

  2,600   (170,058  (265,543  (712,567  (191,144  (9,250

Statement of Financial Position Data (end of period)

      

Cash and cash equivalents

  119,235   80,746   117,989   109,369   163,532   7,914 

Total assets

  2,024,183   2,047,390   2,128,368   1,775,654   2,329,886   112,751 

Long-term debt

  672,618   750,563   997,384   1,300,873   1,807,004   87,447 

Totallong-term liabilities

  2,059,445   1,973,446   2,561,930   2,663,922   3,136,704   151,793 

Total equity (deficit)

  (271,066  (185,247  (767,721  (1,331,676  (1,233,008  (59,669

Statement of Cash Flows

      

Depreciation and amortization

  140,538   148,492   143,075   167,951   150,439   7,280 

Acquisition of wells, pipelines, properties, plant and equipment(3)

  197,509   245,628   230,679   253,514   188,389   9,117 

Other Financial Data

      

Ratio of earnings to fixed charges(4)(5)

  1.01                

 

(1)Includes Petróleos Mexicanos, the subsidiary entities and the subsidiary companies listed in Note 4 to our consolidated financial statements included herein.
(2)Translations into U.S. dollars of amounts in pesos have been made at the exchange rate established by the Ministry of Finance and Public Credit for accounting purposes of Ps. 20.6640 = U.S. $1.00 at December 31, 2016. Such translations should not be construed as a representation that the peso amounts have been or could be converted into U.S. dollar amounts at the foregoing or any other rate.
(3)Includes capitalized financing cost. See Note 12 to our consolidated financial statements included herein and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
(4)Earnings, for this purpose, consist ofpre-tax income (loss) from continuing operations before income from equity investees, plus fixed charges, minus interest capitalized during the period, plus the amortization of capitalized interest during the period and plus dividends received on equity investments.Pre-tax income (loss) is calculated after the deduction of hydrocarbon duties, but before the deduction of the hydrocarbon income tax and other income taxes. Fixed charges for this purpose consist of the sum of interest expense plus interest capitalized during the period, plus amortization premiums related to indebtedness and plus the estimated interest within rental expense. Fixed charges do not take into account exchange gain or loss attributable to our indebtedness.
(5)Earnings for the years ended December 31, 2013, 2014, 2015 and 2016 were insufficient to cover fixed charges. The amount by which fixed charges exceeded earnings was Ps. 165,217 million, Ps. 283,640, Ps. 765,161 million and Ps.236,800 million for the years ended December 31, 2013, 2014, 2015 and 2016 respectively.

Source: PEMEX’s consolidated financial statements, prepared in accordance with IFRS, as it relates to the selected statements of comprehensive income, statement of financial position and statement of cash flows data; and Petróleos Mexicanos, as it relates to other financial data.

 

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EXCHANGE RATES

The following table sets forth, for the periods indicated, the high, low, average andperiod-end exchange rates for the purchase of U.S. dollars, expressed in pesos per U.S. dollar. These rates have not been restated in constant currency units.

 

Period

 Exchange Rate 
           High                     Low             Average(1)            Period End      

Year Ended December 31,

    

2011

  14.254   11.505   12.464   13.951 

2012

  14.365   12.625   13.140   12.964 

2013

  13.433   11.976   12.857   13.098 

2014

  14.794   12.846   13.370   14.750 

2015

  17.358   14.564   15.873   17.195 

2016

  20.842   17.190   18.667   20.617 

November 2016

  20.842   18.435   20.009   20.457 

December 2016

  20.738   20.223   20.499   20.617 

2017

    

January 2017

  21.891   20.753   21.391   20.836 

February 2017

  20.816   19.735   20.301   19.998 

March 2017

  19.927   18.665   19.280   18.829 

April 2017(2)

  18.868   18.478   18.701   18.843 

 

 (1)Average ofmonth-end rates, except for 2016 and 2017 monthly exchange rates.
 (2)For the period from April 1, 2017 to April 21, 2017.

Source: Noon buying rate for cable transfers in New York reported by the Federal Reserve.

The noon buying rate for cable transfers in New York reported by the Federal Reserve on April 21, 2017 was Ps. 18.8425 = U.S. $1.00.

 

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RISK FACTORS

Risk Factors Related to Our Operations

Crude oil and natural gas prices are volatile and low crude oil and natural gas prices adversely affect our income and cash flows and the amount of hydrocarbon reserves that we have the right to extract and sell.

International crude oil and natural gas prices are subject to global supply and demand and fluctuate due to many factors beyond our control. These factors include competition within the oil and natural gas industry, the prices and availability of alternative sources of energy, international economic trends, exchange rate fluctuations, expectations of inflation, domestic and foreign laws and government regulations, political and other events in major oil and natural gas producing and consuming nations and actions taken by oil exporting countries, trading activity in oil and natural gas and transactions in derivative financial instruments (which we refer to as DFIs) related to oil and gas.

When international crude oil, petroleum product and/or natural gas prices are low, we generally earn less revenue and, therefore, generate lower cash flows and earn less income before taxes and duties because our costs remain roughly constant. Conversely, when crude oil, petroleum product and natural gas prices are high, we earn more revenue and our income before taxes and duties increases. Crude oil export prices, which had generally traded above U.S. $75.00 per barrel since October 2009 and traded above U.S. $100.00 per barrel as of July 30, 2014, began to fall in August 2014. After a gradual decline that resulted in per barrel prices falling to U.S. $91.16 at September 30, 2014, this decline sharply accelerated in October 2014 and prices fell to U.S. $53.27 per barrel at the end of 2014, with a weighted average price for the year of 2014 of U.S. $86.00 per barrel. During 2015, the weighted average Mexican crude oil export price was approximately U.S. $44.17 per barrel and fell to U.S. $26.54 per barrel by the end of December 2015. In 2016, the weighted average Mexican crude oil export price was approximately U.S. $35.63 per barrel, falling to U.S. $18.90 per barrel on January 20, 2016, the lowest in twelve years, before rebounding to U.S. $46.53 per barrel on December 28, 2016. This decline in crude oil prices had a direct effect on our results of operations and financial condition for the year ended December 31, 2016. During the first three months of 2017, the weighted average Mexican crude oil price was U.S. $44.11 per barrel, an increase of U.S. $8.48 per barrel as compared to the 2016 weighted average Mexican crude oil export price. As of April 27, 2017, the weighted average Mexican crude oil export price was U.S. $42.25 per barrel, a slight decrease from the first three months of 2017, but an increase of U.S. $6.62 per barrel as compared to the 2016 weighted average Mexican crude oil export price. Future declines in international crude oil and natural gas prices will have a similar negative impact on our results of operations and financial condition. These fluctuations may also affect estimates of the amount of Mexico’s hydrocarbon reserves that we have the right to extract and sell. See “—Risk Factors Related to our Relationship with the Mexican Government—Information on Mexico’s hydrocarbon reserves is based on estimates, which are uncertain and subject to revisions” below and “Item 11—Quantitative and Qualitative Disclosures About Market Risk—Changes in Exposure to Main Risks—Market Risk—Hydrocarbon Price Risk.”

We have a substantial amount of indebtedness and other liabilities and are exposed to liquidity constraints, which could make it difficult for us to obtain financing on favorable terms and could adversely affect our financial condition, results of operations and ability to repay our debt and, ultimately, our ability to operate as a going concern.

We have a substantial amount of debt, which we have incurred primarily to finance the capital expenditures needed to carry out our capital investment projects. Due to our heavy tax burden, our cash flow from operations in recent years has not been sufficient to fund our capital expenditures and other expenses and, accordingly, our debt has significantly increased and our working capital has decreased. The sharp decline in oil prices that began in late 2014 has had a negative impact on our ability to generate positive cash flows, which, together with our continued heavy tax burden and increased competition from the private sector, has further exacerbated our ability to fund our capital expenditures and other expenses from cash flow from operations. Therefore, in order to develop our hydrocarbon reserves and amortize scheduled debt maturities, we will need to raise significant amounts of financing from a broad range of funding sources.

 

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As of December 31, 2016, our total indebtedness, including accrued interest, was approximately U.S. $96.0 billion (Ps. 1,983.1 billion), in nominal terms, which represents a 10.6% increase (a 32.8% increase in peso terms) compared to our total indebtedness, including accrued interest, of approximately U.S. $86.8 billion (Ps. 1,493.4 billion) as of December 31, 2015. 23.5% of our existing debt as of December 31, 2016, or U.S. $22.5 billion, is scheduled to mature in the next three years. As of December 31, 2016, we had negative working capital of U.S. $3.4 billion. Our level of debt may increase further in the short or medium term and may have an adverse effect on our financial condition, results of operations and liquidity position. To service our debt and to raise funds for our capital expenditures, we have relied and may continue to rely on a combination of cash flows provided by our operations, the divestment ofnon-strategic assets, drawdowns under our available credit facilities and the incurrence of additional indebtedness. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview—Changes to Our Business Plan.”

Certain rating agencies have expressed concerns regarding: (1) our heavy tax burden, (2) the total amount of our debt; (3) the significant increase in our indebtedness over the last several years; (4) our negative free cash flow during 2016, primarily resulting from our significant capital investment projects and the low price of oil; (5) the natural decline of certain of our oil fields and lower quality of crude oil; (6) our substantial unfunded reserve for retirement pensions and seniority premiums, which was equal to U.S. $59.1 billion as of December 31, 2016; and (7) the resilience of our operating expenses notwithstanding the sharp decline in oil prices that began in late 2014. On January 29, 2016, Standard & Poor’s (S&P) rating agency downgraded ourstand-alone credit profile from “BB+” to “BB,” and on August 23, 2016 downgraded our credit outlook from stable to negative. On December 23, 2016, S&P affirmed our global foreign currency rating of “BBB+.” On March 31, 2016, Moody’s Investors Service announced the revision of our global foreign currency and local currency credit ratings from “Baa1” to “Baa3” and changed the outlook for our credit ratings to negative. On December 9, 2016, Fitch Ratings affirmed our “BBB+” global credit rating, but revised the outlook for our credit ratings from stable to negative.

Any further lowering of our credit ratings may have adverse consequences on our ability to access the financial markets and/or our cost of financing. If we were unable to obtain financing on favorable terms, this could hamper our ability to obtain further financing, invest in projects financed through debt and meet our principal and interest payment obligations with our creditors. As a result, we may be exposed to liquidity constraints and may not be able to service our debt or make the capital expenditures required to maintain our current production levels and to maintain, and increase, the proved hydrocarbon reserves assigned to us by the Mexican Government, which may adversely affect our financial condition and results of operations. See “—Risk Factors Related to our Relationship with the Mexican Government—We must make significant capital expenditures to maintain our current production levels, and to maintain, as well as increase, the proved hydrocarbon reserves assigned to us by the Mexican Government. Reductions in our income, adjustments to our capital expenditures budget and our inability to obtain financing may limit our ability to make capital investments” below.

If such constraints occur at a time when our cash flow from operations is less than the resources necessary to fund our capital expenditures or to meet our debt service obligations, in order to provide additional liquidity to our operations, we could be forced to further reduce our planned capital expenditures, implement further austerity measures and/or sell additionalnon-strategic assets in order to raise funds. A reduction in our capital expenditure program could adversely affect our financial condition and results of operations. Additionally, such measures may not be sufficient to permit us to meet our obligations.

Our consolidated financial statements have been prepared under the assumption that we will continue as a going concern. However, our independent auditors have stated in their most recent report that there is important uncertainty and significant doubt concerning our ability to continue operating as a result of recurring net losses, negative working capital, negative equity and negative cash flows from operating activities for the year ended December 31, 2016. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If the actions we are taking to improve our financial condition, which are described in detail under “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital

 

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Resources—Overview—Changes to Our Business Plan,” are not successful, we may not be able to continue operating as a going concern.

We are an integrated oil and gas company and are exposed to production, equipment and transportation risks, blockades to our facilities and criminal acts and deliberate acts of terror.

We are subject to several risks that are common among oil and gas companies. These risks include production risks (fluctuations in production due to operational hazards, natural disasters or weather, accidents, etc.), equipment risks (relating to the adequacy and condition of our facilities and equipment) and transportation risks (relating to the condition and vulnerability of pipelines and other modes of transportation). More specifically, our business is subject to the risks of explosions in pipelines, refineries, plants, drilling wells and other facilities, oil spills, hurricanes in the Gulf of Mexico and other natural or geological disasters and accidents, fires and mechanical failures. Criminal attempts to divert our crude oil, natural gas or refined products from our pipeline network and facilities for illegal sale have resulted in explosions, property and environmental damage, injuries and loss of life.

Our facilities are also subject to the risk of sabotage, terrorism, blockades and cyber-attacks. For example, widespread demonstrations, including blockades, as a result of the Mexican Government’s recent increase in fuel prices, have prevented us from accessing certain of our refined products supply terminals and caused critical gasoline shortages at retail service stations in at least three Mexican states. The occurrence of these incidents related to the production, processing and transportation of oil and gas products could result in personal injuries, loss of life, environmental damage from the subsequent containment,clean-up and repair expenses, equipment damage and damage to our facilities. Although we have established an information security program, which includes cybersecurity systems and procedures to protect our information technology, and have not yet suffered a cyber-attack, if the integrity of our information technology were ever compromised due to a cyber-attack, or due to the negligence or misconduct of our employees, our business operations could be disrupted and our proprietary information could be lost or stolen. As a result of these risks, we could face, among other things, regulatory action, legal liability, damage to our reputation, a significant reduction in revenues, an increase in costs, a shutdown of operations, or loss of our investments in affected areas.

We purchase comprehensive insurance policies covering most of these risks; however, these policies may not cover all liabilities, and insurance may not be available for some of the consequential risks. There can be no assurance that accidents, sabotage or acts of terror will not occur in the future, that insurance will adequately cover the entire scope or extent of our losses or that we may not be found directly liable in connection with claims arising from accidents or other similar events. See “Item 4—Information on the Company—Business Overview—PEMEX Corporate Matters—Insurance.”

Developments in the oil and gas industry and other factors may result in substantialwrite-downs of the carrying amount of certain of our assets, which could adversely affect our operating results and financial condition.

We evaluate on an annual basis, or more frequently where the circumstances require, the carrying amount of our assets for possible impairment. Our impairment tests are performed by a comparison of the carrying amount of an individual asset or acash-generating unit with its recoverable amount. Whenever the recoverable amount of an individual asset orcash-generating unit is less than its carrying amount, an impairment loss is recognized to reduce the carrying amount to the recoverable amount.

Changes in the economic, regulatory, business or political environment in Mexico or other markets where we operate, such as the gradual liberalization of fuel prices pursuant to energy reform and the significant decline in international crude oil and gas prices, among other factors, may result in the recognition of impairment charges in certain of our assets. Due to the decline in oil prices, we have performed impairment tests of ournon-financial assets (other than inventories and deferred taxes) at the end of each quarter. As of December 31, 2015, we recognized an impairment charge of Ps. 477,945 million. As of December 31, 2016, we recognized a net reversal of impairment in the amount of Ps. 331,314 million. See Note 12(d) to our consolidated financial

 

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statements for further information about the impairment of certain of our assets. Future developments in the economic environment, in the oil and gas industry and other factors could result in further substantial impairment charges, adversely affecting our operating results and financial condition.

Increased competition in the energy sector due to the current legal framework in Mexico could adversely affect our business and financial performance.

The Political Constitution of the United Mexican States (the “Mexican Constitution”) and theLey de Hidrocarburos (Hydrocarbons Law) allows other oil and gas companies, in addition to us, to carry out certain activities related to the energy sector in Mexico, including exploration and extraction activities, and the import and sale of gasoline. As a result, we face competition for the right to explore and develop new oil and gas reserves in Mexico. We will also likely face competition in connection with certain refining, transportation and processing activities. In addition, increased competition could make it difficult for us to hire and retain skilled personnel. For more information, see “Item 4—Information on the Company—History and Development—Energy Reform.” If we are unable to compete successfully with other oil and gas companies in the energy sector in Mexico, our results of operations and financial condition may be adversely affected.

We are subject to Mexican and internationalanti-corruption,anti-bribery andanti-money laundering laws. Our failure to comply with these laws could result in penalties, which could harm our reputation, prevent us from obtaining governmental authorizations needed to carry out our operations and have an adverse effect on our business, results of operations and financial condition.

We are subject to Mexican and internationalanti-corruption,anti-bribery andanti-money laundering laws. See “Item 4—Information on the Company—General Regulatory Framework.” Although we maintain policies and processes intended to comply with these laws, including the review of our internal control over financial reporting, we are subject to the risk that our employees, contractors or any person doing business with us may engage in fraudulent activity, corruption or bribery, circumvent or override our internal controls and procedures or misappropriate or manipulate our assets for their personal or business advantage to our detriment. We have in place a number of systems for identifying, monitoring and mitigating these risks, but our systems may not be effective and we cannot ensure that these compliance policies and processes will prevent intentional, reckless or negligent acts committed by our officers or employees.

If we fail to comply with any applicableanti-corruption,anti-bribery oranti-money laundering laws, we and our officers and employees may be subject to criminal, administrative or civil penalties and other remedial measures, which could have material adverse effects on our business, financial condition and results of operations. Any investigation of potential violations ofanti-corruption,anti-bribery oranti-money laundering laws by governmental authorities in Mexico or other jurisdictions could result in an inability to prepare our consolidated financial statements in a timely manner. This could adversely impact our reputation, ability to access the financial markets and ability to obtain contracts, assignments, permits and other government authorizations necessary to participate in our industry, which, in turn, could have adverse effects on our business, results of operations and financial condition.

Our compliance with environmental regulations in Mexico could result in material adverse effects on our results of operations.

A wide range of general andindustry-specific Mexican federal and state environmental laws and regulations apply to our operations; these laws and regulations are often difficult and costly to comply with and carry substantial penalties fornon-compliance. This regulatory burden increases our costs because it requires us to make significant capital expenditures and limits our ability to extract hydrocarbons, resulting in lower revenues. For an estimate of our accrued environmental liabilities, see “Item 4—Information on the Company—Environmental Regulation—Environmental Liabilities.” Growing international concern over greenhouse gas emissions and climate change could result in new laws and regulations that could adversely affect our results of

 

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operations and financial condition. International agreements, including the Paris Agreement approved by the Mexican Government, contemplate coordinated efforts to combat climate change. We may become subject to market changes, including carbon taxes, efficiency standards,cap-and-trade and emission allowances and credits. These measures could increase our operating and maintenance costs, increase the price of our hydrocarbon products and possibly shift consumer demand tolower-carbon sources. See “Item 4—Environmental Regulation—Climate Change” for more information on the Mexican Government’s current legal and regulatory framework for combatting climate change.

Risk Factors Related to Mexico

Economic conditions and government policies in Mexico and elsewhere may have a material impact on our operations.

A deterioration in Mexico’s economic condition, social instability, political unrest or other adverse social developments in Mexico could adversely affect our business and financial condition. Those events could also lead to increased volatility in the foreign exchange and financial markets, thereby affecting our ability to obtain new financing and service our debt. Additionally, the Mexican Government announced budget cuts in November 2015, February 2016, and September 2016 in response to declines in international crude oil prices, and it may cut spending in the future. See “—Risk Factors Related to our Relationship with the Mexican Government—The Mexican Government controls us and it could limit our ability to satisfy our external debt obligations or could reorganize or transfer us or our assets” below. These cuts could adversely affect the Mexican economy and, consequently, our business, financial condition, operating results and prospects.

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. These problems may worsen or reemerge, as applicable, in the future and could adversely affect our business and ability to service our debt. A worsening of international financial or economic conditions, such as a slowdown in growth or recessionary conditions in Mexico’s trading partners, including the United States, or the emergence of a new financial crisis, could have adverse effects on the Mexican economy, our financial condition and our ability to service our debt.

Changes in Mexico’s exchange control laws may hamper our ability to service our foreign currency debt.

The Mexican Government does not currently restrict the ability of Mexican companies or individuals to convert pesos into other currencies. However, we cannot provide assurances that the Mexican Government will maintain its current policies with regard to the peso. In the future, the Mexican Government could impose a restrictive exchange control policy, as it has done in the past. Mexican Government policies preventing us from exchanging pesos into U.S. dollars could hamper our ability to service our foreign currency obligations, including our debt, the majority of which is denominated in currencies other than pesos.

Political conditions in Mexico could materially and adversely affect Mexican economic policy and, in turn, our operations.

Political events in Mexico may significantly affect Mexican economic policy and, consequently, our operations. Enrique Peña Nieto, a member of thePartido Revolucionario Institucional(Institutional Revolutionary Party or PRI), was elected President of Mexico and took office on December 1, 2012. As of the date of this annual report, no political party holds a simple majority in either house of the Mexican Congress.

Presidential and federal congressional elections in Mexico will be held in July 2018. The Mexican presidential election will result in a change in administration, as presidential reelection is not permitted in Mexico. As a result, we cannot predict whether changes in Mexican governmental policy will result from the change in administration. Political events in Mexico could adversely affect economic conditions and/or the oil and gas industry and, by extension, our results of operations and financial position.

 

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Mexico has experienced a period of increasing criminal activity, which could affect our operations.

In recent years, Mexico has experienced a period of increasing criminal activity, primarily due to the activities of drug cartels and related criminal organizations. In addition, the development of the illicit market in fuels in Mexico has led to increases in theft and illegal trade in the fuels that we produce. In response, the Mexican Government has implemented various security measures and has strengthened its military and police forces, and we have also established various strategic measures aimed at decreasing incidents of theft and other criminal activity directed at our facilities and products. See “Item 8—Financial Information—Legal Proceedings—Actions Against the Illicit Market in Fuels.” Despite these efforts, criminal activity continues to exist in Mexico, some of which may target our facilities and products. These activities, their possible escalation and the violence associated with them, in an extreme case, may have a negative impact on our financial condition and results of operations.

Economic and political developments in the United States may adversely affect PEMEX.

Changes in economic, political and regulatory conditions in the United States or in U.S. laws and policies governing foreign trade and foreign relations could create uncertainty in the international markets and could have a negative impact on the Mexican economy. Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the high degree of economic activity between the two countries generally, including the trade facilitated by the North American Free Trade Agreement (“NAFTA”). In addition, political developments in the United States, including changes in the administration and governmental policies, can also have an impact on the exchange rate between the U.S. dollar and the Mexican peso, economic conditions in Mexico and the global capital markets.

Following the U.S. elections in November 2016 and the change in the U.S. administration, there is uncertainty regarding future U.S. policies with respect to matters of importance to Mexico and its economy. In particular, the U.S. administration has raised the possibility ofre-negotiating, or withdrawing from, NAFTA and taking actions related to trade, tariffs, immigration and taxation that could affect Mexico.

Since 2003, exports of petrochemical products from Mexico to the United States have enjoyed azero-tariff rate under NAFTA and, subject to limited exceptions, exports of crude oil and petroleum products have also been free or exempt from tariffs. During 2016, our export sales to the United States amounted to Ps. 138.2 billion, representing 12.8% of total sales and 35.0% of export sales for the year. Any increase of import tariffs could make it economically unsustainable for U.S. companies to import our petrochemical, crude oil and petroleum products if they are unable to transfer those additional costs onto consumers, which would increase our expenses and decrease our revenues, even if domestic and international prices for our products remain constant. Higher tariffs on products that we export to the United States could also require us to renegotiate our contracts or lose business resulting in a material adverse impact on our business and results of operations.

Because the Mexican economy is heavily influenced by the U.S. economy, there-negotiation, or even termination, of NAFTA and/or other U.S. government policies that may be adopted by the U.S. administration may adversely affect economic conditions in Mexico. These developments could in turn have an adverse effect on our financial condition, results of operations and ability to repay our debt.

Risk Factors Related to our Relationship with the Mexican Government

The Mexican Government controls us and it could limit our ability to satisfy our external debt obligations or could reorganize or transfer us or our assets.

We are controlled by the Mexican Government and our annual budget may be adjusted by the Mexican Government in certain respects. Pursuant to the Petróleos Mexicanos Law, Petróleos Mexicanos was transformed from a decentralized public entity to a productivestate-owned company on October 7, 2014. The Petróleos Mexicanos Law establishes a special regime governing, among other things, our budget, debt levels,

 

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administrative liabilities, acquisitions, leases, services and public works. This special regime provides Petróleos Mexicanos with additional technical and managerial autonomy and, subject to certain restrictions, with additional autonomy with respect to our budget. Notwithstanding this increased autonomy, the Mexican Government still controls us and has the power to adjust our financial balance goal, which represents our targeted net cash flow for the fiscal year based on our projected revenues and expenses, and our annual wage and salary expenditures, subject to the approval of theCámara de Diputados (Chamber of Deputies).

The adjustments to our annual budget mentioned above may compromise our ability to develop the reserves assigned to us by the Mexican Government and to successfully compete with other oil and gas companies that enter the Mexican energy sector. See “Item 4—Information on the Company—History and Development—Capital Expenditures” for more information about our February 2016 budget adjustment and “—General Regulatory Framework” for more information about the Mexican Government’s authority with respect to our budget. In addition, the Mexican Government’s control over us could adversely affect our ability to make payments under any securities issued by Petróleos Mexicanos. Although Petróleos Mexicanos is wholly owned by the Mexican Government, our financing obligations do not constitute obligations of and are not guaranteed by the Mexican Government.

The Mexican Government’s agreements with international creditors may affect our external debt obligations. In certain past debt restructurings of the Mexican Government, Petróleos Mexicanos’ external indebtedness was treated on the same terms as the debt of the Mexican Government and other public sector entities, and it may be treated on similar terms in any future debt restructuring. In addition, Mexico has entered into agreements with official bilateral creditors to reschedule public sector external debt. Mexico has not requested restructuring of bonds or debt owed to multilateral agencies.

The Mexican Government has the power, if the Mexican Constitution and federal law were further amended, to further reorganize our corporate structure, including a transfer of all or a portion of our assets to an entity not controlled, directly or indirectly, by the Mexican Government. See “—Risk Factors Related to Mexico” above.

We pay significant taxes and duties to the Mexican Government, and, if certain conditions are met, to pay a state dividend, which may limit our capacity to expand our investment program or negatively impact our financial condition generally.

We are required to make significant payments to the Mexican Government, including in the form of taxes and duties, which may limit our ability to make capital investments. In 2016, approximately 32.0% of our sales revenues was used for payments to the Mexican Government in the form of taxes and duties, which constituted a substantial portion of the Mexican Government’s revenues.

The Secondary Legislation includes changes to the fiscal regime applicable to us, particularly with respect to the exploration and extraction activities that we carry out in Mexico. As of 2016, we have the obligation, subject to the conditions set forth in the Petróleos Mexicanos Law, to pay a state dividend to the Mexican Government. We were not required to pay a state dividend in 2016 and are not required to do so in 2017. See “Item 8—Financial Information—Dividends” for more information. Although the changes to the fiscal regime applicable to us are designed in part to reduce the Mexican Government’s reliance on payments made by us, we cannot provide assurances that we will not be required to continue to pay a large proportion of our sales revenue to the Mexican Government. See “Item 4—Information on the Company—Taxes, Duties and Other Payments to the Mexican Government—Fiscal Regime.” In addition, the Mexican Government may change the applicable rules in the future.

The Mexican Government has historically imposed price controls in the domestic market on our products.

The Mexican Government has from time to time imposed price controls on the sales of natural gas, liquefied petroleum gas, gasoline, diesel, gas oil intended for domestic use, fuel oil and other products. As a result of these

 

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price controls, we have not been able to pass on all of the increases in the prices of our product purchases to our customers in the domestic market when the peso depreciates in relation to the U.S. dollar. A depreciation of the peso increases our cost of imported oil and petroleum products, without a corresponding increase in our revenues unless we are able to increase the price at which we sell products in Mexico. In accordance with theLey de Ingresos de la Federación para el Ejerecicio Fiscal de 2017 (2017 Federal Revenue Law), the Mexican Government will gradually remove price controls on gasoline and diesel over the course of 2017 and 2018 as part of the liberalization of fuel prices in Mexico. On December 27, 2016, the Ministry of Finance and Public Credit announced maximum gasoline and diesel prices to be applied in each of the regions of Mexico where prices are not determined based on market conditions. For more information, see “Item 4—Information on the Company—Business Overview—Industrial Transformation.”

We do not control the Mexican Government’s domestic policies and the Mexican Government could impose additional price controls on the domestic market in the future. The imposition of such price controls would adversely affect our results of operations. For more information, see “Item 4—Information on the Company—Business Overview—Refining—Pricing” and “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Pricing.”

The Mexican nation, not us, owns the hydrocarbon reserves located in the subsoil in Mexico and our right to continue to extract these reserves is subject to the approval of the Ministry of Energy.

The Mexican Constitution provides that the Mexican nation, not us, owns all petroleum and other hydrocarbon reserves located in the subsoil in Mexico.

Article 27 of the Mexican Constitution provides that the Mexican Government will carry out exploration and production activities through agreements with third parties and through assignments to and agreements with us. The Secondary Legislation allows us and other oil and gas companies to explore and extract the petroleum and other hydrocarbon reserves located in Mexico, subject to assignment of rights by the Ministry of Energy and entry into agreements pursuant to a competitive bidding process.

Access to crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income, and our ability to generate income would be materially and adversely affected if the Mexican Government were to restrict or prevent us from exploring or extracting any of the crude oil and natural gas reserves that it has assigned to us or if we are unable to compete effectively with other oil and gas companies in future bidding rounds for additional exploration and production rights in Mexico. For more information, see “—We must make significant capital expenditures to maintain our current production levels, and to maintain, as well as increase, the proved hydrocarbon reserves assigned to us by the Mexican Government. Reductions in our income, adjustments to our capital expenditures budget and our inability to obtain financing may limit our ability to make capital investments” below.

Information on Mexico’s hydrocarbon reserves is based on estimates, which are uncertain and subject to revisions.

The information on oil, gas and other reserves set forth in this annual report is based on estimates. Reserves valuation is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner; the accuracy of any reserves estimate depends on the quality and reliability of available data, engineering and geological interpretation and subjective judgment. Additionally, estimates may be revised based on subsequent results of drilling, testing and production. These estimates are also subject to certain adjustments based on changes in variables, including crude oil prices. Therefore, proved reserves estimates may differ materially from the ultimately recoverable quantities of crude oil and natural gas. Downward revisions in our reserve estimates could lead to lower future production, which could have an adverse effect on our results of operations and financial condition. See “—Risk Factors Related to Our Operations—Crude oil and natural gas prices are volatile and low crude oil and natural gas prices adversely affect our income

 

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and cash flows and the amount of hydrocarbon reserves that we have the right to extract and sell” above. We revise annually our estimates of hydrocarbon reserves that we are entitled to extract and sell, which may result in material revisions to these estimates. Our ability to maintain ourlong-term growth objectives for oil production depends on our ability to successfully develop our reserves, and failure to do so could prevent us from achieving ourlong-term goals for growth in production.

We must make significant capital expenditures to maintain our current production levels, and to maintain, as well as increase, the proved hydrocarbon reserves assigned to us by the Mexican Government. Reductions in our income, adjustments to our capital expenditures budget and our inability to obtain financing may limit our ability to make capital investments.

Because our ability to maintain, as well as increase, our oil production levels is highly dependent upon our ability to successfully develop existing hydrocarbon reserves and, in the long term, upon our ability to obtain the right to develop additional reserves, we continually invest capital to enhance our hydrocarbon recovery ratio and improve the reliability and productivity of our infrastructure. During 2016, our total proved reserves had a net increase of 40 million barrels of oil equivalent after accounting for discoveries, extensions, revisions, and delimitations. This amount, however, was less than production in 2016. Accordingly, our total proved reserves decreased by 11.1%, from 9,632 million barrels of crude oil equivalent as of December 31, 2015 to 8,562.8 million barrels of crude oil as of December 31, 2016. See “Item 4—Information on the Company—Business Overview—Exploration and Production—Reserves” for more information about the factors leading to this decline, including the results of Round Zero. Our crude oil production decreased by 1.0% from 2012 to 2013, by 3.7% from 2013 to 2014 and by 6.7% from 2014 to 2015 and by 5.0% from 2015 to 2016 primarily as a result of the decline of the Cantarell,Tsimín-Xux, Antonio J. Bermúdez, Chuc and Crudo Ligero projects.

Pursuant to energy reform in Mexico, the Mexican Government outlined a process, commonly referred to as Round Zero, for the determination of our initial allocation of rights to continue to carry out exploration and production activities in Mexico. On August 13, 2014, the Ministry of Energy granted us the right to continue to explore and develop areas that together contain 95.9% of Mexico’s estimated proved reserves of crude oil and natural gas. The development of the reserves that were assigned to us pursuant to Round Zero, particularly the reserves in the deep waters of the Gulf of Mexico and in shale oil and gas fields in the Burgos basin, will demand significant capital investments and will pose significant operational challenges. Our right to develop the reserves assigned to us through Round Zero is conditioned on our ability to develop such reserves in accordance with our development plans, which were based on our technical, financial and operational capabilities at the time. We cannot provide assurances that we will have or will be able to obtain, in the time frame that we expect, sufficient resources or the technical capacity necessary to explore and extract the reserves that the Mexican Government assigned to us as part of Round Zero, or that it may grant to us in the future. The decline in oil prices has forced us to make adjustments to our budget, including a significant reduction of our capital expenditures. Unless we are able to increase our capital expenditures, we may not be able to develop the reserves assigned to us in accordance with our development plans. We would lose the right to continue to extract these reserves if we fail to develop them in accordance with our development plans, which could adversely affect our operating results and financial condition. In addition, increased competition in the oil and gas sector in Mexico may increase the costs of obtaining additional acreage in bidding rounds for the rights to new reserves.

Our ability to make capital expenditures is limited by the substantial taxes and duties that we pay to the Mexican Government, the ability of the Mexican Government to adjust certain aspects of our annual budget, cyclical decreases in our revenues primarily related to lower oil prices and any constraints on our liquidity. The availability of financing may limit our ability to make capital investments that are necessary to maintain current production levels and increase the proved hydrocarbon reserves that we are entitled to extract. The energy reform has provided us with opportunities to enter into strategic alliances and partnerships, which may reduce our capital commitments and allow us to participate in projects for which we are more competitive. However, no assurance can be provided that these strategic alliances and partnerships will be successful or reduce our capital commitments. For more information, see “Item 4—Information on the Company—History and Development—

 

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Capital Expenditures” and “—Energy Reform.” For more information on the liquidity constraints we are exposed to, see “—We have a substantial amount of indebtedness and other liabilities and are exposed to liquidity constraints, which could make it difficult for us to obtain financing on favorable terms and could adversely affect our financial condition, results of operations and ability to repay our debt and, ultimately, our ability to operate as a going concern” above.

We may claim some immunities under the Foreign Sovereign Immunities Act and Mexican law, and your ability to sue or recover may be limited.

We arepublic-sector entities of the Mexican Government. Accordingly, you may not be able to obtain a judgment in a U.S. court against us unless the U.S. court determines that we are not entitled to sovereign immunity with respect to that action. Under certain circumstances, Mexican law may limit your ability to enforce judgments against us in the courts of Mexico. We also do not know whether Mexican courts would enforce judgments of U.S. courts based on the civil liability provisions of the U.S. federal securities laws. Therefore, even if you were able to obtain a U.S. judgment against us, you might not be able to obtain a judgment in Mexico that is based on that U.S. judgment. Moreover, you may not be able to enforce a judgment against our property in the United States except under the limited circumstances specified in the Foreign Sovereign Immunities Act of 1976, as amended. Finally, if you were to bring an action in Mexico seeking to enforce our obligations under any securities issued by Petróleos Mexicanos, satisfaction of those obligations may be made in pesos, pursuant to the laws of Mexico.

Our directors and officers, as well as some of the experts named in this annual report, reside outside the United States. Substantially all of our assets and those of most of our directors, officers and experts are located outside the United States. As a result, investors may not be able to effect service of process on our directors or officers or those experts within the United States.

 

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Item 4.Information on the Company

HISTORY AND DEVELOPMENT

We are the largest company in Mexico according to the June 2016 special edition ofExpansiónmagazine, and according to the November 21, 2016 issue ofPetroleum Intelligence Weekly,we were the eighthlargest crude oil producer and the eighteenth largestoil and gas company in the world based on data from the year 2015.

Our executive offices are located at Avenida Marina Nacional No. 329, Colonia Verónica Anzures, Ciudad de México 11300, México. Our telephone number is(52-55) 1944-2500.

In March 1938, President Lázaro Cárdenas del Río nationalized the foreign-owned oil companies that were then operating in Mexico, and the Mexican Congress established Petróleos Mexicanos through theDecreto que crea la Institución Petróleos Mexicanos (Decree that creates the entity Petróleos Mexicanos), which was published in the Official Gazette of the Federation and took effect on July 20, 1938.

In July 1992, theLey Orgánica de Petróleos Mexicanos y Organismos Subsidiarios (Organic Law of Petróleos Mexicanos and Subsidiary Entities) took effect and, among other things, created Pemex-Exploration and Production, Pemex-Refining,Pemex-Gas and Basic Petrochemicals and Pemex-Petrochemicals as decentralized public entities of the Mexican Government with the legal authority to own property and conduct business in their own names. Each of the subsidiary entities had the characteristics of a subsidiary of Petróleos Mexicanos. The principal lines of business of those subsidiary entities were as follows:

 

  Pemex-Exploration and Production explored for, exploited, transported, stored and marketed crude oil and natural gas;

 

  Pemex-Refining refined petroleum products and derivatives that may be used as basic industrial raw materials and stored, transported, distributed and marketed these products and derivatives;

 

  Pemex-Gas and Basic Petrochemicals processed, produced, stored, transported, distributed and marketed natural gas, natural gas liquids, artificial gas and derivatives that may be used as basic industrial raw materials and produced, stored, transported, distributed and marketed petrochemicals that were classified as “basic” (ethane, propane, butane, pentanes, hexane, heptane, carbon black feedstocks, natural gasoline and methane, when used as raw materials and intended for use in petrochemical industrial processes) prior to the enactment of the Hydrocarbons Law in August 2014; and

 

  Pemex-Petrochemicals engaged in industrial petrochemical processes and stored, distributed and marketed other petrochemicals.

Energy Reform

Energy Reform Decree

On December 20, 2013, amendments to Articles 25, 27 and 28 of the Mexican Constitution were signed into law by President Enrique Peña Nieto and published in the Official Gazette of the Federation. We refer to this as the Energy Reform Decree. The Energy Reform Decree, which includes transitional articles setting forth the general framework and timeline for the related secondary legislation, took effect on December 21, 2013.

Secondary Legislation

On August 11, 2014, the secondary legislation was published pursuant to the Energy Reform Decree in the Official Gazette of the Federation. We refer in this annual report to this legislation as the Secondary Legislation. The Secondary Legislation includes nine new laws, of which the following are most relevant to our operations:

 

  The new Petróleos Mexicanos Law, which took effect, with the exception of certain provisions, on October 7, 2014 and repealed the previous Petróleos Mexicanos Law, which had been effective as of November 29, 2008;

 

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  Hydrocarbons Law, which took effect on August 12, 2014 and repealed theLey Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(Regulatory Law to Article 27 of the Mexican Constitution Concerning Petroleum Affairs, which we refer to as the Regulatory Law); and

 

  Ley de Ingresos sobre Hidrocarburos (Hydrocarbons Revenue Law).

Together, the Hydrocarbons Law and the Hydrocarbons Revenue Law establish the legal framework for the exploration and production of oil and gas through assignments and contracts, as well as the new fiscal regime through which the Mexican Government will collect revenues from participants in the Mexican oil and gas industry. The Hydrocarbons Law empowers the Ministry of Energy to determine the appropriate contract model for each area that is subject to a competitive bidding process, while the Ministry of Finance and Public Credit is responsible for determining the economic and fiscal terms of each contract. The following arrangements comprise the new contractual regime established by the Secondary Legislation for upstream activities:

 

  licenses, pursuant to which a license holder is entitled to the oil and gas that are extracted from the subsoil;

 

  production-sharing contracts, pursuant to which a contractor is entitled to receive a percentage of production;

 

  profit-sharing contracts, pursuant to which a contractor is entitled to receive a percentage of the profit from the sale of the extracted oil and gas; and

 

  service contracts, pursuant to which a contractor would receive cash payments for services performed (service contracts, together with licenses, production-sharing contracts and profit-sharing contracts are known as the contracts for the exploration and extraction of oil and gas, collectively referred to as contracts for exploration and production).

The fiscal terms of each contract for exploration and production are to be established in accordance with the Hydrocarbons Revenue Law. See “—Taxes, Duties and Other Payments to the Mexican Government—Fiscal Regime” below in this Item 4.

For midstream and downstream activities, including oil refining and natural gas processing, the Hydrocarbons Law establishes a permit regime that is granted by the Ministry of Energy and the Energy Regulatory Commission, as applicable. The Hydrocarbons Law also sets forth the process by which entities may apply for these permits. The Energy Regulatory Commission began issuing permits for the retail sale of gasoline and diesel fuel in 2016. During 2017 and 2018, the Energy Regulatory Commission, with the opinion of theComisión Federal de Competencia Económica (Federal Economic Antitrust Commission), will issue guidelines and schedules for different regions in Mexico relating to the processes to be used by the Ministry of Finance and Public Credit to determine prices of gasoline and diesel, which will take into account, among other things, transportation costs and volatility in international prices. Beginning in 2018, the prices of gasoline and diesel fuel will be freely determined by market conditions.

Legal Regime for Petróleos Mexicanos

As part of energy reform, Petróleos Mexicanos was transformed from a decentralized public entity into a productive state-owned company on October 7, 2014—the day on which the new Petróleos Mexicanos Law took effect, with the exception of certain provisions. As a productive state-owned company, Petróleos Mexicanos remains wholly owned by the Mexican Government and has the corporate purpose of generating economic value and increasing the income of the Mexican nation while adhering to principles of equity, as well as social and environmental responsibility.

On December 2, 2014, upon its determination that the new Board of Directors of Petróleos Mexicanos was performing its duties and the mechanisms for our oversight, transparency and accountability had been implemented, the Ministry of Energy formally announced in the Official Gazette of the Federation that the

 

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special regime provided for in the Petróleos Mexicanos Law, which governs Petróleos Mexicanos’ activities relating to productive state-owned subsidiaries, affiliates, compensation, assets, administrative liabilities, budget, debt levels and the state dividend, had taken effect. On June 10, 2015, theDisposiciones Generales de Contratación para Petróleos Mexicanos y Sus Empresas Productivas Subsidiarias (General Provisions for Contracting for Petróleos Mexicanos and its Productive State-Owned Subsidiaries) were published in the Official Gazette of the Federation, and on June 11, 2015, the special regime for acquisitions, leases, services and public works became effective.

Corporate Reorganization

In accordance with the transitional articles of the Petróleos Mexicanos Law, on November 18, 2014, the Board of Directors of Petróleos Mexicanos approved the Director General’s proposal for our corporate reorganization. In our corporate reorganization, the four existing subsidiary entities of Petróleos Mexicanos were transformed into two new productive state-owned subsidiaries—Pemex Exploration and Production and Pemex Industrial Transformation—and five new productive state-owned subsidiaries—Pemex Drilling and Services, Pemex Logistics, Pemex Cogeneration and Services, Pemex Fertilizers and Pemex Ethylene—were created. Each of these productive state-owned subsidiaries is a legal entity empowered to own property and carry on business in its own name and has technical and operational autonomy, subject to the central coordination and strategic direction of Petróleos Mexicanos.

On March 27, 2015, the Board of Directors of Petróleos Mexicanos adoptedacuerdos de creación (creation resolutions) for each of the new productive state-owned subsidiaries, all of which were subsequently published in the Official Gazette of the Federation on April 28, 2015.

The principal lines of business of the new productive state-owned subsidiaries are as follows:

 

  Pemex Exploration and Production, formed on June 1, 2015 as a successor to Pemex-Exploration and Production, explores for, exploits, transports, stores and markets crude oil and natural gas;

 

  Pemex Cogeneration and Services, formed on June 1, 2015, generates, supplies and trades electric and thermal energy;

 

  Pemex Drilling and Services, formed on August 1, 2015, performs drilling and well repair services;

 

  Pemex Fertilizers, formed on August 1, 2015, integrates the ammonia production chain up to the point of sale of fertilizers;

 

  Pemex Ethylene, formed on August 1, 2015, separates the ethylene business from our petrochemicals segment in order to take advantage of the integration of the ethylene production chain and distributes and trades other gases, including methane and propylene;

 

  Pemex Logistics, formed on October 1, 2015, provides land, maritime and pipeline transportation, storage and distribution to us and third parties; and

 

  Pemex Industrial Transformation, formed on November 1, 2015 as a successor of Pemex-Refining,Pemex-Gas and Basic Petrochemicals and Pemex-Petrochemicals, refines petroleum products and derivatives; processes natural gas, natural gas liquids, artificial gas and derivatives and engages in industrial petrochemical processes.

Capital Expenditures

The following table shows our capital expenditures, excludingnon-capitalizable maintenance, for each of the three years ended December 31, 2016, and the budget for these expenditures for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial

 

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statements prepared in accordance with IFRS. The following table presents our capital expenditures by subsidiary. For the year ended December 31, 2015, we have included capital expenditures made by the subsidiary entities prior to our recent corporate reorganization, and for the new productive state-owned subsidiaries, capital expenditures made after their creation. For the year ended December 31, 2016 and for the 2017 budget, we have included capital expenditures made by, or expected to be made by, the new productive state-owned subsidiaries.

Capital Expenditures and Budget by Subsidiary

 

   Year ended December 31,   Budget
2017(1)
 
   2014   2015   2016   
   (in millions of pesos)(2) 

Pemex-Exploration and Production(3)

  Ps. 222,069   Ps. 153,110   Ps. 137,242   Ps. 73,927 

Pemex Industrial Transformation(4)

       4,952    33,947    21,369 

Pemex Logistics(5)

       631    7,015    4,449 

Pemex Drilling and Services(6)

           2,688    1,580 

Pemex Ethylene(7)

       426    746    1,786 

Pemex Fertilizers(8)

       205    379    444 

Pemex-Refining

   39,767    34,152    n.a.     

Pemex-Gas and Basic Petrochemicals

   7,549    5,070    n.a.     

Pemex-Petrochemicals

   4,765    2,604    n.a.     

Pemex Cogeneration and Services

                

Petróleos Mexicanos

   3,006    2,157    1,004    5,422 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capital expenditures

  Ps. 277,156   Ps. 203,307   Ps. 183,021   Ps. 108,977 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Numbers may not total due to rounding.

(1)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(2)Figures for 2014, 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.
(3)For the year ended December 31, 2015, this includes capital expenditures made by Pemex-Exploration and Production and the new productive state-owned subsidiary Pemex Exploration and Production.
(4)Figures for the year ended December 31, 2015 include capital expenditures after November 1, 2015, when Pemex Industrial Transformation was formed.
(5)Figures for the year ended December 31, 2015 include capital expenditures after October 1, 2015, when Pemex Logistics was formed.
(6)For the year ended December 31, 2015, capital expenditures for Pemex Drilling and Services were allocated under Pemex Exploration and Production.
(7)Figures for the year ended December 31, 2015 include capital expenditures after October 1, 2015, when Pemex Ethylene was formed.
(8)Figures for the year ended December 31, 2015 include capital expenditures after October 1, 2015, when Pemex Fertilizers was formed.

Source: Petróleos Mexicanos.

 

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The following table shows our capital expenditures, excludingnon-capitalizable maintenance, by segment for the years ended December 31, 2015 and 2016 and the budget for these expenditures in 2017.

Capital Expenditures by Segment

 

   Year ended December 31,   Budget
2017(1)
 
   2015   2016   
   (millions of pesos) 

Exploration and Production(2)

  Ps. 151,546   Ps. 137,242   Ps. 73,927 

Industrial Transformation

      

Refining

   29,646    30,501    18,919 

Gas and Aromatics(3)

   5,654    3,446    2,450 
  

 

 

   

 

 

   

 

 

 

Total

   35,300    33,947    21,369 

Logistics(4)

   9,827    7,015    4,449 

Drilling and Services(5)

   1,564    2,688    1,580 

Ethylene(6)

   1,869    746    1,786 

Fertilizers(7)

   1,044    379    444 

Cogeneration and Services

            

Corporate and other Subsidiaries

   2,157    1,004    5,422 
  

 

 

   

 

 

   

 

 

 

Total Capital Expenditures

  Ps. 203,307   Ps. 183,021   Ps. 108,977 
  

 

 

   

 

 

   

 

 

 

 

Note: Numbers may not total due to rounding.

 (1)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
 (2)Figures for the exploration and production segment for the year ended December 31, 2015 include capital expenditures related to the drilling and services segment until the formation of Pemex Drilling and Services on August 1, 2015 and to the logistics segment until the formation of Pemex Logistics on October 1, 2015.
 (3)Figures for the gas and aromatics activities for the year ended December 31, 2015 include the capital expenditures for the prior gas and basic petrochemicals and petrochemicals segments.
 (4)Figures for the logistics segment for the year ended December 31, 2015 refer to logistics capital expenditures made by Pemex Refining and Pemex Gas and Basic Petrochemicals until September 30, 2015, and to capital expenditures made by Pemex Logistics after its formation on October 1, 2015.
 (5)Figures for the drilling and services segment for the year ended December 31, 2015 refer to capital expenditures for drilling and services made by Pemex Exploration and Production.
 (6)Figures for the ethylene segment for the year ended December 31, 2015 refer to capital expenditures made by Pemex Petrochemicals until September 30, 2015 and to capital expenditures made by Pemex Ethylene after its formation on October 1, 2015.
 (7)Figures for the fertilizers segment for the year ended December 31, 2015 refer to capital expenditures made by Pemex Petrochemicals until September 30, 2015, and to capital expenditures made by Pemex Fertilizers after its formation on October 1, 2015.

Source: Petróleos Mexicanos.

Capital expenditures and budget by project are described under each segment below in this Item 4.

Sincemid-2014, the international reference prices of crude oil have fluctuated significantly. During January 2016, the Mexican crude oil export price fell to U.S. $18.90 per barrel and the weighted average price for the year was U.S. $35.63 per barrel. Based on its estimate that the weighted average Mexican crude oil export price would be U.S. $42.00 per barrel, the Mexican Congress approved our Ps. 204.6 billion capital expenditures budget, including maintenance, for 2017.

In light of the oil and gas market and global economic conditions, on December 14, 2016 the Chamber of Deputies approved a 2017 budget of Ps. 391.9 billion, which included a financial balance goal (which we define as sales after deducting costs and expenses, investment expenses, taxes and duties, and financial debt service) of Ps. 93.8 billion. On December 14, 2016, the budget was presented to the Board of Directors of Petróleos Mexicanos along with detailed capital expenditure allocations by subsidiary entity. On April 7, 2017, the Board

 

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of Directors of Petróleos Mexicanos was presented with an amended budget with capital expenditure allocations presented by subsidiary entity and by project. With this budget, our management expects that we will be able to maintain our medium- and long-term growth plans without the need to incur more indebtedness than the amount included in our approved financing program for 2017. The budget approved by the Board of Directors of Petróleos Mexicanos was based on the guiding principles of: maintaining the industrial safety and reliability of our facilities; taking advantage of the new contractual models provided by the energy reform in order to attract third-party investment; meeting our labor and financial obligations; and stabilizing our crude oil and gas production levels in the medium and long-term.

Our budget for 2017 includes a total of Ps. 109.0 billion for capital expenditures. We expect to direct Ps. 73.9 billion (or 67.8% of our total capital expenditures) to exploration and production programs in 2017. This investment in exploration and production activities reflects our focus on maximizing the potential of hydrocarbon reserves and our most productive projects, the promotion of ourfarm-out program, which we believe will allow us to sustain and increase our production levels while decreasing our corresponding capital expenditures, and our intention to take advantage of the opportunities provided by the energy reform. The energy reform provides us with opportunities to form new strategic partnerships in order to enhance our financial, technical and operational capabilities along our entire value chain. See “—Energy Reform” above in this Item 4. We continuously review our capital expenditures portfolio in accordance with our current and future business plans and upcoming opportunities. In the upcoming years, we expect to receive financial resources from third parties who may partner with us on certain projects, a collaboration made possible following the implementation of the Secondary Legislation. See “—Energy Reform” above in this Item 4 for more information about these new opportunities.

Our main objectives for upstream investment are to maximize our long-term economic value, and to increase and improve the quality of the oil and gas reserves assigned to us, enhance Pemex Exploration and Production’s reserves recovery ratio, improve the reliability of its production and transportation infrastructure for crude oil and natural gas operations and continue to emphasize industrial safety and compliance with environmental regulations. Our 2017 budget objectives include maintaining crude oil production at levels sufficient to satisfy domestic demand and have a surplus available for export and maintaining natural gas production levels in order to attempt to satisfy domestic demand.

Our downstream investment program seeks to improve the quality of our product selection and the reliability of our logistics and distribution services, to achieve a level of efficiency similar to that of our international competitors and to continue to emphasize industrial safety and environmental compliance.

 

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BUSINESS OVERVIEW

Overview by Business Segment

Exploration and Production

Our exploration and production segment operates through the productive state-owned subsidiary Pemex Exploration and Production and explores for and produces crude oil and natural gas, primarily in the northeastern and southeastern regions of Mexico and offshore in the Gulf of Mexico. In nominal peso terms, our capital expenditures in exploration and production activities decreased by 9.4% in 2016. As a result of our investments in previous years, our total hydrocarbon production reached a level of approximately 1,115.7 million barrels of oil equivalent in 2016. Despite these investments, our crude oil production decreased by 5.0% from 2015 to 2016, averaging 2,153.5 thousand barrels per day in 2016, primarily as a result of the decline of the Cantarell, Crudo Ligero Marino, El Golpe-Puerto Ceiba, Bellota-Chinchorro, Antonio J. Bermúdez, Cactus-Sitio Grande, Ixtal-Manik, Chuc, Costero Terrestre, andTsimín-Xux projects, which was partially offset by development of the Integral Yaxché project’s Xanab field and by repairs, stimulations and diversification of artificial systems at our onshore fields that helped maintain production levels.

Our natural gas production (excluding natural gas liquids) decreased by 9.5% from 2015 to 2016, averaging 5,792.5 million cubic feet per day in 2016. This decrease in natural gas production resulted primarily from decreased volumes in the Burgos, Crudo Ligero Marino, Ixtal-Manik, Integral Veracruz Basin, Cactus-Sitio Grande, Integral Macuspana Basin and Ogarrio-Sánchez Magallanes projects. Exploration drilling activity decreased by 19.2% from 2015 to 2016, from 26 exploratory wells completed in 2015 to 21 exploratory wells completed in 2016. Development drilling activity decreased by 55.2% from 2015 to 2016, from 286 development wells completed in 2015 to 128 development wells completed in 2016. In 2016, we completed the drilling of 149 wells in total. Our drilling activity in 2016 was focused on increasing the production of crude oil and associated gas in the Ayatsil-Tekel, Chuc, Crudo Ligero Marino, El Golpe-Puerto Ceiba,Ku-Maloob-Zaap andTsimín-Xux, Aceite Terciario del Golfo andOgarrio-Sánchez Magallanes projects.

Our primary objectives in 2017 include: (i) generating economic value and profitability to ensure the sustainability of the company; (ii) improving our performance in industrial safety and environmental protection; and (iii) increasing productivity and efficiency. We aim to meet these objectives through the following: (1) exploration and extraction of oil and solid, liquid or gaseous hydrocarbons in Mexico, its exclusive economic zone and abroad, in a profitable and sustainable manner; (2) acceleration of the development of shale; (3) use of farm-outs to develop complex fields and leverage resources from third parties; (4) containment of production decline and increase of profitability of assignments migrated without third-party participation; (5) increase of the production of oil and gas to meet demands in the southeast of Mexico; (6) optimal allocation of resources for our projects and continuous performance evaluation; (7) increase of efficiency levels above international standards in our gas utilization and production costs; and (8) efficient use of our investments and logistics capacity and minimization of operating costs. Our production goals for 2017 include producing crude oil at a level of approximately 1,925.2 thousand barrels per day and maintaining natural gas production above 4,729.0 million cubic feet per day. We aim to meet these production goals through exploration and development activities, increasing inventory reserves through new discoveries and reclassifications, managing the decline in field production by applying primary, secondary and enhanced oil recovery processes and continuing to develop extra-heavy crude oil fields.

Industrial Transformation

Our industrial transformation segment is comprised of two principal activities: (i) refining and (ii) gas and aromatics:

Refining

Our refining business, which formerly operated as Pemex-Refining and operates through the productive state-owned subsidiary Pemex Industrial Transformation, converts crude oil into gasoline, jet fuel, diesel, fuel

 

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oil, asphalts and lubricants. We also distribute and market most of these products throughout Mexico, where we experience significant demand for our refined products. At the end of 2016, atmospheric distillation refining capacity reached 1,602 thousand barrels per day. In 2016, we produced 977 thousand barrels per day of refined products as compared to 1,114 thousand barrels per day of refined products in 2015. This decrease in refined products production was mainly due to a decrease in crude oil processing and to operational issues inEl Sistema Nacional de Refinación (the National Refining System). As the result of operational problems, processing of crude oil by the National Refining System decreased 12.3%, from 1,064 million barrels per day in 2015 to 933 million barrels per day in 2016. Our primary goal for 2017 is to increase production of petroleum products, which we expect will result from an increase in distillate production and a decrease in fuel oil production.

Gas and Aromatics

Our gas and aromatics business processes wet natural gas to produce dry natural gas, liquefied petroleum gas (LPG) and other natural gas liquids, along with aromatic chain products such as styrene, toluene, benzene and xylene. In 2016, our total sour natural gas processing capacity remained at 2015 levels of 4,523 cubic feet per day. We processed 3,672 million cubic feet of wet natural gas per day in 2016, a 9.8% decrease from the 4,073 million cubic feet per day of wet natural gas processed in 2015. We produced 308 thousand barrels per day of natural gas liquids in 2016, a 5.8% decrease from the 364 thousand barrels per day of natural gas liquids production in 2015. We also produced 3,074 million cubic feet of dry gas (which is natural gas with a methane content of more than 90.0%) per day in 2015, 11.0% less than the 3,454 cubic feet of dry gas per day produced in 2015. We produced 940 thousand tons of aromatics and derivatives, an 8.0% decrease from 2015.

In 2017, we expect to have a lower supply of natural gas from our fields, which would require us to import higher volumes of natural gas to satisfy domestic demand.

Fertilizers

Our fertilizers segment operates through the productive state-owned subsidiary Pemex Fertilizers and integrates the ammonia production chain up to the point of sale of fertilizers.

Our strategies focus on: (1) increasing the economic value of our segment by generating diverse investment opportunities in the agricultural sector in Mexico and (2) ensuring a reliable supply of raw materials for our plants through a long-term contract that sustains operations at our four ammonia plants.

Ethylene

Our ethylene segment operates through the productive state-owned subsidiary Pemex Ethylene and takes advantage of the integration of the ethylene production chain. In 2016, we produced a total of 2,528.7 thousand tons of petrochemical products, a 14.8% decrease from the 2,969.7 thousand tons of petrochemical products produced in 2015.

We have two primary goals for our ethylene segment in 2017. The first is to better market our products and services to certain customers, mainly by (1) becoming a reliable supplier, adopting competitive business practices, focusing on profitable and abandoning unprofitable markets; and (2) evaluating strategic business relationships and partnerships to increase the profitability of our petrochemical processes. The second is to streamline our activities and operations in Pemex Ethylene’s value chain by following the best operational and maintenance practices.

Drilling and Services

Our drilling and services segment operates through the productive state-owned subsidiary Pemex Drilling and Services and provides drilling, completion, work-over and other services for wells in offshore and onshore fields. In 2016, this segment mainly provided drilling services to Pemex Exploration and Production, but also provided services to external clients such asComisión Nacional del Agua (CONAGUA) and the Armada Company.

 

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Our well drilling activities during 2016 led to onshore discoveries. Our main discoveries were of crude oil reserves located in the Southeastern and Veracruz basins, specifically in the Northern and Southern regions. Exploration activity in the Northern region also led to the discovery of additionalnon-associated gas reserves in the Burgos basin. We are currently working on development plans for these new reserves.

Logistics

Our logistics segment operates through the productive state-owned subsidiary Pemex Logistics and provides land, maritime and pipeline transportation, storage and distribution services to us and other companies, including theComisión Federal de Electricidad (Federal Electricity Commission or CFE),Aeropuertos y Servicios Auxiliares, CENAGAS, local gas stations and distributors.

During 2016, we transported 58,016 millionton-kilometers of crude oil and petroleum products, an 11.3% decrease as compared to 2015, due to decreased production in our exploration and production segment, decreased processing of crude oil in our refineries and the illicit market in fuels which can lead to temporary pipeline closures.

During 2016, we transported approximately 5,440 million cubic feet per day of natural gas, a 5.8% increase as compared to the 5,142 million cubic feet per day transported in 2015, partially due to the transportation of an estimated 655 million cubic feet per day for the CFE as agreed among the Ministry of Energy, the Energy Regulatory Commission and Pemex Industrial Transformation. On January 1, 2016, we began providing operation, maintenance and information technology services to, among others, CENAGAS in connection with its natural gas transportation infrastructure.

During 2016, we also transported 140 thousand barrels per day of LPG and 2,589 thousand barrels per day of crude oil and petroleum products to be processed in our refining system and to satisfy domestic demand for petroleum products, as compared to 174 thousand barrels per day of LPG and 3,181 thousand barrels per day of crude oil and petroleum products transported in 2015. Of the total amount we transported in 2016, we carried 77% of the transported volumes in 2016 through pipelines, 12% by vessels and the remaining 11% by train tank cars and trucks.

Our logistics segment will continue to provide services to our other segments and to third parties throughout Mexico. It hopes to meet its customers’ needs by providing its services in an efficient manner.

Cogeneration and Services

Our cogeneration and services segment operates through the productive state-owned subsidiary Pemex Cogeneration and Services and uses thermal heat and steam from our industrial processes to produce the electricity required by us, as well as to generate surplus electricity to sell to third parties in Mexico. Our cogeneration and services segment designs construction, financing and development structures for cogeneration through alliances with third parties in close geographic proximity to our productive work centers.

International Trading

The international trading segment, which operates through P.M.I. Comercio Internacional, S.A. de C.V. (which we refer to as PMI), P.M.I. Trading, Ltd., P.M.I. Norteamérica, S.A. de C.V., (which, together with PMI, we collectively refer to as the “PMI Subsidiaries”) and Mex Gas International, Ltd., (which, together with the PMI Subsidiaries, we collectively refer to as the “Trading Companies”) provides us with international trading, distribution, risk management, insurance and transportation services. The Trading Companies sell, buy and transport crude oil, refined products and petrochemicals in world markets, and provide related risk management, insurance, transportation and storage services. The Trading Companies have offices in Mexico City, Houston, Amsterdam, Singapore and Madrid. Export sales are made through PMI to approximately 34 major customers in various foreign markets.

 

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In 2016, our crude oil exports increased in volume by 1.9%, from 1,172.4 thousand barrels per day in 2015 to 1,194.4 thousand barrels per day in 2016. Natural gas imports increased by 36.6% in 2016, from 1,415.8 million cubic feet per day in 2015 to 1,933.9 million cubic feet per day in 2016. In 2016, exports of petrochemical products decreased 62.6%, from 333.8 thousand metric tons in 2015 to 124.7 thousand metric tons in 2016, while imports of petrochemical products increased 159.3%, from 107.3 thousand metric tons in 2015 to 278.2 thousand metric tons in 2016. In 2016, exports of petroleum products increased 1.6%, from 130.8 thousand barrels per day in 2015 to 132.9 thousand barrels per day in 2016, while imports of other petroleum products and liquefied petroleum gas increased 8.1%, from 739.8 thousand barrels per day in 2015 to 799.5 thousand barrels per day in 2016. As a major supplier of crude oil to the United States, our international trading segment’s crude oil exports to the U.S. totaled U.S. $7.5 billion in 2016, a decrease of U.S. $3.4 billion from 2015.

In addition to being our international trading arm, our trading segment is also active in the Mexican market. The PMI Subsidiaries are party to multiple long-term contracts that we expect will generate business during 2017, including a long-term contract with Petróleos Mexicanos for sulfur sales and a long-term agreement with Mex Gas, one of our affiliates, for naphtha sales.

Infrastructure of PEMEX

 

 

LOGO

Exploration and Production

Following our 2015 corporate reorganization, certain business units and assets that were operated by our exploration and production segment were transferred to our drilling and services segment upon the formation of Pemex Drilling and Services on August 1, 2015. For the year ended December 31, 2015, we have not presented separately the operating results of our drilling and services segment in this Item 4 and, accordingly, the results of

 

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our exploration and production segment include the results of that segment for this period. Operating results for both the exploration and production and drilling and services segments are presented separately for periods beginning January 1, 2016. For a detailed description of the financial results of each segment, see our consolidated financial statements included herein.

Exploration and Drilling

We seek to identify new oil reservoirs through our exploration program in order to increase the future replacement rate of proved reserves. From 1990 to 2016, we completed 13,186 exploration and development wells. During 2016, our average success rate for exploratory wells was 28.6% and our average success rate for development wells was 85.9%. From 2011 to 2016, we discovered 18 new crude oil fields and 14 new natural gas fields, bringing the total number of our crude oil and natural gas producing fields to 405 at the end of 2016.

Our 2016 exploration program was comprised of exploration in both onshore and offshore regions, including the deep waters of the Gulf of Mexico. These exploratory activities yielded 57 million barrels of oil equivalent of proved reserves resulting from the discovery of one oil producing field. We continued our main seismic data acquisition activities, in particular, those related to three-dimensional seismic data.

 

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The following table summarizes our drilling activity for the five years ended December 31, 2016, all of which occurred in Mexican territory.

 

     Year ended December 31, 
     2012     2013     2014     2015     2016 

Wells initiated(1)

     1,290      705      474      274      93 

Exploratory wells initiated(1)

     36      40      20      22      23 

Development wells initiated(1)

     1,254      665      454      252      70 

Wells drilled(2)

     1,238      817      535      312      149 

Exploratory wells

     37      38      24      26      21 

Productive exploratory wells(3)

     21      23      8      13      6 

Dry exploratory wells

     16      15      16      13      15 

Success rate %

     57      61      33      50      29 

Development wells

     1,201      779      511      286      128 

Productive development wells

     1,159      747      484      266      110 

Dry development wells

     42      32      26      20      18 

Success rate %(4)

     97      96      95      93      86 

Producing wells (annual averages)

     9,439      9,836      9,558      9,363      8,750 

Marine region

     537      559      581      544      539 

Southern region

     1,230      1,340      1,420      1,403      1,244 

Northern region

     7,672      7,937      7,557      7,416      6,966 

Producing wells (at year end)(5)

     9,476      9,379      9,077      8,826      8,073 

Crude oil

     6,188      6,164      5,598      5,374      4,912 

Natural gas

     3,288      3,215      3,479      3,452      3,161 

Producing fields

     449      454      428      434      405 

Marine region

     38      42      45      41      43 

Southern region

     101      102      97      97      88 

Northern region

     310      310      286      296      274 

Drilling rigs

     136      139      136      113      110 

Kilometers drilled

     3,007      1,627      1,413      815      330 

Average depth by well (meters)

     2,429      2,710      2,738      3,038      3,655 

Discovered fields(6)

     9      10      2      6      1 

Crude oil

     2      5            6      1 

Natural gas

     7      5      2             

Crude oil and natural gas output by well (barrels of oil equivalent per day)

     392      371      370      349      348 

Total developed acreage (km2)(7)

     8,652      8,706      8,339      8,654      7,017(8) 

Total undeveloped acreage (km2)(7)

     1,040      977      1,278      1,000      712(8) 

 

Note: Numbers may not total due to rounding.

(1)“Wells initiated” refers to the number of wells the drilling of which commenced in a given year, regardless of when the well was or will be completed.
(2)“Wells drilled” refers to the number of wells the drilling of which was completed in a given year, regardless of when the drilling of the well commenced.
(3)Excludesnon-commercial productive wells.
(4)Excludes injector wells.
(5)All productive wells, and all other wells referred to in this table, are “net,” because we do not grant others any fractional working interests in any wells that we own; we also have not acquired any fractional working interest in wells owned by others.
(6)Includes only fields with proved reserves.
(7)All acreage is net because we neither grant others fractional interests nor enter into other types of production sharing arrangements.
(8)These values relate only to our current assignments.

Source: Pemex Exploration and Production.

 

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Extensions and Discoveries

During 2016, our exploratory activity in the shallow waters of the Gulf of Mexico led to the incorporation of approximately 57 million barrels of oil equivalent in one field. We have also increased exploratory work in shallow waters to incorporate proved reserves.

Reserves

Under the Mexican Constitution, all oil and other hydrocarbon reserves located in the subsoil of Mexico are owned by the Mexican nation and not by us. As of December 31, 2014, Pemex-Exploration and Production was assigned rights through Round Zero corresponding to areas that together contained 95.2% of Mexico’s total proved reserves. Pemex Exploration and Production, as the successor to Pemex-Exploration and Production, has the right to extract, but not own, these reserves, and to sell the resulting production. As of the date of this report, the exploration and development activities of Petróleos Mexicanos and the subsidiary entities are limited to reserves located in Mexico.

Proved oil and natural gas reserves are those estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations.

Proved reserves estimates as of December 31, 2016 were prepared by our exploration and production segment and were reviewed by the Independent Engineering Firms (as defined below), which audit its estimates of our oil and gas reserves. In addition, pursuant to theReglamento de la Ley de Hidrocarburos(Regulations to the Hydrocarbons Law), the NHC reviewed and approved the proved reserves reports estimates as of December 31, 2016 that we provided on March 31, 2017.

We estimate reserves based on generally accepted petroleum engineering and evaluation methods and procedures, which are based primarily on applicable SEC regulations and, as necessary, the Society of Petroleum Engineers’ (which we refer to as the SPE) publication entitledStandards Pertaining to the Estimating and Auditingof Oil and Gas Reserves Information, dated February 19, 2007 and other SPE publications, including the SPE’s publication entitledPetroleum Resources Management System, as well as other technical sources, includingEstimation and Classification of Reserves of Crude Oil, Natural Gas, and Condensate, by Chapman Cronquist, andDetermination of Oil and Gas Reserves, Petroleum Society Monograph Number 1, published by the Canadian Institute of Mining and Metallurgy & Petroleum. The choice of method or combination of methods employed in the analysis of each reservoir is determined by:

 

  experience in the area;

 

  stage of development;

 

  quality and completeness of basic data; and

 

  production and pressure histories.

Reserves data set forth herein represent only estimates. Reserves valuation is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserves estimate depends on the quality of available data, engineering and geological interpretation and professional judgment. As a result, estimates of different engineers may vary. In addition, the results of drilling, testing and producing subsequent to the date of an estimate may lead to the revision of an estimate.

During 2016, we did not record any material increase in our proved oil and gas reserves as a result of the use of new technologies.

 

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In order to ensure the reliability of our reserves estimation efforts, we have undertaken the internal certification of our estimates of reserves since 1996. We have established certain internal controls in connection with the preparation of our proved reserves estimates. Initially, teams of geoscientists from our exploration and production business units (with each of these units covering several projects) prepare the reserves estimates, using distinct estimation processes for valuations relating to new discoveries and developed fields, respectively. Subsequently, the regional reserves offices collect these reserves estimates from the units and request that theGerencia de Recursos y Certificación de Reservas (Office of Resources and Certification of Reserves), the central hydrocarbon reserves management body of Pemex Exploration and Production, review and certify such valuations and the booking of the related reserves. This internal certification process is undertaken in accordance with internal guidelines for estimating and classifying proved reserves, which are based on the SEC’s rules and definitions. The Office of Resources and Certification of Reserves, which additionally oversees and conducts an internal audit of the process described above, consists entirely of professionals with geological, geophysical, petrophysical and reservoir engineering backgrounds. The engineers who participate in our reserves estimation process are experienced in: reservoir numerical simulation; well drilling and completion; pressure, volume and temperature (PVT) and analytical tools used in forecasting the performance of the various elements comprising the production system; and design strategies in petroleum field development. Furthermore, all of our personnel have been certified by theSecretaría de Educación Pública(Ministry of Public Education), most have earned master’s degrees in areas of study such as petroleum engineering, geology and geophysical engineering and they possess an average of over fifteen years of professional experience.

In addition to this internal review process, our exploration and production segment’s final reserves estimates are audited by independent engineering firms. Three independent engineering firms audited our estimates of proved reserves as of December 31, 2016: Netherland Sewell; DeGolyer and MacNaughton; and Ryder Scott (we refer to these firms together as the Independent Engineering Firms). The reserves estimates reviewed by the Independent Engineering Firms totaled 97.6% of our estimated proved reserves. The remaining 2.4% of our estimated proved reserves consisted of reserves located in certain areas in which third parties provide us with drilling services. Under such agreements, the corresponding third party is responsible for assessing the volume of reserves. Netherland Sewell audited the reserves in the Aceite Terciario de Golfo, Poza Rica-Altamira and the Litoral de Tabasco business units. DeGolyer and MacNaughton audited reserves in the Burgos and Veracruz business units and Ryder Scott audited the reserves in the Bellota-Jujo, Cinco Presidentes, Macuspana-Muspac, Samaria-Luna,Abkatún-Pol-Chuc, Cantarell andKu-Maloob-Zaap business units. The audits conducted by the Independent Engineering Firms consisted primarily of: (1) analysis of historical static and dynamic reservoir data that we have provided; (2) construction or updating of the Independent Engineering Firms’ own static and dynamic reservoir characterization models of some of our fields; (3) economic analysis of fields; and (4) review of our production forecasts and reserves estimates.

Since reserves estimates are, by definition, only estimates, they cannot be reviewed for the purpose of verifying exactness. Instead, the Independent Engineering Firms conducted a detailed review of our reserves estimates so that they could express an opinion as to whether, in the aggregate, the reserves estimates we furnished were reasonable and had been estimated and presented in conformity with generally accepted petroleum engineering and evaluation methods and procedures.

All questions, including any suggested modifications to proved reserves estimates, that arose during the Independent Engineering Firms’ review process were resolved by our exploration and production segment to the satisfaction of the Independent Engineering Firms. The Independent Engineering Firms have concluded that our estimated total proved oil and natural gas reserve volumes set forth in this report are, in the aggregate, reasonable and have been prepared in accordance with Rule4-10(a) of RegulationS-X of the SEC, as amended (which we refer to as Rule4-10(a)), are consistent with international reserves reporting practice and are in accordance with the revised oil and gas reserves disclosure provisions of ASC Topic 932.

Our total proved developed and undeveloped reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from field processing plants decreased by 9.5% in 2016, from 7,977 million barrels at

 

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December 31, 2015 to 7,219 million barrels at December 31, 2016. Our proved developed reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants decreased by 14.7% in 2016, from 5,725 million barrels at December 31, 2015 to 4,886 million barrels at December 31, 2016.These decreases were principally due to a decrease in oil production in 2016, lower prices of hydrocarbons, a decrease in field development activities and field behavior. The amount of crude oil, condensate and liquefiable hydrocarbon reserves added in 2016 was insufficient to offset the level of production in 2016, which amounted to 891 million barrels of crude oil, condensates and liquefiable hydrocarbons.

Our total proved developed and undeveloped dry gas reserves decreased by 18.9% in 2016, from 8,610 billion cubic feet at December 31, 2015 to 6,984 billion cubic feet at December 31, 2016. Our proved developed dry gas reserves decreased by 24.9% in 2016, from 6,012 billion cubic feet at December 31, 2015 to 4,513 billion cubic feet at December 31, 2016. These decreases were principally due to a decrease in oil production in 2016, lower prices of oil and gas, a decrease in field development activities and field behavior. The amount of dry gas reserves added in 2016 was insufficient to offset the level of production in 2016, which amounted to 1,134 billion cubic feet of dry gas. Our proved undeveloped dry gas reserves decreased by 4.9% in 2016, from 2,598 billion cubic feet at December 31, 2015 to 2,471 billion cubic feet at December 31, 2016.

During 2016, proved reserves increased by 40 million barrels of oil equivalent due to reclassifications, development, revisions and discoveries.

During 2016, exploratory activity in shallow waters incorporated approximately 57 million barrels of oil equivalent in one new field located close to our existing facilities. We also maintained exploratory work in shallow waters in order to incorporate proved reserves that support future new production in the short term.

The following three tables of crude oil and dry gas reserves set forth our estimates of our proved reserves determined in accordance with Rule4-10(a).

Summary of Oil and Gas(1) Proved Reserves as of December 31, 2016 Based on Average Fiscal Year Prices

 

   Crude Oil and
Condensates(2)
   Dry Gas(3) 
   (in millions of
barrels)
   (in billions of
cubic feet)
 

Proved developed and undeveloped reserves

    

Proved developed reserves

   4,886    4,513 

Proved undeveloped reserves

   2,233    2,471 
  

 

 

   

 

 

 

Total proved reserves

   7,219    6,984 
  

 

 

   

 

 

 

 

 Note:Numbers may not total due to rounding.
 (1)We do not currently produce synthetic oil or synthetic gas, or other natural resources from which synthetic oil or synthetic gas can be produced.
 (2)Crude oil and condensate reserves include the fraction of liquefiable hydrocarbons recoverable in natural gas processing plants located at fields.
 (3)Reserve volumes reported in this table are volumes of dry gas, although natural gas production reported in other tables refers to sour wet gas. There is a shrinkage in volume when natural gas liquids and impurities are extracted to obtain dry gas. Therefore, reported natural gas volumes are greater than dry gas volumes.
 Source:Pemex Exploration and Production.

 

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Crude Oil and Condensate Reserves

(including natural gas liquids)(1)

 

   2012   2013   2014   2015   2016 
Proved developed and undeveloped reserves  (in millions of barrels) 

At January 1

   11,362    11,424    11,079    10,292    7,977 

Revisions(2)

   1,012    630    95    (1,491   189 

Extensions and discoveries

   103    62    119    111    (55

Production

   (1,053   (1,037   (1,001   (935   (891
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31

   11,424    11,079    10,292    7,977    7,219 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proved developed reserves at December 31

   7,790    7,360    7,141    5,725    4,886 

Proved undeveloped reserves at December 31

   3,634    3,719    3,151    2,252    2,333 

 

Note: Numbers may not total due to rounding.

(1)Crude oil and condensate reserves include the fraction of liquefiable hydrocarbons recoverable in natural gas processing plants located at fields.
(2)Revisions include positive and negative changes due to new data from well drilling, revisions made when actual reservoir performance differs from expected performance and the effect of changes in hydrocarbon prices.

Source: Pemex Exploration and Production.

Dry Gas Reserves

 

   2012   2013   2014   2015   2016 
Proved developed and undeveloped reserves  (in billions of cubic feet) 

At January 1

   12,734    12,713    12,273    10,859    8,610 

Revisions(1)

   1,377    1,010    4    (955   (183

Extensions and discoveries

   162    89    93    47    (308

Production(2)

   (1,560   (1,539   (1,511   (1,341   1,134 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31

   12,713    12,273    10,859    8,610    6,984 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proved developed reserves at December 31

   7,951    7,461    6,740    6,012    4,513 

Proved undeveloped reserves at December 31

   4,762    4,811    4,119    2,598    2,471 

 

Note: Numbers may not total due to rounding.

(1)Revisions include positive and negative changes due to new data from well drilling, revisions made when actual reservoir performance differs from expected performance and the effect of changes in hydrocarbon prices.
(2)Production refers here to dry gas, although natural gas production reported in other tables refers to sour wet gas. There is a shrinkage in volume when natural gas liquids and impurities are extracted to obtain dry gas. Therefore, reported natural gas volumes are greater than dry gas volumes.

Source: Pemex Exploration and Production.

 

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The following table sets forth, as of December 31, 2016, the volumes of proved developed and undeveloped reserves, the number of producing wells and the number of proved undeveloped locations for the fields that contained 95.1% of our proved reserves.

 

   Reserves         

Field

  Proved(1)   Developed(1)   Undeveloped(1)   Number of
Producing
Wells
   Number of
Undeveloped
Locations(2)
 
   (in millions of barrels of oil equivalent)         

Ku-Maloob-Zaap

   2,586.1    2,166.4    419.6    173    41 

Akal

   822.4    822.4        98     

Aceite Terciario del Golfo(3)

   730.5    130.1    600.4    1,978    4,202 

Ayatsil

   639.5    147.1    492.4    6    14 

Antonio J.Bermúdez(4)

   396.4    262.3    134    221    45 

Jujo-Tecominoacán

   223.7    128.8    94.9    34    17 

Xux

   140.9    119.4    21.5    12    3 

Xanab

   130.6    75.8    54.8    10    11 

Onel

   130.5    89.3    41.1    6    8 

Santuario

   108    33.7    74.3    29    32 

Ek

   92.8    92.8        14     

Balam

   87.8    87.8        7     

Homol

   79.7    30.4    49.3    9    5 

Tsimín

   72.2    72.2        16     

Ebano-Pánuco-Cacalilao

   64.6    41.5    23    323    310 

Lakach

   63.5        63.5        3 

Tamaulipas Constituciones

   63.3    32.7    30.6    244    133 

Tekel

   60.8        60.8        8 

Pokche

   57.1        57.1        4 

Xikin

   55.9        55.9        4 

Sihil

   51.9    51.9        15     

Arenque

   50.1    15.9    34.3    14    10 

Kambesah

   48    48        5     

Kab

   48    14.3    33.7    4    5 

Kuil

   45.8    21.9    23.9    9    2 

Puerto Ceiba

   45.1    29.9    15.2    14    10 

Eltreinta

   44    21    23    8    16 

Costero

   44    44        12     

Giraldas

   43.2    34.7    8.5    9    1 

Ixtal

   42    36.8    5.3    10     

Ayín

   38.8        38.8        4 

Tizón

   37    37        11     

Yaxché

   35.1    13    22.1    8    5 

Gasífero

   34.9    23.5    11.4    22    9 

Ogarrio

   34.7    33.8    0.9    108    2 

Cuervito

   34.6    15.5    19.2    89    59 

Utsil

   34.3        34.3        3 

Terra

   31.8    15.6    16.2    11    4 

Chuc

   29.9    26.8    3.1    13    1 

Poza Rica

   29.6    25.1    4.5    93    19 

Kax

   29.4    29.4        2     

May

   29.2    29.2        12     

Chinchorro

   29.1    22.4    6.7    5    2 

 

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   Reserves        

Field

  Proved(1)  Developed(1)  Undeveloped(1)  Number of
Producing
Wells
   Number of
Undeveloped
Locations(2)
 
   (in millions of barrels of oil equivalent)        

Rabasa

   27.2   25.4   1.8   48    1 

Teotleco

   25.3   25.3      6     

Bellota

   24.7   18.7   6   5    2 

Sen

   24.5   18.9   5.6   12    1 

Madrefil

   24.2   21.4   2.8   5    1 

Lum

   23.1   17.6   5.5   3    3 

Cárdenas

   22.9   11.2   11.7   8    4 

Etkal

   22.6   10.5   12.1   1    2 

Cuitláhuac

   22.3   13   9.3   182    54 

Tetl

   20.4      20.4       3 

Caparroso-Pijije-Escuintle

   20.1   16.4   3.8   16    1 

Cinco Presidentes

   19.8   18.3   1.5   34    3 

Tupilco

   19.8   17.9   1.9   30    1 

Nejo

   19.5   14.6   4.9   198    35 

Ixtoc

   19.1   19.1      10     

Edén-Jolote

   19.1   14.1   5   7    2 

Cauchy

   18.6   18.6      23     

Los Soldados

   17.6   16   1.6   22    1 

Jaatsul

   17.1      17.1       2 

Magallanes-Tucán-Pajonal

   15.3   12.8   2.4   42    5 

Paredón

   15   15      2     

San Ramón

   15   13.9   1   50    3 

Nohoch

   14.4   14.4      7     

Ayocote

   14.4   10.1   4.3   15    2 

Taratunich

   13.7   13.7      7     

Guaricho

   13.5   13.1   0.4   14    1 

Uech

   13.5   13.5      2     

Jacinto

   13.4   13.4      3     

Sinán

   13   13      7     

Mora

   12.8   9.4   3.4   5    2 

Bacab

   12.8   12.8      6     

Tintal

   12.4   8.5   3.9   6    8 

Takín

   12.3   12.3      4     

Sunuapa

   12.2   10.2   2.1   10    2 

Esah

   11.6      11.6       2 

Bedel

   11.3   5.6   5.6   6    8 

Sini

   11.1   8.3   2.8   6    1 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total

   8,142.3   5,419.7   2,722.6   4,456    5,142 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Our proved reserves

   8,562.8   5,753.4   2,808.4    

Percentage

   95.1  94.2  96.9   

 

Note: Numbers may not total due to rounding.

(1)Proved reserves, developed reserves and undeveloped reserves are expressed in millions of barrels of oil equivalent. To convert dry gas to barrels of oil equivalent, a factor of 5.201 thousand cubic feet of dry gas per barrel of oil equivalent is used.
(2)Undeveloped Locations refers to the number of geographic sites or locations where a well will be drilled to produce undeveloped proved reserves.
(3)Includes extraction assignments and temporary assignments.
(4)Includes the Cunduacán, Iride, Oxiacaque, Platanal and Samaria fields.

Source: Pemex Exploration and Production.

 

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Our reserve-replacement ratio, or RRR, for a given period is calculated by dividing the sum of proved reserves additions due to discoveries, developments, delineations and revisions by that period’s total production. During 2016, we obtained 40 million barrels of oil equivalent of proved reserves, which represents a RRR of 4%. While low, our 2016 RRR is an improvement as compared to 2015, where there was no replacement of proved reserves. We expect continued improvements in our RRR in subsequent years.

Our reserves production ratio, which is presented in terms of years, is calculated by dividing the estimated remaining reserves at the end of the relevant year by the total production of hydrocarbons for that year. As of December 31, 2016, this ratio was equal to 7.7 years for proved reserves of crude oil equivalent, which represents a decrease of 4.9% as compared to the 2015 reserves production ratio of 8.1 years for proved reserves. For more information, see Note 29 to our consolidated financial statements included herein.

Sales Prices and Production Costs

The following table sets forth our average sales price per unit of oil and gas produced and our average production cost per unit of production, in the aggregate and for each field containing 10% or more of our proved reserves.

Unit Sales Prices and Production Costs(1)

 

   Ku-Maloob-
Zaap
   Akal   Other Fields   All Fields 
   (in U.S. dollars) 

Year ended December 31, 2016

        

Average sales prices

        

Crude oil, per barrel

  U.S. $30.11   U.S. $ 36.67   U.S. $ 40.21   U.S. $ 36.55 

Natural gas, per thousand cubic feet

  U.S. $3.40   U.S. $2.86   U.S. $3.16   U.S. $3.01 

Average production costs, per barrel of oil equivalent

  U.S. $5.34   U.S. $16.53   U.S. $8.08   U.S. $7.78 

Year ended December 31, 2015

  

Average sales prices

        

Crude oil, per barrel

  U.S. $41.21   U.S. $47.79   U.S. $51.51   U.S. $48.22 

Natural gas, per thousand cubic feet

  U.S. $4.59   U.S. $3.59   U.S. $3.79   U.S. $3.78 

Average production costs, per barrel of oil equivalent

  U.S. $6.93   U.S. $15.97   U.S. $9.69   U.S. $9.40 

Year ended December 31, 2014

  

Average sales prices

        

Crude oil, per barrel

  U.S. $80.58   U.S. $90.67   U.S. $95.14   U.S. $90.37 

Natural gas, per thousand cubic feet

  U.S. $6.96   U.S. $5.36   U.S. $5.74   U.S. $5.71 

Average production costs, per barrel of oil equivalent

  U.S.$5.05   U.S. $10.79   U.S. $9.16   U.S. $8.22 

 

(1)Average of sales prices as of the last day of each month of the year.

Source: Pemex Exploration and Production.

In 2016, our average production cost was U.S. $7.78 per barrel of oil equivalent, and represented a decrease of 17.2%, as compared to our average production cost of U.S. $9.40 per barrel in 2015. This decrease resulted primarily from a decrease in expenses in the maintenance of wells, equipment and production facilities and lowernon-income related taxes and duties.

We calculate and disclose our production costs pursuant to international practices, which are based on U.S. GAAP under ASC Topic 932. In accordance with ASC Topic 932, the production cost per barrel of oil equivalent is calculated by dividing total production expenses (in U.S. dollars) by total production of oil and gas (in barrels of oil equivalent) for the relevant period.

 

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Our total production cost consists of all direct and indirect costs incurred to produce crude oil and gas, including costs associated with the operation and maintenance of wells and related equipment and facilities. In addition, it includes costs of labor to operate the wells and facilities, the costs of materials, supplies and fuel consumed, including gas used for gas lifting, nitrogen and other chemicals, repair andnon-capitalized maintenance costs, and other costs, such as fees for general services, a labor fund for active personnel, corporate services, indirect overhead and applicable taxes and duties. However, it excludesnon-cash expenses such as amortization of capitalized well expenses, the depreciation of fixed assets, expenses associated with the distribution and handling of oil and gas and other expenses that are related to exploration and drilling activities.

Crude Oil and Natural Gas Production

In 2016, we produced an average of 2,153.5 thousand barrels per day of crude oil, 5.0% less than our average production in 2015 of 2,266.8 thousand barrels per day of crude oil. The decrease in 2016 resulted primarily from the decrease of production in the Cantarell, Crudo Ligero Marino, El Golpe-Puerto Ceiba, Bellota-Chinchorro, Complejo Antonio J. Bermúdez, Cactus Sitio Grande, Ixtal-Manik, Chuc, Costero Terrestre, andTsimín-Xux projects. Accordingly, our average production of heavy crude oil decreased by 49.7 thousand barrels per day, or 4.3% less than the average daily production in 2015, primarily due to a decrease in our drilling activities, the natural decline in field production, an increase in fractional flow water production and an increase in the gas production cap of reservoirs, particularly for reservoirs past the saturation stage. In 2016, the average production of light crude oil decreased by 63.6 thousand barrels per day, or 5.7%, as compared to 2015. This decrease occurred mainly due to a natural decline in production in the Chuhuk, Caan, and Ixtal fields of theAbkatún-Pol-Chuc business unit; the Tsimín, Sinán, Bolontikú, and Yaxché fields of the Litoral de Tabasco business unit; the Costero, Sitio Grande, Teotleco fields of the Macuspana-Muspac business unit and the Samaria, ��ride, Cunduacán and Sini fields of the Samaria-Luna business unit.

Crude oil can be classified by its sulfur content. “Sour” or heavy crude oil contains 3.4% or greater sulfur content by weight and “sweet” or light crude oil contains less than 1.0% sulfur content by weight. Most of our production is classified as sour or heavy crude oil.

Our exploration and production segment primarily produces four types of crude oil:

 

  Altamira, a heavy crude oil;

 

  Maya, a heavy crude oil;

 

  Isthmus, a light crude oil; and

 

  Olmeca, an extra-light crude oil.

Most of our production consists of Isthmus and Maya crude oil. In 2016, 51.2% of our total production of crude oil consisted of heavy crude oil and 48.8% consisted of light and extra-light crude oil. The Marine regions yield mostly heavy crude oil (59.9% of these regions’ production in 2016), although significant volumes of light crude oil are also produced there (40.1% of these regions’ production in 2016). The Southern region yields mainly light and extra-light crude oil (together, 93.5% of this region’s production in 2016), and the Northern region yields both light and extra-light crude oil (42.8% of this region’s production in 2016) and heavy crude oil (57.2% of this region’s production in 2016).

The most productive crude oil and natural gas fields in the Gulf of Mexico are located in the Ku-Maloob-Zaap, Litoral de Tabasco,Abkatún-Pol-Chuc and Cantarell business units in the Marine regions and the Sarmaria Luna and Bellota-Jujo business units in the Southern region. In particular, theKu-Maloob-Zaap business unit was the most important crude oil producer in 2016, producing an average of 866.6 thousand barrels of crude oil per day in 2016, or 40.2% of our total crude oil production for the year, and 589.3 million cubic feet per day of natural gas, or 10.2% of our total natural gas production for the year. Our second most important crude oil producer was Litoral de Tabasco which produced an average of 359.9 thousand barrels of crude oil per day in

 

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2016, or 16.7% of our total crude oil production for the year, and an average of 950.0 million cubic feet per day of natural gas, or 16.4% of our total natural gas production for the year.

The following table sets forth our annual crude oil production rates by type of oil for the five years ended December 31, 2016.

Crude Oil Production

 

   

 

   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in thousands of barrels per day)   (%) 

Marine regions

            

Heavy crude oil

   1,280.2    1,258.3    1,160.1    1,054.9    1,018.3    (3.5

Light crude oil(1)

   614.5    638.1    691.3    705.4    682.7    (3.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   1,894.6    1,896.4    1,851.4    1,760.3    1,700.9    (3.4

Southern region

            

Heavy crude oil

   18.5    26.5    35.0    31.7    22.3    (29.7

Light crude oil(1)

   489.6    454.3    417.4    362.1    321.8    (11.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   508.2    480.8    452.4    393.8    344.1    (12.6

Northern region

            

Heavy crude oil

   86.3    80.2    70.4    65.7    62.0    (5.6

Light crude oil(1)

   58.8    64.7    54.6    47.0    46.5    (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   145.1    144.9    125.0    112.7    108.5    (3.7

Total heavy crude oil

   1,385.0    1,365.1    1,265.5    1,152.3    1,102.6    (4.3

Total light crude oil(1)

   1,162.9    1,157.1    1,163.3    1,114.5    1,050.9    (5.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total crude oil

   2,547.9    2,522.1    2,428.8    2,266.8    2,153.5    (5.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

(1)Includes extra-light crude oil.

Source: Pemex Exploration and Production.

 

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The following table sets forth our annual crude oil production by region and business unit for the five years ended December 31, 2016.

Crude Oil Production

 

   

 

   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in thousands of barrels per day)   (%) 

Marine regions

            

Ku-Maloob-Zaap

   855.1    863.8    856.7    853.1    866.6    1.6 

Cantarell

   454.1    439.8    374.9    273.4    215.8    (21.1

Litoral de Tabasco

   319.2    299.2    320.4    347.2    359.9    3.7 

Abkatún-Pol-Chuc

   266.3    293.6    299.3    286.7    258.7    (9.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   1,894.6    1,896.4    1,851.4    1,760.3    1,701.0    (3.4

Southern region

            

Samaria-Luna

   205.1    172.5    161.4    145.4    127.0    (12.7

Bellota-Jujo

   130.3    134.3    124.8    101.7    90.3    (11.2

Cinco Presidentes

   96.0    93.1    89.1    87.6    80.0    (8.7

Macuspana-Muspac

   76.8    80.9    77.0    59.0    46.8    (20.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   508.2    480.8    452.4    393.8    344.1    (12.6

Northern region

            

Aceite Terciario del Golfo

   68.6    66.2    48.8    42.0    39.8    (5.2

Poza Rica-Altamira

   67.8    61.5    59.8    58.7    53.9    (8.0

Burgos

   4.8    8.0    5.0    0.0    —      ��   

Veracruz

   4.0    9.3    11.4    12.1    14.8    22.3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   145.1    144.9    125.0    112.7    108.5    (3.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total crude oil

   2,547.9    2,522.1    2,428.8    2,266.8    2,153.5    (5.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

Source: Pemex Exploration and Production.

The Marine regions, which are comprised of the Northeastern Marine region and the Southwestern Marine region, are located on the continental shelf and its slope in the Gulf of Mexico. They cover a surface area of approximately 550,000 square kilometers, located entirely within Mexican territorial waters, along the coast of the states of Tabasco, Campeche, Yucatán, Quintana Roo and the southern coast of the state of Veracruz. In 2016, the average crude oil production from the 43 fields located in these regions was 1,701.0 thousand barrels per day.

The Southern region covers an area of approximately 392,000 square kilometers, including the states of Guerrero, Oaxaca, Chiapas, Tabasco, Yucatán, Quintana Roo, Campeche and Veracruz. In 2016, the average crude oil production from the 88 fields located in this region was 344.1 thousand barrels per day.

The Northern region, including its offshore area, is located on the continental shelf in the Gulf of Mexico along the coast of the state of Tamaulipas and the northern coast of the state of Veracruz. It covers an area of approximately 1.8 million square kilometers. Our production area in the onshore portion of this region is located in, among others, the states of Veracruz, Tamaulipas, Nuevo León, Coahuila, San Luis Potosí and Puebla; we also produce offshore on the continental shelf in the Gulf of Mexico. In 2016, the average crude oil and natural gas production in the Northern region totaled 108.5 thousand barrels of crude oil per day and 1,427.8 million cubic feet of natural gas per day, respectively, from the 274 oil and gas fields in this region.

 

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The following table sets forth our annual natural gas production by region and business unit for the five years ended December 31, 2016.

Natural Gas Production

 

   

 

   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in millions of cubic feet per day)   (%) 

Marine regions

            

Cantarell

   1,004.2    1,007.1    1,120.9    1,277.1    1,184.9    (7.2

Litoral de Tabasco

   735.6    747.6    842.6    993.5    950.0    (4.4

Abkatún-Pol-Chuc

   523.6    579.4    553.4    455.9    390.5    (14.3

Ku-Maloob-Zaap

   329.7    405.1    571.0    556.5    589.3    5.9 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   2,593.1    2,739.2    3,087.9    3,283.0    3,114.6    (5.1

Southern region

            

Samaria-Luna

   695.9    606.3    583.1    500.3    498.7    (0.3

Macuspana-Muspac

   542.9    515.1    490.5    455.3    382.2    (16.1

Bellota-Jujo

   297.4    319.7    288.9    264.5    231.5    (12.5

Cinco Presidentes

   116.3    129.4    152.8    160.1    137.7    (14.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   1,652.4    1,570.5    1,515.4    1,380.1    1,250.0    (9.4

Northern region

            

Burgos

   1,269.3    1,286.6    1,221.0    1,099.0    864.6    (21.3

Veracruz

   601.2    494.5    455.3    392.2    322.8    (17.7

Aceite Terciario del

            

Golfo

   148.8    167.0    149.5    145.2    142.5    (1.9

Poza Rica-Altamira

   120.0    112.4    102.8    101.5    97.9    (3.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   2,139.3    2,060.6    1,928.6    1,737.9    1,427.8    (17.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total natural gas

   6,384.9    6,370.3    6,531.9    6,401.0    5,792.5    (9.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

Source: Pemex Exploration and Production.

In 2016, the Marine regions produced 3,114.6 million cubic feet per day of natural gas, or 53.8% of our total natural gas production, a decrease of 5.1% as compared to the regions’ 2015 production of 3,283.0 million cubic feet per day. In 2016, the Southern region produced 1,250.0 million cubic feet per day of natural gas, or 21.6% of our total natural gas production, a decrease of 9.4% as compared to the region’s 2015 production of 1,380.1 million cubic feet per day. In 2016, the Northern region produced 1,427.8 million cubic feet per day of natural gas, or 24.6% of our total natural gas production, a decrease of 17.8% as compared to the region’s 2015 production of 1,737.9 million cubic feet per day.

Our average natural gas production decreased by 9.5% in 2016, from 6,401.0 million cubic feet per day in 2015 to 5,792.5 million cubic feet per day in 2016. Natural gas production associated with crude oil production accounted for 78.4% of total natural gas production in 2016, with the remainder of natural gas production consisting of extraction from fields holding natural gas reserves. As of December 31, 2016, 170 of our 405 gas producing fields, or 42.0%, producednon-associated gas. Thesenon-associated gas fields accounted for 21.6% of all natural gas production in 2016.

Investments in Exploration and Production

In nominal peso terms, our capital expenditures for exploration and production were Ps. 137,242 million in 2016, as compared to Ps. 151,546 million in 2015, representing a decrease of 9.4% in nominal terms. Of our total

 

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capital expenditures, Ps. 25,468 million was directed to theKu-Maloob-Zaap fields, Ps. 13,802 million was directed to theTsimin-Xux project, Ps. 10,024 million was directed to the Chuc project, Ps. 8,179 million was directed to the Cantarell fields, Ps. 4,931 million was directed to the Crudo Ligero Marino project, Ps. 3,543 million was directed to theOgarrio-Sánchez Magallanes project, Ps. 2,859 million was directed to the Delta del Gijalva fields, Ps. 2,562 million was directed to the Antonio J. Bermúdez fields, Ps. 2,032 million was used for development of the Burgos natural gas fields (including Ps. 146 million of investments made through the Financed Public Works Contracts Program, see “—Business Overview—Exploration and Production—Integrated Exploration and Production Contracts and Financed Public Works Contracts” in this Item 4) and Ps. 1,487 million was directed to the ATG project. During 2016, expenditures for these ten projects amounted to 54.6% of all our capital expenditures for exploration and production. The remaining 45.4% amounted to Ps. 62,355 million in nominal terms, which was directed to the 16 remaining projects, as well as to other exploratory projects, other development projects and administrative and technical support.

2017 Exploration and Production Capital Expenditures Budget

For 2017, our total capital expenditures budget is Ps. 73,927 million, as compared to Ps. 137,242 million of capital expenditures made in 2016, representing a decrease of 46.1%, largely due to our strategic focus on our most profitable projects. The 2017 budget includes all of the 26 ongoing strategic exploration and production projects, Ps. 20,344 million in other exploratory projects and Ps. 103 million in administrative and technical support. Approximately Ps. 53,480 million, or 72% of our 2017 capital expenditures budget, is to be allocated to projects relating to field development and pipelines. Approximately Ps. 20,344 million, or 28% of the total budget, will be allocated to exploration activities.

The 2017 exploration and production budget includes Ps. 16,944 million for investments in theKu-Maloob-Zaap project, Ps. Ps. 7,804 million for the Integral Yaxché project, 6,730 million for the Chuc project, Ps. 4,744 million for theTsimin-Xux project, Ps. 2,031 million for the Cantarell project, Ps. 1,990 million for the Delta del Grijalva project, Ps. 1,455 million for the Crudo Ligero Marino project, Ps. 1,445 million for the Antonio J. Bermúdez project, Ps. 1,307 million for theOgarrio-Sánchez Magallanes project, Ps. 904 million for the Burgos project, Ps. 484 million for the Bellota Chinchorro project, and Ps. 28,089 million for the remaining projects, as well as for other exploratory and development projects and administrative and technical support.

Exploration and Production Investment Trends

In 2016, we invested Ps. 32,441 million in nominal terms, or 24% of the total capital expenditures of our exploration and production segment, in exploration activities, which represents a 4% increase from the Ps. 31,146 million invested in exploration activities in 2015. In 2016, we invested Ps. 104,801 million in nominal terms, or 76% of our total capital expenditures in development activities, which represents a 13% decrease from the Ps. 120,398 million invested in development activities in 2015.

In 2017, we have budgeted Ps. 20,885 million, or 28% of total capital expenditures, for exploration activities of our exploration and production segment, which represents a 37% decrease in nominal terms from the amount invested in exploration activities in 2016. For development activities in 2017, we have budgeted Ps. 53,045 million, or 72% of total capital expenditures, which represents a 49% decrease in nominal terms from the amount that we invested in development activities in 2016.

Our projected exploration and development capital expenditures correspond to the areas assigned to us through Round Zero, which represent the areas in which we are exploring, operating or have an interest in developing based on our operational capabilities. The Ministry of Energy granted us the right to explore and develop these areas with the aim of maintaining our production levels in the short term, while providing us with sufficient exploration opportunities to increase our production in the future. Given that a significant number of exploration areas were reserved by the Mexican Government for future competitive bidding rounds, we intend to carry out our strategy of increasing production and improving our RRR over time by entering into strategic joint

 

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ventures with other oil and gas companies. Through these joint ventures, we hope to gain access to new technology and international best practices, while sharing the costs associated with security, occupational health and environmental protection and minimizing our operational risks. Over time, the allocation of our capital expenditures budget may change according to the results of subsequent bidding rounds in which we participate.

The capital expenditures of our exploration and production segment have constituted 74.5% or more of our total capital expenditures in each of the last five years. In 2017, the budgeted capital expenditures of our exploration and production segment constitute 67.8% of our total.

The following table sets forth our capital expenditures related to exploration and development during the three years ended December 31, 2016 and our estimated capital expenditures budget for exploration and development for 2017.

Exploration and Development Capital Expenditures

 

   Year ended December 31,(1)   Budget
2017(2)
 
   2014   2015   2016   
   (in millions of nominal pesos)     

Exploration

  Ps.35,082   Ps. 31,146   Ps. 32,441   Ps. 20,885 

Development

   186,986    120,398    104,801    53,042 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  Ps. 222,069   Ps. 151,544   Ps. 137,242   Ps. 73,927 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Numbers may not total due to rounding.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.

Source: Pemex Exploration and Production.

 

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Investments and Production by Project

We conduct exploration, production and development activities in fields throughout Mexico. Our main projects areKu-Maloob-Zaap,Tsimin-Xux, ATG, Cantarell, Crudo Ligero Marino, Burgos, Chuc, Antonio J. Bermúdez,Ogarrio-Sánchez Magallanes and Delta del Grijalva. These projects are described below.

Exploration and Production’s Capital Expenditures

 

   Year ended December 31,(1)   Budget
2017(2)
 
   2014   2015   2016   
   (in millions of pesos)(3)     

Exploration and Production

      

Ku-Maloob-Zaap

  Ps. 34,232   Ps. 23,507   Ps. 25,468   Ps. 16,944 

Tsimin-Xux

   19,638    13,950    13,802    4,744 

Integral Yaxché

   4,695    6,649    10,116    7,804 

Chuc

   10,618    10,037    10,024    6,730 

Cantarell

   18,276    11,217    8,179    2,031 

Lakach

   6,141    3,079    5,683    1,635 

Crudo Ligero Marino

   12,829    9,275    4,931    1,455 

Ogarrio-Sánchez Magallanes

   7,020    4,626    3,543    1,307 

Delta del Grijalva

   5,348    4,687    2,859    1,990 

Ek-Balam

   5,304    2,722    2,687    433 

Antonio J. Bermúdez

   8,840    5,352    2,562    1,445 

Burgos

   11,695    5,855    2,032    904 

Bellota-Chinchorro

   3,739    4,070    1,978    484 

Ixtal-Manik

   1,815    1,439    1,740    265 

Cactus-Sitio Grande

   3,928    2,671    1,555    739 

Aceite Terciario del Golfo

   18,943    2,817    1,487    871 

El Golpe-Puerto Ceiba

   4,148    2,605    1,375    277 

Jujo-Tecominoacán

   1,680    847    997    938 

Veracruz Basin

   4,262    1,538    884    1,517 

Integral Poza Rica

   1,695    438    521    227 

Tamaulipas-Constituciones

   1,205    459    501    149 

Ayín-Alux

   789    1,161    443    1 

Costero Terrestre

   1,110    321    380    76 

Cuenca de Macuspana

   874    476    368    221 

Lankahuasa

   33        22    4 

Arenque

   708    26    16    6 

Other Exploratory Projects

   31,403    31,146    32,410    20,344 

Other Development Projects

   21    17    172    282 

Administrative and Technical Support

   1,078    557    507    103 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   222,069    151,546    137,242    73,927 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2014, 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

Ku-Maloob-Zaap Project.TheKu-Maloob-Zaap project was our most important producer of heavy crude oil and plays an important part in the production of the Maya crude oil mix. It is the most important project in Mexico in terms of total proved hydrocarbon reserves and crude oil production. It is composed of the Ayatsil,

 

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Bacab, Lum, Ku, Maloob, Tekel, Utsil and Zaap fields, and extends over an area of 305.7 square kilometers. As of December 31, 2016, there was a total of 253 wells completed, 189 of which were producing. The project produced an average of 866.6 thousand barrels of crude oil per day, 40.2% of our total production, and 589.3 million cubic feet of natural gas per day in 2016. As of December 31, 2016, cumulative production was 5.1 billion barrels of crude oil and 2.6 trillion cubic feet of natural gas. As of December 31, 2016, proved hydrocarbon reserves totaled 3.0 billion barrels of crude oil and 1.5 trillion cubic feet of natural gas. Total proved reserves were 3.4 billion barrels of oil equivalent, of which 2.3 billion barrels of oil equivalent were proved developed reserves.

In nominal peso terms, our exploration and production segment’s capital expenditures for this project were Ps. 34,232 million in 2014, Ps. 23,507 million in 2015 and Ps. 25,468 million in 2016. For 2017, we anticipate that our capital expenditures will be Ps. 16,944 million and that total accumulated capital expenditures for this project will reach approximately U.S. $359,951 million. In 2016, we paid approximately U.S. $80.8 million to acquire approximately 193.7 billion cubic feet of nitrogen for the pressure maintenance project in the fifth module of the Cantarell nitrogen cryogenic plant, which began operations in November 2006. In 2017, we expect to spend approximately U.S. $102.9 million to acquire approximately 255.4 billion cubic feet of nitrogen for injection into theKu-Maloob-Zaap fields.

Tsimin-Xux Project.This project consists of the Tsimin and Xux fields, which include volatile oil and gas condensate reservoirs in the shallow waters of the Gulf of Mexico. The Tsimin field is located 62 kilometers from the Dos Bocas Marine Terminal in Paraíso, Tabasco, while the Xux field is located on the continental shelf of the Gulf of Mexico, approximately ten kilometers off the coast of Tabasco. During 2016, one new well was completed at the Tsimin field and two new wells were completed at the Xux field. During 2016, average daily production at theTsimin-Xux project totaled 114.0 thousand barrels of crude oil and 552.5 million cubic feet of natural gas. During 2016, the sales prices of the light and extra-light crude oil produced at this field averaged approximately U.S. $44.87 per barrel, making this one of our most important projects in terms of revenue generation.

As of December 31, 2016, cumulative production totaled 0.1 billion barrels of crude oil and 0.6 trillion cubic feet of natural gas. Proved oil and gas reserves totaled 102.6 million barrels of crude oil and 0.6 trillion cubic feet of natural gas. Total proved reserves were 213.1 million barrels of oil equivalent, of which 191.6 million barrels of oil equivalent were proved developed reserves.

In nominal peso terms, our exploration and production segment’s capital expenditures for theTsimin-Xux project were Ps. 13,802 million in 2016. In 2017, we expect capital expenditures for this project to total Ps. 4,744 million.

Chuc Project.The Chuc project is the second largest producer of light crude oil in the Southwestern Marine region, and includes the operation and maintenance of thePol-A facility and water injection complexes. In 2013, the Ministry of Finance and Public Credit approved the integration of the Caan project into the Chuc project. This project covers an area of 213 square kilometers and has been exploited by our exploration and production segment since 1981. The fields of this project are located on the continental shelf of the Gulf of Mexico, off the coast of the states of Tabasco and Campeche, at a depth of between the20- and100-meter isobaths, approximately 132 kilometers from the Dos Bocas Marine Terminal in Paraíso, Tabasco, and 79 kilometers northeast of Ciudad del Carmen, Campeche. The fields in the project include Abkatún, Batab, Caan, Ché, Chuc, Chuhuk, Etkal, Homol, Kanaab, Kuil, Onel, Pol, Taratunich and Tumut. In January 2007, the Pol and Batab projects were merged into the Chuc project. As of December 31, 2016, 113 wells had been completed, of which 77 were producing. During 2016, average production totaled 220.4 thousand barrels per day of crude oil and 329.9 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production totaled 5.7 billion barrels of crude oil and 6.6 trillion cubic feet of natural gas. As of December 31, 2016, proved hydrocarbon reserves totaled 297.1 million barrels of oil and 518.7 billion cubic feet of natural gas, or 377.8 million barrels of oil equivalent. As of December 31, 2016, total proved developed reserves were 240.2 million barrels of oil equivalent.

 

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In nominal peso terms, our exploration and production segment’s capital expenditures for the Chuc project were Ps. 10,618 million in 2014, Ps. 10,037 million in 2015 and Ps. 10,024 million in 2016. In 2017, we expect our capital expenditures to be Ps. 6,730 million and anticipate that our total accumulated capital expenditures for this project will reach approximately U.S. $142,969 million.

Cantarell Project.The Cantarell project is located on the continental shelf of the Gulf of Mexico. It consists of the Akal, Chac, Ixtoc, Kambesah, Kutz, Nohoch, Sihil and Takin fields, which extend over an area of 294.4 square kilometers. As of December 31, 2016, there was a total of 561 wells drilled in the Cantarell project, 151 of which were producing. During 2016, the Cantarell business unit, of which the Cantarell project is part, was the fourth most important producer of crude oil in Mexico, averaging 215.8 thousand barrels per day of crude oil. This was 21.1% less than 2015 production, which was 273.4 thousand barrels per day, as a result of the decline of crude oil reserves remaining in these fields. Natural gas production from the Cantarell business unit during 2016 averaged 1,184.9 million cubic feet per day. This was 7.2% less than the 2015 average natural gas production, which was 1,277.1 million cubic feet per day, due to the natural decline of field production and an increase in the fractional water flow of wells in highly fractured deposits.

As of December 31, 2016, cumulative production of the Cantarell project was 14.2 billion barrels of crude oil and 9.3 trillion cubic feet of natural gas. As of December 31, 2016, proved oil and gas reserves of the Cantarell project totaled 769.8 billion barrels of crude oil and 959.3 trillion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 977.9 million barrels of oil equivalent, all of which were proved developed reserves.

The Akal field, which is the most important field in the Cantarell project, averaged 69.5 thousand barrels per day of crude oil production during 2016. This was 30.0% less than the average production in 2015, which was 99.4 thousand barrels per day.

In nominal peso terms, our exploration and production segment’s capital expenditures for the Cantarell project totaled Ps. 18,276 million in 2014, Ps. 11,217 million in 2015 and Ps. 8,179 million in 2016. For 2017, we budgeted Ps. 2,031 million for capital expenditures for the Cantarell project. By the end of 2017, we expect our capital expenditures to total approximately U.S. $43,146 million for this project.

On October 10, 1997, we awarded abuild-own-operate contract for a nitrogen cryogenic plant at the Cantarell project to a consortium formed by BOC Holdings, Linde, Marubeni, West Coast Energy and ICA Fluor Daniel. Under this contract, the consortium is responsible for the financing, design, construction and operation of the plant. The plant began operations in 2000 and cost approximately Ps. 10,131 million. Pursuant to the terms of the agreement, Pemex Exploration and Production has the right to acquire the nitrogen plant in the case of a default by the consortium. Pemex Exploration and Production has the obligation to acquire the nitrogen plant if it defaults under the contract. Under the terms of the contract, Pemex Exploration and Production committed to purchasing 1.2 billion cubic feet per day of nitrogen from the consortium and to continue to supply service through June 2027.

During 2016, we paid approximately U.S. $108.5 million under this contract for an approximate total volume of 250.1 billion cubic feet of nitrogen, which was injected into the Cantarell fields. In 2017, our exploration and production segment expects to pay approximately U.S. $152.6 million under this contract for an approximate total volume of 438.0 billion cubic feet of nitrogen to be injected into the fields.

Crudo Ligero Marino Project.In 2013, the Ministry of Finance and Public Credit approved the designation of the Crudo Ligero Marino project as a stand-alone project, thereby separating it from the Strategic Gas Program of which it formed part from 2001 through 2012. In 2013, theOch-Uech-Kax project was integrated into this project. The main objectives for the Crudo Ligero Marino project during the years 2015 to 2037 are to continue constructing six marine structures, in addition to the marine structure completed during 2014, drill additional wells, implement secondary recovery, as well as intervention, optimization and maintenance techniques to its

 

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facilities, particularly in the Sinan, Kab and May fields. As of December 31, 2016, a total of 99 wells had been completed at this project, of which 41 were producing. During 2016, average daily production totaled 86.4 thousand barrels of crude oil and 280.9 million cubic feet of natural gas. As of December 31, 2016, cumulative production was 885.9 million barrels of crude oil and 2,409.4 billion cubic feet of natural gas. Proved oil and gas reserves totaled 91.2 million barrels of crude oil and 268.3 billion cubic feet of natural gas. Total proved reserves were 147.9 million barrels of oil equivalent, of which 114.2 million barrels were proved developed reserves.

In nominal peso terms, our exploration and production segment’s capital expenditures for the Crudo Ligero Marino project totaled Ps. 4,931 million in 2016. For 2017, we anticipate our capital expenditures to total Ps. 1,455 million.

Ogarrio-Sánchez Magallanes Project.TheOgarrio-Sánchez Magallanes project is composed of 21 crude oil and natural gas producing fields and forms part of the Cinco Presidentes business unit. This project is located between the state borders of Veracruz and Tabasco and covers an area of 10,820 square kilometers. From a geological standpoint, this project pertains to the Isthmus Saline basin, specifically the southeastern basins at the Tertiary level. TheOgarrio-Sánchez Magallanes project is geographically bounded by the Gulf of Mexico to the north, the geological folds of the Sierra Madre of Chiapas to the south, the Tertiary basin of Veracruz to the west and the Comalcalco Tertiary basin to the east. The primary objective of this project is to increase production levels through the drilling of development wells and infill wells, which are drilled between producing wells to more efficiently recover oil and gas reserves, the execution of workovers of wells and the implementation of secondary and enhanced oil recovery processes. In addition, we aim to optimize the infrastructure of this project in order to counteract the decreases in production levels that result from the natural depletion of its reservoirs.

As of December 31, 2016, theOgarrio-Sánchez Magallanes project had 524 producing wells and 27 new wells had been completed during 2016. Average daily production totaled 80.0 thousand barrels of crude oil and 137.7 million cubic feet of natural gas during 2016. As of December 31, 2016, cumulative production was 1.3 billion barrels of crude oil and 1.9 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 149.9 million barrels of crude oil and 268.1 billion cubic feet of natural gas. Total proved reserves were 196.8 million barrels of oil equivalent, of which 175.5 million barrels were proved developed reserves.

In nominal peso terms, our capital expenditures for theOgarrio-Sánchez Magallanes project were Ps. 3,543 million in 2016. For 2017, we anticipate that our capital expenditures will total Ps. 1,307 million.

Delta del Grijalva Project.The Delta del Grijalva project is the most important project in the Southern region in terms of both oil and gas production. The project covers an area of 1,343 square kilometers and has been exploited by our exploration and production segment since 1982. As of December 31, 2016, there was a total of 196 wells drilled, of which 60 were producing. During 2016, the project produced an average of 81.6 thousand barrels per day of crude oil and 325.4 million cubic feet per day of natural gas. The most important fields are Terra, Tizón, Sen and Caparroso-Pijije-Escuintle.

 

  Terra.This field covers an area of 13.7 square kilometers. As of December 31, 2016, a total of 13 wells had been completed, 11 of which were producing. During 2016, the field produced an average of 21.7 thousand barrels per day of crude oil and 65.2 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production was 43.6 million barrels of crude oil and 137.5 billion cubic feet of natural gas. Proved hydrocarbon reserves totaled 18.4 million barrels of crude oil and 56.9 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 31.8 million barrels of oil equivalent, 15.6 million of which were proved developed reserves.

 

  

Sen.This field covers an area of 45.1 square kilometers. As of December 31, 2016, a total of 49 wells had been completed, 13 of which were producing. During 2016, the field produced an average of 5.1 thousand barrels per day of crude oil and 20.7 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production was 312.8 million barrels of crude oil and 858.0 billion

 

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cubic feet of natural gas. Proved hydrocarbon reserves totaled 13.3 million barrels of crude oil and 48.0 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 24.5 million barrels of oil equivalent, 18.9 million of which were proved developed reserves.

 

  Caparroso-Pijije-Escuintle.This field covers an area of 28.2 square kilometers. As of December 31, 2016, a total of 53 wells had been completed, 14 of which were producing. During 2016, the field produced an average of 12.8 thousand barrels per day of crude oil and 35.9 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production was 231.3 million barrels of crude oil and 648.8 billion cubic feet of natural gas. Proved hydrocarbon reserves totaled 11.7 million barrels of crude oil and 35.9 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 20.1 million barrels of oil equivalent, 16.4 million of which were proved developed reserves.

 

  Tizón.This field covers an area of 17.8 square kilometers. As of December 31, 2016, a total of 17 wells had been completed, 11 of which were producing. During 2016, the field produced an average of 28.5 thousand barrels per day of crude oil and 162.5 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production was 76.4 million barrels of crude oil and 437.7 billion cubic feet of natural gas. Proved hydrocarbon reserves totaled 16.3 million barrels of crude oil and 88.1 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 37.0 million barrels of oil equivalent, 37.0 million of which were proved developed reserves.

As of December 31, 2016, cumulative production in the Delta del Grijalva project was 0.8 billion barrels of crude oil and 2.9 trillion cubic feet of natural gas. Proved oil and gas reserves as of December 31, 2016 totaled 67.8 million barrels of crude oil and 259.0 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 128.6 million barrels of oil equivalent, 100.3 million of which were proved developed reserves.

In nominal peso terms, our exploration and production segment’s capital expenditures for the Delta del Grijalva project were Ps. 5,348 million in 2014, Ps. 4,687 million in 2015 and Ps. 2,859 million in 2016. In 2017, we expect our capital expenditures to be Ps. 1,990 million, bringing our total capital expenditures for the project to approximately U.S. $42,275 billion.

Antonio J. Bermúdez Project.In 2002, we began investing in the Antonio J. Bermúdez project, the main investment project in the Southern region and the fifth largest in Mexico. This project is designed to accelerate reserves recovery, as well as increase the recovery factor by drilling additional wells and implementing a system of pressure maintenance through nitrogen injection. It consists of the Samaria, Cunduacán, Oxiacaque, Iride and Platanal fields, and covers an area of 163 square kilometers. As of December 31, 2016, a total of 845 wells had been completed, of which 239 were producing. During 2016, the project produced an average of 45.4 thousand barrels per day of crude oil and 173.3 million cubic feet per day of natural gas. As of December 31, 2016, cumulative production was 3.0 billion barrels of crude oil and 4.6 trillion cubic feet of natural gas. As of December 31, 2016, proved hydrocarbon reserves in this field totaled 256.2 million barrels of crude oil and 601 billion cubic feet of natural gas. As of December 31, 2016, total proved reserves were 396.4 million barrels of oil equivalent, of which 262.3 million were proved developed reserves.

In nominal peso terms, our exploration and production segment’s capital expenditures for the Antonio J. Bermúdez project were Ps. 8,840 million in 2014, Ps. 5,352 million in 2015 and Ps. 2,562 million in 2016. For 2017, we anticipate that our capital expenditures for this project will be Ps. 1,445 million and that our total accumulated investments in the project will reach approximately U.S. $30,697 billion. In March 2005, we entered into a contract with Praxair México, S. de R.L. de C.V. to build, own and operate a nitrogen cryogenic plant, which was completed in June 2008. After completing testing in July 2008, we began injecting 190 million cubic feet per day of nitrogen into the project. In 2016, we paid approximately Ps. 808.5 million to acquire nitrogen from this plant, which we used to inject approximately 131.7 million cubic feet per day during 2016 for pressure maintenance in connection with the project. Between 2016 and 2022, we plan to continue to inject the same volume of nitrogen.

 

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Burgos Project.The Burgos project is the largest producer ofnon-associated gas in Mexico. In 1997, our exploration and production segment, through Pemex-Exploration and Production, initiated a development program for the Burgos natural gas fields. The purpose of the Burgos project is to enable us to meet increasing domestic demand for natural gas. The fields in Burgos accounted for 14.9% of our total natural gas production in 2016. The project is located in northeastern Mexico.

During 2016, the Burgos project produced an average of 864.6 billion cubic feet per day of natural gas. As of December 31, 2016, the drilling of 7,977 wells had been completed, 3,042 of which were producing. The most important fields are the Nejo, Arcabuz-Culebra, Cuitláhuac, Cuervito, Velero, Comitas and Santa Anita fields, which together produced 54.0% of the total production of the Burgos project in 2016.

Main Fields of the Burgos Project

(as of December 31, 2016)

 

   Nejo   Arcabuz-
Culebra
   Cuitláhuac   Velero   Cuervito   Santa
Anita
   Comitas 

Wells completed

   407    968    443    219    135    79    137 

Producing wells

   261    575    196    134    92    59    92 

2016 production of natural gas (million cubic feet per day)

   176    101    64    36    29    29    32 

Cumulative production of natural gas (billion cubic feet)

   489.5    2,043.0    788.3    337.5    198.4    254.4    212.0 

Proved reserves of natural gas (billion cubic feet)

   82.5    47.6    107.8    16    140.4    49.6    34.6 

Proved developed reserves

   62.3    45.9    62.8    16    62.7    31.4    32.5 

Proved undeveloped reserves

   20.2    1.7    45    0    77.7    18.2    2.1 

 

Source: Pemex Exploration and Production.

During 2016, proved reserves decreased by 31.7 million barrels of oil equivalent, from 210.5 million barrels of oil equivalent in 2015 to 178.8 million barrels of oil equivalent in 2016, primarily due to reduced oil production in 2016, lower prices of hydrocarbons and a decrease in development activities.

In nominal peso terms, our exploration and production segment’s capital expenditures (including capital expenditures made pursuant to FPWCs) for the Burgos project were Ps. 11,695 million in 2014, Ps. 5,855 million in 2015 and Ps. 2,032 million in 2016. For 2017, we anticipate that our capital expenditures for this project will amount to Ps. 904 million and that our total accumulated capital expenditures will reach approximately U.S. $19,204 billion.

Aceite Terciario del Golfo Project (formerly Paleocanal de Chicontepec). The ATG project is located in the Northern region and covers an area of 4,243 square kilometers. This project comprises 29 fields, which are divided among eight sectors. As of December 31, 2016, there was a total of 4,544 wells completed, of which 2,224 were producing. The project produced an average of 39.8 thousand barrels of crude oil per day in 2016 as compared to 42.0 thousand barrels of crude oil per day in 2015, which represents a 5.3% decrease, and 142.5 million cubic feet of natural gas per day in 2016 as compared to 145.2 million cubic feet of natural gas per day in 2015, which represents a 1.9% decrease. The decrease in crude oil and natural gas production was primarily due to the decline in pressure in certain reservoirs. As of December 31, 2016, cumulative production was 301.8 million barrels of crude oil and 644.9 billion cubic feet of natural gas. As of December 31, 2016, proved reserves totaled 513.1 million barrels of crude oil and 1,063.8 billion cubic feet of natural gas. Total proved hydrocarbon reserves were 730.5 million barrels of oil equivalent, of which 130.1 million barrels of oil equivalent were proved developed reserves. During 2016, field development activities at the project included the drilling of 11 wells and the completion of 16 wells, all of which were classified as producing, reflecting a 100%

 

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success rate. As of December 31, 2016, 75% of the total producing wells were operating with artificial systems such as mechanical, pneumatic, hydraulic and electric pumping, while the remaining 25% were “flowing wells” that are classified accordingly because they did not require any means of artificial lift.

In nominal peso terms, our exploration and production segment’s capital expenditures for the ATG project were Ps. 18,943 million in 2014, Ps. 2,817 million in 2015 and Ps. 1,487 million in 2016. For 2017, we anticipate that our capital expenditures for this project will be Ps. 871 million and that total accumulated investments in this project will be approximately U.S. $18.5 billion.

Crude Oil Sales

During 2016, domestic consumption of crude oil amounted to approximately 935 thousand barrels per day, which represented 43.4% of our total crude oil production. Through PMI’s activities, we sold the remainder of our crude oil production abroad. Maya crude oil accounted for 78.2% of exported crude oil volume sold by PMI in 2016. See “—Business Overview—International Trading” in this Item 4.

The following table sets forth crude oil distribution for the past five years.

Crude Oil Distribution

 

   At December 31,   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in thousands of barrels per day)   (%) 

Production

   2,547.9    2,522.1    2,428.8    2,266.8    2,153.5    (5.0

Distribution

            

Refineries

   1,211.0    1,229.1    1,161.1    1,064.0    935.0    (12.1

Export terminals

   1,268.3    1,190.4    1,148.6    1,177.7    1,198.7    1.8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   2,479.3    2,419.5    2,309.7    2,241.7    2,133.7    (4.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Statistical differences in stock measurements(1)

   68.6    102.6    119.1    25.2    19.8    (21.4

 

Note: Numbers may not total due to rounding.

(1)Includes measurement inconsistencies, shrinkage and leakage, naphthas and condensates added to crude oil.

Source: Pemex Exploration and Production.

Differences between the volume of crude oil measured at the wellhead and the volume distributed reflect customary adjustments due to, among other things, shifting inventories, evaporation, shrinkage and product segregation. In August 2014, we identified increases in the difference between the volumes of crude oil production and distribution. Based on an analysis conducted in coordination with the NHC, we implemented various corrective measures to improve our measurement methodology and management system, including continuously monitoring our wells, calibrating our measurement equipment and installing additional crude oil dehydration systems. To this end, sediment tanks have also been installed at marine terminals in order to accelerate water evaporation and crude oil stabilization in accordance with industry standards. In addition, crude oil barrels undergo a stabilization process in preparation for export, which involves certification by us, the buyer and a third party to verify that the contents meet international standards and contain no more than 0.5% water.

Gas Flaring

The flaring of produced gas, which consists of the burning off of surplus combustible vapors from a well, usually occurs as a result of operational adjustments to carry out maintenance at production facilities, and in some cases is due to limitations in the ability to handle, process or transport natural gas. In addition, the flaring of

 

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produced gas is also used as a safety measure to relieve well pressure. Gas flaring is considered to be one of the most significant sources of air emissions from offshore oil and gas installations. In 2016, gas flaring represented 8.8% of total natural gas production, as compared to 6.8% in 2015, primarily due to an explosion that occurred at theAbkatún-A platform in February 2016, management of oils with highgas-oil ratio and failures in gas compression equipment on offshore platforms. For more information on the explosion at theAbkatún-A platform, see “—Health, Safety and Environmental Performance” in this Item 4. We continue to implement programs to reduce gas flaring and improve gas extraction efficiency, including strategies to optimize the exploitation of wells with high associated gas content at the Cantarell project. In addition, in March 2017, we agreed to certain programs with the NHC, including five projects for U.S. $3.0 billion, which may allow us to improve our gas utilization rate to up to 98.0% at ourKu-Maloob-Zaap business unit by 2020.

Pipelines

The crude oil and natural gas pipeline network owned by our exploration and production segment connects crude oil and natural gas producing centers with refineries and petrochemical plants. At the end of 2016, this pipeline network consisted of approximately 42,260 kilometers of pipelines, of which 1,200 kilometers were located in the Northeast Marine region, 1,061 kilometers were located in the Southeast Marine region, 9,193 kilometers were located in the Southern region, 26,244 kilometers were located in the Northern region and 4,562 kilometers are distribution and commercial pipelines. For a description of products transported by the pipeline network, see “—Business Overview—Logistics” in this Item 4.

Integrated Exploration and Production Contracts and Financed Public Works Contracts

Our FPWC program, previously known as the Multiple Services Contracts program, was first announced in December 2001. The objective of the program was to provide a contractual framework that promotes efficient execution of public works in order to increase Mexico’s oil and gas production. The FPWC were public works contracts based on unit prices that aggregate a number of different services into a single contract. Under the FPWC framework, Pemex-Exploration and Production retained the rights and title to all oil and gas produced and works performed under each FPWC.

Our Integrated E&P Contracts program was established as part of reforms to the Mexican energy sector enacted in 2008. The objective of these Integrated E&P Contracts was to increase our execution and production capabilities. The oil and gas reserves located in and extracted from the areas to which we have a legal right, continue to be owned exclusively by the Mexican Government. Under this program, payments to the contractors were made on aper-barrel basis, plus recovery costs, provided that the payments did not exceed our cash flow from the particular block.

We may amend our Integrated E&P Contracts and FPWCs in order to align these contracts, which were entered into prior to the enactment of the Secondary Legislation, that are required to give effect to the Energy Reform Decree, with the new contractual framework established under the Hydrocarbons Law. Accordingly, an existing Integrated E&P Contract or FPWC may be migrated into a contract for exploration and production upon agreement by the contract parties to the technical guidelines established by the Ministry of Energy (after seeking our favorable opinion) and the financial terms determined by the Ministry of Finance and Public Credit. Upon approval by the contract parties, the existing Integrated E&P Contract or FPWC will be replaced by the new contract for exploration and production without the need for a bidding process. If the contract parties do not agree to the proposed technical guidelines and contractual and financial terms, the original Integrated E&P Contract or FPWC will remain in effect.

On December 19, 2014, we and the relevant counterparties requested that the Ministry of Energy migrate the Integrated E&P Contracts governing the Santuario, Magallanes, Altamira, Arenque, Ébano, Miquetla and Pánuco blocks, and the FPWC governing the Misión and Olmos blocks, into new contracts for exploration and production. Parties to the Integrated E&P contracts governing the Nejo and San Andrés blocks made similar

 

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requests on November 24, 2015 and December 1, 2015. As part of the migration process, the Ministry of Energy, Ministry of Finance and Public Credit and the NHC requested further information on the proposed fiscal and technical terms of the new contracts, which Pemex Exploration and Production provided. On December 7, 2015, January 29, 2016 and May 11, 2016, the parties to the Altamira, San Andrés and Nejo blocks, respectively, withdrew their request for migration.

The migration of Integrated E&P Contracts and FPWCs into contracts for exploration and production has taken longer than expected. As of the date of this annual report, we have not yet migrated any of the Integrated E&P contracts or FPWCs. Nonetheless, we plan to migrate the Integrated E&P Contract corresponding to the Santuario block in the Southern region of Mexico and the FPWC corresponding to the Misión block of the Burgos business unit in the Northern region into contracts for exploration and production in the first six months of 2017.

Among the FPWC works during 2016, maintenance activities were carried out in the Burgos project under the FPWC program. The work carried out in 2016 represented an investment of approximately U.S. $189.3 million. By the end of 2016, natural gas production in the existing FPWC blocks reached 305.4 million cubic feet per day, which represents approximately 35.3% of all natural gas production from Burgos during 2016.

During 2016, contractors expended approximately U.S $323.3 million in connection with Integrated E&P Contracts. By the end of 2016, production in the existing Integrated E&P blocks reached 31.5 thousand barrels per day of crude oil and 22.3 million cubic feet per day of natural gas, for a total of 34.3 thousand barrels of oil equivalent per day.

New Exploration and Production Contracts and Farm-Outs

We have pursued farm-outs as part of the opportunities made available to us by energy reform. Through these agreements, we may enter into partnerships with third parties who, in exchange for an interest in the fields that have been granted to us, make financial contributions to the partnership and provide field services. On July 28, 2016, the NHC published the tender offer and bidding package to select a partner for Pemex Exploration and Production to carry out exploration and production activities in the Trión block field assignments located in the Perdido Fold Belt in the Gulf of Mexico. Since the Trión block has a depth greater than 2,500 meters, it requires a high level of technical expertise and financial investment to develop.

On December 5, 2016, the NHC announced that BHP Billiton Petróleo Operaciones de México, S. de R.L. de C.V., or BHP Billiton Mexico, an affiliate of BHP Billiton Limited and BHP Billiton Plc, had been selected as the partner for Pemex Exploration and Production for activities in the Trión block. Pursuant to the terms of its bid, BHP Billiton Mexico will make a U.S. $789.6 million contribution to the partnership in exchange for a 60% participating interest in the Trión Block, BHP Billiton Mexico will be the operator of the Trión block. BHP Billiton Mexico must invest U.S. $1.9 billion in the Trión Project before we are required to invest in the project, which, depending on the timeline set by the consortium, will likely be in four to five years. The corresponding exploration and production contract, joint operating agreement and other relevant agreements were executed on March 3, 2017.

On October 17, 2016, Petróleos Mexicanos’ Board of Directors approved the request to the Ministry of Energy for farm-outs related to the Ayín Batsil shallow water fields in the Campeche Basin. These fields are located at water depths of 160 meters. This shallow-waterfarm-out is to be included in the first bidding round of Round Two, which is expected to consist of 15 blocks to be awarded in June 2017. A secondfarm-out related to the Ogarrio and Cárdenas-Mora onshore fields located in the Southern Region is also scheduled for Round Two bidding in July 2017.

 

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Competitive Bidding Rounds

On December 5, 2016, the NHC published the results of the bidding process referred to as Round 1.4, through which a consortium consisting of Pemex Exploration and Production, Chevron Energía de Mexico, S. de R.L. de C.V., or Chevron Energía, a subsidiary of Chevron Corporation and INPEX Corporation was awarded an exploration contract for a field located in the Perdido Fold Belt in the Gulf of Mexico. The field covers an area of approximately 1,686.9 square kilometers and is located approximately 117 kilometers off the coast of Mexico in water depths ranging between 500 meters and 1,700 meters. Chevron Energía will be the operator and holds 33.3334% interest in the consortium, while Pemex Exploration and Production and INPEX Corporation each holds 33.3333% interest. The corresponding exploration and production contract, joint operating agreement and other relevant agreements were executed on February 28, 2017.

Collaboration and Other Agreements

Pemex Exploration and Production, or its predecessor Pemex-Exploration and Production, have entered intonon-commercial scientific and technology agreements with the following parties, which remain in effect as of the date of this annual report:

 

  BP Exploration Operating Co. Ltd. during 2012;

 

  Statoil Mexico A.S., ExxonMobil Ventures Mexico Ltd., Japan Oil, Gas and Metals National Corporation, Chevron Deepwater Mexico Inc., BG North America LLC during 2013; and

 

  Itera Group LLC, during 2013.

Pemex Exploration and Production did not enter into any collaboration agreements in 2016.

Through these agreements, we seek to increase our technical and scientific knowledge in areas including deepwater subsalt exploration and drilling; enhanced oil recovery processes, such as air injection; and reservoir characterization of complex structures. These broad agreements of technological and scientific collaboration are strictlynon-commercial,i.e., there is no transfer of resources and they do not establish a binding relationship among the parties.

Industrial Transformation

Our industrial transformation segment is comprised of two principal activities: (i) refining and (ii) gas and aromatics.

Refining

Refining Processes and Capacity

Our refining production processes include the following:

 

  Atmospheric distillation.This process heats crude oil in a tube furnace at atmospheric pressure to distill refined products. The primary products produced are gasoline, jet fuel, diesel, atmospheric gas oil and atmospheric residual crude oil.

 

  Vacuum distillation.This process heats crude oil or other feedstock in a vacuum distillation column, which is operated at low pressures. The objective of this process is to maximize production of heavy vacuum gas oil, which is produced by boiling crude oil.

 

  Cracking.This process uses either heat and pressure or a catalytic agent to increase gasoline yields from crude oil.

 

  Visbreaking.This is a thermal cracking process, which uses a horizontal-tube heater fired to a high temperature. Visbreaking reduces flasher bottom viscosity and produces some heavy gas oil.

 

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  Reforming processes.These processes use heat and catalysts to transform smaller or unstable hydrocarbon molecules into larger, more useful refining or blending products. For example, we use reforming processes to convert low octane gasoline into higher octane stocks that are suitable for blending into finished gasoline and to convert naphthas into more volatile, higher octane products.

 

  Hydrotreatment or residual hydrocracking.This process uses a catalyst and hydrogen at high temperature and pressure to remove sulfur, nitrogen and some aromatic compounds. Hydrotreatment also processes some lighter liquid productoff-take.

 

  Alkylation and isomerization.This polymerization process unites olefins and isoparaffins. Butylenes and isobutanes are combined with sulfuric acid or hydrofluoric acid to rearrange straight-chain hydrocarbon molecules into branched-chain products. Pentanes and hexanes, which are difficult to reform, are isomerized through the use of aluminum chloride and other precious-metal catalysts. Normal butane may be isomerized to provide a portion of the isobutane feed needed for the alkylation process. The process produces a high octane, low sensitivity blending agent for gasoline.

 

  Coking.This process is a severe method of thermal cracking used to upgrade heavy residuals into lighter products or distillates. Coking producesstraight-run gasoline (coker naphtha) and various middle-distillate fractions used as catalytic feedstock, thus generating a concentrated solid material.

These production processes together constitute our production capacity as set forth in the table below.

Refining Capacity by Production Process

 

   At December 31, 
   2012     2013     2014     2015     2016 
   (in thousands of barrels per day) 

Production Process

                  

Atmospheric distillation

   1,690.0      1,690.0      1,602.0      1,640.0      1,602.0 

Vacuum distillation

   832.0      832.0      767.5      772.4      767.5 

Cracking

   422.5      422.5      422.5      422.5      422.5 

Visbreaking

   91.0      91.0      91.0      91.0      91.0 

Reforming

   279.3      279.3      279.3      279.3      279.3 

Hydrotreatment

   1,067.5      1,067.5      1,067.5      1,099.9      1,230.0 

Alkylation and isomerization

   155.3      155.3      154.3      154.8      154.3 

Coking

   155.8      155.8      155.8      155.8      155.8 

 

Source: Base de Datos Institucional (Pemex Institutional Database, or Pemex BDI).

As of December 31, 2016, we owned and operated six refineries: Cadereyta, Madero, Minatitlán, Salamanca, Salina Cruz and Tula. Our refineries consist of atmospheric and vacuum distillation units, where the bulk of crude oil input is processed. Secondary processing facilities include desulfurization units and facilities for catalytic cracking, reforming and hydrotreating. During 2016, our refineries processed 933.1 thousand barrels per day of crude oil (122 thousand barrels per day at Cadereyta, 87.4 thousand barrels per day at Madero, 112.5 thousand barrels per day at Minatitlán, 170.9 thousand barrels per day at Salamanca, 238.7 thousand barrels per day at Salina Cruz and 201.6 thousand barrels per day at Tula), which in total consisted of 532.8 thousand barrels per day of Olmeca and Isthmus crude oil and 400.3 thousand barrels per day of Maya crude oil. In recent years, we have been affected by operational difficulties at our auxiliary services facilities. In order to increase the processing of crude oil at our refineries and the production of petroleum products, we have included certain actions in our 2017-2021 Business Plan to increase safety and reliability at our auxiliary services facilities.

Since 1993, through our subsidiary company, P.M.I. Norteamérica, S.A. de C.V., we have participated in a limited partnership with Shell Oil Company in a refinery located in Deer Park, Texas, which has the capacity to

 

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process 340 thousand barrels per day of crude oil. Under the Deer Park Limited Partnership agreement, P.M.I. Norteamérica, S.A. de C.V. and Shell Oil Company each provide 50% of the refinery’s crude oil input and own 50% of the refinery’s output. This agreement is limited to the specific purpose of operating the Deer Park refinery.

Production

We produce a wide range of products derived from crude oil and natural gas, including LPG, gasoline, jet fuel, diesel, fuel oil, asphalts, lubricants and other refined products. In 2016, we produced 977.2 thousand barrels per day of refined products (including dry gasby-products of the refining process), as compared to 1,114.3 thousand barrels per day in 2015, representing a decrease of 12.3%. This decrease in refined products production was mainly due to an increase in corrective maintenance and auxiliary services failures and to low performance at our Tula, Madero, Minatitlán and Cadereyta refineries.

The following table sets forth, by category, our production of petroleum products from 2012 through 2016.

Refining Production

 

   Year ended December 31,   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in thousands of barrels per day)   (%) 

Refinery Crude Oil Runs

   1,199.3    1,224.1    1,155.1    1,064.5    933.1    (12.3

Refined Products

        

Liquefied petroleum gas

   25.2    25.2    26.4    21.4    17.2    (19.6

Gasoline

        

Pemex Magna

   336.8    360.5    290.9    272.5    150.6    (44.7

Ultra-Low Sulfur Magna

   61.5    56.7    99.1    88.4    165.5    87.2 

Pemex Premium(1)

   19.7    19.8    30.8    16.8    7.7    (54.2

Base

   0.0    0.2    0.8    3.6    1.6    (55.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   418.1    437.3    421.6    381.4    325.3    (14.7

Kerosene (Jet fuel)

   56.6    60.8    53.4    47.8    42.8    (10.5

Diesel

        

Pemex Diesel(2)

   225.9    217.7    186.9    191.5    130.1    (32.1

Ultra-Low Sulfur Diesel

   72.6    92.1    97.8    83.0    85.1    2.5 

Others

   1.0    3.7    1.9    0.2    1.0    400 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   299.6    313.4    286.6    274.7    216.2    (21.3

Fuel oil(3)

   273.4    268.8    259.2    237.4    228.1    (3.9

Other refined products

        

Asphalts

   23.1    18.7    23.9    17.7    16.9    (4.5

Lubricants

   3.9    4.4    3.7    2.3    3.0    30.4 

Paraffins

   0.8    0.7    0.6    0.5    0.6    20.0 

Still gas

   67.8    70.7    63.9    62.2    61.9    (0.5

Other refined products(4)

   57.3    75.7    66.7    68.9    65.3    (5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   152.9    170.2    158.8    151.6    147.6    (2.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total refined products

   1,225.9    1,275.8    1,206.1    1,114.3    977.2    (12.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

(1)Pemex Premium is anultra-low sulfur gasoline with 0.003% sulfur content.
(2)Pemex Diesel is sold in the northern border market with 0.0015% sulfur content.
(3)Includes heavy fuel oil and intermediate 15.
(4)Includes mainly coke, along with other products such as aeroflex1-2, furfural extract, and light cyclic oil.

Source: Pemex BDI.

 

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Fuel oil, automotive gasoline and diesels represent the bulk of our production. In 2016, gasoline represented 33.3%, diesel fuel represented 22.1% and fuel oil represented 23.3% of total petroleum products production. Jet fuel represented 4.4% and LPG represented 1.8% of total production of petroleum products in 2016. The remainder, 15.1%, of our production consisted of a variety of other refined products.

As a result of our strategy of investing in technology to improve the quality of our fuels, all of our automotive gasoline production now consists of unleaded gasoline. In addition, we have introduced new environmentally sound products such asultra-low sulfur gasoline (or ULSG) andultra-low sulfur diesel (or ULSD).

In recent years, including 2016, our production has been affected by operational problems in our auxiliary services facilities. In order to improve production, our 2017-2021 Business Plan includes measures to ensure the supply of auxiliary services through partnerships with third parties. On February 23, 2017, we entered into a contract with Air Liquide for the supply of hydrogen to our Miguel Hidalgo refinery in Tula in order to decrease unscheduled stoppages and increase gasoline production.

Variable Refining Margin

During 2016, the National Refining System recorded a variable refining margin of U.S. $4.48 per barrel, an increase of U.S. $1.13 per barrel as compared to 2015. This is broadly the result of the recovery in prices for refined products in 2016. The following table sets forth the variable refining margin for the five years ended December 31, 2016.

Variable Refining Margin

 

   Year ended December 31,   2016
vs. 2015
 
   2012   2013  2014   2015   2016   
   (U.S dollars per barrel)   (%) 

Variable margin

   0.01    (1.84  1.76    3.35    4.48    33.7 

Domestic Sales

We market a full range of refined products, including gasoline, jet fuel, diesel, fuel oil and petrochemicals. We are one of a few major producers of crude oil worldwide that experiences significant domestic demand for our refined products.

 

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For the five years ended December 31, 2016, the value of our domestic sales of refined products and petrochemicals was as follows:

Value of Refining’s Domestic Sales(1)

 

  Year ended December 31,  2016
vs. 2015
 
  2012  2013  2014  2015  2016  
  (in millions of pesos)(2)  (%) 

Refined Products

      

Gasoline

      

Pemex Magna

 Ps.326,187.2  Ps.340,750.7  Ps.347,952.4  Ps.274,006.9  Ps.248,595.2   (9.3

Pemex Premium

  42,486.0   63,723.1   80,058.9   81,813.5   87,422.8   6.9 

Aviation fuels

  396.2   370.8   358.1   323.7   328.0   1.3 

Others

  95.6   43.4   29.5   16.1   14.5   (9.9
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  369,165.1   404,887.9   428,398.8   356,160.2   336,360.4   (5.6

Kerosene (Jet fuel)

  36,336.5   35,417.9   36,449.3   27,077.2   28,945.2   6.9 

Diesel

      

Pemex Diesel

  163,113.6   178,929.4   194,545.6   139,796.2   117,556.3   (15.9

Others

  30,609.0   32,542.0   31,156.7   22,930.4   19,236.4   (16.1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  193,722.6   211,471.4   225,702.4   162,726.7   136,792.7   (15.9

Fuel oil

      

Total

  99,839.9   78,001.8   46,838.3   25,906.0   16,436.3   (36.6

Other refined products

      

Asphalts

  11,165.0   7,865.4   10,788.0   7,575.5   5,468.7   (27.8

Lubricants

  3,097.7   2,991.2   2,618.9   1,297.5   1,473.0   13.5 

Paraffins

  377.1   339.4   319.2   257.9   267.0   3.5 

Coke

  346.3   473.4   763.3   669.5   501.9   (25.0

Citroline

  6.4   2.3   0.4   0.9   4.6   401.8 

Gas oil for domestic use

  217.6   275.4   432.5   588.3   428.8   (27.1

Total

 Ps.15,210.0  Ps.11,947.0  Ps.14,922.3  Ps.10,389.6  Ps.8,143.9   (21.6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Refined Products

 Ps.714,274.1  Ps.741,726.1  Ps.752,311.1  Ps.582,259.8  Ps.526,678.5   (9.5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Petrochemicals(3)

  Ps.    6,494.6  Ps.6,882.8  Ps.7,582.2  Ps.3,930.9  Ps.3,117.9   (20.7

 

Note: Numbers may not total due to rounding.

(1)Excludes IEPS tax and value added tax. See “—Taxes, Duties and Other Payments to the Mexican Government” in this Item 4.
(2)Figures are stated in nominal pesos. See “Item 3—Key Information—Selected Financial Data.”
(3)Petrochemical products produced at refineries operated by our industrial transformation segment (carbon black feedstocks and propylene).

Source: Pemex BDI.

In 2016, our domestic sales of refined products decreased by Ps. 55,581.3 million, or 9.5% in value, as compared to 2015 levels (excluding IEPS tax and value added tax). This was primarily due to a 10.8% decrease in the average prices for our refined products, a 15.9% decrease in the value of diesel sales, a 5.6% decrease in the value of gasoline sales and 36.6% decrease in the value of fuel oil sales.

 

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The volume of our domestic sales of refined products for the five-year period ended December 31, 2016 was distributed as follows:

Volume of Refining’s Domestic Sales

 

   Year ended December 31,   2016
vs. 2015
 
   2012   2013   2014   2015   2016   
   (in thousands of barrels per day, except where
otherwise indicated)
   (%) 

Refined Products

            

Gasoline

            

Pemex Magna

   715.3    667.6    639.1    638.0    637.5    (0.1

Pemex Premium

   87.7    119.2    137.1    154.8    185.1    19.6 

Aviation fuels

   0.5    0.5    0.4    0.5    0.5    (1.0

Others

   0.2    0.1                1.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   803.7    787.3    776.7    793.3    823.1    3.8 

Kerosenes (jet fuel)

   59.3    62.2    66.5    70.8    76.2    7.6 

Diesel

            

Pemex Diesel

   339.4    333.2    336.4    330.6    335.5    1.5 

Others

   61.1    58.5    53.0    54.2    51.8    (4.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   400.5    391.7    389.4    384.7    387.2    0.6 

Fuel oil

            

Total

   214.4    189.3    121.7    111.7    102.6    (8.1

Other refined products

            

Asphalts

   22.3    17.3    21.7    15.9    15.9     

Lubricants

   4.1    4.7    4.0    2.6    3.1    19.2 

Paraffins

   0.8    0.7    0.6    0.6    0.6     

Coke

   49.8    47.8    46.0    45.9    36.3    (20.9

Citroline

   0.01                0.01     

Gas oil for domestic use

   0.6    0.7    0.9    1.2    0.9    (25.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77.7    71.2    73.3    66.2    56.9    (14.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total refined products

   1,555.5    1,501.8    1,427.6    1,426.7    1,446.0    1.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Petrochemicals(1)(2)

   653.3    738.8    703.8    620.9    543.5    (12.5

 

Note: Numbers may not total due to rounding.

(1)In thousands of metric tons.
(2)Petrochemical products produced at refineries operated by our refining business (black carbon feedstocks and propylene).

Source: Pemex BDI.

The volume of our domestic gasoline sales increased by 3.8% in 2016, from 793.3 thousand barrels per day in 2015 to 823.1 thousand barrels per day in 2016. The volume of our diesel sales increased by 0.6%, from 384.7 thousand barrels per day in 2015 to 387.2 thousand barrels per day in 2016. The increase in the volume of our domestic gasoline and diesel sales is mainly due to an increase in demand resulting from an increase in the number of vehicles operated in Mexico. The volume of our domestic sales of fuel oil decreased by 8.1%, from 111.7 thousand barrels per day in 2015 to 102.6 thousand barrels per day in 2016, primarily due to a decrease in CFE’s demand for fuel oil based on its substitution of fuel oil with natural gas.

Sales of Pemex Premium gasoline increased 19.6% in 2016, while those of Pemex Magna decreased slightly from the previous year. This change in consumption patterns is the result of a decrease in the price differential between the two kinds of gasolines.

We have also made concerted efforts to build and enhance our brands. As a result of energy reform, beginning in April 2016, the Mexican government has allowed private companies, including third-party

 

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franchises, to participate as retailers in the Mexican gasoline market and purchase gasoline products from us or import these same products from abroad. Pursuant to this regulatory change, on June 5, 2016, we announced that a joint branding program had been established with various entities that own and operate retail service stations in Mexico. The joint branding program allows our franchisees to rename their retail service stations while continuing to sell our products under our brand. In addition, we will continue to provide technical and operational assistance to such franchisees. We believe that this program will strengthen our relationship with entities that own and operate retail service stations in Mexico as we continue to adapt to the new competitive pressures in the Mexican fuel market.

At the end of 2016, there were 11,578 retail service stations in Mexico, of which 11,531 were privately owned and operated as franchises, while the remaining 47 were owned by Pemex Industrial Transformation. This total number of retail service stations represents an increase of 3.3% from the 11,210 service stations as of December 31, 2015.

The largest consumers of fuel oils in Mexico are CFE and our productive state-owned subsidiaries. CFE consumed approximately 86.0% of our fuel oil production during 2016, pursuant to a fuel oil supply contract entered into in January 1, 2004. The minimum amount of fuel oil that we agreed to supply to CFE during 2015 was 58.1 thousand barrels per day, in accordance with our supply capacity and the requirements of CFE under its official program of substitution of fuel oil with natural gas. In 2016, we actually supplied 88 thousand barrels per day. The price per cubic meter of the fuel oil supplied to CFE is based on the three-month average spot price per cubic meter of Fuel Oil No. 6 sulfur at Houston, Texas, as quoted in Platt’s U.S. Marketscan and adjusted for quality and transportation cost differentials. In addition, the price of the fuel oil is then revised, either upwards or downwards, depending on whether the amount of fuel oil requested exceeds the minimum amount agreed to in the supply contract. The contract can be terminated by either party upon six months’ notice. The total amount paid to us by CFE under this contract in 2016 was Ps. 14,013 million, which represented 2.4% of our total revenues from domestic sales of refined products.

Pricing Decrees

The energy reform provides for fuel price liberalization, which began in January 2017. Our sales will continue to be regulated by the Energy Regulatory Commission until COFECE determines that there is effective competition in the wholesale market.

Historically, the Mexican Government has established periodic increases on the price of gasoline. On January 1, 2014, pursuant to theImpuesto a los Combustibles Fósiles(IEPS Tax on Fossil Fuels) approved under theLey del Impuesto Especial sobre Producción y Servicios(Special Tax on Production and Services Law, or the IEPS Law), unleaded gasoline became subject to aone-time price increase of ten Mexican cents per liter. See “—Information on the Company—Taxes, Duties and Other Payments to the Mexican Government” in this Item 4. For the period from January 1 to December 31, 2015, the Mexican Government eliminated these periodic price increases in favor of aone-time price increase of 26 Mexican cents per liter of magna gasoline and 27 Mexican cents per liter of premium gasoline. From January 1, 2016 to July 31, 2016, prices were 44 Mexican cents lower per liter as compared to 2015 and from August 1, 2016 to December 31, 2016, prices were 43 Mexican cents higher per liter as compared to 2015. The sale of gasoline began to be liberalized on January 1, 2017 and the Ministry of Finance and Public Credit established a flexible mechanism to reflect international market prices. As a result, in January 2017, magna gasoline prices were between Ps. 1.35 and Ps. 2.61 per liter higher than in December 2016. For more information, see “Item 5—Operating and Financial Review and Prospects—IEPS Tax, Hydrocarbon Duties and Other Taxes.”

The Mexican Government has also established periodic increases on the price of diesel. On January 1, 2014, pursuant to the IEPS Tax on Fossil Fuels, diesel became subject to aone-time price increase of thirteen Mexican

 

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cents per liter. From January 1 to December 31, 2014, periodic increases continued at a rate of eleven Mexican cents per liter per month. For the period January 1 to December 31, 2015, the Mexican Government eliminated these periodic price increases in favor of aone-time price increase of 26 Mexican cents per liter. From January 1, 2016, the Mexican Government established a mechanism to determine prices that takes into account international market prices, subject to minimum and maximum prices, and adds a flat IEPS Tax. As a result, from January 1, 2016 to August 31, 2016 prices decreased by 43 Mexican cents per liter as compared to the same period in 2015 and from September 1, 2016 to December 31, 2016, this amounted to a 43 Mexican cent increase per liter as compared to the same period in 2015. The sale of diesel began to be liberalized on January 1, 2017 and the Ministry of Finance and Public Credit established a flexible mechanism to reflect international market prices. As a result, in January 2017, diesel prices were between Ps. 1.78 and Ps. 3.05 per liter higher than in December 2016.

Since the early 1980s, the Mexican Government has also established a discount of 30% on the price at which we sell gas oil intended for domestic use to the state of Chihuahua during the months of January, February and December of each year. On January 1, 2014, pursuant to the IEPS Tax on Fossil Fuels, such gas oil became subject to aone-time price increase of 10.857 Mexican cents per liter. Gas oil became subject to aone-time price increase of 11.307 Mexican cents per liter in 2015, 11.558 Mexican cents per liter as of January 1, 2016 and 11.94 Mexican cents per liter as of January 1, 2017. Notably, the discount on the price of gas oil in the state of Chihuahua was suspended in December 2016.

Since December 2008, the price at which we sell fuel oil to CFE has been linked to international market prices in accordance with a pricing methodology established by the Mexican Government. This methodology is based on the price of fuel oil in the U.S. Gulf of Mexico coastal region, and is then adjusted for quality as well as expenses related to distribution.

On January 1, 2015, the IEPS Tax on Fossil Fuels of 14.00 Mexican cents per liter of fuel oil became effective through the fiscal year ended December 31, 2015. As of January 1, 2016, fuel oil became subject to a premium of 14.31 Mexican cents per liter and as of January 1, 2017, the IEPS Tax on Fossil Fuels is 14.78 Mexican cents per liter.

The Mexican Government could modify these price controls or impose additional price controls in the future. See “Item 3—Key Information—Risk Factors—Risk Factors Related to our Relationship with the Mexican Government—The Mexican Government has historically imposed price controls in the domestic market on our products.”

We withhold IEPS Tax. While it is included in the price to our customers, it is not calculated as part of our revenue. For more information, see “Item 4—Taxes, Duties and Other Payments to the Mexican Government—Fiscal Regime for PEMEX.”

Investments

Over the past several years, we have focused our investment program on enhancing the quality of the gasoline and diesel we produce to meet Mexico’s new environmental standards. Our aim is to improve our ability to process heavy crude oil in order to optimize the crude oil blend in our refineries and to increase production of unleaded gasoline and diesel to supply growing demand at a lower cost, as opposed to increasing our overall crude oil processing capacity. This focus is primarily the result of the abundance of heavy crude oils in Mexico.

Our refining business invested Ps. 30,501 million in capital expenditures in 2016 and, due to budget cuts, has budgeted Ps. 18,919 million in capital expenditures for 2017. We hope to complement our capital expenditures in 2017 through strategic alliances.

The following table sets forth our refining business’ capital expenditures, excludingnon-capitalizable maintenance, for each of the three years ended December 31, 2016, and the budget for 2017. Capital expenditure

 

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amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

Refining’s Capital Expenditures

 

   Year ended December 31,(1)   Budget
2017(2)
 
   2014   2015   2016   
   (in millions of pesos)(3) 

Refining

        

Fuel Quality Investments(4)

   Ps.7,814    Ps.9,045    Ps.10,702    Ps.4,990 

Reconfiguration of Miguel Hidalgo Refinery in Tula

   1,077    4,674    8,610    1,821 

New Refinery in Tula(5)

   1,128    561    1,849    0 

Minatitlán Refinery Energy Train

           1,100    28 

Cadereyta Refinery Energy Train

           872    7 

Residual Conversion from Salamanca Refinery

   1,310    913    749    4,900 

Tuxpan Pipeline and Storage and Distribution Terminals

   275    100    15    132 

Others

   28,163    14,353    6,604    7,040 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   Ps.39,767    Ps.29,646    Ps.30,501    Ps.18,919 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.(1) Amounts based on cash basis method of accounting.

(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2014, 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.
(4)Includes clean fuels investments for gasoline and diesel in our six refineries.
(5)Includespre-investments studies,on-site preparation and other expenses related to this project.

Source: Petróleos Mexicanos.

In the medium term, we will continue to import unleaded gasoline to satisfy domestic demand. During 2016, we imported approximately 505 thousand barrels per day of unleaded gasoline, which represented approximately 61.4% of total domestic demand for unleaded gasoline in that year.

Our projects, which will involve some private sector investments, aim to reduce greenhouse gas emissions by promoting cleaner fuels and increasingcrude-oil processing capacity. Certain of these projects, including the Fuels Quality Project (formerly known as the Clean Fuels Project), the reconfiguration of the Miguel Hidalgo Refinery in Tula and the residual conversion of the Salamanca Refinery, are already part of ongoing projects developed by our industrial transformation segment. Our projects are described in further detail below.

Fuel Quality Project

Our Fuel Quality Project is being developed in our six refineries, with a first phase involving the installation of eight ULSG post-treatment units, the capacities of which are set forth below by refinery. The first phase of this project is being carried out at each of the following sets of our refineries: set 1, Tula and Salamanca (which are approximately 96.4% and 97.0% complete, respectively), with construction expected to be completed by the second quarter of 2016; set 2, Cadereyta and Madero (which are both 100% completed); and set 3, Minatitlán and Salina Cruz (which are 100% and approximately 96.4% complete, respectively), with the commencement of operations at Minatitlán in October 2015 interrupted due to lack of fuel, and the construction of Salina Cruz expected to be completed by the second quarter of 2016. We began production of ULSG at our Cadereyta refinery in February 2014 and at our Madero refinery in July 2015. In August 2016, we began producing ULSG at our Minatitlán, Tula, Salamanca and Salina Cruz refineries. In light of these projects, and as of the date of this annual report, all gasoline produced in Mexico meets international environmental standards. The consumption of cleaner fuels will allow us to reduce emissions of greenhouse compounds.

 

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Plant Capacity

 

   Cadereyta  Madero  Minatitlán  Salamanca  Salina Cruz  Tula 

ULSG units (tbpd)

   (42)   (20)   (25)   (25)   (25)   (30) 

 

Note: tbpd = thousand barrels per day.

ULSG: Ultra Low Sulfur Gasoline.

Source: Pemex Industrial Transformation.

In addition to our ULSG post-treatment units, we have entered the following contracts for phase one of our fuel quality project:Sistema Integral de Mezcla en Línea Optimizado Automático(SIMLOA) at our Tula and Cadereyta refineries; laboratories at our Tula, Salamanca, Salina Cruz, Minatitlán and Madero refineries; rehabilitation tanks at our Tula, Salamanca and Salina Cruz refineries; parasitic gasoline at our Tula and Salamanca refineries; a steam condensation station at our Salamanca refinery; a turbogeneratorTG-204 at our Cadereyta refinery; and a turbogeneratorTG-8 at our Madero refinery. As of the date of this annual report, our overall progress on these contracts for each of the refineries is approximately: 79.9% at our Tula refinery, 94.1% at our Salamanca refinery, 100% at our Salina Cruz refinery, 100% at our Minatitlán refinery, 69.5% at our Cadereyta refinery and 75.1% at our Madero refinery. Both turbogenerator contracts have since been suspended due to budgetary constraints.

The second phase of the Fuel Quality Project involves the construction of five ULSD facilities and the reconfiguration of 17 existing units, as well as the installation of five hydrogen plants, four sulfur recovery units and five sour water treatment plants. This portion of the project will be carried out in three stages: (i) early production, (ii) Cadareyta diesel and (iii) a diesel stage for the five remaining refineries, as described below.

Early production.We initiated projects to increase efficiency at some of our processing plants and to produce ULSD through eight construction and services contracts totaling Ps. 130 billion. All of these projects are complete and the respective plants are in operation.

Cadereyta diesel phase.Construction began in March 2013 and, as of the date of this annual report, is approximately 68% complete. Construction is expected to be completed by the fourth quarter of 2017. Due to the 2016 Budget Adjustment Plan, however, two of the four relevant contracts have been suspended since April 2016. The two other contracts have been completed. We are currently investigating funding alternatives through alliances and/or strategic partnerships in order to resume work under these contracts.

Diesel phase for outstanding refineries.The Open Book Cost Estimation (OBCE) methodology is used in connection with the implementation of the diesel phase at the refineries other than Cadereyta and is divided into two stages: (i) the development of detailed engineering plans and the placement of purchase orders for equipment requiring significant delivery time, which was completed with the execution of the Final Works Agreement on December 17, 2015; and (ii) the execution of detailed engineering, procurement and construction, which commenced in January 2016. Due to the 2016 Budget Adjustment Plan, however, the project was suspended in October 2016 with only a small portion completed. Until construction is completed, we plan to importultra-low sulfur fuels in order to meet domestic demand. We are currently investigating funding alternatives through alliances and/or strategic partnerships in order to resume work under the contracts.

As of the date of this annual report, we also have 15 contracts for complementary facilities, which integrate the total scope of the Fuel Quality Project. Of those 15, five have been completed, eight are in development and two have been suspended as the result of budgetary constraints.

Reconfiguration of the Miguel Hidalgo Refinery in Tula

On August 12, 2009, we announced the construction of a new refinery in Tula on land that was donated by the state government of Hidalgo. Upon completion of ourpre-investment studies relating to the new refinery in

 

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Tula, we determined that it would be more cost-effective to forgo construction of a new refinery and instead direct our investments to the reconfiguration of the existing Miguel Hidalgo refinery. Accordingly, on December 3, 2014, we announced the commencement of renovations to upgrade the refinery as part of theAprovechamiento de Residuales en la Refinería de Tula Hidalgo (Residue Use at the Tula Hidalgo Refinery, which we refer to as the Tula refinery reconfiguration project). The reconfigured refinery is intended to (i) generally modernize processing; (ii) increase the efficiency with which vacuum residue is converted into high value fuels; (iii) produce higher value products; (iv) increase refining margins; and (v) reduce fuel oil handling problems.

Pemex Industrial Transformation plans to implement the reconfiguration project in two phases: (i) phase one for the development of engineering plans and (ii) phase two for detailed engineering, procurement and construction. In September 2013, ICA Fluor Daniel, S. de R.L. de C.V. (ICA Fluor) was awarded a U.S. $94.8 million contract to carry out studies and to provide engineering services for phase one. Site conditioning work began in February 2014 and construction of the first processing unit began in October 2014.

At the end of 2016, the integral project was approximately 27.0% complete and basic and detailed engineering plans were 100% complete. The project is now advancing to phase two, however, due to budgetary restrictions, some tasks have been rescheduled and project completion has slowed. In light of continued budgetary constraints, we have developed a new strategy which engages a third party for technical and financial assistance. See “—Investments” below for more information regarding capital expenditures by project.

Residual Conversion of the Salamanca Refinery

The reconfiguration of the “Ingeniero Antonio M. Amor” refinery in Salamanca, Guanajuato focuses on the conversion of residuals into high-steam distillates (without a need for increased crude oil processing), as well as a new lubricants train to produce group II lubricants. As part of the reconfiguration, we will construct new plants and refurnish existing plants. This project also involves the construction of a perimeter wall surrounding the refinery with two security entrances, the relocation of CFE’s electric transmission lines, site improvements, as well as the construction of a delayed coker unit, a catalytic cracking unit, a hydrogen plant, a coker naphthas hydro-desulfurization plant, a gasoil hydro-desulfurization plant, a new lubricants train, a naphtha reforming plant, a sulfur recovery unit, an amine regeneration unit and a sour water treatment facility. In addition, this project involves the construction of storage tanks, effluent treatment plants (at which industrial wastewater is treated for reuse) and infrastructure (including roads and street lights) in the areas surrounding the refinery, as well as services, electric power supply, high burner areas, buildings and other service and support facilities. Other units, including certain distillation vacuum units, will undergo renovations designed to efficiently transport residuals to the coker plant for processing and to maximize the conversion of residuals into distillates. Finally, the project includes the integration of pipelines, pumping equipment and electrical substations from existing facilities.

In accordance with the OBCE methodology, Pemex Industrial Transformation plans to implement the project in two phases as part of a strategy to increase efficiency, mitigate technical and economic risks, define the project’s scope and reduce uncertainty. Phase one includes the development of engineering plans, while phase two includes engineering plans, together with procurement and construction. At the end of 2016, the project was approximately 12.7% complete and phase one was approximately 98% complete. The project, however, has been suspended due to budgetary constraints. See “—Investments” below for more information regarding capital expenditures by project.

Pemex Industrial Transformation, together with the Department of Corporate Alliances and New Business, is currently seeking partners to continue the project.

Tuxpan Maritime Terminal

The Tuxpan Maritime Terminal project is intended to help meet the increasing demand for refined products in the metropolitan area of the Mexico Valley. The total cost of the project is approximately Ps. 4,777 million,

 

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which includes the construction of a pipeline measuring 18 inches in diameter and 109 kilometers in length from Cima de Togo to Venta de Carpio, five storage tanks located at the Tuxpan Maritime Terminal with a capacity of 100,000 barrels each, a research study to determine the best option for the discharge of refined products from tankers and pipelines to these storage tanks and auxiliary and integration services.

By the end of 2016, two of the three relevant phases of this project, thepre-investment studies and transportation on the Tuxpan-Mexico pipelines, were complete. The third phase, storage, is 91.3% complete. As of the date of this annual report, four of the project’s five tanks have been delivered to the Tuxpan Maritime Terminal and are in operation and one tank is 87% complete.

Hydrogen Supply for Refineries

Pursuant to energy reform and 2017-2021 Business Plan, we aim to partner with third parties for issues related to auxiliary services, such as the supply of hydrogen to refineries, which will permit us to specialize, maximize value, and focus on the processing of crude oil.

Gas and Aromatics

Natural Gas and Condensates

Our average natural gas production decreased by 11.0 % in 2016, from 3,454.4 million cubic feet per day in 2015 to 3,074.2 million cubic feet per day in 2016, while the average wet natural gas processed decreased by 9.8%, from 4,072.8 million cubic feet per day in 2015 to 3,671.5 million cubic feet per day in 2016.

All wet natural gas production is directed to our gas processing facilities. At the end of 2016, we owned nine facilities.

The following facilities are located in the Southern region:

 

  Nuevo Pemex. This facility contains 13 plants that together in 2016 produced 878.6 million cubic feet per day of dry gas, 25.0 thousand barrels per day of ethane, 31.4 thousand barrels per day of liquefied gas, 15.1 thousand barrels per day of naphtha and 66.3 thousand tons of sulfur.

 

  Cactus. This facility contains 22 plants that together in 2016 produced 716 million cubic feet per day of dry gas, 22.9 thousand barrels per day of ethane, 29.2 thousand barrels per day of liquefied gas, 15.5 thousand barrels per day of naphtha and 271.3 thousand tons of sulfur.

 

  Ciudad Pemex. This facility contains eight plants that together in 2016 produced 610.4 million cubic feet per day of dry gas and 126.1 thousand tons of sulfur.

 

  La Venta. This facility contains one plant that in 2016 produced 128.2 million cubic feet of dry gas per day.

 

  Matapionche.This facility contains five plants that together in 2016 produced 14.6 million cubic feet per day of dry gas, 0.7 thousand barrels per day of liquefied gas, 0.2 thousand barrels per day of naphtha and 3.5 thousand tons of sulfur.

 

  The Morelos, Cangrejera and Pajaritos facilities form the Coatzacoalcos area gas processing complex (which we refer to as a GPC):

 

  Morelos. This facility contains one plant that in 2016 produced 27.9 thousand barrels per day of ethane, 26.8 thousand barrels per day of liquefied gas and 8.3 thousand barrels per day of naphtha.

 

  Cangrejera. This facility contains two plants that together in 2016 produced 26.8 thousand barrels per day of ethane, 28.7 thousand barrels per day of liquefied gas and 8.4 thousand barrels per day of naphtha.

 

  Pajaritos. This facility contains one plant that produced 3.7 thousand barrels per day of ethane in 2016.

 

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The following facilities are located in the Northern region:

 

  Burgos.This facility contains nine plants that together in 2016 produced 534.4 million cubic feet per day of dry gas, 11.6 thousand barrels per day of liquefied gas and 13.1 thousand barrels per day of naphtha.

 

  Poza Rica. This facility contains five plants that together in 2016 produced 134.5 million cubic feet per day of dry gas, 3.7 thousand barrels per day of liquefied gas, 1.2 thousand barrels per day of naphtha and 0.6 thousand tons of sulfur.

 

  Arenque.This facility contains three plants that together in 2016 produced 30.2 million cubic feet per day of dry gas and 3.4 thousand tons of sulfur.

The following tables set forth our processing capacity, as well as our total natural gas processing and production, for the five years ended December 31, 2016.

Gas and Aromatics’ Processing and Production Capacity(1)

 

     Year ended December 31, 
     2012     2013     2014     2015     2016 
     

(in millions of cubic feet per day,

except where otherwise indicated)

 

Sweetening plants

                    

Sour condensates(1)

     144      144      144      144      144 

Sour natural gas(2)(3)

     4,503      4,503      4,523      4,523      4,523 

Natural gas liquids recovery plants

                    

Cryogenics

     5,912      5,912      5,912      5,912      5,912 

Natural gas liquids fractionating(2)(4)

     569      569      569      569      591 

Processing of hydrosulfuric acid

     219      219      219      219      219 

Aromatic compounds and derivates(Cangrejera and Independencia)(5)(6)

                       1,694      1,694 

 

(1)Production capacity refers to aromatic compounds and derivatives.
(2)In thousands of barrels per day.
(3)In 2014, following a review of the sour natural gas processing capacity of the Poza Rica Complex reflecting an increase in capacity from 230 to 250 million cubic feet per day, the total installed sour natural gas processing capacity of thePemex-Gas and Basic Petrochemicals increased from 4,503 to 4,523 million cubic feet per day.
(4)The liquids fractionating plant at the Reynosa complex has been out of service since August 31, 2009.
(5)Thousand tons per year.
(6)Since November 2015, the operation of the Methanol I and II plants, the CPQ Independencia petrochemical specialties plant and the CPQ Cangrejera aromatic compounds plants have been assigned to Pemex Industrial Transformation.

Source: Pemex BDI.

 

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Natural Gas, Condensates and Aromatics’ Processing and Production(1)

 

     Year ended December 31,     2016
vs. 2015
 
     2012     2013     2014     2015     2016     
     (in millions of cubic feet per day,
except where otherwise indicated)
     (%) 

Processing

                        

Wet gas

     4,382      4,404      4,343      4,073      3,672      (9.8

Sour gas

     3,395      3,330      3,356      3,225      2,997      (7.1

Sweet gas(2)

     987      1,074      986      847      675      (20.3

Condensates(3)(6)

     46      46      49      45      41      (8.9

Gas to natural gas liquids extraction

     4,346      4,381      4,303      3,904      3,450      (11.6

Wet gas

     4,206      4,234      4,172      3,745      3,394      (9.4

Reprocessing streams(4)

     140      147      131      159      56      (64.8

Production

                        

Dry gas(5)

     3,692      3,755      3,699      3,454      3,074      (11.0

Natural gas liquids(6)(7)

     365      362      364      327      308      (5.8

Liquefied petroleum gas(6)(8)

     204      206      205      174      159      (8.6

Ethane(6)

     115      109      110      107      106      (0.9

Naphtha(6)

     72      73      77      69      62      (10.1

Sulfur(9)(11)

     1,011      1,029      962      858      673      (21.6

Methanol(9)

     151      157      168      161      145      (9.9

Aromatic compounds and derivatives(9)(10)

     166      799      1,017      1,022      940      (8.0

Others(9)(12)

     31      588      899      535      507      (5.2

 

Note: Numbers may not total due to rounding.

GPC = Gas Processing Complex

(1)Excludes operations of our exploration and production segment, which produced 5,792.5 million cubic feet per day in 2016.
(2)Includes sweet vapor from condensates.
(3)Includes internal streams.
(4)Reprocessing of pipeline dry gas at the Pajaritos cryogenic plant.
(5)Includes ethane reinjected into the natural gas stream.
(6)In thousands of barrels per day.
(7)Includes stabilized condensates, reprocessing streams from the Cangrejera petrochemical complex and other streams for fractionating.
(8)Includes production from GPC, refineries and transfers from Pemex Exploration and Production.
(9)In thousands of tons.
(10)Includes aromine 100, benzene, styrene, toluene, ethylbenzene, fluxoil, high octane hydrocarbon and xylenes.
(11)Production of gas processing GPCs and refineries.
(12)Includes butanes, petrochemical specialties, pentanes, hexane, hydrogen, BTX liquids, isopentanes and petroleum products, naphtha gas, petrol octane base and heavy naphtha.

Source: Pemex BDI.

Domestic consumption of dry gas totaled 3,347.3 million cubic feet per day in 2016, a 3.1% increase from the 2015 domestic consumption of 3,246.8 million cubic feet per day.

We import dry gas to satisfy shortfalls in our production and to meet demand in areas of northern Mexico that, due to their distance from the fields, can be supplied more efficiently by importing natural gas from the United States. In August 2013, we announced a natural gas supply strategy developed in partnership with the Mexican Government to address the domestic natural gas shortages. Under this strategy, we will increase our liquefied natural gas imports in the short term. See “—Business Overview—Industrial Transformation—Gas and Aromatics—Natural Gas Supply Strategy” in this Item 4. In 2016, we imported 1,933.9 million cubic feet per day of natural gas, an increase of 36.6% from the 1,415.8 million cubic feet per day imported in 2015, due to lower availability of sour wet natural gas and dry gas from our exploration and production segment’s fields. The total amount of natural gas imported per day in 2016 included 103.2 million cubic feet of liquefied natural gas imported through Manzanillo.

We process sour and sweet condensates from our exploration and production segment in order to obtain stabilized natural gas liquids and also recover liquid hydrocarbons obtained from the processing of sweet natural

 

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gas. In addition, we obtain natural gas liquids from internal streams and liquid hydrocarbons condensed in sour wet gas pipelines. Our production of natural gas liquids, including stabilized condensates, reprocessing and other fractionating streams, decreased by 5.8% from 327 thousand barrels per day in 2015 to 308 thousand barrels per day in 2016.

We process sour condensates, which have a higher sulfur content, to produce stabilized sweet condensates. The volume of sour condensates we processed from our exploration and production segment and internal streams of our gas and aromatic compoundsub-segment totaled 41 thousand barrels per day in 2016, an 8.8% decrease from the 45 thousand barrels per day processed in 2015. We also process sweet condensates at our Burgos facilities to produce light and heavy natural gasoline.

The production of aromatic compounds and derivatives decreased 8.0%, from 1,021.7 thousand tons in 2015 to 940.2 thousand tons in 2016 due to operational challenges in the continuous catalyst regeneration and styrene plants throughout the year.

Natural Gas Supply Strategy

On August 13, 2013, we and the Mexican Government presented a strategy to address domestic natural gas shortages in the short-, medium- and long-term. In the short-term, we have increased our liquefied natural gas imports, which increased by 36.3% in 2016, from 1,418.4 million cubic feet per day in 2015 to 1,933.9 million cubic feet per day in 2016, including imports of natural gas through Manzanillo. On January 1, 2016, as part of the opening of the natural gas market, we transferred certain of our transportation assets to CENAGAS in a step towards that goal.

Over the five years ended December 31, 2016, the value of our domestic sales was distributed as follows:

Value of Gas and Aromatics’ Domestic Sales(1)

 

  Year ended December 31,  2016
vs. 2015
 
  2012  2013  2014  2015  2016  
  (in millions of pesos)(2)  (%) 

Natural gas

  Ps.50,233.0   Ps.68,128.7   Ps.78,666.4   Ps.53,037.3   Ps.67,536.5   27.3 

Liquefied petroleum gas

  64,966.5   71,728.9   78,258.9   78,194.0   50,179.8   (35.8

Ethane(3)

     32.3   283.6   310.7   1,284.7   313.5 

Heptane

  8.6   62.7   39.1   1.0      (100.0

Propane

  69.6   70.3   92.4   57.6   73.8   28.1 

Light naphtha

        2.8   39.7   84.5   112.9 

Heavy naphtha

     4.4   15.7   191.0   404.8   111.9 

Sulfur

  1,167.2   659.6   795.9   926.1   585.7   (36.8

Methanol

  665.3   733.9   775.5   748.4   625.1   (16.5

Aromatic compounds and derivatives(4)

  2,979.4   3,641.4   4,427.5   3,479.4   2,122.1   (39.0

Others(5)

  192.4   347.7   658.9   400.2   261.5   (34.7
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total

  Ps.120,282.0   Ps.145,409.9   Ps.164,016.7   Ps.137,385.4   Ps.123,158.5   (10.4
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Note: Numbers may not total due to rounding.

(1)Excludes value added tax.
(2)Figures are stated in nominal pesos.
(3)Ethane sales to Petroquímica Mexicana de Vinilo S.A. de C.V. began in October 2013. In January 2016, we began the supply of ethane to Braskem IDESA.
(4)Includes aromine 100, benzene, styrene, toluene, xylene.
(5)Includes petrochemical specialties, hydrogen, isopropane, heptane, hexane, pentane and naphtha gas.

Source: Pemex BDI.

 

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The volume of our domestic sales of gas and aromatics for the five-year period ended December 31, 2016 was distributed as follows:

Volume of Gas and Aromatics’ Domestic Sales

 

  Year ended December 31,  2016
vs. 2015
 
      2012          2013          2014          2015          2016      
  (in thousands of barrels per day, except where otherwise indicated)  (%) 

Natural gas(1)

  3,387.7   3,463.5   3,451.2   3,246.8   3,347.3   3.1 

Liquefied petroleum gas(2)

  286.5   284.3   282.1   278.8   202.1   (27.5

Ethane (3)

     0.8   5.8   8.8   30.5   246.6 

Heptane

  0.5   3.9   3.0   0.1      (100.0

Propane

  8.2   9.3   9.7   10.1   11.3   11.9 

Heavy naphtha(4)

     0.4   1.5   29.9   64.3   115.1 

Light naphtha(4)

        0.3   6.2   13.3   114.5 

Sulfur(4)

  649.1   520.7   655.3   572.7   580.5   1.4 

Methanol(4)

  107.7   100.1   110.9   112.0   111.3   (0.6

Aromatic compounds and derivatives(4)(5)

  161.4   197.4   246.8   240.0   155.1   (35.4

Others(4)(6)

  12.5   25.9   51.3   40.6   29.7   (26.8
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total

  4,613.6   4,606.3   4,817.9   4,546.0   4,545.4   (0.01
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Note: Numbers may not total due to rounding.

(1)In millions of cubic feet per day.
(2)In thousands of barrels per day.
(3)Ethane sales to Petroquímica Mexicana de Vinilo S.A. de C.V. began in October 2013.
(4)In thousands of tons per year.
(5)Includes aromine 100, benzene, styrene, toluene and xylene.
(6)Includes petrochemical specialties, hydrogen, isopropane, heptane, hexane, pentane and naphtha gas.

Source:Pemex BDI.

In 2016, the value of our domestic sales decreased by 10.4%, as compared to 2015, to Ps. 123,158.4 million, primarily as a result of a decrease in domestic sales of LPG. Domestic sales of LPG decreased by 27.5%, as compared to 2015, to 202.1 thousand barrels per day due to price decreases driven by competition from private companies able to import LPG as of March 2016 pursuant to the energy reform. Domestic sales of natural gas increased by 3.1%, as compared to 2015, to 3,347.3 million cubic feet per day due to increasing domestic demand in the industrial sector, which accounts for 29.7% of total domestic sales. Demand in the electric sector decreased by 7.5%. Domestic sales of sulfur increased by 1.4%, as compared to 2015, to 580.5 thousand tons due to a greater than expected demand from private chemical companies. Domestic sales of aromatic compounds and derivatives decreased by 35.4%, as compared to 2015, to 155.1 thousand tons due to decreased production resulting from operational difficulties at the CRR and styrene plants.

Subsidiaries of Pemex Industrial Transformation

Pemex Industrial Transformation conducts certain management, real estate and distribution activities through its subsidiaries and through certain joint ventures. The following table lists its subsidiaries, their principal operating activities and Pemex Industrial Transformation’s ownership interest as of December 31, 2016.

 

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Subsidiaries of Pemex Industrial Transformation(1)

 

Subsidiary

  

Principal Activity

  Ownership
Interest (%)
 

Mex Gas Internacional, S.L.(2)

  

Holding company

   100.00 

Pasco International, Ltd.

  

Holding company

   100.00 

Terrenos para Industrias, S.A.

  

Real estate holding company

   100.00 

 

(1)As of December 31, 2016.
(2)Mex Gas Internacional, S.L. is the only subsidiary of Pemex Industrial Transformation that is a consolidated subsidiary company. See Note 4 to our consolidated financial statements included herein.

Source: Pemex Industrial Transformation

The following table lists Pemex Industrial Transformation’s joint ventures, its principal operating activities and Pemex Industrial Transformation’s ownership interests as of December 31, 2016.

Joint Ventures of Pemex Industrial Transformation(1)

 

Subsidiary

  

Principal Activity

  Ownership
Interest (%)
 

CH4 Energía, S.A. de C.V.

  

Gas trading

   50.00 

Ductos y Energéticos del Norte, S. de R.L. de C.V.

  

Holding company

   50.00 

 

(1)As of December 31, 2016.

Source: Pemex Industrial Transformation

Divestitures

On July 31, 2015, we announced the divestiture of our 50% ownership interest in the Gasoductos de Chihuahua, S. de R.L. de C.V. (Gasoductos de Chihuahua) joint venture with Infraestructura Energética Nova, S.A.B. de C.V. (IEnova). IEnova shareholders approved the transaction in September 2015. On September 15, 2016, Mexico’sComisión Federal de Competencia Económica (Federal Economic Competition Commission or COFECE) approved the proposed direct sale to IEnova as it was structured, which included a competitive bidding process with respect to Gasoducto San Fernando and LPG Ducto TDF. The initial divestiture did not include Gasoductos de Chihuahua’s subsidiary company, Ductos y Energéticos del Norte, S. de R.L. de C.V., so Pemex Industrial Transformation retained a 50% share participation. On September 28, 2016, we announced the divestiture of our interest in Gasoductos de Chihuahua. IEnova’s interest in the company increased from 50% to 100%. The transaction was valued at US$ 1,143.8 million.

Los Ramones

The Los Ramones pipeline project, which is being implemented in two phases, is part of a strategy to supply central Mexico with natural gas imported from the United States. When complete, the Los Ramones pipeline is projected to have a transportation capacity of 3,530 million cubic feet per day and an approximate length of 859.4 km. Phase one of the pipeline project is complete and currently serves to address the natural gas deficit in the country with a maximum capacity of 2,100 million cubic feet per day. Phase two of this project, with a total capacity of 1,430 million cubic feet per day and consisting of the construction of a pipeline running from Los Ramones, Nuevo León to Apaseo el Alto, Guanajuato, is further subdivided into two stages: Ramones Norte totaling 452 km in length and Ramones Sur totaling 291 km in length. TAG Pipelines, S. de R.L. de C.V. (an indirect subsidiary of Pemex Industrial Transformation, which we refer to as TAG Pipelines) developed the project through partnerships for each of these stages. In 2016, commercial operations for this pipeline project commenced. On January 1, 2016, the transport service contract was transferred to CENAGAS, which is now responsible for monitoring the operations of the Los Ramones system and for payment of transportation services.

 

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Pricing Decrees

The energy reform provides for fuel price liberalization, which began in January 2017. Our sales will continue to be regulated by the Energy Regulatory Commission until COFECE determines that there is effective competition in the wholesale market.

The Mexican Government currently determines natural gas prices for domestic sales, which are calculated in accordance with directives issued by the Energy Regulatory Commission on July 20, 2009 and the related Resolutions of December 20, 2010, March 3, 2011, December 20, 2012, January 17, 2013, March 21, 2013 and December 3, 2013, by which the Energy Regulatory Commission approved and issued a temporary methodology for determining the maximum prices of natural gas of first-hand sales. On February 15, 2016, the Energy Regulatory Commission issued a new methodology which, effective March 1, 2016, determines the maximum first-hand sales price of natural gas. These prices aim to reflect natural gas opportunity costs and competitive conditions in international markets and at the point of sale.

Since 2003, price control mechanisms for LPG have been implemented through governmental decrees. In January 2010, the Mexican Government issued a decree establishing the maximum weighted averageend-user price of LPG before taxes of Ps. 8.08 per kilogram. Subsequently, as of February 2010, the Mexican Government established monthly maximum price increases in cents per kilogram before taxes, as follows:

 

                             Period                            

  Mexican Cents per Kilogram 

February 2010 to July 2011

   5 

August to November 2011

   7 

December 2011

   8 

January 2012 to October 2013

   7 

November to December 2013

   9 

January to December 2014

   9

January 2015

   23

January 2016

   34** 

 

 *On January 1, 2014 and 2015, pursuant to the IEPS Tax on Fossil Fuels, a price increase of 12 and 13 Mexican cents per kilogram, respectively, went into effect in addition to the monthly price increase of nine Mexican cents per kilogram in 2014 and ten Mexican cents per kilogram in 2015; this resulted in a total increase of 23 Mexican cents per kilogram in 2015. The ten Mexican cent per kilogram increase in January 2015 was aone-time increase for the year, and no further monthly increases were established for the remainder of 2015.
 **The 34 Mexican cent per kilogram increase in January 2016 was aone-time increase for the year, and no further monthly increases were established for the remainder of 2016.

Beginning in August 2014, the methodology for calculatingend-user price was modified from weighted average prices to simple average prices.

On January 1, 2016, the Mexican Government issued a decree establishing aone-time price increase of 34 Mexican cents per kilogram, which was effective until August 16, 2016. On August 17, 2016, the Mexican Government authorized an end user discount of 9.97%, which was effective until December 31, 2016. Since January 1, 2017, we have sold natural gas in accordance with the new methodology for determining first-hand sales, and all end user prices have been freely determined by the market.

The Mexican Government could modify these price controls or impose additional price controls in the future. See “Item 3—Key Information—Risk Factors—Risk Factors Related to our Relationship with the Mexican Government—The Mexican Government has historically imposed price controls in the domestic market on our products.”

 

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Natural Gas Hedging Operations

We offer, as a value-added service, various hedging contracts to our domestic customers to protect them against fluctuations in the prices of natural gas. For information on hedging contracts offered to natural gas domestic customers, see “Item 11—Quantitative and Qualitative Disclosures about Market Risk.”

Gas and Aromatics Capital Expenditures

Our gas and aromatics business invested Ps. 3,446 million in capital expenditures in 2016 and has budgeted Ps. 2,450 million in capital expenditures for 2017.

The following table sets forth our gas and aromatics business’ capital expenditures, excludingnon-capitalizable maintenance, for each of the three years ended December 31, 2016, and the budget for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

Gas and Aromatics’ Capital Expenditures

 

   Year ended December 31,(1)   Budget
2017(2)
 
   2014   2015   2016   
   (in millions of pesos)(3) 

Gas and Aromatics

  

Modernization of Transportation Areas of GPCs

   Ps. 252    Ps. 534    Ps. 482    Ps. 296 

Modernization of Measuring, Control and Security Systems of GPCs

   187    463    481     

Refurbishment and Modernization of Natural Gas Turbocompressors of the Cryogenic Plants at Nuevo Pemex GPC

   27    143    257    47 

Modernization and Rehabilitation of Facilities of the Supply and Water Treatment System at Nuevo Pemex GPC

   117    344    255    62 

Integral Project of Electric Reliability at GPCs

   240    474    177    5 

Adaptation of Fractionation Plants and Conversion of the Liquids Sweetener at Nuevo Pemex GPC

   880    320    174    36 

Refurbishment of Refrigerating and Ethane Turbocompressors of Fractionating Plants at Nuevo Pemex GPC

       199    119     

Integral Maintenance of Gas Sweetening Plants 1, 2, 3 and 12 at Cactus GPC

   30    109    116    117 

Conservation and Modernization of the Storage Area at Coatzacoalcos Area GPC

   286    208    88    35 

Security Requirements for Improvement of Operational Reliability of the GPCs

   74    211    87    24 

Conditioning of the Venting Systems at Cactus GPC

       109    75    2 

Conservation of Processing Capacity at Nuevo Pemex GPC

   504    180    70     

Conservation of Operational Reliability at Ciudad Pemex GPC

   352    196    31    21 

Efficiency in Storage and Distribution I

   142    102    27     

 

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   Year ended December 31,(1)   Budget
2017(2)
 
   2014   2015   2016   
   (in millions of pesos)(3) 

Conditioning of Facilities for Ethane Supply at Cactus GPC

   313    234    21    2 

Integral Facilities Maintenance at Cactus GPC

   113    137    21     

Others

   8,797    1,691    965    1,803 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   Ps. 12,314    Ps. 5,654    Ps. 3,446    Ps. 2,450 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

          GPC = Gas Processing Complex.

          PC = Petrochemical Complex.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2014, 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

Ethane Supply Contract

On February 19, 2010, we entered into a contract to supply 66,000 barrels per day of ethane to the Etileno XXI project, a petrochemical complex in Nanchital, Veracruz that will produce ethylene and polyethylene. The Etileno XXI project is being developed and will be owned and operated by Braskem-IDESA, a Brazilian-Mexican consortium. In order to meet the obligations of this contract, we made adjustments to the infrastructure of our gas processing plants in the Ciudad Pemex, Nuevo Pemex and Cactus. Additional ethane will be transported from the GPCs located in Tabasco, in southeastern Mexico, to Coatzacoalcos, Veracruz. This contract provides for “take or pay—delivery or pay” obligations for the parties, and thus, in case of breach of our supply obligation, we are subject to the payment of liquidated damages. In the event of termination as a consequence of our material default under the ethane supply contract, we may be obligated to pay to the other parties involved in the project an amount equal to the termination value of this project (the value of which is determined pursuant to the contract and takes into consideration, among other factors, the outstanding debt of the project and the amount invested in the project at such time). The Etileno XXI project commenced operations on March 18, 2016. By December 31, 2016, we had supplied 562.8 million cubic meters of ethane for a total of Ps. 1,426 million. Also as of December 31, 2016, construction of the pipeline to transport ethane from the gas processing plants located in Tabasco, in Southeastern Mexico, to Coatzacoalcos, Veracruz, was complete.

Fertilizers

Our fertilizers segment operates through the productive state-owned subsidiary Pemex Fertilizers, produces ammonia and carbon dioxide and integrates the ammonia production chain up to the point of sale of fertilizers.

Capacity

At the end of 2016, we owned four petrochemical plants, three of which are in operation, for the production of petrochemical products mainly those classified as“non-basic.” We had a total production capacity per unit of 480 thousand tons of petrochemicals per year in 2016. Three of these plants produce ammonia and have an installed capacity of 1,440 thousand tons per year in 2015 and 2016.

 

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The total production capacity of our operating plants for the last two years was distributed among our facilities as set forth below:

Fertilizers’ Total Capacity

 

   Year ended December 31, 

Petrochemical Complexes

  2015   2016 
   (thousands of tons) 

Cosoleacaque (ammonia)

   1,440    1,440 

 

Source: Pemex Fertilizers.

Production

The following table summarizes the annual production of our fertilizers segment for the two years ended December 31, 2016.

Fertilizers’ Production

 

   Year ended December 31, 
   2015   2016   2016
vs. 2015
 
   (thousands of tons)   (%) 

Methane Derivatives

      

Ammonia

   575    533    (7.3

Carbon dioxide

   830    786    (5.3
  

 

 

   

 

 

   

Total

   1,405    1,319    (6.1
  

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

Source: Pemex BDI.

Total annual production of methane derivatives in 2016 decreased 6.1% from 1,405 thousand tons in 2015 to 1,319 thousand tons in 2016, mainly due to low gas supply and operations failures in our ammonia plants.

In 2016 we produced 533 thousand tons of ammonia, which represents a decrease of 7.3% as compared to 575 thousand tons produced in 2015. In 2016, we produced 786 thousand tons of carbon dioxide, aby-product of the production process, which represents a 5.3% decrease as compared to 2015.

Sales of Fertilizers

The following table sets forth the value of our domestic sales for the two years ended December 31, 2016:

Value of Fertilizers Segments’ Domestic Sales(1)

 

   Year ended December 31, 
       2015           2016       2016
    vs. 2015    
 
   (in millions of pesos)(2)   (%) 

Methane Derivatives

      

Ammonia

   Ps. 4,414.6    Ps. 4,593.1    4.0 

Carbon dioxide

   69.9    90.2    29.0 

Urea (resale)

   46.5    6.9    (85.2
  

 

 

   

 

 

   

Total

   Ps. 4,531.0    Ps. 4,690.2    3.5 
  

 

 

   

 

 

   

 

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Note:Numbers may not total due to rounding.
(1)Excludes value added tax.
(2)Figures are stated in nominal pesos.

Source:Pemex BDI.

In 2016 the value of domestic sales in our fertilizers segment increased by 3.5%, from Ps. 4,531.0 million in 2015 to Ps. 4,690.2 million in 2016, primarily due to an increase in the volume of sales of ammonia, as presented in more detail below.

Volume of sales

The following table sets forth the value of our domestic sales for the two years ended December 31, 2016:

Volume of Fertilizers Segment’s Domestic Sales

 

   Year ended December 31, 
   2015   2016   2016
vs. 2015
 
   (thousands of tons)   (%) 

Methane Derivatives

      

Ammonia

   643.4    752.8    17.0 

Carbon dioxide

   166.0    179.7    8.3 

Urea (resale)

   10.0    1.7    (83.0
  

 

 

   

 

 

   

Total

   819.4    934.2    14.0 
  

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

(1)In thousands of tons.

Source:Pemex BDI.

Fertilizers Capital Expenditures

Our fertilizers segment invested Ps. 379 million in capital expenditures in 2016 and has budgeted Ps. 444 million in capital expenditures for 2017. The following table sets forth our fertilizers segment’s capital expenditures, excludingnon-capitalizable maintenance, for each of the two years ended December 1, 2016, and the budget for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

 

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Fertilizers Segments’ Capital Expenditures

 

     Year ended December 31,(1)     Budget
2017(2)
 
   2015   2016   
   (in millions of pesos)(3) 

Fertilizers

      

Rehabilitation of Ammonia Plant IV and Integration and Auxiliary Services for Cosoleacaque PC

   Ps. 791    Ps. 295    Ps. 225 

Efficiency in Storage and Distribution of Pemex-Petrochemicals

       45    68 

Maintaining the Production Capacity of Ammonia Plant VII and its Auxiliary Services at Cosoleacaque PC

   101    18     

Maintaining the Production Capacity of Ammonia Plant VI at Cosoleacaque PC

   97    16     

Safety and Environmental Protection, Derived from Observations and Regulations II in Cosoleacaque PC

   43    5     

Rehabilitation of Primary Reformers and Auxiliary Ammonia Plant VI and VII of Cosoleacaque PC

           126 

Others

   12        24 
  

 

 

   

 

 

   

 

 

 

Total

   Ps. 1,044    Ps. 379    Ps. 444 
  

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

          PC = Petrochemical Complex.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

In 2016, we invested Ps. 379 million in our fertilizers segment and expect to invest Ps. 444 million to our fertilizers segment in 2017.

Pajaritos Petrochemical Complex

On January 16, 2014, our subsidiary company P.M.I. Norteamérica, S.A. de C.V. signed an agreement through one of its subsidiaries to purchase the existing assets of Agro Nitrogenados, S.A. de C.V., a subsidiary of Minera del Norte, S.A. de C.V., including a closed fertilizer production facility located in Pajaritos, Veracruz, Mexico, for the purchase price of U.S. $275 million, which was subsequently lowered to U.S. $273 million. The renovation of the facility will involve restoring operations of our rotating, static and mechanical equipment, building a carbon dioxide compressor station, as well as other auxiliary projects. We expect to begin operations in the fourth quarter of 2017 and to have an annual production capacity of up to 990,000 tons of urea.

Acquisition of Fertinal

On January 28, 2016, PMX Fertilizantes Pacífico, S.A. de C.V., one of our subsidiaries, acquired 99.99% of the outstanding shares of Fertinal, for a total purchase price of Ps. 4,322.8 million. The net value of Fertinal’s assets is Ps. 315.8 million (consisting of total assets of Ps. 12,341.1 million and total liabilities of Ps. 12,025.3 million) and a goodwill of Ps. 4,007.0 million. As of December 31, 2016, a calculation of the impairment of goodwill resulted in the complete cancellation of that amount. See Note 22 to our consolidated financial statements contained herein.

 

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Fertinal’s total production capacity for the last year is as set forth below:

Fertinal’s Total Capacity

 

     Year ended December 31, 2016   
   (thousands of tons) 

Nitrate and phosphates

   1,299 

 

Source: Fertinal Group.

Fertinal’s total production for the last year is set forth below:

Fertinal’s Production

 

     Year ended December 31, 2016   
   (thousands of tons) 

Phosphates

   184.3 

Nitrate

   136.4 

Others

   80.3 
  

 

 

 

Total

   401.0 
  

 

 

 

 

Source: Fertinal Group.

The following table sets forth the value of Fertinal’s domestic sales for the year ended December 31, 2016:

Value of Fertinal’s Domestic Sales(1)

 

     Year ended December 31, 2016   
   (in millions in pesos)(2) 

Phosphates

   Ps. 1,265.8 

Nitrogenated

   857.5 

Others

   522.9 
  

 

 

 

Total

   Ps. 2,646.3 
  

 

 

 

 

Note: Numbers may not total due to rounding.

(1)Excludes value added tax.
(2)Figures are stated in nominal pesos.

Source: Fertinal Group.

We intend to incorporate Fertinal into the gas ammonia solid fertilizers value chain in order to offer a wide range of fertilizers and to cover approximately 50% of the domestic market. We are also assessing the possibility of selling this integrated business in the future.

Ethylene

Our ethylene segment operates through the productive state-owned subsidiary Pemex Ethylene and takes advantage of the integration of the ethylene production chain by manufacturing various petrochemical products. Our ethylene segment manufactures various petrochemical products, including:

 

  ethane derivatives, such as ethylene, polyethylene, low density polyethylene, ethylene oxide and glycols;

 

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  propylene and derivatives, such as acrylonitrile and propylene; and

 

  others such as oxygen, nitrogen, hydrogen, butadiene and CPDI, among other products.

Capacity

Total production capacity of our operating plants for the last two years was distributed among our facilities as set forth below:

Ethylene Segments’ Production Capacity

 

     Year ended December 31,   
   2015   2016 
   (in thousands of tons) 

Petrochemical Facility

  

Cangrejera(1)

   1,321    1,321 

Morelos

   2,277    2,277 
  

 

 

   

 

 

 

Total

   3,598    3,598 
  

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

(1)Our ethylene segment’s capacity in Cangrejera does not include products from the aromatics and derivatives chain. These products belong to Pemex Industrial Transformation.

Source: Pemex Ethylene.

Production

The following table sets forth our ethylene segment’s production for the two years ended December 31, 2016:

Ethylene Segment’s Production(1)

 

       Year ended December 31,     
       2015           2016       2016
vs. 2015
 
   (in thousands of tons)   (%) 

Ethane derivatives

   1,992.8    1,690.7    (15.2

Propylene and derivatives

   66.0    42.8    (35.2

Others

   910.9    795.2    (12.7
  

 

 

   

 

 

   

Total(1)

   2,969.7    2,528.7    (14.8
  

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

(1)Figures include petrochemical products used as raw material to produce other petrochemicals.

Source: Pemex BDI.

In 2016, our total production in the ethylene segment decreased 14.8%, from 2,969.7 thousand tons in 2015 to 2,528.7 thousand tons in 2016, primarily due to a decrease in the production of ethylene at the Cangrejera petrochemical complex and a reduced supply of ethane gas from our third-party supplier.

 

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Domestic Sales

The following table sets forth our ethylene segment’s domestic sales for the two years ended December 31, 2016.

Value of Ethylene Segments’ Domestic Sales(1)

 

   Year ended December 31, 
   2015   2016   2016
vs. 2015
 
   (in millions of pesos)(2)   (%) 

Ethane derivatives

   Ps.15,580.6    Ps. 14,539.4    (6.7

Propylene and derivatives

   1,156.5    788.3    (31.8

Others

   104.0    64.8    (37.7
  

 

 

   

 

 

   

Total

   Ps. 16,841.1    Ps. 15,392.5    (8.6
  

 

 

   

 

 

   

 

Note: Numbers may not total due to rounding.

(1)Excludes value added tax.
(2)Figures are stated in nominal pesos.

Source: Pemex BDI.

In 2016, our domestic sales decreased by 8.6% in 2016, from Ps. 16,841.1 million in 2015 to Ps. 15,392.5 million in 2016. This decrease was primarily due to lower production of high density polyethylene, low density polyethylene and ethylene oxide, which was partially offset by an increase in the sales of low linear density polyethylene in 2016 as compared to 2015.

Sales to other Subsidiary Entities

The following table sets forth the intercompany sales of petrochemical products for the two years ended December 31, 2016.

Ethylene Segment’s Intercompany Sales(1)

 

   Year ended December 31, 
       2015           2016       2016
    vs. 2015    
 
   (in millions of pesos)(2)   (%) 

Ethane and derivatives

   Ps. 84.7    Ps. 109.8    29.6 

Others

   91.9    373.7    306.6 
  

 

 

   

 

 

   

 

 

 

Total

   Ps. 176.6    Ps. 483.5    173.8 
  

 

 

   

 

 

   

 

 

 

 

Note: Numbers may not total due to rounding.

(1)Excludes value added tax.
(2)Figures are stated in nominal pesos.

Source:Pemex Ethylene.

In 2016, our intercompany sales increased by 173.8%, from Ps. 176.6 million in 2015 to Ps. 483.5 million in 2016. This increase was primarily due to an increase in the sales of pyrolysis liquids and nitrogen.

Ethylene Capital Expenditures

Our ethylene segment invested Ps. 746 million in capital expenditures in 2016, and has budgeted Ps. 1,786 million for capital expenditures in 2017.

 

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The following table sets forth our ethylene segment’s capital expenditures, excludingnon-capitalizable maintenance, for each of the two years ended December 31, 2016, and the budget for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

Ethylene’s Capital Expenditures

 

   Year ended December 31,(1)   Budget
2017(2)
 
   2015   2016   
   (in millions of pesos)(3) 

Ethylene

      

Maintaining the Production Capacity of Ethylene Plant 2013-2015 at Morelos PC

   Ps. 93    Ps. 122    Ps.— 

Modernization and Optimization of Auxiliary Services Infrastructure I at Morelos PC

   5    105    213 

Modernization of Fire Protection Network at Cangrejera PC

   102    71    118 

Safety and Environmental Protection Based on Observations and Regulations IV at Morelos PC

   114    43    1 

Maintaining Production Capacity of the Low Density Polyethylene Plant

   112    40    156 

Maintaining the Production Capacity of Ethane Derivatives Chain II at Morelos PC

   87    38    0 

Maintaining the Production Capacity of Auxiliary Services II

   78    27    32 

Maintaining the production capacity of ethylene oxide plant 2015-2017 at Morelos PC

   1    23    97 

Maintaining the Production Capacity of Auxiliary Services III

   59    17    19 

Maintaining the Production Capacity of Auxiliary Services at Morelos PC

   48    17    42 

Maintaining the Production Capacity of the Ethane Derivatives Chain III at Morelos PC

   54    8    2 

Maintaining the Production Capacity of the Mitsui plant 2015-2017 at Morelos PC

   4    8    24 

Maintaining the Production Capacity of the Swing Plant 2015-2017 at Morelos PC

   7    6    150 

Modernization and Expansion of Production Capacity of Ethane Derivatives Chain I at Morelos PC

   402    3    6 

Modernization and Optimization of Infrastructure and Auxiliary Services I at Cangrejera PC

   277         

Others

   426    219    927 
  

 

 

   

 

 

   

 

 

 

Total

   Ps. 1,869    Ps. 746    Ps. 1,786 
  

 

 

 �� 

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

         PC = Petrochemical Complex.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

 

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Joint Venture with Mexichem

We have a 44.1% interest in a joint venture with Mexichem S.A.B. de C.V., which we refer to as Mexichem, through an investment in Petroquímica Mexicana de Vinilo S.A. de C.V. (PMV), a Mexican entity incorporated by Mexichem in 2011. This joint venture allowed for the integration of the caustic soda-salt-chlorine-ethylene-vinyl chloride monomer production chain, which has streamlined operations and is expected to reduce manufacturing costs. Plants associated with this project began operating on September 12, 2013. The ethylene and vinyl chloride monomer plants are operated by employees of Pemex Ethylene. Vinyl chloride monomer plants and related infrastructure at the Pajaritos petrochemical complex were divested from Pemex-Petrochemicals and contributed to PMV. During 2016, our petrochemicals segment supplied 2.6 thousand barrels per day of ethane to PMV, a decrease of 71.1 % as compared to 8.8 thousand barrels per day in 2015.

As a result of an accident at vinyl chloride plant III on April 20, 2016, the vinyl chloride III and ethylene plants ceased operations and the soda plant began operating at reduced capacity, which led to a decline in sales of all products in 2016. The vinyl chloride plant was the only plant affected by the accident, and we are currently evaluating plants to resume operations. To date, the cause of the accident is unknown.

Drilling and Services

Our drilling and services segment operates through the productive state-owned subsidiary Pemex Drilling and Services and provides drilling, completion, work-over and other services for wells in offshore and onshore fields. During 2016, this segment mainly provided drilling services to Pemex Exploration and Production, but also began to provide services to third-party clients such as CONAGUA and the Armada Company.

As a result of our corporate reorganization, for the year ended December 31, 2015, we have presented operating results for our drilling and services segment together with results for our exploration and production segment. We have summarized some of these results below. For additional results for this segment, please see “—Exploration and Production—Exploration and Drilling” above in this Item 4. Operating results for these segments are presented separately for periods beginning January 1, 2016. When reviewing these results, please note that our exploration and production segment receives drilling services not only from our drilling and services segment but also from third parties. Accordingly, the amounts presented above under drilling activity do not relate only to services provided by our drilling and services segment. For a detailed description of the financial results of each segment, see our consolidated financial statements included herein.

During 2016, we drilled 93 wells, 41 onshore and 52 offshore; completed 92 wells, 41 onshore and 51 offshore; and made 617 workovers, 540 onshore and 77 offshore. Of the wells completed, two were for CONAGUA. Those services were performed with an average of 54 drilling and workover rigs, 24 terrestrial and 30 marine, including both owned and leased equipment. Moreover, we conducted 24,851 well services in 2016, of which 52.7% were wireline operations, 28.2% were cementing jobs, 16.0% were logging operations and perforations and 3.1% were coiled tubing operations.

Given the current state of the oil and gas industry and the decline in global oil prices, the demand for well drilling and services decreased in 2016 by approximately 12% as compared to 2015. In 2017, we expect well interventions to decrease by approximately 37.9% and we expect to operate an average of 35 rigs—16 land and 19 marine—including both owned and leased equipment, which represents a 35.2% decrease as compared to 2016. Of these, we expect that 13 land and 3 marine will be rigs we own, which is a 42.9% decrease as compared to 2016. By the end of 2017, we expect to be operating a total of 14 rigs—11 land and 3 marine rigs.

In 2016, we acquired two 3,000 hp land rigs for Ps. 1,442.3 million. Plans to acquire two marine rigs have been postponed due to delays in construction. In 2017, in accordance with our “Programa de modernización de la infraestructura de perforación” (Drilling Infrastructure Modernization Program), we expect to acquire two 200 hp land rigs for well repairs.

 

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Drilling and Services Capital Expenditures

Our drilling and services segment invested Ps. 2,688 million on capital expenditures in 2016 and has budgeted Ps. 1,580 million for capital expenditures in 2017.

The following table sets forth our drilling and services segment’s capital expenditures, excludingnon-capitalizable maintenance, for each of the two years ended December 31, 2016, and the budget for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

Drilling and Services’ Capital Expenditures

 

   Year ended
December 31, 2015(1)
   Budget
2017(3)
 
   2015(2)   2016   
   (in millions of pesos)(4) 

Drilling and Services

      

Acquisition of TwoJack-Up Platforms

   Ps.    553    Ps.    772    Ps.    838 

Acquisition of Nine Land-Based Drilling Rigs

   288    340    386 

Drilling Rig Equipment and Well Service Equipment Maintenance Program

       74    287 

Acquisition of Two Modular Drilling Rigs

   723        65 

Others

       1,501    3 
  

 

 

   

 

 

   

 

 

 

Total

   Ps. 1,564    Ps. 2,688    Ps. 1,580 
  

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

(1)Amounts based on cash basis method of accounting.
(2)Figures for the drilling and services segment for the year ended December 31, 2015 refer to capital expenditures since August 1, 2015, when Pemex Drilling and Services was formed.
(3)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(4)Figures for 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

Logistics

Our logistics segment operates through the productive state-owned subsidiary Pemex Logistics and provides land, maritime and pipeline transportation, storage and distribution services to some of our other subsidiary entities and to other companies, including CFE,Aeropuertos y Servicios Auxiliares, CENAGAS, local gas stations and distributors.

Transportation of Crude Oil and Refined Products

During 2016, we transported 58,016 millionton-kilometers of crude oil and petroleum products, an 11.3% decrease as compared to 2015 due to decreased production in our exploration and production segment, decreased processing of crude oil in our refineries and the illicit market in fuels which can lead to temporary pipeline closures. During 2016, we transported approximately 4,688 million cubic feet per day of natural gas, through an operation and maintenance service contract provided to CENAGAS. During 2016, we also transported 140 thousand barrels per day of LPG and 2,475 thousand barrels per day of crude oil and petroleum products to be processed in our refining system and to satisfy domestic demand for petroleum products, as compared to 174 thousand barrels per day of LPG and 3,181 thousand barrels per day of crude oil and petroleum products transported in 2015. Of the total amount we transported in 2016, we carried 79.5% of the transported volumes in 2016 through pipelines, 7.8% by vessels and the remaining 12.7% by train tank cars and trucks.

 

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During 2016, we transported approximately 5,440 million cubic feet per day of natural gas, an increase as compared to the 5,142 million cubic feet per day transported in 2015, partially due to the transportation of an estimated 655 million cubic feet per day for the CFE as agreed among the Ministry of Energy, the Energy Regulatory Commission and Pemex Industrial Transformation. On January 1, 2016, we began providing operation, maintenance and information technology services, among others, to CENAGAS in connection with its natural gas transportation infrastructure.

Our pipelines connect crude oil and natural gas producing centers with refineries and petrochemical plants, and our refineries and petrochemical plants with Mexico’s major cities. At the end of 2016, our pipeline network measured approximately 17,696 kilometers in length, of which 17,433 kilometers are operational and 263 kilometers are temporarily out of operation. These pipelines may be temporarily out of operation because of a decline in production in a field where the pipeline is located or because transportation service is irregular, making operation of the pipeline unprofitable. Once production is restored in that field, pipelines become operational again. We are currently analyzing the 263 kilometers of pipelines temporarily out of operation to determine if and how they may be used.

Approximately 5,259 kilometers of the pipelines currently in operation transport crude oil, 8,582 kilometers transport petroleum products and petrochemicals, 1,583 kilometers transport LPG, 1,982 kilometers transport basic and secondary petrochemicals and 290 kilometers transport other products, including fuel oil, jet fuel and water.

On January 1, 2016, the 9,168 kilometers of pipelines used to transport natural gas were transferred to CENAGAS. For more information, see Note 9 to our consolidated financial statements included herein.

We have been working to implement a pipeline integrity management plan, which is based on the guidelines of API Standard RP 1160, “Managing System Integrity for Hazardous Liquid Pipelines;” the American Society of Mechanical Engineers B31.8S, “Managing System Integrity of Gas Pipelines” andNOM-027.

The pipeline integrity management plan consists of the following stages:

 

  collection of detailed records and the development of a pipeline database;

 

  categorization and identification of threats that could affect pipeline integrity, safety and operation;

 

  identification of critical points in the pipeline;

 

  risk assessment and evaluation of pipeline integrity;

 

  maintenance and risk-mitigation planning; and

 

  ongoing monitoring during all stages.

We have made considerable progress towards satisfying the requirements ofNOM-027. Specifically, as of December 31, 2016, we have analyzed 96% of our overall logistics pipeline network. In addition, we have implemented several measures required by our pipeline integrity management plan, including our data collection requirements.

Despite having implemented strategies to improve the integrity and operation of our transportation pipeline network, we experienced 35 leaks and spills in 2016, which represents a 45.3% decrease as compared to 64 incidents in 2015. Of the 35 incidents we experienced in transportation pipelines in 2016, 14 were due to a failure in the mechanical integrity of the pipelines, two were due to third-party incidents and 19 were due to other factors.

The transportation of crude oil, natural gas and other products through a pipeline network is subject to various risks, including risks of leaks and spills, explosions and theft. In 2016, we incurred a total of Ps. 3,891.1 million in expenditures for the remediation and maintenance of our pipeline network and we have budgeted an additional Ps. 2,987.3 million for these expenditures in 2017. For more information on recent issues with our pipeline network, see “Item 3—Key Information—Risk Factors—Risk Factors Related to our

 

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Operations—We are an integrated oil and gas company and are exposed to production, equipment and transportation risks, criminal acts and deliberate acts of terror” and “—Environmental Regulation—Environmental Liabilities” below.

Other Transportation Equipment and Storage Facilities

As of December 31, 2016, we owned 16 refined product tankers and leased one. We also own 17 tugs, 1,485 tank trucks and 511 train tank cars, as well as 74 major wholesale storage and distribution centers, 10 liquefied gas terminals, five maritime terminals and 10 dock operation and maintenance facilities. These facilities, together with our pipeline network, constitute our oil and gas transportation and distribution infrastructure.

Our current fleet includes 17 vessels, of which we own 16 and lease one. Altogether, we have a transportation capacity of 4,618 thousand barrels. 67.5% of our vessels are located on the Pacific Coast and 32.4% are in the Gulf of Mexico. Of the vessels on the Pacific Coast, 83.7% are used to transport distillates, and 16.3% to transport fuel oil and heavy diesel. Of the vessels in the Gulf of Mexico, 82.5% are used for distillates and 17.5% for fuel oil and heavy diesel. Our vessel, BT Burgos, is currently out of operation due to an accident which occurred on September 24, 2016.

The plan for renewal and modernization of our fleet was concluded in 2014; however, we may resume renewal and modernization efforts pursuant to future demand for petroleum products or the retirement of a vessel in accordance with current international regulation.

On July 25, 2013, as part of a plan to modernize the fleet, we signed an agreement with the Secretaría de Marina—Armada de México (Mexican Navy), valued at approximately Ps. 3,212.1 million (U.S. $250.0 million), for the construction of 22 marine vessels for Pemex-Refining, now Pemex Industrial Transformation. The agreement initially included construction of 16 tugs, three multipurpose vessels and three barges, but was modified in 2016 to remove the construction of the three barges and extend the final delivery date to December 31, 2018. This transaction is now valued at approximately Ps. 4,346.4 million.

Treatment and Primary Logistics

Treatment and primary logistics systems are the pipeline systems between our oil fields and our refineries and delivery terminals. During 2016, Pemex Exploration and Production began to transfer its treatment and logistics systems to Pemex Logistics, including the transfer of the Misión, Altamira and Santuario systems on May 1, 2016, the Dos Bocas Maritime Terminal system on September 1, 2016, and the oil and gas South Terrestrial system on November 1, 2016. Altogether these systems include 1,357 kilometers of natural gas pipelines, 1,124 kilometers of crude oil pipelines and 401 kilometers of gasoline pipelines, as well as one maritime export terminal for crude oil.

During 2016, these treatment and primary logistics systems transported an average of 2,133 thousand barrels per day of crude oil, of which 935 thousand barrels per day were delivered to the National Refining System and 1,198 thousand barrels per day were delivered to export terminals. For our gas distribution, an average of 4,195 million cubic feet per day was transported in 2016, of which 3,699 million cubic feet per day were delivered to process plants, 496 million cubic feet per day were delivered directly to pipelines, and 36 million cubic feet per day of condensate were delivered to process plants.

During 2016, we experienced six leaks and spills.

Open Season

As a result of energy reform, we may offer pipeline transportation and storage services for refined products to the wider energy market. During 2017, under the guidelines issued by the Energy Regulatory Commission, Pemex Logistics will participate in an “open season,” a transparent and competitive auction procedure where any participant can compete to offer its services.

 

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Once the capacity reserve authorized by the CRE has been allocated to Pemex Industrial Transformation in a volume sufficient to ensure that national supply is not affected, the remaining services will be offered through an auction.

Pemex Logistics will offer its services in the north of Mexico, which includes the Rosarito area, and the Guaymas area. Once the auction process is complete, we anticipate that our logistics segment will gradually extend its transportation and storage services to the rest of Mexico, until reaching full coverage before the end of 2017.

During 2016, our logistics segment earned Ps. 71,130.8 million, primarily for services rendered to our other subsidiary entities.

Logistics Capital Expenditures

Our logistics segment invested Ps. 7,015 million in capital expenditures in 2016 and has budgeted Ps. 4,449 million in capital expenditures for 2017.

The following table sets forth our logistics segment’s capital expenditures, excludingnon-capitalizable maintenance, for each of the two years ended December 31, 2016, and the budget for 2017. Capital expenditure amounts are derived from our budgetary records, which are prepared on a cash basis. Accordingly, these capital expenditure amounts do not correspond to capital expenditure amounts included in our consolidated financial statements prepared in accordance with IFRS.

Logistics’ Capital Expenditures

 

     Year ended December 31,(1)     Budget
2017(2)
 
   2015   2016   
   (in millions of pesos)(3) 

Logistics

      

Larger Fleet Modernization

   458    583    487 

Renewal of Tugs, Chalanes and Multipurpose Vessels of the Smaller Fleet

   401    495    36 

Refurbishment, Modification and Modernization of Pumping and Compression Stations Nationwide

   221    476    97 

Maintenance of Safety, Measurement, Control and Automation Systems in Storage and Distribution Terminals

   460    452    332 

Acquisition of 5 Tankers Vessel by Cash and/or by Leasing

   363    427    309 

Evaluation and Rehabilitation of the Mechanical Integrity of the Pipeline’s Poza Rica-Salamanca and Nuevo Teapa- Tula-Salamanca

   461    347    388 

Replacement of Vessel Tanks Nuevo Pemex I, II, III and IV by Acquisition and/or Leasing

   278    326    240 

Implementation of the SCADA System in 47 Pipeline Transportation Systems

   520    270    106 

Evaluation and Rehabilitation of the Mechanical Integrity of the Pipelines in Northern and Pacific Zones

   271    251    450 

Evaluation and Rehabilitation of the Mechanical Integrity of the Pipelines Nuevo Teapa-Madero-Cadereyta

   574    193    41 

Integral Maintenance of Pipeline Systems for Natural Gas and LPG, Stage II

   293    172    176 

 

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     Year ended December 31,(1)     Budget
2017(2)
 
   2015   2016   
   (in millions of pesos)(3) 

Modernization of the Instrumented Security and Basic Control Systems of the Pumping Stations and Product Receipt Northern Zone

   278    110    2 

Evaluation and Rehabilitation of the Mechanical Integrity of the Turbosine, Diesel, Gasoline and Fuel Oil Pipelines and Gas Pipelines in the Central Zone

   464    109    62 

Natural Gas Transportation from Jáltipan to Salina Cruz Refinery

   403    31    7 

Maintenance of Marine Facilities

   316    28    65 

Others

   4,066    2,745    1,654 
  

 

 

   

 

 

   

 

 

 

Total

   Ps. 9,827    Ps. 7,015    Ps. 4,449 
  

 

 

   

 

 

   

 

 

 

 

Notes: Numbers may not total due to rounding.

(1)Amounts based on cash basis method of accounting.
(2)Budget authorized on December 14, 2016 and presented to the Board of Directors of Petróleos Mexicanos on April 7, 2017.
(3)Figures for 2014, 2015 and 2016 are stated in nominal pesos. Figures for 2017 are stated in constant 2017 pesos.

Source: Petróleos Mexicanos.

Private Sector Participation in Natural Gas Distribution

Prior to the enactment of the Hydrocarbons Law, the Regulatory Law provided that private and “social sector” companies could, with governmental authorization, store, distribute and transport natural gas and construct, own and operate natural gas pipelines, facilities and equipment.

Since 1997, the Regulatory Law has required us to provide the private sector with open access to our transportation system for distribution, ending our prior exclusive rights over the distribution lines. We continue to market natural gas and may develop natural gas storage systems.

In 1996, the Energy Regulatory Commission approved the Gradual Access Program for 1996 to 1997, which required that we open access to our natural gas distribution system to the private sector and prohibited vertical integration between transportation and distribution. As a result,Pemex-Gas and Basic Petrochemicals’ distribution assets located within the following official distribution zones were privatized: Chihuahua, Toluca, Saltillo, Nuevo Laredo, Río Pánuco, Northern Tamaulipas, Distrito Federal, Valle deCuautitlán-Texcoco-Hidalgo, Hermosillo, Monterrey, Mexicali, El Bajío, Cananea, Querétaro, La Laguna, Bajío Norte, Puebla, Tlaxcala, Guadalajara, Piedras Negras and Ciudad Juárez. Most recently,Pemex-Gas and Basic Petrochemicals’ distribution assets located within Altamira and Morelos were privatized in 2012 and the distribution assets located within Veracruz were privatized in 2013.

In addition, with respect to first-hand sales of natural gas,Pemex-Gas and Basic Petrochemicals, now Pemex Industrial Transformation, submitted to the Energy Regulatory Commission its proposal for a new payment system in 2013, which would provide customers with the option to reserve transportation capacity of natural gas and make payments based on the volume consumed. This new payment system is designed to allow customers to better estimate their consumption of natural gas, as well as enhance our ability to manage costs and capacity related to the transportation of natural gas. We continue to employ a temporary methodology for determining maximum prices of first-hand sales of natural gas. However, we are prepared to begin operating under the new system once the Energy Regulatory Commission approves it and issues final regulations to govern natural gas sales under the system. The Energy Regulatory Commission has stated that it plans to issue new regulations by July 1, 2017.

 

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The Hydrocarbons Law, which repealed the Regulatory Law, provides for the participation of other companies in the entire natural gas value chain. The law additionally establishes a permit regime that governs all midstream and downstream activities in Mexico. In January 2015, the Energy Regulatory Commission granted Gasoducto de Aguaprieta S. de R.L. de C.V. a transportation permit corresponding to the northwestern region of Mexico, including Cajeme and Navojoa in the state of Sonora and another for Ahome, Choix, El Fuerte, Guasave and Salvador Alvarado in the state of Sinaloa.

Pursuant to the Hydrocarbons Law, on August 11, 2014, CENAGAS was created as a decentralized public entity of the Mexican Government to act as the independent administrator of the Integrated Natural Gas System. This system interconnects the infrastructure for the storage and transportation of natural gas across the nation, with the aim of expanding coverage, strengthening security measures and improving the continuity, quality and efficiency in transportation service. As an integrated system of transportation systems owned by CENAGAS or other participating companies, the Integrated Natural Gas System functions as a primary transportation service supplier in Mexico with standardized fares. Within this system, theSistema Nacional de Gasoductos (National Gas Pipelines System) acts as the commercial administrator for the total available capacity of the Integrated Natural Gas System. In order for a transportation system to become part of the Integrated Natural Gas System, its transport capacity must enhance the Integrated Natural Gas System’s flow capacity and improve the overall transportation service provided to users.

In accordance with the Energy Reform Decree, we signed a transfer agreement with CENAGAS on October 29, 2015 for the transfer to CENAGAS of assets associated with the Integrated Natural Gas System and the distribution contract for the Naco-Hermosillo pipeline system. The National Gas Pipeline System has 87 pipelines with a total length of almost 9,000 kilometers and a transport capacity over 5,000 million cubic feet per day, while the Naco-Hermosillo system is a 300 kilometers long pipeline with a transport capacity of 90 million cubic feet per day. The approximate aggregate book value of these assets, which were transferred to CENAGAS on January 1, 2016, was Ps. 35.3 billion as of December 31, 2016, as described in Note 9 to our consolidated financial statements included herein.

Cogeneration and Services

Our cogeneration and services segment operates through the productive state-owned subsidiary Pemex Cogeneration and Services and uses the thermal heat and steam from our industrial processes to produce the electricity required by us, as well as surplus electricity to sell to third parties in Mexico. Our cogeneration and services segment also provides technical and management services associated with supplying electricity.

Our cogeneration and services segment designs construction, financing and development structures for cogeneration through alliances with third parties in close geographic proximity to our productive work centers.

In 2013, we, throughPemex-Gas and Basic Petrochemicals, now Pemex Industrial Transformation, entered into a services agreement with the Cogeneration Plant of Nuevo Pemex, which we refer to as the Cogeneration Plant, owned by ACT Energy México, S. de R. L. de C. V., to convert demineralized/condensed water from liquid to steam and natural gas into electricity to supply the Nuevo Pemex gas processing complex and to transport natural gas to our other centers and productive state-owned subsidiaries. Through this services agreement, the Cogeneration Plant agrees to provide a minimum of between 550 and 800 tons per hour of steam and 277.2 megawatts of electricity to the Nuevo Pemex gas processing complex and our 191 other workplaces and productive state-owned subsidiaries throughout the country. On December 6, 2016, the services agreement with the Cogeneration Plant was amended to increase the supply of steam by 140 tons per hour beginning on December 1, 2017.

During 2016, the Cogeneration Plant generated an average of 561.3 tons per hour of steam for the Nuevo Pemex gas processing complex, a 4.5% decrease as compared to 2015, and 298 megawatts of electricity, a 2.6% decrease as compared to 2015. These decreases are primarily due to significant maintenance performed at the plant during February and March.

 

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In November 2016, Pemex Industrial Transformation and CFE entered into a services agreement for the conversion of demineralized/condensed water from liquid to steam, pursuant to which CFE will supply 662 tons of steam per hour to the Salamanca refinery through the external cogeneration project developed by CFE. Operational and performance tests began in November 216 and will conclude in the second half of 2017. Our cogeneration and services segment will monitor and manage the services agreement between the parties.

Our cogeneration and services segment has two cogeneration projects to supply steam and electricity to Tula and Cadereyta refineries. During 2016, we carried out activities to define the scope of these projects and to develop the relevant user requirements, which we are working to formalize with the aim of commencing operations by the end of 2022. These projects will be developed through alliances with, and investment capital from, third parties. The projected total investment is U.S. $ 1,127 million, with an estimated capacity of 969 megawatts of electricity and 2,000 tons per hour of steam.

The following table sets forth a brief summary of the three projects discussed above.

Projects under Development

 

   

Electricity

(Megawatts)

   

Steam

(tons/hour)

 
   Capacity   Our Demand     

Tula

   444    267    1,150 

Cadereyta

   525    135    850 

 

Source: Pemex Cogeneration and Services.

We did not have capital expenditures for our cogeneration and services segment for the year ended December 31, 2016, and do not have any capital expenditures budgeted for 2017.

International Trading

PMI and its subsidiaries conduct international commercial activities for our crude oil, refined and petrochemical products, with the exception of natural gas, which is marketed directly by our industrial transformation segment. The PMI subsidiaries’ main objectives are to assist in maximizing our profitability and optimizing our operations through the use of international trade, facilitating our link with the international markets and pursuing new business opportunities in marketing our products. PMI and its subsidiaries manage the international sales of our crude oil and petroleum products and acquire in the international markets those petroleum products that we import to satisfy domestic demand. Sales of crude oil are carried out through PMI. Sales and purchases of petroleum products in the international markets are carried out through P.M.I. Trading, Ltd., which also performs third-party trading, transportation and risk management activities.

Exports and Imports

PMI purchases crude oil from our exploration and production segment and then sells it to PMI’s customers. PMI sold an average of 1.2 million barrels of crude oil per day in 2016, which represented 55.5% of our total crude oil production.

 

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The following tables set forth the composition and average prices of our crude oil exports for the periods indicated.

 

  Year ended December 31, 
  2012  2013  2014  2015  2016 
  (tbpd)  (%)  (tbpd)  (%)  (tbpd)  (%)  (tbpd)  (%)  (tbpd)  (%) 

Crude Oil Exports (by Volume)

          

Olmeca (API gravity of38°-39°)

  194   15   99   8   91   8   124   11   108   9 

Isthmus (API gravity of32°-33°)

  99   8   103   9   134   12   194   17   153   13 

Maya (API gravity of21°-22°)

  944   75   968   81   887   78   743   63   865   72 

Altamira (API gravity of15.0°-16.5°)

  19   2   20   2   27   2   28   2   23   2 

Talam (API gravity of-15.8º)

      3   0.3   83   7   45   4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  1,256   100  1,189   100  1,142   100  1,172   100  1,194   100 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

Notes:Numbers may not total due to rounding.
 tbpd = thousand barrels per day.
 API gravity refers to the specific gravity or density of liquid petroleum products, measured in degrees on the American Petroleum Institute (API) scale. On the API scale, oil with the lowest specific gravity has the highest API gravity. In addition, holding all other factors constant, the higher the API gravity, the greater the value of the crude oil.

Source: PMI operating statistics as of January 27, 2017.

 

   Year ended December 31, 
   2012   2013   2014   2015   2016 
   (U.S. dollars per barrel) 

Crude Oil Prices

          

Olmeca

  U.S.$109.39   U.S.$107.92   U.S.$93.54   U.S.$51.46   U.S.$39.71 

Isthmus

   107.28    104.69    93.39    49.28    37.72 

Maya

   99.99    96.89    83.75    41.12    35.28 

Altamira

   96.40    94.35    81.30    36.19    30.35 

Talam

       36.74    36.40    28.26 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average realized price

  U.S. $101.96   U.S. $98.44   U.S. $85.48   U.S. $43.12   U.S. $35.63 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Source: PMI operating statistics as of January 27, 2017.

Geographic Distribution of Export Sales

As of December 31, 2016, PMI had 34 customers in 18 countries. Among these countries, the largest proportion of our exports has consistently been to customers in the United States, Spain, India, Canada, South Korea and Japan. Since 2009, the percentage of our crude oil export sales to the United States compared to our total crude oil export sales has declined, while the proportion of crude oil export sales to countries in Europe and Asia, particularly Spain and India, has increased. In 2016, 47.8% of our crude oil exports were to customers located in the United States, which represents an 11% decrease as compared to 2015. The decrease in our crude oil exports to the United States can be attributed mainly to the steady increase of domestic production of light and extra-light crude oil in the United States, primarily as a result of shale discoveries and advances in technology that have made extraction of oil from shale rock commercially viable. In response to the increased availability of light crude oil in the U.S. Gulf of Mexico and other developing trends in international demand for imported crude oil, we have expanded the scope of its geographic distribution and renewed our strategy to diversify and strengthen the presence of Mexican crude oil in the international market. In January 2014, PMI began exporting Olmeca crude oil to European countries other than Spain. As part of our initiative to increase export sales of crude oil to East Asia, PMI also began exporting Isthmus and Maya crude oil to South Korea in January 2015 and continued to do so in 2016.

 

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The following table sets forth our crude oil export sales by country for the five years ended December 31, 2016.

Crude Oil Exports byCountry

 

     Percentage of Exports 
     2012     2013     2014     2015     2016 

United States

     76.2     72.1     69.4     58.8     47.8

Spain

     13.2      14.4      14.2      13.8      14.9 

India

     6.0      8.2      7.0      9.1      10.4 

Canada

     1.8      1.9      1.8      0.0      0.0 

China

     0.8      1.6      1.2      1.3      1.7 

Others

     2.0      1.8      6.3      16.9      25.3 
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

     100.0     100.0     100.0     100     100
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

Note: Numbers may not total due to rounding.

Source: PMI operating statistics as of January 27, 2017.

The following table sets forth the geographic distribution of PMI’s sales of crude oil exports for the five years ended December 31, 2016. The table also presents the distribution of exports among PMI’s crude oil types for those years.

Composition and Geographic Distribution of Crude Oil Export Sales

 

   Year ended December 31, 
   2012   2013   2014   2015   2016 
   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%) 

PMI Crude Oil Export Sales to:

                    

United States and Canada

   980    78    879    74    813    71    690    59    570    48 

Europe

   176    14    179    15    215    18    248    21    272    23 

Far East

   85    7    116    10    100    9    219    19    318    26 

Central and South America

   14    1    15    1    15    1    15    1    34    3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,256    100    1,189    100    1,142    100    1,172    100    1,194    100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Olmeca (API gravity of 38°-39°)

                    

United States and Canada

   184    15    90    8    35    3    40    4    4    0.3 

Others

   9    1    8    1    56    5    84    7    104    9 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   194    15    99    8    91    8    124    11    108    9 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Isthmus (API gravity of 32°-33°)

                    

United States and Canada

   58    5    62    5    89    8    78    7    3    0.3 

Others

   41    3    41    3    45    4    116    10    150    13 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   99    8    103    9    134    12    194    17    153    13 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Maya (API gravity of 21°-22°)

                    

United States and Canada

   719    57    707    59    662    58    513    44    540    45 

Others

   224    18    260    22    225    20    230    20    325    27 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   944    75    968    81    887    78    743    63    865    72 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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   Year ended December 31, 
   2012   2013   2014   2015   2016 
   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%)   (tbpd)   (%) 

Altamira (API gravity of15.0°-16.5°)

                    

United States and Canada

   18    1    20    2    27    2    28    2    22    2 

Others

   1    1            0.4    0.4            2    0.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   19    2    20    2    27    2    28    2    24    2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Talam (API gravity of 15.8°)

                    

United States and Canada

                           31    3    1    0.1 

Others

                   3    0.3    52    4    44    4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

                   3    0.3    83    7    45    4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:Numbers may not total due to rounding.

tbpd = thousand barrels per day.

API gravity refers to the specific gravity or density of liquid petroleum products, measured in degrees on the API scale. On the API scale, oil with the lowest specific gravity has the highest API gravity. In addition, holding all other factors constant, the higher the API gravity, the greater the value of the crude oil.

Source: PMI operating statistics as of January 27, 2017.

PMI sells a significant percentage of its crude oil under evergreen contracts, which can be terminated by either party pursuant to a three-monthphase-out clause. In addition, PMI enters into agreements with various international customers, including those located in the United States, Europe, India, China and Japan. PMI’s crude oil exports are sold on aFree On Board (FOB) basis.

In total, we exported 1.2 million barrels of crude oil per day in 2016. In 2017, we expect to export approximately 869 thousand barrels of crude oil per day.

The following table sets forth the average volume of our exports and imports of crude oil, natural gas and petroleum products for the five years ended December 31, 2016.

Volume of Exports and Imports

 

   Year ended December 31,   2016
vs. 2015
 
     2012       2013       2014       2015       2016     
   (in thousands of barrels per day, except as noted)   (%) 

Exports

    

Crude Oil:

            

Olmeca

   193.7    98.6    91.2    124.2    108.0    (13.0

Isthmus

   99.4    102.7    133.7    194.0    152.7    (21.3

Maya

   943.7    967.6    887.1    743.4    864.9    16.3 

Altamira

   18.8    19.9    27.2    27.8    23.6    (15.1

Talam

           3.0    83.1    45.2    (45.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total crude oil

   1,255.5    1,188.8    1,142.2    1,172.4    1,194.4    1.9 

Natural gas(1)

   0.9    3.1    4.1    2.8    2.2    (21.4

Gasoline

   69.4    66.8    66.0    62.9    52.7    (16.2

Other petroleum products

   83.5    97.7    135.3    130.8    132.8    1.5 

Petrochemical products(2)(3)

   1,344.7    1,336.9    488.0    333.8    124.7    (62.6

Imports

            

Natural gas(1)

   1,089.3    1,175.4    1,250.4    1,415.8    1,933.9    36.6 

Gasoline

   396.3    375.2    389.7    440.1    510.8    16.1 

Other petroleum products and LPG(1)(4)

   260.2    220.5    243.4    299.8    288.7    (3.7

Petrochemical products(2)(5)

   445.1    287.8    332.7    107.3    278.2    159.3 

 

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Note: Numbers subject to adjustment because crude oil exports may be adjusted to reflect the percentage of water in each shipment.

(1)Numbers expressed in millions of cubic feet per day.
(2)Thousands of metric tons.
(3)Includes propylene.
(4)In 2013, we began importing liquefied natural gas through Manzanillo.
(5)Includes isobutane, butane andN-butane.

Source: PMI operating statistics as of January 27, 2017, and Pemex Industrial Transformation.

Crude oil exports increased by 1.9% in 2016, from 1,172.4 thousand barrels per day in 2015 to 1,194.4 thousand barrels per day in 2016, mainly due to a 16.3% increase of exports of Maya crude oil, which was partially offset by a 21.3% decrease in exports of Isthmus crude oil and a 13.0% decrease in Olmeca crude oil export during 2016.

Natural gas imports increased by 36.6% in 2016, from 1,415.8 million cubic feet per day in 2015 to 1,933.9 million cubic feet per day in 2016, which includes imports of liquefied natural gas through Manzanillo. The decreased availability of wet gas and natural gas from our exploration and production segment’s fields made it necessary to increase natural gas imports. We exported 2.2 million cubic feet of natural gas per day in 2016, a decrease of 21.4% as compared to natural gas exports in 2015 of 2.8 million cubic feet per day, primarily as a result of a decrease in the temporary surplus of natural gas that was originally designated for domestic consumption and subsequently used for export.

In 2016, exports of petroleum products decreased by 8.1%, from 193.8 thousand barrels per day in 2015 to 185.5 thousand barrels per day in 2016, mainly due to a 16.2% decrease in the volume of exports of gasoline and an 8.6% decrease in the volume of sales of fuel oil. Imports of petroleum products increased by 8.1% in 2016, from 739.8 thousand barrels per day in 2015 to 799.5 thousand barrels per day in 2016, primarily due to an 18.6% increase in domestic demand for gasoline and a 29.3% increase in domestic demand for diesel.

P.M.I. Trading, Ltd. sells refined and petrochemical products on anFOB,DeliveredEx-ship andCost and Freight basis and buys refined and petrochemical products on anFOB,Cost and Freight andDelivered Ex-ship orDelivery at Frontier basis.

The following table sets forth the value of exports and imports of crude oil, natural gas and petroleum products for the five years ended December 31, 2016.

Value of Exports and Imports(1)

 

  Year ended December 31,  2016
vs. 2015
 
  2012  2013  2014  2015  2016  
  (in millions of U.S. dollars)  (%) 

Exports

      

Olmeca

 U.S.$7,753.7  U.S.$3,883.9  U.S.$3,114.7  U.S.$2,333.1  U.S.$1,569.4   (32.7

Isthmus

  3,904.4   3,925.7   4,557.1   3,489.0   2,107.6   (39.6

Altamira

  661.6   683.7   806.8   366.8   262.7   (28.4

Maya

  34,532.7   34,217.9   27,119.4   11,158.8   11,168.3   0.1 

Talam

        40.4   1,103.6   467.2   (57.7

Total crude oil(2)

 U.S.$46,852.3  U.S.$42,711.3  U.S.$35,638.4  U.S.$18,451.2  U.S.$15,575.2   (15.6

Natural gas

  0.6   2.8   4.8   1.6   1.1   (31.3

Gasoline

  2,257.4   2,162.5   1,985.9   1,007.4   733.2   (27.2

Other petroleum products

  3,280.6   3,654.7   3,885.8   1,984.8   1,161.9   (41.4

Petrochemical products

  362.9   234.0   166.9   63.5   20.5   (67.7
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total natural gas, petroleum and petrochemical products

 U.S.$5,901.5  U.S.$6,054.0  U.S.$6,040.3  U.S.$3,057.3  U.S.$1,916.7   (37.3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total exports

 U.S.$52,753.8  U.S.$48,765.3  U.S.$41,681.8  U.S.$21,508.5  U.S.$17,491.9   (18.7
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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  Year ended December 31,  2016
vs. 2015
 
  2012  2013  2014  2015  2016  
  (in millions of U.S. dollars)  (%) 

Imports

      

Natural gas

 U.S.$1,216.2  U.S.$2,495.3  U.S.$2,819.3  U.S.$1,673.6  U.S.$2,097.9   25.4 

Gasoline

  19,144.0   17,485.9   16,691.2   12,805.2   11,994.8   (6.3

Other petroleum products and LPG

  10,486.9   8,220.3   8,775.8   6,178.6   5,689.5   (7.9

Petrochemical products

  526.9   322.3   373.3   196.3   85.5   (56.4
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total imports

 U.S.$31,374.0  U.S.$28,523.8  U.S.$28,659.6  U.S.$20,853.7  U.S.$19,867.7   (4.7
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net exports (imports)

 U.S.$21,379.8  U.S.$20,241.5  U.S.$13,022.2  U.S.$654.8  U.S.$(2,375.8  (2.6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

Note: Numbers may not total due to rounding.

(1)Does not include crude oil, refined products and petrochemicals purchased by P.M.I. Trading, Ltd. or P.M.I. Norteamérica, S.A. de C.V. from third parties outside of Mexico and resold in the international markets. The figures expressed in this table differ from the amounts contained under the line item “Net Sales” in our financial statements because of differences in methodology associated with the calculation of the exchange rates and other minor adjustments.
(2)Crude oil exports are subject to adjustment to reflect the percentage of water in each shipment.

Source: PMI operating statistics as of January 27, 2017, which are based on information in bills of lading, and Pemex Industrial Transformation.

Imports of natural gas increased in value by 25.4% during 2016, primarily as a result of an increase in domestic demand for natural gas and an increase in natural gas prices. Imports of gasoline decreased in value by 6.3%, despite a 16.1% increase in volume of domestic gasoline sales, due to a decrease in the average sales price of gasoline.

The following table describes the composition of our exports and imports of selected refined products in 2014, 2015 and 2016.

Exports and Imports of Selected Petroleum Products

 

     Year ended December 31, 
     2014   2015   2016 
     (tbpd)     (%)   (tbpd)     (%)   (tbpd)     (%) 

Exports

                    

Liquefied petroleum gas(2)

     1.3      0.7              4.5      2.4 

Fuel oil

     123.6      63.9    123.9      64.0    113.3      61.1 

Gasoline

     66.0      34.1    62.9      32.5    52.7      28.4 

Others

     3.2      1.3    6.9      3.6    15.0      8.1 
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

     193.5      100.0   193.7      100.0   185.5      100.0
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Imports

                    

Gasoline(3)

     389.7      57.8    440.1      59.5    510.8      63.9 

Fuel oil

     13.0      2.0    17.0      2.3    10.7      1.3 

Liquefied petroleum gas(2)

     84.6      13.2    105.2      14.2    50.6      6.3 

Diesel

     132.9      20.8    145.3      19.6    187.8      23.5 

Others

     39.7      6.2    32.4      4.4    39.6      5.0 
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

     633.1      100.0   739.8      100.0   799.5      100.0
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

 

Notes:Numbers may not total due to rounding.
          tbpd= thousand barrels per day.
(1)Includes gasoline and blendstock.
(2)Includes butanes.
(3)Includes aviation gasoline, vacuum as oil, isobutanes, naphthas and jet fuel.

Source: Pemex BDI.

 

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Exports of petroleum products decreased in value by 36.7% in 2016, primarily due to a 33.4% decrease in sales of fuel oil and decreases in the prices of petroleum products. In 2016, imports of petroleum products decreased in value, by 7.9%, despite an 8.1% increase in volume, primarily due to increased domestic demand for regular gasoline, which decreased the average price of gasoline as compared to prior years. Our net imports of petroleum products for 2016 totaled U.S. $3,794.4 million, which represents a 19.1% increase from our net imports of petroleum products of U.S. $3,186.4 million in 2015.

For the three years ended December 31, 2016, our exports and imports of selected petrochemicals were as follows:

Exports and Imports of Selected Petrochemicals

 

     Year ended December 31, 
     2014   2015   2016 
     (tmt)     (%)   (tmt)     (%)   (tmt)     (%) 

Exports(1)

                    

Sulfur

     335.6      68.8    270.6      81.1    86.5      69.4 

Butadien

     41.8      8.6    41.1      12.3    35.9      28.8 

Ethylene

     15.6      3.2    1.5      0.4           

Polyethylenes

     23.9      4.9    11.0      3.3    1.7      1.3 

Others

     71.1      14.6    9.6      2.9    0.6      1.3 
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

     488.0      100.0   333.8      100.0   124.7      100.0
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Imports(2)

                    

Ammonia

               33.0      30.7    234.9      84.4 

Methanol

     50.1      15.1    30.0      23.3    43.3      15.6 

Isobutane-butane-hexane-1

     228.7      68.7                     

Xylenes

     3.0      0.9    3.0      2.8           

Toluene

     10.5      3.2    25.0      23.3           

Others

     40.4      12.1    21.3      19.8           
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

     332.7      100.0   107.3      100.   278.2      100.0
    

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

 

Notes:Numbers may not total due to rounding.
          tmt= thousand metric tons.
(1)Exports include propylene.
(2)Imports include isobutane, butane andN-butane.

Source: Pemex BDl.

In 2016, our exports of petrochemical products decreased by 209.9 thousand metric tons, from 333.8 thousand metric tons in 2015 to 124.7 thousand metric tons in 2016. Our imports of petrochemical products increased by 170.9 thousand metric tons, from 107.3 thousand metric tons in 2015 to 278.2 thousand metric tons in 2016. Petrochemical exports decreased in 2016, mainly due a 68.0% decrease in sales of sulfur and 9.4% decrease in sales of polyethylenes. Imports of petrochemical products increased in 2016, primarily due to higher demand for methanol.

Supply Commitments

We sell crude oil through a variety of contracts, some of which specify the delivery of a fixed and determinable quantity of crude oil. As of the date of this report, we are party to the following long-term crude oil supply agreements:

 

  

An agreement executed on May 1, 1999, among Pecten Trading Company, which is a trading subsidiary of Shell Oil Company, and P.M.I. Norteamérica, S.A. de C.V., to supply the Deer Park refinery joint venture with a total of approximately 200 thousand barrels per day of Maya crude oil.

 

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Effective May 2008, this agreement was amended to reduce the supply to approximately 170 thousand barrels per day of Maya crude oil from May 2008 to March 2023 (when the agreement expires). In addition, PMI has agreed to supply additional volume depending on the availability of Maya crude oil. The additional volume is revised frequently, taking into account the refinery’s needs, as well as PMI’s available supply. In 2012 and 2013, PMI provided an additional 30 thousand barrels per day of Maya crude oil, increasing the total volume supplied during this period to 200 thousand barrels per day. For the period from January 2014 through December 31, 2017, the total volume to be supplied has been reduced to 170 thousand barrels per day.

 

  An agreement executed on May 1, 2012, with Chevron Products Company, a division of Chevron U.S.A. Inc., to supply its refinery in Pascagoula, Mississippi with approximately 95 thousand barrels per day of Maya crude oil for a period of three years. On May 1, 2015, this agreement was extended for three additional years, however, our supply commitment was decreased to approximately 51 thousand barrels per day of Maya crude oil.

 

  An agreement executed on January 1, 2014, with Valero Marketing and Supply Company Co., a subsidiary of Valero Energy Corp., to supply its refineries in the United States with approximately 80 thousand barrels per day of Maya crude oil for a period of four years, with an option to extend this agreement subject to the express agreement of both parties. Our supply commitment under this agreement increased in 2016 to 87 thousand barrels per day of Maya crude oil.

 

  An agreement executed in January 2013 and extended on October 20, 2014 with Unipec America, Inc., acting on behalf of Unipec Asia Co., Ltd., a branch of China International United Petroleum & Chemicals Co. Ltd., which is a subsidiary of SINOPEC, to export crude oil to China. Under this agreement, we exported 500 thousand barrels of Maya crude oil each month until July 2016, for an aggregate amount of 22 million barrels of crude oil exports. In July 2016, this agreement was extended until June 2017. This agreement is limited to the specific purpose of establishing the terms for our crude oil exports to China.

 

  Two agreements with Houston Refining LP, one executed on February 1, 2011 and amended on January 1, 2015, and the other executed on January 1, 2014 and amended on July 1, 2015. Under each agreement, PMI has agreed to export 36 thousand barrels per day of Maya crude oil over a period of two years.

 

  The remainder of our supply agreements were entered into with four different customers and require that we deliver a total of 57 thousand barrels per day of crude oil during 2017.

We expect to fulfill the majority of these supply commitments with both proved developed and proved undeveloped reserves.

In addition to these agreements, PMI has automatic renewal contracts and occasional contracts with many other customers around the world, including the United States, Europe, India, China, South Korea and Japan. In total, we exported 1,194 thousand barrels per day of crude oil in 2016. During 2017, we expect to export approximately 869 thousand barrels per day of crude oil.

The Secretary of Energy has entered into certain agreements to reduce or increase crude oil exports. See “Item 4—Information on the Company—Trade Regulation and Export Agreements” below in this Item 4.

Hedging Operations

P.M.I. Trading, Ltd. engages in hedging operations to cover its price exposure in the trading of petroleum products. The internal policies and procedures of P.M.I. Trading, Ltd. establish: (1) that DFIs are used exclusively to mitigate the volatility of oil and gas prices; (2) limits on the maximum amount of capital at risk and on the daily and accumulated annual losses for each business unit; and (3) the segregation of risk-taking and

 

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risk measurement. Capital at risk is calculated on a daily basis in order to compare the actual figures with the aforementioned limit. P.M.I. Trading, Ltd. has a risk management subcommittee that reviews risk and hedging operations and meets on a quarterly basis. See “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Changes in Exposure to Main Risks—Hydrocarbon Price Risk.”

Gas Stations in the United States

On December 3, 2015, we announced our initiative to open gas stations in the United States by opening five gas stations that will be owned and operated by franchisees in Houston, Texas. This is part of our strategy to expand our operations to the United States in order to fulfill the energy reform mandate to generate economic value in international markets. Further, it will allow us to measure the impact of our brand against others and identify business opportunities abroad. The gas stations’ fuel supply is derived from the United States wholesale market and selling prices are subject to local market conditions. As of the date of this report, all five of these gas stations have commenced operations.

PEMEX Corporate Matters

In addition to the operating activities that we undertake through the activities of our subsidiary entities and subsidiary companies, we have certain centralized corporate operations that coordinate general labor, safety, insurance and legal matters.

Industrial Safety and Environmental Protection

Our Corporate Office of Planning, Coordination and Performance is responsible for planning, conducting and coordinating programs to:

 

  foster a company culture of safety and environmental protection;

 

  improve the safety of our workers and facilities;

 

  reduce risks to residents of the areas surrounding our facilities; and

 

  reduce greenhouse gas emissions and identify the risks associated with climate change in Mexico in order to develop strategies to minimize the impact of climate change on our operations.

We intend to further develop industrial safety and environmental programs for each subsidiary entity. The environmental and safety division of each subsidiary entity coordinates closely with the Corporate Office of Planning, Coordination and Performance.

Insurance

We maintain a comprehensive property and general liability insurance program for onshore and offshore properties and liabilities. All onshore properties, such as refineries, processing plants, pipelines and storage facilities are covered, as are all of our offshore assets, such as drilling platforms, rigs, gas gathering systems, maritime terminals and production facilities. Our insurance covers risks of sudden and accidental physical damage to or destruction of our properties, as well as risk of sudden and accidental physical loss, including as a consequence of purposeful terrorist acts. This insurance also provides coverage for the contents of pipelines and storage facilities, and any of our liabilities arising from such acts. Our insurance also covers extraordinary costs related to the operation of offshore wells, such as control andre-drilling costs, evacuation expenses and liability costs associated with spills. We also maintain protection and indemnity insurance for our full marine fleet, in addition to life insurance, automobile and heavy equipment insurance, cargo and marine hull insurance, as well as insurance for deep water drilling activities and onshore and offshore construction risks.

In accordance with Mexican law, we have entered into all of our insurance contracts with Mexican insurance carriers. These policies have limits of U.S. $1.8 billion for onshore property, U.S. $1.3 billion for offshore property, U.S. $0.3 billion for extraordinary costs related to the operation of offshore wells, U.S.

 

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$1.0 billion for marine-related liabilities, U.S. $1.1 billion for onshore and offshore liabilities, U.S. $0.5 billion for offshore terrorist acts and U.S. $0.5 billion for onshore terrorist acts. Limits of insurance policies purchased for each category of risk are determined using professional risk management assessment surveys conducted by international companies on an annual basis and the market capacity available per risk, and must be in compliance with local regulations enacted following the energy reform.

Since June 2003, we have not maintained business interruption insurance, which in the past compensated us for loss of revenues resulting from damages to our facilities. We have discontinued such insurance based on the following factors: (1) the existence of mitigating factors across all of our facilities, (2) the nature and operation of our facilities, such as the ability of any of our six refineries to compensate for the loss of one refinery and the physical separation of plants within the refineries, and (3) the excess processing capacity available across our different lines of business,vis-à-vis the restricted coverage available in the international reinsurance markets. These factors led us to conclude that the benefits of this type of coverage were outweighed by the costs. Instead, we purchasead-hoc business interruption mitigation insurance coverage, which compensates us for the additional expenses necessary to recover our production capabilities in the shortest time possible.

During 2016 we continued to engage in deep water exploratory and drilling activities that were covered by our existing insurance program. In August 2012, we purchased a policy to increase the coverage available for potential property damage, third-party liability and control of well risks related to these activities. Under this policy, we maintain coverage for each deep water well drilled, and the limits are determined based on the risk profile of the corresponding well. This policy has a limit of U.S. $3.3 billion, including U.S. $1.3 billion for control of well risks, U.S. $1.1 billion for casualty and U.S. $0.9 billion for property damage. This policy also contemplates additional coverage for environmental liabilities and remediation activities relating to deep water exploration and drilling.

All of our insurance policies are in turn reinsured through Kot Insurance Company, AG (which we refer to as Kot AG). Kot AG is a wholly owned subsidiary company that was originally formed in 1993 under the laws of Bermuda as Kot Insurance Company, Ltd. and was subsequently organized under the laws of Switzerland in 2004. Kot AG is used as a risk management tool to structure and distribute risks across the international reinsurance markets. The purpose of Kot AG is to reinsure policies held through our local insurance carriers and maintain control over the cost and quality of the insurance covering our risks. Kot AG reinsures over 95% of its reinsurance policies with unaffiliated third-party reinsurers. Kot AG carefully monitors the financial performance of its reinsurers and actively manages counterparty credit risk across its reinsurance portfolio to ensure its own financial stability and maintain its creditworthiness. Kot AG maintains solid capitalization and solvency margins consistent with guidelines provided by Swiss insurance authorities and regulations. As of December 31, 2016, Kot AG’s net risk retention is capped at U.S. $180 million, of which U.S. $150 million corresponds to property and liabilities, and is spread across different reinsurance coverage to mitigate potential aggregation factors.

Investment in Repsol

As of December 31, 2016, we owned a total of 22,221,893 shares of Repsol, S.A. (formerly known as Repsol YPF, S.A., and which we refer to as Repsol), which represents approximately 1.5% of Repsol’s total shares. We recorded the 22,221,893 Repsol shares that we hold as“available-for-sale-non-current asset” investments and valued them, as of December 31, 2016, at Ps. 6,463.1 million. As of December 31, 2015, our investment in 20,724,331 shares of Repsol, approximately 1.5% of Repsol’s total shares, was valued at Ps. 3,944.7 million. As described in Note 10 to our consolidated financial statements, we recorded the effect of the valuation of the investment at fair value as a loss of Ps. 3,206.3 million and a profit of Ps. 207,816 in the consolidated statements of changes in equity (deficit) for the years ended December 31, 2015 and 2016, respectively. See Note 10 to our consolidated financial statements included herein.

On August 4, 2015, P.M.I. Holdings, B.V. obtained a loan for U.S. $250.0 million, which bears interest at a rate of 1.79% and is collateralized by all of our Repsol shares. This loan is due to mature in 2018.

 

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Ethics Committee

Our Ethics Committee consists of members from our management team, with the head of our Institutional Internal Control Unit serving as its chairman. Among other duties, the Ethics Committee is responsible for regulating and promoting the enforcement of our code of ethics and our code of conduct, as well as promoting corporate strategies that are designed to foster a culture of ethics and integrity. See “Item 16B—Code of Ethics” for more information regarding our code of ethics.

Our Ethics Committee is responsible for:

 

  promoting awareness and use of our code of ethics and code of conduct, including through online training available for our employees, in order to improve our culture of ethics;

 

  establishing procedures that implement the principles found in our code of ethics in order to increase compliance and to detect behavior that adversely affects our activities;

 

  working with the Liabilities Unit of Petróleos Mexicanos and our Internal Auditing Area to exchange information regarding violations of our code of ethics and our code of conduct.

Collaboration and Other Agreements

On April 10, 2014, Petróleos Mexicanos signed a memorandum of understanding with TOTAL, a French company, to establish a framework for cooperation in the exchange of experience, knowledge and best practices related to upstream activities and scientific, administrative and technical matters, as well as the development of a sustainable energy sector.

On April 10, 2014, Petróleos Mexicanos signed a memorandum of understanding with GDF Suez, a French company, to establish terms for technical cooperation and the exchange of knowledge and experience related to energy efficiency, water treatment and natural gas projects, among others.

On September 25 and 26, 2014 at the World National Oil Companies Congress, Petróleos Mexicanos signed a memorandum of understanding with each of: (1) Petronas and YPF SA, (2) BHP Billiton and (3) Oil and Natural Gas Corporation Limited, through which the parties indicated their intent to analyze business opportunities in deep water, mature fields and heavy and extra-heavy crude oil, assess natural gas infrastructure and exchange best practices for sustainable development, environmental protection and exploration and production activities.

On October 2, 2014, Petróleos Mexicanos and Exxon Mobil signed a memorandum of understanding with the aim of identifying business opportunities in exploration, production and industrial transformation processes with a focus on sustainable development and environmental stewardship, as well as exchanging best practices for the development of human resources and industrial safety.

On October 17, 2014, Petróleos Mexicanos and Pacific Rubiales signed a memorandum of understanding to identify opportunities for collaboration in exploration and production activities, hydrocarbons transportation, electricity generation and the exchange of best practices for industrial safety training andhealth-at-work initiatives.

On October 26, 2014, Petróleos Mexicanos and Chevron signed a memorandum of understanding with the aim of establishing opportunities for cooperation in mutually beneficial projects related to deep water, heavy crude oil and the revitalization of mature fields, among other things. This memorandum of understanding also lays the foundation for collaboration in connection with natural gas production, refining and fuel distribution and carbon-dioxide emissions reduction.

On October 29, 2014, Petróleos Mexicanos, through PMI, and Kuwait Foreign Petroleum Exploration Company signed a memorandum of understanding to share technical and commercial information for the evaluation and development of joint business opportunities in oil and gas exploration and production, both in Mexico and abroad.

 

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On October 30, 2014, Petróleos Mexicanos and Eni S.p.A., an Italian oil and gas company, signed a memorandum of understanding to identify opportunities for collaboration in exploration and refining activities, natural gas and petrochemical production, technological development, emissions reduction, as well as the exchange of best practices for the development of human capital.

On November 13, 2014, Petróleos Mexicanos and CNOOC, a Chinese state-owned oil and gas company, the China Development Bank and the Industrial and Commercial Bank of China signed memoranda of understanding which intend to, among other things, encourage cooperation among the parties with respect to technical, human resources and financial matters.

On December 4, 2014, Petróleos Mexicanos and Reliance Industries Limited, an Indian oil and gas company, signed a memorandum of understanding to collaborate in the development of new technologies and human resources. This memorandum of understanding also lays the foundation for collaboration and the possibility of joint business opportunities in exploration, production, refining and downstream activities.

On February 5, 2015, Petróleos Mexicanos and theInstituto Politécnico Nacional (National Polytechnic Institute) of Mexico entered into a collaboration agreement for the development of human resources, technology and research, with the aim of promoting and supporting joint research programs and the development of knowledge related to the hydrocarbons industry.

On February 18, 2015, Petróleos Mexicanos and the Organisation for EconomicCo-operation and Development (OECD) signed a memorandum of understanding with the aim of benefiting from the OECD’s knowledge of and experiences with international best practices relating to the procurement of goods and services.

On February 19, 2015, Petróleos Mexicanos signed a memorandum of understanding with the Infraestructura Energética Nova, S.A.B. de C.V. and Sempra LNG units of the U.S. energy company Sempra Energy for the potential joint development of a natural gas liquefaction project at the site of the Energía Costa Azul facility located in Ensenada, Mexico.

On April 7, 2015, Petróleos Mexicanos and First Reserve signed a memorandum of understanding and cooperation to explore new opportunities for joint energy projects, which would provide access to financing, as well as the exchange of technical and operational experience. This agreement contemplates up to U.S. $1.0 billion of investments in potential projects relating to infrastructure, maritime transport and power cogeneration, among others.

On May 12, 2015, Petróleos Mexicanos and Global Water Development Partners, a company founded by private equity funds operated by Blackstone, signed a memorandum of understanding with the aim of creating a partnership to invest in water and wastewater infrastructure for Petróleos Mexicanos’ upstream and downstream facilities. This partnership is intended to finance and carry out environmentally sustainable projects for water treatment in Petróleos Mexicanos’ operations.

On May 12, 2015, PMX Cogeneración, S.A.P.I. de C.V., an affiliate of Petróleos Mexicanos, signed a memorandum of understanding with the consortium formed by Enel S.p.A., an Italian renewable energy company, and Abengoa, S.A., a Spanish renewable energy company, to develop a cogeneration power plant to generate and supply clean energy to the Antonio Dovali Jaime refinery in Salina Cruz, as well as the Mexican national grid.

On June 1, 2015, Petróleos Mexicanos and the U.S. based global asset manager BlackRock Inc. signed a memorandum of understanding with the aim of accelerating the development and financing of energy-related infrastructure projects that are of strategic importance to Petróleos Mexicanos.

On July 20, 2015, Petróleos Mexicanos, through its Corporate Office of Procurement and Supply, signed an agreement with the OECD with the aim of adopting and promoting best practices in procurement and fostering

 

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efficient management strategies and transparency in Petróleos Mexicanos’ processes. The agreement also contemplates the training of our personnel by the OECD on issues of transparency and ethics, the design of procurement procedures and mitigating risks of collusion.

On July 22, 2015, Petróleos Mexicanos and theSecretaría de Desarrollo Agrario, Territorial y Urbano (Ministry of Agriculture, Land and Urban Development) signed a collaboration agreement with the aim of establishing consulting and training mechanisms for the development of hydrocarbon exploration, extraction and distribution projects in strict observance of the applicable legal framework and with full respect for agricultural landowners.

On July 23, 2015, Petróleos Mexicanos and the Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C. signed a collaboration agreement with the purpose of (1) fostering competitive development within the Mexican oil and gas industry; (2) carrying out specialized research and consulting services, including lectures, seminars, conferences and other events of common interest to the institutions; and (3) providing postgraduate studies for our employees and internships for college students at Petróleos Mexicanos.

On July 28, 2015, Petróleos Mexicanos and Banco Santander, S.A. (Santander) signed a collaboration agreement with the purpose of providing our franchisees with access to Santander banking services such as bank card sales, deposits ande-banking services, payroll management and the transportation of money.

On September 9, 2015, Petróleos Mexicanos and General Electric signed a memorandum of understanding with the aim of creating a partnership to invest in new technology and financing initiatives for gas compression, power generation and the production of hydrocarbons, both onshore and offshore, including in deepwater fields.

On October 7, 2015, Petróleos Mexicanos, through its subsidiary Pemex Cogeneration and Services, and Dominion Technologies signed a memorandum of understanding to form a company aimed at the joint implementation of cogeneration projects.

On October 10, 2015, Petróleos Mexicanos and the United Nations Development Programme in Mexico reaffirmed their commitment to use best practices in terms of inclusion, equality andnon-discrimination in the workplace.

On November 30, 2015, Petróleos Mexicanos and Global Water Development Partners agreed to create a joint venture intended to invest approximately U.S. $800 million in water and wastewater treatment infrastructure for upstream and downstream facilities in Mexico. This partnership aims to (1) provide access to advanced technology to meet the supply and treatment requirements of wastewater at our facilities, in both onshore and offshore production areas, as well as in refineries and petrochemical plants; and (2) in the future, to potentially implement and finance environmentally sustainable solutions for water management.

On January 19, 2016, Petróleos Mexicanos and Mubadala Petroleum signed a memorandum of understating agreeing to joint projects to explore the Mexican energy sector, including its upstream activities, primary midstream activities and infrastructure projects for a total investment of approximately U.S. $4.0 billion. Among these projects is a commercial logistic infrastructure system in the Salina Cruz, Oaxaca area, for an approximate investment in excess of U.S. $3.0 billion.

On January 19, 2016, Petróleos Mexicanos and the Abu Dhabi National Oil Company signed a memorandum of understanding with the aim to share each company’s best practices with respect to different upstream activities, including exploration, development and production in oil fields; improved recovery, handling and processing of liquefied natural gas; as well as human resources training, sustainability, internal controls, transparency, process development and cyber-security.

On January 19, 2016, Petróleos Mexicanos and Saudi Aramco signed a memorandum of understanding renewing and strengthening the relationship between both companies and establishing an exchange of ideas

 

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surrounding operational excellence, sustainability and energy efficiency, and innovation and technological development.

These broad agreements of technological and scientific collaboration are strictlynon-commercial,i.e., there is no transfer of resources among the parties.

Property, Plants and Equipment

General

Substantially all of our property, consisting of refineries, storage, production, manufacturing and transportation facilities and certain retail outlets, is located in Mexico, including Mexican waters in the Gulf of Mexico. The location, character, utilization and productive capacity of our exploration, drilling, refining, petrochemical production, transportation and storage facilities are described above. See “—Exploration and Production,” “—Drilling and Services,” “Industrial Transformation,” “—Ethylene,” “—Fertilizers,” “—Logistics” and “—Cogeneration and Services.” The insurance program covering all of our properties is also described above. See “—Insurance.”

Reserves

Under Mexican law, all crude oil and other oil and gas reserves located in the subsoil of Mexico are owned by the Mexican nation and not by us. The Mexican Government has granted us the right to exploit the petroleum and other oil and gas reserves assigned to us in connection with Round Zero, as well as the right to explore for and exploit petroleum and other oil and gas reserves in areas that have been granted to us in Round 1.4. Productive state-owned companies and other companies participating in the Mexican oil and gas industry may report assignments or contracts and the corresponding expected benefits for accounting and financial purposes. See “Information on the Company—History and Development—Energy Reform” above in this Item 4. Our estimates of hydrocarbons reserves are described under “—Exploration and Production—Reserves” above.

 

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GENERAL REGULATORY FRAMEWORK

Petróleos Mexicanos is regulated by the Mexican Constitution, the Petróleos Mexicanos Law and the Hydrocarbons Law, among other regulations. The purpose of the Petróleos Mexicanos Law is to regulate the organization, management, operation, monitoring, evaluation and accountability of Petróleos Mexicanos as a productive-state owned company of the Mexican Government. On October 31, 2014, the Regulations to the Petróleos Mexicanos Law were published in the Official Gazette of the Federation. These regulations were modified on February 9, 2015. The purpose of these regulations is to regulate, among other things, the appointment and removal of the members of the Board of Directors of Petróleos Mexicanos, potential conflicts of interest for Board members, and the evaluation of Petróleos Mexicanos.

The Mexican Government and its ministries regulate our operations in the oil and gas sector. The Ministry of Energy monitors our operations, and the Secretary of Energy acts as the chairperson of the Board of Directors of Petróleos Mexicanos. In addition, theLey de los Órganos Reguladores Coordinados en Materia Energética (Coordinated Energy Regulatory Bodies Law related to the Energy Matters Law, which was enacted as part of the Secondary Legislation and took effect on August 12, 2014) establishes mechanisms for the coordination of these entities with the Ministry of Energy and other ministries of the Mexican Government. The NHC has the authority to award and execute contracts for exploration and production in connection with competitive bidding rounds. The Energy Regulatory Commission has the authority to grant permits for the storage, transportation and distribution of oil, gas, petroleum products and petrochemicals in Mexico, and to regulate the first-hand sale of these products. The regulatory powers of the NHC and the Energy Regulatory Commission extend to all oil and gas companies operating in Mexico, including Petróleos Mexicanos and our subsidiary entities.

On December 2, 2014, the Ministry of Energy published in the Official Gazette of the Federation a statement declaring that the new Board of Directors of Petróleos Mexicanos was performing its duties and the mechanisms for our oversight, transparency and accountability had been implemented in accordance with the Petróleos Mexicanos Law. As a result, the special regime that governs Petróleos Mexicanos’ activities relating to productive state-owned subsidiaries, affiliates, compensation, assets, administrative liabilities, budget, debt levels and the state dividend took effect. On June 10, 2015 the General Provisions for Contracting with Petróleos Mexicanos and its Productive State-Owned Subsidiaries were published in the Official Gazette of the Federation, and on June 11, 2015, the special regime for acquisitions, leases, services and public became effective. In accordance with the Petróleos Mexicanos Law, each year the Ministry of Finance and Public Credit provides us with estimated macroeconomic indicators for the following fiscal year, which we are to use to prepare the consolidated annual budget for Petróleos Mexicanos and the subsidiary entities, including our financing program. Upon approval by the Board of Directors of Petróleos Mexicanos, our consolidated budget and financing program is then submitted to the Ministry of Finance and Public Credit, which has the authority to adjust our financial balance goal and the ceiling on our wage and salary expenditures for the fiscal year. The consolidated annual budget and financing program of Petróleos Mexicanos and the subsidiary entities, including any adjustments made by the Ministry of Finance and Public Credit, is then incorporated into the federal budget for approval by the Chamber of Deputies. The Mexican Government is not, however, liable for the financial obligations that we incur. In approving the federal budget, the Chamber of Deputies authorizes our financial balance goal and the ceiling on our wage and salary expenditures for the fiscal year, which it may subsequently adjust at any time by modifying the applicable law.

The Superior Audit Office of the Federation, or the ASF, reviews annually theCuenta Pública(Public Account) of Mexican Government entities, including Petróleos Mexicanos and our subsidiary entities. This review focuses mainly on the entities’ compliance with budgetary benchmarks and budget and accounting laws. The ASF prepares reports of its observations based on this review. The reports are subject to our analysis and, if necessary, our clarification and explanation of any issues raised during the audit. Discrepancies in amounts spent may subject our officials to legal sanctions. However, in most instances, the observed issues are explained and clarified.

 

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As an issuer of debt securities that are registered under the Securities Act and in connection with certain representations and covenants included in our financing agreements, we must comply with the U.S. Foreign Corrupt Practices Act, or the FCPA. The FCPA generally prohibits companies and anyone acting on their behalf from offering or making improper payments or providing benefits to government officials for the purpose of obtaining or keeping business. In addition, we are subject to other international laws and regulations related to anti-corruption, anti-bribery and anti-money laundering, including the U.K. Bribery Act 2010, which prohibits the solicitation of, the agreement to receive and the acceptance of bribes.

We are also subject to various domestic and international laws and regulations related to anti-corruption, anti-bribery and anti-money laundering. TheCódigo Penal Federal (Federal Criminal Code) criminalizes certain corrupt practices, including bribery, embezzlement and abuse of authority. TheLey Federal Anticorrupción en Contrataciones Públicas (Federal Law of Anti-Corruption in Public Contracting) sanctions companies and individuals that violate this law while participating in federal government contracting in Mexico, as well as Mexican companies and individuals engaged in international commercial transactions. This law is analogous in many respects to the FCPA. In addition, the Federal Law of Administrative Responsibilities of Public Officials prohibits the bribery of federal public officials in Mexico, including members of the Mexican Congress and the federal judiciary.

We also employ internal control procedures and guidelines designed to monitor the activities of our employees, including senior management, and to ensure compliance with applicable anti-corruption, anti-bribery and anti-money laundering laws and regulations. TheLineamientos que regulan el sistema de control interno en Petróleos Mexicanos, sus empresas productivas subsidiarias y empresas filiales (Guidelines governing the internal control system of Petróleos Mexicanos, its productive subsidiary entities and affiliates) set forth the principles underlying our internal controls system and the procedures necessary for its implementation and monitoring. In addition, theLineamientos para la participación de testigos sociales durante actividades de procura y abastecimiento y procedimiento de contratación de Petróleos Mexicanos y sus empresas productivas subsidiarias (Guidelines for the participation of public witnesses in the procurement and supply activities and contracting procedures of Petróleos Mexicanos, its productive subsidiary entities and affiliates), delineates the ways in which public witnesses may act as third-party observers in connection with our procurement procedures. These internal controls and guidelines are applicable to Petróleos Mexicanos and the subsidiary entities. For a description of the risks relating to anti-corruption, anti-bribery and anti-money laundering laws and regulations, see “Item 3—Key Information—Risk Factors—Risk Factors Related to our Operations—We are subject to Mexican and international anti-corruption, anti-bribery and anti-money laundering laws. Our failure to comply with these laws could result in penalties, which could harm our reputation, prevent us from obtaining governmental authorizations needed to carry out our operations and have an adverse effect on our business, results of operations and financial condition.”

On May 27, 2015 theDecreto mediante el cual se reformaron, adicionaron y derogaron diversas disposiciones de la Constitución Política de los Estados Unidos Mexicanos, en materia de combate a la corrupción (Decree that reformed, added to and repealed various provisions of the Mexican Constitution, related to combating corruption matters) was published in the Official Gazette of the Federation. Pursuant to this decree, theLey General del Sistema Nacional Anticorrupción (General Law of the National Anti-corruption System); theLey de Fiscalización y Rendición de Cuentas de la Federación (Federal Audit and Accountability Law); and theLey General de Responsabilidades Administrativas (General Law of Administrative Liabilities), among others, which were published in the Official Gazette of the Federation on July 18, 2016. Among other things, these laws establish a national anti-corruption system to coordinate efforts among the Mexican Government, federal entities, states and municipalities to prevent, investigate and punish corrupt activities and oversee public resources, as well as determine administrative liabilities of public officials and the applicable penalties. The Mexican Senate is to appoint the head of the Special Anti-Corruption Prosecutor’s Office, which was created to investigate and prosecute actions considered crimes of corruption.

 

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ENVIRONMENTAL REGULATION

Legal Framework

We are subject to the environmental laws and regulations issued by the local and state governments where our facilities are located, including those associated with atmospheric emissions, water usage and wastewater discharge, as well as the management of hazardous andnon-hazardous waste. In particular, we are subject to the provisions of theLey General del Equilibrio Ecológico y la Protección al Ambiente (General Law on Ecological Equilibrium and Environmental Protection, which we refer to as the Environmental Law) and related regulations, theLey General de Cambio Climático (General Law on Climate Change) and other technical environmental standards issued by the Secretaría del Medio Ambiente y Recursos Naturales (Secretariat of the Environment and Natural Resources or SEMARNAT). We are also subject to theLey General para la Prevención y Gestión Integral de los Residuos (General Law on Waste Prevention and Integral Management),Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética (Law of Use of Renewable Energy and Financing of the Energy Transition), as well as theLey para el Aprovechamiento Sustentable de la Energía (Sustainable Use of Energy Law).

Before we carry out any activity that may have an adverse impact on the environment, we are required to obtain certain authorizations from the Hydrocarbons Industrial Safety and Environmental Protection Agency, the SEMARNAT, the Ministry of Energy, the National Water Commission and the Mexican Navy, as applicable. In particular, specific environmental regulations apply to petrochemical, crude oil refining and extraction activities, as well as to the construction of crude oil and natural gas pipelines. Before authorizing a new project, the Hydrocarbons Industrial Safety and Environmental Protection Agency requires the submission of an environmental impact analysis and any other information that it may request.

The Hydrocarbons Industrial Safety and Environmental Protection Agency is an administrative body of the SEMARNAT that operates with technical and administrative autonomy and has the authority to regulate and supervise companies participating in the oil and gas sector through its issuance of rules establishing safety standards, limits on greenhouse gas emissions and guidelines for the dismantling and abandonment of facilities, among other things. The Hydrocarbons Industrial Safety and Environmental Protection Agency provides that until the general administrative provisions and Official Mexican Standards proposed by the Hydrocarbons Industrial Safety and Environmental Protection Agency are in effect, obligations will continue under the guidelines, technical and administrative arrangements, agreements and Official Mexican Standards promulgated by the SEMARNAT, CNH and CRE.

The environmental regulations specify, among other matters, the maximum permissible levels of emissions and water discharge. These regulations also establish procedures for measuring pollution levels.

In April 1997, the SEMARNAT issued regulations governing the procedures for obtaining an environmental license, under which new industrial facilities can comply with all applicable environmental requirements through a single administrative procedure. Each environmental license integrates all of the different permits, licenses and authorizations related to environmental matters for a particular facility. Since these regulations went into effect, we have been required to obtain an environmental license for any new facility. Our facilities that existed prior to the effectiveness of these regulations are not subject to this requirement.

We are also subject to theNOM-001-SEMARNAT-1996 issued by CONAGUA in conjunction with theProcuraduría Federal de Protección al Ambiente(PROFEPA), which sets forth the maximum permissible levels of pollutants in wastewater that can be discharged into national bodies of water.

Federal and state authorities are authorized to inspect any facility to determine its compliance with the Environmental Law, local environmental laws, regulations and technical environmental regulations. Violations ornon-compliance with environmental standards and regulations may result in substantial fines, temporary or

 

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permanent shutdown of a facility, required capital expenditures to minimize the effect of our operations on the environment, cleanup of contaminated soil and water, cancellation of a concession or revocation of an authorization to carry out certain activities and, in certain cases, criminal proceedings. See “Item 3—Key Information—Risk Factors—Risk Factors Related to Our Operations—Our compliance with environmental regulations in Mexico could result in material adverse effects on our results of operations.”

Mexico generally reviews and updates its environmental regulatory framework every five years, and we work with the Mexican Government to develop new environmental regulations of activities related to the oil and gas industry.

In August 2016, theNOM-016-CRE-2016 was published in the Official Gazette of the Federation, which establishes the petroleum products quality requirements, including a maximum sulfur content for diesel fuel of 15 Mg/kg, to be applicable throughout Mexico by December 31, 2018.

In November 2016, theNOM-014-CRE-2016 was published in the Official Gazette of the Federation, which establishes the ethane and propane quality requirements for ethylene production, as well as the grade mixture for propellant butanes, whether domestically produced or imported.

During 2016, the CNH updated the technical provisions for the use of natural gas in exploration and extraction activities and issued regulations for drilling, exploration and development. Also in 2016, theAgencia de Seguridad Energía y Ambiente (National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector, better known as the Agency for Safety, Energy and Environment, or ASEA) required that CONAGUA monitor water tables before we began drilling shale gas exploratory wells in the northern part of Veracruz and the southern part of Tamaulipas.

Climate Change

On June 6, 2012, the General Law on Climate Change was published in the Official Gazette of the Federation, with the objectives of regulating greenhouse gas emissions and reducing the vulnerability of Mexico’s infrastructure, population and ecosystems to the adverse effects of climate change. The General Law on Climate Change establishes a series of financial, regulatory and technical rules and regulations, as well as tools for strategy formation, evaluation and monitoring that form the framework for a comprehensive public policy on climate change.

Our Special Climate Change Program 2014-2018 aims to reduce greenhouse gas emissions, improve energy and operational efficiency, reduce gas flaring and promote the efficient use of gas, among other things. Pursuant to this program, in 2016, we began upgrading the Ing. Antonio Dovalí Jaime Refinery in Salina Cruz, Oaxaca to operate on cleaner natural gas. We also began the test period for a cogeneration project to increase energy efficiency at the Antonio M. Amor Refinery in Salamanca, Guanajuato. In addition, we launched our PEMEX Environmental Strategy 2016-2020, which incorporates our formerPlan de Acción Climática(Climate Action Plan), to identify action items, projects and best practices to mitigate the impact of our operations on climate change. These actions include the construction of infrastructure for transportation and gas management.

We also work with several national and international entities to develop and promote initiatives that mitigate the effects of climate change. For instance, we participate in the Climate and Clean Air Coalition (CCAC), which aims to substantially reduce emissions of climate pollutants. In compliance with CCAC criteria, we carried out inspections in our Dos Bocas, Cactus and Atasta facilities, and are working to mitigate the emissions identified in those inspections.

In accordance with the actions carried out by the Mexican Government to mitigate global climate change, we are implementing carbon capture, use and storage (CCUS) techniques. In 2014, the “Technology Route Map of CCUS in Mexico” was developed in conjunction with SENER, SEMARNAT and CFE. This led to the

 

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execution of integrated carbon capture projects at PEMEX and CFE facilities and enhanced oil recovery (EOR) initiatives. In 2016, several tools were developed to evaluate the firstCCUS-EOR project in Mexico. This project included a plan to inject carbon dioxide produced at our Cosoleacaque Petrochemical Complex into the Brillante producing field at the Cinco Presidentes business unit.

During 2016, we recorded greenhouse gas emissions of approximately 57.9 million tons of carbon dioxide equivalent, which represented an 11.1% increase compared to 2015, mainly due to an increase in the dispatch of bitter gas into our burners in Kumaza, AbkatúnPol-Chuc and Litoral Tabasco, increase in dispatch of acid gas into our burners for maintenance activities in the sulfur plants at the Poza Rica, Ciudad Pemex and Nuevo Pemex Complexes and an increase in the volume of gas into our burners for maintenance issues in the sulfur plants in the Minatitlán and Salina Cruz refineries. Our gas usage level was 91.2% during 2016, as compared to 93.2% in 2015, due to field performance, volume of waste gas used in artificial pumping systems and variations and adjustments to the allocated budget.

In 2016, we continued to develop several conservation and reforestation projects designed to increase carbon capture and preserve the ecosystems in which we operate. Our biodiversity conservation efforts and indirect mitigation measures have been carried out through the following projects:

 

  Proyecto de Conservación, Manejo y Restauración de los Ecosistemas Naturales de la Cuenca Media del Río Usumacinta (Conservation, Management and Restoration Project of the Natural Ecosystems of the Rio Usumacinta Basin) in Chiapas;

 

  Operación y manejo del corredor ecológico JATUSA (Operation and Management of the JATUSA Ecological Corridor) in the Jaguaroundi and Tuzandépetl ecologic parks, and the Santa Alejandrina swamp;

 

  Educación Ambiental y Operación de la Casa del Agua, en los Pantanos de Centla (Environmental Education and Operation of the Casa del Agua in Pantanos de Centla) in Tabasco;

 

  Educación Ambiental y Restauración Forestal en Áreas Naturales Protegidas del Golfo de México, Subregión Planicie Costera (Environmental Education and Reforestation in Protected Natural Areas of the Gulf of MexicoSub-region Coastal Plain);

 

  Sistematización e integración de datos de registros de aves de la Reserva de la Biosfera de Calakmul (Systematization and Integration of Data from the Biosphere Reserves of Calakmul Bird Registry) Campeche, México;

 

  Producción de hortalizas para autoabastecimiento familiar, agroindustria, nutrición y manejo secundario al cultivo del banano (Produce Production for Self-Sufficiency, Agribusiness, Nutrition and Secondary Management of the Cultivation of the Banana Tree) in communities located in the region known as “La Isla”, in Tabasco;

 

  Proyectos productivos sostenibles en los Municipios de Frontera, Paraíso y Cárdenas (Sustainable Productive Projects in the Municipalities of Frontera, Paraíso and Cárdenas) in Tabasco; and

 

  Monitoreo Adaptativo: Mitigación y adaptación ante el Cambio Climático Calakmul (Adapted Monitoring: Mitigation and Adaptation before Calakmul’s Climat Change) in Campeche.

We also began to develop the JATUSA Ecological Corridor project. This project is one of our most important conservation initiatives and its purpose is to merge natural or modified spaces, ecosystems and habitats to facilitate the conservation of biodiversity. It includes the implementation of a new scheme that allows third party participation to maximize profits and facilitate the preservation of the ecosystem.

Clean Development Mechanism Projects

In 2000, Mexico ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change as anon-Annex B country. Accordingly, Mexico is not subject to emission caps under the Kyoto

 

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Protocol, but Mexican companies, such as PEMEX, are allowed to develop Clean Development Mechanism (CDM) projects. These CDM projects generate carbon dioxide emission reduction certificates or credits that can be traded in international markets. We have registered two CDM projects with the United Nations Framework Convention on Climate Change: Waste Energy Recovery at the Dos Bocas Marine Terminal and Tres Hermanos Oil Field Gas Recovery and Utilization Project. The execution of these projects is subject to market conditions, including an increase in the price of certified emission reductions. In addition, we began working on the Elimination of Nitrous Oxide in Lazaro Cardenas CDM project following our acquisition of Fertinal. As of the date of this annual report, that CDM project is in its final stages of development and will be registered with the United Nations once finalized.

 

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HEALTH, SAFTEY AND ENVIRONMENTAL PERFORMANCE

We believe that we are in substantial compliance with all current federal and state environmental laws as those laws have been historically interpreted and enforced and that we maintain an organizational structure designed to identify and solve environmental risks. We engage external consultants to perform operational audits at our processing plants. In addition, our subsidiary entities have specialized departments that implement their own internal environmental programs, audits and facilities inspections. When these internal audits reveal problems or deficiencies, the subsidiary entities take the necessary measures to eliminate them.

In addition to our internal monitoring structure, Petróleos Mexicanos and its subsidiary entities’ environmental audit program is subject to review by ASEA, which is in charge of reviewing compliance with environmental regulations for the oil and gas sector and establishes environmental remediation standards.

Since 1993, we have participated in the National Environmental Audit Program (NEAP), a voluntary alternative to the traditional system of inspections and penalties, with PROFEPA and now with ASEA. This program was created by PROFEPA in 1992 as a regulatory incentive for companies to voluntarily correct any environmental irregularities in their operations.

In general terms, voluntary environmental auditing consists of three stages: (i) an audit and compliance diagnosis; (ii) development of an action plan to correct irregularities; and (iii) the implementation of the action plan. If a company satisfactorily completes these three stages, ASEA grants the audited company a clean industry certificate, which means that it complies with the applicable environmental legislation of their industry.

As of December 31, 2016, we were in the process of auditing 660 facilities with the objective of obtaining a “clean industry” certificate for each facility. In 2015, we certified 73 facilities, while the 2016 audits resulted in the certification of 445 facilities, of which 270 werere-certifications and 175 were certified for the first time. The audits of the remaining 215 facilities have begun, but are still under review. We will continue including new facilities under this program as we expand our activities in the areas of exploration, exploitation, refining and distribution of hydrocarbons.

During 2016, we did not experience any major incident that had significant environmental consequences. We did, however, experience the following material blasts or hazardous events at our facilities during 2016, none of which had significant environmental consequences:

 

  On January 23, 2016, a fire occurred during rig installation of theZaap-E platform, located in the Gulf of Mexico. The fire was caused by a lack of supervision and poor risk assessment. No personnel were injured.

 

  On February 7, 2016, a fire and explosion occurred at theAbkatun-A-Compression processing platform in the Gulf of Mexico, which activated the safety systems, procedures and protocols and the platform was evacuated. As a result of this accident, three offshore workers (two PEMEX employees and one contractor) lost their lives. The explosion was caused when the welding of anFA-4210 cap failed.

 

  On February 17, 2016, a fire and explosion occurred at well 864 at the Samaria oil field. As a result of this explosion, two contractors were injured. The accident occurred while personnel were cleaning an oil rig, a process that employs the use of hydrogen peroxide steam generators. The fire was caused by a failure to apply preventative industrial safety measures and environmental protections.

 

  On May 13, 2016, an accident occurred during electrical maintenance at Cangrejera Petrochemical Complex, producing an electrical discharge that killed one worker. The accident was caused by the absence of personal safety equipment, inadequate risk assessment and poor supervision.

 

  On June 24, 2016, a fire occurred during a poly pig launch at Pera 10, in the state of Tabasco. As a result of this fire, one worker was injured and another lost his life. The fire was caused when the tramp oil remover was opened without having previously been drained, due to by poor planning, failure to update operating procedures and a lack of personal safety equipment.

 

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  On September 5, 2016, a fire occurred during maintenance activities at the Madero Refinery when a plug valve was disassembled. As a result of this accident, three workers were injured. The accident was primarily caused by a lack of blanketing, pipe blinding and explosive gas detectors, as well as poor planning and supervision.

 

  On September 10, 2016, during pipe gasket removal at Cactus GPC, a sour gas leak occurred, killing one worker and injuring three others. Maintenance staff were intoxicated by hydrogen sulfide acid. The leak and subsequent injuries and death were principally caused by a lack of pressure surveillance at the air station and inadequate education regarding operating safety limits of air supply equipment.

 

  On September 24, 2016, a fire and explosion occurred at the oil tanker B/T Burgos, near the Port of Veracruz. As a result of this fire and explosion, the port tank 2 was completely destroyed and the vessel seriously damaged. The 31 workers aboard the vessel were safely evacuated without injury. The accident did not involve a gasoline spill or any impact to the marine environment. The oil tanker vessel was towed to Pajaritos Maritime Terminal for inspection. As of the date of this annual report, the cause of the fire and explosion is under assessment by Lloyd’s Register.

In 2016, our lost time injury rate decreased 23.4% from 0.47 in 2015 to 0.36 in 2016. The segment that contributed most to this decrease was the industrial transformation segment. Our lost days indicator due to injuries decreased 25.8% from 31 to 23 lost days per million man hours worked with risk exposure from 2015 to 2016. Lost days are those missed as a result of incapacitating injuries suffered at work or those on which compensation is paid for partial, total or permanent incapacity or death. From 2015 to 2016, our contractors’ lost time injury rate decreased 40.9% from 0.44 to 0.26 injuries per million man hours worked with risk exposure.

In order to decrease our number of accidents, we have established the “Binomio” (Audit-Advisory Plan) project. This new program seeks to align our strategies, increases accountability and includes 12zero-tolerance EH&S guidelines. We have also run EH&S campaigns to decrease moderate and minor accidents. These campaigns focus on promoting a culture of safety and reducing accidents by better identifying risks, preventing slips and falls, providing additional lessons on how to handle objects and instructing on better planning and job scheduling. We have also used theBinomio program with our contractors to identify companies that have had fatal and/or serious accidents in the previous year to avoid entering into contracts with companies that perform poorly on the EH&S guidelines.

In 2016, our primary initiatives in industrial safety, health and environmental protection included the following:

 

  weekly visits to subsidiary facilities to supervise the implementation of the PEMEX-SSPA System;

 

  SSPA campaigns launched to raise worker awareness of workplace risks and decrease accidents related to improper use of personal safety equipment;

 

  a PEP campaign aimed at ensuring that all platform workers are in optimal health;

 

  in a joint effort with ASEA, executing a strategy to comply with new requirements from ASEA applicable to the PEMEX-SSPA System; and

 

  technical support to guide the implementation of the PEMEX-SSPA System in facilities belonging to our corporate administration and service areas.

Environmental Liabilities

As of December 31, 2016, our estimated and accrued environmental liabilities totaled Ps. 8,230.5 million. Of this total, Ps. 1,014.9 million belong to Pemex Exploration and Production, Ps. 2,690.7 million to Pemex Industrial Transformation and Ps. 4,524.9 million to Pemex Logistics. The following tables detail our environmental liabilities by subsidiary entity and operating region at December 31, 2016.

 

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Pemex Exploration and Production(1)

 

   Estimated Affected Area   Estimated Liability 
   (in hectares)   (in millions of pesos) 

Northern region

   131.39   Ps. 596.1 

Southern region

   89.89    149.7 
  

 

 

   

 

 

 

Total(2)

   221.28   Ps. 745.9 
  

 

 

   

 

 

 

 

 Note:Numbers may not total due to rounding.
 (1)Includes all liabilities of Pemex Exploration and Production that were assumed pursuant to our corporate reorganization.
 (2)During 2016, environmental remediation was completed on 75.16 hectares. There were 107.68 hectares of additional affected areas in 2016, as a result of spills from pipelines mainly.
 Source:PEMEX.

 

   Holding Ponds Drainage 
   Number of Holding Ponds
Reported as Liabilities(1)
   Estimated Liability 
       (in millions of pesos) 

Southern region

   11   Ps.20.8 

Northern region

   69    248.2