UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 20-F
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20062007
Commission File Number:Number 0-99
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 Huasteca
México, D.F. 11311
México
(Address of principal executive offices)
 
Celina Torres Uribe
(5255) 1944 9700
ri@dcf.pemex.com
Avenida Marina Nacional No. 329
Torre Ejecutiva Piso 38 Colonia Huasteca
11311 México, D.F., 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
8.85% Global Guaranteed Notes due 2007
9.50% Global Guaranteed Bonds due 2027
91/4% Global Guaranteed Bonds due 2018
93/8% Notes due December 2, 2008 Puttable at Par on December 2, 2001
8.50% Notes due 2008
9.125% Notes due 2010
8.00% Notes due 2011
7.875% Notes due 2009
8.625% Bonds due 2022
7.375% Notes due 2014
6.125% Notes due 2008
8.85% Guaranteed Notes due 2007
93/8% Guaranteed Notes due 2008
5.75% Notes due 2015
91/4% Guaranteed Bonds due 2018
8.625% Guaranteed Bonds due 2023
9.50% Guaranteed Bonds due 2027
5.75% Notes due 2015
6.625% Bonds due 2035
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     þ 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)15 (d) of the Securities Exchange Act of 1934.
o Yes     þ No
 
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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.
þ Yes     o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedaccelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.Act, (Check one):
Large accelerated filer o          Accelerated filer o          Non-accelerated filer þ
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Indicateo U.S. GAAP          o IFRS          þ 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:follow.
o Item 17     þ Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
o Yes     þ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
o Yes     o No
 

 

 
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 1312
Item 5.
 Operating and Financial Review and Prospects 9397
Item 6.
 Directors, Senior Management and Employees 128133
Item 7.
 Major Shareholders and Related Party Transactions 154159
Item 8.
 Financial Information 154160
Item 9.
 The Offer and Listing 161167
Item 10.
 Additional Information 162167
Item 11.
 Quantitative and Qualitative Disclosures About Market Risk 168174
Item 12.
 Description of Securities Other than Equity Securities 173179
Item 13.
 Defaults, Dividend Arrearages and Delinquencies 174180
Item 14.
 Material Modifications to the Rights of Security Holders and Use of Proceeds 174180
Item 15.
 Controls and Procedures 174180
Item 16A.
 Audit Committee Financial Expert 175181
Item 16B.
 Code of Ethics 175181
Item 16C.
 Principal Accountant Fees and Services 176181
Item 16D.
 Exemptions from the Listing Standards for Audit Committees 176183
Item 16E.
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers 176183
Item 17.
 Financial Statements 177184
Item 18.
 Financial Statements 177184
Item 19.
 Exhibits 177184
EX-10.1: CONSENT LETTER OF RYDER SCOTT COMPANY, LLP
EX-10.2: CONSENT LETTER OF NETHERLAND, SEWELL INTERNATIONAL, S. DE R.L. DE C.V.
EX-10.3: CONSENT LETTER OF DEGOLYER AND MACNAUGHTON
EX-12.1: CERTIFICATION
EX-12.2: CERTIFICATION
EX-13.1: CERTIFICATIONS


i

Petróleos Mexicanos and its four subsidiary entities,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)Pemex-Petrochemicals and together with Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals, collectively referred to as the subsidiary entities), comprise the state oil and gas company of the United Mexican States, which we refer to as Mexico. Each of Petróleos Mexicanos and the subsidiary entities is a decentralized public entity of the Federal Government of Mexico, which we refer to as the Mexican Government, and 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 12 and listed in Note 2c.3b. to our consolidated financial statements incorporated in Item 18, including the Pemex Project Funding Master Trust (which we refer to as the Master Trust) and the Fideicomiso Irrevocable de Administración F/163 (which we refer to as the Fideicomiso F/163) (which are described below under “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Commitments for Capital Expenditures and Sources of Funding”), are incorporated into the consolidated financial statements; these subsidiary companies are also identified with the corresponding ownership percentages in “—Consolidated Structure of PEMEX” on page 3.4. Petróleos Mexicanos, the subsidiary entities and the consolidated subsidiary companies are collectively referred to as “PEMEX” or “we.”
 
References herein to “U.S. $,” “$,” “U.S. dollars” or “dollars” are to United States dollars. References herein to “pesos” or “Ps.” are to the lawfullegal currency of Mexico. References herein to “euros” or “€” are to the lawfullegal currency of the European Economic and Monetary Union. References herein to “pounds” or “£” are to the lawfullegal currency of the United Kingdom. The term “billion” as used herein means one thousand million.
 
We maintain our consolidated financial statements and records in constant pesos. Unless otherwise indicated, we have translated all peso amounts to U.S. dollars in thisForm 20-F, including all convenience translations of our consolidated financial statements included herein, at an exchange rate of Ps. 10.881010.8662 = U.S. $1.00, which is the exchange rate thatSecretaría de Hacienda y Crédito Público(Ministry of Finance and Public Credit)Credit or SHCP) instructed us to use on December 31, 2006.2007. 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. The peso has depreciated substantially in relation to the U.S. dollar since the end of 1994, when the Mexican Government allowed the peso to float freely against the U.S. dollar and the Mexican Government established a broad economic reform program in response to these and other events. Due to the volatility of the peso/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.
 
FORWARD-LOOKING STATEMENTS
 
ThisForm 20-F contains words, such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. We have made forward-looking statements that address, among other things, our:
 
 • drilling and other exploration activities;
 
 • import and export activities;
 
 • projected and targeted capital expenditures and other costs, commitments and revenues; and
 
 • liquidity.
 
Actual results could differ materially from those projected in such forward-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;
 
 • limitations on our access to sources of financing on competitive terms;


2

 • significant economic or political developments in Mexico;


2

 • developments affecting the energy sector; and
 
 • changes in our regulatory environment.
 
Accordingly, you should not place undue reliance on these forward-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 any forward-looking statement, you should see “Item 3—Key Information—Risk Factors.”
 
PRESENTATION OF INFORMATION CONCERNING RESERVES
 
The estimates of Mexico’s proved reserves of crude oil and natural gas for the five years ended December 31, 20062007 included in this annual report have been calculated according to the technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. Although DeGolyer and MacNaughton, Netherland, Sewell International, S. de R.L. de C.V. and Ryder Scott Company, L.P. reviewed our estimates of the hydrocarbon reserves of Mexico as of December 31, 2005,2007, all reserve estimates involve some degree of uncertainty. See “Item 3—Key Information—Risk Factors—Risk Factors Related to the Relationship between PEMEX and the Mexican Government—The Mexican nation, not PEMEX, owns the hydrocarbon reserves in Mexico,” and “—Information on Mexico’s hydrocarbon reserves is based on estimates, which are uncertain and subject to revision” for a description of the risks relating to our reserves and our reserve estimates.


3

(FLOW CHART)(FLOW CHART)


4

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 financial data set forth below should be read in conjunction with and are qualified in their entirety by reference to, our consolidated financial statements included in Item 18. The selected financial data set forth below as of the five years ended December 31, 20062007 have been derived from our consolidated financial statements for the years ended December 31, 20022003 and 2003,2004, which are not included herein, and the consolidated financial statements of PEMEX for the years ended December 31, 2004, 2005, 2006 and 2006.2007.
 
Our consolidated financial statements for the years ended December 31, 2002, 2003, 2004 and 2005 were prepared in accordance with Mexican Generally Accepted Accounting Principles (“(which we refer to as Mexican GAAP”)GAAP). Our consolidated financial statements for the yearyears ended December 31, 2006 and 2007 were prepared in accordance withNormas de Información Financiera Mexicanas(Mexican (Mexican Financial Reporting Standards or “Mexican FRS”Mexican FRS or “NIFs”)NIFs), which replaced Mexican GAAP, although this change had no accounting implications for PEMEX in 2006.2006 or 2007. In this document, unless otherwise stated, we use the term Mexican FRS to mean (1) Mexican GAAP for periods ending prior to January 1, 2006 and (2) NIF for periods ending on or after January 1, 2006. See “Item 5—Operating and Financial Review and Perspective—Prospects—Recently Issued Accounting Standards.” Beginning January 1, 2003, we recognize the effects of inflation in accordance with Governmental Standard GS-06 BIS “A” Section C, which requires the adoption ofBulletin B-10, “Recognition of the Effects of Inflation on the Financial Information,” under Mexican FRS (which we refer to asBulletin B-10). As a result of the provisions ofBulletin B-10, we have restated our consolidated financial statements for the years ended December 31, 2002, 2003, 2004, 2005 and 2005,2006, in order to present our results for each of these years on the same basis and purchasing power as the results for the year ended December 31, 20062007 with respect to the recognition of the effects of inflation. Consequently, the amounts shown in our consolidated financial statements are expressed in thousands of constant Mexican pesos as of December 31, 2006.2007. The December 31, 20062007 restatement factors applied to the financial statements at December 31, 2002, 2003, 2004, 2005 and 20052006 were 1.1760, 1.1310, 1.0752, 1.0405 and 1.04051.0376, respectively, which correspond to inflation from January 1, 2003, 2004, 2005, 2006 and 20062007 through December 31, 2006,2007, respectively, based on the national consumer price index, or “NCPI.” See Note 2b.3a. to our consolidated financial statements included herein for a summary of the effects of adoption ofBulletin B-10 and Notes 2h.3i., 2m.3o., 2n., 2o.3q. and 2x.3v. to our consolidated financial statements included herein for a discussion of the inflation accounting rules applied as a result of the adoption ofBulletin B-10.
 
Mexican FRS differs in certain significant respects from United States Generally Accepted Accounting Principles (which we refer to as U.S. GAAP). The principal differences between our net income and equity under U.S. GAAP and Mexican FRS are described in Note 2021 to our consolidated financial statements and “Item 5—Operating and Financial Review and Prospects—U.S. GAAP Reconciliation.”


5

Selected Financial Data of PEMEX
 
                                                
 Year Ended December 31,(1)(2)  Year Ended December 31,(1)(2)
 2002 2003 2004 2005 2006 2006(4)  2003 2004 2005 2006 2007 2007(4)
 (in millions of constant pesos as of
 (in millions
  (in millions of constant pesos as of
 (in millions
 December 31, 2006)(3) of U.S.
  December 31, 2007)(3) of U.S.
   dollars)    dollars)
Income Statement Data
                                          
Amounts in accordance with Mexican FRS:                                          
Net sales(5)
 Ps.582,306  Ps.707,374  Ps.831,769  Ps.966,284  Ps.1,062,495  $97,647  Ps.736,254  Ps.865,122  Ps.1,003,831  Ps.1,103,510  Ps.1,136,035  $104,548 
Total revenues(5)
  582,205   710,724   843,763   978,601   1,132,236   104,056 
Total revenues net of the IEPS tax  443,726   604,321   784,943   957,567   1,132,236   104,056 
Total sales net of the IEPS tax  625,852   804,092   982,007   1,103,510   1,136,035   104,548 
Operating income  334,466   415,726   489,437   518,970   581,348   53,428   433,643   509,922   539,703   604,277   590,431   54,336 
Comprehensive financing cost  7,057   34,770   7,578   4,661   22,983   2,112 
Net income (loss) for the period  (27,795)  (45,970)  (27,413)  (79,374)  45,252   4,159 
Comprehensive financing result  36,077   7,863   4,836   23,847   20,047   1,845 
Net income (loss) for the year  (47,698)  (28,443)  (82,358)  46,953   (18,308)  (1,685)
Balance Sheet Data (end of period)
                                          
Amounts in accordance with Mexican FRS:                                          
Cash and cash equivalents  51,598   82,945   91,256   125,724   188,684   17,341   86,063   94,686   130,450   195,777   170,997   15,737 
Total assets  868,309   956,248   1,018,792   1,084,818   1,204,734   110,719   992,193   1,057,088   1,125,596   1,250,020   1,330,281   122,424 
Long-term debt  224,672   343,394   436,358   521,924   505,474   46,455   356,302   452,761   541,543   524,475   424,828   39,096 
Total long-term liabilities  616,968   749,523   831,893   941,634   994,854   91,430   777,698   863,164   977,030   1,032,251   990,909   91,192 
Equity (deficit)  117,521   51,870   35,851   (27,959)  39,954   3,672   53,820   37,199   (29,010)  41,456   49,908   4,593 
Amounts in accordance with U.S. GAAP:                                          
Total revenues net of IEPS tax  443,726   604,321   780,302   957,564   1,129,349   103,791 
Total sales net of IEPS tax  625,679   803,672   982,007   1,103,510   1,136,035   104,548 
Operating income net of IEPS tax  189,472   279,203   435,156   516,025   655,141   60,210   288,513   446,471   524,954   611,476   581,482   53,513 
Comprehensive financing (cost) income  (9,557)  (30,325)  2,239   (11,341)  (17,494)  (1,608)  (31,465)  2,323   (10,116)  (18,152)  (25,610)  (2,357)
Net income (loss) for the period  (36,946)  (74,997)  (13,990)  (76,900)  54,667   5,024   (77,816)  (14,516)  (79,791)  56,722   (32,642)  (3,004)
Total assets  860,435   922,318   981,673   1,040,628   1,179,919   108,438   956,988   1,018,574   1,079,745   1,224,272   1,211,301   111,474 
Equity (deficit)  19,376   (50,240)  (52,530)  (116,561)  (22,054)  (2,027)  (52,129)  (54,505)  (120,943)  (22,883)  (198,083)  (18,229)
Other Financial Data
                                          
Amounts in accordance with Mexican FRS:                                          
Depreciation and Amortization  38,245   45,856   45,051   54,931   63,293   5,817   47,580   46,744   56,996   65,672   72,592   6,681 
Investments in fixed assets at cost(6)
  107,413   76,756   80,708   86,600   100,856   9,269   79,641   83,742   89,855   104,647   155,121   14,276 
Ratio of earnings to fixed charges:                  
Mexican FRS(7)
  —   —   —   1.8581   —   n.a. 
U.S. GAAP(7)
  —   —   —   2.0680   —   n.a. 
 
n.a. = Not applicable.
 
(1)Includes Petróleos Mexicanos, the subsidiary entities and the subsidiary companies (including the Pemex Project Funding Master Trust, FideicomisoF/163 and RepCon Lux, S.A., and, for U.S. GAAP purposes, Pemex Finance, Ltd.). For Mexican FRS purposes, beginning with the year ended December 31, 2005, we include the financial position and results of Pemex Finance, Ltd. For Mexican FRS and U.S. GAAP purposes, beginning with the year ended December 31, 2003, we include the financial position and results of Fideicomiso F/163 and RepCon Lux, S.A.
 
(2)Mexican FRS differs from U.S. GAAP. For the most significant differences between U.S. GAAP and Mexican FRS affecting our consolidated financial statements, see Note 2021 to our consolidated financial statements included herein and “Item 5—Operating and Financial Review and Prospects—U.S. GAAP Reconciliation.”
 
(3)Our consolidated financial statements for each of the five years ended December 31, 20062007 were prepared in accordance with Mexican FRS, including the recognition of the effects of inflation in accordance withBulletin B-10.
 
(4)Translations into U.S. dollars of amounts in pesos have been made at the established exchange rate established by the SHCP for accounting purposes of Ps. 10.881010.8662 = U.S. $1.00 at December 31, 2006.2007. 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.


6

(5)Includes the Special Tax on Production and Services, which we refer to as the “IEPS tax” as part of the sales price of the products sold, except in 2006 and 2007, when the IEPS tax rate was negative.
 
(6)Includes investments in fixed assets and capitalized interest.interest until 2006, and, beginning in 2007, capitalized comprehensive financial result. See Note 3i. to our consolidated financial statements included herein and “Item 5—Operating and Financial Review andProspects—Liquidity and Capital Resources.” For 2003, it excludes certain expenditures charged to the oil field exploration and depletion reserve. See Note 2e.
(7)Under Mexican FRS, earnings for the years ended December 31, 2003, 2004, 2005 and 2007 were insufficient to our financial statements included hereincover fixed charges. The amount by which fixed charges exceeded earnings was Ps. 49,612 million, Ps. 45,026 million, Ps. 86,639 million and “Item 5—OperatingPs. 16,174 million, respectively. Under U.S. GAAP, earnings for the years ended December 31, 2003, 2004, 2005 and Financial Review2007 were insufficient to cover fixed charges. The amount by which fixed charges exceeded earnings was Ps. 79,844 million, Ps. 32,601 million, Ps. 84,708 million and Prospects—Liquidity and Capital Resources.”Ps. 33,160 million, respectively.
Source: PEMEX’s financial statements.


6

EXCHANGE RATES
 
The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rate 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  Exchange Rate 
Year Ended December 31, High Low Average(1) Period End  High Low Average(1) Period End 
2002  10.425   9.001   9.746   10.425 
2003  11.406   10.113   10.846   11.242   11.406   10.113   10.846   11.242 
2004  11.635   10.805   11.309   11.154   11.635   10.805   11.309   11.154 
2005  11.411   10.414   10.894   10.628   11.411   10.414   10.894   10.628 
2006  11.460   10.431   10.949   10.799   11.460   10.431   10.902   10.799 
2007  11.269   10.667   10.925   10.917 
  
2007
                
2008
                
January  11.092   10.765   10.957   11.038   10.973   10.819   10.906   10.819 
February  11.157   10.917   10.995   11.157   10.824   10.673   10.768   10.726 
March  11.185   11.013   11.114   11.043   10.849   10.630   10.733   10.630 
April  11.031   10.924   10.980   10.930   10.601   10.442   10.515   10.510 
May  10.931   10.738   10.822   10.738   10.570   10.306   10.438   10.329 
June(2)
  10.979   10.712   10.833   10.790   10.437   10.274   10.333   10.290 
 
 
(1)Average of month-end rates, except for 20072008 monthly exchange rates.
 
(2)For the period from June 1, 20072008 to June 29, 2007.25, 2008.
Source: Source:Noon buying rate for cable transfers in New York reported by the Federal Reserve Bank of New York.
 
The noon buying rate for cable transfers in New York reported by the Federal Reserve Bank of New York on June 29, 200725, 2008 was Ps. 10.79010.290 = U.S. $1.00.


7

RISK FACTORS
 
Risk Factors Related to the Operations of PEMEX
 
Crude oil and natural gas prices are volatile, and low crude oil and natural gas prices negatively affect PEMEX’s income
 
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 and with other industries in supplying clients with competing commodities, international economic trends, exchange rate fluctuations, expectations of inflation, domestic and foreign government regulations, political and other events in major oil and natural gas producing and consuming nations and actions taken by Organization of the Petroleum Exporting Countries (OPEC) members and other oil exporting countries.
 
When international crude oil and natural gas prices are low, we earn less export sales revenue and, therefore, earn less income because our costs remain roughly constant. Conversely, when crude oil and natural gas prices are high, we earn more export sales revenue and our income increases. As a result, future fluctuations in international crude oil and natural gas prices will directly affecthave a direct effect on our results of operations and financial condition.
 
PEMEX is an integrated oil and gas company and is exposed to production, equipment and transportation risks 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, hurricanes in the Gulf of Mexico and other natural or geological disasters and accidents, fires and mechanical failures.
Our facilities are also subject to the risk of sabotage and terrorism. In July 2007, two of our pipelines were attacked. In September 2007, six different sites were attacked and 12 of our pipelines were affected. A group called the Popular Revolutionary Army claimed responsibility for all the attacks.
The occurrence of any of these events could result in personal injuries, loss of life, equipment damage and environmental damage with the resultingclean-up and repair expenses.expenses, equipment damage and damage to our facilities. A shutdown of the affected facilities could disrupt our production and increase our production costs.
 
Although we have purchased insurance policies covering some of these risks, these policies may not cover all liabilities, and insurance may not be available for all risks. There can be no assurance that accidents 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 these and other events. See “Item 4—Information on the Company—Business Overview—PEMEX Corporate Matters—Insurance.”
 
PEMEX has a substantial amount of debtliabilities that could adversely affect our financial health and results of operations
 
We have a substantial amount of debt. As of December 31, 2006,2007, our total indebtedness, excluding accrued interest, but including notes payable to contractors, was approximately U.S. $52.2$46.1 billion, in nominal terms, which is a 4.8% increase overan 11.7% decrease as compared to our total indebtedness, excluding accrued interest, but including notes payable to contractors, of U.S. $49.8$52.2 billion at December 31, 2005.2006. Our level of debt may not decrease in the near or medium term and may have an adverse effect on our financial condition and results of operations.
 
To service our debt, we have relied and may continue to rely on a combination of cash flows provided by operations, drawdowns under our available credit facilities and the incurrence of additional indebtedness.


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Certain rating agencies have expressed concern regarding the total amount of our debt, our increase in indebtedness over the last several years and our substantial unfunded reserve for retirement pensions and seniority premiums. Due to our heavy tax burden, we have resorted to financings to fund our capital investment projects. Any lowering of our credit ratings may have adverse consequences on our ability to access the financial marketsand/or our cost of financing. Although since December 2006 we have financed most of our investments in PIDIREGASProyectos de Infraestructura Productiva de Largo Plazo(long-term productive infrastructure projects, which we refer to as PIDIREGAS) capital expenditures with our own resources through inter-company private placements (see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Commitments for Capital Expenditures and Sources of Funding”), we have relied and will continue to rely on


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debt to finance our investments in capital expenditures. If we are unable to obtain financing on terms that are favorable, this may hamper our ability to obtain further financing and, as well as hamper investment in downstream facilities financed through debt. As a result, we may not be able to make the capital expenditures needed to maintain our current production levels and increase Mexico’s hydrocarbon reserves, which may adversely affect our financial health and results of operation. See “—Risk Factors Related to the Relationship between PEMEX and the Mexican Government—PEMEX must make significant capital expenditures to maintain its current production levels and increase Mexico’s hydrocarbon reserves. Mexican Government budget cuts, reductions in PEMEX’s income and inability to obtain financing may limit PEMEX’s ability to make capital investments”investments” below.
 
PEMEX’s compliance with environmental regulations in Mexico could result in material adverse effects on our results of operations
 
A wide range of general and industry-specific Mexican federal and state environmental laws and regulations apply to our operations. Numerous Mexican Government agencies and departments issue environmental rules and regulations, which are often difficult and costly to comply with and which carry substantial penalties for non-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.”
 
PEMEX publishes less U.S. GAAP financial information than U.S. companies are required to file with the U.S. Securities and Exchange Commission
 
We prepare our financial statements according to Mexican FRS, which differs in certain significant respects from U.S. GAAP. See “Item 3—Key Information—Selected Financial Data” and Note 2021 to our consolidated financial statements included herein. As a foreign issuer, we are not required to prepare quarterly U.S. GAAP financial information, and we therefore generally prepare a reconciliation of our net income and equity under Mexican FRS to U.S. GAAP as well as explanatory notes and additional disclosure requirements under U.S. GAAP on a yearly basis only. As a result, there may be less or different publicly available information about us than there is about U.S. issuers.
 
Risk Factors Related to the Relationship between PEMEX and the Mexican Government
 
The Mexican Government controls PEMEX and it could limit PEMEX’s ability to satisfy its external debt obligations and the Mexican Governmentor could privatizereorganize or transfer PEMEX or its assets
 
Petróleos Mexicanos is a decentralized public entity of the Mexican Government, and therefore the Mexican Government controls us, as well as our annual budget, which is approved by the Mexican Congress. However, our financing obligations do not constitute obligations of and are not guaranteed by the Mexican Government. The Mexican Government has the power to intervene directly or indirectly in our commercial and operational affairs. Intervention by the Mexican Government could adversely affect our ability to make payments under any securities issued or guaranteed by us.
 
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


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indebtedness was treated on the same terms as the debt of the Mexican Government and other public sector entities. 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 would have the power, if federal law and theConstitución Política de los Estados Unidos Mexicanos(the Political (Political Constitution of the United Mexican States) were amended, to privatize orreorganize PEMEX, including a transfer of all or a portion of Petróleos Mexicanos and the subsidiary entities or their assets.assets to an entity not controlled by the Mexican Government. A privatizationreorganization or transfer could adversely affect production, cause a disruption in our workforce and our operations, and cause us to default on certain obligations. See also “—Considerations Related to Mexico” below.


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Petróleos Mexicanos and the subsidiary entities pay special taxes, duties and dividends to the Mexican Government
 
The Mexican Government taxes Petróleos Mexicanos and the subsidiary entities heavily. In 2006,2007, approximately 55%63.2% of the sales revenues of Petróleos Mexicanos and the subsidiary entities were used to pay taxes to the Mexican Government. The Mexican Congress determines the rates of taxes and duties applicable to Petróleos Mexicanos and the subsidiary entities from year to year depending on a variety of factors. For further information, see “Item 4—Information on the Company—Taxes and Duties” and “Item 5—Operating and Financial Review and Prospects—IEPS Tax, Excess Gains Duty, Hydrocarbon Duties and Other Taxes.”
 
The Mexican Government has entered into agreements with other nations to limit production
 
Although Mexico is not a member of OPEC, in the past it has entered into agreements with OPEC and non-OPEC countries to reduce global crude oil supply. We do not control the Mexican Government’s international affairs and the Mexican Government could agree with OPEC or other countries to reduce our crude oil production or exports in the future. A reduction in our oil production or exports could reduce our revenues. For more information, see “Item 5—Operating and Financial Review and Prospects—Export Agreements.”
 
The Mexican Government has imposed price controls in the domestic market on our products
 
Since 2003, theThe Mexican Government has imposedimposes price controls on the sales of natural gas, and liquefied petroleum gas (LPG). In September 2005, gasolines, diesel, domestic gas oil and January 2007, the Mexican Government set a ceiling price for sales of natural gas and LPG, respectively, sold by PEMEX in the domestic market.fuel oil number 6, among others. As a result of these price controls, PEMEX wasis not able to pass on all of the increases in the prices of its product purchases to its customers in the domestic market. We do not control the Mexican Government’s domestic policies and the Mexican Government could impose additional price controls in the domestic market on natural gas, LPG or other petroleum products in the future. The imposition of such price controls would reduce our revenues. For more information, see “Item 4—Information on the Company—Business Overview—Refining—Pricing Decrees” and “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Pricing Decrees.”
 
The Mexican nation, not PEMEX, owns the hydrocarbon reserves in Mexico
 
The Political Constitution of the United Mexican States provides that the Mexican nation, not PEMEX, owns theall petroleum and allother hydrocarbon reserves located in Mexico. Although Mexican law gives Pemex-Exploration and Production the exclusive right to exploit Mexico’s hydrocarbon reserves, it does not preclude the Mexican Congress from changing current law and assigning some or all of these rights to another company. Such an event would adversely affect our ability to generate income.
 
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 thisForm 20-F 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 reserve estimate depends on the quality


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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. Therefore, proved reserve estimates may differ materially from the ultimately recoverable quantities of crude oil and natural gas. Pemex-Exploration and Production revises its estimates of Mexico’s hydrocarbon reserves annually, which may result in material revisions to our estimates of Mexico’s hydrocarbon reserves.


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PEMEX must make significant capital expenditures to maintain its current production levels and increase Mexico’s hydrocarbon reserves. Mexican Government budget cuts, reductions in PEMEX’s income and inability to obtain financing may limit PEMEX’s ability to make capital investments
 
We invest funds to increase the amount of extractable hydrocarbon reserves in Mexico. We also continually invest capital to enhance our hydrocarbon recovery ratio and improve the reliability and productivity of our infrastructure. Our ability to make these capital expenditures is limited by the substantial taxes that we pay and cyclical decreases in our revenues primarily related to lower oil prices. In addition, budget cuts imposed by the Mexican Government and the availability of financing may also limit our ability to make capital investments. For more information, see “Item 4—Information on the Company—History and Development—Capital Expenditures and Investments.”
 
PEMEX may claim some immunities under the Foreign Sovereign Immunities Act and Mexican law, and your ability to sue or recover may be limited
 
Petróleos Mexicanos and the subsidiary entities are decentralized public 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. In addition, Mexican law does not allow attachment prior to judgment or attachment in aid of execution upon a judgment by Mexican courts upon the assets of Petróleos Mexicanos or the subsidiary entities. As a result, your ability to enforce judgments against us in the courts of Mexico may be limited. 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. Finally, if you were to bring an action in Mexico seeking to enforce our obligations under any of our securities, satisfaction of those obligations would be made in pesos, pursuant to the laws of Mexico.
 
Our directors and officers, as well as some of the experts named in thisForm 20-F, 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, you may not be able to effect service of process on our directors or officers or those experts within the United States.
 
Considerations Related to Mexico
 
Economic conditions and government policies in Mexico may have a material impact on PEMEX’s 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 and service foreign debt. In addition, the Mexican Government may cut spending in the future. These cuts could adversely affect our business, financial condition 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 reemerge in the future, and could adversely affect our business and our ability to service our debt.


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Changes in exchange rates or in Mexico’s exchange control laws may hamper the ability of PEMEX to service its foreign currency debt
 
While the Mexican Government does not currently restrict the ability of Mexican companies or individuals to convert pesos into dollars or other currencies, in the future, the Mexican Government could impose a restrictive exchange control policy, as it has done in the past. We cannot assure you that the Mexican Government will maintain its current policies with regard to the peso or that the peso’s value will not fluctuate significantly in the future. The peso has been subject to significant devaluations against the U.S. dollar in the


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past and may be subject to significant fluctuations in the future. Mexican Government policies affecting the value of the peso could prevent us from paying our foreign currency obligations.
 
Most of our debt is denominated in U.S. dollars, as is all of the debt of Pemex Finance, Ltd., a Cayman Islands company with limited liability established to issue securities backed by crude oil receivables sold through our subsidiary P.M.I. Comercio Internacional, S.A. de C.V. (which we refer to as PMI, and together with P.M.I. Trading, Ltd. and their affiliates, the PMI Group) to provide financing for investments in certain of our largest capital expenditures for long-term productive infrastructure projects, which we refer to as PIDIREGAS.dollars. In the future, we may incur additional indebtedness denominated in U.S. dollars or other currencies. Declines in the value of the peso relative to the U.S. dollar or other currencies may increase our interest costs in pesos and result in foreign exchange losses.
 
For information on historical peso/U.S. dollar exchange rates, see “Item“Item 3—Key Information—KeyInformation—Exchange Rates.”
 
Political conditions in Mexico could materially and adversely affect Mexican economic policy and, in turn, PEMEX’s operations
 
Political events in Mexico may significantly affect Mexican economic policy and, consequently, our operations. Presidential and federal congressional elections in Mexico were held on July 2, 2006. On December 1, 2006, Felipe de Jesús Calderón Hinojosa, a member of the National Action Party, formally assumed office as the new President of Mexico. As a result of these elections,Currently, no political party holds a simple majority in either house of the Mexican Congress. It is not certain how the policies of the new administration and a possible lack of alignment between the President of Mexico and the Mexican Congress may affect us.
 
Other Risk Factors
 
If we are not able to adequately implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and are the subject of sanctions or investigation, our results of operations and our ability to provide timely and reliable financial information may be adversely affected
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the SEC and the Public Company Accounting Oversight Board, or PCAOB, are creating uncertainty for public companies and foreign issuers, increasing legal and financial compliance costs and making some activities more time consuming. We will be evaluatingManagement evaluated our internal controlscontrol over financial reporting to allowas of December 31, 2007 in compliance with the management to report on, andcertification requirement of Section 404 of the Sarbanes-Oxley Act of 2002. In 2009, our registered independent public accounting firm to attest to, our internal controls over financial reporting. Weexternal auditors will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404, of theSarbanes-Oxley Act of 2002, which for the management’s report, we are required to include in our annual report which we will file in 20082010 for our 20072009 fiscal year, and, for the auditor’s attestation report,year. In addition, we are required to includein the process of implementing the automatization of controls in our annual report which we will file in 2009 forsystem to strengthen our 2008 fiscal year.internal controls. As a result, we will incur substantial additional expenses and diversion of management’s time. While we expect to be able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our deadline, we cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations since there is presently no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or the PCAOB.SEC. Any such action could adversely affect our financial results. In addition, if we fail to develop and maintain effective internal controls and proceduresand/or if we have unexpected problems in the implementation of the automatization of controls in our system, we may be unable to provide the financial information in a timely and reliable manner.


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Item 4.  Information on the Company
 
HISTORY AND DEVELOPMENT
 
We are the largest company in Mexico, and according to the December 18, 20063, 2007 issue ofPetroleum Intelligence Weekly, we were the tenthfourth largest national oil and gas company in the world based on data from


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the year 2005.2006. In 1938, President Lázaro Cárdenas del Río nationalized the foreign-owned oil companies which were then operating in Mexico, and the Mexican Congress established Petróleos Mexicanos by a decree effective on July 20, 1938. Since 1938, Mexican federal laws and regulations have entrusted Petróleos Mexicanos with the central planning and management of Mexico’s petroleum industry. On July 17, 1992, the Mexican Congress created the subsidiary entities out of operations that had previously been directly managed by Petróleos Mexicanos. Petróleos Mexicanos and its four subsidiary entities, Pemex-Exploration and Production,Pemex-Refining, Pemex-Gas and Basic Petrochemicals and Pemex-Petrochemicals, are decentralized public entities of the Mexican Government, and each is a legal entity empowered to own property and carry on business in its own name.
 
PEMEX’s executive offices are located at Avenida Marina Nacional No. 329, Colonia Huasteca, México, D.F. 11311, México. PEMEX’s telephone number is(52-55)1944-2500.
 
Organizational Laws
 
The activities of Petróleos Mexicanos and the subsidiary entities are regulated primarily by:
 
 •  theLey Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(the Regulatory (Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs, which we refer to as the Regulatory Law); and
 
 •  theLey Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(the Organic (Organic Law of Petróleos Mexicanos and Subsidiary Entities, which we refer to as the Organic Law).
 
The Organic Law and related regulations grant Petróleos Mexicanos and certain of the subsidiary entities the exclusive right to:
 
 •  explore, exploit, refine, transport, store, distribute and sell (first-hand) crude oil;
 
 •  explore, exploit, produce and sell (first-hand) natural gas and transport and store natural gas, to the extent the transportation and storage activities are inextricably linked with such exploitation and production; and
 
 •  produce, store, transport, distribute and sell (first-hand) the derivatives of petroleum (including petroleum products) and natural gas used as basic industrial raw materials that constitute basic petrochemicals, which include ethane, propane, butanes, pentanes, hexanes, heptanes, naphthas, carbon black feedstocks and methane, but, in the case of methane, only if obtained from hydrocarbons used as basic raw materials by the petrochemical industry and obtained from deposits located in Mexico.
 
The Organic Law allocates the operating functions of Petróleos Mexicanos among the four subsidiary entities, each of which has the characteristics of a subsidiary of Petróleos Mexicanos. The principal objectives of the subsidiary entities are as follows:
 
 •  Pemex-Exploration and Production explores for and exploits crude oil and natural gas and transports, stores and markets these hydrocarbons;
 
 •  Pemex-Refining refines petroleum products and derivatives that may be used as basic industrial raw materials and stores, transports, distributes and markets these products and derivatives;
 
 •  Pemex-Gas and Basic Petrochemicals processes natural gas, natural gas liquids and derivatives that may be used as basic industrial raw materials and stores, transports,


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distributes and markets these products and produces, stores, transports, distributes and markets basic petrochemicals; and
 •  Pemex-Petrochemicals engages in industrial petrochemical processes and stores, distributes and markets petrochemicals other than basic petrochemicals.
 
In 1995, the Mexican Congress amended the Regulatory Law to allow private and social sector companies, which include labor-controlled organizations and industries, to participate, with the Mexican Government’s approval, in the storage, distribution and transportation of natural gas. Pursuant to the


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Regulatory Law, as amended, these types of companies may construct, own and operate pipelines, installations and equipment. Since 1997, the Mexican Government has required that we divest our existing natural gas distribution assets but has allowed us to retain exclusive authority over the exploration, exploitation, production and first-hand sale of natural gas, as well as the transportation and storage inextricably linked with this type of exploitation and production. See “—“Business Overview—Gas and Basic Petrochemicals—Private Sector Participation in Natural Gas Distribution” below.
 
In January 2006, the Mexican Congress amended the Regulatory Law and the Organic Law to allow us to co-generate electric energy and to enter into agreements with theComisión Federal de Electricidad(Federal Electricity Commission) andLuz y Fuerza del Centro(Central Light and Power) to sell our excess production to these entities. The funds and the public investment projects required to carry out these works and allow the acquisition of any additional production by these entities must be included in the annualPresupuesto de Egresos de la Federación(Federal Expenditures Budget), which is subject to discussion by and approval of the Chamber of Deputies.
 
On April 8, 2008, President Felipe Calderón submitted to the Mexican Congress five bills, three of which propose amendments to the following laws:
•  the Regulatory Law;
•  theLey Orgánica de la Administración Pública Federal(Federal Public Administration Organic Law); and
•  theLey de la Comisión Reguladora de Energía(Energy Regulatory Commission Law).
The other two bills propose the enactment of the following new laws:
•  theLey Orgánica de Petróleos Mexicanos(Organic Law of Petróleos Mexicanos), which will replace the Organic Law; and
•  theLey de la Comisión del Petróleo(Petroleum Regulatory Commission Law).
None of the five proposed bills includes an amendment to the Political Constitution of the United Mexican States.
In connection with the proposed bills, on May 14, 2008, President Felipe Calderón sent to the Mexican Congress a separate bill that proposes to modify the Federal Duties Law in order to create a special fiscal regime that would establish two new duties in place of the Ordinary Hydrocarbons Duty and the Hydrocarbon Duty for the Oil Revenues Stabilization Fund. These new duties would apply exclusively to exploration and exploitation of oil and gas in the Chicontepec region and deep waters in the Gulf of Mexico.
Together, these bills respond to the principal challenges faced by Mexico’s hydrocarbon sector, which is limited by the Political Constitution of the United Mexican States. Under the bills submitted by President Felipe Calderón, the following critical initiatives would take effect:
1. Third parties would be able to engage in the transportation, storage and distribution of our petroleum products and basic petrochemicals.
2. The private sector would be permitted to participate in crude oil processing, as long as PEMEX does not transfer the ownership rights to hydrocarbons.
3. Third parties would be able to construct, operate and own pipelines and equipment in accordance with PEMEX’s technical and regulatory framework.
4. Payment obligations in respect of construction and services contracts would always be made in cash and in no case would ownership rights over hydrocarbons be granted.
5. A Petroleum Commission with technical and operative autonomy would be created to support the Ministry of Energy in strategic planning related to the energy sector. The Petroleum Commission would be composed of five members appointed by the President of Mexico.


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6. “Citizen Bonds” could be issued, which may be held only by Mexican citizens, retirement and pension funds in Mexico and investment companies on behalf of individuals. The face value of each “Citizen Bond” would be Ps. 100.00, and it would not grant any equity or voting rights in PEMEX; however, the bonds’ returns would be linked to our performance.
7. An additional commissioner would be appointed for the purpose of representing the interests of the “Citizen Bond” holders and to issue reports on the accuracy, fairness and sufficiency of the information submitted by the Board of Directors of Petróleos Mexicanos.
8. PEMEX would be granted greater administrative autonomy in adopting corporate governance practices in line with international standards.
The Mexican Congress is currently reviewing the proposed energy reform bill. We can make no assurance as to whether such bill will be passed or, if passed, what the final terms will be. See “Item 3 Key Information— Risk Factors— Considerations Related to Mexico. Political conditions in Mexico. Political conditions in Mexico could materially and adversely affect Mexican economic policy and, in turn, PEMEX’s operations.”
Capital Expenditures and Investments
 
We fund our annual budget (not including PIDIREGAS) through revenue generated by our own operations and financing activities. Capital expenditures are undertaken by Petróleos Mexicanos and the subsidiary entities. Capital expenditures and operating expenses must be authorized in our annual budget, which is approved by the Mexican Congress. PIDIREGAS are long-term productive infrastructure projects funded through financing activities of the Pemex Project Funding Master Trust and the Fideicomiso F/163 or directly by a contractor and must also be authorized in a budget approved by the Mexican Congress. Thus, each year, we submit proposals to and negotiate with the Mexican Government regarding how our after-tax funds should be allocated.
 
PIDIREGAS.  An important component of our capital expenditures are PIDIREGAS. Because of federal budgetary constraints, the Mexican Government has sought private sector participation in the building and financing of PIDIREGAS. The Mexican Government approves the designation of certain infrastructure projects as PIDIREGAS. This designation means that these projects are treated as off-balance sheet items for annual budgetary purposes and under Governmental Standards, until delivery of the completed project to us or until our payment obligations begin under the contract. For Mexican FRS purposes, all PIDIREGAS financings and assets are included in our balance sheet.
 
TheLey General de Deuda Pública(General Law of Public Debt) and theLey Federal de Presupuesto y Responsabilidad Hacendaria(Federal Law of Budget and Fiscal Accountability) define the PIDIREGAS legal framework. Article 18 of the General Law of Public Debt outlines the treatment of financial obligations under PIDIREGAS, defining as a direct liability the amounts payable under a financing during the current and immediately following fiscal years, and the remaining amounts as a contingent liability until itstheir full payment. Article 32 of the Federal Law of Budget and Fiscal Accountability grants PIDIREGAS preferential and priority treatment for inclusion in the Mexican Government’s budget in future years, until the full payment of a project’s costs.
 
PIDIREGAS have three stages.
 
 •  First, PEMEX identifies a project as a PIDIREGAS and the Mexican Government authorizes expenditures related to its development.


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 •  Then, private sector companies, in cooperation with us, build and deliver the project to the specific subsidiary entity in charge of each project.
 
 •  Finally, we, with the Mexican Government’s authorization, pay all amounts owing to contractors and make final payments to receive delivery of the completed project and then record as a liability the full principal amount of all indebtedness incurred to finance the project.


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Compliance with Governmental Standards and the Guidelines for the Accounting Treatment of Investments in Long-Term Productive Infrastructure Projects (Technical Release GS-09-B)NG-09-B), which outlines the accounting and budgetary treatment applicable to PIDIREGAS, is mandatory during the construction period and after delivery of the PIDIREGAS. The distinction between PIDIREGAS and non-PIDIREGAS expenditures is an important factor for budgetary purposes, since a project’s designation as a PIDIREGAS assures that its financing will not be affected by across-the-board budget cuts. For the purposes of our consolidated financial statements included herein, which are prepared in accordance with Mexican FRS, all of the accounts related to PIDIREGAS were incorporated into the consolidated financial statements,i.e., all of the effects of Technical Release NIF-09-BNG-09-B are excluded. These expenditures and liabilities are included in our consolidated financial statements in accordance with Mexican FRSBulletin B-8 “Consolidated and Combined Financial Statements and Valuation of Permanent Investments in Stocks.”
 
In recent years, PIDIREGAS have represented a significant portion of our total annual capital expenditures. PIDIREGAS capital expenditures alone totaled, in nominal terms, Ps. 124.3 billion in 2007 (90.8% of our total capital expenditures), Ps. 106.1 billion in 2006 (86.5% of our total capital expenditures), and Ps. 86.6 billion in 2005 (82.8% of our total capital expenditures) and Ps. 90.8 billion in 2004 (90.5% of our total capital expenditures). For 2007,2008, we have budgeted, in nominal terms, Ps. 132.3136.0 billion for PIDIREGAS capital expenditures (or approximately 89.4%84.1% of our total budgeted capital expenditures).


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The following table sets forth our capital expenditures for PIDIREGAS for the five years ended December 31, 2006,2007, and the budget for such expenditures for 2007.2008.
 
PIDIREGAS Expenditures
 
                        
 Year ended December 31,(1)(2) 
             Budget
                         
 2002 2003 2004 2005 2006   2007(3)  Year ended December 31,(1)(2) 
 (millions of nominal pesos)   (millions of
            Budget
 
     constant 2007
  2003 2004 2005 2006 2007 2008(3) 
     pesos)  (millions of nominal pesos) 
Pemex-Exploration and Production
                                                  
Ku-Maloob-Zaap Ps.865  Ps.3,072  Ps.10,222  Ps.16,424  Ps.26,724   Ps.30,097  Ps.3,072  Ps.10,222  Ps.16,424  Ps.26,724  Ps.35,706   Ps.22,484 
Cantarell  24,397   23,011   27,240   25,030   25,992    26,644   23,011   27,240   25,030   25,992   29,049    48,350 
Strategic Gas Program(4)
  8,967   18,079   23,413   20,635   23,420    20,664   18,079   23,413   20,635   23,420   23,401    27,897 
Burgos  9,383   10,995   16,344   12,439   15,726    19,193   10,995   16,344   12,439   15,726   14,622    16,512 
Antonio J. Bermúdez  471   3,622   6,270   7,045   6,908    7,249   3,622   6,270   7,045   6,908   8,484    9,628 
Chuc(5)
  302   1,753   4,152   2,266   3,150    3,832 
Aceite Terciario del Golfo(5)
  —   —   —   —   4,938    15,988 
Chuc(6)
  1,753   4,152   2,266   3,150   3,702    3,442 
Jujo-Tecominoacán  279   1,668   1,699   2,340   2,943    2,628   1,668   1,699   2,340   2,943   3,696    5,035 
Caan(6)
  374   834   1,393   1,808   2,241    3,183 
Arenque  183   1,089   2,274   2,344   2,231    1,833   1,089   2,274   2,344   2,231   3,533    1,970 
Agua Fría-Coapechaca-Tajín(7)
  93   1,860   2,402   1,628   2,207    — 
Bellota-Chinchorro  244   1,399   2,001   1,550   1,985    2,648   1,399   2,001   1,550   1,985   2,903    3,758 
Caan(7)
  834   1,393   1,808   2,241   2,494    2,741 
El Golpe-Puerto Ceiba  1,915   1,695   2,124   1,634   2,002    1,774 
Delta del Grijalva  1,439   641   728   1,100   1,663    2,153   641   728   1,100   1,663   1,851    2,943 
El Golpe-Puerto Ceiba  396   1,915   1,695   2,124   1,634    3,114 
Ek-Balam  748   668   639   603   1,493    2,596 
Integral Poza Rica  22   424   938   1,192   1,321    873   424   938   1,192   1,321   1,295    1,595 
Cactus-Sitio Grande  114   1,276   918   493   1,221    1,412   1,276   918   493   1,221   1,045    1,110 
Ek-Balam  99   748   668   639   603    276 
Taratunich(6)
  92   938   787   489   441    — 
Integral Yaxche  18   158   383   271   617    1,809 
Cárdenas  241   215   143   245   494    591 
Carmito-Artesa  187   606   614   320   325    440   606   614   320   325   366    429 
Integral Yaxche  —   18   158   383   271    858 
Och-Uech-Kax  261   750   718   347   268    385   750   718   347   268   64    923 
Cárdenas  44   241   215   143   245    586 
Pol(5)
  720   1,466   481   217   186    — 
Amatitlán-Profeta-Tzapotempa-Vinazco(7)
  8   465   650   291   106    — 
Ayín-Alux  17   37   108   30   37    349   37   108   30   37   15    559 
Lakach(8)
  —   —   —   —   —    419 
Agua Fría-Coapechaca-Tajín(5)
  1,860   2,402   1,628   2,207   —    — 
Taratunich(7)
  938   787   489   441   —    — 
Pol(6)
  1,466   481   217   186   —    — 
Amatitlán-Profeta-Tzapotempa-Vinazco(5)
  465   650   291   106   —    — 
Integral Batab(5)(6)
  57   388   593   17   27    —   388   593   17   27   —    — 
Integral Abkatún(6)(7)
  529   1,856   2,769   409   26    —   1,856   2,769   409   26   —    — 
Integral Kanaab(6)(7)
  13   284   186   121   26    —   284   186   121   26   —    — 
Aceite Terciario del Golfo(7)
  —   —   —   —   —    8,828 
                              
Total  49,557   79,435   109,638   101,823   121,929    137,245   79,435   109,638   101,823   121,929   141,769    172,553 
Pemex-Refining
                                                  
Cadereyta(8)
  115   —   —   —   —    — 
Madero(9)
  6,608   11,323   —   —   —    —   11,323   —   —   —   —    — 
Salamanca(10)
  —   2,679   —   —   —    —   2,679   —   —   —   —    — 
Tula(11)
  1,461   133   —   —   —    —   133   —   —   —   —    — 
Minatitlán  —   —   445   2,459   7,861    11,865   —   445   2,459   7,861   8,855    6,351 
Fuel Quality Investments  —   —   —   —   —    1,392 
Fuel Quality Investments(8)
  —   —   —   —   —    2,602 
Residual Conversion from Tula Refinery  —   —   —   —   —    907   —   —   —   —   —    — 
Residual Conversion from Salamanca Refinery  —   —   —   —   —    1,149   —   —   —   —   —    — 
                              
Total  8,184   14,134   445   2,459   7,861    15,314   14,134   445   2,459   7,861   8,855    8,953 
Pemex-Gas and Basic Petrochemicals
                                                  
Modular Cryogenic Plants in Reynosa  75   1,105   537   1,270   477    1,297   1,105   537   1,270   477   1,696    1,466 
                              
Total  75   1,105   537   1,270   477    1,297   1,105   537   1,270   477   1,696    1,466 
Pemex-Petrochemicals
                                                  
Modernization and Enlargement of the Aromatics Train 1 at Cangrejera petrochemical complex  —   —   —   —   —    626   —   —   —   —   217    268 
Styrene plant at Cangrejera petrochemical complex  —   —   —   —   —    267   —   —   —   —   —    291 
Ethylene plant at Cangrejera petrochemical complex  —   —   —   —   —    123   —   —   —   —   —    192 
                              
Total  —   —   —   —   —    1,016   —   —   —   —   217    752 
Total PIDIREGAS Expenditures
  57,815   94,674   110,620   105,552   130,267    154,872 
Total PIDIREGAS
  94,674   110,620   105,552   130,267   152,538    183,724 
Maintenance by Pemex-Exploration and Production included in PIDIREGAS Expenditures(12)
  13,671   21,749   19,802   18,942   24,209    22,616   21,749   19,802   18,942   24,209   28,227    47,735 
                              
Total PIDIREGAS Capital Expenditures
 Ps.44,144  Ps.72,925  Ps.90,818  Ps.86,610  Ps.106,058   Ps.132,256  Ps.72,925  Ps.90,818  Ps.86,610  Ps.106,058  Ps.124,311   Ps.135,989 
                              


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Note: Numbers may not total due to rounding.
(1)Amounts based on cash basis method of accounting and on the approved dollar amount of capital expenditure translated into pesos at the exchange rate of Ps. 11.20.accounting.
 
(2)Includes capitalized interest during construction period.
 
(3)ApprovedAmended budget.
 
(4)The Strategic Gas Program includes 23several different natural gas projects expected to increase domestic supply of natural gas, thereby minimizing imports. See “—Business Overview—Exploration and Production—Investments and Production by Project—Strategic Gas Program.”
 
(5)The Pol and the Integral Batab projects were merged into the Chuc project as of January 2007.
(6)The Integral Abkatún, the Integral Kanaab and the Taratunich projects were merged into the Caan project as of January 2007.
(7)The Agua Fría-Coapechaca-Tajín and the Amatitlán-Profeta-Tzapotempa-Vinazco projects were merged into the new Aceite Terciario del Golfo Project as ofin January 2007.
(6)The Pol and the Integral Batab projects were merged into the Chuc project in January 2007.
(7)The Integral Abkatún, the Integral Kanaab and the Taratunich projects were merged into the Caan project in January 2007.
 
(8)In November 2003, the CadereytaThis project was certified as 99.31% complete and formally concluded.implemented in 2008.
 
(9)The Madero project was completed on October 24, 2002, and the final payment was made to the contractor on March 3, 2003.
 
(10)The Salamanca project was completed on January 9, 2003.
 
(11)The Tula project was completed and contractors were paid on August 27, 2002, although amounts were budgeted for and paid in 2003 to cover potential adjustments or additional works required in connection with this project.
 
(12)Maintenance expenditures are not capitalized in accordance with Mexican FRS.
Source: Petróleos Mexicanos.
 
During 2006,2007, Pemex-Exploration and Production continued implementing 27 PIDIREGAS.Pemex-Exploration and Production will continue to develop these projects in 2007, although21 PIDIREGAS; some of these projects were consolidated in January 2007.


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The following table sets forth our approved capital expenditures budget for PIDIREGAS projects for 20072008 through 2010.2011.
 
PIDIREGAS Approved Budget Expenditures
 
                                
 Year ended December 31,(1)(2)  Year ended December 31,(1)(2) 
 2007 2008 2009 2010  2008 2009 2010 2011 
 (millions of constant 2007 pesos)  (millions of constant 2008 pesos) 
Pemex-Exploration and Production
                                
Ku-Maloob-Zaap Ps.30,097  Ps.16,471  Ps.13,543  Ps.9,629 
Cantarell  26,644   16,775   14,661   17,338  Ps.48,350  Ps.27,407  Ps.20,887  Ps.21,458 
Strategic Gas Program  20,664   19,694   23,517   14,094   27,897   31,600   30,707   30,680 
Ku-Maloob-Zaap  22,484   12,856   8,390   5,092 
Burgos  19,193   25,431   26,470   28,724   16,512   19,259   18,903   19,967 
Aceite Terciario del Golfo  15,988   26,603   26,836   26,339 
Antonio J. Bermúdez  7,249   5,577   5,090   2,896   9,628   8,478   8,520   7,131 
Chuc(3)
  3,832   3,532   1,801   42 
Jujo-Tecominoacán  2,628   243   994   882   5,035   3,437   2,363   2,395 
Caan(4)
  3,183   1,532   1,153   317 
Bellota-Chinchorro  3,758   2,685   3,374   1,581 
Chuc  3,442   1,583   2,909   3,306 
Delta del Grijalva  2,943   2,841   1,918   1,622 
Caan  2,741   2,422   1,610   1,033 
Ek-Balam  2,596   630   924   258 
Arenque  1,833   2,336   6,262   1,382   1,970   5,597   3,528   1,495 
Bellota-Chinchorro  2,648   2,347   617   464 
Delta del Grijalva  2,153   2,595   47   — 
Integral Yaxche  1,809   206   250   1,364 
El Golpe-Puerto Ceiba  3,114   2,783   2,264   63   1,774   1,994   2,096   1,584 
Integral Poza Rica  873   739   1,084   966   1,595   2,447   1,857   547 
Cactus-Sitio Grande  1,412   980   1,205   330   1,110   1,049   1,375   225 
Ek-Balam  276   899   566   579 
Carmito-Artesa  440   306   435   333 
Integral Yaxche  858   504   440   593 
Och-Uech-Kax  385   801   585   8   923   948   219   217 
Cárdenas  586   501   104   36   591   431   332   252 
Ayín-Alux  349   1,018   1,785   974   559   167   1,596   1,055 
Aceite Terciario del Golfo(5)
  8,828   11,733   18,549   749 
Carmito-Artesa  429   760   257   234 
Lakach  419   2,551   8,318   3,540 
                  
Total  137,245   116,794   121,173   80,400   172,553   155,951   147,171   131,375 
Pemex-Refining
                                
Minatitlán  11,865   4,553   —   —   6,351   —   —   — 
Salina Cruz  —   —   1,755   6,877   —   1,770   6,938   8,081 
Fuel Quality Investments  1,392   6,340   19,389   0   2,602   6,560   18,880   — 
Residual Conversion from Tula Refinery  907   5,023   5,885   5,625   —   —   3,831   1,280 
Residual Conversion from Salamanca Refinery  1,149   4,013   4,267   4,476   —   5,254   2,143   3,407 
                  
Total  15,314   19,929   31,296   16,978   8,953   13,584   31,792   12,768 
Pemex-Gas and Basic Petrochemicals
                                
Modular Cryogenic Plants in Reynosa  1,297   1,619   164   —   1,466   92   —   — 
                  
Total  1,297   1,619   164   —   1,466   92   —   — 
Pemex-Petrochemicals
                                
Modernization and Enlargement of the Aromatics Train 1 at Cangrejera petrochemical complex  626   2,266   171   —   268   718   2,011   137 
Styrene plant at Cangrejera petrochemical complex  267   600   246   —   291   690   222   — 
Ethylene plant at Cangrejera petrochemical complex  123   360   754   671   192   223   782   1,268 
                  
Total  1,016   3,226   1,171   671   752   1,631   3,015   1,405 
                  
Total PIDIREGAS Expenditures Budget
  154,872   141,568   153,804   98,049   183,724   171,259   181,979   145,548 
Maintenance by Pemex-Exploration and Production included in PIDIREGAS Expenditures Budget(6)
  22,616   21,637   21,325   19,713 
Maintenance by Pemex-Exploration and Production included in PIDIREGAS Expenditures Budget(3)
  47,735   35,308   33,348   29,807 
                  
Total PIDIREGAS Capital Expenditures Budget
 Ps.132,256  Ps.119,931  Ps.132,479  Ps.78,336  Ps.135,989  Ps.135,951  Ps.148,631  Ps.115,741 
                  
 
 
Note: Numbers may not total due to rounding.
 
(1)Amounts based on cash basis method of accounting.
 
(2)Includes capitalized interest during the construction period.
 
(3)The Pol and the Integral Batab projects were merged into the Chuc project as of 2007.
(4)The Integral Abkatún, the Integral Kanaab and the Taratunich projects were merged into the Caan project as of 2007.
(5)The Agua Fría-Coapechaca-Tajín and the Amatitlán-Profeta-Tzapotempa-Vinazco were merged into the new Aceite Terciario del Golfo Project as of 2007.
(6)Maintenance expenditures are not capitalized in accordance with Mexican FRS.
Source: Petróleos Mexicanos.


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Non-PIDIREGAS Capital Expenditures.  In addition to the Ps. 130.3124.3 billion spent on PIDIREGAS in 2006,2007, in nominal terms we spent Ps. 20.112.6 billion in 20062007 on other capital expenditures excluding PIDIREGAS (which


19

(which we refer to as non-PIDIREGAS capital expenditures), which represents a 6.1%24.1% decrease from the Ps. 21.416.6 billion in nominal terms of non-PIDIREGAS capital expenditures in 2005.2006. Of the Ps. 20.112.6 billion in non-PIDIREGAS capital expenditures during 2006,2007, we allocated Ps. 8.12.0 billion (or 40.3%15.9% of total non-PIDIREGAS capital expenditures) to exploration and production programs. Of the Ps. 21.416.6 billion in non-PIDIREGAS capital expenditures during 2005,2006, we directed Ps. 11.04.6 billion (or 51.4%27.7% of total non-PIDIREGAS capital expenditures) to exploration and production programs.
 
Excluding PIDIREGAS expenditures, weWe have budgeted a total of Ps. 18.025.8 billion in nominal terms for non-PIDIREGAS capital expenditures in 2007.2008. We expect to direct Ps. 4.23.9 billion (or 23.3%15.1% of total non-PIDIREGAS capital expenditures) to exploration and production programs in 2007.2008. In addition to our budgeted capital expenditures, the Mexican Congress allocates money in our budget to make principal payments on our PIDIREGAS debt. These payments are expected to total Ps. 55.844.7 billion in 2007.2008. The amounts allocated by the Mexican Congress to make payments on our PIDIREGAS debt are not included in any of the tables or discussions of capital expenditures herein, as these amounts do not reflect actual capital expenditures.
 
Our non-PIDIREGAS capital expenditures for the five years ended December 31, 20062007 and budgeted for 20072008 and 20082009 were distributed and budgeted among Petróleos Mexicanos and the subsidiary entities as follows:
 
Non-PIDIREGAS Capital Expenditures(1)
 
                                                        
 Year ended December 31,  Year ended December 31, 
           Budget
 Budget
            Budget
 Budget
 
 2002 2003 2004 2005 2006 2007(2)(3) 2008(4)  2003 2004 2005 2006 2007 2008(2)(3) 2009(4) 
     (in millions of nominal pesos)      (in millions of nominal pesos) 
Pemex-Exploration and Production(5)
 Ps.13,443  Ps.8,945  Ps.3,694  Ps.11,040  Ps.8,142  Ps.4,247  Ps.23,171  Ps.3,305  Ps.957  Ps.7,566  Ps.4,631  Ps.2,021  Ps.3,904  Ps.524 
Pemex-Refining
  5,893   5,744   4,647   6,542   7,369   8,097   15,140   5,744   4,647   6,542   7,369   7,124   12,585   15,826 
Pemex-Gas and Basic Petrochemicals
  1,721   2,148   1,961   1,936   2,845   3,457   5,373   2,148   1,961   1,936   2,845   2,308   5,145   4,873 
Pemex-Petrochemicals
  1,454   1,627   1,598   1,530   1,426   1,747   4,591   1,627   1,598   1,530   1,426   922   3,057   3,863 
Petróleos Mexicanos
  432   549   343   388   349   447   700   549   343   388   349   227   1,100   981 
                              
Subtotal Non-PIDIREGAS Expenditures
  22,942   19,013   12,243   21,436   20,130   17,997   48,975 
Maintenance by Pemex-Exploration and Production included in Non-PIDIREGAS Capital Expenditures(5)
  8,146   5,640   2,737   3,474   3,511   2,262   2,164 
               
Total Non-PIDIREGAS Capital Expenditures
 Ps.14,796  Ps.13,373  Ps.9,506  Ps.17,962  Ps.16,619  Ps.15,735  Ps.46,811  Ps.13,373  Ps.9,506  Ps.17,962  Ps.16,619  Ps.12,602  Ps.25,791  Ps.26,067 
                              
 
 
Note: Numbers may not total due to rounding.
 
(1)There are no capital expenditures at the subsidiary company level.
 
(2)Amended capital budget for 2007,2008, which includes resources provided by Article 2519 of the Federal Law of Budget Law.and Fiscal Accountability.
 
(3)The 20072008 non-PIDIREGAS budget is subject to revision if our revenues increase.
 
(4)Subject to approval by the Mexican Congress during the 20082009 budgetary process.
 
(5)Maintenance expenditures are not capitalized in accordance with Mexican FRS.FRS and, consequently, have been excluded from the Non-PIDIREGAS capital expenditures.
Source:Source:Petróleos Mexicanos.


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Our main objectives for upstream investment are to maximize the long-term economic value, and increase and improve the quality of Mexico’s oil and gas reserves, increase our light crude oil and natural gas production capacities, enhance Pemex-Exploration and Production’s reserves recovery ratio, and improve the reliability of its production and transportation infrastructure for crude oil and natural gas operations. In 2007,operations and continue to emphasize industrial safety and environmental compliance. The 2008 budget objectives include strengthening Pemex-Exploration and Production plans to continue itsProduction’s Strategic Gas Program to increase the supply of natural gas for the domestic market in the medium to long term. The 2007 budget objectives are to maintain the supply of hydrocarbons, increase the production of high-quality petrochemicals and increase our refining capacity in order to satisfy the domestic demand for refined products. Moreover, our production goals for 2007 include producing, on average, 1.7% less crude oil and 6.1% more natural gas as compared to 2006, in order to satisfy domestic demand for natural gas, and to lower the rate of increase of imports of natural gas and natural gas derivatives.
 
Our downstream investment program seeks to improve the quality of our product selection and the reliability of our logistic 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
Pemex-Exploration and Production’s primary objectives for 2008 include: (1) sustaining current production levels in order to satisfy domestic demand and have surpluses available for export; (2) increasing gas production levels in order to reach a growth rate that satisfies domestic demand and decreases our dependence on natural gas imports; (3) continuing to increase the replacement rate of proved and total reserves; (4) improving performance in terms of industrial security and environmental protection, as well as continuing to build the relationships with the communities in which PEMEX operates. Our downstream investment program seeks to meet these objectives by improving the quality of our product selection and the reliability of our logistic and distribution services to achieve a level of efficiency similar to that of our international competitors while continuing to emphasize industrial safety and environmental compliance.
 
Pemex-Exploration and Production 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 investment in exploration and production activities increased by 15.2%12.9% in 2006,2007, and we continued to finance an array of programs to expand production capacity and efficiency. As a result of our investments in previous years, our total hydrocarbon production reached a level of approximately 4,4344,392 thousand barrels of oil equivalent per day in 2006.2007. Pemex-Exploration and Production’s crude oil production decreased by 2.3%5.3% from 20052006 to 2006,2007, averaging 3,2563,082 thousand barrels per day in 2006.2007. Pemex-Exploration and Production’s natural gas production (excluding natural gas liquids) increased by 11.2%13.1% from 20052006 to 2006,2007, averaging 5,3566,058.5 million cubic feet per day in 2006.2007. Exploration drilling activity decreased by 6.8%29.0%, from 74 exploratory wells in 2005 to 69 exploratory wells completed in 2006.2006 to 49 exploratory wells completed in 2007. Development drilling activity decreasedincreased by 12.1%3.9%, from 668 development wells in 2005 to 587 development wells in 2006.2006 to 610 development wells in 2007. In 2006,2007, we completed the drilling of 656659 wells. Our drilling activity in 20062007 was focused on increasing the production of non-associated gas and light oil production in the Burgos, Veracruz and Macuspana regions.
 
Our onshore and offshore drilling efforts in 20062007 led to significant discoveries of non-associated gas fields and light and extra-light crude oil resources, particularly in the Southwesternsoutheastern basins of the Marine region.and Southern regions. Our current challenge with respect to these discoveries is their immediate development in order to maintain current production levels.
Pemex-Exploration and Production’s production goals for 2008 include maintaining its crude oil production at approximately 3.0 million barrels per day and increasing its natural gas production by 4.0% as compared to 2007, in order to satisfy domestic demand for natural gas, as well as to lower the following years.rate of increase of imports of natural gas and natural gas derivatives.
 
Refining
 
Pemex-Refining converts crude oil into gasoline, jet fuel, diesel, fuel oil, asphalts and lubricants. It also distributes and markets most of these products throughout Mexico, where it experiences a significant demand for its refined products. Pemex-Refining’s atmospheric distillation refining capacity remained constant at approximately 1,540 thousand barrels per day during 2006.2007. In 2006,2007, Pemex-Refining produced 1,3301,312 thousand barrels per day of refined products as compared to 1,3381,330 thousand barrels per day of refined products in 2005.2006.
 
Gas and Basic Petrochemicals
 
Pemex-Gas and Basic Petrochemicals processes wet natural gas in order to obtain dry natural gas, LPG and other natural gas liquids. Furthermore, it transports, distributes and sells natural gas and LPG throughout Mexico and produces and sells several basic petrochemical feedstocks, which are used byPemex-Refining or Pemex-Petrochemicals. In 2006,2007, Pemex-Gas and Basic Petrochemicals’ total sour natural gas processing capacity remained constant at approximately 4,503 million cubic feet per day. Pemex-Gas and Basic


21

Petrochemicals processed 3,2033,162 million cubic feet per day of sour natural gas in 2006,2007, a 1.6% increase1.3% decrease from the 3,1533,203 million cubic feet per day of sour natural gas processed in 2005.2006. It produced 405 thousand barrels per day of natural gas liquids in 2007, a 7.1% decrease from the 436 thousand barrels per day of natural gas liquids in 2006, remaining constant from natural gas liquid production in 2005.2006. It also produced 3,546 million cubic feet of dry gas per day in 2007, a 2.9% increase from the 3,445 million cubic feet per day of dry gas in 2006, a 9.5% increase from the 3,147 million cubic feet per day produced in 2005.2006.
 
Petrochemicals
 
Pemex-Petrochemicals manufactures different petrochemical products, including: (1) methane derivatives, such as ammonia and methanol; (2) ethane derivatives, such as ethylene, polyethylenes, vinyl chloride monomer and ethylene oxide; (3) aromatics and their derivatives, such as styrene, toluene and paraxylene; (4) propylene and its derivatives, such as acrylonitrile; and (5) oxygen, nitrogen and other products.Pemex-Petrochemicals’ total annual production (excluding ethane and butane gases) increased by 5.7%14.1% in 2006,2007, from 6,219 thousand tons in 2005 to 6,572 thousand tons in 2006 to 7,496 thousand tons in 2007, mainly due to increased production of certain products during 2006, including2007 (including ammonia, vinyl chloride monomer ethylene oxide and glycols andlinear low density polyethylene.polyethylene). In order to provide comparable figures, we have not included in this total an additional 5,068 thousands tons of refined products produced in certain plants at the Cangrejera complex that were transferred during 2007 from Pemex-Refining to Pemex-Petrochemicals.


21

International Trading
 
In 2006,2007, our crude oil exports which we export through our subsidiary PMI, decreased by 1.3%5.9%, from 1,817.1 thousand barrels per day in 2005 to 1,792.7 thousand barrels per day in 2006.2006 to 1,686.1 thousand barrels per day in 2007. Natural gas imports decreased by 6.1%14.5% in 2006,2007, from 480.4 million cubic feet per day in 2005 to 451.0 million cubic feet per day in 2006.2006 to 385.6 million cubic feet per day in 2007. In 2006,2007, exports of petrochemical products by volume decreased by 3.5%9.4%, from 853.6 thousand metric tons in 2005 to 823.7 thousand metric tons in 2006 to 746 thousand metric tons in 2007, while imports of petrochemical products by volume increaseddecreased by 9.6%2.4%, from 397.4 thousand metric tons in 2005 to 435.6 thousand metric tons in 2006.2006 to 425.1 thousand metric tons in 2007. In 2006,2007, exports of refined products by volume increaseddecreased by 1.1%6.0%, from 186.2 thousand barrels per day in 2005 to 188.2 thousand barrels per day in 2006 to 176.9 thousand barrels per day in 2007, while imports of refined products by volume increased by 9.7%14.6%, from 391.9431.1 thousand barrels per day in 20052006 to 430.1494.0 thousand barrels per day in 2006.2007.
 
We are a major supplier of crude oil to the United States. TheP.M.I. Comercio Internacional, S.A. de C.V. (which we refer to as PMI) and P.M.I. Trading, Ltd. and their affiliates (which we refer to as P.M.I. Trading, Ltd., and together with PMI, Group providesthe PMI Group) provide us and a number of independent customers with international trading, distribution and related services. PMI and P.M.I. Trading, Ltd. sell, buy and transport crude oil, refined products and petrochemicals in world markets. The PMI Group also provides related risk management, insurance, transportation and storage services to us. The PMI Group has offices in Mexico City, Houston and Madrid. The PMI Group’sOur trading volume of sales and imports totaled U.S. $52,262.6$59,672.2 million in 2006,2007, including U.S. $34,707.2$37,937.2 million in crude oil sales.


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Infrastructure of PEMEX
 
(MAP)(MAP)
 
Exploration and Production
 
Reserves
Under the Political Constitution of the United Mexican States and the Regulatory Law, all oil and other hydrocarbon reserves within Mexico are owned by the Mexican nation and not by us. Under the Organic Law, Petróleos Mexicanos and the subsidiary entities, except for Pemex-Petrochemicals, have the exclusive right to produce, not own, these reserves, and sell the resulting production. The exploration and development activities of Petróleos Mexicanos and the subsidiary entities are limited to reserves located in Mexico.


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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 recoverable in future years from known reservoirs under existing economic and operating conditions—i.e., prices and costs at the date of estimation. Mexico’s proved reserves are estimated by Pemex-Exploration and Production’s technical staff.
Pemex-Exploration and Production estimates Mexico’s reserves using standard geological and engineering methods generally accepted by the petroleum industry. The choice of method or combinations 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 represents 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 reserve 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.
Since 1996, reserves valuations have been prepared by the business units of Pemex-Exploration and Production, and these estimates are periodically reviewed by Pemex-Exploration and Production’s management. In addition, final reserves estimates are reviewed by independent engineering firms.
During 2006, Pemex-Exploration and Production retained three independent engineering firms to review its estimates of Mexico’s proved reserves as of December 31, 2005: Netherland, Sewell International, S. de R.L. de C.V. (“Netherland Sewell”); DeGolyer and MacNaughton (“DeGolyer”); and Ryder Scott Company L.P. (“Ryder Scott”, and, together with Netherland Sewell and DeGolyer, the “Independent Engineering Firms”). The reserves estimates reviewed by the Independent Engineering Firms totaled 99.8% of Mexico’s reserves. The 0.2% reserves not covered by the review are located in areas in which third parties provide services to PEMEX through the Financed Public Works Contracts program, as described under “Financed Public Works Contracts” below. Netherland reviewed the reserves in the Northeastern Marine region and Southern region, DeGolyer reviewed the reserves in the Southwestern Marine region and Ryder Scott reviewed the reserves in the Northern region. The audits conducted by the Independent Engineering Firms consisted primarily of: (1) analysis of historical static and dynamic reservoir data provided byPemex-Exploration and Production; (2) construction or updating of their own static and dynamic reservoir characterization models of Mexican oil fields; (3) economic analysis of their reserves estimates; and (4) review of PEMEX’s production forecasts and the 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 Pemex-Exploration and Production’s reserves estimates so that they could express an opinion as to whether, in the aggregate, the reserves estimates furnished by us were reasonable and had been estimated and presented in conformity with generally accepted petroleum and engineering and evaluation principles.
All questions that arose during the Independent Engineering Firms’ review process were resolved by Pemex-Exploration and Production 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 withRule 4-10 ofRegulation S-X of the SEC, are consistent with international reserve reporting practice, and are in accordance with oil and gas reserve disclosure provisions of the Financial Accounting Standards Board—FASB No. 69 Statement of Standards.


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During the first half of 2007, the same independent engineering firms will review Pemex-Exploration and Production’s estimates of Mexico’s proved reserves as of December 31, 2006.
Mexico’s total proved developed and undeveloped reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants decreased by 6.0% in 2006, from 13,671 million barrels of oil at December 31, 2005 to 12,849 million barrels of oil at December 31, 2006. Mexico’s proved developed reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants, decreased by 6.6% in 2006, from 9,617 million barrels of oil at December 31, 2005 to 8,978 million barrels of oil at December 31, 2006. Mexico’s total proved developed and undeveloped dry gas reserves decreased by 4.8% in 2006, from 14,557 billion cubic feet at December 31, 2005 to 13,856 billion cubic feet at December 31, 2006. Mexico’s proved developed dry gas reserves decreased by 2.3% in 2006, from 8,888 billion cubic feet at December 31, 2005 to 8,688 billion cubic feet at December 31, 2006.
The following two tables of crude oil and dry gas reserves set forth our estimates of Mexico’s proved reserves determined in accordance withRule 4-10(a) ofRegulation S-X of the Securities Act.
Crude Oil and Condensate Reserves
(including natural gas liquids)(1)
                     
  2002  2003  2004  2005  2006 
     (in millions of barrels)    
 
Proved developed and undeveloped reserves
                    
At January 1  18,767   17,196   16,041   14,803   13,671 
Revisions(2)
  (247)  120   (109)  197   433 
Extensions and discoveries(2)
  (36)  84   245   25   79 
Production  (1,288)  (1,359)  (1,374)  (1,354)  (1,332)
                     
At December 31  17,196   16,041   14,803   13,671   12,849 
                     
Proved developed reserves at December 31
  11,725   10,473   9,745   9,617   8,978 
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.
(2)Revisions and extensions include positive and negative changes due to new data gathered through drilling of extension wells.
Source: Pemex-Exploration and Production.
Dry Gas Reserves
                     
  2002  2003  2004  2005  2006 
  (in billions of cubic feet) 
 
Proved developed and undeveloped reserves
                    
At January 1  16,256   14,985   14,850   14,807   14,557 
Revisions(1)
  (443)  695   547   661   280 
Extensions and discoveries(1)
  313   354   641   394   505 
Production(2)
  (1,141)  (1,184)  (1,231)  (1,305)  (1,487)
                     
At December 31  14,985   14,850   14,807   14,557   13,856 
                     
Proved developed reserves at December 31
  8,572   8,094   8,325   8,888   8,688 
Note: Numbers may not total due to rounding.
(1)Revisions and extensions include positive and negative changes due to new data gathered through drilling of extension wells.
(2)Production refers 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 the volume of proved developed and undeveloped reserves, the number of producing wells, and the number of proved undeveloped locations for the fields that contain over 85% of Mexico’s proved reserves, as of December 31, 2006.
                     
  Proved
  Developed
  Undeveloped
  Producing
  Undeveloped
 
Field
 Reserves  Reserves  Reserves  Wells  Locations(2) 
  (in millions of barrels of crude oil equivalent)(1)       
 
Akal  4,600.1   4,006.4   593.7   183   13 
Ku-Maloob-Zaap  2,487.1   1,410.7   1,076.4   74   98 
Jujo-Tecominoacán  964.7   554.8   410.0   58   16 
Samaria  850.4   590.4   260.1   45   10 
Chicontepec  653.6   117.6   536.1   577   1,719 
Iride  610.7   451.6   159.1   39   8 
Sihil  286.0   73.0   213.0   4   8 
Ixtal  211.5   128.8   82.8   4   4 
Cunduacán  201.0   119.9   81.1   18   3 
Oxiacaque  160.5   46.6   113.9   8   8 
Sinán  156.8   126.2   30.6   14   5 
Caan  140.0   140.0   0.0   24   0 
Bolontikú  133.0   60.6   72.3   5   5 
May  131.1   64.5   66.6   6   7 
Chuc  129.4   126.2   3.2   16   3 
Cactus  101.0   44.6   56.3   21   7 
Chiapas-Copanó  95.2   95.2   0.0   14   0 
Muspac  94.9   94.9   0.0   15   0 
Balam  90.4   90.4   0.0   4   0 
Poza Rica  89.7   73.2   16.6   192   12 
Puerto Ceiba  89.0   66.9   22.1   16   3 
Cárdenas  84.9   70.7   14.2   14   3 
Sen  66.2   47.0   19.2   13   4 
Ogarrio  55.3   36.6   18.7   48   22 
Paredón  52.6   52.6   0.0   7   0 
Lum  52.6   27.3   25.2   1   3 
Caparroso-Pijije-Escuintle  51.7   42.8   8.9   14   2 
Abkatún  50.7   50.7   0.0   14   0 
Platanal  48.7   11.9   36.9   2   3 
Papán  46.5   46.5   0.0   0   0 
Ayín  45.6   0.0   45.6   0   3 
Ek  39.7   39.7   0.0   2   0 
Alux  36.9   0.0   36.9   0   2 
Cuitláhuac  35.2   27.9   7.3   223   29 
Bacab  30.9   30.9   0.0   4   0 
Culebra  29.2   23.1   6.2   444   38 
Tizón  25.4   11.4   14.0   3   3 
Arcabuz  18.8   14.7   4.2   183   21 
Kutz  15.3   15.3   0.0   3   0 
Ixtoc  14.4   14.4   0.0   3   0 
Arcos  13.6   13.6   0.0   156   0 
Nohoch  12.6   12.6   0.0   5   0 
Pol  9.9   9.9   0.0   12   0 
Misón  6.9   0.0   6.9   0   3 
Chac  6.2   6.2   0.0   2   0 
Luna-Palapa  3.3   3.3   0.0   6   0 
Citam  2.3   1.2   1.2   1   1 
Escarbado  1.5   1.5   0.0   1   0 
                     
Total
  13,133.3   9,094.2   4,039.1   2,498   2,066 
                     
Mexico’s proved reserves
  15,514.2   10,648.1   4,866.1         
Percentage
  85%   85%   83%         
Note: Numbers may not total due to rounding.
(1)To convert dry gas to barrel of oil equivalent, a factor is used of 5.201 thousand cubic feet of dry gas per barrel of oil equivalent.
(2)Undeveloped locations refers to the number of geographic sites or locations where a well will be drilled to produce undeveloped proved reserves.
Source: Pemex-Exploration and Production.


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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 through 2006,2007, we completed 5,2165,875 exploration and development wells. During 2006,2007, our average success rate for exploratory wells was 46%49% and our average success rate for development wells was 92%94%. From 20022003 to 2006,2007, we discovered 2628 new crude oil fields and 7672 new natural gas fields, bringing the total number of our crude oil and natural gas producing fields to 364352 at the end of 2006.2007.
 
The 20062007 exploration program was comprised of exploration in both onshore and offshore regions, including the deep waters in the Gulf of Mexico, where we discovered new reservoirs with thethat represent new drilling of the Lakach-1 well. Our activities focused on efficient ways of identifying potential hydrocarbon sources.opportunities. The exploratory activity yielded 182.9182.8 million barrels of crude oil equivalent of proved reserves in 2006. Our2007. A total of 14 fields were discovered, ten of which contain non-associated gas and four of which contain crude oil. In addition, within the currently producing fields, seven reservoirs were discovered, four of which contain non-associated gas and three of which contain crude oil. Exploration in deep waters continued and new reservoirs of non-associated gas were discovered with the drilling of the Lalail-1 well in the mid-Miocene. We also continued our main seismic data acquisition activities, in termsparticular, those related to three-dimensional seismic data. We acquired 11,849 square kilometers of three-dimensional seismic acquisition weredata in 2007, of which 75% was in the Burgos Project, where 1,260 square kilometers were acquired.deep waters of the Gulf of Mexico.


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The following table summarizes our drilling activity for the five years ended December 31, 2006.2007.
 
                                        
 Year Ended December 31,  Year Ended December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
Wells drilled  447   653   733   759   672   653   733   759   672   615 
Exploratory wells drilled  58   96   105   73   58   96   105   73   58   49 
Development wells drilled  389   557   628   686   614   557   628   686   614   566 
Wells completed  459   593   727   742   656   593   727   742   656   659 
Exploratory wells  55   88   103   74   69   88   103   74   69   49 
Exploratory productive wells(1)  27   53   42   39   32   53   42   39   32   24 
Success rate%  49   60   41   53   46 
Success rate %  60   41   53   46   49 
Development wells  404   505   624   668   587   505   624   668   587   610 
Development productive wells  355   455   581   612   541   455   581   612   541   569 
Success rate%  88   90   93   92   92 
Success rate %(2)
  90   93   92   92   94 
Producing wells (annual averages)(2)(3)
  4,590   4,941   5,286   5,682   6,080   4,941   5,286   5,682   6,080   6,280 
Marine region  346   369   380   388   411   369   380   388   411   434 
Southern region  1,000   979   935   959   958   979   935   959   958   926 
Northern region  3,245   3,593   3,972   4,335   4,711   3,593   3,972   4,335   4,711   4,920 
Producing wells (at year end)  2,067   2,307   5,217   5,671   5,998   4,870   5,217   5,671   5,998   5,941 
Producing fields  309   340   355   357   364   340   355   357   364   352 
Marine region  20   23   25   29   30   23   25   29   30   30 
Southern region  93   102   97   84   88   102   97   84   88   87 
Northern region  196   215   233   244   246   215   233   244   246   235 
Drilling Rigs  70   101   132   116   103   101   132   116   103   116 
Kilometers drilled  1,186   1,763   2,106   2,004   1,858   1,763   2,106   2,004   1,858   1,798 
Average depth by well (meters)  2,478   2,904   2,692   2,828   2,771   2,904   2,692   2,828   2,771   2,744 
Discovered fields(1)(4)
  16   33   24   16   13   33   24   16   13   14 
Crude oil  2   11   8   3   2   11   8   3   2   4 
Natural gas  14   22   16   13   11   22   16   13   11   10 
Crude oil and natural gas output by well (barrels per day)  900   880   833   774   729   880   833   774   729   699 
 
 
Note: Numbers may not total due to rounding.
 
(1)Includes only fields with proved reserves.Excludes non-commercial productive wells.
 
(2)Excludes injector wells.
(3)In May 2007,2008, the monthly average of total producing wells was 6,361.6,427.
(4)Includes only fields with proved reserves.
Source: Pemex-Exploration and Production.


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The following table sets forth our lifting costs (the average amount in U.S. dollars that it costs us to extract a barrel of oil equivalent) for each of the last three years.
 
         
Average Lifting Costs
 
Year Ended December 31, 
2004
 2005  2006 
(U.S. dollars per barrel) 
 
$3.78 $4.24  $4.13 
Source: Pemex-Exploration and Production.
Our lifting costs decreased by 2.6% from 2005 to 2006, primarily as a result of a 1.6% decrease in production expenses, from Ps. 74.1 billon in 2005 to Ps. 72.9 billon in 2006. This decrease in production expenses was primarily due to a decrease in the expense of gas used for gas lifting, which in turn was due to a reduction in gas prices. The total production of hydrocarbons in barrels of oil equivalent increased by 0.9% from 2005 to 2006.
Pemex-Exploration and Production calculates and discloses its lifting costs (the cost of producing oil from a well) in accordance with international practice. The production or lifting cost per barrel is calculated by dividing the total production expenses (in U.S. dollars) into the total production of hydrocarbons (in barrels of oil equivalent) over the relevant period. The lifting costs are calculated in accordance with U.S. GAAP SFAS No. 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies.”
The total lifting 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 and non-capitalized maintenance costs, and other costs, such as fees for general services, a labor fund for active personnel, corporate services and indirect overhead, but excludes non-cash expenses such as amortization of capitalized well expenses, the depreciation of fixed assets, and expenses associated with the distribution and handling of hydrocarbons and other expenses that are related to exploration and drilling activities.
Extensions and Discoveries
 
During 2006,2007, we discovered new sources of crude oil and natural gas reserves in 14 fields, 12 of which were discovered onshore, 10 in the Northern region and two in the Southern region. The two offshore field discoveries were made in the Southwestern and Northeastern Marine regions, as well as the Northern and Southern regions.region. In addition, seven reservoirs were discovered in currently producing fields. The new discoveries yielded a total of 182.9 million barrels of crude oil equivalent of proved reserves. The extensions yielded a total reduction of 7.2182.8 million barrels of crude oil equivalent of proved reserves.
 
In the Southwestern Marine region, the drilling of the Lakach-1, Onel-1, Yaxché-101Kuil-1 andHomol-101 Xulum-101 wells led to the addition of 55.716.1 million barrels of proved crude oil reserves and 405.79.4 billion cubic feet of proved natural gas reserves. The drilling of the Paché-1, Tajón-101, Cráter-1 and Gaucho-301 wells in the NorthernSouthern region led to the addition of 109.9 billion cubic feet27.8 million barrels of proved natural gasoil reserves mainly in the Burgos basin, where the drilling of the General-8, Mareógrafo-1, Arcabuz-560, Cachas-1, Quintal-1, Explorador-115, Cheche-1, Rusco-1, Fogonero-101, Antiguo-7 and Rosal-2 wells added 62.3111.8 billion cubic feet of proved natural gas reserves. Other important discoveries occurred inIn the VeracruzNorthern regions’ Burgos basin, with the drilling of Enispe-1, Fresnel-1, Mocarroca-1, Romarik-1the Axón-1, Bato-1, Bonanza-1, Calibrador-1, Vigilante-1, Barajas-1, Castell-1, Jaf-1, Obertura-1, Aceitero-1, Oasis-401 and Rosenblú-11001, Fémur-1 and


24

Quetzalli-1 wells which added 3.3 led to the addition of 0.3 million barrels of proved crude oil reserves and 47.783.7 billion cubic feet of proved natural gas reserves. Finally, the drilling of the Maloob-DL3 well in the SouthernNortheastern Marine region the exploration activities via the Nelash-1 and Cobra-1 wells led to the addition of 7.285.0 million barrels of proved crude oil reserves and 32.839.3 billion cubic feet of proved natural gas reserves.
Reserves
Under the Political Constitution of the United Mexican States and the Regulatory Law, all oil and other hydrocarbon reserves within Mexico are owned by the Mexican nation and not by us. Under the Organic Law, Petróleos Mexicanos and the subsidiary entities, except for Pemex-Petrochemicals, have the exclusive right to produce, not own, these reserves, and sell the resulting production. 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 recoverable in future years from known reservoirs under existing economic and operating conditions —i.e., prices and costs at the date of estimation. Mexico’s proved reserves are estimated by Pemex-Exploration and Production’s technical staff.
Pemex-Exploration and Production estimates Mexico’s reserves using standard geological and engineering methods generally accepted by the petroleum industry. 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 represents 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 reserve 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.
Since 1996, reserves valuations have been prepared by the business units of Pemex-Exploration and Production, and these estimates are periodically reviewed by Pemex-Exploration and Production’s management. In addition, final reserves estimates are reviewed by independent engineering firms.
During 2007, Pemex-Exploration and Production retained three independent engineering firms to review its estimates of Mexico’s proved reserves as of December 31, 2007: Netherland, Sewell International, S. de R.L. de C.V. (Netherland Sewell); DeGolyer and MacNaughton (D&M); and Ryder Scott Company, L.P. (Ryder Scott, and, together with Netherland Sewell and D&M, the Independent Engineering Firms). The reserves estimates reviewed by the Independent Engineering Firms totaled 99.6% of Mexico’s reserves. The 0.4% of reserves not covered by the review are located in areas in which third parties provide services to Pemex-Exploration and Production through the Financed Public Works Contracts program, as described under “Financed Public Works Contracts” below. Under such agreements, the corresponding third party is responsible for assessing the volume of reserves, which is in turn certified by an engineering firm hired by such party. Netherland Sewell reviewed the reserves in the Northeastern Marine region and Southern region, D&M reviewed the reserves in the Southwestern Marine region and Ryder Scott reviewed the reserves in the Northern region. The audits conducted by the Independent Engineering Firms consisted primarily of: (1) analysis of historical static and dynamic reservoir data provided by Pemex-Exploration and Production; (2) construction or updating of their own static and dynamic reservoir characterization models of Mexican oil fields; (3) economic analysis of selected fields; and (4) review of Pemex-Exploration and Production’s production forecasts and the reserves estimates.


25

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 Pemex-Exploration and Production’s reserves estimates so that they could express an opinion as to whether, in the aggregate, the reserves estimates furnished by us were reasonable and had been estimated and presented in conformity with generally accepted petroleum and engineering and evaluation principles.
All questions that arose during the Independent Engineering Firms’ review process were resolved by Pemex-Exploration and Production 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 withRule 4-10(a) ofRegulation S-X of the SEC, are consistent with international reserve reporting practice, and are in accordance with oil and gas reserve disclosure provisions of the Financial Accounting Standards Board — SFAS No. 69 Statement of Standards.
Mexico’s total proved developed and undeveloped reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants decreased by 5.2% in 2007, from 12,849 million barrels of oil at December 31, 2006 to 12,187 million barrels of oil at December 31, 2007.
Mexico’s proved developed reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants, decreased by 6.0% in 2007, from 8,978 million barrels of oil at December 31, 2006 to 8,436 million barrels of oil at December 31, 2007.
Mexico’s total proved developed and undeveloped dry gas reserves decreased by 5.0% in 2007, from 13,856 billion cubic feet at December 31, 2006 to 13,162 billion cubic feet at December 31, 2007. Mexico’s proved developed dry gas reserves decreased by 6.0% in 2007, from 8,688 billion cubic feet at December 31, 2006 to 8,163 billion cubic feet at December 31, 2007.
The following two tables of crude oil and dry gas reserves set forth our estimates of Mexico’s proved reserves determined in accordance withRule 4-10(a) ofRegulation S-X of the SEC.
Crude Oil and Condensate Reserves
(including natural gas liquids)(1)
                     
  2003  2004  2005  2006  2007 
  (in millions of barrels) 
 
Proved developed and undeveloped reserves
                    
At January 1  17,196   16,041   14,803   13,671   12,849 
Revisions(2)
  120   (109)  165   425   455 
Extensions and discoveries  84   245   57   86   150 
Production  (1,359)  (1,374)  (1,354)  (1,332)  (1,268)
                     
At December 31  16,041   14,803   13,671   12,849   12,187 
                     
Proved developed reserves at December 31
  10,473   9,745   9,617   8,978   8,436 
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.
(2)Revisions include positive and negative changes due to new data from well drilling and revisions made when actual reservoir performance differs from expected performance.
Source: Pemex-Exploration and Production.


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Dry Gas Reserves(1)
                     
  2003  2004  2005  2006  2007 
  (in billions of cubic feet) 
 
Proved developed and undeveloped reserves
                    
At January 1  14,985   14,850   14,807   14,557   13,856 
Revisions(2)
  695   547   640   280   879 
Extensions and discoveries  354   641   415   505   171 
Production(3)
  (1,184)  (1,231)  (1,305)  (1,487)  (1,744)
                     
At December 31  14,850   14,807   14,557   13,856   13,162 
                     
Proved developed reserves at December 31
  8,094   8,325   8,888   8,688   8,163 
Note: Numbers may not total due to rounding.
(1)To convert dry gas to barrels of oil equivalent, a factor of 5.201 thousand cubic feet of dry gas per barrel of oil is used.
(2)Revisions include positive and negative changes due to new data from well drilling and revisions made when actual reservoir performance differs from expected performance.
(3)Production refers 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 the volume of proved developed and undeveloped reserves, the number of producing wells, and the number of proved undeveloped locations for the fields that contain over 86% of Mexico’s proved reserves, as of December 31, 2007.
                     
  Proved
  Developed
  Undeveloped
  Producing
  Undeveloped
 
Field
 Reserves  Reserves  Reserves  Wells  Locations(2) 
     (in millions of barrels of crude oil equivalent)(1) 
 
Akal  3,699.3   3,338.9   360.4   168   8 
Ku-Maloob-Zaap  2,732.7   1,778.9   953.9   105   74 
Jujo-Tecominoacán  931.6   531.4   400.2   54   18 
Samaria  650.4   469.1   181.4   52   21 
Iride  627.4   388.7   238.7   39   2 
Aceite Terciario del Golfo (formerly Chicontepec)  625.9   22.7   603.2   590   1,763 
Sihil  284.6   28.5   256.1   4   15 
May  273.9   114.2   159.8   7   16 
Cunduacán  258.2   157.0   101.2   17   1 
Oxiacaque  230.7   111.1   119.7   8   7 
Ixtal  162.1   89.3   72.9   4   5 
Caan  124.9   124.9   0.0   19   0 
Bolontikú  98.4   71.2   27.1   7   6 
Cactus  96.3   39.9   56.3   19   6 
Sinán  93.8   82.2   11.7   12   3 
Chiapas-Copanó  93.1   93.1   0.0   10   0 
Chuc  90.9   87.7   3.2   17   3 
Cárdenas  88.8   74.7   14.1   11   5 
Balam  86.8   86.8   0.0   4   0 
Ek  85.1   49.7   35.4   7   8 
Poza Rica  84.1   74.3   9.8   198   12 
Puerto Ceiba  76.1   73.9   2.2   17   3 
Bellota  74.8   74.8   0.0   10   0 
Sen  68.4   44.0   24.4   12   5 
Mora  67.6   54.6   13.0   6   4 
Ogarrio  63.5   51.8   11.6   41   10 
Lizamba  61.7   61.7   0.0   37   0 
Papán  51.4   46.3   5.1   9   1 
Lum  49.4   24.2   25.2   1   3 
Paredón  46.9   46.9   0.0   6   0 
Ayín  45.8   0.0   45.8   0   3 
San Ramón  42.4   25.1   17.2   28   17 
Caparroso-Pijije-Escuintle  39.8   30.7   9.0   13   2 
Abkatún  38.9   38.9   0.0   11   0 
Yaxché  37.8   13.0   24.8   1   6 
Alux  37.1   0.0   37.1   0   2 
Onel  34.0   0.0   34.0   0   4 
Platanal  33.7   10.5   23.2   2   2 
Cuitláhuac  33.2   24.2   9.0   219   51 
Narváez  31.8   25.3   6.4   9   1 
Tizón  29.8   16.9   12.9   4   5 
Magallanes-Tucán-Pajonal  29.6   24.0   5.6   34   7 
Culebra  29.1   21.9   7.2   446   50 
Rodador  28.8   25.3   3.5   16   2 
Ché  28.3   0.0   28.3   0   3 
Chinchorro  26.4   22.5   3.8   5   1 
Homol  26.2   8.4   17.8   1   2 
Cinco Presidentes  24.6   14.3   10.3   27   13 
Arcabuz  22.1   16.9   5.2   220   31 
Cráter  19.5   4.7   14.8   1   3 
Fundador  12.8   12.8   0.0   22   0 
Arcos  12.3   12.3   0.0   138   0 
Pol  11.6   11.6   0.0   12   0 
Velero  10.9   9.8   1.1   136   11 
                     
Total
  12,665.2   8,661.7   4,003.6   2,836   2,215 
                     
Mexico’s proved reserves
  14,717.2   10,005.3   4,711.9         
Percentage
  86%   87%   85%         
Note: Numbers may not total due to rounding.
(1)To convert dry gas to barrel of oil equivalent, a factor is used of 5.201 thousand cubic feet of dry gas per barrel of oil equivalent.
(2)Undeveloped locations refers to the number of geographic sites or locations where a well will be drilled to produce undeveloped proved reserves.
Source: Pemex-Exploration and Production.


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Production or Lifting Costs
The production or lifting costs, which represent the average amount in U.S. dollars that it costs us to extract a barrel of oil equivalent, amounted in 2007 to U.S. $4.72 per produced barrel of oil equivalent.
The following table sets forth our lifting costs for each of the last three years.
         
Average Lifting Costs
Year Ended December 31,
2005 2006 2007
(U.S. dollars per barrel)
 
U.S. $4.24 U.S. $4.13  U.S. $4.72 
Source: Pemex-Exploration and Production.
In 2007, the extraction costs of U.S. $4.72 per barrel of oil equivalent produced increased by 14.3% as compared to lifting costs of U.S. $4.13 in 2006. This increase resulted primarily from a 13.4% increase in production expenses, from Ps. 72.9 billion in 2006 to Ps. 82.7 billion in 2007, due to the allocation of additional management costs and an increase in labor reserve expenses. The unit cost also increased as a result of a 1% reduction in the total hydrocarbon production in terms of barrels of oil equivalent in 2007 as compared to 2006.
Pemex-Exploration and Production calculates and discloses its lifting costs in accordance with international practice. The production or lifting cost per barrel is calculated by dividing the total production expenses (in U.S. dollars) into the total production of hydrocarbons (in barrels of oil equivalent) over the relevant period. The lifting costs are calculated in accordance with SFAS No. 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies.”
The total lifting 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 and non-capitalized maintenance costs, and other costs, such as fees for general services, a labor fund for active personnel, corporate services and indirect overhead, but excludes non-cash expenses such as amortization of capitalized well expenses, the depreciation of fixed assets, and expenses associated with the distribution and handling of hydrocarbons and other expenses that are related to exploration and drilling activities.
Crude Oil and Natural Gas Production
In 2007, we produced an average of 3,082 thousand barrels per day of crude oil, 5.3% less than our average daily production in 2006 of 3,256 thousand barrels per day of crude oil. The decrease was mainly due to the natural decline of production in the Cantarell complex. Shutdowns of wells in the offshore regions as a result of adverse weather conditions, maintenance and inventory accumulations also contributed to the decline. Accordingly, our production of heavy crude oil decreased by 198 thousand barrels per day, which was 8.8% less than the average daily production in 2006. The 8.8% decrease in our heavy crude oil production was partially offset by an increase in light and extra-light crude oil production of 24 thousand barrels per day, or a 2.4% increase as compared to 2006, as a result of the completion and workover of several wells in the Southwestern Marine region.
Crude oil can be classified by its sulphur content. “Sour” or heavy crude oil contain 3.4% or greater sulphur content by weight and “sweet” or light crude oil contain less than 1.0% sulphur content by weight. Most of our production is classified as sour or heavy crude oil.
Pemex-Exploration and Production produces four types of crude oil:
•  Altamira, a heavy crude oil;
•  Maya, a heavy crude oil;


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•  Isthmus, a light crude oil; and
•  Olmeca, a very light crude oil.
Most of Pemex-Exploration and Production’s production consists of Isthmus and Maya crude oil. In 2007, 66% of Pemex-Exploration and Production’s total production of crude oil consisted of heavy crudes and 34% consisted of light and very light crudes. The Marine region yields mostly heavy crude oil (78.3% of this region’s production in 2007), although significant volumes of light crude oil are also produced (21.7% of this region’s production). The Southern region yields mainly light and very light crudes (together, 97.7% of this region’s production), and the Northern region yields heavy crude oil (61.0% of this region’s production in 2007) and light and very light crudes (39.0% of this region’s production in 2007).
The most productive crude oil and natural gas fields in the Gulf of Mexico are located in the Cantarell and Ku-Maloob-Zaap complexes in the Northeastern Marine region and in Chuc, Caan, Sinán and Ixtal in the Southwestern Marine region. In particular, the Cantarell complex produced 1,496.5 thousand barrels per day of crude oil in 2007, or 48.6% of the total crude oil production in 2007, and 944.9 million cubic feet per day of natural gas, or 15.6% of the total natural gas production in 2007.
The following table sets forth our annual crude oil production rates by type of oil for the five years ended December 31, 2007.
Crude Oil Production
                         
                 2007
 
  2003  2004  2005  2006  2007  vs. 2006 
  (in thousands of barrels per day)  (%) 
 
Marine region
                        
Heavy crude oil  2,380.9   2,412.3   2,330.8   2,173.6   1,981.7   (8.8)
Light crude oil  433.0   416.7   422.5   506.2   547.9   8.2 
                         
Total  2,813.9   2,829.0   2,753.3   2,679.8   2,529.6   (5.6)
Southern region
                        
Heavy crude oil  6.4   7.1   20.8   14.2   10.7   (24.6)
Light crude oil  476.9   465.6   475.7   477.1   454.5   (4.7)
                         
Total  483.3   472.7   496.6   491.3   465.2   (5.3)
Northern region
                        
Heavy crude oil  38.0   38.6   35.4   55.9   53.0   (5.2)
Light crude oil  35.6   42.6   48.1   28.6   33.9   18.5 
                         
Total  73.6   81.2   83.5   84.5   86.9   2.8 
Total heavy crude oil  2,425.4   2,458.0   2,387.0   2,243.8   2,045.4   (8.8)
Total light crude oil  945.5   924.9   946.4   1,011.8   1,036.3   2.4 
                         
Total crude oil  3,370.9   3,382.9   3,333.3   3,255.6   3,081.7   (5.3)
                         
Note:  Numbers may not total due to rounding.
Source: Pemex-Exploration and Production.


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The following table sets forth our annual crude oil production by region for the five years ended December 31, 2007.
Crude Oil Production
                         
                 2007
 
  2003  2004  2005  2006  2007  vs. 2006 
  (in thousands of barrels per day)  (%) 
 
Northern region
                        
Burgos  —   —   —   —   —   — 
Poza Rica-Altamira  72.1   79.5   81.6   83.0   85.1   2.5 
Veracruz  1.5   1.7   1.9   1.5   1.8   20.0 
                         
Total  73.6   81.2   83.5   84.5   86.9   2.8 
Southern region
                        
Cinco Presidentes  37.3   37.7   38.8   39.3   44.6   13.5 
Bellota-Jujo  195.4   212.3   224.0   219.1   190.0   (13.3)
Macuspana  2.5   4.9   5.0   6.6   10.4   57.6 
Muspac  42.2   36.1   33.3   33.6   33.6   0 
Samaria-Luna  205.9   181.6   195.5   192.7   186.7   (3.1)
                         
Total  483.3   472.7   496.6   491.3   465.2   (5.3)
Marine region
                        
Cantarell  2,122.8   2,136.4   2,035.3   1,800.9   1,496.5   (16.9)
Ku-Maloob-Zaap  293.6   304.4   321.7   403.8   527.2   30.6 
Abkatún-Pol-Chuc  359.0   321.8   299.8   332.2   312.3   (6.0)
Litoral de Tabasco  38.6   66.4   96.5   142.9   193.6   35.5 
                         
Total  2,813.9   2,829.0   2,753.3   2,679.8   2,529.6   (5.6)
                         
Total crude oil  3,370.9   3,382.9   3,333.3   3,255.6   3,081.7   (5.3)
                         
Source:Pemex-Exploration and Production
The Marine region is located on the continental shelf and its slope in the Gulf of Mexico. It covers a surface of approximately 550,000 square kilometers, totally included in 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 2007, the average crude oil production, from 32 fields located in this region, was 2,529.6 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 2007, the average oil production, from 85 oil fields located in this region, totaled 465.2 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, among others, in the states of Veracruz, Tamaulipas, Nuevo León, Coahuila, San Luis Potosí and Puebla. In 2007, the average crude oil and natural gas production in the Northern region totaled 86.9 thousand barrels of crude oil per day and 2,556 million cubic feet of natural gas reserves, respectively.per day, respectively, from 231 oil and gas fields, in this region.


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The following table sets forth our annual natural gas production rates for the five years ended December 31, 2007:
                         
  Year Ended December 31,  2007 
  2003  2004  2005  2006  2007  vs. 2006 
  (in million cubic feet per day)  (%) 
 
Northern region
                        
Burgos  1,030.7   1,094.5   1,217.3   1,330.3   1,411.8   6.1 
Veracruz  205.2   313.8   499.2   723.3   921.7   27.4 
Poza Rica-Altamira  110.8   119.5   118.8   174.1   222.5   27.8 
                         
   1,346.7   1,527.8   1,835.2   2,227.6   2,556.0   14.7 
Southern region
                        
Cinco Presidentes  58.7   67.8   62.8   56.7   61.4   8.3 
Bellota-Jujo  276.6   276.6   281.9   271.4   239.6   (11.7)
Macuspana  147.5   179.6   167.5   192.9   223.1   15.7 
Muspac  686.0   558.1   449.2   368.5   310.9   (15.6)
Samaria-Luna  461.2   412.9   438.9   462.6   517.6   11.9 
                         
   1,630.0   1,495.1   1,400.3   1,352.1   1,352.8   0.1 
Marine region
                        
Cantarell  786.1   789.1   760.7   717.7   944.9   31.7 
Ku-Maloob-Zaap  154.4   158.4   167.1   202.5   212.2   4.8 
Abkatún-Pol-Chuc  494.3   456.1   431.8   512.5   544.2   6.2 
Litoral de Tabasco  87.0   146.5   222.9   343.6   448.4   30.5 
                         
   1,521.8   1,550.0   1,582.5   1,776.4   2,149.7   21.0 
                         
Total natural gas  4,498.4   4,572.9   4,818.0   5,356.1   6,058.5   13.1 
                         
Source: Pemex-Exploration and Production
In 2007, the Northern region produced 2,556.0 million cubic feet per day of natural gas, or 42.2% of our total natural gas production, an increase of 14.7% as compared to the region’s 2006 production of 2,227.6 million cubic feet per day. In 2007, the Southern region produced 1,352.8 million cubic feet per day of natural gas, or 22.3% of our total natural gas production, an increase of 0.1% as compared to the region’s 2006 production of 1,352.1 million cubic feet per day. In 2007, the Marine region produced 2,149.7 million cubic feet per day of natural gas, or 35.5% of our total natural gas production, an increase of 21.0% as compared to the region’s 2006 production of 1,776.4 million cubic feet per day.
 
ExpendituresInvestments in Exploration and Production
 
In nominal peso terms, our capital expenditures for exploration and production were Ps. 130,071115,563 million in 2006,2007, as compared to Ps. 112,863102,351 million in 2005,2006, representing a 15.2%12.9% increase in nominal terms. An important component of our investment budget consists of projects financed under PIDIREGAS. In 2006,2007, in nominal peso terms, Pemex-Exploration and Production’s PIDIREGAS expenditures totaled approximately Ps. 121,929141,769 million, including Ps. 24,20928,227 million of maintenance expenditures, which are not capitalized under


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Mexican FRS. Of our total PIDIREGAS expenditures, Ps. 26,72435,706 million was directed to the Ku-Maloob-Zaap fields, Ps. 25,99229,049 million was directed to the Cantarell fields, Ps. 23,42023,401 million was directed to the Strategic Gas Program, Ps. 15,72614,622 million was used for development of the Burgos natural gas fields (including Ps. 2,4283,003 million from the Financed Public Works Contracts Program, see “Item 4—4 — Information on the Company—Company — Financed Public Works Contracts”), Ps. 6,9088,484 million was directed to the Antonio J. Bermúdez fields, Ps. 2,2314,938 million was directed to the Arenque fields,Aceite Terciario del Golfo project, Ps. 2,943 million in the Jujo-Tecominoacán fields and Ps. 3,1503,702 million was directed to the Chuc project, Ps. 3,696 million was directed to the Jujo-Tecominoacán fields and Ps. 2,494 million was directed to the Caan fields. During 2006,2007, expenditures for these eightnine projects amounted to 87.8%88.9% of all PIDIREGAS expenditures for exploration and production. The remaining 12%11.1% amounted to Ps. 14,83515,677 million in nominal terms, which was directed to the 1912 remaining projects, 17 of which were commenced in 2002.projects.


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In 2006,2007, our PIDIREGAS capital expenditures in exploration and production totaled Ps. 97,720113,542 million as compared to Ps. 82,88197,720 million in 2005,2006, which represents an increase of 17.9%16.2%.
The Ku-Maloob-Zaap, Cantarell, Strategic Gas Program, Burgos, Antonio J. Bermúdez, Arenque, Jujo-Tecominoacán and Chuc PIDIREGAS are described below.
Ku-Maloob-Zaap.  The Ku-Maloob-Zaap project is one of the main producers of heavy crude oil and plays an important part in the production of the Maya crude oil mix. In order to maintain our volume of production, we are drilling wells and implementing a pressure maintenance system in this project. In nominal peso terms, our PIDIREGAS expenditures were Ps. 10,222 million in 2004, Ps. 16,424 million in 2005 and Ps. 26,724 million in 2006 in the Ku-Maloob-Zaap project. For 2007, we anticipate that our PIDIREGAS expenditures in this project will reach Ps. 30,097 million and that our total accumulated PIDIREGAS expenditures in the project will reach approximately U.S. $7.5 billion. In 2007, Pemex-Exploration and Production expects to invest approximately U.S. $51 million in a pressure maintenance project with a volume of 56 billion cubic feet. This pressure maintenance project is expected to reach an average nitrogen injection rate of 400 million cubic feet per day while operational, with a maximum injection rate of 566 million cubic feet per day, by taking advantage of the fifth module added to the Cantarell nitrogen cryogenic plant. In addition, in 2007, the Floating Production, Storage and Offloading (FPSO) vessel, Yùum K’ak’náab (Lord of the Sea) will begin operations. It will be the first FPSO vessel operating in the Gulf of Mexico, and will allow us to: 1) increase our production flexibility in the Northeast Marine region; 2) blend different types of crude oil in order to maintain a Maya type mix and satisfy the export market; 3) increase our storage capacity by 2.2 million barrels; and 4) establish an additional offloading position with a maximum capacity of 1.2 million barrels per day.
Cantarell.  In nominal peso terms, Pemex-Exploration and Production’s PIDIREGAS expenditures were Ps. 27,240 million in 2004, Ps. 25,030 million in 2005 and Ps. 25,992 million in 2006 in the development of the Cantarell reservoirs in the Marine region. For 2007, we have budgeted Ps. 26,644 million for Cantarell PIDIREGAS expenditures. By the end of 2007, we expect our PIDIREGAS expenditures in the Cantarell project to total approximately U.S. $23.1 billion.
On October 10, 1997, we awarded a build-own-operate contract for a nitrogen cryogenic plant at the Cantarell oil and natural gas field 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 cost approximately Ps. 10,131 million in nominal terms. Pursuant to the terms of the agreement, the consortium has legal ownership of the plant, andPemex-Exploration and Production has committed to buy from the consortium 1.2 billion cubic feet per day of nitrogen for a period of 15 years. The plant began operations in 2000. During 2006, Pemex-Exploration and Production paid approximately U.S. $166 million under this contract for a total volume of approximately 430 billion cubic feet of nitrogen. In 2007, Pemex-Exploration and Production expects to pay approximately U.S. $197 million under this contract for a total volume of approximately 489 billion cubic feet of nitrogen, which will be injected into the Cantarell field. In 2006, we added a fifth module to the nitrogen plant, which increased its production capacity by approximately 300 million cubic feet per day, in order to reach a total nitrogen production of approximately 1.5 billion cubic feet per day. We plan to inject approximately 1.34 billion cubic feet per day into the Cantarell reservoirs in 2007, and we plan to inject approximately


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0.93 billion cubic feet per day from 2008 to 2016. After 2016, we will gradually reduce the amount of nitrogen we inject into the Cantarell reservoirs and the excess nitrogen will be injected in other fields in the Marine region. By maintaining favorable crude oil recovery rates at Cantarell, we expect that the injection program will yield long-term benefits, including increasing the productive life of the wells and the volume of oil recovered. In the event that the agreement is rescinded due to a cause imputed to us, we will be obligated under the agreement to purchase the nitrogen production plant, with an estimated value of approximately U.S. $712 million as of December 31, 2006, which includes the fifth module.
Strategic Gas Program.  In 2001, Pemex-Exploration and Production initiated a nine-year, U.S. $8,105 million project named the Strategic Gas Program. Field development and optimization of production will represent 76% of expenditures, with the goal of increasing the production of natural gas to 2,308 million cubic feet per day by 2015. Exploration activities will represent 12% of expenditures with the goal of increasing proved reserves in twelve different exploratory natural gas and integral gas projects. Finally, development of newly discovered fields will represent 12% of our total outlays. In nominal peso terms, Pemex-Exploration and Production’s PIDIREGAS expenditures were Ps. 23,420 million in the program in 2006, as compared with Ps. 20,635 million in 2005. For 2007, we expect PIDIREGAS expenditures to be Ps. 20,664 million, which would bring our total PIDIREGAS expenditures in the program to approximately U.S. $10.7 billion through December 31, 2007. During the period from 2002 to 2006, average production was 1,020.4 million cubic feet per day of natural gas. Since 2002, 143 exploratory wells demonstrated offshore and onshore gas potential, resulting in a 37% exploratory success ratio. During 2006, 11 fields were discovered. The Cachas, Explorador, Fogonero, Mareógrafo, Quintal and Rusco fields were discovered in the Burgos basin. The Lakach field was discovered in the deep waters of the Gulf of Mexico. The Cobra field was discovered in the onshore area of the Southeastern basin. Finally, the Enispe, Romarik and Rosenblú fields were discovered in the Veracruz basin.
Burgos.  In 1997, Pemex-Exploration and Production initiated a15-year project to develop the Burgos natural gas fields in Northern Mexico, which accounted for 11% of our total natural gas production in 1997. We expect that the Burgos project will better enable us to meet increasing domestic demand for natural gas. Three major turn-key contracts have been awarded to Dowell-Schlumberger México (worth U.S. $108 million), Industrial Perforadora de Campeche, S.A. de C.V. (worth U.S. $96.4 million) and Halliburton International, Inc. (worth U.S. $71 million) for this project. From 2003 to 2006, exploration activities and reclassification of reserves in the Burgos area increased estimated proved reserves by 62.7 million barrels of oil equivalent, and production in this period was 351.8 million barrels of oil equivalent. During 2006, reserves increased by 54.9 million barrels of oil equivalent, from 404.6 million barrels of oil equivalent in 2005 to 459.5 million barrels of oil equivalent in 2006. In nominal peso terms, our PIDIREGAS expenditures were Ps. 16,344 million in 2004, Ps. 12,439 million in 2005 and Ps. 15,726 million in 2006 in the Burgos project (including Financed Public Works Contracts). For 2007, we anticipate that our PIDIREGAS expenditures in this project will amount to Ps. 19,193 million and that our total accumulated PIDIREGAS expenditures will reach approximately U.S. $10.6 billion.
Antonio J. Bermúdez.  In 2002, we began investing in the Antonio J. Bermúdez project, the main PIDIREGAS in the Southern region. This project is designed to accelerate reserve recovery, as well as increase the recovery factor by drilling additional wells and implementing a pressure maintenance system. In nominal peso terms, our PIDIREGAS expenditures were Ps. 6,270 million in 2004, Ps. 7,045 million in 2005 and Ps. 6,908 million in 2006 in the Antonio J. Bermúdez project. For 2007, we anticipate that our PIDIREGAS expenditures in this project will amount to Ps. 7,249 million and that our total accumulated investments will be approximately U.S. $2.9 billion. In July 2007, the injection of 190 million cubic feet per day of nitrogen supplied by a modular plant under construction will be started. This modular plant will be located next to the field. We will pay approximately U.S. $35 million under the contract for this volume of nitrogen. From 2008 to 2022, we plan to inject the same volume.
Arenque.  In 2002, Pemex-Exploration and Production initiated this project to recover light crude oil reserves with high gas-oil relation. The Arenque project includes drilling and secondary recovery processes, as well as exploratory studies. In nominal peso terms, our PIDIREGAS expenditures were Ps. 2,274 million in 2004, Ps. 2,344 million in 2005 and Ps. 2,231 million in 2006 in the Arenque project. In 2007, we expect our


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PIDIREGAS expenditures to be Ps. 1,833 million in this project, bringing our total PIDIREGAS expenditures in the Arenque project to approximately U.S. $0.9 billion.
Jujo-Tecominoacán.  This field is the second largest crude oil producer in the Southern region and has been exploited by Pemex-Exploration and Production since 1980. Our investments in the Jujo-Tecominoacán fields since 2002 are designed to slow the decrease in oil production in recent years, by drilling additional wells and implementing maintenance programs. In nominal peso terms, our PIDIREGAS expenditures were Ps. 1,699 million in 2004, Ps. 2,340 million in 2005 and Ps. 2,943 million in 2006 in theJujo-Tecominoacán project. In 2007, we expect our PIDIREGAS expenditures to be Ps. 2,628 million in this project, bringing our total PIDIREGAS expenditures in the Jujo-Tecominoacán project to approximately U.S. $1.0 billion. We plan to convert a production well into an injection well in 2007. In 2007, we expect to begin injecting nitrogen supplied by a modular plant under construction near the field. We plan to inject approximately 90 million cubic feet per day beginning in November 2007.
Chuc.  The Chuc project is part of an integrated strategy of light crude oil production in the Southwestern Marine region. It is part of the operating and maintenance of the Pol-A facility and water injection complexes. In January 2007, the Pol and Batab projects were merged into the Chuc project. In nominal peso terms, our PIDIREGAS expenditures were Ps. 5,226 million in 2004, Ps. 2,500 million in 2005 and Ps. 3,363 million in 2006 in the Chuc, Pol and Batab projects. In 2007, we expect our PIDIREGAS expenditures to be Ps. 3,832 million in this project and anticipate that our total accumulated PIDIREGAS expenditures will reach approximately U.S. $1.5 billion.
 
Non-PIDIREGAS Investments.  In addition to PIDIREGAS investments, Pemex-Exploration and Production makes non-PIDIREGAS investments calledRecursos Propios(Proprietary Funds) orInversiones Programables(Programmed Investments), authorized by the Ministry of Finance and Public CreditSHCP and the Mexican Congress. In nominal peso terms, in 2006,2007, non-PIDIREGAS capital expenditures of Pemex-Exploration and Production totaled Ps. 4.631 million, of which Ps. 3,642 million, or 78.6%, was invested in strategic projects and Ps. 989 million, or 21.4%, in general operating improvements.2,021 million. Our non-PIDIREGAS investments consisted of Ps. 31174 million in oil and gas exploration and Ps. 4,3201,947 million in general field development and facilities.
 
20072008 Exploration and Production PIDIREGAS and Non-PIDIREGAS Capital Expenditures Budget.  For 2008, Pemex-Exploration and Production anticipates a total PIDIREGAS and Non-PIDIREGAS capital expenditures budget of Ps. 128,722 million as compared to Ps. 115,563 million in 2007, representing an increase of 11.4%. For 2008, Pemex-Exploration and Production anticipates a total of Ps. 4,2473,904 million in non-PIDIREGAS expenditures, including Ps 2,262 million of expenditures for maintenance.capital expenditures. In addition to these non-PIDIREGAS capital expenditures, the 20072008 budget includes all of the 2122 on-going PIDIREGAS strategic exploration and production projects for a total PIDIREGAS budget of approximately Ps. 137,245172,553 million (including Ps. 22,61647,735 million of non-capitalized expenditures for maintenance), of which Ps. 6,9776,883 million relates to Financed Public Works Contracts. Approximately Ps. 116,192105,965 million, or 84.7%82.3% of our PIDIREGAS and Non-PIDIREGAS capital expenditures budget, is to be allocated to projects relating to field development pipelines and exploration activities,pipelines, including the continuation of certain projects that began during the period from 1999 to 2005. Approximately Ps. 21,05322,757 million, or 15.3%17.7%, will be allocated to operating projects as well as to projects relating to maintenance facilities, industrial safety and environmental projects. exploration activities.
The 20072008 PIDIREGAS budget includes Ps. 30,09722,484 million for Ku-Maloob-Zaap, Ps. 26,64448,350 million for Cantarell, Ps. 20,66427,897 million for the Strategic Gas Program, Ps. 19,19316,512 million for Burgos, Ps. 7,2499,628 million for Antonio J. Bermúdez, Ps. 15,988 million for Aceite Terciario del Golfo, Ps. 3,442 million for the Chuc project, Ps. 5,035 million for the Jujo-Tecominoacán project, Ps. 2,741 million for the Caan project and Ps. 33,39820,476 million for the other PIDIREGAS.
 
Exploration and Production Investment Trends.  In 2006,2007, we invested Ps. 12,96013,624 million in nominal terms, or 12.7%11.8% of the total capital expenditures of Pemex-Exploration and Production, in exploration activities, which represents an 11.6% decreasea 5.1% increase from the Ps. 14,65312,960 million invested in exploration activities in 2005.2006. In 2006,2007, we invested Ps. 89,391101,939 million in nominal terms, or 87.3%88.2% of the total capital expenditures for Pemex-Exploration and Production, in development activities, which represents a 17.9%14.0% increase from the amountPs. 89,391 million invested in development activities in 2005. In 2005, we invested Ps. 75,794 million in nominal terms, or 83.8% of the total capital expenditures for Pemex-Exploration and Production, in development activities.2006.
 
In 2007,2008, we have budgeted Ps. 100,286105,965 million, or 86.0%82.3% of total capital expenditures, for the development activities of Pemex-Exploration and Production, which represents an 12.2%a 3.9% increase in nominal terms from 2006.2007. For exploration activities, we have budgeted Ps. 16,32822,757 million, or 14.0%17.7% of total capital expenditures, which represents a 26.0%67.0% increase in nominal terms from the amounts that Pemex-Exploration


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and Production invested in exploration activities in 2006.2007. In 2008,2009, we expect to spend Ps. 16,36723,190 million, or 14.1%19.1% of the total capital expenditures for Pemex-Exploration and Production, in exploration activities, which represents a 0.2%1.9% increase in nominal terms from the amount projected for 2007. In 2009, we expect to spend Ps. 16,131 million, or 14.1% of the total capital expenditures for Pemex-Exploration and Production, in exploration activities, which represents a 1.4% decrease in nominal terms from the amount projected for 2008. In 2010, we expect to spend Ps. 14,91221,903 million, or 14.1%19.1% of the total capital expenditures for Pemex-Exploration and Production, in exploration activities, which represents a 7.6%5.5% decrease in nominal terms from the amount projected for 2009. These are baseline projections and are currently under revision. We expect capital expenditures allocated to exploration activities to increase during the 2008 to 2009 period.
 
Capital expenditures for Pemex-Exploration and Production as a percentage of PEMEX’s total capital expenditures have been increasing in recent years, from 69.9%70.7% in 20022003 to 83.4% in 2006; this trend will reversecontinued increasing in upcoming years,2007, with capital expenditures for Pemex-Exploration and Production as a percentage of PEMEX’s total capital expenditures decreasingincreasing to 78.8%84.4% in 2007 and2007. In 2008, we expect this ratio to 69.7% in 2008.decrease to 79.6%.


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The following table sets forth our PIDIREGAS and Non-PIDIREGAS capital expenditures related to exploration and development during the five years ended December 31, 2006.2007.
 
Exploration and Development Capital Expenditures for2002-20062003-2007
 
                                        
 Year ended December 31,(1)  Year ended December 31,(1) 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
   (millions of nominal pesos)    (millions of nominal pesos) 
Exploration Ps.8,552  Ps.16,411  Ps.21,664  Ps.14,653  Ps.12,960  Ps.16,411  Ps.21,664  Ps.14,653  Ps.12,960  Ps.13,624 
Development  32,630   44,580   69,129   75,794   89,391   44,580   69,129   75,794   89,391   101,939 
                      
Total
 Ps.41,182  Ps.60,991  Ps.90,793  Ps.90,447  Ps.102,351  Ps.60,991  Ps.90,793  Ps.90,447  Ps.102,351  Ps.115,563 
                      
 
 
Note: Numbers may not total due to rounding.
 
(1)Amounts based on cash basis method of accounting.
(1) Amounts based on cash basis method of accounting.
 
The following table sets forth our estimated capital expenditures budget for exploration and development for 20072008 through 2010:2011:
 
Estimated Exploration and Development Capital Expenditures for2007-20102008-2011
 
                                
 Year ended December 31,(1)  Year ended December 31,(1) 
 2007(2) 2008 2009 2010  2008(2) 2009 2010 2011 
   (millions of nominal pesos)    (millions of nominal pesos) 
Exploration(3)
 Ps.16,328  Ps.16,367  Ps.16,131  Ps.14,912  Ps.22,757  Ps.23,190  Ps.21,903  Ps.19,577 
Development(3)
  100,286   99,796   98,357   90,922   105,965   97,977   92,539   82,713 
                  
Total
 Ps.116,614  Ps.116,163  Ps.114,488  Ps.105,834  Ps.128,722  Ps.121,167  Ps.114,442  Ps.102,290 
                  
 
 
Note: Numbers may not total due to rounding.
 
(1)
(1) Amounts based on cash basis method of accounting.
(2)Approved budget.
(3)Estimated budgets for 2008 through 2010 are based on amounts authorized by the Ministry of Finance and Public Credit for projects in 2007.
Financed Public Works Contracts
 
Our Financed Public Works Contracts program, or FPWC, previously known as the Multiple Services Contracts program, was first announced in December 2001. The objective of the program is to provide a contractual framework that promotes an efficient execution of public works, in order to increase Mexico’s hydrocarbons production. The FPWC(2) Approved budget.
(3) Estimated budgets for 2009 through 2011 are public works contracts based on unit prices that aggregate a number of different services into a single contract. Underamounts authorized by the FPWC framework, Pemex-Exploration and Production


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retains the rights and title to all hydrocarbons produced and works performed under each FPWC, as all works are performed on behalf of Pemex-Exploration and Production.
The invitationSHCP for bids for the first two rounds of FPWC bidding, corresponding to works and services necessary for non-associated natural gas production in eight blocks in the Burgos basin, occurred in July 2003 and in the second half of 2004, respectively. The following table summarizes the results of those rounds.
         
      Contract amount
 
      (in millions of
 
Block Signature date Contractor U.S. dollars) 
 
Reynosa-Monterrey
 November 14, 2003 Repsol Exploración México, S.A. de C.V. $2,437 
Cuervito
 November 21, 2003 PTD Servicios Múltiples, S. de R.L. de C.V., a consortium comprised by Petróleo Brasileiro, S.A. (Petrobras), Teikoku Oil Co., Ltd. and D&S Petroleum  260 
Misión
 November 28, 2003 Servicios Múltiples de Burgos, S.A. de C.V., a consortium comprised by Tecpetrol (a subsidiary of Techint Group) and Industrial Perforadora de Campeche, S.A. de C.V.  1,036 
Fronterizo
 December 8, 2003 PTD Servicios Múltiples, S. de R.L. de C.V., a consortium comprised by Petróleo Brasileiro, S.A. (Petrobras), Teikoku Oil Co., Ltd. and D&S Petroleum  265 
Olmos
 February 9, 2004 Lewis Energy México, S. de R.L. de C.V.  344 
Pandura-Anáhuac
 December 9, 2004 Industrial Perforadora de Campeche, S.A. de C.V. and Compañía de Desarrollo y Servicios Petroleros, S.A. de C.V.  900 
Pirineo
 March 23, 2005 Monclova Pirineo Gas, S. de R.L. de C.V., a consortium comprised by Constructora Industrial Monclova, Materiales la Gloria, Alianz Petroleum, Steel Serv., Suelopetrol, NCT, Estudios y Proyectos and Petrotesting Colombia  645 
         
    Total $5,887 
         
Source: Pemex-Exploration and Production.
As of December 31, 2006, seven contracts had been awarded under the FPWC program, for a total amount of U.S. $5,887 million.
During 2006, through the FPWC program, 63 wells were drilled, 67 wells were completed and 945 square kilometers of three-dimensional seismic information was acquired, among other projects. The projects carried out in 2006 represented an investment of approximately U.S. $222 million. At the end of 2006, natural gas production in the seven blocks listed in the table above reached 153 million cubic feet per day.
During 2005, theAuditoría Superior de la Federación(the Supreme Auditor of the Federation, which we refer to as the ASF), an entity of the Mexican Congress, recommended that before proceeding with future FPWC bidding rounds for non-associated natural gas projects in the Burgos basin, the scope of the terms “exploration” and “exploitation” be clarified and, if necessary, redefined under the Regulatory Law. After


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conducting the appropriate legal analysis, we clarified the terminology used in the FPWC and in May 2006, we were notified that all observations made by the ASF regarding the FPWC program had been resolved.
On August 10, 2006, we launched the invitation for bids for the third round of FPWC bidding in the Burgos basin. We awarded two contracts for the Nejo and Monclova blocks, but we did not receive any bids for the Euro block contract. The following table summarizes the results of this third round:
         
      Contract amount
 
      (in millions of
 
Block Signature date Contractor U.S. dollars) 
 
Nejo
 April 3, 2007 Iberoamericana de Hidrocarburos, S. A. de C. V. $911.5 
Monclova
 April 20, 2007 GPA Energy, S. A. de C. V:  433.5 
         
    Total $1,345.0 
         
There are two pending legal proceedings related to the FPWC program. See “Item 8—Financial Information—Legal Proceedings—Civil Actions.”2008.
 
Crude Oil and Natural Gas Production
In 2006, we produced an average of 3,256 thousand barrels per day of crude oil, 2.3% lower than our average daily production in 2005 of 3,333 thousand barrels per day of crude oil. The decrease was mainly due to a production decline in the Cantarell complex caused by natural advances of gas oil and water which came into contact with crude oil and adverse weather conditions. Accordingly, our production of heavy crude oil decreased by 143 thousand barrels per day, which was 6.0% less than the average daily production in 2005. The 6.0% decrease in our heavy crude oil production was partially offset by an increase in light and extra-light crude oil production of 65 thousand barrels per day, or a 6.9% increase as compared to 2005, due to an increase in production provided by completions and workover jobs in the Southwestern Marine region.
Crude oil can be classified by sulphur content. “Sour” crudes contain 3.4% or greater sulphur content by weight and “sweet” crudes contain less than 1.0% sulphur content by weight. Most of our production is classified as sour crudes.
Pemex-ExplorationInvestments and Production produces four types of crude oil:
•  Altamira, a heavy crude oil;
•  Maya, a heavy crude oil;
•  Isthmus, a light crude oil; and
•  Olmeca, a very light crude oil.
Most of Pemex-Exploration and Production’s production consists of Isthmus and Maya crude oil. In 2006, 68.9% of Pemex-Exploration and Production’s total production of crude oil consisted of heavy crudes and 31.1% consisted of light and very light crudes. The Marine region yields mostly heavy crude oil (81.1% of this region’s production in 2006), although significant volumes of light crude oil are also produced (18.9% of this region’s production). The Southern region yields mainly light and very light crudes (together, 97.1% of this region’s production), and the Northern region yields heavy crude oil (66.2% of this region’s production in 2006) and light and very light crudes (33.8% of this region’s production in 2006).
The most productive crude oil and natural gas fields in the Gulf of Mexico are located in the Cantarell and Ku-Maloob-Zaap complexes in the Northeastern Marine region and in Chuc, Caan, Sinán and Ixtal in the Southwestern Marine region. In particular, the Cantarell complex produced 1,788 thousand barrels per day of crude oil in 2006, or 54.9% of the total crude oil production in 2006, and 716 million cubic feet per day of natural gas, or 13.4% of the total natural gas production in 2006.


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The following table sets forth our annual crude oil production rates by type of oil for the five years ended December 31, 2006.
                         
                 2006
 
  2002  2003  2004  2005  2006  vs. 2005 
  (in thousands of barrels per day)  (%) 
 
Marine region
                        
Heavy crude oil  2,127.1   2,380.9   2,412.3   2,330.8   2,173.6   (6.7)
Light crude oil  476.7   433.0   416.7   422.5   506.2   19.8 
                         
Total  2,603.8   2,813.9   2,829.0   2,753.3   2,679.8   (2.7)
Southern region
                        
Heavy crude oil  6.2   6.4   7.1   20.8   14.2   (31.7)
Light crude oil  492.2   476.9   465.6   475.7   477.1   0.3 
                         
Total  498.4   483.3   472.7   496.6   491.3   (1.1)
Northern region
                        
Heavy crude oil  40.3   38.0   38.6   35.4   55.9   57.9 
Light crude oil  34.6   35.6   42.6   48.1   28.6   (40.5)
                         
Total  74.9   73.6   81.2   83.5   84.5   1.2 
Total heavy crude oil  2,173.7   2,425.4   2,458.0   2,387.0   2,243.8   (6.0)
Total light crude oil  1,003.5   945.5   924.9   946.4   1,011.8   6.9 
                         
Total crude oil  3,177.1   3,370.9   3,382.9   3,333.3   3,255.6   (2.3)
                         
Note:  Numbers may not total due to rounding.
Source: Pemex-Exploration and Production.
The following table sets forth our annual crude oil production by business unit for the five years ended December 31, 2006.
Crude Oil Production
                         
                 2006
 
  2002  2003  2004  2005  2006  vs. 2005 
  (in thousands of barrels per day)  (%) 
 
Northern region
                        
Burgos  —   —   —   —   —   — 
Poza Rica-Altamira  73.4   72.1   79.5   81.6   83.0   1.7 
Veracruz  1.5   1.5   1.7   1.9   1.5   (24.3)
                         
Total  74.9   73.6   81.2   83.5   84.5   1.2 
Southern region
                        
Cinco Presidentes  34.3   37.3   37.7   38.8   39.3   1.3 
Bellota-Jujo  201.8   195.4   212.3   224.0   219.1   (2.2)
Macuspana  1.6   2.5   4.9   5.0   6.6   33.3 
Muspac  48.2   42.2   36.1   33.3   33.6   0.8 
Samaria-Luna  212.3   205.9   181.6   195.5   192.7   (1.4)
                  ��      
Total  498.4   483.3   472.7   496.6   491.3   (1.1)
Marine region
                        
Cantarell  1,902.3   2,122.8   2,136.4   2,035.3   1,800.9   (11.5)
Ku-Maloob-Zaap(P)  249.3   293.6   304.4   321.7   403.8   25.5 
Abkatún-Pol-Chuc  406.8   359.0   321.8   299.8   332.2   10.8 
Litoral de Tabasco  45.4   38.6   66.4   96.5   142.9   48.1 
                         
Total  2,603.8   2,813.9   2,829.0   2,753.3   2,679.8   (2.7)
                         
Total crude oil  3,177.1   3,370.9   3,382.9   3,333.3   3,255.6   (2.3)
                         


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In 2006, the Marine region’s offshore facilities, which are located in the Campeche Sound in the Gulf of Mexico, produced 82.3% of Pemex-Exploration and Production’s total crude oil production. Approximately 15.1% of crude oil production came from onshore facilities in the Southern region. Inland facilities in the Northern region accounted for the remaining 2.6% of total crude oil production. Due to the high productivity of certain wells, 23 fields accounted for 90.0% of Pemex-Exploration and Production’s total crude oil production in 2006.
The Marine region is an area of approximately 21,000 square kilometers in the Campeche Sound in the Gulf of Mexico. Our production area covers 9,000 square kilometers of the Marine region. We began geophysical operations in this region in 1972, commenced drilling in 1974 and began production in June 1979. In 2006, the average production level for this region was 2,679.8 thousand barrels per day. The Marine region’s production area includes 29 oil fields that are less than 100 meters below sea level and have an average well depth of 3,500 meters.
The Southern region covers an area of approximately 23,000 square kilometers, with our production area in this region comprising 9,000 square kilometers in the states of Chiapas, Tabasco and Veracruz. In 2006, production in the Southern region totaled 491.3 thousand barrels per day. This production area included 84 oil fields with an average well depth of 5,500 meters.
The Northern region, including the continental shelf area in the Gulf of Mexico, covers an area of approximately 2 million square kilometers. Our production area in this region is located in the states of Veracruz, Tamaulipas, Nuevo León, Coahuila, San Luis Potosí, Puebla and the continental platform in the Gulf of Mexico. In 2006, production in the Northern region totaled 84.5 thousand barrels of crude oil per day and 2,228 million cubic feet of natural gas per day. This production area included 244 oil fields with an average well depth of 2,100 meters.
The following table sets forth our annual natural gas production rates for the five years ended December 31, 2006:
                         
  Year Ended December 31,  2006
 
  2002  2003  2004  2005  2006  vs. 2005 
  (in million cubic feet per day)  (%) 
 
Northern region
                        
Burgos  1,006.9   1,030.7   1,094.5   1,217.3   1,330.3   9.3 
Veracruz  153.9   205.2   313.8   499.2   723.3   44.9 
Poza Rica-Altamira  107.1   110.8   119.5   118.8   174.1   46.5 
                         
   1,267.9   1,346.7   1,527.8   1,835.2   2,227.6   21.4 
Southern region
                        
Cinco Presidentes  56.5   58.7   67.8   62.8   56.7   (9.7)
Bellota-Jujo  292.2   276.6   276.6   281.9   271.4   (3.7)
Macuspana  132.4   147.5   179.6   167.5   192.9   15.2 
Muspac  725.7   686.0   558.1   449.2   368.5   (18.0)
Samaria-Luna  497.0   461.2   412.9   438.9   462.6   5.4 
                         
   1,703.8   1,630.0   1,495.1   1,400.3   1,352.1   (3.4)
Marine region
                        
Cantarell  704.3   786.1   789.1   760.7   717.7   (5.7)
Ku-Maloob-Zaap  126.8   154.4   158.4   167.1   202.5   21.2 
Abkatún-Pol-Chuc  520.3   494.3   456.1   431.8   512.5   18.7 
Litoral de Tabasco  100.3   87.0   146.5   222.9   343.6   54.1 
                         
   1,451.8   1,521.8   1,550.0   1,582.5   1,776.4   12.3 
                         
Total natural gas  4,423.5   4,498.4   4,572.9   4,818.0   5,356.1   11.2 
                         
In 2006, the Northern region produced 42% of the total natural gas production, an increase of 21.4% as compared to the region’s 2005 production of 38% of the total natural gas production. In 2006, the Southern


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region produced 25% of the total natural gas production, a decrease of 3.4% as compared to the region’s 2005 production of 29% of the total natural gas production. In 2006, the Marine region produced 33% of the total natural gas production, an increase of 12.3% as compared to the region’s 2005 production of 33% of the total natural gas production.
Production by FieldsProject
 
We conduct exploration, production and development activities in fields throughout Mexico. Mexico’s nine main fieldsprojects are Ku-Maloob-Zaap, Cantarell, Strategic Gas Program, Burgos, Antonio J. Bermúdez, Aceite Terciario del Golfo, Chuc, Jujo-Tecominoacán and Caan. They are described below.
 
Ku-Maloob-Zaap Complex.Project.  This complexThe Ku-Maloob-Zaap project is one of fields is located off the coastmain producers of Campeche in Mexican territorial watersheavy crude oil and plays an important part in the Gulfproduction of Mexico. Thisthe Maya crude oil mix. It is the second most important complex of fieldsproject in Mexico in terms of total proved remaining hydrocarbon reserves.reserves and crude oil production. It is composed of the Bacab, Lum, Ku, Maloob and Zaap fields, and extends over an area of 121149.5 square kilometers. As of December 31, 2006,2007, there were a total of 93139 wells drilled, 74108 of which were producing. In terms of crude oil production, this complex was the second most important in Mexico, producingThe project produced an average of 394.2527.3 thousand barrels of crude oil and 201.2212.2 million cubic feet of natural gas per day in 2006.2007. As of December 31, 2006,2007, cumulative production was 2.22.4 billion barrels of crude oil and 1.11.2 trillion cubic feet of natural gas. ProvedAs of December 31, 2007, proved hydrocarbon reserves totaled 2.12.4 billion barrels of crude oil and 1.3 trillion cubic feet of natural gas as of December 31, 2006.gas. Total proved reserves were 2.52.8 billion barrels of crude oil equivalent, as of December 31, 2006, of which 1.41.8 billion were developed.
 
In nominal peso terms, PIDIREGAS expenditures for this project were Ps. 16,424 million in 2005, Ps. 26,724 million in 2006 and Ps. 35,706 million in 2007. For 2008, we anticipate that PIDIREGAS expenditures will reach Ps. 22,484 million and that total accumulated PIDIREGAS expenditures will reach


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approximately U.S. $10 billion. In 2007, Pemex-Exploration and Production invested approximately U.S. $36 million to acquire nitrogen for the pressure maintenance project in the fifth module of the Cantarell nitrogen cryogenic plant, which began operations in November 2006. The Floating Production, Storage and Offloading (FPSO) vessel, Yùum K’ak’náab (Lord of the Seas) also began operations in 2007. It is the first FPSO vessel operating in the Gulf of Mexico, and has allowed us to: (1) increase our production flexibility in the Northeastern Marine region; (2) blend different types of crude oil in order to maintain a Maya type mix and satisfy the export market; (3) maximize the value of production in the Northeastern Marine region; (4) increase our storage capacity by 2.2 million barrels; and (5) establish an additional offloading position with a maximum capacity of 1.2 million barrels per day. In 2008, we expect to invest approximately U.S. $22 million to acquire approximately 28 billion cubic feet of nitrogen, which will be injected into the Ku-Maloob-Zaap fields.
Cantarell Project.  The Cantarell project is located on the continental shelf of the Gulf of Mexico. It consists of the Akal, Chac, Ixtoc, Kutz, Nohoch, Sihil and Takin fields, which extend over an area of 185.5 square kilometers. The Akal field is considered one of the last super giant oil fields in the world discovered in the past 30 years.several decades. As of December 31, 2006,2007, there were a total of 427448 wells drilled, 200189 of which were producing. During 2006,2007, the Cantarell project was the most important producer of crude oil in Mexico, averaging 1.8 million barrels per day of crude oil, 11.9% lower than the production in 2005, which was 2.0 million1,496.5 thousand barrels per day of crude oil. The naturalThis was 16.9% less than the production in 2006, which was 1,800.9 thousand barrels per day. Natural gas production from Cantarell during 2006 was 715.52007 averaged 944.9 million cubic feet per day of natural gas, 5.8% lowerday. This was 31.7% higher than the 20052006 average natural gas production, which was 759.2717.7 million cubic feet per day. As of December 31, 2006,2007, cumulative production was 12.212.7 billion barrels of crude oil and 5.05.3 trillion cubic feet of natural gas. ProvedAs of December 31, 2007, proved hydrocarbon reserves totaled 4.23.4 billion barrels of crude oil and 2.72.3 trillion cubic feet of natural gas asgas. As of December 31, 2006. Total2007, total proved reserves were 4.94.0 billion barrels of crude oil equivalent, as of December 31, 2006, of which 4.13.4 billion were developed.
Abkatún-Pol-Chuc Complex.  This area is made up of three fields in the Southwestern offshore region, which extend over an area of 198 square kilometers. As of December 31, 2006, there were a total of 197 wells drilled, six of which were injectors. Currently, there are 42 producing wells. During 2006, the complex was the third most important crude oil producer, averaging 151.8 thousand barrels of crude oil and 159.5 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 3.9 billion barrels of crude oil and 3.5 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 151.4 million barrels of crude oil and 173.5 billion cubic feet of natural gas as of December 31, 2006. Total proved reserves were 190.1 million barrels of crude oil equivalent as of December 31, 2006, of which 186.9 million were developed.
Caan Field.  This field is located in the Southwestern offshore region and covers an area of 46 square kilometers. As of December 31, 2006, there were a total of 42 wells drilled, 24 of which were producing. During 2006, the field was the fifth most important crude oil producer, averaging 88.2 thousand barrels of crude oil and 185.4 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 782.6 million barrels of crude oil and 1.4 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 73.1 million barrels of crude oil and 292.0 billion cubic feet of natural gas. Total proved reserves were 140.0 million barrels of crude oil equivalent, all of which were developed.
 
Antonio J. Bermúdez Complex.  This complex of fields is the largest crude oil producerIn nominal peso terms, Pemex-Exploration and Production’s PIDIREGAS expenditure on developing reservoirs in the SouthernMarine region totaled Ps. 25,030 million in 2005, Ps. 25,992 million in 2006 and Ps. 29,049 million in 2007. For 2008, we have budgeted Ps. 48,350 million for PIDIREGAS expenditures for the fourth largest in Mexico. It consistsCantarell project. By the end of 2008, we expect our PIDIREGAS expenditures to total approximately U.S. $27.6 billion for this project.
On October 10, 1997, we awarded a build-own-operate contract for a nitrogen cryogenic plant at the Cantarell complex 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 Samaria, Cunduacán, Oxiacaque, Iride, Platanalplant. The plant began operations in 2000 and Carrizo fields,cost approximately Ps. 10,131 million in nominal terms. Pursuant to the terms of the agreement, Pemex-Exploration and covers an areaProduction has the right to acquire the nitrogen plant in the case of 192 square kilometers. Asa 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 December 31, 2006, there were a total of 435 wells drilled, 112 of which were producing. During 2006, the complex produced an average of


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142.3 thousand barrels of crude oilcontract Pemex-Exploration and 298.8 millionProduction has committed to purchase 1.2 billion cubic feet per day of natural gas per day. Asnitrogen from the consortium for a period of December 31, 2006, cumulative production was 2.7 billion barrels of crude oil and 3.7 trillion cubic feet of natural gas. Proved hydrocarbon reserves in this field totaled 1.2 billion barrels of crude oil and 2.6 trillion cubic feet of natural gas as of December 31, 2006. Total proved reserves were 1.9 billion barrels of crude oil equivalent as of December 31, 2006, of which 1.2 billion were developed.15 years.
 
Jujo-Tecominoacán Field.  This field is the second largest crude oil producer in the Southern region,During 2007, Pemex-Exploration and the sixth largest producer in Mexico and coversProduction paid approximately U.S. $241 million under this contract for an areaapproximate total volume of 74 square kilometers. As of December 31, 2006, there were a total of 127 wells drilled, 58 of which were producing. During 2006, the field produced an average of 85.3 thousand barrels of crude oil and 97.0 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 1.0 billion barrels of crude oil and 1.2 trillion cubic feet of natural gas, and proved hydrocarbon reserves totaled 625.8 million barrels of crude oil and 1.4 trillion cubic feet of natural gas. Total proved reserves were 964.7 million barrels of crude oil equivalent as of December 31, 2006, of which 554.8 million were developed.
Puerto Ceiba Field.  This field is one of the most important crude oil producers in the Southern region and in 2006 was the seventh largest producer in Mexico, covering an area of 41.2 square kilometers. As of December 31, 2006, there were 42 wells drilled in the field, 16 of which were producing. During 2006, this field produced an average of 54.4 thousand barrels of crude oil and 37.2 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 135.2 million barrels of crude oil and 89.0526 billion cubic feet of natural gas. Proved hydrocarbon reserves innitrogen, which was injected into the Cantarell field. In 2008, Pemex-Exploration and Production expects to pay approximately U.S. $157 million under this field totaled 77.4 million barrelscontract for an approximate total volume of crude oil and 47.5511 billion cubic feet of natural gas as of December 31, 2006. Total proved reserves were 89.0 million barrels of crude oil equivalent as of December 31, 2006, of which 66.9 million were developed.nitrogen to be injected into the field.
 
Delta del Grijalva Project.Strategic Gas Program (SGP).  In terms2001, Pemex-Exploration and Production began a nine-year, U.S. $8,105 million Strategic Gas Program. Based on the identification of production, this project produces light oil. It is ranked as the most important light oil produceraccelerated growth in the Southern region,demand for natural gas in the medium and onelong term as compared to its projected supply, Pemex-Exploration and Production decided to review its energy policy. With the objective of addressing natural gas shortages, Pemex-Exploration and Production identified and selected a portfolio of investment options aimed at increasing gas production. Field development and production optimization represents 76% of program expenditures, with the most important in Mexico. It includesgoal of increasing the fieldsproduction of Caparroso-Pijije-Escuintle, Escarbado, Luna-Palapa, Sen and Tizón. During 2006, the fields produced an average of 50.4 thousand barrels of crude oil and 163.8natural gas to 2,308 million cubic feet ofper day by 2015. Exploration


35

activities, which include twelve different exploratory natural gas per day.and integral gas projects, represent 12% of program expenditures, with the goal of increasing proved reserves. Development of newly discovered fields represents 12% of program expenditures. The Veracruz and Crudo Ligero Marino projects in the Northern and Southwestern Marine regions are the program’s most important producers are Sen, Luna-Palapa, Caparroso-Pijije-Escuintle and Tizón.projects.
 
 •  Sen.Veracruz Project.  The Veracruz project is the second most important non-associated gas project in Mexico. It is located on the western margin of the Gulf of Mexico, in central Veracruz. During 2007, it produced an average of 0.9 billion cubic feet of natural gas per day. As of December 31, 2007, cumulative production totaled 2.0 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 1.0 trillion cubic feet of natural gas and 214.6 million barrels of oil equivalent. In addition, developed reserves totaled 1.0 trillion cubic feet of natural gas, and 200 million barrels of oil equivalent. Two of the most important fields in the Veracruz project are Lizamba and Papán.
•  Lizamba.  This field covers an area of 4140 square kilometers. As of December 31, 2006, there were a total of 34 wells drilled, 13 of which were producing. During 2006, the field2007, it produced an average of 21.5 thousand barrels of crude oil and 55.6242.8 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 192.1 million barrels2007, 51 wells had been drilled, 37 of crude oil and 526.5which were operating. Proved reserves were 320.9 billion cubic feet of natural gas and proved hydrocarbon reserves totaled 40.961.7 million barrels of crude oil and 105.8 billion cubic feet of natural gas. Total proved reserves were 66.2 million barrels of crude oil equivalent, asall of December 31, 2006, of which 47.0 million were developed.
 
 •  Luna-Palapa.Papán.  This field was one of the last discoveries in the Veracruz project in 2005. The field covers an area of 1729.4 square kilometers. As of December 31, 2006, there were a total of 41 wells drilled, six of which were producing. During 2006, the field producedProduction began on June 15, 2007, and reached an average of 3.4 thousand barrels of crude oil and 20.257.2 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 117.2 million barrels2007, 18 wells had been drilled, nine of crude oilwhich were operating. The other nine wells were completed in April 2008. Their respective gas pipelines were completed in June 2008 and 655.9are expected to be operational by July 2008. As of December 31, 2007, proved reserves totaled 267.4 billion cubic feet of natural gas and proved hydrocarbon reserves51.4 million barrels of oil equivalent, of which 240.9 billion cubic feet of natural gas and 46.3 million barrels of oil equivalent were developed.
•  Crudo Ligero Marino Project.  This project is located on the continental shelf of the Gulf of Mexico off the coast of the states of Tabasco and Campeche, 76 kilometers northeast from the Dos Bocas Marine Terminal in Paraiso, Tabasco. The project is composed of the Bolontikú, Citam, Hayabil, Ichalkil, Kab, Kix, May, Men, Misón, Nak, Sinán, and Yum fields, all in the Southwestern Marine region. As of December 31, 2007, 59 wells had been drilled, 26 of which were producing. Approximately half of the fields in this project are not yet developed. During 2007, average daily production totaled 1.7156.7 thousand barrels of crude oil and 382.3 million cubic feet of natural gas. As of December 31, 2007, cumulative production totaled 131.3 million barrels of crude oil and 6.5327.6 billion cubic feet of natural gas. Proved hydrocarbon reserves totaled 282.8 million barrels of crude oil and 1.0 trillion cubic feet of natural gas. Total proved reserves were 3.3535.0 million barrels of crude oil equivalent, as of December 31, 2006, all of which are developed.
•  Caparroso-Pijije-Escuintle.  This field covers an area of 16.6 square kilometers. As of December 31, 2006, there were a total of 35 wells drilled, 14 of which were producing. During 2006, the field produced an average of 18.6 thousand barrels of crude oil and 55.5 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 123.4272.5 million barrels of crude oil and 359.5 billion cubic feet of natural gas, and proved hydrocarbon reserves totaled 30.2 million barrels of crude oil and 89.6 billion cubic feet of natural gas. Total proved reserves were 51.7 million barrels of crude oil equivalent as of December 31, 2006, 42.8 million of which were developed.


37

•  Tizón.  This field covers an area of 14 square kilometers. As of December 31, 2006, there were a total of six wells drilled, three of which were producing. During 2006, the field produced an average of 5.2 thousand barrels of crude oil and 29.3 million cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 9.9 million barrels of crude oil and 60.9 billion cubic feet of natural gas, and proved hydrocarbon reserves totaled 13.0 million barrels of crude oil and 52.4 billion cubic feet of natural gas. Total proved reserves were 25.4 million barrels of crude oil equivalent as of December 31, 2006, of which 11.4 million were developed.
 
Aceite Terciario del Golfo Project (formerly Paleocanal de Chicontepec).  This complexIn nominal peso terms, Pemex-Exploration and Production’s PIDIREGAS expenditures for the SGP were Ps. 20,635 million in 2005, Ps. 23,420 million in 2006 and Ps. 23,401 million in 2007. For 2008, we expect PIDIREGAS expenditures to be Ps. 27,897 million, which would bring our total PIDIREGAS expenditures for the program to approximately U.S. $13.5 billion through December 31, 2008.
During the period from 2003 to 2007, average production was 1.3 billion cubic feet of natural gas per day. Since 2003, 143 exploratory wells demonstrated offshore and onshore gas potential, resulting in a 48% exploratory success ratio. During 2007, four fields includesand a reservoir were discovered in the Profeta-Tzapotempa-VinazcoVeracruz Basin through the Barajas-1, Castell-1, Jaf-1, Obertura-1 and Agua Fría-Coapechaca-Tajín projects, among others, and isQuetzalli-1 wells, which together added an aggregate of 34.3 billion cubic feet of natural gas to proved reserves. Development has focused on the May field, development. The complex, which is partwhere 166.7 million barrels of oil equivalent were added from the production of the Northern region, covers an areaMay-7, -38 and -51 wells.
Burgos Project.  The Burgos project is the largest producer of 3,731 square kilometersnon-associated gas in Mexico. The fields accounted for 11% of our total natural gas production in 1997. The project is located in northeastern Mexico. In 1997, Pemex-Exploration and it is divided into eight sectors containing 29Production initiated a15-year development project of the Burgos natural gas fields. As of December 31, 2006, thereWe expect the Burgos project will better enable us to meet increasing domestic demand for


36

natural gas. Three major turn-key contracts were a total of 1,462 wells drilled, 577 of which were producing. awarded to Dowell-Schlumberger México (U.S. $108 million), Industrial Perforadora de Campeche, S.A. de C.V. (U.S. $96.4 million) and Halliburton International, Inc. (U.S. $71 million) for this project.
During 2006, this complex of fields2007, the project produced an average of 22.7 thousand barrels of crude oil and 26.9 million1.4 billion cubic feet of natural gas per day. As of December 31, 2006, cumulative production was 141.5 million barrels of crude oil and 241.6 billion cubic feet of natural gas. Proved hydrocarbon reserves totaled 502.0 million barrels of crude oil and 0.8 trillion cubic feet of natural gas as of December 31, 2006. Total proved reserves were 653.6 million barrels of crude oil equivalent as of December 31, 2006,2007, 6,304 wells had been drilled, 2,801 of which 117.6 million were developed.
Burgos Project.  The Burgos fields are located in northeastern Mexico. During 2006, they produced an average of 1.3 billion cubic feet of natural gas per day. This complex of fields is the largest producer of non-associated gas in Mexico.operating. Some of the most important producersfields are the Arcabuz-Culebra, Cuitláhuac, Velero, Fundador and Arcos fields.fields, all of which jointly produced 43.8% of the total production of the project.
 
 •  Arcabuz-Culebra.  This field covers an area of 380 square kilometers. As of December 31, 2006,2007, there were a total of 790831 wells drilled in this area, 627field, 666 of which were producing. During 2006,2007, the field produced an average of 245.3257.1 million cubic feet of natural gas per day. As of December 31, 2006,2007, cumulative production was 1,414.3 billion1.5 trillion cubic feet of natural gas, and provedgas. Proved gas reserves totaled 249.2256.8 billion cubic feet of natural gas, of which 195.2194.0 billion were developed.
 
 •  Cuitláhuac.  This field covers an area of 190210 square kilometers. As of December 31, 2006,2007, there were a total of 339349 wells drilled in this area, 223219 of which were producing. During 2006,2007, the field produced an average of 117.997.0 million cubic feet of natural gas per day. As of December 31, 2006,2007, cumulative production was 479.6515.1 billion cubic feet of natural gas, and provedgas. Proved hydrocarbon reserves totaled 159.6155.3 billion cubic feet of natural gas, of which 126.4113.1 billion were developed.
•  Velero.  This field covers an area of 58 square kilometers. As of December 31, 2007, 175 wells had been drilled, 136 of which were operating. The average daily production of the field was 113.1 million cubic feet of natural gas. Cumulative production was 156.2 billion cubic feet of natural gas. Proved reserves were 58.7 billion cubic feet of natural gas, of which 51.0 billion cubic feet were developed.
 
 •  Arcos.  This field covers an area of 45 square kilometers. As of December 31, 2006,2007, there were a total of 184187 wells drilled in this area, 156 of which 138 were producing. During 2006,2007, the field produced an average of 97.164.2 million cubic feet of natural gas per day. As of December 31, 2006,2007, cumulative production was 550.5574.3 billion cubic feet of natural gas. As of December 31, 2007, proved reserves totaled 64.0 billion cubic feet of natural gas, all of which were developed.
•  Fundador.  This field covers an area of 4.1 square kilometers. As of December 31, 2007, 22 wells had been drilled, and all of them were operating. During 2007, the average daily production was 86.4 million cubic feet per day of natural gas. During 2007, cumulative production was 91.4 billion cubic feet of natural gas. As of December 31, 2007, proved reserves were 59.9 billion cubic feet of natural gas, and proved gas reserves totaled 74.5 billion cubic feet of natural gas, of which 74.5 billionall were developed.
 
From 2003 to 2007, exploration activities and the reclassification of reserves increased estimated proved reserves by 470.5 million barrels of oil equivalent. Production for this period was 457.3 million barrels of oil equivalent. During 2007, reserves decreased by 49.5 million barrels of oil equivalent, from 459.5 million barrels of oil equivalent in 2006 to 410.0 million barrels of oil equivalent in 2007.
In nominal peso terms, our PIDIREGAS expenditures for the Burgos project were Ps. 12,439 million in 2005, Ps. 15,726 million in 2006 and Ps. 14,622 million in 2007 (including Financed Public Works Contracts). For 2008, we anticipate that our PIDIREGAS expenditures will amount to Ps. 16,512 million and that our total accumulated PIDIREGAS expenditures will reach approximately U.S. $11.7 billion.
Muspac Field.Antonio J. Bermúdez Project.  Muspac isIn 2002, we began investing in the most important gas and condensate producing fieldAntonio J. Bermúdez project, the main PIDIREGAS in the Southern region coveringand the third largest in Mexico. This project is designed to accelerate reserve recovery, as well as increase the recovery factor by drilling additional wells and implementing a pressure maintenance system. It consists of the Samaria, Cunduacán, Oxiacaque, Iride, Platanal and Carrizo fields, and covers an area of 17192 square kilometers. As of December 31, 2006,2007, there were a total of 31453 wells drilled, 15 of which 118 were producing. During 2006,2007, the fieldproject produced an average of 1.0129.5 thousand barrels of crude oil and 84.4329.1 million cubic feet of natural gas per day. As of December 31, 2006,2007, cumulative production was 73.52.7 billion barrels of crude oil and 3.8 trillion cubic feet of natural gas. As of


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December 31, 2007, proved hydrocarbon reserves in this field totaled 1.2 billion barrels of crude oil and 2.5 trillion cubic feet of natural gas. As of December 31, 2007, total proved reserves were 1.8 billion barrels of crude oil equivalent, of which 1.1 billion were developed.
In nominal peso terms, our PIDIREGAS expenditures for the Antonio J. Bermúdez project were Ps. 7,045 million in 2005, Ps. 6,908 million in 2006 and Ps. 8,484 million in 2007. For 2008, we anticipate that our PIDIREGAS expenditures for this project will be Ps. 9,628 million and that our total accumulated investments will be approximately U.S. $3.9 billion. In March 2005, we entered into a contract with Praxair México, S.R.L. de C.V. to build, own and operate a nitrogen cryogenic plant. We expect the construction of this plant to be completed in August 2008. After testing is complete, which we expect to happen in September 2008, we will begin injecting into the field 190 million cubic feet per day of nitrogen. We will pay approximately U.S. $3.7 million per month to acquire this nitrogen for pressure maintenance in connection with the project. From 2008 to 2022, we plan to continue to inject this same volume of nitrogen.
Aceite Terciario del Golfo Project (formerly Paleocanal de Chicontepec).  The Aceite Terciario del Golfo project is located in the Northern region and covers an area of 3,731 square kilometers. This project is comprised of 29 fields in eight sectors. As of December 31, 2007, there were a total of 1,608 drilled wells, of which 590 were producing. During 2007, average daily production was 22.4 thousand barrels of crude oil and 27.1 million cubic feet of natural gas. As of December 31, 2007, cumulative production was 149.4 million barrels of crude oil and 250.8 billion cubic feet of natural gas. As of December 31, 2007, proved hydrocarbon reserves totaled 481.6 million barrels of crude oil and 707.4 billion cubic feet of natural gas. As of December 31, 2007, total proved reserves totaled 625.9 million barrels of oil equivalent, of which 22.7 million were developed.
In nominal peso terms, our PIDIREGAS expenditures for the Aceite Terciario de Golfo project were Ps. 4,938 million in 2007. For 2008, we anticipate that our PIDIREGAS expenditures for this project will be Ps. 15,988 million and that our total accumulated investments will be approximately U.S. $1.9 billion.
Chuc Project.  This project is part of a complete light crude oil production strategy in the Southwestern Marine region. It is part of the operating and maintenance of the Pol-A facility and water injection complexes. The fields of the project are located on the continental shelf of the Gulf of Mexico, off the coast of the states of Tabasco and Campeche, between the 20 and 100 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 Batab, Ché, Chuc, Chuhuk, Etkal, Homol, Kuil, Onel, Pokoch, Pol, Tumut, Uchak, and Wayil. In January 2007, the Pol and Batab projects were merged into the Chuc project. As of December 31, 2007, 84 wells had been drilled, of which 35 were producing. During 2007, average daily production totaled 111.6 thousand barrels of crude oil and 124.6 million cubic feet of natural gas. The cumulative production totaled 1.8 billion barrels of crude oil and 1.8 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 199.3 million barrels of oil and 499.7 billion cubic feet of natural gas, or a total of 307.0 million barrels of oil equivalent. As of December 31, 2007, total developed proved reserves were 115.9 million barrels of oil equivalent.
In nominal peso terms, our PIDIREGAS expenditures for the Chuc, Pol and Batab projects were Ps. 2,266 million in 2005, Ps. 3,150 million in 2006 and Ps. 3,702 million in 2007. In 2008, we expect our PIDIREGAS expenditures for the Chuc project to be Ps. 3,442 million and anticipate that our total accumulated PIDIREGAS expenditures will reach approximately U.S. $1.9 billion.
Jujo-Tecominoacán Project.  The Jujo-Tecominoacán project is the second largest crude oil producer in the Southern region and the seventh largest producer in Mexico. The project covers an area of 82 square kilometers and has been exploited by Pemex-Exploration and Production since 1980. Since 2002, our investments in the Jujo-Tecominoacán fields are focused on maintaining oil production by drilling additional wells and implementing maintenance programs.
As of December 31, 2007, there were a total of 146 wells drilled, of which 55 were producing. During 2007, the project produced an average of 74.4 thousand barrels of crude oil and 86.7 million cubic feet of natural gas per day. As of December 31, 2007, cumulative production was 1.1 billion barrels of crude oil


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and 1.4 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 4.6596.2 million barrels of crude oil and 357.0 billion1.3 trillion cubic feet of natural gas asgas. As of December 31, 2006. Total2007, total proved reserves were 94.9934.6 million barrels of crude oil equivalent, as534.4 million of which were developed.
A pressure maintenance program was implemented in 2003 that included the injection of natural gas into the field. The average amount injected was 70 million cubic feet per day from October 2006 through October 2007. On November 30, 2007, we began a 90 million cubic feet per day injection. The cost to supply nitrogen for a period of 10 years is Ps. 488.2 million and U.S. $204 million.
In nominal peso terms, our PIDIREGAS expenditures for the Jujo-Tecominoacán project were Ps. 2,340 million in 2005, Ps. 2,943 million in 2006 and Ps. 3,696 million in 2007. In 2008, we expect our PIDIREGAS expenditures to be Ps. 5,035 million, bringing our total PIDIREGAS expenditures to approximately U.S. $1.6 billion.
Caan Project.  The Caan project is located on the continental shelf of the Gulf of Mexico, off the coast of Tabasco and Campeche, between the 20 and 70 meter isobaths, approximately 142 kilometers from the Dos Bocas Marine Terminal in Paraíso, Tabasco and approximately 79 kilometers northeast from Ciudad del Carmen, Campeche. This project includes the Caan, Abkatún, Kanaab and Taratunich fields, which are marine complex facilities and are strategic for managing the production at the Southwestern Marine region.
As of December 31, 2006,2007, there were a total of 206 wells drilled, of which 41 were producing. During 2007, average daily production totaled 131.4 thousand barrels of crude oil and 283.5 million cubic feet of natural gas. As of December 31, 2007, cumulative production was 3,269.5 million barrels of crude oil and 3.6 trillion cubic feet of natural gas. Proved hydrocarbon reserves totaled 138.5 million barrels of crude oil and 366.5 billion cubic feet of natural gas. Total proved reserves were 219.5 million barrels of crude oil equivalent, all of which were developed.


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PipelinesIn nominal peso terms, PIDIREGAS expenditures for the Caan project were Ps. 1,808 million in 2005, Ps. 2,241 million in 2006 and Ps. 2,494 million in 2007. In 2008, we expect PIDIREGAS expenditures to be Ps. 2,741 million, bringing total PIDIREGAS expenditures to approximately U.S. $1.7 billion.
 
The crude oil and natural gas pipeline network owned by Pemex-Exploration and Production connects crude oil and natural gas producing centers with refineries and petrochemical plants. At the end of 2006, this pipeline network consisted of approximately 34,865 kilometers of pipe, of which 3,431 kilometers were located in the Marine region, 11,624 kilometers were located in the Southern region and 19,810 kilometers were located in the Northern region. For a description of products transported by the pipeline network, see “— Transportation and Distribution” below.
Crude Oil Sales
 
During 2006,2007, domestic consumption of crude oil amounted to approximately 1,4451,356 thousand barrels per day, which represented 44% of our total crude oil production. Through PMI’s activities, we sold the remainder of our crude oil production abroad. See “—International Trading” below. Maya crude oil accounted for 83%87% of exported crude oil volume sold by PMI in 2006.2007.
 
The following table sets forth crude oil distribution for the past five years.
 
Crude Oil Distribution
 
                                                
 At December 31, 2006
  At December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in thousands of barrels per day) (%)  (in thousands of barrels per day) (%) 
Production
  3,177.1   3,370.9   3,382.9   3,333.3   3,255.6   (2.3)  3,370.9   3,382.9   3,333.3   3,255.6   3,081.7   (5.3)
Distribution
                                                
Refineries  1,171.9   1,246.4   1,257.9   1,274.9   1,242.1   (2.6)  1,246.4   1,257.9   1,274.9   1,242.1   1,230.9   (0.9)
Products under processing agreements(1)
  130.4   112.5   97.4   81.4   80.2   (1.5)  112.5   97.4   81.4   80.2   0   (100.0)
Petrochemicals  144.5   150.4   133.8   131.0   122.3   (6.6)  150.4   133.8   131.0   122.3   125.5   2.6 
Exports  1,716.2   1,848.3   1,873.6   1,832.6   1,789.1   (2.4)
Export terminals  1,848.3   1,873.6   1,832.6   1,789.1   1,701.3   (4.9)
                        
Total  3,163.1   3,357.6   3,362.7   3,319.9   3,233.7   (2.6)  3,357.6   3,362.7   3,319.9   3,233.7   3,057.8   (5.4)
                        
Stock changes, statistical
                        
differences(2)
  14.0   13.3   20.3   13.4   21.8   62.7 
Stock changes, statistical differences(2)
  13.3   20.3   13.4   21.8   24.0   10.1 
 
     _ _­ ­
Note: Numbers may not total due to rounding.
(1) Represents exports to third-party processors for re-import into Mexico.
(2) Measurement inconsistencies, shrinkage and leakage.
Source: Pemex-Exploration and Production.


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Maya crude oil accounted for 42%37% of domestic consumption in 2006.2007. Due to its sulphur content, Maya crude oil requires extra processing and has lower refining yields than most valuable sweet crudes, and thus requires extra investment by the purchaser to refine. Therefore, we receive a lower price for Maya crude oil than we do for sweeter crude oils that cost less to refine. As a consequence of this price difference, we must continue to support the export value of sour crude oil such as Maya crude oil in relation to other grades of crude oil by creating incentives for refiners to invest in high-conversion refineries capable of upgrading the relatively large proportion of residue produced from processing sour crude oil in less efficient refining complex configurations.oil. We may do this by entering into long-term Maya crude oil supply agreements pursuant to which purchasers agree to undertake projects to expand the capacity of their respective refineries to upgrade residue from Maya crude oil. See “International Trading—Geographic Distribution of Export Sales” below.


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Gas Flaring
 
The flaring of produced gas, which isconsists of the process of burning off of surplus combustible vapors from a well, either as a means of disposal or as a safety measure to relieve well pressure, is considered to be one of the most significant sources of air emissions from offshore oil and gas installations. In 2006,2007, gas flaring represented 5.1%9.0% of our total natural gas production, which is an increase from 2005,2006, when gas flaring represented 3.8%5.1% of total natural gas production. The increase occurred as a consequence of maintenance activitieswas due to the gas pipeline running from Samaria to Cactus,certain operational problems as well as maintenance on platform compression equipment, an increase in gas production high in nitrogen content in the Northeastern Marine region, maintenance in pipeline 3 from Atasta to Ciudad Pemex, maintenance work at Akal C4, C6, C7 and C8 processing platforms, and failures atexplosions in certain of Pemex-Gas and Basic Petrochemicals’30-inch and48-inch diameter gas pipelines.
Pipelines
The crude oil and natural gas pipeline network owned by Pemex-Exploration and Production connects crude oil and natural gas producing centers with refineries and petrochemical plants. At the compression facilitiesend of 2007, this pipeline network consisted of approximately 35,212 kilometers of pipelines, of which 3,476 kilometers were located in the Marine region, 11,549 kilometers were located in the Southern region and 20,187 kilometers were located in the Northern region. For a description of products transported by the pipeline network, see “—Transportation and Distribution” below.
Financed Public Works Contracts
Our Financed Public Works Contracts program, or FPWC, previously known as the Multiple Services Contracts program, was first announced in December 2001. The objective of the program is to provide a contractual framework that promotes an efficient execution of public works, in order to increase Mexico’s hydrocarbons production. The FPWC are public works contracts based on unit prices that aggregate a number of different offshore platforms.services into a single contract. Under the FPWC framework, Pemex-Exploration and Production retains the rights and title to all hydrocarbons produced and works performed under each FPWC, as all works are performed on behalf of Pemex-Exploration and Production.


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The invitation for bids for the first two rounds of FPWC bidding, corresponding to works and services necessary for non-associated natural gas production in eight blocks in the Burgos basin, occurred in July 2003 and in the second half of 2004, respectively. On August 10, 2006, we launched the invitation for bids for the third round of FPWC bidding in the Burgos basin. During 2007 we awarded two contracts for the Nejo and Monclova blocks, but we did not receive any bids for the Euro block contract. The following table summarizes the results of those rounds.
Contract Amount
(in millions of
BlockSignature dateContractorU.S. dollars)
Reynosa-Monterrey
November 14, 2003Repsol Exploración México, S.A. de C.V.U.S. $2,437
Cuervito
November 21, 2003PTD Servicios Múltiples, S. de R.L. de C.V., a consortium comprised by Petróleo Brasileiro, S.A. (Petrobras), Teikoku Oil Co., Ltd. and D&S Petroleum260
Misión
November 28, 2003Servicios Múltiples de Burgos, S.A. de C.V., a consortium comprised by Tecpetrol (a subsidiary of Techint Group) and Industrial Perforadora de Campeche, S.A. de C.V.1,036
Fronterizo
December 8, 2003PTD Servicios Múltiples, S. de R.L. de C.V., a consortium comprised by Petróleo Brasileiro, S.A. (Petrobras), Teikoku Oil Co., Ltd. and D&S Petroleum265
Olmos
February 9, 2004Lewis Energy México, S. de R.L. de C.V.344
Pandura-Anáhuac
December 9, 2004Industrial Perforadora de Campeche, S.A. de C.V. and Compañía de Desarrollo y Servicios Petroleros, S.A. de C.V.900
Pirineo
March 23, 2005Monclova Pirineo Gas, S. de R.L. de C.V., a consortium comprised by Constructora Industrial Monclova, Materiales la Gloria, Alianz Petroleum, Steel Serv., Suelopetrol, NCT, Estudios y Proyectos and Petrotesting Colombia645
Nejo
April 3, 2007Iberoamericana de Hidrocarburos, S. A. de C. V.911.5
Monclova
April 20, 2007GPA Energy, S. A. de C. V:433.5
TotalU.S. $7,232
Source: Pemex-Exploration and Production.
As of December 31, 2007, nine contracts had been awarded under the FPWC program, for a total amount of U.S. $7,232 million.


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During 2007, through the FPWC program, 52 wells were drilled, 55 wells were completed and 1,392 square kilometers of three-dimensional seismic information was acquired, among other projects. The projects carried out in 2007 represented an investment of approximately U.S. $275 million. At the end of 2007, natural gas production in the nine blocks listed in the table above reached 236 million cubic feet per day.
There is one pending legal proceeding related to the FPWC program. See “Item 8 — Financial Information — Legal Proceedings — Civil Actions.”
Collaboration Agreements
During 2007, Pemex-Exploration and Production entered into non-commercial scientific and technology agreements with Statoil, Royal Dutch Shell, Petrobras, Chevron and Nexen. Through these agreements, PEMEX seeks to increase its technical and scientific knowledge in areas such as deep-water 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 strictly non-commercial,i.e., there is no transfer of resources among the parties.
 
Refining
 
Refining Processes and Capacity
 
Pemex-Refining’s 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, kerosene, 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.
 
 •  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, Pemex-Refining uses 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 resid hydrocracking.  This process uses a catalyst and hydrogen at high temperature and pressure to remove sulphur, nitrogen and some aromatic compounds. Hydrotreatment also processes some lighter liquid product off-take.
 
 •  Alkylation and isomerization.  This polymerization process unites olefins and isoparaffins. Butylenes and isobutanes are combined with sulphuric 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 produces straight-run gasoline (coker naphtha) and various middle-distillate fractions used as catalytic feedstock, thus generating a concentrated solid material called coke of petroleum.


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These production processes together constitute Pemex-Refining’s production capacity as set forth in the table below.
 
Refining Capacity by Production Process
 
                                        
 At December 31,  At December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (in thousands of barrels per day)  (in thousands of barrels per day) 
Production Process
                                        
Atmospheric distillation  1,540.0   1,540.0   1,540.0   1,540.0   1,540.0   1,540.0   1,540.0   1,540.0   1,540.0   1,540.0 
Vacuum distillation  768.4   768.4   768.4   768.4   754.0   768.4   768.4   768.4   754.0   754.0 
Cracking  395.5   395.5   374.5   374.5   380.5   395.5   374.5   374.5   380.5   380.5 
Visbreaking  141.0   141.0   141.0   141.0   91.0   141.0   141.0   141.0   91.0   91.0 
Reforming  301.3   301.3   301.3   301.3   279.3   301.3   301.3   301.3   279.3   279.3 
Hydrotreatment  987.1   987.1   987.1   987.1   926.1   987.1   987.1   987.1   926.1   926.1 
Alkylation and isomerization  143.9   143.9   143.9   143.9   152.5   143.9   143.9   143.9   152.5   152.5 
Coking  —   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0 
 
Source: Base de Datos Institucional (Pemex BDI).
 
At the end of 2006,2007, Pemex-Refining owned and operated six refineries: Cadereyta, Madero, Minatitlán, Salamanca, Salina Cruz and Tula, and one topping unit located in the petrochemical complex of Cangrejera.Tula. Our refineries are comprised of atmospheric and vacuum distillation units, where the bulk of crude oil input is processed. Secondary processing facilities include desulphurization units and facilities for catalytic cracking, reforming and hydrotreating. During 2006,2007, our refineries processed 1,2841,270 thousand barrels per day of crude oil (207(210 thousand barrels at Cadereyta, 149141 thousand barrels at Madero, 169170 thousand barrels at Minatitlán, 196188 thousand barrels at Salamanca, 290272 thousand barrels at Salina Cruz and 273289 thousand barrels at Tula), which consisted of 784742 thousand barrels per day of Olmeca and Isthmus crude oil and 500528 thousand barrels per day of Maya crude oil.
 
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. Under the Deer Park Limited Partnership agreement, P.M.I. Norteamérica, S.A. de C.V. and Shell Oil Company each provides 50% of the refinery’s crude oil input and owns 50% of the refinery’s output. The partnership completed a substantial upgrading program in mid-1995 to enable it to process Maya crude oil. PEMEXP.M.I. Norteamérica, S.A. de C.V. and Shell Oil Company completed an expansion project at the refinery in Deer Park in April 2001, thereby increasing the capacity of the refinery by 60 thousand barrels per day to 340 thousand barrels per day. The expansion project included an expansion of the refinery’s existing coking unit, a new sulphur plant and upgrades to the crude distillation, distillates hydrotreating and hydrocracking units.
 
Production
 
Pemex-Refining produces a wide range of products derived from crude oil and natural gas, including liquefied petroleum gas,LPG, gasoline, jet fuel, diesel, fuel oil, asphalts, lubricants and other refined oil and natural gas products. Pemex-Refining produced 1,3301,312 thousand barrels per day of refined products (including dry gasby-products of the refining process) in 2006,2007, a decrease of 0.6%1.3% from 20052006 levels.


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The following table sets forth, by category, Pemex-Refining’s production of refined products from 20022003 through 2006.2007.
 
Pemex-Refining Production
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in thousands of barrels per day) (%)  (in thousands of barrels per day) (%) 
Refinery crude oil runs
  1,245.4   1,285.9   1,303.4   1,284.4   1,284.2   0.0   1,285.9   1,303.4   1,284.4   1,284.2   1,269.8   (1.1)
Refined products
                                                
Liquefied petroleum gas  31.3   33.8   28.0   30.6   25.4   (17.0)  33.8   28.0   30.6   25.4   26.6   4.7 
Gasoline                                                
Nova (leaded)/Base  16.4   10.5   3.9   4.8   7.5   56.3   10.5   3.9   4.8   7.5   4.5   (40.0)
Pemex Magna  359.4   396.5   418.5   412.0   413.7   0.4   396.5   418.5   412.0   413.7   425.7   2.9 
Pemex Premium  21.8   37.6   43.8   38.2   35.0   (8.4)  37.6   43.8   38.2   35.0   26.1   (25.4)
Others  0.7   0.6   0.4   0.1   0.1   0.0   0.6   0.4   0.1   0.1   0.1   0.0 
                      
Total  398.2   445.2   466.7   455.1   456.2   0.2   445.2   466.7   455.1   456.2   456.4   0.0 
Kerosenes                                                
Jet fuel  56.7   59.6   62.1   63.3   64.8   2.4   59.6   62.1   63.3   64.8   66.3   2.3 
                      
Total  56.7   59.6   62.1   63.3   64.8   2.4   59.6   62.1   63.3   64.8   66.3   2.3 
Diesel                                                
Pemex Diesel  246.7   290.8   319.6   312.3   318.3   1.9   290.8   319.6   312.3   318.3   326.2   2.5 
Low sulphur diesel  0.7   0.6   —   —   —   —   0.6   —   —   —   —   — 
Others  19.5   16.4   5.1   5.9   9.8   66.1   16.4   5.1   5.9   9.8   7.8   (20.4)
                      
Total  266.9   307.8   324.7   318.2   328.1   3.1   307.8   324.7   318.2   328.1   334.0   1.8 
Fuel oil  449.6   396.5   368.0   350.8   325.2   (7.3)  396.5   368.0   350.8   325.2   301.5   (7.3)
Other refined products                                                
Asphalts  28.8   25.6   27.2   29.3   32.3   10.2   25.6   27.2   29.3   32.3   31.9   (1.2)
Lubricants  4.9   5.5   5.4   5.2   5.1   (1.9)  5.5   5.4   5.2   5.1   5.2   2.0 
Paraffins  1.0   0.9   1.0   1.1   1.0   (9.1)  0.9   1.0   1.1   1.0   1.1   10.0 
Still gas  37.4   51.3   49.9   51.9   56.7   9.2   51.3   49.9   51.9   56.7   55.2   (2.6)
Other refined products(1)
  1.1   16.7   28.2   32.8   34.8   6.1   16.7   28.2   32.8   34.8   34.2   (1.7)
                      
Total  73.3   100.1   111.7   120.2   129.9   8.1   100.1   111.7   120.2   129.9   127.6   (1.8)
                      
Total refined products  1,275.9   1,342.9   1,361.2   1,338.3   1,329.7   (0.6)  1,342.9   1,361.2   1,338.3   1,329.7   1,312.4   (1.3)
                      
 
  _ _­ ­
Note: Numbers may not total due to rounding.
(1) Includes aeroflex 1-2, coke, furfural extract and light cyclic oil as of 2005.
Source:Source:Pemex BDI.
 
Fuel oil, automotive gasoline and diesels represent the bulk of Pemex-Refining’s production. In 2006,2007, fuel oil represented 24%23%, gasoline represented 34%35% and diesels represented 25% of total refined product production. Jet fuel represented 5% and liquefied petroleum gasLPG represented 2% of total production of refined products in 2006.2007. The remainder of Pemex-Refining’s 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, over the past several years Pemex-Refining has been producingincreased its production of unleaded gasoline (including Pemex Premium) as opposed


42

to leaded gasoline (Nova Base, a leaded gasoline, is produced only as a base for other products). All of our automotive gasoline production now consists of unleaded gasoline. In addition, we introduced new


44

environmentally sound products such as Pemex Diesel, with 0.05% sulphur content. The share of Pemex Diesel as a percentage of total diesel produced by Pemex-Refining has increased from 92%94% in 20022003 to 97%98% in 2006.2007. We also promote liquefied petroleum gasLPG as an environmentally sound substitute fuel for gasoline in motor vehicles.
 
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.
 
Over the five years ended December 31, 2006,2007, the value of Pemex-Refining’s domestic sales of refined products and petrochemicals was as follows:
 
Value of Domestic Sales(1)(1)
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in millions of constant pesos at December 31, 2006)(2) (%)  (in millions of constant pesos at December 31, 2007)(2) (%) 
Oil Products
                                                
Gasoline                                                
Pemex Magna Ps.69,338.1  Ps.93,277.3  Ps.126,220.0  Ps.156,905.2  Ps.181,286.7   15.5  Ps.96,783.6  Ps.130,964.6  Ps.162,803.3  Ps.188,101.3  Ps.209,006.5   11.1 
Pemex Premium  15,032.9   21,183.2   29,666.3   35,230.0   40,410.7   14.7   21,979.5   30,781.5   36,554.3   41,929.7   38,331.9   (8.6)
Aviation fuels  151.6   150.1   128.7   179.0   180.4   0.8   155.7   133.5   185.7   187.2   212.9   13.7 
Others  148.5   97.8   97.7   63.7   94.4   48.2   101.5   101.4   66.1   97.9   74.1   (24.3)
                      
Total  84,671.0   114,708.6   156,112.7   192,377.8   221,972.2   15.4   119,020.5   161,981.0   199,609.3   230,316.1   247,625.4   7.5 
Kerosene                                                
Jet fuel  6,282.1   8,338.7   11,774.8   16,899.6   18,897.1   11.8   8,652.2   12,217.4   17,534.9   19,607.4   23,369.3   19.2 
Other kerosene  160.9   132.7   140.3   153.4   192.3   25.4   137.7   145.6   159.2   199.5   183.2   (8.2)
                      
Total  6,443.0   8,471.4   11,914.9   17,053.0   19,089.5   11.9   8,789.8   12,362.8   17,694.0   19,807.1   23,552.5   18.9 
Diesel                                                
Pemex Diesel  30,751.7   42,148.0   55,562.5   69,730.7   76,036.1   9.0   43,732.3   57,651.1   72,351.9   78,894.3   84,752.0   7.4 
Others  5,829.8   9,421.8   10,534.1   12,197.2   12,337.5   1.2   9,776.0   10,930.1   12,655.7   12,801.3   12,168.2   (4.9)
                      
Total  36,581.4   51,569.9   66,096.6   81,927.9   88,373.6   7.9   53,508.4   68,581.2   85,007.6   91,695.6   96,920.1   5.7 
Fuel oil                                                
Total  32,305.0   35,639.3   33,900.1   41,122.6   43,298.9   5.3   36,979.0   35,174.4   42,668.4   44,926.5   42,395.7   (5.6)
Other refined products                                                
Asphalts  2,191.7   2,657.9   3,072.7   3,681.7   5,759.5   56.4   2,757.8   3,188.2   3,820.1   5,976.0   6,107.4   2.2 
Lubricants  1,034.5   1,299.6   1,338.6   1,598.6   2,059.9   28.9   1,348.5   1,388.9   1,658.7   2,137.3   2,167.9   1.4 
Paraffins  148.6   138.1   155.6   209.5   225.2   7.5   143.3   161.4   217.4   233.7   247.7   6.0 
Others(3)
  1.2   27.8   35.1   48.6   79.8   64.2   28.8   36.4   50.4   82.8   98.0   18.4 
                      
Total  3,375.8   4,123.4   4,602.0   5,538.3   8,124.3   46.7   4,278.4   4,775.0   5,746.5   8,429.7   8,621.1   2.3 
                      
Total Oil Products
 Ps.163,376.4  Ps.214,512.4  Ps.272,626.6  Ps.338,019.6  Ps.380,858.5   12.7  Ps.222,575.9  Ps.282,874.6  Ps.350,725.8  Ps.395,175.0  Ps.419,114.8   6.1 
                      
Petrochemicals(4)
 Ps.662.1  Ps.1,058.4  Ps.1,814.6  Ps.2,155.9  Ps.2,448.6   13.6  Ps.1,098.2  Ps.1,882.8  Ps.2,236.9  Ps.2,540.6  Ps.2,508.1   (1.3)
 
Notes: Numbers may not total due to rounding.
(1)Excludes IEPS tax and value added tax. See “—Taxes and Duties” below.
(2)Figures have been restated to constant pesos as of December 31, 2006,2007, by applying the inflation factors, as measured by the NCPI, from the respective years through December 31, 2006.2007. For the five years ended December 31, 2006,2007, the inflation factor is the average inflation rate for each of these years.
(3)Includes aeroflex 1-2, coke and furfural extract.
(4)These are petrochemical products produced at refineries operated by Pemex-Refining.
Source:Source:Pemex BDI.


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The largest consumers of fuels in Mexico are the Federal Electricity Commission and our subsidiary entities. The Federal Electricity Commission consumed approximately 77%78% of our fuel oil production during 20062007 pursuant to a fuel oil supply contract entered into in November 1995 and amended effective January 1, 2005. Pursuant to this amendment, the minimum amount of fuel oil that we have agreed to supply to the Federal Electricity Commission is 206,500159,958 barrels of fuel oil per day, in accordance with the supply capacity of Pemex-Refining and the reduced requirements of the Federal Electricity Commission under its program of substitution of fuel oil with natural gas. The price per cubic meter of the fuel oil supplied to the Federal Electricity Commission is based on the three-month average spot price per cubic meter of Fuel Oil No. 6 (3% sulphur) 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 discounted by a commercial margin on each cubic meter of fuel oil. In 2006,2007, this volume discount amounted to approximately 0.8%0.9% of total fuel oil sales to the Federal Electricity Commission. The contract can be terminated by either party upon six months’ notice. The total amount paid to us by the Federal Electricity Commission under this contract in 20062007 was Ps. 33,14032,178 million, andwhich represented 8.7%7.7% of our total revenues from domestic sales of refined products.
 
Our domestic sales of refined oil products increased by 12.7%6.1% in value, or Ps. 42,838.923,940 million in 2006,2007, as compared to 20052006 levels. This increase was due primarily to a 17.6% average5.5% increase in domestic distillates sales and a general increase in international prices of refined products, a 7.1% increase in domestic sales volumes of distillates and increased sales of products that have greater added value.products.
 
The volume of our domestic gasoline sales in 20062007 increased by 7.0%5.8%, from 672.1 thousand barrels per day in 2005 to 718.9 thousand barrels per day in 2006.2006 to 760.9 thousand barrels per day in 2007. The volume of our domestic diesel sales increased by 7.7%3.9%, from 320.1 thousand barrels per day in 2005 to 344.9 thousand barrels per day in 2006.2006 to 358.4 thousand barrels per day in 2007. The volume of our domestic sales of fuel oil decreased by 22.6%2.6%, from 340.6 thousand barrels per day in 2005 to 263.7 thousand barrels per day in 2006 to 256.9 thousand barrels per day in 2007, primarily due to a lower demand bydecrease in the Federal Electricity Commission due to its program of substitutingCommission’s demand for fuel oil, which they are replacing with natural gas for fuel oil.under an official program.


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The volume of Pemex-Refining’s domestic sales of refined products for the five-year period ended December 31, 20062007 was distributed as follows:
 
Volume of Domestic Sales
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in thousands of barrels per day, except where otherwise indicated) (%)  (in thousands of barrels per day, except where otherwise indicated) (%) 
Oil Products
                                                
Gasoline                                                
Pemex Magna  476.5   500.2   525.5   559.6   601.8   7.5   500.2   525.5   559.6   601.8   658.9   9.5 
Pemex Premium  88.5   100.1   110.4   111.7   116.3   4.1   100.1   110.4   111.7   116.3   101.3   (12.9)
Aviation fuels  0.4   0.4   0.4   0.5   0.5   0.0   0.4   0.4   0.5   0.5   0.5   0 
Others  0.8   0.4   0.4   0.3   0.2   (33.3)  0.4   0.4   0.3   0.2   0.2   0 
                      
Total  566.2   601.2   636.7   672.1   718.9   7.0   601.2   636.7   672.1   718.9   760.9   5.8 
Kerosenes                                                
Jet fuel  53.3   54.2   57.8   58.7   61.2   4.3   54.2   57.8   58.7   61.2   67.9   10.9 
Other kerosenes  0.8   0.7   0.7   0.8   1.0   25.0   0.7   0.7   0.8   1.0   0.9   (10.0)
                      
Total  54.1   54.9   58.5   59.5   62.2   4.5   54.9   58.5   59.5   62.2   68.8   10.6 
Diesel                                                
Pemex Diesel  228.0   240.7   255.4   273.4   297.9   9.0   240.7   255.4   273.4   297.9   314.5   5.6 
Others  42.7   54.0   47.3   46.7   46.9   0.4   54.0   47.3   46.7   46.9   43.9   (6.4)
                      
Total  270.7   294.7   302.7   320.1   344.9   7.7   294.7   302.7   320.1   344.9   358.4   3.9 
Fuel oil                                                
Total  406.2   354.6   332.5   340.6   263.7   (22.6)  354.6   332.5   340.6   263.7   256.9   (2.6)
Other oil products                                                
Asphalts  21.6   22.2   24.5   26.9   28.8   7.1   22.2   24.5   26.9   28.8   29.9   3.8 
Lubricants  5.2   5.7   5.7   5.7   5.5   (3.5)  5.7   5.7   5.7   5.5   5.7   3.6 
Paraffins  1.1   1.0   1.1   1.1   1.0   (9.1)  1.0   1.1   1.1   1.0   1.1   10.0 
Others(1)
  1.3   22.8   28.4   31.2   31.4   0.6   22.8   28.4   31.2   31.4   33.1   5.4 
                      
Total  29.1   51.7   59.7   64.8   66.7   2.9   51.7   59.7   64.8   66.7   69.8   4.6 
                      
Total oil products  1,326.2   1,357.1   1,390.0   1,457.1   1,456.4   0.0   1,357.1   1,390.0   1,457.1   1,456.4   1,514.8   4.0 
                      
Petrochemicals(2)
  235.3   272.3   286.0   289.0   333.8   15.5   272.3   286.0   289.0   333.8   290.9   (12.9)
 
Note: Numbers may not total due to rounding.
(1)Includes aeroflex 1-2, coke and furfural extract.
(2)In thousands of metric tons. These are petrochemical by-products of the refining process produced and sold by Pemex-Refining.
Source:Source:Pemex BDI.
 
Since 1998, at the retail level, we have offered standard and premium grades of unleaded gasoline throughout the country. As of October 2006, all premium gasoline has an ultra-low sulphur content of 0.003%. As of January 2007, diesel sold at the northern border of Mexico has a sulphur content of 0.0015%. Our efforts to build and enhance our brands have also progressed during the past five years. All of Mexico’s independent gasoline service stations now participate in our franchise program, which provides financial assistance to upgrade equipment and facilities and technical assistance in the development of marketing and customer service programs. At the end of 2006,2007, there were 7,5547,940 retail service stations in Mexico, of which 7,5097,892 were privately owned and operated as franchises.


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Pricing Decrees
In September 2007, the Mexican Government suspended the periodic increases in retail prices of unleaded gasolines and diesel from October 2007 to December 2007. On December 21, 2007, the Mexican Government announced that from January 5, 2008 to March 31, 2008, the periodic increases in retail prices of unleaded gasolines and diesel would continue. As of the date of this report, the periodic increases have been reinstated, although the percentage of the periodic increases was modified on March 28, 2008, April 2, 2008 and May 27, 2008.
The Mexican Government has also established a discount of 30% on the price at which PEMEX sells domestic gas oil to the State of Chihuahua during the months of January, February and December of each year. This discount has been in effect since the early 1980s.
On January 29, 2008, the Mexican Government established a discount of 10% to the price at which PEMEX sells fuel oil number 6 to the Federal Electricity Commission, which was effective from January 1, 2008 to March 31, 2008. For April, May and June 2008, the discount was 8%. As of the date of this report, PEMEX has not received any information related to the establishment of an applicable discount for July 2008 or any other future period. See Item 3 “Key Information—Risk Factors—Risk Factors Related to the Relationship between PEMEX and the Mexican Government—The Mexican Government has imposed price controls in the domestic market on our products.”
Investments
 
Over the last twelvethirteen years, Pemex-Refining has focused its investment program on enhancing the quality of gasoline and diesel to meet new environmental standards in Mexico, improving its ability to process heavy crudes in order to optimize the crude oil blend in its refineries and increasing the production of unleaded gasoline and diesel to supply growing demand at low cost, as opposed to increasing its overall crude oil processing capacity. This focus is primarily the result of the abundance of heavy crudes in Mexico. In addition, due to the reduced availability of heavy crudes in the export markets, the lower cost of raw materials in Mexico leads to higher profit margins on the heavy crudes we do export. In the medium-term, Pemex-Refining will continue to import unleaded gasoline to satisfy domestic demand. During 2006,2007, Pemex-Refining imported approximately 274305 thousand barrels per day of unleaded gasoline, which represented 38%almost 40% of total domestic demand for unleaded gasoline in that year.
 
Clean Fuels Project.  Construction will begin on new ultra-low sulphur gasoline post treatment plants in 2009 and on ultra-low sulphur diesel plants in 2010. Until construction is completed, we will import ultra-low sulphur fuels in order to meet local demand.
New Refinery Project.  We have commissioned a study to evaluate ways to increase refining capacity as well as to determine a location for a new refinery, on which we expect to begin construction by the end of 2010.
Non-PIDIREGAS Investments.  In nominal terms, in 2006,2007, Pemex-Refining invested Ps. 7,3697,124 million, excluding capital expenditures related to PIDIREGAS, as compared to Ps. 6,5427,369 million in 2005,2006, representing a 12.6% increase.3.3% decrease. Pemex-Refining invested 20%6.6% of this total amount to expand and upgrade refineries and related installations, 22%16.6% in environmental and industrial safety projects, 32%39.7% in maintenance and rehabilitation projects and 26%37.1% in other projects and acquisitions.
 
Cadereyta Project.  In November 1997, Pemex-Refining awarded a U.S. $1.6 billion contract to upgrade and renovate the Cadereyta refinery to Conproca, S.A. de C.V. (CONPROCA), a consortium formed by SK Engineering & Construction Co., Ltd., Siemens AG and Triturados Basálticos y Derivados, S.A. de C.V. We expect theThe project to increasehas increased clean fuel production substantially, specifically gasoline and diesel, which will enablehas helped Pemex-Refining to fulfill futuresatisfy increased demand requirements in northern Mexico and comply with future environmental regulations. In November 2003, the project was certified as 99.31% complete and formally concluded. Pemex-Refining makes semi-annual amortization payments on June 15 and December 15 of each year, the first of which was a payment of U.S. $53.2 million on December 15, 2000. During 2006,2007, Pemex-Refining made amortization payments totaling U.S. $170.9$262.8 million. Semi-annual amortization payments will continue until


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June 15, 2010. There is a pending legal proceeding related to the Cadereyta Project. See “Item 8—Financial Information—Legal Proceedings—Civil Actions.”
 
Madero Project.  In February 1999, Pemex-Refining awarded a U.S. $1.2 billion contract for the Madero refinery upgrading project to another consortium, PEMOPRO, S.A. de C.V., led by SK Engineering & Construction Co., Ltd., Siemens AG and Triturados Basálticos y Derivados, S.A. de C.V. The total cost of the project was U.S. $1.8 billion and involved the construction of ten new plants and the upgrading of seven others at the Madero complex in the state of Tamaulipas in northeastern Mexico. Between 1999 and 2002, the project increased the Madero refinery’s processing capacity for heavy crude oil (Maya) by 100 thousand barrels per day, increased gasoline production by 15 thousand barrels per day, increased middle distillates (diesel and jet fuel) production by approximately 10 thousand barrels per day and reduced production of high sulphur fuel oil by 22 thousand barrels per day. The project was completed on October 25, 2002. Payments on this project are due in April, June, October and December of each year. The first amortization payments of U.S. $136.5 million were made in 2003. During 2006,2007, Pemex-Refining made amortization payments totaling U.S. $69.9 million in respect of this project. Amortization payments will continue until 2022.
 
Tula and Salamanca Projects.  On November 11, 1999, Pemex-Refining awarded the Tula and Salamanca projects to Samsung Ingeniería Tula, S.A. de C.V. / Siemens, S.A. de C.V. and to Samsung Ingeniería México, S.A. de C.V. / Siemens AG and Siemens, S.A. de C.V., respectively, through an international bidding process. These projects are dedicated exclusively to increasing gasoline quality, whereas the Cadereyta and Madero projects are dedicated to increasing heavy crude oil processing capacities through residual conversion. The construction period for the Tula and Salamanca projects lasted 29 and 34 months, respectively. Total costs were U.S. $160.5 million for the Tula project and U.S. $257.0 million for the Salamanca project. The Tula project was completed on August 27, 2002, and the Salamanca project was completed on January 9, 2003. Payments on the Tula project are due in February, April and August of each year, and payments on the Salamanca project are due in April, June, October and December of each year. The first amortization payments of U.S. $22.0 million for the Tula project and U.S. $33.6 million for the Salamanca project were made in 2003. During 2006,2007, Pemex-Refining made amortization payments of


46

U.S. $22.0 million and U.S. $33.6 million, respectively, for each of these two projects. The last payments under these two projects will be made in 2022.
 
Minatitlán Project.  This refining project is intended to increase production of high quality gasoline and middle distillates and to improve the crude oil blend. The project consists of six contracts awarded through competitive bidding packages, eachduring the period from 2003 to 2005.
Contract Amount
(in millions of
Contractor(s)Contract DateU.S. dollars)
Tradeco Infraestructura, S.A. de C.V and Pager de Tabasco, S.A. de C.V. November 2003U.S.$43.8
ICA Fluor Daniel, S. de R.L. de C.V. October 2004U.S. $684.4
Dragados Proyectos Industriales de México, S.A. de C.V. and Dragados Industrial, S.A. October 2004U.S. $534.1
Mina-Trico, S. de R.L. de C.V. January 2005U.S. $317.0
Proyectos Ebramex, S. de R.L. de C.V. January 2005U.S. $317.9
Samsung Ingeniería Minatitlán, S.A. de C.V. and Samsung Engineering, Co. Ltd. January 2005U.S. $154.1
As of which was published during 2003. Pemex-Refining awarded the first contract of Ps. 379 millionDecember 31, 2007, construction related to Tradeco Infraestructura, S.A. de C.V. on December 8, 2003. The construction period for the first contract was originally expected to last approximately 600 days, but the project was completed in September 2006, in 689 days, due to delays in the construction. The second contract of U.S. $684.4 million was awarded to ICA Fluor Daniel, S. de R.L. de C.V. in October 2004. The construction period for this contract was originally expected to last approximately 1,290 days. The third contract of U.S. $534.1 million was awarded to Dragados, Proyectos Industriales de México, S.A. de C.V. and Dragados Industrial, S.A., in October 2004. The construction period for this contract was originally expected to last approximately 1,128 days. The fourth contract of U.S. $317.0 million was awarded to Mina-Trico, S. de R.L. de C.V. This contract was signed in February 2006, and the construction period was originally expected to last approximately 1,064 days. The fifth contract of U.S. $317.9 million was awarded to Proyectos Ebramex, S. de R.L. de C.V. The contract was signed in January 2006, and the construction period was originally expected to last approximately 1,128 days. The sixth contract of U.S. $154 million was granted to Samsung Engineering, Co. Ltd. The contract was executed in February 2006, and the construction period was originally expected to last approximately 1,002 days.completed. Due to delays in the construction, we now expect the five remaining portions of the project to be completed between 20072008 and 2008.2009. During 2006,2007, we spent an estimated U.S. $720$790.6 million on the Minatitlán project.project, including capitalized interest.
 
20072008 Refining Investment Budget.  For 2007,2008, Pemex-Refining has budgeted Ps. 15,3148,953 million for investment in PIDIREGAS. Pemex-Refining had initially budgetedPIDIREGAS and Ps. 10,44212,585 million for investments in 2007, excluding expenditures related to PIDIREGAS. Although the Ministry of Finance and Public Credit has authorized only Ps. 8,097 million for these non-PIDIREGAS investments, Pemex-Refining expects to receive additional resources in order to meet all of its financial commitments. Pemex-Refiningprojects. Pemex-


49

Refining will invest 32%8.8% of the total amount to expand and upgrade refineries and related installations, 17%19.8% in environmental and industrial safety projects, 27%44.5% in maintenance and rehabilitation projects and 24%26.9% in other projects and acquisitions.
 
Gas and Basic Petrochemicals
 
Natural Gas and Condensates
 
Pemex-Exploration and Production’s average natural gas production increased by 11.2%13.1%, from 4,818 million cubic feet per day in 2005 to 5,356 million cubic feet per day in 2006 to 6,059 million cubic feet per day in 2007, and the average wet natural gas processed by Pemex-Gas and Basic Petrochemicals increased by 7.1%3.3%, from 3,879 million cubic feet per day in 2005 to 4,153 million cubic feet per day in 2006.2006 to 4,288 million cubic feet per day in 2007. Natural gas production associated with crude oil production accounted for 57.7%56.9% of total natural gas production in 2006,2007, with the remainder of natural gas production consisting of extraction from fields holding natural gas reserves. Although natural gas production is more geographically diverse than crude oil production, 150152 fields (or 41.2%43.2% of the 364352 producing fields) accounted for 42.3%43.1% of all production in 2006.2007. Of the total production, 33.2%35.5% originated in the Marine region, 25.2%22.3% in the Southern region and the remainder, 41.6%42.2%, in the Northern region.
 
All wet natural gas production is directed to Pemex-Gas and Basic Petrochemical’s gas processing facilities. At the end of 2006,2007, Pemex-Gas and Basic Petrochemicals owned 12 facilities.
 
The following facilities are located in the Southern region:
 
 •  Cactus:  This facility contains twenty-two plants that together produced 652784 million cubic feet per day of dry gas (which is natural gas with a methane content of more than 93%90.5%), 2418 thousand barrels per day of ethane, 4535 thousand barrels per day of liquefied gas, 2118 thousand barrels per day of naphtha and 242262 thousand tons of sulphur in 2006.2007.
 
 •  Ciudad Pemex:  This facility contains eight plants that together produced 798710 million cubic feet per day of dry gas and 232204 thousand tons of sulphur in 2006.2007.


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 •  Cangrejera:  This facility contains twothree plants that together produced 3631 thousand barrels per day of ethane, 4439 thousand barrels per day of liquefied gas and 12 thousand barrels per day of naphtha and 0.5 thousand tons of sulphur in 2006.2007.
 
 •  Morelos:  This facility contains one plant that produced 3531 thousand barrels per day of ethane, 4642 thousand barrels per day of liquefied gas and 11 thousand barrels per day of naphtha in 2006.2007.
 
 •  Nuevo Pemex:  This facility contains 13 plants that together produced 899814 million cubic feet per day of dry gas, 1824 thousand barrels per day of ethane, 58 thousand barrels per day of liquefied gas, 3331 thousand barrels per day of naphtha and 214170 thousand tons of sulphur in 2006.2007.
 
 •  Pajaritos:  This facility contains one plant that produced 1011 thousand barrels per day of ethane in 2006.2007.
 
 •  La Venta:  This facility contains one plant that produced 115119 million cubic feet per day of dry gas in 2006.2007.
 
 •  Matapionche:  This facility contains five plants that together produced 6660 million cubic feet per day of dry gas, two2 thousand barrels per day of liquefied gas, one1 thousand barrels per day of naphtha and 1110 thousand tons of sulphur in 2006.2007.
 
The following facilities are located in the Northern region:
 
 •  Reynosa:  This facility contains two plants that together produced 188178 million cubic feet per day of dry gas, 0.4 thousand barrels per day of ethane, three3 thousand barrels per day of liquefied gas, four2 thousand barrels per day of naphtha and one1 thousand barrels per day of other products in 2006.2007.


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 •  Poza Rica:  This facility contains four plants that together produced 8590 million cubic feet per day of dry gas, three4 thousand barrels per day of ethane, two3 thousand barrels per day of liquefied gas, one1 thousand barrels per day of naphtha and nine10 thousand tons of sulphur in 2006.2007.
 
 •  Arenque:  This facility contains three plants that together produced 3028 million cubic feet per day of dry gas, one1 thousand barrels per day of ethane plus liquids and three3 thousand tons of sulphur in 2006.2007.
 
 •  Burgos:  This facility contains seven plants that together produced 612763 million cubic feet per day of dry gas, 1417 thousand barrels per day of liquefied gas and eight10 thousand barrels per day of naphtha in 2006.
•  The following tables set forth Pemex-Gas and Basic Petrochemicals’ total natural gas processing and production, as well as processing capacity, for the five years ended December 31, 2006.2007.


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The following tables set forth Pemex-Gas and Basic Petrochemicals’ total natural gas processing and production, as well as processing capacity, for the five years ended December 31, 2007.
 
Natural Gas and Condensates Processing and Production(1)
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in millions of cubic feet per day,
 (%)  (in millions of cubic feet per day,
 (%) 
 except where otherwise indicated)    except where otherwise indicated)   
Processing
                                                
Wet gas  3,770   3,853   3,963   3,879   4,153   7.1   3,853   3,963   3,879   4,153   4,288   3.3 
Sour gas  3,260   3,360   3,349   3,153   3,203   1.6   3,360   3,349   3,153   3,203   3,162   (1.3)
Sweet gas(2)
  510   492   614   726   950   30.9   492   614   726   950   1,125   18.4 
Condensates(3)
  94   95   107   102   101   (1.0)  95   107   102   101   79   (21.8)
Gas to natural gas liquids extraction  3,746   3,829   3,925   3,810   4,108   7.8   3,829   3,925   3,810   4,108   4,264   3.8 
Wet gas  3,600   3,689   3,803   3,712   3,987   7.4   3,689   3,803   3,712   3,987   4,134   3.7 
Reprocessing streams(4)
  146   141   123   98   121   23.5   141   123   98   121   130   7.4 
Production
                                                
Dry gas(5)
  2,916   3,029   3,144   3,147   3,445   9.5   3,029   3,144   3,147   3,445   3,546   2.9 
Natural gas liquids(6)(7)
  418   428   451   436   436   0.0   428   451   436   436   405   (7.1)
Liquefied petroleum gas(6)
  205   212   225   215   215   0.0   212   225   215   215   199   (7.4)
Ethane(6)
  127   125   133   129   127   (1.6)  125   133   129   127   119   (6.3)
Naphtha(6)(8)
  84   86   90   88   92   4.5   86   90   88   92   85   (7.6)
Sulphur(9)
  703   757   759   692   711   2.7   757   759   692   711   659   (7.3)
 
Note: Numbers may not total due to rounding.
(1)Excludes operations of Pemex-Exploration and Production. Pemex-Exploration and Production produced a total of 5,3566,058 million cubic feet per day of natural gas in 2006.2007.
(2)Includes sweet vapor from condensates.
(3)Includes internal streams.
(4)Reprocessing of pipeline dry gas at various cryogenic plants.
(5)Does not include 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 pentanes.
(9)In thousands of tons.
Source:Source:Pemex BDI.


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Processing Capacity
 
                                        
 Year Ended December 31,  Year Ended December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (In millions of cubic feet per day,
  (In millions of cubic feet per day,
 
 except where otherwise indicated)  except where otherwise indicated) 
Sweetening plants
                                        
Sour condensates(1)(2)
  144   144   144   144   144   144   144   144   144   144 
Sour natural gas(3)(2)
  4,173   4,503   4,503   4,503   4,503��  4,503   4,503   4,503   4,503   4,503 
Natural gas liquids recovery plants
                                        
Cryogenics(4)(3)
  4,559   4,592   4,992   4,992   5,392   4,592   4,992   4,992   5,392   5,392 
Absorption(5)(4)
  475   554   554   350   350   554   554   350   350   350 
                      
Total  5,034   5,146   5,546   5,342   5,742   5,146   5,546   5,342   5,742   5,742 
Natural gas liquids fractionating(5)(4)
  563   569   574   574   587   569   574   574   587   587 
Processing of hydrosulphuric acid(6)
  219   219   219   219   219 
Processing of hydrosulphuric acid(5)(6)
  219   219   219   219   219 
 
 
(1)In thousands of barrels per day.
(2)In 2002, sour gas sweetening plants No. 1 and No. 2 at Ciudad Pemex increased production capacity from 400 to 525 million cubic feet per day. In 2003, a sour natural gas sweetening plant began operations at the Arenque complex, with a capacity of 34 million cubic feet per day.
(3)In 2003, as a result of Pemex-Gas and Basic Petrochemicals’ processing capacity review, adjustments set forth above to the capacity of plants to process sour natural gas, absorb natural gas liquids and fractionate natural gas liquids were made.
(4)(3)Includes the cryogenic plant located in Cangrejera. In 2003, a new cryogenic plant began operations at the Arenque complex, with a capacity of 33 million cubic feet per day. In 2004, two modular cryogenic plants started operations at the Burgos complex, each with


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a capacity of 200 million cubic feet per day. In 2006, two additional modular cryogenic plants started operations at the Burgos complex, each with a capacity of 200 million cubic feet per day.
(4)
(5)In 2002, the Cangrejera plant increased its liquids fractionating capacity from 104 thousand barrels per day to 113 thousand barrels per day. In 2004, a liquids fractionating plant began operations at the Burgos complex, with a capacity of 5.7 thousand barrels per day. In 2006, this plant’s processing capacity was adjusted to four thousand barrelbarrels per day. In 2006, two liquids fractionating plants began operations at the Burgos complex, each with a capacity of seven thousand barrels per day.
(6)
(5)In 2003, one sulphur recovery plant began operations at the Arenque complex, with a capacity of 13 tons per day of sulphur production. This increase in capacity was offset by a decrease in capacity at Matapionche.
(6)In 2006, one sulphur recovery plant began operations at the Cangrejera complex, with a capacity of ten tons per day of sulphur production.
Source: Source:Pemex BDI.
 
Domestic consumption of dry gas totaled 5,0855,204 million cubic feet per day in 2006,2007, a 9.0%2.3% increase from the 20052006 domestic consumption of 4,6655,085 million cubic feet per day. The subsidiary entities consumed approximately 41.9%40.8% of the total domestic dry gas consumed in 2006,2007, while the industrial-distributor sector consumed 22.7%22.8%, the electrical sector consumed 32.8%33.7% and the electrical autogeneration sector consumed 2.6%2.7%.
 
We import dry gas to satisfy shortfalls in our production and to meet demand in areas of northern Mexico which, due to their distance from the fields, can be supplied more efficiently by importing natural gas from the United States. We imported 451.0385.6 million cubic feet per day of dry gas in 2006,2007, a 6.1% decrease of 14.5% from the 480.4451 million cubic feet per day imported in 2005.2006.
 
Pemex-Gas and Basic Petrochemicals also produces liquid hydrocarbons obtained from sweet natural gas and recovered in surface separating facilities and liquid hydrocarbons condensed in natural gas pipelines. Our production of natural gas liquids, including stabilized condensates and reprocessing and other fractionating streams remained constant atdecreased from 436 thousand barrels per day in 2005 and 2006.2006 to 405 thousand barrels per day in 2007.
 
Pemex-Gas and Basic Petrochemicals processes sour condensates, which have a higher sulphur content, to produce stabilized sweet condensates. The volume of sour condensates we processed from Pemex-Exploration and Production and internal streams of Pemex-Gas and Basic Petrochemicals amounted to 73 thousand barrels per day in 2007, a 21.5% decrease from 93 thousand barrels per day in 2006, a 1.1% decrease from 942006. Of these amounts, 63 thousand barrels per day (86.3%) resulted in 2005. Of these amounts,stabilized condensates during 2007, and 81 thousand barrels per day (87.1%) resulted in stabilized condensates during 2006, and 81 thousand barrels per day (86.2%) resulted in stabilized condensates during 2005.2006. Pemex-Gas and Basic Petrochemicals also processes sweet condensates at its Reynosa and Burgos facilities to produce solvents, naphtha and heavy naphtha.
 
In October 2004 and April 2005, Pemex-Gas and Basic Petrochemicals entered into two contracts to build two new modular cryogenic plants at the Burgos gas processing center, each of which will have a processing capacity of 200 million cubic feet per day of sweet wet gas.
In March and July 2006, Pemex-Gas and Basic Petrochemicals commenced the operation of two modular cryogenic plants numbers 3 and 4, and two liquid fractionating plants (numbers 3 and 4, respectively), at the Burgos gas processing center in northern Mexico in order to recover the liquid hydrocarbons associated


52

with the natural gas production in the Burgos basin and ensure sufficient supply of natural gas in Mexico. Each cryogenic plant has a processing capacity of 200 million cubic feet per day of sweet wet gas, while each fractionating plant has a processing capacity of seven thousand barrels per day of sweet condensates.
 
In January 2007, we began building cryogenic plants numbers 5 and 6, each one with a processing capacity of 200 million cubic feet per day. Cryogenic plant number 5 is scheduled to begin operations in September 2008 and plant number 6 is expected to begin commercial operations in December 2008. With the completion of this phase of the project, the total cryogenic capacity at the Burgos gas-processing center will reach 1,200 million cubic feet per day.
The Regulatory Law limits basic petrochemicals to the following nine products that are used in the petrochemical production process: ethane, propane, butane, pentanes, hexane, heptane, carbon black, naphthas and methane, when obtained from hydrocarbon reservoirs in Mexico and used as raw material for petrochemical industrial processes. Pemex-Gas and Basic Petrochemicals produces methane, ethane, propane, butane and naphtha. All other petrochemical products, with the exception of the nine petrochemical products mentioned above, may be produced by Pemex-Petrochemicals, Pemex-Refining or by private sector companies. However, the Regulatory Law also allows companies that produce basic petrochemicals, as by-products of non-basic petrochemical production, to sell these basic petrochemicals internally within plants in the same unit or complex or to sell them to us.Petróleos Mexicanos and the subsidiary entities.


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Over the five years ended December 31, 2006,2007, the value of Pemex-Gas and Basic Petrochemicals’ domestic sales were distributed as follows:
 
Value of Domestic Sales of Pemex-Gas and Basic Petrochemicals(1)
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in millions of constant pesos at December 31, 2006)(2) (%)  (in millions of constant pesos at December 31, 2007)(2) (%) 
Natural gas Ps.36,664.0  Ps.59,047.2  Ps.74,399.7  Ps.82,242.2  Ps.75,354.6   (8.4) Ps.61,266.8  Ps.77,196.4  Ps.85,333.7  Ps.78,187.2  Ps.78,933.2   1.0 
Liquefied petroleum gas  31,613.6   42,513.3   45,871.6   50,497.9   52,706.1   4.4   44,111.4   47,595.9   52,396.1   54,687.3   54,456.5   (0.4)
Petrochemicals                                                
Hexane  162.0   251.0   307.5   423.2   378.3   (10.6)  260.4   319.1   439.1   392.5   344.8   (12.2)
Dissolving agents  258.1   48.5   67.1   116.4   109.8   (5.7)  50.3   69.6   120.8   113.9   81.6   (28.4)
Sulphur  133.6   224.0   203.2   192.9   238.1   23.4   232.4   210.8   200.2   247.1   236.1   (4.5)
Carbon black  164.1   316.5   398.9   662.3   819.8   23.8   328.4   413.9   687.2   850.6   1,038.5   22.1 
Pentanes  57.3   26.6   49.7   40.4   72.6   79.7   27.6   51.6   41.9   75.3   63.1   (16.2)
Heptane  24.6   34.8   44.7   67.2   69.8   3.9   36.1   46.4   69.7   72.4   68.3   (5.7)
Butane  44.1   63.2   74.9   91.8   100.3   9.3   65.6   77.7   95.3   104.1   141.1   35.5 
Propane  22.7   32.3   43.9   45.7   49.1   7.4   33.5   45.6   47.4   50.9   60.5   18.9 
Isobutane  3.0   0.4   0.0   0.0   0.0   0.0   0.4   0.0   0.0   0.0   0.0   0.0 
Others  135.0   9.1   14.9   4.6   6.0   30.4   9.4   15.5   4.8   6.2   3.4   (45.2)
                      
Total Petrochemicals  1,004.8   1,006.2   1,204.8   1,644.7   1,843.9   12.1   1,044.0   1,250.1   1,706.5   1,913.2   2,037.4   6.5 
                      
Total Ps.69,282.5  Ps.102,566.7  Ps.121,476.0  Ps.134,384.6  Ps.129,904.6   (3.3) Ps.106,422.2  Ps.126,042.3  Ps.139,436.1  Ps.134,787.7  Ps.135,427.1   0.5 
                      
 
 
Note: Numbers may not total due to rounding.
 
(1)Excludes value added tax.
 
(2)Figures have been restated to constant pesos as of December 31, 2006,2007, by applying the inflation factors from the respective years through December 31, 2006.2007. For the five years ended December 31, 2006,2007, the inflation factor is the average inflation rate for each of these years.
Source: Source:Pemex BDI.


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Subsidiaries of Pemex-Gas and Basic Petrochemicals
 
Pemex-Gas and Basic Petrochemicals conducts certain management, real estate and distribution activities through its subsidiaries and through certain joint ventures. The following table lists Pemex-Gas and Basic Petrochemicals’ subsidiaries, their principal operating activities and Pemex-Gas and Basic Petrochemicals’ ownership interest:
 
Subsidiaries of Pemex-Gas and Basic Petrochemicals(1)(2)
 
       
    Ownership
 
Subsidiary
 
Principal Activity
 
Interest (%)
 
 
Mex Gas International, Ltd.(2)
 Holding company  100.00%
Pasco Terminals, Inc.  Storage and distribution of liquid sulphur  100.00 
Pasco International, Ltd.  Holding company  100.00 
Pan American Sulphur, Ltd.  Storage and distribution of sulphuric acid and distillates  99.87 
Terrenos para Industrias, S.A.  Real estate holding company  100.00 
 
 
(1)As of December 31, 2006.2007.
 
(2)Mex Gas International, Ltd. is the only subsidiary of Pemex-Gas and Basic Petrochemicals that is a consolidated subsidiary company. See Note 2c.3b. to our consolidated financial statements included herein.
Source: Pemex-Gas and Basic Petrochemicals.


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The following table lists Pemex-Gas and Basic Petrochemicals’ joint ventures, their principal operating activities and Pemex-Gas and Basic Petrochemicals’ ownership interest:
 
Joint Ventures of Pemex-Gas and Basic Petrochemicals(1)
 
       
    Ownership
 
Subsidiary
 
Principal Activity
 
Interest (%)
 
 
Gasoductos de Chihuahua, S. de R.L. de C.VC.V. Transport of gas  50.00%
CH4 Energía, S.A. de C.V.  Trading of gas  50.00 
 
 
(1) As of December 31, 2006.
(1)As of December 31, 2007.
Source: Pemex-Gas and Basic Petrochemicals.
 
Private Sector Participation in Natural Gas Distribution
 
The Regulatory Law, as amended on May 12, 1995, provides that private and “social sector” companies may, with governmental authorization, store, distribute and transport natural gas, and may construct, own and operate natural gas pipelines, facilities and equipment. The regulations implementing this amendment went into effect on November 9, 1995.
 
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, theComisión Reguladora de EnergiaEnergía(Energy Regulatory Commission) approved the Gradual Access Program for1996-1997, 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 have been privatized: Chihuahua, Toluca, Saltillo, Nuevo Laredo, Río Pánuco, Norte de Tamaulipas, Distrito Federal, Valle de Cuautitlán, Texcoco, Querétaro, La Laguna, Bajío Norte, Puebla-Tlaxcala, Guadalajara, Piedras Negras and Ciudad Juárez. As of 1999, all of our natural gas distribution pipelines were opened to private sector use and there were no further distribution assets left to divest pursuant to the program, although a portion of these assets are still held in trust and the distribution assets located within Veracruz have not yet been divested.


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Pricing Decrees
 
On January 1, 2007, President Felipe Calderón issued an executive decree establishing maximumNatural gas prices on first-hand and end-user salesfor domestic sale are calculated in accordance with the directives of liquefied petroleum gas as part of a Mexican Government program to stabilize LPG prices. Pursuant to this decree, the maximum increase that the LPG price may have during 2007 is fixed until theComisión Federal de Competencia(Federal Competition Commission) evaluates and issues a statement about the conditions of effective competition in the Mexican LPG market. The decree also establishes that the Ministry of Energy, through the Energy Regulatory Commission will establish a mechanism to fixas published in the maximumDiario Oficial de la Federación(Official Gazette of the Federation) on March 20, 1996. These prices reflect the natural gas opportunity costs and competitive conditions in international markets and at the point of first hand sales, and the Ministry of Economy will fix the end-user’s purchase price. This decree will expire in December 2007.sale.
 
On September 12, 2005, President Foxthe Mexican Government issued an executive decree establishing ceiling prices on first-hand and end-user sales of natural gas for industrial use and to local distribution companies as part of a Mexican Government program to stabilize natural gas prices. The purpose of this program was to curtail the effects of the increase in natural gas prices due to the impact of Hurricane Katrina on the production in the Gulf of Mexico. Pursuant to the decree, the maximum prices of first hand sales were adjusted periodically according to a formula determined by the Mexican Government, and the Ministry of Economy fixed the industrial and local distribution company purchase price from September 2005 through January 2006. The decree expired in January 2006.


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Since 2003, the price control mechanisms for LPG have been implemented by governmental decrees. On January 1, 2007, President Felipe Calderón issued an executive decree establishing maximum prices on first-hand and end-user sales of LPG as part of a Mexican Government program to stabilize LPG prices. This decree expired on September 27, 2007, when President Calderón issued a decree suspending the increases in prices of LPG from October 2007 to December 2007.
On December 28, 2007, President Felipe Calderón issued a new decree establishing the maximum LPG price for first-hand and end-user sales during January 2008. The decree became effective on January 1, 2008 and should have expired on January 31, 2008. However, the decree was extended on January 31, February 29, March 31, April 30 and May 30, 2008 and is still in force as of the date of this report. See Item 3 “Key Information—Risk Factors—Risk Factors Related to the Relationship between PEMEX and the Mexican Government—The Mexican Government has imposed price controls in the domestic market on our products.”
Natural Gas Hedging Operations
 
Pemex-Gas and Basic Petrochemicals offers its customers financial instruments as a value added service and we provide various hedging contracts to our customers in order to give them the option of protecting against fluctuations in the price of our products.
 
AtPemex-Gas and Basic Petrochemicals’ hedging program offers customers financial derivatives instruments including forwards, swaps and options. Since April 2006, in order to hedge the end of 2003,risk that Pemex-Gas and Basic Petrochemicals is exposed to under its hedging program, Pemex-Gas and Basic Petrochemicals has transferred its operational risk through swaps and options instruments through its subsidiary MGI Supply, Ltd. MGI Supply, Ltd. settles these transactions with international counterparties in order to transfer the Ministry of Energy published a bulletin announcingrisk to them.
Previous hedging operations have included two hedging mechanisms that Pemex-Gas and Basic Petrochemicals would offeroffered to its natural gas customers for the period from January 1, 2004 through December 31, 2006 to replace a program established for the2001-2003 period.2006. This program applied to approximately 20% of our total domestic sales of natural gas to industrial customers. These mechanisms provided two alternatives:
 
 •  Customers could purchase natural gas swaps from us at a fixed price equal to a maximum of U.S. $4.50 per million BTUsBritish Thermal Units (BTUs) over the period from January 1, 2004 through December 31, 2006 for purchases of up to 10 million cubic feet per day. If the customer’s requirements were higher (up to 20 million cubic feet per day), the fixed price was U.S. $4.55 per million BTUs; or
 
 •  Customers could purchase natural gas swaps from us for the period between January 2004 through December 2004 at a lower fixed price of U.S. $4.425 per million BTUs, so long as the reference price in Reynosa did not exceed U.S. $6.00 per million BTUs. If the reference price exceeded that amount, the customer would also pay the difference between U.S. $6.00 per million BTUs and the average spot price. In June 2004, all the customers who had already entered the program agreed to renew their respective contracts for the period from 2005 through 2006.
 
Pemex-Gas and Basic Petrochemicals modified its traditional risk profile for natural gas in order to mitigate the potential volatility in income resulting from the sale of this product. This strategy does not leave Pemex-Gas and Basic Petrochemicals with any exposure to basis risk (i.e., the risk arising from the price of a derivative being based on a different reference price than that of the underlying commodity), due to the fact that the derivatives are now priced using the same market indices as the ones used to price Pemex-Gas and Basic Petrochemicals’ natural gas sales. These hedging mechanisms expired in December 2006 in accordance with their terms and were not renewed by the Ministry of Energy.


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For more information on these fixed price sales, see “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”
 
Investments
 
In nominal peso terms, Pemex-Gas and Basic Petrochemicals invested Ps. 3,3224,004 million in 2006,2007, as compared to Ps. 3,2063,322 million in 2005,2006, in projects primarily related to natural gas and condensates processing, transportation and storage. For 2007,2008, the Mexican Government approved Ps. 1,2971,466 million in nominal terms for capital expenditures for investment in PIDIREGAS for Pemex-Gas and Basic Petrochemicals at the modular cryogenic plants in Reynosa. In addition to this, Ps. 3,4575,145 million in nominal terms has been budgeted for Pemex-Gas and Basic Petrochemicals’ non-PIDIREGAS-related capital expenditures in 2007.2008.
 
Petrochemicals
 
Capacity
 
At the end of 2006,2007, Pemex-Petrochemicals operated six petrochemical complexes and one petrochemical unit for the production of non-basic petrochemical products. Pemex-Petrochemicals also owns the Camargo petrochemical complex, which stopped operating fivesix years ago, and a petrochemical unit at Reynosa, which stopped operating in August 1998. At the end of 2006,2007, Pemex-Petrochemicals owned 51 plants, including those that were not producing. Pemex-Petrochemicals had a total installed capacity sufficient to produce 12.6 million tons of petrochemical products per year in 2006, which was the same capacity it had


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in 2005.2007, unchanged from 2006. Pemex-Petrochemicals’ total production capacity for the last five years was distributed among its facilities as set forth below:
 
Pemex-Petrochemicals’ Total Capacity
 
                                        
 Year Ended December 31,  Year ended December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (in thousands of tons)  (in thousands of tons) 
Petrochemical Facility
                                        
Cosoleacaque  4,998   4,975   4,975   4,975   4,975   4,975   4,975   4,975   4,975   4,975 
Cangrejera  2,427   3,205   3,255   3,280   3,280   3,205   3,255   3,280   3,280   3,280 
Morelos  2,107   2,263   2,263   2,263   2,263   2,263   2,263   2,263   2,263   2,263 
Pajaritos  1,021   1,021   1,021   1,021   1,021   1,021   1,021   1,021   1,021   1,021 
Escolín  337   337   337   337   337   337   337   337   337   337 
San Martín Texmelucan  268   288   288   288   288   288   288   288   288   288 
Camargo  333   333   333   333   333   333   333   333   333   333 
Tula  71   76   76   76   76   76   76   76   76   76 
                      
Total  11,561   12,496   12,546   12,571   12,571   12,496   12,546   12,571   12,571   12,571 
                      
 
 
Note: Numbers may not total due to rounding.
Source:Pemex BDI.
 
Production
 
Pemex-Petrochemicals manufactures different non-basic petrochemical products, including:
 
 •  methane derivatives, such as ammonia and methanol;
 
 •  ethane derivatives, such as ethylene, polyethylenes,polyethylene, vinyl chloride monomer, ethylene oxide and glycols;
 
 •  aromatics and their derivatives, such as paraxylene, styrene, bencene,benzene, toluene and xylenes;
 
 •  propylene and its derivatives, such as acrylonitrile and propylene; and


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 •  other products, such as oxygen, nitrogen, hexane, heptane, pyrolysis liquids, specialty petrochemical products, hydrochloric acid and muriatic acid.
 
Our combined total annual petrochemical production increased by 3.4%7.3%, from 10,603 thousand tons in 2005 to 10,961 thousand tons in 2006.2006 to 11,756 thousand tons in 2007. Of this amount, Pemex-Petrochemicals produced 6,5727,496 thousand tons of petrochemicals in 2006,2007, representing a 5.7%14.1% increase from its production of 6,2196,572 thousand tons in 2005.2006. The remainder was produced by Pemex-Gas and Basic Petrochemicals. For information on Pemex-Gas and Basic Petrochemicals’ petrochemical production, see “—Gas and Basic Petrochemicals” above.
 
Pemex-Petrochemicals’ production increased in 20062007 to the highest production level of the past five years. Throughout this period,During the past five years, Pemex-Petrochemicals has increased production of some products, like ammonia at the Cosoleacaque petrochemical complex (due to high demand for urea production), low-density polyethylenes at the Cangrejera petrochemical complex (after its revamping in 2005) and ethylene oxide and glycols at the Morelos petrochemical complex (resulting from a catalyst change after its annual maintenance program in 2006). The vinyl chloride monomer plant at the Pajaritos petrochemical complex has increased its production due to better operational performance in 2006.2007 and decreased its production of other products, such as methanol and acrylonitrile (due to their high cost of production). We met our methanol demand by relying on imported products.


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The following table summarizes the annual production associated with the principal petrochemical activities of Pemex-Petrochemicals for the five years ended December 31, 2006.2007.
 
Pemex-Petrochemicals Production
 
��                        
                        
 Year Ended December 31, 2006
  Year ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in thousands of tons per year) (%)  (in thousands of tons per year) (%) 
Liquids
                                                
Hexanes  57   70   66   66   53   (19.7)  70   66   66   53   56   5.7 
Heptanes  8   18   11   15   14   (6.7)  18   11   15   14   13   (7.1)
                      
Total  65   88   77   81   68   (16.0)  88   77   81   68   69   1.5 
Other inputs
                                                
Oxygen  376   399   418   433   447   3.2   399   418   433   447   410   (8.3)
Nitrogen  109   106   112   118   117   (0.8)  106   112   118   117   106   (9.4)
Hydrogen  —   167   162   184   167   (9.2)  167   162   184   167   161   (3.6)
                      
Total  485   672   692   735   731   (0.5)  672   692   735   731   677   (7.4)
Petrochemicals
                                                
Methane derivatives  1,663   1,383   1,668   1,242   1,404   13.0   1,383   1,668   1,242   1,404   1,859   32.4 
Ethane derivatives  2,309   2,218   2,073   2,440   2,748   12.6   2,218   2,073   2,440   2,748   2,607   (5.1)
Aromatics and derivatives  670   795   1,222   1,187   1,089   (8.3)  795   1,222   1,187   1,089   1,338   22.9 
Propylene and derivatives  115   125   116   104   24   (76.9)  125   116   104   24   47   95.8 
Others  467   723   327   321   338   5.3   723   327   321   338   708   109.5 
                      
Total  5,224   5,244   5,406   5,294   5,603   5.8   5,244   5,406   5,294   5,603   6,559   17.1 
Other products
                                                
Hydrochloric acid  92   66   38   93   126   35.5   66   38   93   126   141   11.9 
Muriatic acid  24   14   11   16   44   175.0   14   11   16   44   50   13.6 
                      
Total  116   81   49   109   170   56.0   81   49   109   170   191   12.4 
                      
Subtotal
  6,085   6,223   6,219   6,572   7,496   14.1 
           
Refined products(1)
  n.a.   n.a.   n.a.   n.a.   5,068     
   
Total
  5,889   6,085   6,223   6,219   6,572   5.7                   12,565     
              
 
 
Notes:Numbers may not total due to rounding.
Note: Numbers may not total due to rounding.
n.a. = Not applicable.
(1)Began production in 2007 using plants transferred from Pemex-Refining to Pemex-Petrochemicals. Refined products produced at these plants are basically virgin stock.
Source: Source:Pemex BDI.
 
Investments
 
Pemex-Petrochemicals invested Ps. 1,426922 million in 20062007 in non-PIDIREGAS-related capital expenditures, as compared to Ps. 1,5301,426 million in 2005,2006, in nominal peso terms, in projects such as the ethane and aromatics derivative plants at the Cangrejera petrochemical complex, the expansion of its high density polyethylene plant to produce linear high and low density polyethylene the revamping of its ethylene oxide production capacity, and the second phase of the ethylene cracker renovation process at the Morelos petrochemical facility. For 2007, Pemex-Petrochemicals expects to invest Ps. 1,747 million in non-PIDIREGAS-related capital expenditures in projects such asfacility, the expansionfirst phase of transportation and storage facilities for the high-density polyethylene plant, the expansion ofexpanding its ethylene oxide production capacity, the expansion of its styrene production capacity and investment in general maintenance and security as well as the second phasesustainment of the ethylene cracker renovation processcapacity at the Morelos petrochemical facility. Pemex-Petrochemicals’ 2007 budgetfacilities. Pemex-Petrochemicals also includesinvested Ps. 1,016217 million in PIDIREGAS capital expenditures related to the renovationmodernization and expansion of the aromatics plant and the expansion of the styrene plant and the ethylene plant at the Cangrejera petrochemical complex.


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In addition,Pemex-Petrochemicals’ 2008 budget includes Ps. 752 million in PIDIREGAS capital expenditures. For non-PIDIREGAS capital expenditures, in 2008, Pemex-Petrochemicals is considering a proposalexpects to develop additional productive chains in the ethylene process with the participationinvest Ps. 3,057 million, of private investment. This project includes investments of Pemex-Petrochemicals inwhich it has allocated Ps. 470 million to continue the expansion of ethylene crackers at Cangrejeraoxide capacity, Ps. 191 million for expansion of ethylene capacity, Ps. 41 million to others (styrene and aromatics), Ps. 58 million to revamp the Morelos petrochemical complex. Raw materialsswing plant, Ps. 567 million for security and environmental protection projects, Ps. 1,341 million for maintaining the expanded facilities will be supplied by Pemex-Gas and Basic Petrochemicals. The petrochemicals products obtained from these new facilities, such as ethylenes, will be used as inputs for derivative plants, in which PEMEX has the option to participate in association with national and international commercial partners. We are currently negotiating with potential commercial partners the detailsproduction capacity of the project.plants, Ps. 248 million for modernizing and optimizing projects, and Ps. 141 million for administrative infrastructure projects, among others.
Pemex-Petrochemicals expects that its 2008 budget will allow it to meet its contractual commitments and other commitments arising from the engineering and construction bidding process in connection with the projects mentioned above during 2008.
 
Domestic Sales
 
In 2006,2007, the value of the domestic sales of petrochemical products by Pemex-Petrochemicals decreasedincreased by 0.8%1.4%, from Ps. 20,527.121,131.8 million in 20052006 to Ps. 20,366.221,424.2 million in 2006.2007. This decreaseincrease was primarily due to a lackan increase in the prices of productionsome of acrylonitriles at the Tula petrochemical plant due to market conditions. The ethaneproducts manufactured by Pemex-Petrochemicals, such as polyethylene, ethylene oxide and monoethylene glycol. Ethylene derivatives are onesome of the most important products in theterms of demand in Pemex-Petrochemicals’ domestic sales of Pemex-Petrochemicals.sales.
 
Over the five years ended December 31, 2006,2007, the value of Pemex-Petrochemicals’ domestic sales was distributed as set forth in the table below. The sales of petrochemical products by Pemex-Gas and Basic Petrochemicals and Pemex-Refining are included under “—Gas and Basic Petrochemicals” and “—Refining” above.
 
Value of Domestic Sales(1)
 
                                                
 Year Ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in millions of constant pesos at December 31, 2006)(2) (%)  (in millions of constant pesos at December 31, 2007)(2) (%) 
Petrochemical Product
                                                
Ethane derivatives Ps.4,903.3  Ps.7,144.8  Ps.8,953.4  Ps.10,682.9  Ps.11,240.6   5.2  Ps.7,413.4  Ps.9,290.0  Ps.11,084.5  Ps.11,663.1  Ps.11,742.2   0.7 
Aromatics and derivatives  1,586.9   2,204.4   5,005.0   5,789.3   5,831.5   0.7   2,287.3   5,193.1   6,006.9   6,050.7   5,898.5   (2.5)
Methane derivatives  1,324.5   1,889.5   2,331.3   2,646.8   2,685.9   1.5   1,960.5   2,418.9   2,746.3   2,786.9   3,124.9   12.1 
Propylene and derivatives  636.2   877.8   1,200.9   1,131.4   339.8   (70.0)  910.8   1,246.0   1,173.9   352.6   346.8   (1.6)
Others  105.2   152.2   156.8   276.7   268.4   (3.0)  157.9   162.7   287.1   278.5   311.8   12.0 
                      
Total Ps.8,556.0  Ps.12,268.7  Ps.17,647.3  Ps.20,527.1  Ps.20,366.2   (0.8) Ps.12,729.9  Ps.18,310.7  Ps.21,298.7  Ps.21,131.8  Ps.21,424.2   1.4 
                      
 
 
Note: Numbers may not total due to rounding.
 
(1)Excludes value added tax.
 
(2)Figures have been restated to constant pesos as of December 31, 2006,2007, by applying the inflation factors from the respective years through December 31, 2006.2007. For the five years ended December 31, 2006,2007, the inflation factor is the average inflation rate for each of these years.
Source:Source:Pemex BDI.
 
Private Sector Participation in Petrochemicals Sector
 
Before May 1, 2006, Pemex-Petrochemicals, Petróleos Mexicanos and, in some cases, Pemex-Refining were the sole shareholders and owners of the following seven subsidiaries:
 
 •  Petroquímica Cosoleacaque, S.A. de C.V.;
 
 •  Petroquímica Escolín, S.A. de C.V.;


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 •  Petroquímica Tula, S.A. de C.V.;
 
 •  Petroquímica Camargo, S.A. de C.V.;


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 •  Petroquímica Cangrejera, S.A. de C.V.;
 
 •  Petroquímica Morelos, S.A. de C.V.; and
 
 •  Petroquímica Pajaritos, S.A. de C.V.
 
On September 15, 2004, a resolution was published in theDiario Oficial de la Federación(Official Gazette of the Federation)Federation authorizing the Ministry of Energy to carry out the merger of the seven subsidiaries of Pemex-Petrochemicals into Pemex-Petrochemicals. The merger process was completed on May 1, 2006, after obtaining all the necessary legal and corporate authorizations. The assets and liabilities associated with the production of non-basic petrochemicals, as well as the real estate corresponding to each complex or plant of these seven subsidiaries, were integrated into Pemex-Petrochemicals.
 
We expect that thisThe merger will behas been highly beneficial to us, as we anticipate that it will allowhas allowed us to do the following:
 
 •  take advantage of the existing production chains in these former subsidiaries to improve our production, planning and commercialization processes and maximize the return on our investments;
 
 •  generate synergies with respect to the installations, inventory, purchases and specialized technical resources of each of our production centers;
 
 •  improve the management of our supply chains and our relationships with our suppliers and customers; and
 
 •  reduce our operational expenses; and
•  provide petrochemical products to national and international markets more effectively and focus our efforts on being an integrated company.expenses.
 
International Trading
 
The PMI Group
 
The PMI Group conducts international commercial activities for our crude oil, refined oil and petrochemical products, except for natural gas, which is marketed directly by Pemex-Gas and Basic Petrochemicals. The PMI Group’s main objective is to assist in maximizing our profitability and optimizing our operations through the use of international trade, facilitating the link between the international markets and us and pursuing new business opportunities in marketing our products. The PMI Group manages the international sales of our crude oil and petroleum products and acquires 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 (refined products, petrochemical products and LPG) in the international markets are carried out through P.M.I. Trading, Ltd. P.M.I. Trading, Ltd., which also performs third-party trading, transportation and risk-management activities.
 
Exports and Imports
 
PMI purchases crude oil from Pemex-Exploration and Production and then sells it to PMI’s customers. PMI sold an average of 1,7931,686.1 thousand barrels per day of crude oil in 2006,2007, which represented 55.1%54.7% 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,  Year Ended December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (tbpd)  (%) (tbpd)  (%) (tbpd)  (%) (tbpd)  (%) (tbpd)  (%)  (tbpd)  (%) (tbpd)  (%) (tbpd)  (%) (tbpd)  (%) (tbpd)  (%) 
Crude oil exports (by volume)
                                                                                
Olmeca (API gravity of 38°-39°)  245   14   216   12   221   12   216   12   231   13   216   12   221   12   216   12   231   13   173   10 
Isthmus (API gravity of 32°-33°)  46   3   25   1   27   1   81   4   68   4   25   1   27   1   81   4   68   4   41   2 
Maya (API gravity of 21°-22°)  1,398   82   1,590   86   1,608   86   1,506   83   1,480   83   1,590   86   1,608   86   1,506   83   1,480   83   1,460   87 
Altamira (API gravity 15.0°-16.5°)  17   1   14   1   13   1   15   1   14   1   14   1   13   1   15   1   14   1   13   1 
                                          
Total  1,705   100   1,844   100   1,870   100   1,817   100   1,793   100   1,844   100   1,870   100   1,817   100   1,793   100   1,686   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 scale. On the API scale, oil with the least specific gravity has the highest API gravity. In addition, if all other things are equal, the higher the API gravity, the greater the value of the crude oil.
Source:PMI operating statistics which are based on information in bills of lading.and Indicadores Petroleros.
 
                                        
 Year Ended December 31,  Year Ended December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (U.S. dollars per barrel)  (U.S. dollars per barrel) 
Crude Oil Prices
                                        
Olmeca U.S.$24.87  U.S.$29.32  U.S.$39.34  U.S.$53.91  U.S.$64.67  U.S.$29.32  U.S.$39.34  U.S.$53.91  U.S. $64.67  U.S.$70.89 
Isthmus  23.48   28.08   38.04   53.11   57.29   28.08   38.04   53.11   57.29   69.92 
Maya  20.89   24.13   29.82   40.61   51.10   24.13   29.82   40.61   51.10   60.38 
Altamira  19.41   22.81   28.12   36.07   45.75   22.81   28.12   36.07   45.75   53.71 
Weighted average realized price U.S.$21.52  U.S.$24.78  U.S.$31.05  U.S.$42.71  U.S.$53.04  U.S.$24.78  U.S.$31.05  U.S.$42.71  U.S.$53.04  U.S.$61.64 
 
 
Source: PMI operating statistics which are based on information in bills of lading.and Indicadores Petroleros.
 
Geographic Distribution of Export Sales
 
In 2006, 98.2%2007, 80.2% of PMI’s sales of our crude oil exports were to customers located in the western hemisphere.United States. As of December 31, 2006,2007, PMI had 2923 customers in 1412 countries. Among these countries, the largest proportion of our exports has consistently been to customers in the United States, Spain, the Netherlands Antilles, India and Canada.
 
The following table sets forth our crude oil export sales by country.
 
Crude Oil Exports by Country
 
                                        
 Percentage of Exports  Percentage of Exports 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
United States  78.6%  78.0%  79.2%  78.6%  80.3%  78.0%  79.2%  78.6%  80.3%  80.2%
Spain  8.3   7.8   8.0   8.9   8.0   7.8   8.0   8.9   8.0   7.4 
Netherlands Antilles  5.3   5.7   6.2   5.2   4.3   5.7   6.2   5.2   4.3   4.1 
Japan  0.6   0.6   0.0   0.0   0.0 
India  2.8   1.9   1.8   1.8   2.1 
Canada  1.2   1.6   1.5   2.0   2.0   1.6   1.5   2.0   2.0   1.8 
Others  6.1   6.4   5.0   5.4   5.3   6.4   3.1   3.6   3.5   4.4 
                      
Total  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
                      
 
 
Note: Numbers may not total due to rounding.
Source: PMI operating statistics, which are based on information in bills of lading.statistics.


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The following table sets forth the geographic distribution of PMI’s sales of crude oil exports from January 1, 20022003 through December 31, 2006.2007. 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
 
                                                                      
 At December 31,  At December 31, 
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 (tbpd) (%) (tbpd) (%) (tbpd) (%) (tbpd) (%) (tbpd) (%)  (tbpd) (%) (tbpd) (%) (tbpd) (%) (tbpd) (%) (tbpd) (%) 
PMI Crude Oil Export Sales to:
                                                                                
United States and Canada  1,360   80   1,467   80   1,510   81   1,464   81   1,477   82   1,467   80   1,510   81   1,464   81   1,477   82   1,383   82 
Europe  181   11   176   10   178   10   194   11   171   10   176   10   178   10   194   11   171   10   163   10 
Central and South America  117   7   137   7   145   8   125   7   113   6   137   7   145   8   125   7   113   6   104   6 
Far East  47   3   63   3   36   2   34   2   32   2   63   3   36   2   34   2   32   2   35   2 
Africa  —   —   1   —   —   —   —   —   —   —   1   —   —   —   —   —   —   —   —   — 
                                          
Total  1,705   100   1,844   100   1,870   100   1,817   100   1,793   100   1,844   100   1,870   100   1,817   100   1,793   100   1,686   100 
                                          
Olmeca (API gravity of 38°-39°)
                                                                                
United States and Canada  225   13   195   11   208   11   200   11   214   12   195   11   208   11   200   11   214   12   160   9 
Others  20   1   21   1   14   1   16   1   17   1   21   1   14   1   16   1   17   1   13   1 
                                          
Total  245   14   216   12   221   12   216   12   231   13   216   12   221   12   216   12   231   13   173   10 
                                          
Isthmus (API gravity of 32°-33°)
                                                                                
United States and Canada  29   2   11   1   6   —   38   2   41   2   11   1   6   —   38   2   41   2   16   1 
Others  17   1   14   1   22   1   43   2   27   1   14   1   22   1   43   2   27   1   25   2 
                                          
Total  46   3   25   1   27   1   81   4   68   4   25   1   27   1   81   4   68   4   41   2 
                                          
Maya (API gravity of 21°-22°)
                                                                                
United States and Canada  1,090   64   1,247   68   1,283   69   1,212   67   1,208   67   1,247   68   1,283   69   1,212   67   1,208   67   1,195   71 
Others  308   18   342   19   325   17   294   16   272   15   342   19   325   17   294   16   272   15   265   16 
                                          
Total  1,398   82   1,590   86   1,608   86   1,506   83   1,480   83   1,590   86   1,608   86   1,506   83   1,480   83   1,460   87 
                                          
Altamira (API gravity of 15.0°-16.5°)
                                                                                
United States and Canada  17   1   14   1   13   1   15   1   14   1   14   1   13   1   15   1   14   1   13   1 
Others  —   —   —   —   —   —   —   —   1   —   —   —   —   —   —   —   1   —   —   — 
                                          
Total  17   1   14   1   13   1   15   1   14   1   14   1   13   1   15   1   14   1   13   1 
                                          
 
 
Notes: Numbers may not total due to rounding.
Notes:  Numbers may not total due to rounding.
tbpd = thousands barrels per day.
API gravity refers to the specific gravity or density of liquid petroleum products measured in degrees on the American Petroleum Institute scale. On the API scale, oil with the least specific gravity has the highest API gravity. In addition, if all other things are equal, the higher the API gravity, the greater the value of the crude oil.
Source: PMI operating statistics, which are based on information in bills of lading.statistics.
 
PMI makessells a significant percentage of its crude oil sales under evergreen contracts, which can be terminated by either party pursuant to a three month phase-out clause. PMI sells most of its remaining exports to the same customers that purchase under evergreen contracts, but PMI makes these sales pursuant to separate supply contracts, which apply the pricing formulas included in the evergreen contracts. PMI generally sells crude oil on aFree On Boardbasis (at the shipping point). In practically all cases, PMI sells refined products onFree on BoardandCost and Freightbases and buys refined products onDelivery Ex-shiporDelivery at FrontierandCost and Freight bases.
 
PMI has entered into several long-term Maya crude oil supply agreements pursuant to which the purchasers have agreed to undertake projects to expand the capacity of their respective refineries to upgrade residue from Maya crude oil. Under these agreements, PMI provides the purchasers with certain support mechanisms that will protect, under certain adverse market conditions, the investments that the purchasers undertake in accordance with


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undertake. Once such contracts have expired, the agreements.commercial relationship has continued under evergreen contracts. These agreements include:
 
 •  anAn agreement with Port Arthur Coker Co., signed on March 10, 1998, which was assigned to Valero Energy Corporation on November 1, 2005, to supply its Port Arthur, Texas refinery with Maya crude oil for a period of eight years following project completion, which


59

occurred in March 2001; the amount of Maya crude oil supplied is adjusted every six months and is currentlymonths. On December 31, 2007, the volume to be supplied was set at 195188 thousand barrels per day;day and on May 1, 2008, the volume was adjusted to 177 thousand barrels per day.
 •  anAn agreement with Coastal Aruba Refining Company, N.V. (which was assigned to Valero Energy Corporation on March 5, 2004 following its acquisition of Coastal Aruba Refining Company, N.V.), signed on July 30, 1998, to supply its refinery in Aruba with approximately 100 thousand barrels per day of Maya crude oil for a period of five years following project completion, which occurred in April 2000. The agreement was extended until July 2005, after which time PMI continued to supply the same amount of Maya crude oil for the refinery under an evergreen contract signed in July 1996 with Valero Marketing & Supply Company;2005.
 
 •  anAn agreement with Exxon Company U.S.A. and Exxon Trading Company International, signed on September 25, 1998, to supply its Baytown, Texas refinery with approximately 65 thousand barrels per day of Maya crude oil for a period of five years following project completion, which occurred in December 2001. Following the merger of Exxon Corporation and Mobil Corporation, this agreement was replaced with a new agreement containing similar terms and provisions, signed by Exxon Mobil Sales & Supply Corporation in December 1999. This long-term agreement ended onin December 21, 2006, but PMI continues to supply the same amount of Maya crude oil for the refinery under an existing evergreen contract;2006.
 
 •  anAn agreement with Pecten Trading Company, which is a trading subsidiary of Shell Oil Company, signedexecuted on May 1, 1999, and an agreement with P.M.I. Norteamérica, S.A. de C.V., signed on the same date, to supply the Deer Park refinery joint venture with a total of approximately 50200 thousand barrels per day, 50 of Maya crude oilwhich were under the support mechanism for such contract for a period of seven years following project completion, which occurred in April 2001, and up to2001. Effective May 2008, the contract volume is for approximately 170 thousand barrels per day until 2023;2023.
 
 •  anAn agreement with Marathon Petroleum Supply, LLC (formerly Marathon Ashland Supply, LLC), signedexecuted on May 19, 1999, to supply its Garyville, Louisiana refinery with approximately 100 thousand barrels per day of Maya crude oil for a period of five years following project completion, which occurred in December 2001. This agreement ended in December 2006, but PMI continues to supply the same amount of Maya crude oil for the refinery under a new evergreen contract;2006.
 
 •  anAn agreement with Valero Marketing and Supply Company and Valero Refining—Texas, L.P., signedexecuted on December 17, 2001, to supply their Texas City, Texas refinery with approximately 90 thousand barrels per day of Maya crude oil for a period of five years following project completion, which occurred in January 2004;2004.
 
 •  anAn agreement with Chevron Products Company, a division of Chevron U.S.A. Inc., signedexecuted on March 6, 2002, to supply its Pascagoula, Mississippi refinery with approximately 130 thousand barrels per day of Maya crude oil for a period of five years following project completion, which occurred in May 2003; and2003. Therefore, this agreement terminated on April 2008.
 
 •  anAn agreement with Hunt Crude Oil Supply Company, signed on December 19, 2005, to supply its refinery in Tuscaloosa, Alabama, with approximately 14 thousand barrels per day of Altamira crude oil for a period of five years following project completion, which is programmed to occuroccurred in June 2007.
 
These long-term Maya crude oil supply agreements further our strategy of supporting the export value of MayaMexican heavy crude oil in relation to the value of other grades of crude oil by creating incentives for refiners to invest in new high-conversion refineries, which will beare capable of upgrading the significant proportion of residue produced from processing Maya and Altamira crude oil in less-efficient refining complex configurations.


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The Ministry of Energy has entered into certain agreements to reduce or increase exports of crude oil as discussed below in “—Trade Regulations and Export Agreements.”
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, 2006.2007.
 
Volume of Exports and Imports
 
                        
                         Year Ended December 31, 
 Year Ended December 31, 2006
            2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in thousands barrels per day, except as noted) (%)  (in thousands barrels per day, except as noted) (%) 
Exports
                                                
Crude Oil                                                
Olmeca  244.8   215.6   221.4   215.8   230.6   6.9   215.6   221.4   215.8   230.6   172.7   (25.1)
Isthmus  45.8   24.9   27.4   81.0   68.3   (15.7)  24.9   27.4   81.0   68.3   41.1   (39.8)
Altamira  16.9   13.7   13.4   14.7   14.3   (2.7)  13.7   13.4   14.7   14.3   12.7   (11.2)
Maya  1,397.6   1,589.6   1,608.1   1,505.6   1,479.5   (1.7)  1,589.6   1,608.1   1,505.6   1,479.5   1,459.6   (1.3)
                        
Total crude oil  1,705.1   1,843.9   1,870.3   1,817.1   1,792.7   (1.3)  1,843.9   1,870.3   1,817.1   1,792.7   1,686.1   (5.9)
 
Natural gas(1)
  4.4   —   —   23.9   32.7   36.8   —   —   23.9   32.7   138.7   324.2 
Refined products  155.9   178.9   151.8   186.2   188.2   1.1   178.9   151.8   186.2   188.2   176.9   (6.0)
Petrochemical products(2)
  801.7   834.8   915.7   853.6   823.7   (3.5)
Petrochemical products(2)(3)
  834.8   915.7   853.6   823.7   746.0   (9.4)
 
Imports
                                                
Natural gas(3)
  592.5   756.9   765.6   480.4   451.0   (6.1)
Natural gas(1)
  756.9   765.6   480.4   451.0   385.6   (14.5)
Refined products  349.9   287.2   310.5   391.9   430.1   9.7   287.2   310.5   391.9   431.1   494.0   14.6 
Petrochemical products(2)
  295.3   532.4   276.6   397.4   435.6   9.6 
Petrochemical products(2)(4)
  532.4   276.6   397.4   435.6   425.1   (2.4)
 
 
Note:Numbers are subject to adjustment because the volume of crude oil exports actually sold during December 20062007 may be adjusted to reflect the percentage of water in each shipment.
(1)Fuel oil equivalent. Numbers expressed in millions of cubic feet per day.
(2)Thousands of metric tons.
(3)Includes propylene.
(4) Millions of cubic feet per day.Includes isobutane, butane and N-butane.
Source: PMI operating statistics, which are based on information in bills of lading.statistics.
 
Crude oil exports decreased by 1.3%5.9% in 2006,2007, from 1,817.1 thousand barrels per day in 2005 to 1,792.7 thousand barrels per day in 2006 principallyto 1,686.1 thousand barrels per day in 2007, mainly as a result of lower crude oil production, especially during the decline in production from Cantarell. fourth quarter, during which time bad weather conditions exacerbated export reductions.
Natural gas imports decreased by 6.1%14.5% in 2006,2007, from 480.4 million cubic feet per day in 2005 to 451.0 million cubic feet per day in 2006 to 385.6 million cubic feet per day in 2007, due to higherincreased domestic production. Although we normally do not export natural gas, weWe exported 32.7138.7 million cubic feet per day of natural gas in 2006, also due2007, an increase of 324.2%, as compared to higher domestic production in 2006. Ournatural gas exports of petrochemical products by volume decreased by 3.5%, from 853.6 thousand metric tons in 2005 to 823.7 thousand metric tons in 2006, while imports of petrochemical products by volume increased by 9.6%, from 397.4 thousand metric tons in 2005 to 435.6 thousand metric tons in 2006, due to a decrease in the production of methanol, xylenes and toluene, as a result of maintenance work performed at the Aromatics Train at the Cangrejera petrochemical complex during the first half of 2006. increased domestic production.
In 2006,2007, exports of refined products decreased by volume increased by 1.1%6.0%, from 186.2 thousand barrels per day in 2005 to 188.2 thousand barrels per day in 2006 while imports of refined products by volume increased by 9.7%, from 391.9to 176.9 thousand barrels per day in 20052007, due to 430.1the additional processing of coker gasoline, a reduction of natural gasoline production and an increase in domestic consumption of jet fuel. Imports of refined products increased by 14.6%, from 431.1 thousand barrels per day in 2006.2006, to 494.0 thousand barrels per day in 2007, due to growth in domestic demand of gasoline and imports of ultra low sulphur diesel. As of January 2007, clean fuels specifications for gasoline and diesel for transportation were established in México. Imports of ultra low sulphur diesel and ultra low sulphur premium gasoline were required to meet domestic demand. During 2007,2008, import volumes of refined products are likely to increase due to an expected 5% increase in domestic demand for gasoline and diesel fuel. We expect that our refined products production will increase slightly, but not enough to meet the expected increase in demand.diesel.


6164

PMI Trading sells refined and petrochemical products on aFree on Board andCost and Freightbasis and buys refined and petrochemical products on aFree on Board,Cost and FreightandDelivery Ex-shiporDelivery 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, 2006.2007.
 
Value of Exports and Imports(1)
 
                                                
 Year ended December 31, 2006
  Year Ended December 31, 2007
 
 2002 2003 2004 2005 2006 vs. 2005  2003 2004 2005 2006 2007 vs. 2006 
 (in millions of nominal U.S. dollars) (%)  (in millions of nominal U.S. dollars) (%) 
Exports
                                                
Olmeca $2,222.9  $2,307.7   3,187.9   4,246.4   5,443.4   28.2  U.S. $2,307.7  U.S.$3,187.9  U.S. $4,246.4  U.S. $5,443.4  U.S.$4,469.1   (17.9)
Isthmus  392.5   255.4   380.9   1,569.6   1,427.9   (9.0)  255.4   380.9   1,569.6   1,427.9   1,049.9   (26.5)
Altamira  119.6   114.5   138.2   193.8   238.9   23.3   114.5   138.2   193.8   238.4   248.7   4.3 
Maya  10,657.2   13,998.7   17,551.0   22,319.8   27,596.9   23.6   13,998.7   17,551.0   22,319.8   27,597.1   32,169.6   16.6 
                      
Total crude oil(2)
 $13,392.2  $16,676.3  $21,257.9  $28,329.5  $34,707.2   22.5  U.S.$16,676.3  U.S. $21,257.9  U.S. $28,329.5  U.S. $34,706.8  U.S.$37,937.2   9.3 
Natural gas  4.0   —   —   78.9   71.8   (9.0)  —   —   78.9   71.8   350.5   388.2 
Refined products  1,288.1   1,743.5   2,036.8   3,119.2   3,758.0   20.5   1,743.5   2,036.8   3,119.2   3,758.0   4,116.6   9.5 
Petrochemical products  145.3   185.9   250.8   356.7   352.6   (1.0)  185.9   250.8   356.7   352.6   297.1   (15.7)
                      
Total products $1,437.4  $1,929.4  $2,287.6  $3,554.8  $4,182.4   17.7 
Total natural gas and products U.S. $1,929.4  U.S.$2,287.6  U.S. $3,554.8  U.S $4,182.4  U.S.$4,764.2   13.9 
                      
Total exports $14,829.6  $18,605.7  $23,545.5  $31,884.1  $38,889.6   22.0  U.S.$18,605.7  U.S. $23,545.5  U.S. $31,884.1  U.S.$38,889.2  U.S. $42,701.4   9.8 
                      
Imports
                                                
Natural gas $775.4  $1,526.2  $1,715.1  $1,397.9  $1,134.5   (18.8) U.S. $1,526.2  U.S.$1,715.1  U.S.$1,397.9  U.S. $1,134.5  U.S. $995.7   (12.2)
Refined products  3,827.4   3,777.3   5,306.2   9,418.2   11,973.7   27.1   3,777.3   5,306.2   9,418.2   12,007.4   15,696.2   30.7 
Petrochemical products  70.2   105.5   145.9   207.4   264.8   27.7   105.5   145.9   207.4   264.8   278.9   5.3 
                      
Total imports $4,673.0  $5,409.0  $7,167.2  $11,023.5  $13,373.0   21.3  U.S. $5,409.0  U.S. $7,167.2  U.S. $11,023.5  U.S.$13,406.8  U.S. $16,970.8   26.6 
                      
Net exports
 $10,156.6  $13,196.7  $16,378.3  $20,860.6  $25,516.6   22.3  U.S.$13,196.7  U.S.$16,378.3  U.S.$20,860.6  U.S.$25,482.4  U.S.$25,730.6   1.0 
                      
 
 
Note: Numbers may not total due to rounding.
 
(1)Does not include crude oil, refined products petrochemicals and natural gaspetrochemicals 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 in the financial statements under “Net Sales” because of the 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.
Sources: PMI operating statistics, which are based on information in bills of lading.lading, and Indicadores Petroleros.
 
Imports of natural gas decreased in value by 18.8%12.2% during 2006,2007, mainly as a result of higherincreased domestic production.
 
In 2006, we continued to be a net importer of refined products, with2007, imports of refined products increasingincreased in value by 27.1%30.7%, while exports of refined products increased in value by 20.5%9.5%. Our net imports of refined products for 20062007 totaled U.S. $8,215.7$11,579.6 million, a 30.4%40.4% increase from the refined products trade deficit of U.S. $6,299$8,249.4 million in 2005.2006.


6265

The following table describes the composition of our imports and exports of selected refined products in 2004, 2005, 2006 and 2006.2007.
 
Imports and Exports of Selected Refined Products
 
                                                
 Year Ended December 31,  Year Ended December 31, 
 2004 2005 2006  2005 2006 2007 
 (tbpd)  (%) (tbpd)  (%) (tbpd )  (%)  (tbpd) (%) (tbpd ) (%) (tbpd ) (%) 
Imports
                                                
Gasoline(1)
  192.6   62.0   249.4   63.6   280.2   65.1   249.4   63.6   281.2   65.1   318.6   64.5 
Fuel oil  17.1   5.5   27.5   7.0   14.3   3.3   27.5   7.0   14.3   3.3   16.9   3.4 
Liquefied petroleum gas  84.4   27.2   72.9   18.6   75.6   17.6 
Liquefied petroleum gas(2)
  72.9   18.6   75.6   17.6   82.8   16.8 
Diesel  3.6   1.2   24.9   6.4   41.3   9.6   24.9   6.4   41.3   9.6   52.7   10.7 
Others  12.8   4.1   17.2   4.4   18.7   4.3   17.2   4.4   18.7   4.3   22.9   4.6 
                          
Total  310.5   100.0%  391.9   100.0%  430.1   100.0%  391.9   100.0%  431.1   100.0%  494.0   100.0%
                          
Exports
                                                
Gasoline(1)
  76.7   50.5   81.3   43.7   86.9   46.2   81.3   43.7   86.9   46.2   79.7   44.8 
Diesel  7.7   5.1   0.4   0.2   0.2   0.1   0.4   0.2   0.2   0.1   2.8   1.6 
Liquefied petroleum gas  0.2   0.1   1.8   0.9   2.1   1.1 
Liquefied petroleum gas(2)
  1.8   0.9   2.1   1.1   1.0   0.6 
Jet fuel  6.8   4.5   6.9   3.7   6.3   3.3   6.9   3.7   6.3   3.3   3.4   1.9 
Fuel oil  3.5   2.3   0.8   0.4   38.0   20.2   0.8   0.4   38.0   20.2   37.0   20.8 
Others  56.9   37.5   94.9   51.0   54.6   29.0   94.9   51.0   54.6   29.0   53.9   30.3 
                          
Total  151.8   100.0%  186.2   100.0%  188.2   100.0%  186.2   100.0%  188.2   100.0%  177.8   100.0%
                          
 
 
Notes: tbpd = thousands of barrels per day.
 Numbers may not total due to rounding.
 
(1)Includes methyl terbutyl ether (MTBE) and pentanes.
(2) Includes butanes.
Source: PMI operating statistics based on INCOTERMS (International Commercial Terms).
In 2007, our exports of petrochemical products decreased by 9.4%, from 823.7 thousand metric tons in 2006 to 746.0 thousand metric tons in 2007, while imports of petrochemical products decreased by 2.4%, from 435.6 thousand metric tons in 2006 to 425.1 thousand metric tons in 2007. Petrochemical exports decreased in 2007, due to higher demand in the domestic market and a smaller surplus of petrochemical products. Specifically, ethylene exports decreased due to a higher operational rate of Pemex-Petrochemicals linear low polyethylene plant, which consumes ethylene as feedstock. As a result, domestic sales of polyethylene increased in 2007, leading to a reduction of polyethylene exports of approximately 22 thousand metric tons. In addition, increases in domestic sales of monoethylene glycol in 2007 led to a reduction of exports. Finally, acrylonitrile and ammonia exports increased in 2007 as compared to 2006 export levels.
Imports of petrochemical products decreased in 2007, mainly due to lower requirements of isobutane from Pemex-Refining and smaller requirements of ammonia from Pemex-Petrochemicals as a result of an increase in domestic production. However, methanol imports increased by 38.5 thousand metric tons in 2007 as a result of a reduction in domestic production. Toluene imports increased by 5.7 thousand metric tons in 2007 as compared to 2006.


6366

For the three years ended December 31, 2006,2007, our imports and exports of selected petrochemicals were as follows:
 
Imports and Exports of Selected Petrochemicals
 
                                                
 Year Ended December 31,  Year Ended December 31, 
 2004 2005 2006  2005 2006 2007 
 (tmt) (%) (tmt) (%) (tmt) (%)  (tmt) (%) (tmt) (%) (tmt) (%) 
Imports
                                                
Isobutane-butane-hex1  167.4   60.5   140.2   35.3   185.2   42.5   140.2   35.3   185.2   42.5   146.1   34.4 
Methanol  37.9   13.7   123.5   31.1   153.4   35.2   123.5   31.1   153.3   35.2   191.9   45.1 
Ammonia  14.7   5.3   74.6   18.8   50.7   11.6   74.6   18.8   50.7   11.6   27.0   6.4 
Polyethylene  10.7   3.9   4.1   1.0   0.0   0.0 
Xylenes  18.5   6.7   22.8   5.7   33.2   7.6   22.8   5.7   33.2   7.6   31.8   7.5 
Toluene  10.2   3.7   3.7   0.9   9.2   2.1   3.7   0.9   9.2   2.1   15.0   3.5 
Benzene  3.3   1.2   —   —   —   — 
Others  14.0   5.0   28.4   7.2   3.9   0.9   32.5   8.2   3.9   0.9   13.3   3.1 
                          
Total  276.6   100.0%  397.4   100.0%  435.6   100.0%  397.4   100.0%  435.6   100.0%  425.1   100.0%
                          
Exports
                                                
Sulphur  607.2   66.3   487.1   57.1   484.6   58.8   487.1   57.1   484.6   58.8   471.1   63.1 
Ammonia  35.9   3.9   0.0   0.0   35.7   4.3   0.0   0.0   35.7   4.3   54.7   7.3 
Ethylene  154.3   16.9   163.9   19.2   80.1   9.7   163.9   19.2   80.1   9.7   24.4   3.3 
Polyethylenes  25.5   2.8   39.2   4.6   94.7   11.5   39.2   4.6   94.7   11.5   73.0   9.8 
Others  92.9   10.1   163.4   19.1   128.7   15.6   163.4   19.1   128.7   15.6   122.9   16.5 
                          
Total  915.7   100.0%  853.6   100.0%  823.7   100.0%  853.6   100.0%  823.7   100.0%  746.0   100.0%
                          
 
 
Notes: tmt = thousands of metric tons.
 
Numbers may not total due to rounding.
 
 Exports include propylene. Imports include isobutane, butane and N-butane.
Source: PMI operating statistics based on INCOTERMS (International Commercial Terms).
 
Hedging Operations
 
P.M.I. Trading, Ltd. engages in hedging operations to cover the variationsprice exposure in the purchase and sale prices fortrading of petroleum products. Our internal policies establish a limit on the maximum capital at risk. Capital at risk is calculated daily in order to compare the actual figures with the aforementioned limit. Internal controls include a risk comptroller responsible for ensuring compliance, an internal auditing department and a risk management committee. See “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”
 
Transportation and Distribution
 
Our pipelines connect crude oil and natural gas producing centers with refineries and petrochemical plants, and the refineries and petrochemical plants with Mexico’s major cities. At the end of 2006,2007, our pipeline network measured approximately 61,77362,718 kilometers in length. Of these pipelines, 50,689 kilometers are currently operational and 12,029 kilometers are out of operation. Most of the total network, approximately 11,763pipelines out of operation are those classified as being in “stand-by” status, which occurs when there is a decline in production in a field where the pipeline is located or when transportation service is irregular, making operation of the pipeline unprofitable. Once production is restored in the field, we change the status of the pipelines back to “operational.” Approximately 8,738 kilometers of the pipelines currently in operation transport crude oil, approximately 10,03310,120 kilometers transport petroleum products and petrochemicals, 16,69314,706 kilometers transport natural gas, 1,6291,632 kilometers transport LPG, 1,1681,278 kilometers transport basic petrochemicals and the remaining pipelines14,215


67

kilometers are crude oil and natural gas gathering pipelines. Ownership of the pipelines is distributed among ourthe subsidiary entities according to the products they transport.


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At the end of 2005, we obtained the required authorization to build an LPG pipeline, which will transport up to 30 thousand barrels per day of LPG from the Burgos gas processinggas-processing center to the city of Monterrey; it is expected that this project will startstarted operations by Julyin December 2007. PEMEX expects the construction of the Emiliano Zapata Compression Stationcompression station located in the State of Veracruz to be completed by the end of 2008. This compression station will help increase the transportation of dry gas from the Southern Mexico to Central and Northern Mexico.
 
The transportation of crude oil, natural gas and other products through a pipeline network is subject to leaks and spills in soil. See “Item 3—Key Information—Risk Factors— Risk Factors Related to the Operations of PEMEX.” In 2005, we began the process of updating and modernizing our Supervisory, Control and Data Acquisition System, which is used for “real-time” monitoring of the operating conditions of our pipeline system, in order to increase the safety of the pipelines connecting our production centers. The objective of this project is to control in “real-time” the operating conditions and the levels of gas in the pipelines that transport both natural and liquefied gas. In the first stage of the project, completed at the end of 2006, we modernized the SCADA computer system (both hardware and software), with the assistance of Telvent Canada, Ltd., a company that specializes in industrial supervisory control. In the second stage of the project, launched in April 2006, we integrated into our modernized system eight petrochemical pipelines, which represent 1,216 kilometers of our pipeline network, and put in place 31 strategic installations to monitor certain operating conditions, such as the pressure and temperature of our pipelines. In addition, in 2006, as part of our Emergency Program for Strengthening Safety, Health and Environmental Protection, we inspected and repaired 10,224 kilometers of our pipeline network. In 2007, we have budgetedincurred a total of Ps. 19.518.4 billion of expenditures for the remediation and maintenance of our pipelines and we expect to invest up to a totalhave budgeted an additional Ps. 25.5 billion of Ps. 26.4 billion ininvestments for the remediation and maintenance of our pipeline network throughin 2008. For more information on recent problems with our pipeline network, see “Item 3—Key Information—Risk Factors—PEMEX is an integrated oil and gas company and is exposed to production, equipment and transportation risks and deliberate acts of terror” and “Item 4—Information on the Company—Environmental Regulation—Environmental Liabilities.”
 
During 2006,2007, we transported approximately 81.177.9 billion tons per kilometer of crude oil and petroleum products to be processed in our refining system and petroleum products to satisfy domestic demand, as compared to the 80.281.1 billion tons per kilometer carried in 2005.2006. Of the total amount of tons per kilometer we transported in 2006,2007, we carried 58.0%60% through pipelines, 36.6%33.4% by vessels and the remainder by train tank cars and tank trucks.
 
At the end of 2006,2007, we owned sevensix refined product tankers and leased another 19.18. We also owned 77 major wholesale storage centers.
 
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
 
Petróleos Mexicanos’ Corporate Direction of Operations 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 the residents surrounding our facilities; and
 
 •  protect the environment.


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We intend to develop further the industrial safety and environmental programs for each subsidiary entity. The environmental and safety division of each subsidiary entity coordinates closely with the Corporate Direction of Operations.


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Insurance
 
We maintain a comprehensive property and civil liability insurance coverageprogram for our onshore property,and offshore properties and liabilities. All onshore properties, such as refineries, processprocessing plants, pipelines and storage facilities andare covered as well as all our offshore propertiesassets, such as drilling platforms, rigs, gas gathering systems, floating docks and production facilities. Our insurance covers risks of sudden and accidental physical destruction orto all properties against all risk of physical loss or damage to our properties.including as a consequence of terrorist acts. Our offshore general and civil liability insurance also covers extraordinary costs related to the operation of offshore wells, such as control and repairre-drilling costs, evacuation costsexpenses and liability costs associated with spills. We maintain additional coverage for offshore environmental liabilities. We also maintain protection and indemnity insurance life insurance,for all our marine fleet, as well as life insurance, for automobiles and heavy equipment electronic equipmentinsurance, and cargo and marine hull insurance for our shipping fleet.insurance.
 
We contractIn accordance with Mexican law, we have arranged all of our insurance policies throughcontracts with Mexican insurance carriers. These policies have limits of U.S. $2 billion for onshore property and U.S. $1.3 billion for each onshore and offshore property, U.S. $150$300 million for extraordinary costs related to the operation of offshore wells, U.S. $1.0 billion for protection and indemnification for marine-related liabilities, and U.S. $500 million for civil liabilities. Since June 2003, we have stopped purchasing business interruption insurance that compensated us for loss of revenues derivedresulting from damages to our facilities becauseas a result of the following factors: (1) the existence of mitigating factors related toacross all 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 any one refinery and the physical separation of plants within the refineries, and (3) the excess processing capacity available across our different lines of business, as well asvis-a-vis the availablerestricted coverage and restrictive conditionsavailable in the international insurance and reinsurance markets,markets. These factors led us to conclude that the benefits of this type of coverage were outweighed by the costs. Instead, we have purchasedpurchase ad-hoc business interruption mitigation insurance coverage that compensates us only for the additional expenses necessary to recover our production capabilities in the least time possible. OurAll PEMEX insurance policies are in turn reinsured through Kot Insurance Company, AG, which we refer to as Kot AG. Kot AG ouris a wholly owned subsidiary company organized under the laws of Switzerland (previously organized under the laws of Bermuda as Kot Insurance Company, Ltd.), which in turn passes most of these risksis used as a risk management tool to distribute risk across the Bermudan and Europeaninternational reinsurance markets. The purpose of Kot AG is to reinsure policies of the insurers of Petróleos Mexicanos and maintain control over the subsidiary entities,quality of the subsidiary companies and their affiliates.insurance behind our risks. Kot AG reinsures 81.6%over 96.8% of its reinsurance policies with unaffiliated third party reinsurers. Kot AG carefully allocates credit risk and monitors the financial performance of the parties toonto whom it has passed risk onto on a permanent basis. Kot AG’s net risk retention is capped at U.S. $120 million through different reinsurance coverages.
 
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,” “—Refining,” “—Gas and Basic Petrochemicals,” “—Petrochemicals” and “—Transportation and Distribution.”
 
Reserves
 
Under Mexican law, all crude oil and other hydrocarbon reserves within Mexico are owned by the Mexican nation and not by us. Pemex-Exploration and Production has the exclusive right to exploit those reserves under the Regulatory Law and related laws and regulations. Our estimates of Mexico’s hydrocarbon reserves are described under “—Exploration and Production—Reserves.”


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GENERAL REGULATORY FRAMEWORK
 
The Mexican Government and its agencies closely regulate and supervise our operations. The Ministry of Energy monitors our activities and the Secretary of Energy acts as the chairperson of the Board of Directors of Petróleos Mexicanos. The Ministry of Finance and Public CreditSHCP approves the annual budget and financing program of Petróleos Mexicanos and the subsidiary entities. The Mexican Government incorporates the annual budget and financing program of Petróleos Mexicanos and the subsidiary entities into its budget, which the Mexican Congress must approve each year. The Mexican Government is not, however, directly liable for the financial obligations that we incur. TheSecretaría de Medio Ambiente y Recursos Naturales(the Ministry of the Environment and Natural Resources), which we refer to as SEMARNAT, in conjunction with other federal and state authorities, regulates our activities that affect the environment. TheSecretaría de la Función Pública(the Ministry of the Public Function)Control), which we refer to as SFP, appoints the external auditors andcomisarios(supervising officers) of Petróleos Mexicanos and the subsidiary entities.
 
Beginning in 2008, the Independent Audit Committee of Petróleos Mexicanos will approve the selection and appointment of the external auditors of Petróleos Mexicanos. See “Item 6—Directors, Senior Management and Employees—Audit Committee.”
The ASFAuditoría Superior de la Federación(ASF) reviews annually theCuenta Pública(public account)Public Account) of the federal government entities on an annual basis, including Petróleos Mexicanos and the 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. The financial information provided to the ASF is prepared in accordance with Governmental Standards applicable to Mexican public sector entities, which differ in several aspects from Mexican FRS. As a result, our financial statements reflect different financial data than that included in the public account.Public Account.
On March 18, 2008, the members of the Independent Audit Committee of Petróleos Mexicanos were appointed by the SFP. See “Item 6—Directors, Senior Management and Employees—Audit Committee.”
 
ENVIRONMENTAL REGULATION
 
Legal Framework
 
We are subject to various laws related to the environmental protection of natural resources, as well as the management of hazardous and non-hazardous wastes. In particular, wePetróleos Mexicanos and the subsidiary entities are subject to the provisions of theLey General del Equilibrio Ecológico y la Protección al Ambiente(General Law on Ecological Equilibrium and Environmental Protection,Protection), which we refer to as the Environmental Law),Law, the regulations issued thereunder and several technical environmental norms issued by the SEMARNAT. TheSecretaría de Salud(the Ministry of Health), theSecretaría de Comunicaciones y Transportes(the Ministry of Communications and Transportation), theSecretaría de Marina (Ministry(Ministry of Navy) and the Ministry of Energy assist the SEMARNAT in its functions. In addition, wePetróleos Mexicanos and the subsidiary entities are subject to the environmental laws and regulations issued by the governments of each of the states of Mexico where our facilities are located.
 
The Environmental Law and related regulations require that we obtain certain authorizations from the SEMARNAT before we carry out any activity that may have an adverse effect on the environment. In particular, these environmental regulations apply to chemical, petrochemical, crude oil refining and extraction activities, as well as the construction of crude oil and natural gas pipelines. Before authorizing a new project, the SEMARNAT requires the submission of an environmental impact analysis and any other information that it may request. The SEMARNAT is entitled to grant or deny its authorization of any activity.
 
The environmental regulations that apply generally to Mexican industry apply to us. These regulations specify, among other matters, permissible levels of emissions, water discharges and hazardous substances discharges as well as atmospheric pollution level limits. The technical regulations for oil and petrochemical industries set forth maximum permissible levels of pollution in residual water discharges and natural gas


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emissions. These regulations also establish procedures for measuring pollution levels. Mexico generally updates and revises its environmental regulatory framework as necessary, and we participate with the Mexican Government in developing environmental regulations that are related to our activities.
 
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


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requirements by way of 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, while our facilities that existed prior to the effectiveness of these regulations are not subject to this obligation.
 
Federal and state authorities in Mexico may inspect any facility to determine compliance with the Environmental Law, local environmental laws, regulations and technical environmental regulations. Violations or non-compliance with the legal provisions may result in the application of substantial fines, temporary or permanent shutdown of a facility, required capital expenditures to minimize the effect of our operations on the environment, cleanup of contaminated land and water, cancellation of a concession or revocation of authorization to carry out certain activities and, in certain cases, criminal prosecution of employees and individuals. See “Item 3—Key Information—Risk Factors—Risk Factors Related to the Operations of PEMEX—PEMEX’s compliance with environmental regulations in Mexico could result in material adverse effects on our results of operations.”
 
On March 29, 2005, the SEMARNAT issued aNorma Oficial Mexicana(Official Mexican Rule)Standard) identified as NOM-138-SEMARNAT/SS-2003, which establishes maximum permissible limits for hydrocarbons in soil and specifications for its characterization and remediation. On January 30, 2006, the SEMARNAT issued NOM-086-SEMARNAT-SENER-SCFI-2005, which sets forth environmental specifications for fossil fuels. On April 3, 2006, the SEMARNAT issued NOM-EM-148-SEMARNAT-2006, which establishes standards for sulphur recovery at the Tula and Salamanca refineries. On June 23, 2006, the SEMARNAT issued NOM-052-SEMARNAT-2005, which sets forth the procedures and standards to be followed to identify and classify hazardous residuals. On October 19, 2006, the SEMARNAT issuedPROY-NOM-148-SEMARNAT-2006, which establishes standards for sulphur recovery in all refineries. WePetróleos Mexicanos and the subsidiary entities are currently evaluatingin compliance with these regulations.
On November 28, 2007, SEMARNAT issued NOM-148-SEMARNAT-2006, which establishes standards for sulphur recovery in all refineries. The refineries located in Cadereyta, Nuevo León; Ciudad Madero, Tamaulipas; Tula, Guanajuato; and Salamanca, Guanajuato will be in compliance in 2008 with NOM-148 and the impactrefineries located in Minatitlán, Veracruz and Salina Cruz, Oaxaca will be in compliance in 2010. To comply with NOM-148, Petróleos Mexicanos and the subsidiary entities expect to spend approximately Ps. 2.8 billion on the rehabilitation of thesesulphur recovery plants and the construction of new regulations on our operations.plants and their corresponding installations.
 
PEMEX’s Internal Monitoring
 
We believe that we are currently in substantial compliance with current federal and state environmental laws as those laws have been historically interpreted and enforced. We maintain an organizational structure that permits us to implement and monitor our environmental program. The subsidiary entities have specialized departments, depending on the size and geographic distribution of their respective sites, which implement their own environmental programs and conduct internal environmental audits and inspections of their sites and their immediate surroundings based on the standards of the SEMARNAT. When these internal audits reveal deficiencies, the subsidiary entities take the necessary remedial actions to eliminate these deficiencies. If soil or bodies of water are contaminated at levels that exceed the levels stipulated in the applicable regulation, the remediation requirements derived from these internal audits and inspections are recorded in our financial statements as environmental liabilities when they are known and estimable.
 
Our Corporate Direction of Operations has developed an integrated safety and environmental protection management system and is currently implementing strategies within PEMEX to create a company culture focused on improving industrial safety and environmental protection. This system is an administrative tool composed of diverse, interdependent and interrelated elements, focused on diagnosis, evaluation, implementation and continuing preventive improvements related to safety and environmental protection. The diagnosis and evaluation stages have been completed; the system is now in an advanced stage of implementation.
We maintain an internal structure to identify and solve environmental problems and retain external consultants to perform operational audits at our industrial plants, including cost estimates for remedying any shortfall in compliance with Mexican environmental laws. Such remedies can include improving the operating


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efficiency of plants, cleaning up contaminated land and water and capital expenditures to minimize the effect of our operations on the environment.
 
In addition to our internal monitoring structure for identifying affected areas, areas of non-compliance and improvement opportunities, ourPetróleos Mexicanos and the subsidiary entities’ environmental program is subject to the review of theProcuraduría Federal de Protección al Ambiente(the Office of the Federal Attorney for Environmental Protection,Protection), which we refer to as PROFEPA).PROFEPA. PROFEPA administers the Mexican environmental regulatory rubric and establishes


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acceptable standards of environmental remediation. Although PROFEPA has the authority to review and inspect remediation works performed by us and compliance with permitted contamination levels established by laws and regulations, it does not determine our environmental liabilities. We maintain proper records of all of the studies, estimations, performed works and any other information that PROFEPA may request from time to time.
 
Since 1993, we have participated in a voluntary environmental audit program with PROFEPA. As each environmental audit is completed, we send the audit report (which includes the estimated costs for remedying environmental anomalies) to PROFEPA for its review and approval. After approval by PROFEPA, we review the audits and determine which findings can be resolved by changing current plant or drilling operations and implementing the current capital expenditures plan. If the audit report is approved by PROFEPA, we negotiate a corrective action plan with PROFEPA, stipulating the time period, amounts to be expended and the steps to be taken to bring each site into compliance. As of December 31, 2006,2007, with respect to Petróleos Mexicanos and the subsidiary entities, 565656 environmental audits including the negotiation of a corrective action plan, had been concluded under the program with PROFEPA, and all main facilities had been covered. As of December 31, 2006,2007, corrective action plans for 377422 audits had been implemented and all of these sites have received andor retained “clean industry” certifications from PROFEPA. With respect to the remaining 188234 audits, 33 audits were begun but are not yet complete, the audit reports for 109 of those audits have been83 were finished and sent it to PROFEPA for its review and approval and the corrective action plans for 79 of those28 audits have beenwere agreed upon and are currently being implemented.
While the audits of Petróleos Mexicanos’ four subsidiaries’ main facilities are complete, there are a number of facilities yet to be audited, and some The corrective action plan was completed audits are pending evaluations. Pemex-Refining expects 18 pipeline systems to be audited, and nine audits should be completed by 2008. Pemex-Gas and Basic Petrochemicals foresees audits of six pipelines transferred by Pemex-Petrochemical in June 2007. Pemex-Exploration and Production is evaluating a new program for regional audits primarily covering its pipelines systems. We cannot predict the outcome of these audits, the outcome of pending evaluations of audits nor the outcomeeach of the new regional program.remaining 90 audits and sent to PROFEPA for compliance evaluation and the release of the “clean industry” certification.
 
During 2006,2007, Petróleos Mexicanos experienced 1021 major accidents,incidents, which affected areas in 9four Mexican states, Oaxaca,Guanajuato, Querétaro, Veracruz Baja California, Colima, Nuevo León, Querétaro, Tamaulipas, Puebla and Yucatán.Tlaxcala, as well as offshore waters. In coordination with the state governments, the military, civil protection services and local authorities, among others, we implemented emergency action plans in order to protect and restore the local residents’ health and safety in the affected areas, as well as to offset any negative environmental impact. In order to protect itself from civil environmental liabilities, Petróleos Mexicanos has increased its insurance coverage, which covers most of the expenses directly related to these accidents. This coverage does not, however, cover the deductible and those expenses excluded from the insurance policies, such as fines, public relations expenses and siteclean-up not directly related to the accident, among others. For information relating to our environmental liabilities, see “—Environmental Liabilities” below. The majority of our remediation activities in connection with 1020 of the major accidents in 20062007 have been completed, but some of the legal proceedings are still pending resolution by the Mexican environmental authorities, as a result of various administrative delays, including site analysis and other investigations into the causes of the accidents.
 
Of the 10 accidents21 major incidents during 2007, 19 were caused by pipeline attacks in 2006,various locations. We lost 172,820 barrels of crude oil and distillated products and 743.866 million cubic feet of gas through a combination of fire, evaporation and spillage. One of the three most significant accidents occurred inincidents was the statesspill of Tamaulipas, Colima and Yucatán. In June 2006, the Madero-Cadereyta24-inch diameter oil pipeline ruptured near Ciudad Cuauhtémoc, Tamaulipas, spilling 2,50016,536 barrels of gas oil. In May 2006,oil, which was caused by a pipeline rupture resulting from excessive pressure. Another significant incident occurred at the14-inch diameter Cabezal de Playa Progreso—TAD Progreso Yucatán pipeline spilled 1,058 Usumacinta offshore platform, where approximately 22,700 barrels of gasoline. In August 2006,crude oil and 37.8 million cubic feet of sour gas were lost during 54 days at the20-inch diameter Terminal Marítima-TAD Tapeixtles fuel KAB-121 well. During the first 15 days, 28.0% of the crude oil pipelineand gas spilled 1,084or evaporated was consumed by fire. During the remaining 39 days, crude oil and gas were spilled or evaporated under controlled conditions. Of the approximately 22,700 barrels of fuel oil. In each case,crude oil that was spilled, 41.0% evaporated and 8,701 barrels were recovered offshore. We spent 3,621 work days on seven fronts on the spill contaminatedcoasts of Tabasco and Campeche and were able to recover 394 barrels onshore. We applied 34,400 liters of low toxicity biodegradable dispersants to the soil inremaining 615 barrels of oil to minimize the affected area.environmental impact on the sea. According to the model of


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atmospheric dispersion PHAST 6.5, the concentration of the plume of burning crude oil and gas was one part per million of H2S (hydrogen sulfide) after traveling 50 kilometers and coming to rest near Dos Bocas. However, the sulphur oxide emissions were equivalent to just one day of refinery sulphur oxide emissions.
 
After each of these three accidents,the incidents that occurred, we developed an emergency action plan in coordination with local and national authorities and private companies which reinforced the existing emergency procedures and helped to isolate the damaged areas and to evacuate nearby towns in a very short period of time, and in such a way that damage to local residents and properties was significantly reduced. In each case, PROFEPA requested that we initiate environmental impact evaluations. We anticipate that during the second half of 2007, the results of these


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evaluations will provide estimates of the areas that have been impacted, as well as recommendations for environmental remediation measures.
 
On April 29, 2005, the Board of Directors of Petróleos Mexicanos approved the Emergency Plan for Strengthening Safety, Health and Environmental Protection. The implementation of the plan commenced with the audits of the high-risk pipelines and facilities by a multidisciplinary task force. This initial review identified critical areas that required attention. Through this Emergency Plan, several measures were put into practice to limit the quantity and severity of personal and industrial incidents. During 2006, as a result of the implementation of the plan, our accident frequency rate decreased by 37% as compared to 2005, from 1.06 to 0.67 per million man hours worked with exposure to risk. To achieve zero incidents, injuries, emissions of pollutants and illnesses for all of our work centers, in January 2006, we began to implement the PEMEX Safety, Health and Environmental Protection System (PEMEX SSPA)(PEMEX-SSPA), which is expected to be fully implemented over a period of three years. The system includes the incorporation of 12 of the world’s best practices in preventative and corrective safety, as well as the revision of and adherence to root-cause analysis; process safety management, with strong emphasis on mechanical integrity; environmental protection; occupational health; operational discipline; effective audits; emergency response plans; protection teststests; and risk analysis systems. The system includes the incorporation of 12 of the worldwide oil and gas industry’s best practices in preventive and corrective safety measures. The system is comprised of three subsystems: Process Safety Management (ASP), Health Management (SAST) and Environmental Management (SAA). During 2007, we began to implement improvements to the PEMEX-SSPA. More than 16,500 employees were trained to use the system through 724 instructional courses and the new system resulting from the improvements began to operate consistently across the organization. System manuals and technical guides for each system element were developed, approved and circulated within the relevant departments at PEMEX. We implemented an internal evaluation of the implemented best practices and the ASP subsystem in our subsidiary entities. As a result of the implementation of the Emergency Plan and the PEMEX-SSPA, our accident frequency rate decreased by 12% as compared to 2006, from 0.67 to 0.59 per million man hours worked with exposure to risk.
 
Other than as disclosed herein, there are currently no material legal or administrative proceedings pending against us with respect to any environmental matters, and we do not believe that continued compliance with environmental laws will have a material adverse effect on our financial condition or results of operations.matters.
 
Environmental Liabilities
 
At December 31, 2006,2007, our estimated and accrued environmental liabilities totaled Ps. 2,311.42,093.4 million. Of this total, Ps. 690.6371.6 million were attributable to Pemex-Exploration and Production, Ps. 1,292.91,507.7 million to Pemex-Refining, Ps. 273.9211.7 million to Pemex-Gas and Basic Petrochemicals and Ps. 54.02.4 million toPemex-Petrochemicals. There were no environmental liabilities at the subsidiary company level. The following charts detail our environmental liabilities by subsidiary entity and operating region at December 31, 2006.2007.
 
Pemex-Exploration and Production
 
                
      Estimated Affected Area        Estimated Liability         Estimated Affected Area        Estimated Liability   
 (in hectares) (in thousands of pesos)  (in hectares) (in millions of pesos) 
Northern region              266.74                           Ps. 533,482                           146.07                           Ps. 292.13             
Southern region              14.72                           19,361                           4.69                           6.17             
Southeastern Marine region              —                           —             
          
Total(1)
              281.46                           Ps. 552,843                           150.76                           Ps. 298.30             
          
 
 
Note: Numbers may not total due to rounding.
(1) During 2006,2007, environmental remediation was completed on 47.43150.8 hectares. There were 41.2920.11 hectares of additional affected areas, including 13.276.52 hectares in the Northern region and 28.0113.59 hectares in the Southern region, which were affected as a result of spills from pipelines.
Source: PEMEX.


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  Holding Ponds Drainage 
    Number of
  Estimated
 
    Holding Ponds    Liability 
     (in thousands of
 
     pesos) 
 
Northern region(1)
         256           Ps.127,541   
Southern region         5          10,228   
         
Total         261          137,769   
         
Total estimated environmental liabilities of Pemex-Exploration and Production
      Ps.690,612   
         
         
  Holding Ponds Drainage 
    Number of
  Estimated
 
    Holding Ponds(1)    Liability 
     (in millions of
 
     pesos) 
 
Northern region         147.00         Ps.73.24   
Southern region         0.04          0.10   
         
Total         147.04         Ps.73.34   
         
Total estimated environmental liabilities of Pemex-Exploration and Production
       Ps.371.64   
         
 
 
Note: Numbers may not total due to rounding.
(1) A total of 305320 holding ponds, 300315 in the Northern region and 5 in the Southern region, were restored and discharged as liabilities for 2006.in 2007. A total of 229206 holding ponds in the Northern region were classified as new liabilities.
Source: PEMEX.
 
Pemex-Refining
 
                
   Estimated  
 Estimated
    Estimated  
 Estimated
 
   affected area   Liability    affected area   Liability 
 (in hectares) (in thousands
  (in hectares) (in millions
 
   of pesos)    of pesos) 
Pipelines    7.48       Ps.  63,012       0.68       Ps.  16.79   
Refineries(1)
    241.73       714,376       241.73       1,100.14   
Storage and Distribution Terminals,(2)
    58.47       215,532   
Storage and Distribution Terminals    57.47       163.25   
Other affected areas       52.00       300,000       52.00       227.52   
          
Total    359.68       Ps.1,292,919       351.87       Ps.1,507.71   
          
 
 
Note: Numbers may not total due to rounding.
(1) In 2006, SEMARNAT required a complementary characterization site study at the former Azcapotzalco refinery. With the new study’s information, 76.42 hectares were classified as new liabilities, 59.42 hectares at the former Azcapotzalco refinery and 17.00 hectares at the former Azcapotzalco storage and distribution terminal, with an estimated cost of Ps. 511.40 million.
(2) New information from a contaminants dispersion evaluation at Santa Alejandrina swamp in Minatitlán, Veracruz increased the estimated liability of this site by Ps. 149.46 million.
Source: PEMEX.
 
Pemex-Gas and Basic Petrochemicals
 
                
      Estimated     
 Estimated
       Estimated     
 Estimated
 
 affected area Liability  affected area Liability 
 (in hectares) (in thousands of
  (in hectares) (in millions of
 
   pesos)    pesos) 
Gas Complex Processors(1)
       23.41          Ps. 264,953          20.32          Ps. 202.84   
Pipelines       1.80          8,935          0.05          8.85   
          
Total       25.21          Ps. 273,888          20.37          Ps. 211.69   
          
 
 
Note: Numbers may not total due to rounding.
(1) Seven gas processing plant complexes and one gas processing plant have been audited and six gas processing plant complexes were determined to require environmental remediation. In 2006, restoration activities were performed at the processing plant complex in Reynosa with an associated cost of Ps. 1.12 million.
Source: PEMEX.

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Pemex-Petrochemicals
 
                
      Estimated     
 Estimated
       Estimated     
 Estimated
 
 affected area Liability  affected area Liability 
 (in hectares) (in thousands of
  (in hectares) (in millions of
 
   pesos)    pesos) 
Cangrejera petrochemical complex       0.30       Ps.1,780        0.07       Ps.0.4 
Pajaritos petrochemical complex(1)
       10.53        52,175        2.03        2.0 
          
Total(2)(1)
       10.83       Ps.53,955        2.10       Ps.2.4 
          
 
 
Note: Numbers may not total due to rounding.
 
(1)Current value adjustment, increasing the estimated liability of this site by Ps. 4,061 million.
(2) All of Pemex-Petrochemicals’ plants have been audited and the table above reflects the only plants determined to require environmental remediation.
Source: PEMEX.
 
Our estimates of environmental liabilities include cost estimates for general and site-specific evaluation studies and the corresponding remediation. The remediation sites consist of sites identified in the audit process described above as well as those previously identified sites in more mature petroleum operating areas that were not cleaned up in the past. Our environmental liabilities also include the elimination of holding ponds created by abandoned petroleum wells. Additionally, our environmental liabilities include an accrual for information requested and received periodically from field managers as to probable environmental liabilities identified in their respective areas of responsibility. We accrue environmental liabilities when sufficient basic knowledge is available to form a preliminary estimation as to remediation cost. Although the full potential scope of the remediation cost may not be known with certainty, these accruals are made when the liability is probable and the amount is reasonably estimable, in accordance withBulletin C-9 “Liabilities, provisions, contingent assets and liabilities and commitments” for Mexican FRS purposes and with SFAS No. 5 “Accounting for Contingencies” for U.S. GAAP purposes. These estimated liabilities include assumptions resulting from an initial evaluation of damage, including land acreage to be remediated, depth of contamination and type of contamination. While the initial evaluation is extensive, there is a possibility that the actual scope of remediation could vary depending upon information gained during the remediation process. For a further discussion of our environmental liabilities, see Note 2021 IIc. to our consolidated financial statements included herein.
 
Unasserted or additional claims are not reflected in our identified liabilities. We are not aware of any such claims that would be of such a magnitude as to materially affect our estimates of environmental liabilities.
 
At the end of 2006,2007, we were not aware of uncertainties with respect to joint and several liabilities that could affect our assessment of environmental contingencies or otherwise result in a major environmental liability. We are responsible for all production, processing, storage and distribution of petroleum and its derivatives in Mexico. As a result, we believe we are positioned to know immediately of any claims and are therefore directly accountable for any claims that may be brought against us.
 
The timing of remediation or cleanup of the sites accounted for in these environmental liabilities is a function of the annual budget assigned to us by the Mexican Congress.
 
Energy Savings
 
Awards
In 2006,2007, we received seventwo national awards for savings in thermal energyfrom the Ministry of Energy, through the National Savings Energy Commission in the categorycategories of facility upgrading in refiningrenewable energy and gas processing activities.energy supply. The awards were given to the Litoral de Tabasco field for a solar-powered energy generation system and to the Cadereyta refinery for the modernization of their heaters and cooling tower. These savingsprojects reduced energy consumption by the equivalent of 2.2 million213 thousand barrels per year of oil equivalent.


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Letters of Intent
In August 2007, PEMEX signed two letters of intent for the transfer of carbon dioxide emission-reduction certificates with BNP-Paribas and one with Carbon Solutions de México. Under these agreements, PEMEX will implement three projects to reduce greenhouse gas emissions by increasing the thermal efficiency of boilers in the Cadereyta and Tula refineries. The BNP-Paribas project will allow greenhouse gas emissions to be reduced by more than 149 thousand tons annually and the Carbon Solutions de México project will allow greenhouse emissions to be reduced by more than 49 thousand tons annually.
 
Social Responsibility
 
Petróleos Mexicanos has implemented various actionsinitiatives in the area of corporate social responsibility, primarily with respect to the protection and preservation of the environment, community relations, ethical


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work practices, respect for labor rights and the general promotion of quality of life for employees. In particular, we would note the following specific actions taken by Petróleos Mexicanos in 2006:2007:
 
 •  We confirmed that we support the ten principlescontributed Ps.1.7 billion to a variety of charities and development projects in communities in which PEMEX carries out its activities, including:
–  construction of the United Nations Global CompactShicbul-Carmen parallel aqueduct in respect to human rights, labor rights, the environment and anti-corruption.Campeche;
 
–  aid to the people affected by flooding in Tabasco;
–  supporting fishing programs in Minatitlán, Veracruz; and
–  construction of an underpass on the Matamoros-Monterrey southern beltway, in Tamaulipas.
 •  We sponsored and organized the Fourth International Symposium on Corporate Social Responsibility in the Americas, which was co-sponsored by the Regional Association of Oil and Gas Companies in Latin America and the Caribbean (ARPEL).
•  We launched the Ecological Restoration Program in Santa Alejandrina, pursuant to which we are refitting works at the Minatitlán Refinery in Veracruz in accordance with certain requirements of SEMARNAT.
•  We received authorization from SEMARNAT in order to start thecommenced remediation work at the former refinery in Azcapotzalco to transform it into a recreational park. ThisAt the beginning of 2007, 22 hectares were remediated and the first phase of the project was completed in December 2007. The remediation work was initiatedof the second phase, consisting of 33 hectares, began in 2007.January 2008. We expect to have remediated 55 hectares by September 2009.
 
In addition, we have continued to implement other reforestation and environmental restoration activities and environmental education and research in protected natural areas.
 
Environmental Projects and Expenditures
 
In 2006,2007, we spent approximately Ps.4,175Ps.4,120 million on environmental projects and related expenditures, as compared to Ps. 3,0194,175 million in 2005.2006. For 2007,2008, we have budgeted Ps. 1,529 million for development of basic environmental infrastructure.3,694 million. These environmental projects and expenditures are primarily directed to the modernization of installations, the implementation of systems and mechanisms to monitor and control atmospheric pollution, the acquisition of equipment to address the contingencies of hydrocarbon spills, the expansion of water effluent systems, the restoration and reforestation of affected areas, studies for environmental investigation and the conducting of environmental audits. In addition, we continue to conduct extensive research and development efforts to increase our capacity to produce gasoline, diesel and fuel oil with lower sulphur content. We are developing procedures to track the costs and expenses of our industrial safety measures and environmental compliance.
 
We do not believe that the cost of complying with environmental laws or environmental requirements related to the North American Free Trade Agreement (NAFTA) among the governments of Mexico, the United States and Canada, the Vienna Convention for the Protection of the Ozone Layer, the Agreement on Environmental Cooperation between the Governments of Mexico and Canada or Mexico’s membership in the Organization for Economic Cooperation and Development, has caused or will cause a significant increase in our environmental expenditures.


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TRADE REGULATIONSREGULATION AND EXPORT AGREEMENTS
 
Although itMexico is not a member of OPEC, on March 22, 1998, Mexico met with the oil producing countries in Saudi Arabia in order to stabilize oil prices. Mexico agreed to reduce its oil exports by 100 thousand barrels per day as of April 1, 1998 (the Ryadh Agreement). At another meeting in Amsterdam, Mexico agreed to reduce its oil exports by an additional 100 thousand barrels per day as of July 1,1998. During a third meeting held in the Netherlands on March 10, 1999, Mexico accepted a further reduction of oil exports of 125 thousand barrels per day during the period from April 1, 1999 through December 31, 1999 (the Hague Agreement). These agreements were successful in stabilizing oil prices in 1999.
Since then, the Ministry of Energyit has periodically announced increases and decreases in PEMEX’s crude oil exports in conjunction with production revisions by other oil producing countries in order to stabilize oil prices. During 2002, the Ministry of Energy announced a decrease in crude oil exports of 100 thousand barrels per day, to a level of 1.66 million barrels per day, in line with OPEC announcements to reduce crude oil productionHowever, since 2004, PEMEX has not changed its export levels that year.


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During 2003, as a result of increasing market demand and the temporary reductionannouncements by more than 2 million barrels per day of Venezuelan crude oil exports due to a strike, Mexico announced increases in crude oil exports totaling 220 thousand barrels per day to a level of 1.88 million barrels per day.
In March 2004, OPEC announced that it would cut crude oil production by one million barrels per day beginning April 1, 2004. In June 2004, OPEC announced that it would increase crude oil production by 500 thousand barrels per day beginning August 1, 2004. In September 2004, OPEC announced that it would increase crude oil production by 1 million barrels per day beginning November 1, 2004. In March 2005, OPEC announced that it would raise its oil production ceiling from 27 million barrels per day to 27.5 million barrels per day with immediate effect. In June 2005, OPEC announced that it would increase crude oil production by 0.5 million barrels per day beginning July 1, 2005. OPEC members met during the first week of June 2006 in Venezuela and decided to leave oil production levels unchanged despite current high crude oil prices, since crude oil stocks levels were above average in the United States and markets were considered to be well supplied. In October 2006, OPEC met in Doha and decided to cut production to 26.3 million barrels per day. In November 2006, OPEC reduced the current oil production ceiling of 28.0 million barrels per day by 1.2 million barrels per day. In February 2007, OPEC cut another 500 thousand barrels per day. On March 15, 2007, OPEC members met on and left quotas unchanged because they considered the market to be well-supplied and because crude oil stock levels were above average in the United States. Mexico’s crude oil exports for 2006 averaged 1,793 thousand barrels per day.OPEC. As of the date of this report, Mexico has not announced any revisions to its current level of crude oil exports of 1,7031,550 thousand barrels per day as a result of these latest announcements by OPEC, and we believe that Mexico has no plans to change itsPEMEX’s current level of crude oil exports. For more information on these agreements and announcements, see “Item 3—Key Information—Risk Factors—Risk Factors Related to the Relationship between Pemex and the Mexican Government—The Mexican government has entered into agreements with other nations to limit production” and “Item 5—Operating and Financial Review and Prospects—Sales Volumes and Prices—Export Agreements.”
 
NAFTA did not affect the exclusive rights of Mexico, through PEMEX,Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals, to explore and exploit crude oil and natural gas in Mexico, to refine or process crude oil and natural gas and to produce basic petrochemicals in Mexico. Since 2003, non-basic petrochemical products enjoy a zero tariff under NAFTA and, subject to limited exceptions, exports of crude oil and petroleum products from Mexico to the United States and Canada are free or exempt from tariffs. Similarly, since 2003, imports of petroleum products from the United States and Canada to Mexico are free or exempt from tariffs. In addition, in 2004, NAFTA phased in lower tariffs on certain materials and equipment that we import into Mexico. The zero tariff on imports of non-basic petrochemicals from the United States and Canada to Mexico could, over time, increase competition in the non-basic petrochemicals industry in Mexico. To the extent that domestic and international prices for our products remain constant, lower tariffs on the products, materials and equipment that we import from and export to the United States and Canada will decrease our expenses and increase our income.
 
TAXES AND DUTIES
 
General
 
Taxes and duties applicable to PEMEX are a significant source of revenues to the Mexican Government. In 2006,2007, PEMEX paid a number of special hydrocarbon taxes and duties, in addition to the other taxes and duties paid by some of the subsidiary companies, as described below under “—Other Taxes.” TheUntil 2006, the rates at which the Mexican Congress assessed hydrocarbon taxes and duties could vary from year to year and were set after taking into consideration our operating budget, our capital expenditure program and our financing needs. A new fiscal regime for Petróleos Mexicanos and the subsidiary entities, described below, became effective in 2006. We contributed approximately 40%38.8% of the Mexican Government’s revenues in 20052006 and 2006.32.9% in 2007.


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New Fiscal Regime for PEMEX
 
The Mexican Congress approved a new fiscal regime for Petróleos Mexicanos and the subsidiary entities on November 10, 2005. The new fiscal regime went into effect on January 1, 2006. Under the new fiscal regime, Pemex-Exploration and Production is governed by theLey Federal de Derechos(Federal Duties Law), while the other subsidiary entities are governed by theLey de Ingresos de la Federación(Federal Revenue Law) for the applicable fiscal year. The Federal Revenue Law is discussed and approved on an annual basis by the Mexican Congress. Beginning in 2006,2007, the new fiscal regime for Pemex-Exploration and Production consists of the following duties:
 
OrdinaryDerecho Ordinario sobre Hidrocarburos (Ordinary Hydrocarbons DutyDuty)For 2007, the years 2006 to 2009, a variable tax rate which will fluctuate between 78.68% and 87.81%, will apply depending on the weighted average Mexican crude oil export price and the year. As of 2010, the applicable rate will be 79%was 78.76%. This duty is applied to the annual value of extracted production of crude oil and natural gas minus certain permitted deductions (including specific investments, certain costs and expenses, and the other duties referred to below, subject to certain conditions).


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Derecho sobre Hidrocarburos para el Fondo de Estabilización(Hydrocarbon Duty for the Oil RevenuesStabilization FundFund)Rates between 1% and 10% are applied to the value of the extracted crude oil production when the weighted average crude oil export price for a certain year exceeds between U.S. $22.00 and U.S. $31.00 per barrel.
 
Derecho para la Investigación Científicay Tecnológica en Materia de Energía(Duty for the Fund for Scientific andTechnological Research onEnergy Energy)A rate of 0.05% is applied to the value of extracted crude oil and natural gas production for the year.
 
DutyDerecho para la Fiscalización Petrolera (Duty for Fiscal Monitoring of OilActivities Activities)A rate of 0.003% is applied to the value of extracted production of crude oil and natural gas for the year.
 
Derecho Extraordinario sobre la Explotación de Petróleo Crudo(Extraordinary Duty on Crude Oil ExportsExports)A rate of 13.1% is applied to the value resulting from the multiplication of the difference between the annual weighted average price of the Mexican barrel of crude oil over the budgeted crude oil price times the annual export volume. The budgeted crude oil price for 20062007 was U.S.$36.5042.80 per barrel and for 20072008 is U.S.$42.8049.00 per barrel.
 
Derecho Adicional(Additional DutyDuty)This duty is applied if and only if annual crude oil production is below target production from 2006 to 2008, according to a formula based on the difference between target production and the actual crude oil production. If the target production cannot be reached by reason of force majeure, act of God or energy policy, this duty will not be paid.
Excess Gains Revenue DutyThis duty equals 6.5% of the revenues from crude oil export sales when the weighted average price of crude oil exceeds the threshold crude oil price set for the year, which in 2006 was U.S.$36.50 per barrel. This duty was credited against the Hydrocarbon Duty for the Oil Revenues Stabilization Fund and, if necessary, against the Ordinary Hydrocarbons Duty.
In 2007, the excess gains revenue duty was revoked.


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The new fiscal regime for Petróleos Mexicanos and its subsidiary entities, with the exception of Pemex-Exploration and Production, consists of the following taxes and duties:
 
Impuesto a los Rendimientos Petroleros(Hydrocarbon Income TaxTax)This tax is equivalent to the regular income tax applied to all Mexican corporations, a tax to which Petróleos Mexicanos and its subsidiary entities are not subject. A tax rate of 30% is applied to net income, as determined in accordance with the Federal Revenue Law for the applicable fiscal year and the applicable provisions of theLey del Impuesto sobre la Renta(Income Tax Law).year.


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Impuesto Especial sobre Producción y Servicios(IEPS TaxTax)The Special Tax on Production and Services, (whichwhich we refer to as the IEPS Tax)Tax, is an indirect tax on domestic sales of gasoline and diesel that Pemex-Refining collects on behalf of the Mexican Government. The IEPS Tax on the sale of gasoline and diesel is equivalent to the difference between the international reference price of each product (adjusted by freight costs and quality factors) and the retail price of the product (not including value added tax, the retailers’ margin and freight costs). Thus, the Mexican Government ensures that we retain an amount reflecting the international prices (adjusted as described above) of these products, while the Mexican Government collects the difference between the international prices and the prices at which these products are sold in Mexico.
 
Since 2005, as a result of the new rules to calculate this tax rate, thesome rates have becomebeen negative. The Federal Revenue Law for the Fiscal Year of 2006 and 2007 determined that the amounts resulting from negative IEPS negative taxes could be credited against the IEPS tax liability, and, if in excess, can be credited against the value added tax. Any remaining amount can be credited against the Ordinary Hydrocarbons Duty. Negative IEPS taxes, if any, in 2008 may also be credited.
 
The new fiscal regime resulted in a reductionan increase of taxes and duties payable by PEMEX in the amount of approximately Ps. 69.64 billion in 2006. PEMEX expects that the new fiscal regime will result in a reduction of taxes and duties payable by PEMEX in the amount of approximately Ps. 88.6386.0 billion in 2007, as compared to the priortaxes and duties paid by PEMEX in 2006.
On October 1, 2007, a modification to the Federal Duties Law was published in the Official Gazette of the Federation. Effective January 1, 2008, the fiscal regime applicable to Pemex-Exploration and that this amount will increase gradually overProduction was not modified, except for the following years. However, nochanges:
Derecho Ordinario sobre Hidrocarburos(Ordinary Hydrocarbons Duty)The applicable rate for this duty will be 74.0% in 2008, 73.5% in 2009, 73.0% in 2010, 72.5% in 2011 and 71.5% in 2012.
Derecho para la Investigación Científica y Tecnológica enMateria de Energía (Duty for Scientific and Technological Research on Energy)The rate will be 0.15% of the value of extracted crude oil and natural gas production for 2008, 0.30% in 2009, 0.40% in 2010, 0.50% in 2011 and 0.65% in 2012. Under the prior regime, a fixed rate of 0.05% was applied to the value of extracted crude oil and natural gas production for the year.
Derecho Único sobre Hidrocarburos (Sole Hydrocarbons Duty)For this duty, a floating annual rate is applied to the value of the extracted crude oil and natural gas from abandoned fields or fields that are in the process of being abandoned. Rates will fluctuate between 37% and 57%, depending on the weighted average Mexican crude oil export price.


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Pemex-Exploration and Production expects that the fiscal regime will result in an increase of taxes and duties payable by Pemex-Exploration and Production, as compared to its 2007 taxes and duties paid, in the amount of approximately Ps. 106.5 billion for 2008, largely due to increased international crude oil prices. No assurance can be given that PEMEX’s tax regime will not be changed in the future. A new fiscal reform for the Mexican Government will go under discussion during the next Legislative period.
 
Excess Gains Revenue Duty
In 2002 and 2003, we paid an excess gains revenue duty in an amount equal to 39.2% of those revenues in excess of the threshold price set for that year. Thus, in 2002 and 2003, for every dollar exceeding the threshold price, we paid to the Mexican Government 60.8 cents in hydrocarbon duty and 39.2 cents in excess gains revenue duty so that all revenues above the threshold amount for those years of U.S. $15.50 per barrel and U.S. $18.35 per barrel, respectively, were payable to the Mexican Government. However, for the amount up to the threshold price, we paid only the hydrocarbon duty. We paid this duty in 2002 and 2003. In 2004, instead of paying the excess gains revenue duty to the Mexican Government, we were obligated to pay the infrastructure duty, the proceeds of which were dedicated for investment in infrastructure works for exploration, gas, refining and petrochemicals that were carried out by us and our subsidiary entities. Like the excess gains revenue duty, this duty equaled 39.2% of our revenues from crude oil export sales in excess of the threshold crude oil price set for that year (which in 2004 was U.S. $20.00 per barrel). See also “Item 5—Operating and Financial Review and Prospects—General— IEPS Tax, Excess Gains Revenue Duty, Hydrocarbon Duties and Other Taxes.”


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Beginning in 2005, we were obligated to pay the excess gains revenue duty to the Mexican Government instead of the infrastructure duty, in an amount equal to 39.2% of the revenues from crude oil export prices in excess of the threshold crude oil price set for the year (which in 2005 was U.S. $23.00 per barrel). Thus, for every dollar exceeding the threshold price, we were obligated to pay to the Mexican Government 60.8 cents in hydrocarbon duty and 39.2 cents in excess gains revenue duty so that all revenues above the threshold amount for that year were payable to the Mexican Government. However, for the amount up to the threshold price, we paid only the hydrocarbon duty. The portion of the excess gains duty generated in respect of revenues in excess of U.S. $27.00 was allocated as follows:
•  50% for capital expenditures in exploration, production, refining, gas and petrochemical activities of Petróleos Mexicanos and the subsidiary entities; and
•  50% for expenditures of infrastructure and equipment programs and investment projects carried out by the Mexican states.
As of January 1, 2006, we were obligated to pay the excess gains revenue duty to the Mexican Government instead of the infrastructure duty, in an amount equal to 6.5% of the revenues from crude oil export prices in excess of the threshold crude oil price set for the year (which in 2006 was U.S. $36.50 per barrel). This duty was credited against the Hydrocarbon Duty for the Oil Revenues Stabilization Fund. This duty was revoked in 2007.
Other Taxes
 
Since 1994, our interest payments on our external debt have been subject to Mexican Government withholding taxes. Nevertheless, withholding taxes do not represent a substantial portion of our total tax liability.
 
We are subject to municipal and state taxes, such as real property and payroll taxes. However, because most of our facilities are located on federal property, which is not subject to municipal taxation, real property taxes are not a significant part of our overall taxes. Similarly, payroll taxes do not represent a substantial portion of our total tax liability.
 
Petróleos Mexicanos and the subsidiary entities are exempt from Mexican corporate income tax; however, some of our subsidiary companies are Mexican corporations and are subject to the tax regime applicable to all other Mexican corporations. Mexican companies are generally required to pay the higher of their income tax liability (determined at a rate of 30% for 2005 and 29% for 2006)2006 and 28% for 2007) or their asset tax liability (determined at a rate of 1.8% of the average tax value of virtually all of their assets, less the average tax value of certain liabilities). Beginning in 2008, the asset tax has been replaced by a new corporate tax (impuesto empresarial a tasa única), which imposes a minimum tax equal to 16.5% of a corporation’s sales revenues (less certain deductions and certain investment expenditures) in 2008, 17.0% in 2009 and 17.5% in 2010 and thereafter.
 
In addition, we have a number of non-Mexican subsidiary companies that may be subject to taxation in the jurisdiction of their incorporation or operations. The aggregate taxes paid by the subsidiary companies were Ps. 1,414 million in 2004, Ps. 3,7766,053 million in 2005, Ps. 4,274 million in 2006 and Ps. 6,1873,402 million in 2006.2007.
 
UNITED MEXICAN STATES
 
The information in this section with regard to Mexico has been included due to Petróleos Mexicanos’ and the subsidiary entities’ relationship with the Mexican Government and has been reviewed by the Ministry of Finance and Public Credit.
 
Form of Government
 
The President is the chief of the executive branch of the Mexican Government. In accordance with Mexico’s election law, on September 5, 2006, the federal electoral court (Tribunal Electoral del Poder Judicial de la Federación) officially validated the results of the presidential election held in Mexico on July 2, 2006 and declared Felipe de Jesús Calderón Hinojosa, a member of the National Action Party (PAN), the President-elect. Mr. Calderón took office as President of Mexico on December 1, 2006 and his term expires on November 30, 2012. The Political Constitution of the United Mexican States limits the President to one six-year term and does not allow reelection for any additional terms.


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On July 2, 2006, a general election was held in Mexico. In addition to electing a new President, at the federal level, Mexicans elected 500 new deputies to all of the seats of the Chamber of Deputies and 128 new senators to all of the seats of the Senate. Several local elections also took place on the same date, including those in the Federal District, Campeche, Colima, Guanajuato, Morelos, Jalisco, Nuevo León, Querétaro, San Luis Potosí and Sonora. Currently, the PAN holds 9eight state governorships, thePartido de la Revolución Democrática(Democratic Revolution Party, or PRD) holds 4four state governorships and the governorship of the Federal District, and theCoalición por el Bien de Todos(Coalition for the Good of All), an alliance formed by the PRD, the Labor Party, and the Convergence for Democracy, holds 1one state governorship. The PRIPartido Revolucionario Institucional(Institutional Revolutionary Party, or PRI) holds the remaining 1718 of the 31 state governorships.


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The following table provides the current distribution of Congressional seats:seats, reflecting certain post-election changes in the party affiliations of certain senators and deputies:
 
Party Representation in the Mexican Congress
 
                                
 Senate Chamber of Deputies  Senate Chamber of Deputies 
 Seats % of Total Seats % of Total  Seats % of Total Seats % of Total 
National Action Party  52   40.6   206   41.2   52   40.6   207   41.4 
Institutional Revolutionary Party  33   25.8   106   21.2   33   25.8   106   21.2 
Democratic Revolution Party  26   20.3   127   25.4   26   20.3   127   25.4 
Ecological Green Party of Mexico  6   4.7   17   3.4   6   4.7   17   3.4 
Convergence for Democracy  5   3.9   17   3.4   5   3.9   18   3.6 
Labor Party  5   3.9   11   2.2   5   3.9   11   2.2 
New Alliance  0   0.0   9   1.8   0   0.0   9   1.8 
Alternative  0   0.0   5   1.0   0   0.0   5   1.0 
Independent  1   0.8   2   0.4 
Unaffiliated  1   0.8   0   0.0 
                  
Total  128   100.0%  500   100.0%  128   100.0%  500   100.0%
                  
 
 
Note: Totals may differ due to rounding.
Source: Chamber of Deputies and Senate.
 
The Economy
 
National Development Plan
 
ThePlan Nacional de Desarrollo(National Development Plan), announced on May 31, 2007, establishes the basic goals and objectives of President Felipe de Jesús Calderón Hinojosa during his six-year term.
 
The goals of the plan are to:
 
 •  guarantee national security, as well as safeguard national peace, territorial integrity, independence, and sovereignty, and to ensure the continued viability of the State and its democracy;
 
 •  guarantee full enjoymentthe protections of the Rulerule of Law,law, fortifying the institutional framework and strengthening a culture of respect for the law;
 
 •  achieve sustained economic growth at a higher rate than in the past several years, and increase employment in the formal sector;
 
 •  promote a competitive economy that offers quality goods and services at affordable prices;
 
 •  reduce extreme poverty, assuring equality of opportunity for all Mexicans to improve their quality of life and access to basic services;


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 •  reduce significantly the persistent social, economic and cultural gaps among the population;
 
 •  guarantee that Mexicans haveprovide effective opportunities for Mexicans to exercise their rights as citizens, as well as to participate actively in the political, cultural, economic and social lives of their communities and nation;
 
 •  ensure environmental sustainability;
 
 •  consolidate a democratic regime; and
 
 •  utilize the benefits of a globalized world to spur national development, while also promoting Mexico’s interests worldwide.


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The basic strategy that the Mexican Government expects to employ in connection with the plan is based on a program of “Sustainable Human Development” and has the following objectives:
 
 •  improve the quality of the educational system, making it relevant at all levels to employment and extending access to education to a greater percentage of the population;
 
 •  promote economic growth and the competitiveness of the economy, and strengthening ofstrengthen the State’s tax collections in order to provide social programs for human development;
 
 •  strengthen government institutions through viable and responsible citizen participation that reaches all public affairs and involves diverse forms of social and political organization;
 
 •  observe policies aimed at political transparency and accountability;
 
 •  promote policies contributing to the strengthening of families in matters of health, education, housing, culture and recreation; and
 
 •  change Mexico’s environmental culture in order to conserve national resources.
 
On May 27, 2008, the Mexican Government announced thePrograma Nacional de Financiamiento al Desarrollo2008-2012 (National Development Financing Program2008-2012 or PRONAFIDE2008-2012). The program’s objective is to ensure the availability of the fiscal and financial resources needed to achieve a higher and sustainable level of human development in 2012 through (among other things):
•  a sustained increase in the economic growth rate above 5%;
•  the creation of more that 800,000 jobs per year; and
•  a 30% reduction in the percentage of the population living in food poverty.
The growth and job creation strategy established in the National Development Plan, and outlined in greater detail in the program, is based on two pillars:
•  improving the broad determinants of the competitiveness of the Mexican economy, such as the rule of law, macroeconomic stability and the level of technological development; and
•  eliminating the restrictions on the growth of specific economic sectors caused by inadequate legal, regulatory or competition frameworks, or by insufficient availability of resources.
The strategy should lead to an increase in the rate of productivity growth from 0.5% in 2007 to 1.9% in 2012, as well as an expansion in investment from 22.5% of gross domestic product (GDP) in 2007 to 25.5% in 2012. The increased investment will be mainly financed by domestic savings. In particular:
•  domestic savings should rise from 21.7% of GDP in 2007 to 23.8% in 2012. Public savings should grow from 3.3% of GDP in 2007 to 4.2% in 2012 and private savings from 18.4% of GDP to 19.6% during the same period; and
•  external savings are expected to remain below 2.0% of GDP during the2008-2012 period, a level that can be easily financed with the expected flows of foreign direct investment.
On the public finance side, non-oil tax revenues are expected to increase from 9% of GDP in 2007 to 11% in 2012. This should allow public expenditure to increase from 20.4% of GDP in 2007 to 22.1% in 2012. Likewise, public investment should be higher than 5.0% of GDP in 2012, as compared with 4.3% in 2007.
The objectives for public finances will be attained through a fiscal policy that strengthens public finances, a simpler tax scheme that strengthens tax collection by widening the tax base and at the same time favors investment, thereby facilitating compliance with tax obligations, channeling greater resources to social development and infrastructure and improving the efficiency and effectiveness of public spending.
On the financial system side, financial savings are expected to grow from 51.9% to 64.8% of GDP between 2007 and 2012. Together with the expected reduction of the historical balance of the public sector’s borrowing requirements as a proportion of GDP, this should allow financing to the private sector to grow from 23.3% to 39.6% of GDP over the same period. This should enable private sector investment to increase to 20.5% of GDP in 2012, from 18.2% of GDP, currently.


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To achieve these objectives, financial sector policies will focus on:
•  encouraging higher savings and the intermediation of these savings through the financial system;
•  increasing the penetration of the financial system by promoting access to financial services by a higher proportion of the population;
•  continuing to increase competition among intermediaries;
•  strengthening the debt and equity markets’ role in financing the private sector;
•  ensuring the safety, soundness and stability of the financial system;
•  developing a financial and consumer protection culture;
•  consolidating the national pension system; and
•  strengthening and fostering development banks.
The Role of the Mexican Government in the Economy; Privatization
 
On December 4, 2006,In October 2007, theInstituto para la Protección del Ahorro Bancario (Bank Savings Protection Institute, or IPAB) and the Mexican Government sold its remaining 41.8% staketheir interests in Grupo Aeroportuario del Centro Norte,Consorcio Aeroméxico, S.A.B. de C.V. (previously known as Cintra, S.A. de C.V.), which owns Aeroméxico, one of the company that owns the concessionslargest Mexican airline companies, to operate, maintain and develop 13 airports serving areas concentrated in Mexico’s central and northern regions, including the major metropolitan areaa group of Monterrey, tourist destinations suchinvestors organized as Acapulco and Zihuatanejo and a number of regional centers and border cities, through a public offeringtrust constituted at Banco Nacional de México, S.A., for proceeds of U.S. $376 million.approximately Ps. 2.7 billion.
 
Gross Domestic Product
 
According to preliminary figures, Mexico’s gross domestic product (GDP) increased by 3.0% in real terms during 2005. This growth was led by the transportation, storage and communications sector, which grew by 7.1% in real terms. The financial services, insurance and real estate sector grew by 5.8%, the construction sector grew by 3.3%, the commerce, hotels and restaurants sector grew by 3.1%, the community, social and personal services sector grew by 2.1%, the electricity, gas and water sector grew by 1.4%, the manufacturing sector grew by 1.2% and the mining, petroleum and gas sector grew by 1.2%, each in real terms. The agriculture, livestock, fishing and forestry sector contracted by 1.5% in real terms in 2005.
According to preliminary figures, GDP increased by 4.8%4.9% in real terms during 2006, as compared to 2005. All sectors experienced growth in 2006 as compared to 2005: the transportation, storageThe agriculture, forestry, fishing and communicationshunting sector grew by 9.1%6.4%; the mining sector grew by 1.4%; the utilities sector grew by 12.2%; the construction sector grew by 6.9%7.9%; the financial services, insurancemanufacturing sector grew by 5.2%; the wholesale and real estateretail trade sector grew by 6.2%; the transportation and warehousing sector grew by 5.4%; the electricity, gas and waterinformation sector grew by 5.0%10.7%; the agriculture, livestock, fishingfinance and forestryinsurance sector grew by 4.8%16.6%; the real estate, rental and leasing sector grew by 5.9%; the professional, scientific and technical services sector grew by 3.1%; the management of companies and enterprises sector grew by 20.1%; the administrative support and waste management and remediation services sector grew by 3.7%; the education services sector grew by 0.1%; the health care and social assistance sector grew by 2.3%; the arts, entertainment and recreation sector grew by 2.3%; the accommodation and food services sector grew by 1.6%; and other services (except public administration) grew by 3.3%, each in real terms as compared to 2005. In contrast, the public administration sector decreased by 0.9% in real terms as compared to 2005.
According to preliminary figures, GDP grew by 3.2% in real terms during 2007, as compared with 2006. The agriculture, forestry, fishing and hunting sector grew by 2.0%; the utilities sector grew by 7.2%; the construction sector grew by 3.0%; the manufacturing sector grew by 4.7%2.7%; the commerce, hotelswholesale and restaurantsretail trade sector grew by 4.1%; the transportation and warehousing sector grew by 3.4%; the information sector grew by 12.0%; the finance and insurance sector grew by 11.0%; the real estate, rental and leasing sector grew by 4.5%; the professional, scientific and technical services sector grew by 3.7%; the community, socialmanagement of companies and personalenterprises sector grew by 1.3%; the administrative support and waste management and remediation services sector grew by 2.8% and1.7%; the mining, petroleum and gaseducation services sector grew by 2.2%,2.3%; the health care and social assistance sector grew by 2.9%; the arts, entertainment and recreation sector grew by 6.5%; the accommodation and food services sector grew by 2.0%; other services (except public administration) sector grew by 4.2%; and public administration remained stable, each in real terms.terms as compared to 2006. In contrast, the mining sector decreased by 3.4% in real terms as compared to 2006.


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According to preliminary figures, GDP grew by 2.6% in real terms during the first quarterthree months of 2007,2008, as compared with the same periodfirst three months of 2006.2007. The transportation, storage and communicationsutilities sector grew by 7.6%, the electricity, gas and water sector grew by 5.3%, the financial services, insurance and real estate sector grew by 4.9%, the community, social and personal services sector grew by 2.1%,8.0%; the construction sector grew by 2.1%,0.1%; the commerce, hotels and restaurantsmanufacturing sector grew by 1.6%,2.7%; the mining, petroleumwholesale and gasretail trade sector grew by 0.3%5.4%; the transportation and the agriculture, livestock, fishing and forestrywarehousing sector grew by 0.2%4.0%; the information sector grew by 11.6%; the finance and insurance sector grew by 9.6%; the real estate, rental and leasing sector grew by 3.6%; the management of companies and enterprises sector grew by 5.0%; the administrative support and waste management and remediation


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services sector grew by 2.5%; the education services grew by 0.9%; the health care and social assistance sector grew by 0.5%; the arts, entertainment and recreation sector grew by 4.9%; the accommodation and food services sector grew by 3.5%; other services (except public administration) grew by 2.6%; and public administration grew by 0.8%, each in real terms. The manufacturingterms as compared to first three months of 2007. However, the agriculture, forestry, fishing and hunting sector contracteddecreased by 0.1%1.3%; the mining sector decreased by 5.8%; and the professional, scientific and technical services sector decreased by 1.6%, each in real terms inas compared to the first quarterthree months of 2007.
 
The following table sets forth the change in Mexico’s real GDP growth by sector for the periods indicated.indicated:
 
Real GDP Growth by Sector
 
                         
                 First three
 
                 months
 
  2002  2003(1)  2004(1)  2005(1)  2006(1)  of 2007(1)(2) 
 
GDP (constant 1993 prices)  0.8%  1.4%  4.2%  3.0%  4.8%  2.6%
Transportation, storage and communications  1.8   5.0   9.2   7.1   9.1   7.6 
Electricity, gas and water  1.0   1.5   2.8   1.4   5.0   5.3 
Financial services, insurance and real estate  4.2   3.9   3.9   5.8   5.4   4.9 
Community, social and personal services  0.9   (0.6)  0.6   2.1   2.8   2.1 
Construction  2.1   3.3   6.1   3.3   6.9   2.1 
Commerce, hotels and restaurants  0.0   1.5   5.5   3.1   3.7   1.6 
Mining, petroleum and gas  0.4   3.7   3.4   1.2   2.2   0.3 
Agriculture, livestock, fishing and forestry  0.1   3.1   3.5   (1.5)  4.8   0.2 
Manufacturing  (0.7)  (1.3)  4.0   1.2   4.7   (0.1)
                     
              First three
 
              months
 
  2004  2005  2006  2007(1)  of 2008(1)(2) 
 
GDP (constant 2003 prices)  4.0%  3.1%  4.9%  3.2%  2.6%
Primary Activities:                    
Agriculture, forestry, fishing and hunting  2.5   (2.6)  6.4   2.0   (1.3)
Secondary Activities:                    
Mining  1.3   (0.3)  1.4   (3.4)  (5.8)
Utilities  4.0   2.0   12.2   7.2   8.0 
Construction  5.3   2.5   7.9   3.0   0.1 
Manufacturing  3.9   3.6   5.2   2.7   2.7 
Tertiary activities:                    
Wholesale and retail trade  6.9   4.6   6.2   4.1   5.4 
Transportation and warehousing  5.4   3.6   5.4   3.4   4.0 
Information  11.7   8.6   10.7   12.0   11.6 
Finance and Insurance  10.0   21.1   16.6   11.0   9.6 
Real estate, rental and leasing  3.9   2.3   5.9   4.5   3.6 
Professional, scientific and technical services  3.4   3.6   3.1   3.7   (1.6)
Management of companies and enterprises  7.1   4.8   20.1   1.3   5.0 
Administrative support and waste management and remediation services  3.7   3.6   3.7   1.7   2.5 
Education services  0.8   2.1   0.1   2.3   0.9 
Health care and social assistance  0.3   3.6   2.3   2.9   0.5 
Arts, entertainment and recreation  4.8   0.7   2.3   6.5   4.9 
Accommodation and food services  3.5   0.8   1.6   2.0   3.5 
Other services (except public administration)  1.9   2.2   3.3   4.2   2.6 
Public administration  (1.3)  2.3   (0.9)  0.0   0.8 
 
 
Note: Totals may differ due to rounding.
 
(1)Preliminary.
 
(2)First three months of 20072008 results as compared to the same period of 2006.2007.
Source: National Institute of Statistics, Geography and Informatics.
 
Prices and Wages
 
Inflation (as measured by the change in the national consumer price index) during 20052006 was 3.3%4.1%, 0.31.1 percentage points higher than the official inflation target for the year and 1.9 percentage points lower than during 2004. The performance of inflation in 2005 was attributable primarily to two factors, the dilution of several supply disturbances that affected the economy during 2004 and the monetary policies that were adopted in 2005. Inflation for 2006 was 4.05%, 1.05 percentage points higher than the official inflation target for the year and 0.720.8 percentage points higher than inflation for 2005. The increase in inflation in 2006 was attributable primarily to reduced supplies of several consumer goods, including sugar and corn. Inflation for 2007 was 3.8%, 0.8 percentage points higher than the official inflation target for the year and 0.3 percentage points lower than inflation for 2006. Inflation for the five months ended May 31, 20072008 was 0.46%1.6%, 0.101.2 percentage points lowerhigher than during the same period of 2006.2007.


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Interest Rates
 
During 2005,2006, interest rates on28-day Treasury bills (Cetes) averaged 9.2% and interest rates on91-dayCetesaveraged 9.3%, as compared with average rates on28-day and91-dayCetesof 6.8% and 7.1%, respectively, during 2004. These increases in interest rates were primarily the result of the high inflationary expectations that were caused by supply disturbances experienced in 2004 and the monetary policies that were adopted in 2005 to reduce the existing inflationary pressures.


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During 2006, interest rates on28-day Treasury bills averaged 7.2% and interest rates on91-dayCetesaveraged 7.3%, 2.0 percentage points lower, in each case, than the average rates during 2005. These decreases in interest rates were primarily the result of a reduction in inflationary pressures and in the volatility of the international financial markets in the second half of the year, as well as the conclusion of the presidential election process.
During 2007, interest rates on28-day TreasuryCetesaveraged 7.2% and interest rates on91-dayCetesaveraged 7.4%, as compared with average rates on28-dayCetesof 7.2% and on91-dayCetesof 7.3% during 2006.
 
During the first five months of 2007,2008, interest rates on28-day and91-dayCetesaveraged 7.07%7.4% and 7.23%7.5%, respectively, as compared with average rates on28-dayCetesand91-dayCetesof 7.41%7.1% and 7.43%7.2%, respectively, during the same period of 2006.2007. On June 12, 2007,2008, the28-dayCetesrate was 7.20%7.5% and the91-dayCetesrate was 7.41%7.7%.
 
Financial System
 
20062007 Monetary Program
 
Mexico’s monetary program for 20062007 had as its principal objective an inflation rate no higher than 3.0% by the end of 2006.2007. Mexico’s monetary program for 20062007 was made up of the following elements:
 
 •  inflation objectives;the announcement of an explicit, multi-year plan to control inflation;
 
 •  a reference guideline for thesystematic analysis of the economic situationeconomy and inflationary pressures;
 
 •  a framework fordescription of the monetary instruments to be used by the Central BankBanco de México to achieve its objectives; and
 
 •  a plan for regularpolicy of communication with the public that promotes the transparency, credibility and effectiveness ofeffective monetary policy.
 
Until 2008, Banco de México usesused acortoor “short” mechanism to induce the necessary changes in interest rates to achieve inflation objectives. Under thethis mechanism, Banco de México setsset a predetermined amount at which the daily average of the net total balance of all current accounts of banks accumulated during a certain period willwould close and controlscontrolled that amount by restricting the amount of credit it auctions to banks on a daily basis. Prior to April 10, 2003, that amount was set based on a28-day period. On April 10, 2003, the period was changed from 28 days to a daily average balance. When the predetermined amount iswas negative, or “short,” Banco de México exertsexerted upward pressure on interest rates by leaving the market short of pesos and by increasing the interest rate on a portion of the credit it auctions on that day. This mechanism allowsallowed Banco de México to combat inflationary pressures and disorderly conditions in the money and foreign exchange markets and to ensure that changes in the monetary base follow a path consistent with the assumed inflation rate.
 
During 2006,2007, the M1 money supply (defined as bills and coins held by the public, plus checking accounts denominated in pesos and foreign currency, plus interest-bearing deposits denominated in pesos and operated by debit cards) increased by 9.7%6.8% in real terms, as compared to 2005.2006. In addition, checking account deposits denominated in pesos increased by 8.9%9.4% in real terms in 2006,2007, as compared to 2005.2006.
 
During 2006,2007, financial savings increased by 9.8%6.3% in real terms, as compared to 2005.2006. Savings generated by Mexican residents increased by 9.5%4.6% in real terms, while savings generated by non-residents increased by 17.2%48.6% in real terms in 2006,2007, each as compared to 2005.2006.
 
At December 29, 2006,31, 2007, the monetary base totaled Ps. 449.8494.7 billion, an 18.4%a 10.0% nominal increase from the level of Ps. 380.0449.8 billion at December 30, 2005.31, 2006.


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20072008 Monetary Program
 
Mexico’s monetary program for 20072008 has as its principal objective an inflation rate no higher than 3.0% by the end of 2007.2008. Mexico’s monetary policy program for 20072008 is made up of the following elements:
 
 •  inflation objectives;the announcement of an explicit, multi-year plan to control inflation;
 
 •  a reference guideline for thesystematic analysis of the economic situationeconomy and inflationary pressures;


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 •  a framework fordescription of the monetary instruments to be used by the Central BankBanco de México to achieve its objectives; and
 
 •  a plan for regularpolicy of communication with the public that promotes the transparency, credibility and effectiveness of monetary policy.
 
During the first four months of 2007,At April 30, 2008, the M1 money supply increased by 4.00%was 4.6% greater in real terms as compared withthan the same periodlevel at April 30, 2007. In addition, the aggregate amount of 2006. This growth was driven by an increase in checking account deposits denominated in pesos of 3.72%at April 30, 2008 was 4.9% greater in real terms during the first four months of 2007, as compared with the same period of 2006.than at April 30, 2007.
 
During the first four months of 2007,At April 30, 2008, financial savings increased by 3.97%were 9.6% greater in real terms as compared with the same period of 2006.than financial savings at April 30, 2007. Savings generated by Mexican residents increased by 4.26%were 7.0% greater in real terms whileand savings generated by non-residents decreased by 2.89%were 72.0% greater in real terms during the first four months of 2007, each as compared with the same period of 2006. than their respective levels at April 30, 2007.
At June 15, 2007,May 31, 2008, the monetary base totaled Ps. 408.9451.3 billion, a 9.10%an 8.8% nominal decrease from the level of Ps. 449.8494.7 billion at December 29, 2006.31, 2007. Banco de México estimates that the monetary base will total approximately Ps. 548.3 billion at December 31, 2008.
 
After loweringIn October 2007, Banco de México announced that as of January 21, 2008, it would use the overnight funding rate, rather than its other monetary policy instrument, thecortoor “short,” as its primary monetary policy instrument. The minimum overnight funding rate remained at 7.5% from 7.25%October 26, 2007 to 7.00% on April 21, 2006 to relax monetary conditions,June 20, 2008. On June 20, 2008, Banco de México maintained the minimum overnight funding rate at 7.00% until April 26, 2007. On April 27, 2007, Banco de México increasedannounced an increase in the minimum overnight funding rate to 7.25%7.75%. Banco de México’s other monetary policy instrument, the “short,” remainsThecortoremained unchanged at the level of Ps. 79.0 million, a level set on March 23, 2005. On May 25, 2007,2005 until January 21, 2008, when Banco de México announced thatstarted using the “short” would remain at Ps. 79.0 million until further notice.overnight funding rate as its primary monetary policy instrument.
 
Banking System
 
In connection with the implementation of NAFTA, amendments to several laws relating to financial services, including the Banking Law and theLey del Mercado de Valores(Securities Market Law), became effective on January 1, 1994. These measures permit non-Mexican financial groups and financial intermediaries, through Mexican subsidiaries, to engage in various activities in the Mexican financial system, including banking and securities activities. In April 1994, the Ministry of Finance and Public CreditSHCP issued regulations that implemented these amendments, as well as provisions of NAFTA dealing with financial services and any future trade agreements incorporating similar provisions. These regulations set forth rules under which Canadian and U.S. financial institutions (and other foreign financial institutions acting through Canadian or U.S. affiliates) are permitted to establish or acquire Mexican financial institutions and financial holding companies. Pursuant to these rules, the aggregate net capital of Mexican commercial banks controlled by foreign financial institutions, excluding Mexican banks acquired pursuant to a program approved by the Ministry of Finance and Public Credit,SHCP, could not exceed 25% of the total net capitalization of all Mexican banks until January 1, 2000.
 
In December 1998, the Mexican Congress approved legislation introducing a package of financial and banking reforms which supplemented reforms in place since 1995. The 1998 reforms did not affect the general foreign ownership restrictions under the Banking Law and NAFTA regulations discussed above, but removed the remaining restrictions on foreign ownership of the largest Mexican banks.
 
The Banking Law was amended on June 4, 2001 to:
 
 •  enhance corporate governance by (1) expanding minority shareholders’ rights, (2) introducing independent board members and (3) requiring an audit committee of the board of directors;


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 •  improve the framework for banking operations by (1) providing adequate regulation regarding the provision of banking services using new technologies, (2) allowing banks to offer additional services and (3) setting a new framework for related operations; and
 
 •  strengthen regulation and surveillance while reducing their cost by (1) introducing prompt corrective actions based on banks’ capitalization levels, (2) defining responsibilities and activities of the various financial authorities and (3) expanding the role of external auditors.


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Banking Supervision and Support
 
The1994-95 peso devaluation and ensuing financial crisis created concerns about the stability of the Mexican banking system. The devaluation, higher domestic interest rates and contraction in real GDP combined to weaken the quality of the assets of Mexican banks, caused the capitalization of several banks to fall below the minimum required levels and created funding difficulties for many banks.
 
The weakening of the banking system prompted the Mexican Government to enact policies aimed at increasing the capitalization of Mexican banks. New reserve requirements were introduced by Banco de México to facilitate the regulation of liquidity. Pursuant to these requirements, which took effect in March 1995, a bank that overdraws its account with Banco de México must subsequently deposit funds, and maintain amounts on deposit, at least equal to the amount of the overdraft. Substantial fines may be imposed if a bank fails to make and maintain such deposits. The new reserve requirements were intended to reduce Banco de México’s daily net extension of credit. In addition, in 1997 the National Banking and Securities Commission (CNBV) adopted significant changes in the accounting practices applicable to Mexican commercial banks and development banks, with the intent of making those practices more consistent with international accounting standards, including U.S. GAAP.
 
In response to the1994-95 financial crisis, the Mexican Government took a number of additional steps to support the banking system, including broadening the scope for investment by foreign and domestic investors in the equity of Mexican financial institutions, enhancing the power of the CNBV to supervise and intervene in the activities of financial holding companies and creating a number of debtor support programs to restructure past-due loans caused by the crisis, then-rising interest rates and the ongoing recession. From 1994 to 1996, the CNBV exercised its authority to intervene in the management of a number of Mexican financial institutions, including the Cremi/Union financial group, Grupo Financiero Asemex Banpaís, S.A. de C.V. and its banking and insurance subsidiaries, Banco Capital, S.A. and Banco del Sureste, S.A.
 
In addition, the Mexican Government established the Temporary Capitalization Program (PROCAPTE), a voluntary program to assist viable but undercapitalized banks, under which the Banking Fund for the Protection of Savings (FOBAPROA) advanced funds to participating banks in exchange for five-year, mandatorily convertible bonds. By May 1995, the value of bonds issued through PROCAPTE reached Ps. 7.0 billion. In February of 1997, the last bank participating in PROCAPTE liquidated its total participation, thus concluding the PROCAPTE program.
 
Through FOBAPROA, the Mexican Government made foreign exchange available through a foreign exchange credit window to help banks meet dollar liquidity needs. Outstanding drawings under this program reached their highest point of U.S. $3.8 billion in April 1995 and were completely repaid by August 31, 1995. No such drawings were made after that date.
 
In 1995 and 1996, the Ministry of Finance and Public CreditSHCP approved recapitalization plans for twelve of Mexico’s financial institutions, many of which involved strategic investments by foreign financial institutions and the purchase by FOBAPROA of large portions of the loan portfolios of the affected banks.
 
In 1999, the Mexican Government’s program to rescue troubled banks, which was first implemented in 1995, was restructured. Under the revised scheme, FOBAPROA was replaced by theInstituto para la Protección del Ahorro Bancario (Bank Savings Protection Institute, or IPAB), IPAB, which assumed FOBAPROA’s assets and liabilities, except for certain liabilities that were explicitly excluded under the financial reforms. IPAB also manages a deposit insurance program. During 1999, IPAB commenced a transition program under which deposit insurance limits were introduced gradually. Deposit insurance is now limited to 400,000Unidadesunidades de Inversióinversión(or UDIs, units of account whose value in pesos is indexed to


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inflation on a daily basis, as measured by the change in the national consumer price index), per person or entity, per institution. At June 10, 2007,2008, one UDI was worth Ps. 3.82.4.0.
 
The Mexican Congress allocates funds to IPAB on an annual basis to manage and service IPAB’s net liabilities, but those liabilities generally have not become public sector debt as had been originally proposed. In emergency situations, IPAB is permitted to contract additional financing in an amount not exceeding 6% of


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the total liabilities of banking institutions without congressional authorization. At March 31, 2007,2008, IPAB’s debt totaled Ps. 751.6757.3 billion.
 
In addition to Mexico’s auctions of debt securities in the domestic market, IPAB also sells peso-denominated debt securities in Mexico. IPAB uses the proceeds of these sales to service its maturing obligations, to improve the maturity profile of its indebtedness and to reduce its financing costs. IPAB’s securities are sold through auctions conducted by Banco de México.
 
In addition to its other activities, IPAB is now in the process of disposing of the loan portfolios and other assets acquired by FOBAPROA during the1994-1996 period. In 2006,2007, IPAB conducted two auctionsone auction of these loan portfolios and other assets.
 
The Ministry of Finance and Public CreditSHCP issued new rules governing the capitalization requirements of Mexican commercial banks effective on January 1, 2000. These rules currently require Mexican commercial banks to:
 
 •  maintain at 20% the amount of deferred taxes arising from fiscal losses that may be included as Tier 1 capital;
 
 •  include all new issuances of subordinated convertible debt as Tier 2 capital. Outstanding subordinated mandatorily convertible debt, subject to current limitations, will remain as Tier 1 capital until its maturity or conversion;
 
 •  exclude investments in non-financial companies and companies whose shares are not traded on the Mexican Stock Exchange from Tier 1 capital, except where those investments result from the capitalization of restructured loans; and
 
 •  exclude from Tier 2 capital certain specific assets, including credit card debt, mortgages and commercial loans, and establish general loan loss reserves for these types of assets.
 
The new rules also allow Mexican commercial banks, as part of a capitalization program, to issue cumulative and noncumulative subordinated debt securities through a special purpose vehicle, providing them with a new financing alternative in international markets. These securities have a minimum maturity of ten years, are unsecured and deeply subordinated and provide for the deferral (cumulative) or cancellation (noncumulative) of interest payments in certain circumstances and payment of the face value at the maturity date. Subject to limitations, noncumulative instruments may be included as Tier 1 capital.
 
During the second half of 2000, the Mexican Government continued to establish rules and criteria for the regulation of banking institutions in accordance with accepted international practices. In September 2000, the Mexican Government issued new rules for classifying the quality of loan portfolios of commercial banking institutions. At the same time, the rules governing the capitalization requirements of commercial banks were modified. In October 2000 and more recently in September 2003, the Mexican Government announced new rules for classifying the credit portfolios of development banks.
 
At December 29, 2006, calculated in accordance with the accounting criteria applicable to credit institutions since the beginning of 1998,31, 2007, the total amount of past-due loans of commercial banks (excluding banks under Mexican Government intervention and those in special situations) was Ps. 27.6 billion,43,073 million, as compared with Ps. 20.9 billion27,590 million at December 30, 2005. The31, 2006. At December 31, 2007, the total loan portfolio of the banking system increased by 15.3%was 18.3% greater in real terms during 2006 as compared with 2005.than the total loan portfolio at December 31, 2006. The past-due loan ratio of commercial banks was 2.5% at December 31, 2007, as compared to 2.0% at December 29, 2006, as compared to 1.8% at December 30, 2005.31, 2006. The amount of loan loss reserves created by commercial banks (excluding banks under Mexican Government intervention and those in special situations) totaled Ps. 54.5 billion72,857 million at the end of December 2006,31, 2007, as compared with Ps. 50.6 billion57,485 million at December 30, 2005.31, 2006. At this level, commercial banks had reserves covering 208.4%169.2% of their past-due loans at December 31, 2007, exceeding the minimum reserve level of 45% required by the applicable accounting criteria.


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The Securities Market
 
The Mexican Stock Exchange is Mexico’sthe only authorized stock exchange involved in the listing and is locatedtrading of equity and debt securities in Mexico City. TheMexico. Upon the consummation of the initial public offering of its shares on June 18, 2008, the Mexican Stock Exchange is organizedwas transformed from asociedad anónima de capital variable(private company) to asociedad anónima bursátil de capital variable (a public company). In connection with the initial public offering of shares, certain of the former stockholders of the Mexican Stock Exchange (banks and brokerage houses) created a control trust into which they deposited more than 50% of the issued and outstanding shares of the Mexican Stock Exchange for purposes of voting such shares in the future as a corporation with shares owned by 31 brokerage firms, each of which is authorized to trade on the exchange floor.single block. Both debt and equity securities are listed and traded on the Mexican Stock Exchange, including stocks and bonds of private sector corporations, equity certificates or shares issued by banks, commercial paper, bankers’ acceptances, certificates of deposit, Mexican Government debt and special hedging instruments linked to the dollar. Currently, institutional investors are the most active participants in the Mexican Stock Exchange, although retail investors also play a role in the market. The Mexican equity market is one of Latin America’s largest in terms of market capitalization, but it remains relatively small and illiquid compared to major world markets.
 
Effective June 1, 2001, the Securities Market Law was amended to promote the securities market by making it more transparent, liquid and efficient and by implementing stricter corporate governance rules, which are intended to strengthen the rights of minority shareholders of public companies and brokerage houses, among other things. The amended law requires issuers of securities to appoint an audit committee of the board which will have full access to the issuer’s information, appoint independent board members and limit the amount of non-voting and voting-restricted stock they issue. In addition, the reforms introduced provisions intended to regulate the duties of board members and the liability of board members for acting in violation of such duties. The amendments also broadened the scope of insider trading provisions and introduced more severe penalties for insider trading violations.
 
In December 2005, the Mexican Congress passed a new securities law to enhance the institutional framework necessary for a stronger development of the securities market in Mexico. The new law, which entered into effect on June 28, 2006, clarified several aspects of the prior law, such as the disclosure mechanisms and the reach of its application to holding companies and subsidiaries. In addition, the new law improved minority shareholders’ rights and introduced certain new requirements and fiduciary duties applicable to board members, officers and external auditors. The new law also redefined the responsibilities of the corporate structure, requiring the creation of audit and corporate governance committees with independent board members.
 
At December 29, 2006, the Stock Market Index stood at 26,448.32 points, representing a 48.6% nominal increase from the level of 17,802.7 points at December 30, 2005. At June 7,31, 2007, the Stock Market Index stood at 31,184.4929,536.83 points, representing a 17.9%an 11.68% nominal increase from the level at December 29, 2006. At June 13, 2008, the Stock Market Index stood at 30,413.5 points, representing a 3.0% nominal increase from the level at December 31, 2007.
 
External Sector of the Economy
 
Foreign Trade
 
According to preliminary figures, in 2006,2007, Mexico registered a trade deficit of U.S. $10.1 billion, as compared with a deficit of U.S. $6.1 billion for 2006. Merchandise exports increased by 8.8% during 2007, to U.S. $271.9 billion, as compared to a trade deficit of U.S. $7.6$249.9 billion in 2005. Merchandise exports increased by 16.7% to U.S. $250.0 billion in 2006, as compared to U.S. $214.2 billion in 2005.for 2006. In 2006,2007, petroleum exports increased by 22.4%10.2%, while non-petroleum exports increased by 15.7%8.5%, in each case as compared to 2005.2006.
 
According to preliminary figures, in 2006,2007, total imports grew by 15.5%10.1%, to U.S. $281.9 billion, as compared with U.S. $256.1 billion as compared to 2005.for 2006. Imports of intermediate goods increased by 15.0%, imports of capital goods increased by 16.4% and imports of consumer goods increased by 17.3% in 2006, each as compared to 2005.
During the first four months of 2007, according to preliminary figures, Mexico registered a trade deficit of U.S. $3.4 billion, as compared with a surplus of U.S. $1.0 billion for the same period of 2006. Merchandise exports increased by 3.4% during the first four months of 2007, to U.S. $81.3 billion, as compared to U.S. $78.6 billion for the same period of 2006. During the first four months of 2007, petroleum exports decreased by 13.9%, while non-petroleum exports increased by 7.0%, each as compared with the same period of 2006.
During the first four months of 2007, according to preliminary figures, total imports grew by 9.0% to U.S. $84.6 billion, as compared with U.S. $77.6 billion for the same period of 2006. During the first four


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months of 2007, imports of intermediate goods increased by 8.1%8.8%, imports of capital goods increased by 10.1% and imports of consumer goods increased by 13.2%16.7%, each as compared with 2006.
During the first four months of 2008, according to preliminary figures, Mexico registered a trade deficit of U.S. $2.7 billion, as compared with a deficit of U.S. $3.2 billion for the same period of 2007. Merchandise exports increased by 19.4% during the first four months of 2008, to U.S. $97.1 billion, as


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compared to U.S. $81.3 billion for the same period of 2007. During the first four months of 2008, petroleum exports increased by 50.3%, while non-petroleum exports increased by 14.2%, each as compared with the same period of 2007.
During the first four months of 2008, according to preliminary figures, total imports grew by 18.1%, to U.S. $99.9 billion, as compared with U.S. $84.6 billion for the same period of 2007. During the first four months of 2008, imports of intermediate goods increased by 17.6%, imports of capital goods increased by 13.9% and imports of consumer goods increased by 24.2%, each as compared with the first four months of 2006.2007.
 
Balance of International Payments
 
According to preliminary figures, during 2006, Mexico’s current account registered a deficit of U.S. $1.9$5.5 billion or 0.2% of GDP, a 62.2% decrease in nominal termsduring 2007, as compared with the current account deficit of U.S. $4.9 billion registered in 2005. The capital account surplus for 2006 totaled U.S. $0.4 billion, as compared with a surplus of U.S. $12.7 billion in 2005. According to preliminary figures, net foreign investment in Mexico, as recorded in the balance of payments, totaled U.S. $21.3 billion in 2006 and was composed of direct foreign investment inflows totaling U.S. $19.0 billion and foreign portfolio investment (including securities placed abroad) inflows totaling U.S. $2.3 billion.
According to preliminary figures, during the first quarter of 2007, Mexico’s current account registered a deficit of U.S. $2.8$2.2 billion or 0.3% of GDP, as compared to a surplus of U.S. $873 million, or 0.1% of GDP, for the same period ofduring 2006. The capital account registered a surplus of U.S. $4.8$18.3 billion in the first quarter of 2007, as compared withto a deficit of U.S. $873 million deficit$2.0 billion for the same period of 2006. Foreign investment in Mexico, as recorded in the balance of payments, totaled U.S. $8.1$39.5 billion during the first quarter of 2007 and was composed of direct foreign investment inflows totaling U.S. $6.6$24.7 billion and foreign portfolio investment (including securities placed abroad) inflows totaling U.S. $1.6$14.8 billion.
 
According to preliminary figures, during the first quarter of 2008, Mexico’s current account registered a deficit of U.S. $1.5 billion as compared to a deficit of U.S. $2.2 billion for the same period of 2007. The U.S. $1.5 billion deficit registered during the first quarter of 2008 represents 0.6% of GDP. This ratio has been calculated with GDP figures resulting from the method of calculation in place prior to April 2008. In August 1996,April 2008, the following changes to this method of calculation were instituted: (1) 2003 was established as the base year (replacing 1993); (2) new activities were included in the calculation of GDP; and (3) the treatment of taxes was amended in order to reflect more accurately their effect on GDP. The new method of calculation has resulted in increases in nominal GDP of 9.6% for 2003 and 12.6% for 2006. The capital account registered a surplus of U.S. $8.9 billion in the first quarter of 2008, as compared with a U.S. $4.8 billion surplus for the same period of 2007. Foreign Exchange Commission,investment in Mexico, as recorded in the balance of payments, totaled U.S. $5.5 billion during the first quarter of 2008 and was composed of members of the Ministry of Financedirect foreign investment inflows totaling U.S. $4.2 billion and Public Credit and Banco de México, announced a plan to increase Mexico’s reserves by conducting monthly auctions of options to sellforeign portfolio investment (including securities placed abroad) inflows totaling U.S. dollars to Banco de México. The auctions took place among commercial banks, which could assign their rights arising therefrom. The auctions allowed Banco de México to accumulate international assets without creating distortions in the currency markets. On May 18, 2001, the Foreign Exchange Commission determined that accumulated reserve levels were high enough to justify suspending until further notice the sale of options after the auction held on June 29, 2001.$1.3 billion.
 
On March 20, 2003, the Foreign Exchange Commission, composed of members of the SHCP and Banco de México, announced that it had adopted a new mechanism to moderate the rate of accumulation of international reserves expected in 2003.reserves. Under the mechanism, Banco de México announced every quarter, beginning in May 2003, the total amount of dollars it would supply to the currency market in the following three-month period. The amount of dollars to be sold, which were sold exclusively to Mexican credit institutions, equaled 50% of the increase in net international reserves registered during the previous quarter less the sales of dollars made through this mechanism during the previous quarter. The total amount of dollars to be sold in a quarter was sold through daily auctions, each for an amount equal to the total for the quarter divided by the number of business days in the quarter.
 
On March 12, 2004, the Foreign Exchange Commission announced that it would adjust the mechanism that it had adopted on March 20, 2003 to moderate the rate of accumulation of international reserves. Under the adjusted mechanism, which commenced on May 3, 2004 and remains in effect, Banco de México continues to make quarterly announcements regarding the daily amounts of dollars to be supplied to the currency market pursuant to the same formula, but the total amount announced is divided into four equal portions to be sold in the following four quarters. The amount of dollars auctioned during the quarter from May through July 2004 (U.S. $22.0 million) was based retroactively on the accumulation of net international reserves registered in the four quarters from April 16, 2003 through April 16, 2004. The total auctioned for the quarter from May through July 2004 was, therefore, equal to the sum of one-fourth of each of the total amounts announced for the quarters ended in July 2003, October 2003, January 2004 and April 2004. On April 17, 2007,15, 2008, Banco de México announced that the daily amount of dollars to be auctioned for the period from May 2, 20071, 2008 to July 31, 20072008 would be U.S. $21$32 million. The total amount of dollars to be sold in a quarter will be sold through daily auctions, each for an amount equal to the total for the quarter divided by the number of business days in the quarter.
 
At December 29, 2006, Mexico’s international reserves totaled U.S. $67.7 billion, a decrease of U.S. $1.0 billion from the level at December 30, 2005. The net international assets of Banco de México


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totaled U.S. $76.3 billion at December 29, 2006, an increase of U.S. $2.2 billion from the level at December 30, 2005.
At June 1,31, 2007, Mexico’s international reserves totaled U.S. $69.5$78.0 billion, an increase of U.S. $1.8$10.3 billion from the level at December 29, 2006. The net international assets of Banco de México


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totaled U.S. $77.0$87.2 billion at June 1,December 31, 2007, an increase of U.S. $0.7$10.9 billion from the level at December 29, 2006.
 
At June 13, 2008, Mexico’s international reserves totaled U.S. $84.8 billion, an increase of U.S. $6.9 billion from the level at December 31, 2007. The net international assets of Banco de México totaled U.S. $91.9 billion at June 13, 2008, an increase of U.S. $4.7 billion from the level at December 31, 2007.
Direct Foreign Investment in Mexico
 
During 2007, direct foreign investment in Mexico, as recorded in the balance of payments, totaled U.S. $24.7 billion. Direct foreign investment notified to the National Foreign Investment Commission totaled approximately U.S. $22.8 billion during 2007. Of that amount, 49.9% of direct foreign investment was directed at manufacturing, 27.2% was directed at financial services, 5.6% was directed at commerce, 5.2% was directed at mining and 12.1% was directed at other sectors of the economy. By country of origin, 42.8% of the direct foreign investment during 2007 came from the United States, 20.0% came from Spain, 12.8% came from Holland, 6.4% came from France and 18.0% came from other countries.
According to preliminary figures, during 2006,the first quarter of 2008, direct foreign investment in Mexico notified to the National Foreign Investment Commission totaled approximately U.S. $15.9 billion. Total accumulated direct foreign investment in Mexico during the2002-2006 period amounted to approximately U.S. $92.8 billion. Of the total direct foreign investment during the2002-2006 period, 53% was channeled to manufacturing, 20% to financial services, 6% to transportation and communications, and 8% to commerce.
According to preliminary figures, during 2006, foreign investment in Mexico, as recorded in the balance of payments, totaled U.S. $21.3 billion, comprising direct foreign investment inflows of U.S. $19.0 billion and foreign portfolio investment (including securities placed abroad) inflows of U.S. $2.3 billion.
According to preliminary figures, during the first three months of 2007, direct foreign investment in Mexico notified to the National Foreign Investment Commission totaled approximately U.S. $6.6$4.2 billion.
 
Exchange Controls and Foreign Exchange Rates
 
Since December 22, 1994, the Mexican Government has maintained a floating exchange rate policy, with Banco de México intervening in the foreign exchange market from time to time to minimize volatility and ensure an orderly market. The Mexican Government has also promoted market-based mechanisms for stabilizing the exchange rate, such as over-the-counter forward and options contracts between banks and their clients in Mexico, and authorization of peso futures trading on the Chicago Mercantile Exchange. In addition, since October 1996, Banco de México has permitted foreign financial institutions to open peso-denominated accounts and to borrow and lend pesos (subject to general restrictions on conducting banking activities in Mexico).
 
The peso/U.S. dollar exchange rate closed at Ps. 10.811110.9157 = U.S. $1.00 on December 29, 2006,31, 2007, a 1.6%0.95% depreciation of the peso in dollar terms as compared tofrom the exchange rate at the end of 2005.2006. During 2006,2007, the monthly average peso/U.S. dollar exchange rate was Ps. 10.90110.9288 = U.S. $1.00, as compared to Ps. 10.898 = U.S. $1.00 in 2005.
$1.00. The peso/U.S. dollar exchange rate announced byBanco de Méxicoon June 8, 200713, 2008 (to take effect on the second business day thereafter) was Ps. 10.97010.3655 = U.S.US. $1.00.
 
Public Finance
 
Fiscal Policy
 
The rationalization of public expenditure and the augmentation of revenue have been important components of theNational Program for Financing Development (PRONAFIDE), approved on May 27, 2008, establishes that Mexican Government’s economic stabilization strategy. The Mexican Government’s fiscal policy has two fundamental objectives: to establish the macroeconomic foundation for sustained growthgoals will include increased spending on social and to focus the Mexican Government’s resources on those sectors in which the Mexican Government can have the greatest impact in supporting socialeconomic development and the competitiveness of the Mexican economy.
At present, the Mexican Government’s principal short-term fiscalgreater investment in infrastructure, while maintaining a stable and responsible approach to public finances. To meet these policy objectives, in addition to countering inflation, are:PRONAFIDE has outlined the following specific objectives:
 
 •  to strengthen the framework of fiscal responsibility to ensure a responsible and efficient fiscal policy, including a balanced budget and a prudent management of debt, each of which are core components of the development strategy, with the goal of reducing the historical balance of the public sector’s borrowing requirements and strengthening economic activity and exports;the mechanisms to carry out counter-cyclical policies;
 
 •  maintainingto continue to simplify the Mexican taxation system, seeking additional mechanisms to facilitate compliance with tax obligations and reduce tax evasion in order to improve tax collection;
•  to ensure the proper implementation of public finance reforms, in particular the Impuesto Empresarial a Tasa Única (Unique Rate Corporate Tax, or IETU), in order to increase non-oil tax revenues and reduce the volatility of total government revenues;
•  to improve the allocation and use of expenditures by evaluating their results, based on greater transparency and accountability, including the implementation of an adequate surplus inexpenditure programs


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evaluation system, integrating the Mexican Government’s primary balance while incurring only a moderate public sector deficit;accounting systems at all three levels of government and giving priority in the allocation of expenditures to sectors and programs that produce better results; and


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 •  continuingto promote the promotiondevelopment of fiscal federalism;local financial markets and
•  increasing achieve savings in the efficiency and competitivenessfinancial costs of the economypublic sector through the active management of public debt, while maintaining a level of risk consistent with the natural evolution of public finances and the effectivenessdevelopment of the tax collection system.
The Mexican Government’s principal medium-term fiscal policy objectives are:
•  significantly reducing the inflation rate to levels approximating those of Mexico’s major trading partners;
•  consolidating the process of sustainable economic growth;
•  promoting private sector savings;
•  continuing to modernize the economy; and
•  strengthening social policy through increased real spending on social development.local financial markets.
 
20062007 Budget and Fiscal Results
 
According to preliminary figures, public sector budgetary revenues in 20062007 were greater than public sector budgetary expenditures (excluding off-budget revenues and expenditures of the public sector) by approximately Ps. 2.32.7 billion in nominal terms. Public sector budgetary revenues increased by 12.1%5.6% in real terms as compared to budgetary revenues for 2005.2006. Within budgetary revenues, non-oil tax revenues increased by 10.8%10.1% in real terms, while oil related revenues increaseddecreased at a real rate of 14.3%1.7%.
 
The overallAccording to preliminary figures, during 2007, the public sector overall balance registered a surplus of Ps. 9.81.0 billion, or 0.1% of GDP,89.9% lower in 2006 in contrast to a deficit ofreal terms than the Ps. 10.19.9 billion or 0.1% of GDP, for 2005. The 2006 public sector surplus included gross expenditures of Ps. 11.8 billion related to the costs associated with thePrograma de Separación Voluntaria(Voluntary Retirement Program, or PSV), which was implemented in late 2002 with the long-term goal of reducing the number of Government administrative personnel and which offers severance packages to certain persons who retire voluntarily. Excluding the gross expenditure related to the PSV, the public sector surplus for 2006 was Ps. 9.8 billion in nominal terms, equivalent to 0.1% of estimated GDP forregistered during 2006. The primary surplus, defined as total public sector revenues less expenditures (including those related to the PSV) other than interest payments on public debt, was Ps. 261.2245.0 billion in nominal terms in 2006, 25.0% higherfor 2007, 9.5% lower in real terms thanas compared to the Ps. 201.6260.3 billion surplus recorded for 2005.registered during 2006.
 
20072008 Budget and Fiscal Package
 
TheOn October 30, 2007, the Mexican Congress approved the Federal Annual Revenue Law for 2007, as approved by Congress,2008 and the Federal Expenditure Decree for 2007, as passed by2008 (together with the Chamber of Deputies (together,Federal Annual Revenue Law for 2008, the “2007 Budget”), were approved on December 22, 2006 and December 23, 2006, respectively.2008 Budget). The 20072008 Budget maintains fiscal discipline as the cornerstone of the economic program, and contemplates a public sector balancedeficit of 0.0% of GDP for 2007,i.e., a balanced budget.2008.
 
As originally proposed to Congress, the 2007The 2008 Budget contemplated a public sector deficit of 0.0% of GDP and wasis based onupon an estimated weighted average price of Mexico’s oil exports of U.S. $42.50$49.0 per barrel. Congress revised this estimate upward to U.S. $42.80 per barrel. The 2007 Budget estimates that the averagebarrel and an estimated volume of oil exports will be 1.648of 1.7 million barrels per day.
 
Total public sector revenues approved in the 2007 Budget include revenues that are Ps. 26.4 billion higher than those in the budget proposed by the President. This increase resulted mainly from an upward revision in estimated oil revenues, non-oil tax revenues and non-recurring revenues.
Congress implemented expenditure reductions of Ps. 56.8 billion from the budget proposed by the President. The increased resources in the approved 2007 Budget and the expenditure reductions applied to the budget proposed by the President, allow for expenditure increases and reallocations of Ps. 82.9 billion, while nonetheless maintaining fiscal equilibrium unchanged.


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Thepreliminary results for 20052006 and 2006,2007, the revised budget assumptions and targets for 20062007 and the budget assumptions and targets for 2007, as set forth in the 2007 Budget passed by the Mexican Congress,2008 are presented below:below.
 
20052006 and 2006 Results;2007 Results
2006 Revised Budget Assumptions2007 and Targets;
20072008 Budget Assumptions and Targets
 
                                
     2006
      2007
     
 2005 Results 2006 Budget Results 2007 Budget  2006 Budget 2007(1) 2008 Budget 
Real GDP growth(%)  3.0(1)  3.6   4.8(1)  3.6   4.9%  3.6%  3.2%  3.7%
Increase in the national consumer price index(%)  3.3   3.0   4.0   3.0   4.1%  3.0%  3.8%  3.0%
Average export price of Mexican oil mix (U.S.$/barrel)  42.69   36.50   53.20   42.80 
Average export price of Mexican oil mix (U.S. $/barrel) $53.04  $42.80  $61.63  $49.00 
Current account deficit as % of GDP(2)  0.6(1)  2.2   0.3(1)  2.3   0.3%  2.3%  0.6%  1.0%
Average exchange rate (Ps./$1.00)  10.9   11.4   10.9   11.2   10.9   11.2   10.9   11.2 
Average rate on28-dayCetes(%)
  9.2   8.9   7.2   6.8   7.2%  6.8%  7.2%  7.0%
Public sector balance as % of GDP(2)  (0.1)(1)  (0.0)  0.3(1)  (0.0)  0.1%  0.0%  0.0%  0.0%
Primary balance as% of GDP  2.4(1)  N/A   2.8(1)  2.7 
Primary balance as % of GDP(2)
  2.8%  2.7%  2.5%  n.a. 
 
 
N/An.a. = Not available.
 
(1)Preliminary.
(2)Calculated with GDP figures resulting from the method of calculation in place prior to April 2008. In April 2008, the following changes to this method of calculation were instituted: (1) 2003 was established as the base year (replacing 1993); (2) new activities were included in the calculation of GDP; and (3) the treatment of taxes was amended in order to reflect more accurately their effect on GDP. The new method of calculation has resulted in increases in nominal GDP of 9.6% for 2003 and 12.6% for 2006.
Source: Ministry of Finance and Public Credit.SHCP.


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Under the 20072008 Budget, the Mexican Government estimates that it will devote Ps. 369.7173.5 billion (22.3%(6.8% of total budgetary programmable expenditures) to education and Ps. 475.02142.7 billion (28.6%(5.6% of total budgetary programmable expenditures) to health and social security.
 
According to preliminary figures, during the first four months of 2007,2008, the public sector overall balance registered a surplus of Ps. 138.1112.3 billion, 53.4% greater21.8% less in real terms than the Ps. 86.5138.1 billion surplus registered for the same period of 2006.2007. The primary surplus, defined as total public sector revenues less expenditures (including those related to the PSV) other than interest payments on public debt, was Ps. 206.1170.9 billion for the first four months of 2007, 18.6% higher2008, 22.2% lower in real terms as compared to the Ps. 167.0211.0 billion surplus registered for the same period of 2006.2007.
 
Public Debt
 
Internal Public Debt
 
Internal debt of the Mexican Government is presented herein on a “net” basis, and includes only the internal portion of indebtedness incurred directly by the Mexican Government, Banco de México’s general account balance (which was positive at December 29, 2006,28, 2007, indicating monies owed to the Mexican Government) and the assets of theFondo del Sistema de Ahorro Para el Retiro (the (Retirement Savings System Fund). Net internal debt includesCetesand other securities sold to the public in primary auctions, but not such debt allocated to Banco de México for its use in regulating liquidity (Regulación Monetaria). See footnote 2 to the table “Net Internal Public Debt”“Internal Debt of the Federal Government” below. Internal debt does not include the debt of the IPAB or the debt of budget controlledbudget-controlled or administratively controlled agencies. See “—Financial System—Banking Supervision and Support.”
 
Over the last decade, the Mexican Government has pursued an internal debt strategy aimed at lengthening the average maturity of its debt in order to reduce its refinancing risk. To further this goal, the Mexican Government in 1999 offered for the first time10-year UDI-denominated securities and guaranteed30-year UDI-indexed bonds, and subsequently began offering three-year, five-year, seven-year,10-year,20-year and ten-year fixed rate peso-denominated bonds.


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On October 28, 2003, the Mexican Government issued its first20-year fixed rate peso-denominated bonds, placing Ps. 1.0 billion of these instruments in the market. On October 24, 2006, the Mexican Government issued its first30-year fixed rate peso-denominated bonds, placing Ps. 12.6 billionbonds. Since the first quarter of these instruments in the market. The Mexican Government expects to continue to offer each of these instruments on a regular basis, along with the shorter-term2007, seven-year fixed rate peso-denominated bonds mentioned above, pursuant to a securities auction calendar published byare no longer offered. In the last quarter of 2007, the Mexican Government each quarter.offered for the first time3-year UDI-denominated bonds.
 
With the issuance of these securities, the Mexican Government has established a long-dated benchmark yield curve and developed a long-term private domestic debt market. The Mexican Government anticipates that the issuance of these instruments has encouraged:
 
 •  increased use of long-term fixed rate contracts;
 
 •  the issuance of long-term peso-denominated securities by Mexican companies;
 
 •  the development of long-term financial hedging products; and
 
 •  the potential to direct long-term savings toward the financing of long-term investment projects.
 
According to preliminary figures, at December 29, 2006, the net internal debt of the Mexican Government totaled Ps. 1,547.1 billion, as compared to the Ps. 1,183.3 billion outstanding at December 30, 2005. At December 29, 2006, the gross internal debt of the Mexican Government totaled Ps. 1,672.8 billion, as compared to Ps. 1,242.2 billion at December 30, 2005. The Mexican Government’s financing costs on internal debt totaled Ps. 120.1 billion for 2006, an increase in nominal terms of 15.9% as compared to 2005.
According to preliminary figures, at April 30,31, 2007, the net internal debt of the Mexican Government totaled Ps. 1,482.71,788.3 billion, as compared withto the Ps. 1,547.1 billion outstanding at December 29,31, 2006. At April 30,December 31, 2007, according to preliminary figures, the gross internal debt of the Mexican Government totaled Ps. 1,744.81,896.3 billion, as compared to Ps. 1,672.8 billion at December 29,31, 2006. The Mexican Government’s financing costs on internal debt totaled Ps. 18.2141.3 billion for the first three months of 2007, a decreasean increase in nominal terms of 19.9%17.6% as compared to the same period of 2006.
 
The following table summarizesAccording to preliminary figures, at December 31, 2007, the net internal public debt of the Mexican Government at each of the dates indicated.
Internal Debt of the Federal Government(1)
                                                 
  December 31,  April 30
 
  2002  2003  2004  2005  2006(2)  2007 
  (in billions of pesos, except percentages) 
 
Gross Debt
                                                
Government Securities Ps.793.8   87.5% Ps.956.7   94.5% Ps.1,039.3   94.6% Ps.1,173.3   94.5% Ps.1,569.9   93.9% Ps.1,640.3   94.0%
Cetes
  192.1   21.2   206.4   20.4   241.5   22.0   288.2   23.2   346.0   20.7   347.1   19.9 
Floating-Rate Bonds  305.3   33.6   354.7   35.1   310.5   28.2   287.6   23.2   359.6   21.5   351.7   20.2 
Inflation-Linked Bonds  92.7   10.2   83.9   8.3   84.6   7.7   95.3   7.7   155.3   9.3   180.6   10.4 
Fixed-Rate Bonds  203.7   22.4   311.7   30.8   402.7   36.6   502.2   40.4   709.0   42.4   760.9   43.6 
Other  113.6   12.5   55.2   5.5   59.9   5.4   68.8   5.5   102.9   6.1   104.5   6.0 
                                                 
Total Gross Debt Ps.907.4   100.0%  Ps 1,011.9   100.0% Ps.1,099.2   100.0% Ps.1,242.2   100.0% Ps.1,672.8   100.0% Ps.1,744.8   100.0%
                                                 
Net Debt
                                                
Financial Assets(3)
  (86.1)      (84.8)      (69.2)      (58.8)      (125.7)      (197.1)    
                                                 
Total Net Debt Ps.821.3      Ps.927.1      Ps.1,030.0      Ps.1,183.3      Ps.1,547.1      Ps.1,482.7     
                                                 
Gross Debt/GDP      13.6%      13.9%      13.2%      13.8%      17.8%      18.1%
Net Debt/GDP      12.3%      12.7%      12.4%      13.2%      16.5%      16.0%


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Note: Totals may differ due to rounding.
(1)Internal debt figures do not include securities sold by Banco de México in open-market operations pursuant toRegulación Monetaria, which amounted to approximately Ps. 111.8 billion at December 29, 2006.Regulación Monetariadoes not increase the Government’s overall level of internal debt, because Banco de México must reimburse the Government for any allocated debt that Banco de México sells into the secondary market and that is presented to the Government for payment. If Banco de México undertakes extensive sales of allocated debt in the secondary market, however,Regulación Monetariacan result in a situation in which the level of outstanding internal debt is higher than the Government’s figure for net internal debt.
(2)Preliminary.
(3)Includes the net balance denominated in pesos of the General Account of the Federal Treasury with Banco de México.
Source: Ministry of Finance and Public Credit.
External Public Debt
The total external debt of the public sector totaled Ps. 1,686.8 billion, as compared with Ps. 1,471.7 billion outstanding at December 31, 2006. At December 31, 2007, the gross internal debt of the public sector totaled Ps. 1,958.0 billion, as compared with Ps. 1,741.4 billion outstanding at December 31, 2006. For these purposes and for the purposes of the following section, public sector debt consists of the external portion of the long-term indebtedness incurred directly by the Mexican Government, the external long-term indebtedness incurred by budget controlledbudget-controlled agencies, the external long-term indebtedness incurred directly or guaranteed by administratively controlled agencies (including but not limited


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to national development banks), and the short-term external debt of the public sector. Private sector debt guaranteed by the Mexican Government is not included unless and until the Mexican Government is called upon to make payment under its guaranty. For purposes hereof, long-term debt includes all debt with maturities of one year or more from the date of issue.
 
According to preliminary figures, at April 30, 2008, the net internal debt of the Mexican Government totaled Ps. 1,685.4 billion, as compared with the Ps. 1,788.3 billion outstanding at December 31, 2007. At April 30, 2008, according to preliminary figures, the gross internal debt of the Mexican Government totaled Ps. 1,965.4 billion, as compared to Ps. 1,896.3 billion at December 31, 2007. The Mexican Government’s financing costs on internal debt totaled Ps. 17.5 billion for the first quarter of 2008, a 3.8% decrease in nominal terms, as compared to the same period of 2007.
The following table summarizes the net internal public debt of the Mexican Government at each of the dates indicated.
Internal Debt of the Federal Government(1)
                                                 
  December 31,  March 31,
 
  2003  2004  2005  2006  2007(2)  2008 
  (in billions of pesos, except percentages) 
 
                                                 
Gross Debt
                                                
                                                 
Government Securities Ps.956.7   94.5% Ps.1,039.3   94.6% Ps.1,173.3   94.5% Ps.1,569.9   93.9% Ps.1,795.8   94.7% Ps.1,846.4   94.2%
                                                 
Cetes
  206.4   20.4   241.5   22.0   288.2   23.2   346.0   20.7   340.5   18.0   324.2   16.5 
                                                 
Floating-Rate Bonds  354.7   35.1   310.5   28.2   287.6   23.2   359.6   21.5   325.0   17.1   300.0   15.3 
                                                 
Inflation-Linked Bonds  83.9   8.3   84.6   7.7   95.3   7.7   155.3   9.3   235.3   12.4   258.2   13.2 
                                                 
Fixed-Rate Bonds  311.7   30.8   402.7   36.6   502.2   40.4   709.0   42.4   895.1   47.2   964.4   49.2 
                                                 
Other  55.2   5.5   59.9   5.4   68.8   5.5   102.9   6.1   100.6   5.3   114.5   5.8 
                                                 
                                                 
Total Gross Debt Ps.1,011.9   100.0% Ps.1,099.2   100.0% Ps.1,242.2   100.0% Ps.1,672.8   100.0% Ps.1,896.3   100% Ps.1,960.8   100%
                                                 
                                                 
Net Debt
                                                
                                                 
Financial Assets(3)
  (84.8)      (69.2)      (58.8)      (125.7)      (107.9)      (246.4)    
                                                 
     ��                                           
Total Net Debt Ps.927.1      Ps.1,030.0      Ps.1,183.3      Ps.1,547.1      Ps.1,788.3      Ps.1,714.4     
                                                 
                                                 
Gross Internal Debt/GDP(4)
      13.9%      13.2%      13.8%      17.8%      18.3%      18.6%
                                                 
Net Internal Debt/GDP(4)
      12.7%      12.4%      13.2%      16.5%      17.3%      16.3%
Note: Totals may differ due to rounding.
(1)Internal debt figures do not include securities sold by Banco de México in open-market operations pursuant toRegulación Monetaria, which amounted to approximately Ps. 13.8 billion at December 31, 2007.Regulación Monetariadoes not increase the Mexican Government’s overall level of internal debt, because Banco de México must reimburse the Mexican Government for any allocated debt that Banco de México sells into the secondary market and that is presented to the Mexican Government for payment. If Banco de México undertakes extensive sales of allocated debt in the secondary market, however,Regulación Monetariacan result in a situation in which the level of outstanding internal debt is higher than the Mexican Government’s figure for net internal debt.
(2)Preliminary.
(3)Includes the net balance denominated in pesos of the General Account of the Federal Treasury with Banco de México.
(4)Calculated with GDP figures resulting from the method of calculation in place prior to April 2008. See note 2 to the table “2006 and 2007 Results; 2007 and 2008 Budget Assumptions and Targets” under “—Public Finance—2008 Budget.”
Source: SHCP.
External Public Debt
According to preliminary figures, outstanding public sector gross external debt decreasedincreased by approximately U.S. $16.9$0.6 billion in 2006,2007, from U.S. $71.7 billion at December 30, 2005 to U.S. $54.8 billion at December 29, 2006.31, 2006 to U.S. $55.4 billion at December 31, 2007. Of thisthe amount outstanding at December 31, 2007, U.S. $53.9$54.4 billion represented long-term debt and U.S. $0.8$0.9 billion represented short-term debt. Public sector external debt financing costs totaled U.S. $7.3$6.7 billion in 2006,2007, a 2.4% increase7.6% decrease in nominal terms as compared to 2005.2006.
According to preliminary figures, at December 31, 2007, commercial banks held approximately 5.8% of Mexico’s total public sector external debt, multilateral and bilateral creditors (excluding the International Monetary Fund (IMF) held 18.9%, bondholders (including commercial banks holding bonds issued in debt exchange transactions) held approximately 66.8% and others held the remaining 8.6%.


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According to preliminary figures, at March 31, 2008, commercial banks held approximately 7.9% of Mexico’s total public sector external debt, multilateral and bilateral creditors (excluding the IMF) held 17.3%, bondholders (including commercial banks holding bonds issued in debt exchange transactions) held approximately 61.0% and others held the remaining 13.8%.
 
According to preliminary figures, total public debt (gross external debt plus net internal debt) at December 29, 200631, 2007 represented approximately 22.8%22.1% of nominal GDP 1.0 percentage points higher than(using the method of calculation of GDP in place prior to April 2008), which was approximately the same level as at the end of 2005.2006.
According to preliminary figures, outstanding public sector gross external debt increased by approximately U.S. $4.2 billion during the first quarter of 2008, from U.S. $55.3 billion at December 31, 2007 to U.S. $59.6 billion at March 31, 2008. Of this amount, U.S. $56.0 billion represented long-term debt and U.S. $3.6 billion represented short-term debt.
 
According to preliminary figures, total public debt (gross external debt plus net internal debt) at March 31, 20072008 represented approximately 22.9%21.9% of nominal GDP 0.1(using the method of calculation in place prior to April 2008), 0.5 percentage points higherlower than over the same period of 2006.
According to preliminary figures, outstanding public sector gross external debt increased by approximately U.S. $3.9 billion during the first quarter of 2007, from U.S. $54.8 billion at December 29, 2006 to U.S. $58.7 billion at March 31, 2007. Of this amount, U.S. $54.8 billion represented long-term debt and U.S. $3.9 billion represented short-term debt.


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The following table sets forth a summary of the external public debt of Mexico, which includes the external debt of the Mexican Government, budget controlled agencies and administratively controlled agencies and a breakdown of such debt by currency. External public debt as used in this section does not include, among other things, repurchase obligations of Banco de México with the International Monetary FundIMF or the debt of IPAB. See “—Financial System—Banking Supervision and Support” and footnote 1 to the table “Summary of External Public Debt” below.
 
Summary of External Public Debt(1)
By Type
 
                                                
   Long-Term
 Other
          Long-Term
         
 Long-Term
 Debt of
 Long-
 Total
        Debt of
         
 Direct Debt of
 Budget
 Term
 Long-
   Total Long-
  Long-Term Direct
 Budget
 Other Long-
     Total Long-
 
 the Federal
 Controlled
 Public
 Term
 Total Short-
 and Short-
  Debt of the Federal
 Controlled
 Term Public
 Total Long-
 Total Short-
 and Short-
 
 Government Agencies Debt(2) Debt Term Debt Term Debt  Government Agencies Debt(2) Term Debt Term Debt Term Debt 
 (in millions of dollars)      (in millions of dollars)     
December 31,                                                
2002  43,554   10,630   21,845   76,029   2,789   78,818 
2003  44,898   11,190   21,248   77,336   1,688   79,024  U.S. $44,898  U.S. $11,190  U.S. $21,248  U.S. $77,336  U.S. $1,688  U.S. $79,024 
2004  48,561   10,636   17,952   77,149   2,077   79,226   48,561   10,636   17,952   77,149   2,077   79,226 
2005  48,689   6,736   15,464   70,889   786   71,675   48,689   6,736   15,464   70,889   786   71,675 
2006(4)
  39,330   7,046   7,545   53,921   845   54,766   39,330   7,046   7,545   53,921   845   54,766 
March 31, 2007(4)
  38,605   8,858   7,299   54,762   3,912   58,674 
2007  40,114   7,745   6,576   54,435   920   55,355 
March 31, 2008(4)
  39,664   10,175   6,136   55,975   3,603   59,578 
 
By Currency(3)
 
                                                                                          
 December 31, March 31,  December 31, March 31, 
 2002 2003 2004 2005 2006(4) 2007(4)  2003 2004 2005 2006(4) 2007 2008(4) 
 (in
   (in
   (in
   (in
   (in
   (in
    (in
   (in
   (in
   (in
   (in
   (in
   
 millions
   millions
   millions
   millions
   millions
   millions
    millions of
   millions of
   millions of
   millions of
   millions of
   millions of
   
 of $)  (%) of $)  (%) of $)  (%) of $)  (%) of $)  (%) of $)  (%)  $) (%) $)  (%) $)  (%) $)  (%) $)  (%) $)  (%) 
U.S. Dollars  69,804   88.6   70,519   89.2   71,220   89.9   65,480   91.4   50,760   92.7   47,379   80.7   70,519   89.2   71,220   89.9   65,480   91.4   50,760   92.7   44,309   80.0   48,687   81.7 
Japanese Yen  3,849   4.9   4,013   5.1   2,937   3.7   1,990   2.8   1,006   1.8   1,084   1.8   4,013   5.1   2,937   3.7   1,990   2.8   1,006   1.8   1,157   2.1   1,123   1.9 
Pounds Sterling  156   0.2   173   0.2   186   0.2   80   0.1   91   0.2   1,030   1.8 
Pounds  173   0.2   186   0.2   80   0.1   91   0.2   1,040   1.9   1,039   1.7 
Swiss Francs  173   0.2   184   0.2   236   0.3   171   0.2   175   0.3   410   0.7   184   0.2   236   0.3   171   0.2   175   0.3   423   0.8   481   0.8 
Others  4,836   6.1   4,135   5.3   4,647   5.9   3,954   5.5   2,734   5.0   8,771   14.9   4,135   5.3   4,647   5.9   3,954   5.5   2,734   5.0   8,426   15.2   8,248   13.9 
                                                  
Total  78,818   100.0   79,024   100.0   79,226   100.0   71,675   100.0   54,766   100.0   58,674   100.0   79,024   100.0   79,226   100.0   71,675   100.0   54,766   100.0   55,355   100.0   59,578   100.0 
                                                  
 
 
Note:  Totals may differ due to rounding.
 
(1)External debt denominated in foreign currencies other than dollars has been translated into dollars at exchange rates as of each of the dates indicated. External public debt does not include (a) repurchase obligations of Banco de México with the IMF (none of these were outstanding at March 31, 2007)2008), (b) external borrowings by the public sector after March 31, 20072008 and (c) loans from the Commodity Credit Corporation to public sector Mexican banks. External debt is presented herein on a “gross” basis, and includes external obligations of the public sector at their full outstanding face or principal amount. For certain informational and statistical purposes, Mexico sometimes reports its external public sector debt on a “net” or “economic” basis, which is calculated as the gross debt net of certain financial assets held abroad. These financial assets include the value of principal and interest collateral on restructured debt and Mexican public sector external debt that is held by public sector entities but that has not been canceled.
 
(2)Includes debt of development banks and other administratively controlled agencies whose finances are consolidated with the Mexican Government.
 
(3)Adjusted to reflect the effect of currency swaps.
 
(4)Preliminary.
Source:  Ministry of Finance and Public CreditSHCP.


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Subsequent to December 29, 2006:31, 2007:
 
 •  On January 29, 2007,11, 2008, Mexico concluded an exchange and cash tender offer forissued U.S. $1,500,000,000 of its 6.05% Global Notes due 2040.
•  During the first quarter of 2008, Mexico repurchased in open market transactions certain series of its outstanding U.S. dollar-denominated bonds.bonds with maturities between 2009 and 2034, totaling U.S. $714 million. The international offer invited


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table below shows the holders of five series of Mexico’s external bonds maturing in 2019, 2022, 2026, 2031 and 2033 to submit offers, in a modified Dutch auction, to exchange their bonds for reopened 6.75% Global Notes due 2034 plus a cash payment, or to sell their bonds for cash. Following settlement, approximately $2.8 billion of outstanding bonds including Mexico’s 8.125% Global Bonds due 2019, 8.00% Global Notes due 2022, 11.50% Global Bonds due May 15, 2026, 8.30% Global Notes due 2031 and 7.500% Global Notes due 2033 were cancelled. An aggregate principal amount of U.S. $2,266,566,000 in reopened 6.75% Global Notes due 2034 was issued to holders participating in the exchange, and Mexico also made cash payments from available funds totaling approximately U.S. $1,067,637,570. Following the cancellationresults of the bonds tendered and accepted for exchange or purchase by Mexico, approximately U.S. $1,703,447,000 principal amount of 8.125% Global Bonds due 2019, U.S. $753,456,000 principal amount of 8.00% Global Notes due 2022, U.S. $338,580,000 principal amount of 11.50% Global Bonds due May 15, 2026, U.S. $1,878,333,000 principal amount of 8.30% Global Notes due 2031 and U.S. $1,315,425,000 principal amount of 7.500% Global Notes due 2033 remained outstanding.open market transactions.
                 
     Aggregate
  Aggregate
  Aggregate Principal
 
     Principal Amount
  Principal
  Amount
 
     Outstanding before
  Amount
  Outstanding after
 
     Repurchases (in
  Repurchased
  Repurchases (in
 
     millions of U.S.
  (in millions of
  millions of U.S.
 
Title of Purchased Securities ISIN  dollars)  U.S. dollars)  dollars) 
 
10.375% Global Bonds due 2009  US593048BG58  U.S.$970  U.S. $20  U.S. $950 
8.375% Notes due 2011  US91086QAF54   1,711   171   1,540 
5.875% Global Notes due 2014  US91086QAQ10   1,296   5   1,291 
6.625% Global Notes due 2015  US91086QAL23   1,392   48   1,344 
113/8% Global Bonds due September 15, 2016
  US593048BA88   1,771   80   1,691 
8.125% Global Bonds due December 30, 2019  US593048BN00   1,483   131   1,352 
8.00% Global Notes due 2022  US91086QAJ76   743   30   714 
8.30% Global Notes due 2031  US91086QAG38   1,819   45   1,774 
7.500% Global Notes due 2033  US91086QAN88   1,271   2   1,269 
6.75% Global Notes due 2034  US91086QAS75   4,267   183   4,084 
 
 •  On March 21, 2007,April 8, 2008, Mexico issued 500,0001,000,000 Series XWE07XWA08 Warrants and 1,000,000 XWD07 Units, each Unit consisting of one250,000 Series XWDA07 WarrantXWB08 Warrants. XWA08 Warrants and one Series XWDB07 Warrant, which will trade separately after September 24, 2007. The Series XWE07, XWDA07 and XWDB07XWB08 Warrants entitle the holders to exchange, on September 19, October 11, and November 7, 2007, respectively,9, 2008 (unless extended, at Mexico’s sole discretion), up to approximately $2.7U.S. $1.25 billion of various series of outstanding U.S. dollar, euro, Italian lira and Deutsche mark-denominatedDeutsche-mark denominated bonds issued by Mexico for, in the case of the XWA08 Warrants, peso-denominated bondsMBonos issued by the Mexican Government maturing in either 2014, 2017 or 2024.2036 or, in the case of the XWB08 Warrants, UDI-denominated (i.e., inflation indexed), peso-payable Udibonos issued by the Mexican Government maturing in 2017 or 2035.
 
Item 5.  Operating and Financial Review and Prospects
 
General
 
We earn income from:
 
 •  export sales, which consist of sales of crude oil and condensates, refined products and petrochemical products;
 
 •  domestic sales, which consist of sales of natural gas, refined products (such as gasoline, diesel fuel and liquefied petroleum gas)LPG) and petrochemical products; and
 
 •  other sources, including financial and investment income.
 
Our operating expenses include:
 
 •  costs of sales, including the cost of purchases of refined petroleum and other products, depreciation and amortization, salaries, wages and benefits, a portion of the cost of the reserve for labor obligations, the variation of inventories, maintenance, and exploration and non-successful drilling expenses;
 
 •  distribution expenses (including a portion of the cost of the reserve for labor obligations);
 
 •  administrative expenses (including a portion of the cost of the reserve for labor obligations); and
 
 •  interest expense.


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Our income is affected by a number of factors, including:
 
 •  changes in international prices of crude oil and refined petroleum products, which are denominated in U.S. dollars, and domestic prices of petroleum products, which are denominated in pesos;
 
 •  the type and volume of crude oil produced and exported;
 
 •  the type and volume of natural gas produced and sold;


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 •  the results of development and exploration activities;
 
 •  the amount of taxes and duties that the Mexican Government imposes on us;
 
 •  Mexican inflation;
 
 •  fluctuations in the peso-U.S. dollar exchange rate; and
 
 •  Mexican and global economic conditions, including the levels of international interest rates.
 
Overview
 
Our main objectives are to increase our operating efficiency, maintain our hydrocarbon production levels, modernize our infrastructure and improve Mexico’s hydrocarbon reserves replacement rate, while maintaining high health, safety and environmental standards.
 
In orderWe are currently working on 15 strategic initiatives to increasemodernize and improve our operating efficiency, weoperations. These strategic initiatives are seeking to optimizedivided into the utilization of our plants and pipelines, and to implement best practices in drilling, project management, procurement processes, corporate service management (including medical and telecom services) and in our compensation system.following four areas:
(1) Productivity, Efficiency and Project Management:  we seek to implement an integrated investment project management system to create operating efficiencies and to improve productivity levels.
(2) Physical and Industrial Safety and Environmental Protection:  we seek to strengthen the industrial safety and security measures in our facilities, modernize transportation through our pipelines and enhance our environmental protection activities.
(3) Accountability:  we seek to further develop our corporate governance, prevent corruption, improve administrative processes and promote transparency and accountability.
(4) Modernization, Globalization and Customer Service:  we seek to increase our capacity to acquire and assimilate new technologies, promote private investment activities in relation to our business, to the extent permitted by the Mexican Constitution, improve customer service and improve PEMEX’s position worldwide.
 
To maintain our hydrocarbon production, we have established aan exploration strategy for reservoirs located in mature and under-explored basins. Our objective is to take advantage of existing infrastructure and facilitate future discoveries. We expect exploration in under-explored basins to increase, especially in deep waters, where the Cantarell complexmajority of our prospective resources (55%) are located. Our exploration strategy reflects a portfolio of moderate and high-risk exploration opportunities. The volume to manage its future declinebe increased is mainly crude oil, which is significant and strategic for PEMEX. Our strategy seeks to maintain a competitive exploration cost, by combining lower volume opportunities in production levels. This strategy includes workovers, intensive maintenance, drillinglower risk mature basins with higher volume opportunities in higher risk exploratory basins and “plays” (a collection of horizontal wells and the installation of a nitrogen elimination plant as well as desalinization and water separation equipment.reservoirs with similar characteristics). In addition, we continue to focus our production efforts on projects such as Cantarell, Ku-Maloob-Zaap, Crudo Ligero Marino,Antonio J. Bermúdez, Jujo-Tecominoacán and Antonio J. Bermúdez,Chicontepec as well as natural gas projects such as Burgos and the Strategic Gas Program, including the development of the Veracruz basin.
 
We are also working to modernize our infrastructure. In 2006, these efforts included the installation of Mexico’s largest drilling platform, KU-S, in the Campeche Sound, as part of the Ku-Maloob-Zaap project. It has a production capacity of 259 thousand barrels per day and represents a U.S. $250 million investment. Moreover, cryogenic plants 3 and 4 started operations in the Burgos Gas Processing Center (Burgos GPC). The Burgos project also includes the construction of cryogenic plants 5 and 6. It is expected that sweet wet gas processing of the Burgos GPC will reach 1,200 million cubic feet per day by the end of 2008.
Improvements in the area of safety, health and environmental protection began 1011 years ago with the implementation of the PROSSPA and SIASPA management systems. However, during 20062005 both systems were integrated into Pemex—SSPA, as a result,SSPA. Following the integration, our accident frequency rate in 2006 decreased by 37% in 2006, to 0.67%0.7%, as compared with 2005.to 2005, and in 2007, it decreased by 11.9% to 0.6%, as compared to 2006. We


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will continue our efforts to improve facilities maintenance and safety procedures, as we are committed to carrying out all our operations in a manner that ensures the safety of our installations and personnel and that respects neighboring communities and the environment. See “Item 4—Information on the Company—Environmental Regulation—PEMEX’s Internal Monitoring” and “—Business Overview—Transportation and Distribution.”
 
We have been working on strengthening our accounting systems and during the second half of 2008, we expect to finish the implementation of the automatization of controls in our systems through a project called “Icono F”, which should improve PEMEX’s internal controls. In addition, we constituted an independent Audit Committee, which began operating in the first quarter of 2008. See “Item 6—Directors, Senior Management and Employees—Audit Committee.”
We are also working to modernize our infrastructure. In 2007, these efforts included the construction of the nitrogen recovery unit (NRU) in the Ciudad Pemex facility, the Maloob-C drilling platform, cryogenic plants 5 and 6 in the Burgos Gas Processing Center (GPC), the Emiliano Zapata compression station in the state of Veracruz, and the reconfiguration of the Minatitlán refinery. Moreover, PMI is currently implementing a customer service index, which provides us with feedback from customers in connection with nine activities such as response to inquiries on tanks, service quality and experience of operators, deliveries of products and accuracy and completeness of loading documents, among others. We receive from PMI’s customers a score per activity ranging from 1 to 5 and we compute an index based on the average score per activity that represents the level of client satisfaction, which is a useful measurement of our performance. As of the date of this report, we have recorded levels above 90%.
Our consolidated financial statements included herein are presented in constant pesos, so all financial information is restated in constant pesos as of December 31, 2006.2007. Unless otherwise indicated, all amounts included in “Item 5— Operating and Financial Review and Prospects” are presented in constant pesos as of December 31, 2006.2007.
 
We have reported significant losses in recent years; however, this trend was reversed in 2006 asyears. In 2007, we reported a net incomeloss of Ps. 45.318.3 billion, primarily explained by adue to an increase in taxes and duties of Ps. 56.872.5 billion IEPS tax credit, which is reflected in other revenuesand an increase in the income statement, by higher crude oil prices and by a reduction in total taxes and duties.cost of purchased products of Ps. 34.9 billion. We cannot predict whether we will report income or a loss for the 20072008 fiscal year. Excluding the IEPS tax credit, PEMEX would have shown a loss of Ps. 11.5 billion in 2006.
 
Our costs and operating expenses increased by 7.6% in 2006, as a result of a Ps. 27.3 billion increase in our cost of sales, a Ps. 1.2 billion increase in transportation and distribution expenses, and a Ps. 5.3 billion increase in administrative expenses. To reduce our losses in the future, we are undertaking a number of initiatives to increase our efficiency by introducing measures to reduce costs and expenses and increase our profitability.


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An important contribution to our net incomeresults in 2006 was the change in the tax regime applicable to Petróleos Mexicanos and the subsidiary entities effective as of January 1, 2006. As a result of the new fiscal regime, taxes and duties as a percentage of our total sales decreased from 63.9% in 2005 to 54.9% in 2006. The newHowever, this figure increased to 59.6% in 2007, primarily due to the increase in the costs of Pemex-Exploration and Production, which were above the cap on deductible costs established by the Ordinary Hydrocarbons Duty (OHD). Consequently, any cost increase above the current deductible limit will not imply any reduction of our tax base. On October 1, 2007, the tax regime together withwas further amended, effective January 1, 2008. As a result of the implementation of measureslatest changes, the OHD rate will increase to increase our profitability, should enhance our financial performance.74.0% in 2008 and decrease to 71.5% by 2012. However, the Mexican Congress has the power to enact further changes in federal tax law, and we cannot predict the extent or nature of any future changes, if any, to the federal hydrocarbon tax laws applicable to us.
 
In 2006, our equity increased by Ps. 67.970.5 billion, reversing our equity deficit of Ps. 28.029.0 billion as of December 31, 2005 to positive equity of Ps. 40.041.5 billion as of December 31, 2006. This increase was attributable primarily to the payment by the Mexican Government of Ps. 47.048.8 billion pursuant to the Federal Revenue Law and the increase in our net income. Our equity increased by Ps. 8.4 billion from Ps. 41.5 billion in 2006, to Ps. 49.9 billion in 2007, primarily due to a payment of Ps. 11.2 billion to PEMEX from the Fund for the Stabilization of Investment and Infrastructure and the Excess Revenues Fund, which was partially offset by a decrease in the equity effect of the labor reserve amounting to Ps. 3.4 billion. See “—Liquidity and Capital Resources.”
 
Our capital expenditures (both PIDIREGAS and non-PIDIREGAS) in 20062007 totaled Ps. 150.4Ps.136.9 billion (U.S. $13.8$12.6 billion), 87%84.4% of which was allocated to upstream activities and 13%15.6% to downstream activities.


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Critical Accounting Policies
 
Some of our accounting policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to a degree of uncertainty and are based on our historical experience, terms of existing contracts, management’s view of trends in the oil and gas industry, both internationally and within Mexico, economic factors in Mexico and information from outside sources. We believe the following critical accounting policies, among others, affect management’s judgments and estimates used in the preparation of our consolidated financial statements and could potentially impact our financial results and future financial performance.
 
Successful Efforts Method of Oil and Gas Accounting
 
We apply the successful efforts method of oil and gas accounting. This accounting principle requires that costs of drilling exploratory wells and exploratory-type stratigraphic test wells are initially capitalized and, if proved reserves are not discovered, the capitalized costs are later charged to expenses. Development costs, including the costs of drilling development wells and development-type stratigraphic test wells, are capitalized. The capitalized costs of wells and related equipment are amortized over proved developed reserves, as the related oil and gas reserves are extracted. Our reserve estimates are determined in accordance with earth science and petroleum engineering principles and practices in accordance withRule 4-10 ofRegulation S-X of the Securities Act and can vary as a result of changes in such factors as forecasted oil and gas prices, reservoir performance and oil field technology.
 
Downward revision of our reserve estimates can result in either: (a) higher depreciation and depletion expense per barrel in future periods, (b) an immediate write-down of an asset’s book value in accordance with accounting rules for the impairment of properties, or (c) changes in our accrual of the asset retirement obligation. An impairment of oil- and gas-producing fixed assets wouldwill result if the downward revisions wereare so significant that the estimated future cash flows from the remaining reserves in the field wereare insufficient to recover the unamortized capitalized costs. Conversely, if the oil and gas reserve quantities wereare revised upward, ourper-barrel depreciation and depletion expense wouldwill be lower.
 
The application of successful efforts accounting can also cause material fluctuations between periods in exploration expense if drilling results are different than expected or if we change our exploration and development plans. The determination that exploratory drilling was unsuccessful in finding economically producible reserves requires the immediate expensing of previously capitalized drilling costs. We make semi-annual assessments of the amounts included within fixed assets to determine whether capitalization is initially appropriate and can continue. Exploration wells capitalized beyond 12 months are subject to additional judgment as to whether the facts and circumstances have changed and therefore whether the conditions described in clauses (a) and (b) below no longer apply. Exploration wells more than 12 months old are expensed unless (a) (i) they are in an area requiring major capital expenditure before production can begin, (ii) commercially productive quantities of reserves have been found, and (iii) they are subject to further


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exploration or appraisal activity in that either drilling of additional exploratory wells is under way or firmly planned for the near future, or (b) proved reserves are recorded within 12 months following the completion of exploratory drilling.
 
Environmental Remediation, Asset Retirement Obligations
 
We also make judgments and estimates in recording liabilities for environmental cleanup and asset retirement obligations. Estimated liabilities for environmental remediation and asset retirement obligations are subject to change as a result of changes in laws, regulations and their interpretation, the review of additional information on the extent and nature of site contamination, the determination of additional works which need to be undertaken, improvements in technology, the nature and timing of expenditure, foreign currency exchange rates to the extent that some of these costs are incurred in U.S. dollars, and changes in discount rates. In addition, with respect to offshore properties, our historical dismantlement and plugging experiences have been very limited, and, therefore, our estimates of the expected cost or salvage value may vary from


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what will actually be incurred for many of these long-term properties when these activities are ultimately undertaken.
 
While we believe that our environmental remediation and asset retirement obligation provisions are adequate as well as the interpretations applied of existing law are appropriate, the amounts estimated for future liabilities, which are based on discounted cash flows, may differ materially from the costs that will actually be incurred to remediate our properties. If we determine that an insufficient environmental remediation or asset retirement obligation provision has been created,is insufficient, earnings will be adjusted accordingly in the period in which the determination is made.
 
Employee Benefit Plans
 
We provide a range of benefits to our current and retired employees, including pensions, post-retirement health care benefits and post-employment benefits (primarily health services and supplemental payments). We annually record amounts relating to these plans based on calculations which include various actuarial assumptions, such as real discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and modify them based on current rates and trends when it is deemed appropriate to do so. As required by Mexican and U.S. GAAP, the effect of the modifications is generally recorded or amortized over future periods. We believe that the assumptions used in recording our obligations under our plans, which are presented in Notes 1112 and 20 II e.21 II(e) and f.(f) to our consolidated financial statements, are reasonable based on our experience and on the advice of our independent actuaries.
 
Financial Instruments
 
Under Mexican FRS, effective January 1, 2005, we adopted the provisions ofBulletin C-10, “Derivative Financial Instruments and Hedging Operations” (which we refer to asBulletin C-10), which provides expanded guidance for the recognition, valuation, accounting treatment and disclosures applicable to derivative financial instruments including hedges and embedded derivatives.Bulletin C-10 requires that all financial instruments, with the exception of “held to maturity” investments, be recorded at fair value. Held to maturity investments are recorded at amortized cost subject to an impairment review.
 
Quoted market prices for certain derivatives used by us are not readily available. We have calculated the fair value of these derivatives using common market valuation methods and value-influencing market data at the relevant respective balance sheet dates.
 
The use of valuation models requires us to make assumptions and estimates regarding the volatility of derivative contracts at the balance sheet dates, and actual results could differ significantly due to fluctuations in value-influencing market data. The valuation models for our interest rate and currency derivatives are based on calculations and valuations using a group-wide financial reporting system, which provides consistent market data and valuation algorithms throughout our organization. The algorithms used to obtain valuations are those which are commonly used in the financial markets. In certain cases, the calculated fair value of derivatives is


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compared with results which are produced by other market participants, including banks, as well as those available through other internally available systems. The valuations of commodity instruments are also made utilizing common valuation techniques.
 
Through internal guidelines (i.e., group-wide financial guidelines), we ensure that the derivatives used for risk management purposes are only used to hedge recorded, contracted or planned underlying transactions. We calculate and assess market risks in accordance with the policies outlined in “Item 11—Quantitative and Qualitative Disclosures about Market Risk.”
 
Contracts providing for physical delivery in Mexico are currently accounted for as contracts with no derivative components, because no sufficient natural gas market mechanism or spot market exists in Mexico so as to allow us to classify gas as readily convertible to cash. In the future, it is possible that a sufficient market mechanism or spot market for natural gas could emerge, resulting in a need to reassess the Mexican contracts for derivatives under SFAS No. 133. If any such reassessment results in contracts being accounted for as


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derivatives under SFAS No. 133, the impact on future operating results would not be significant, because these contracts qualify for the normal purchases and normal sales exceptions.
 
Impairment of Long-Lived Assets
 
In addition to our oil and gas assets that could become impaired under the application of successful efforts accounting, other long-lived assets could become impaired and require write-down if circumstances warrant. Conditions that could cause our assets to become impaired include lower than forecasted commodity sales prices, changes in our business plans and plant modernizations, or a significant adverse change in the national or international business climate. The amount of an impairment charge would be based on estimates of an asset’s fair value compared with its book value. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding projected commodity sales prices, production and overhead costs and foreign currency exchange rates and inflation could materially affect the anticipated cash flows to be generated by long-lived assets, thereby affecting the evaluations of the carrying values of those long-lived assets.
 
Accounting for Income Taxes
 
As described in Note 1718 to our consolidated financial statements, a new fiscal regime became applicable to Petróleos Mexicanos and the subsidiary entities on January 1, 2006.2006 and amendments to the fiscal regime became applicable to Pemex-Exploration and Production became effective on January 1, 2008. In addition, PMI and PMI North America,Norteamérica, S.A. de C.V. (PMI NASA) are subject to the tax regime applicable to all other Mexican corporations. In general, Mexican companies are taxed based on pre-tax income at a statutory rate.
 
As a consequence of the new tax regime applicable to Petróleos Mexicanos and its subsidiary entities, and in accordance with Mexican FRS, in the preparation of our consolidated financial statements, Petróleos Mexicanos and the subsidiary entities (except Pemex-Exploration and Production) are required to estimate taxable income and the period over which deferred tax assets will be recoverable. This process involves an estimation of our actual current tax and an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include a charge against the tax provision in the statement of operations.
 
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax asset. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax asset will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.


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Inflation Accounting
These policies, together with the rest of our significant accounting policies, are more fully described in Notes 23 and 2019 to our consolidated financial statements included herein.
 
Sales Volumes and Prices
 
The profitability of our operations in any particular accounting period is directly related to the sales volume of, and average realized prices for, the crude oil and natural gas that we sell. The average realized prices for crude oil and natural gas fluctuate from one period to another due to world market conditions and other factors.


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Export Volumes and Prices
 
Pemex-Exploration and Production sells crude oil to PMI, which then sells it to international clients. The volume of crude oil that we export is the volume delivered to international clients as adjusted for water content according to the bill of lading and standard market practice. We base ourPMI bases crude oil export price formulas on a basket of international reference prices and a constant set according to specific market conditions. We determine export prices of petroleum products and natural gas by reference to market conditions and direct negotiations with our clients.
 
Significant changes in international crude oil prices directly affect our financial results. The impact of changes in crude oil prices on our refining activities and petrochemicals business depends on:
 
 •  the magnitude of the change in crude oil prices;
 
 •  how quickly petroleum and petrochemical product prices in international markets adjust to reflect changes in crude oil prices; and
 
 •  the extent to which prices in Mexico, where we sell most of our petroleum products and petrochemicals, reflect international prices for those products.
 
The following table sets forth the weighted average price per barrel of crude oil that PMI received from exports to international customers and the average price of its benchmark, West Texas Intermediate crude oil, for the years indicated. Note that the average prices of West Texas Intermediate crude oil are higher than the average prices of crude oil that we export. This is primarily due to the higher cost of refining sour crude oils, which make up a majority of our exports. See “Item 4—Information on the Company—Business Overview—International Trading.”
 
                                        
 Year Ended December 31,  Year Ended December 31,
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007
 (in dollars per barrel)    (in dollars per barrel)  
West Texas Intermediate crude oil average price $26.16  $31.10  $41.49  $56.59  $66.04  U.S. $31.06  U.S. $41.49  U.S. $56.59  U.S. $66.04  U.S. $72.20 
PEMEX crude oil weighted average export price  21.52   24.78   31.05   42.71   53.04   24.78   31.05   42.71   53.04   61.64 
 
 
Note: The numbers in this table are daily average prices for the full year. Spot prices at year end are different. On June 29, 2007,25, 2008, the spot price for West Texas Intermediate crude oil was U.S. $70.33$133.97 per barrel and the spot price for the PEMEX crude oil basket was an estimated U.S. $61.60$116.36 per barrel.
Sources: PMI operating statistics which are based on information in bills of lading, and Platt’s U.S. Market Scan (McGraw-Hill Company).
 
Domestic Prices
 
CommitteesThe formulas used to determine prices for crude oil, petroleum and petrochemical products sold in the domestic market are determined by the SHCP, in accordance with the Federal Public Administration Organic Law, theLey de Planeaciónand theReglamento Interiorof the SHCP. The SHCP receives the input from PEMEX and other governmental agencies through committees composed of officials of Petróleos Mexicanos, and the subsidiary entities, some of its subsidiary companies and representatives of various governmental agencies including, among others, the Ministry of Finance and Public Credit,SHCP, the Ministry of Energy, SFP and the Ministry of Economy set the formulas that we use to determine prices for crude oil and petroleum products sold in the domestic market. Petróleos Mexicanos and the subsidiary entities, together with the Mexican Government, pursue a policy that keeps domesticEconomy. The SHCP determines wholesale prices generally in line


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with international prices. We determine wholesale prices by reference tobased on opportunity cost, which considers international prices, but makeand makes adjustments to reflect opportunity costs, transportation expenses and differences in the quality of our products relative to international benchmarks. The retail price is comprised ofdetermined based on the wholesale price plus the value added tax, the retailer’s margin and freight costs. The Ministry of FinanceSHCP adjusts prices for petroleum and Public Credit determines retail prices of gasoline and diesel beforepetrochemical products sold in the beginning of each fiscal year in conjunction with the preparation of the Mexican Government’s budget for that year. The Ministry of Finance and Public Credit also adjusts gasoline and diesel pricesdomestic market, so that they are consistent with the Mexican Government’s macroeconomic targets.
Our retail prices for gasoline and diesel reflect the addition of the IEPS tax as described below, as well as the value added tax. We charge the IEPS tax only on gasoline and diesel. See “—IEPS Tax, Excess Gains Duty, Hydrocarbon Duties and Other Taxes” below, for a further discussion of the IEPS tax. For financial statement purposes, the IEPS tax, when due to the Mexican Government, is presented as part of net domestic sales and then deducted after “Income before hydrocarbon extraction duties and other, special tax on production and services, and cumulative effect of adoption of new accounting standards.” From the end of 2005 and through the end of 2006, the IEPS tax rate was negative, and therefore was not reflected as part of net domestic sales. In 2006 (but not in 2005), we received a tax credit equal to the amount of negative IEPS taxes, which is reflected in our income statement under “other revenues.”
Natural gas prices for domestic sale are calculated according to the Energy Regulatory Commission directives published on March 20, 1996. These prices reflect natural gas opportunity costs and competitive conditions in international markets and at the point of sale.
In addition, our maximum prices on first-hand and end-user sales of LPG and on first-hand and end-user sales of natural gas for industrial use and to local distribution companies have been and, in the case of LPG, are currently subject to limitations and adjustments by the Mexican Government, pursuant to two executive pricing decrees issued by former President Fox on February 27, 2003 and September 12, 2005 and by President Calderón on January 1, 2007. See “Item 4—Information on the Company—Business Overview—Refining—Pricing Decrees” and “—Gas and Basic Petrochemicals—Pricing Decrees.”


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The following table compares the average prices in nominal terms of petroleum products in Mexico and in the United States for the years indicated.
 
                                                                                
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007 
 Mexico U.S. Mexico U.S. Mexico U.S. Mexico U.S. Mexico U.S.  Mexico U.S. Mexico U.S. Mexico U.S. Mexico U.S. Mexico U.S. 
Oil Products
                                                                                
Unleaded regular gasoline(1)
 $94.70  $53.92  $87.79  $60.94  $86.48  $72.39  $92.45  $92.42  $96.46  $104.10  $87.79  $60.94  $86.48  $72.39  $92.45  $92.42  $96.46  $104.10  $100.59  $110.15 
Premium gasoline(1)
  106.32   61.68   98.55   68.78   101.17   80.38   109.31   100.67   114.64   112.62   98.55   68.78   101.17   80.38   109.31   100.67   114.64   112.62   124.00   119.95 
Diesel(1)
  72.80   61.50   71.72   72.93   76.55   99.51   79.47   111.18   85.09   118.44 
Jet fuel(2)
  30.11   28.96   36.30   34.87   47.92   48.49   71.69   72.04   81.31   80.91   36.30   34.87   47.92   48.49   71.59   72.04   81.31   80.91   88.93   89.56 
Kerosene(3)
  78.50   30.23   72.80   36.68   71.72   50.76   76.55   72.87   79.37   83.81   72.80   36.68   71.72   50.76   76.55   72.87   79.37   83.67   85.10   91.13 
Natural Gas(4)                                        
Industrial  3.15   3.99   5.31   5.81   6.09   6.41   7.88   8.58   6.67   7.83 
Natural Gas(4) Industrial  5.31   5.81   6.09   6.41   7.88   8.58   6.67   7.81   6.62   7.57 
Residential  5.65   8.45   7.62   10.63   9.58   12.03   11.75   14.78   11.22   13.99   7.62   10.63   9.58   12.03   11.75   14.78   11.22   13.99   11.86   14.04 
Selected Petrochemicals
                                                                                
Ammonia(5)
  133.74   127.47   237.03   205.36   272.48   250.68   324.26   288.87   305.53   282.16   237.03   205.36   272.48   250.68   324.26   288.87   305.53   282.17   310.76   301.95 
Polyethylene L.D.(6)
  735.36   1,013.47   948.07   1,286.82   1,221.15   1,504.37   1,542.75   1,510.54   1,504.40   1,509.98   948.08   1,286.83   1,221.15   1,504.20   1,542.74   1,721.57   1,504.40   1,509.98   1,593.26   1,345.93 
Polyethylene H.D.(7)
  699.51   947.90   824.85   1,187.97   978.44   1,364.33   1,352.19   1,552.94   1,504.53   1,463.60   824.86   1,187.98   978.44   1,364.33   1,352.18   1,552.94   1,504.53   1,463.60   1,485.02   1,270.69 
Styrene(8)
  757.67   701.30   885.89   873.94   1,297.79   1,231.44   1,419.03   1,360.48   1,475.00   1,358.50   885.89   873.94   1,297.79   1,231.44   1,419.03   1,360.49   1,475.00   1,358.50   1,575.75   1,426.84 
 
 
(1)In U.S. dollars per barrel. Prices to final consumers including taxes. Premium price in Mexico City. U.S. prices for Houston, Texas.
Sources: Pemex-Refining and Lundberg Retail Price Survey (Lundberg Survey Inc.).
 
(2)In U.S. dollars per barrel. Mexican prices at the gate of the refineries. U.S. spot prices in Houston, Texas (Jet Fuel Gulf Coast Waterborne).
Sources: Pemex-Refining and Platt’s U.S. Market Scan (McGraw-Hill Company).
 
(3)In U.S. dollars per barrel. In both countries, prices to final consumers. Mexico prices include taxes, while U.S. prices exclude them.
Sources: Pemex-Refining and Petroleum Marketing Monthly published by the Energy Information Administration (DOE) (Kerosene Type Jet Fuel, end users).


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(4)In U.S. dollars per thousand cubic feet. Prices excludeExcluding taxes. Industrial natural gas prices are for Mexico City and surrounding areas. Industrial pricesareas, and correspond to nomination of additional volumes under contractrequested with prior notification, which is required only one day in advance. Residential prices for 2003 and 2007 are nationally weighted; from 2004 to the supplier. Until 2003, residential prices were nationally weighted and since 2004, residential2006 prices are for the sector to which Mexico City belongs. ResidentialCity. These prices reflectreflects the specific cost of transportation and distribution in thatthe relevant area. U.S.U.S prices arerepresent national average industrial prices and Texas residential prices.
 
Sources: Pemex-Gas and Basic Petrochemicals, Energy Regulatory Commission (CRE) and Petroleum Marketing Monthly published by the Energy Information Administration (DOE).
 
(5)In U.S. dollars per ton. Prices exclude taxes. Mexico wholesale prices to contract users at Cosoleacaque petrochemical plant. U.S. spotPetrochemical Plant. Spot prices in Tampa, Florida.for the Caribbean.
 
Sources: Pemex-Petrochemicals,Pemex-Petrochemical and Fertecon Weekly Ammonia Fax (Fertecon Limited) and Fertilizer Market Bulletin (FMB Consultants Ltd.).
 
(6)In U.S. dollars per ton. LPDE filmPX 20020 P quality. Prices exclude taxes. Mexico prices to spot consumers. U.S. export prices aresince June 2006 and U.S. domestic contract average.prices for previous years.
 
Sources: Pemex-Petrochemicals and ICIS-LOR (Icis-Lor Group Ltd.).ICIS-Pricing.
 
(7)In U.S. dollars per ton. Block moldingPADMEX 65050 quality. Prices exclude taxes. Mexico prices to spot consumers. U.S. export prices aresince June 2006 and U.S. domestic contract average.
prices for previous years.Sources: Pemex-Petrochemicals and ICIS-LOR (Icis-Lor Group Ltd.).ICIS-Pricing.
 
(8)In U.S. dollars per ton. Prices exclude taxes. Mexico prices to spot consumers. U.S. prices are average of contract and spot prices.
Sources: Pemex-Petrochemicals and ICIS-LOR (Icis-Lor Group Ltd.).ICIS-Pricing.


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IEPS Tax, Hydrocarbon Duties and Other Taxes
 
The following table sets forth the taxes and duties that we recorded for each of the past three years.
 
                        
 Year ended December 31,(1)  Year ended December 31,(1) 
 2004 2005 2006  2005 2006 2007 
 (in millions of constant pesos as of
  (in millions of constant pesos as of
 
 December 31, 2006)  December 31, 2007) 
Taxes and duties:                        
Hydrocarbon extraction duties and others  Ps. 412,208   Ps. 518,571   Ps. 565,754   Ps. 538,064   Ps. 587,021   Ps. 667,999 
Excess gains duties  36,980   58,665   7,926   60,870   8,224   — 
Hydrocarbon income tax  —   2,058   4,737   2,135   4,915   6,031 
Income tax  2,001   3,837   4,438   3,981   4,605   3,226 
Special tax on production and services(2)
  58,819   21,033   —   21,824   —   — 
              
Total  Ps. 510,009   Ps. 604,164   Ps. 582,855   Ps. 626,874   Ps. 604,765   Ps. 677,256 
              
 
Note: For a description of these taxes and duties, see “Item 4—Information on the Company—Taxes and Duties.”
 
 (1) The amounts are expressed in millions of constant pesos as of December 31, 2006,2007, and do not represent the amount in nominal terms effectively paid to the corresponding tax authorities.
 
 (2) During 2006 and 2007, no IEPS tax was generated due to negative IEPS tax rates, as explained below.
Source: PEMEX’s financial statements.
 
The IEPS tax ensures that Pemex-Refining retains the portion of our sales revenues that represents the adjusted international reference prices of our products, and the Mexican Government receives the difference between the domestic retail prices, which are prices that are set by the Mexican Government based on target rates of inflation, and the adjusted international reference prices of diesel and gasoline.


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Our retail prices for gasoline and diesel reflect the addition of the IEPS tax as described below, as well as the value added tax. We charge the IEPS tax only on gasoline and diesel. See “—IEPS Tax, Excess Gains Duty, Hydrocarbon Duties and Other Taxes” below, for a further discussion of the IEPS tax.
For financial statement purposes, the IEPS tax, when due to the Mexican Government, is presented as part of net domestic sales and then deducted after “Income before hydrocarbon extraction duties.” From the end of 2005 and through the end of 2007, the IEPS tax rate was negative, and therefore was not reflected as part of net domestic sales. In both 2007 and 2006 (but not in 2005), we received a tax credit equal to the amount of negative IEPS taxes, which is reflected in our income statement under “other revenues.”
The SHCP determines retail prices of gasoline and diesel before the beginning of each fiscal year in conjunction with the preparation of the Mexican Government’s budget for that year.
For automotive fuels, the IEPS tax is equal to (a) the retail price at which Pemex-Refining sells gasoline and automotive diesel are sold to retailers less (b) value-added tax, less (c) Pemex-Refining’s wholesale price, value added taxless (d) freight to gas stations and distribution costs.less (e) retailer’s margin.
 
(GRAPH)(FLOWCHART)


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When international prices increase, our wholesale price will increase and, as a result, the IEPS tax that we collect from consumers and transfer to the Mexican Government will decrease.decrease, since the retail price of gasoline and diesel is fixed.
 
Since mid-2005, the retail prices of gasoline and diesel have been less than the sum of Pemex-Refining’s wholesale price, the value-added tax, the freight to the gas station and the retailer’s margin, which has generated a “negative” IEPS tax rate. In 2005, PEMEX did not receive any benefit from the negative IEPS tax rate. In 2006, however, the Federal Revenue Law established that PEMEX was permitted to credit negative IEPS taxes against its IEPS tax liability. Any remaining surplus could then be credited first to its value added tax liability and second to ordinary hydrocarbon duties. The IEPS tax credits are recorded in our income statement under “other revenues.” In 2006,2007, we were permitted to credit Ps. 56.872.1 billion of negative IEPS tax, of which we credited Ps. 4457.3 billion against our IEPS tax and value added tax liabilities. The surplus was credited against the Ordinary Hydrocarbons Duty.
 
Relation to the Mexican Government
 
Petróleos Mexicanos and the subsidiary entities were created as decentralized public entities of the Mexican Government, rather than as Mexican corporations. Therefore, we do not have the power to issue shares of equity securities evidencing ownership interests and are not required, unlike Mexican corporations, to have multiple shareholders. The Mexican Government closely regulates and supervises our operations. Mexican Government secretaries control key executive decisions at PEMEX. The Secretary of the Ministry of Energy is the Chairperson of the Board of Directors of Petróleos Mexicanos. The SFP designates Petróleos Mexicanos’ three independent audit committee members. In addition, the SFP appoints Petróleos Mexicanos and the subsidiary entities’ external auditors.
 
The Mexican Government incorporates the annual budget and financing program of Petróleos Mexicanos and the subsidiary entities into its consolidated annual budget, which it submits to the Mexican Congress for its approval. The Mexican Congress also designates certain of our largest capital expenditures as PIDIREGAS. See “Item 4—Information on the Company—History and Development—Capital Expenditures and Investments.”
 
Inflation
 
Mexico experienced high inflation during the 1980s. The annual rate of inflation (as measured by the change in the NCPI) decreased from a high of 159.2% in 1987 to 11.9% in 1992, 8.0% in 1993 and 7.1% in 1994. However, the economic events that followed the devaluation of the peso against the U.S. dollar in late 1994 and 1995, and turbulence in international financial markets, caused inflation to increase to 52.0% in 1995. After 1995, inflation decreased to 27.7% in 1996 and 15.7% in 1997. The annual inflation rate was 5.7% in 2002, 4.0% in 2003, 5.2% in 2004, 3.3% in 2005, 4.1% in 2006 and 4.05%3.8% in 2006.2007.
 
Mexican inflation has affected our consolidated financial statements in the following ways:
 
 •  Each year, we adjusthave adjusted the value of certain of our fixed assets, materials and spare parts on our balance sheet to reflect the effects of inflation. This revaluation will increasehas increased our assets in periods of high inflation. When we revaluehave revalued fixed assets and inventories to reflect


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the effects of inflation, our subsequent depreciation and cost of sales charges will increase,have increased, reducing our income. The higher carrying value has further exposesexposed us to subsequent impairment charges. Beginning in 2003, we revaluehave revalued all of our fixed assets using the NCPI.NCPI in a comprehensive manner. See Note 2h.3i. to our consolidated financial statements.
 •  Until December 31, 2007, Mexican FRS requiresrequired that financial statements recognize the effects of inflation in accordance withBulletin B-10. A component of inflation accounting which is not reflected in historical based accounting is the recognition of a gain or loss on monetary position, which is included in the income statement as a component of comprehensive financing cost. The gain or loss on monetary position captures the impact of purchasing power fluctuations on monetary assets and liabilities. To the extent that we have had a net monetary liability position,


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the income statement will reflectreflected a monetary gain as measured by the change in the NCPI. To the extent that we have had a net monetary asset position, the income statement will reflectreflected a monetary loss as measured by the change in the NCPI.
Beginning January 1, 2008, we adopted FRS B-10 “Effects of Inflation” which supersedesBulletin B-10 and its five amendments, as well as the related circulars andInterpretación de las Normas de Información Financiera (Interpretation of Financial Reporting Standards or INIF) No. 2. The principal guidelines established by this FRS are:
•  the change in the value ofunidades de inversión(UDIs) may be used to determine the inflation for a given period;
•  the election to use inventory replacement costs as well as specific indexation for fixed assets is eliminated;
•  an entity is only required to recognize the effects of inflation when operating in an inflationary economic environment (i.e.accumulated inflation equal to or higher than 26% in the most recent three-year period); and
•  the accounts of (1) gain or loss from holding non-monetary assets (RETANM), (2) monetary position gains or losses (REPOMO), and (3) deficit/excess in equity restatement will be reclassified to retained earnings, when their unrealized portion is not identified.
In addition, beginning in 2008, comparisons of financial results of different years will be presented in nominal, and not in constant, terms.
We have estimated that the initial effects deriving from this change to FRS would imply a Ps. 178.2 billion charge to results from prior years and a credit in the restatement of equity in the same amount. However, we do not believe the income statement, assets, liabilities and the balance sheet will be affected. See “—Recently Issued Accounting Standards.”
 
Consolidation
 
The financial statements consolidate the results of Petróleos Mexicanos, the subsidiary entities and the subsidiary companies. Certain non-material subsidiary companies are not consolidated and are accounted for under either the cost method or the equity method. For a list of the consolidated subsidiary companies, see Note 2c.3b. to our consolidated financial statements. As described in Note 2c.3b., we began consolidating Pemex Finance, Ltd., for Mexican FRS purposes, in 2005. For U.S. GAAP purposes, Pemex Finance, Ltd. has been consolidated historically.
 
Export Agreements
 
On March 29, 2000, OPEC, excluding Iran, agreed to increase its crude oil production by 1,450 thousand barrels per day.Even though Mexico which is not a member of OPEC, announced on March 29, 2000, that it would increase its exports of crude oil by 150 thousand barrels per day, beginning in April 2000. On June 21, 2000, the Ministry of Energy announced an additional increase in crude oil exports of 75 thousand barrels per day, beginning in July 2000.
Following OPEC’s announcement in January 2001 that it would reduce crude oil production by 1.5 million barrels per day, Mexico announced it would decrease its crude oil exports by 75 thousand barrels per day, beginning on February 1, 2001. Following a March 2001 announcement by OPEC of an additional 1.0 million barrel per day reduction in crude oil production, on March 25, 2001, Mexico announced a further reduction in crude oil exports of 40 thousand barrels per day, beginning on April 1, 2001. On July 24, 2001, Mexico announced that it would reduce its crude oil exports by an additional 70 thousand barrels per day, beginning on September 1, 2001.
Following OPEC’s announcement that it would reduce crude oil production by 1.5 million barrels per day, on January 2, 2002, Mexico announced it would decrease its crude oil exports by 100 thousand barrels per day, to 1.66 million barrels per day, for six months beginning on January 1, 2002. Mexico maintained that level of exports throughout 2002.
In January 2003, as a result of increasing market demand, Mexico agreed to increase its crude oil exports by 100 thousand barrels per day to a level of 1.76 million barrels per day. In February 2003, in light of the loss of more than 2 million barrels per day of Venezuelan crude oil, Mexico announced a further 120 thousand barrel per day increase in its crude oil export to a level of 1.88 million barrels per day. In September 2003, OPEC announced that it would cut crude oil production by 900 thousand barrels per day beginning November 1, 2003. Following this announcement, Mexico announced that it expected to maintain its crude oil exports at their present levels.
In March 2004, OPEC announced that it would cut crude oil production by one million barrels per day beginning April 1, 2004. In June 2004, OPEC announced that it would increase crude oil production by


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500 thousand barrels per day beginning August 1, 2004. In September 2004, OPEC announced that it would increase crude oil production by 1 million barrels per day beginning November 1, 2004.
In March 2005, OPEC announced an additional 500 thousand barrels per day increase in the ceiling to 27.5 million barrels per day in viewpast, following OPEC announcements of the expectationproduction cuts and increases of another year of strong global oil demand. In June 2005, OPEC announced that it would increase crude oil production, by 500 thousand barrels per day beginning July 1, 2005. In September 2005, OPEC announced that it would make available to the market its members’ spare capacity of around 2 million barrels per day for a period of three months, starting October 1, 2005,and in order to maintain oil market stability. The current oil production ceiling of 28.0 million barrels per daystability, Mexico has since been maintained.
OPEC members met during the first week of June 2006announced increases and decreases in Venezuela and decided to leave oil production levels unchanged despite current high crude oil prices, since crude oil stocks levels are above average in the U.S. and markets are considered to be well supplied. In October 2006, OPEC met in Doha and decided to cut production to 26.3 million barrels per day. In November 2006, OPEC reduced the oil production ceiling of 28 million barrels per day by 1.2 million barrels per day and in February 2007 OPEC cut another 500 thousand barrels per day. OPEC members met on March 15, 2007 and left quotas unchanged since they considered the market to be well supplied and because crude oil stock levels were above average in the United States. Mexico’s crude oil exports for 2006 averaged 1,793 thousand barrels per day.in connection with increases or decreases of crude oil production by other oil producing countries. However, since 2004, PEMEX has not changed its export levels as a result of announcements by OPEC. As of the date of this report, Mexico has not announced any revisions to its current level of crude oil exports of 1,703 thousand1.55 million barrels per day as a result of thesethe latest announcements by OPEC, and we do not have any reason to believe that Mexico has no plansany plan to change itsPEMEX’s current level of crude oil exports.
 
Results of Operations of Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies—For the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Sales
Total sales increased by 2.9%, from Ps. 1,103.5 billion in 2006 to Ps. 1,136.0 billion in 2007. This increase resulted primarily from a 4.4% increase in domestic sales, from Ps. 567.3 billion in 2006 to


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Ps. 592.0 billion in 2007, due to increased unit prices and higher volumes of sales, mainly of petroleum products. In addition, total sales also increased due to a 1.5% increase in export sales, from Ps. 535.1 billion in 2006 to Ps. 542.9 billion in 2007, due to higher crude oil prices.
Domestic Sales
Domestic sales increased by 4.4% in 2007, from Ps. 567.3 billion in 2006 to Ps. 592.0 billion in 2007, due to increased prices and volumes of sales of principal petroleum and petrochemicals products. Domestic sales of petroleum and petrochemical products increased by 5.0% in 2007, from Ps. 460.8 billion in 2006 to Ps.484.1 billion in 2007, primarily due to increases in the average domestic sales prices and a 3.1% increase in the sales volumes of petroleum products. The 3.1% increase in the sales volumes of petroleum products, from 1,762 thousand barrels per day in 2006 to 1,816 thousand barrels per day in 2007, was primarily due to the increase in sales of gasoline and diesel. Domestic petrochemical sales (including sales of certain by-products of the petrochemical production process) increased by 0.4%, from Ps. 25.5 billion in 2006 to Ps. 25.6 billion in 2007, due to an increase in the domestic sales of some of the products manufactured by Pemex-Petrochemicals, such as polyethylenes and monoethylene glycol. Sales of natural gas increased by 1.7% in 2007, from Ps. 80.9 billion in 2006 to Ps. 82.3 billion in 2007, as a result of an increase in average prices.
Export Sales
Export sales increased by 1.5% in peso terms in 2007, from Ps. 535.1 billion in 2006 to Ps. 542.9 billion in 2007. Excluding the trading activities of the PMI Group (in order to show only the amount of export sales related to the subsidiary entities), export sales by the subsidiary entities to the PMI Group and third parties increased by 5.3% in peso terms, from Ps. 449.8 billion in 2006 to Ps. 473.7 billion in 2007. In dollar terms, excluding the trading activities of the PMI Group, export sales (which are dollar-denominated) increased by 9.8% in 2007, from U.S. $38.8 billion in 2006 to U.S. $42.6 billion in 2007. This increase was mainly a result of increased oil export prices. The trading and export activities of the PMI Group generated additional marginal revenues of Ps. 69.2 billion in 2007, 18.9% lower in peso terms than the Ps. 85.3 billion of additional revenues generated in 2006, mainly due to a 6.0% decrease in the volume of exports due to a decline in production of the Cantarell field and the closing of some facilities due to adverse weather conditions. The weighted average price per barrel of crude oil that the PMI Group sold to third parties in 2007 was U.S. $61.64, 16.2% higher than the weighted average price of U.S. $53.04 in 2006.
Export crude oil sales by Pemex-Exploration and Production to PMI accounted for 89.0% of export sales (excluding the trading activities of the PMI Group) in 2007, as compared to 89.8% in 2006. These crude oil sales increased in peso terms by 4.4% in 2007, from Ps. 403.9 billion in 2006 to Ps. 421.7 billion in 2007, and increased in dollar terms by 8.9% in 2007, from U.S. $34.8 billion in 2006 to U.S. $37.9 billion in 2007. The weighted average price per barrel of crude oil that Pemex-Exploration and Production sold to PMI for export in 2007 was U.S. $61.57, 15.7% higher than the weighted average price of U.S. $53.20 in 2006. The volume of crude oil exports decreased by 6.0%, from 1,793 thousand barrels per day in 2006 to 1,686 thousand barrels per day in 2007, mainly as a consequence of production shut downs due to adverse weather conditions.
Export sales of petroleum products by Pemex-Refining and Pemex-Gas and Basic Petrochemicals to the PMI Group and third parties, including natural gas liquids, increased from 9.4% of export sales (excluding the trading activities of the PMI Group) in 2006 to 10.5% of those export sales in 2007. Export sales of petroleum products, including natural gas liquids, increased by 16.3%, from Ps. 42.4 billion in 2006 to Ps. 49.3 billion in 2007, primarily due to an increase in export prices of petroleum products and in sales volume. In dollar terms, export sales of petroleum products, including natural gas liquids, increased by 22.2%, from U.S. $3.6 billion in 2006 to U.S. $4.4 billion in 2007. Export sales of natural gas increased by Ps. 3.3 billion, from Ps. 0.8 billion in 2006 to Ps. 4.1 billion in 2007. This increase was mainly due to an increase in natural gas production.


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Petrochemical products accounted for the remainder of export sales in 2006 and 2007. Export sales of petrochemical products (including certain by-products of the petrochemical process) decreased by 23.5%, from Ps. 3.4 billion in 2006 to Ps. 2.6 billion in 2007, primarily due to a 68.7% decrease in the sales volume of benzene and ethylene exports. This decrease was primarily due to (i) in the case of ethylene, the end of the obligation to fulfill export deliveries, and (ii) in the case of benzene, the styrene plant (which uses benzene for its production process) being partially out of operation. In dollar terms, export sales of petrochemical products (including certain by-products of the petrochemical process) decreased by 24.6% in 2007, from U.S. $288.5 million in 2006 to U.S. $217.4 million in 2007.
Services Income
In 2006 and 2007, services income amounted to Ps. 1.1 billion. Services income relates, mainly, to revenues obtained by Kot AG, from reinsurance premiums. There was no meaningful change of services income in 2007 compared to 2006.
Costs of Sales and General Expenses
Costs of sales, transportation, distribution expenses and administrative expenses increased by 9.3%, from Ps. 499.2 billion in 2006 to Ps. 545.6 billion in 2007. This increase was mainly due to greater product purchases, principally petroleum products such as gasoline, diesel and liquefied gas, and an increase in the charges to cost of the reserve for labor obligations, partially offset by a decrease in PEMEX subsidiary companies’ cost of sales and the inventory products favorable fluctuation.
Due to existing price controls imposed by the Mexican Government on gasoline, diesel and LPG products sold in the domestic market, in 2007, we were not able to pass on all of the increases in the prices of our product purchases to our retail customers in Mexico.
Other Revenues (principally IEPS benefit), net
Other revenues, net, increased by 35.6%, from Ps. 61.2 billion in 2006 to Ps. 83.0 billion in 2007, primarily due to an increase in revenues resulting from higher negative rates of the IEPS tax in 2007 as compared to 2006. As a result, PEMEX recognized revenues from the IEPS benefit for Ps. 72.1 billion and Ps. 57.3 billion in 2007 and 2006, respectively.
Comprehensive Financing Result
Under Mexican FRS, comprehensive financing result reflects interest income (including gains and losses on certain derivative instruments), interest expense, foreign exchange gain or loss and the gain or loss attributable to the effects of inflation on monetary liabilities and assets. A substantial portion of PEMEX indebtedness (77.8% at December 31, 2007) is denominated in foreign currencies, so a depreciation of the peso results in foreign exchange loss and higher interest expense in peso terms.
In 2007, comprehensive financing result improved by 16.0%, from a loss of Ps. 23.8 billion in 2006 to a loss of Ps. 20.0 billion in 2007, primarily as a result of the following:
Interest—net.  The decrease of Ps. 4.7 billion in net interest was mainly due to a net gain of Ps. 5.9 billion resulting from foreign currency embedded derivatives. This effect was partially offset by the cost generated by the repurchase of certain debt instruments and to the increase of the non-capitalized interests of the Master Trust.
Exchange rate loss.  The decrease of Ps. 1.1 billion in exchange rate loss, from a loss of Ps. 2.5 billion in 2006 to a loss of Ps. 1.4 billion in 2007, was primarily a result of the smaller peso depreciation against the U.S. dollar in 2007, as compared to 2006. The peso/dollar exchange rate appreciated by 0.1% in dollar terms from January 1 to December 31, 2007, from 10.8810 to 10.8662, while in 2006, the exchange rate depreciated by 1.0%, from 10.7777 to 10.8810.


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Monetary position result.  The decrease of Ps. 2.0 billion in monetary gain was primarily due to the fact that the inflation in 2007 (3.7590%) was less than inflation in 2006 (4.0533%).
Taxes and Duties
Hydrocarbon extraction duties and other duties and taxes (including the IEPS tax) increased by 12.0%, from Ps. 604.8 billion in 2006 to Ps. 677.3 billion in 2007, largely due to the increase of the hydrocarbon extraction duty, from Ps. 587.0 billion in 2006 to Ps. 663.1 billion in 2007. This increase was partially offset by a reduction in the excess gains duties and the hydrocarbon income tax. In 2007, duties and taxes represented 59.6% of total sales and in 2006, they represented 54.8% of total sales, because our effective rate of taxes and duties rises as oil prices increase.
Net Income/(Loss)
In 2007, we had a loss of Ps. 18.3 billion from Ps. 1,136.0 billion in net sales, as compared to net income of Ps. 47.0 billion from Ps. 1,103.5 billion in total revenues in 2006. This change resulted from the various factors described above.
Results of Operations of Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies —For the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 
Sales
 
Total sales, which did not include the IEPS tax in 2006, were Ps. 1,062.51,103.5 billion in 2006, an increase ofincreasing by 12.4% from total sales, in 2005, net of the IEPS tax, of Ps. 945.2 billion.982.0 billion in 2005. The increase in total sales from 2005 to 2006 resulted primarily from a 17.0% increase in export sales, from Ps. 440.7457.3 billion in 2005 to Ps. 515.8535.1 billion in 2006, due to higher crude oil export prices. In addition, total sales increased due to an 8.4% increase in domestic sales, net of the IEPS tax, from Ps. 504.5523.5 billion in 2005 to Ps. 546.7567.3 billion in 2006, due to increased unit prices and higher volumes of sales of principal products.
 
Domestic Sales
 
Domestic sales, which did not include the IEPS tax in 2006, increased by 8.4% in 2006, from Ps. 504.5523.5 billion in 2005, net of the IEPS tax, to Ps. 546.7567.3 billion in 2006, due to increases in prices and in the volume of domestic sales of petroleum and petrochemical products. Domestic sales of petroleum products increased by 12.2% in 2006, from Ps. 395.9410.8 billion in 2005 to Ps. 444.1460.8 billion in 2006, primarily due to increases in the average domestic sales prices and volumes of our principal petroleum products. Domestic petrochemical sales (including sales of certain by-products of the petrochemical production process) increased by 1.7%1.6%, from Ps. 24.225.1 billion in 2005 to Ps. 24.625.5 billion in 2006, due to an increase in the domestic sales of some of the products manufactured by Pemex-Petrochemicals, such as polyethylenes, ethylene oxide and monoethylene glycol. Sales of natural gas by decreased by 7.6% in 2006, from Ps. 84.487.6 billion in 2005 to Ps. 78.080.9 billion in 2006, as a result of a decrease in average prices.
 
Export Sales
 
In 2006, total consolidated export sales increased by 17.0% in peso terms from Ps. 440.7457.3 billion in 2005 to Ps. 515.8535.1 billion in 2006. Excluding the trading activities of the PMI Group, export sales by the subsidiary entities to the PMI Group and third parties increased by 18.9% in peso terms by 18.9%, from Ps. 364.7378.4 billion in 2005 to Ps. 433.5449.8 billion in 2006. In dollar terms, excluding the trading activities of the PMI Group, export sales (which are dollar-denominated) increased by 22.8% in 2006, from U.S. $31.6 billion in 2005 to U.S. $38.8 billion in 2006. This increase was mainly a result of increased oil export prices. The trading and


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export activities of the PMI Group generated additional marginal revenues of Ps. 82.285.3 billion in 2006, 8.2%8.1% higher in peso terms than the Ps. 76.078.9 billion of additional revenues generated in 2005, mainly due to increased prices of crude oil that we exported. The weighted average price per barrel of crude oil that the PMI Group sold to third parties in 2006 was U.S. $53.04, 24.2% higher than the weighted average price of U.S. $42.71 in 2005.


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Crude oil sales by Pemex-Exploration and Production to PMI for export accounted for 89.8% of export sales (excluding the trading activities of the PMI Group) in 2006, as compared to 89.4% in 2005. These crude oil sales increased in peso terms by 19.3% in 2006, from Ps. 326.3338.6 billion in 2005 to Ps. 389.3403.9 billion in 2006, and increased in dollar terms by 23.0% in 2006, from U.S. $28.3 billion in 2005 to U.S. $34.8 billion in 2006. The weighted average price per barrel of crude oil that Pemex-Exploration and Production sold to PMI for export in 2006 was U.S. $53.20, 24.9% higher than the weighted average price of U.S. $42.61 in 2005. The volume of crude oil exports decreased by 1.3%, from 1,817 thousand barrels per day in 2005 to 1,793 thousand barrels per day in 2006, as a result of a decline in the Cantarell field.
 
Export sales of petroleum products by Pemex-Refining and Pemex-Gas and Basic Petrochemicals to the PMI Group and third parties, including natural gas liquids, decreased from 9.6% of export sales (excluding the trading activities of the PMI Group) in 2005 to 9.4% in 2006. Export sales of petroleum products, including natural gas liquids, increased by 17.2%17.1%, from Ps. 34.936.2 billion in 2005 to Ps. 40.942.4 billion in 2006, primarily due to an increase in sales volume and export prices of petroleum products. In dollar terms, export sales of petroleum products, including natural gas liquids, increased by 20.0%, from U.S. $3.0 billion in 2005 to U.S. $3.6 billion in 2006. Export sales of natural gas increased by 18.0% in 2006 as compared to 2005 mainly due to the initiation of operations of the Nejo field in Madero, and the Papán filed in Veracruz. In addition, the various accidents that took place in several pipelines during the months of July and September lead to our inability to provide natural gas to some of our clients in the central zone of the country and, therefore, we sold those amounts to third parties outside of Mexico.
 
Petrochemical products accounted for the remainder of export sales in 2005 and 2006. Export sales of petrochemical products (including certain by-products of the petrochemical process) decreased by 5.7%5.6%, from Ps. 3.53.6 billion in 2005 to Ps. 3.33.4 billion in 2006, primarily due to a decrease in the volume of benzene and ethylene exports. In dollar terms, export sales of petrochemical products (including certain by-products of the petrochemical process) decreased by 4.7% in 2006, from U.S. $302.7 million in 2005 to U.S. $288.5 million in 2006.
 
Other Revenues and ExpensesServices Income
 
Other revenues, net, increased by Ps. 57.4 billion, or 466.7%, from Ps. 12.3 billion inIn 2005 and 2006, services income amounted to Ps. 69.71.2 billion and Ps. 1.1 billion, respectively. Services income relates, mainly, to revenues obtained by Kot AG, from reinsurance premiums. There was no meaningful change in our services income in 2006 primarily dueas compared to an increase in revenues resulting from the application of the negative rate of IEPS tax in accordance with the provisions of the Federal Revenue Law for the Fiscal Year of 2006, which now allows PEMEX to credit the negative IEPS tax against other taxes and duties payable by PEMEX. In 2005, the negative IEPS tax was absorbed by PEMEX.2005.
 
CostsCost of Sales and OperatingGeneral Expenses
 
Costs of sales, transportation, distribution expenses and administrative expenses increased by 7.6%, from Ps. 447.3464.1 billion in 2005 to Ps. 481.1499.2 billion in 2006. This increase was mainly due to greater product purchases, principally petroleum products such as gasoline, diesel and fuel oil, of Ps. 22.122.9 billion, or 11.9%, as compared to Ps. 185.2 billion in 2005, an increase in the chargescharge to income associated withcost of the reserve for labor obligations of Ps. 10.310.7 billion, or 16.7%, as compared to 2005, and an increase in depreciation and amortization costs of Ps. 8.48.7 billion, or 15.3%, as compared to 2005.
 
On September 12, 2005, a presidential decree limited our maximum sales price on first-hand and end-user sales of natural gas for industrial use and to local distribution companies to the natural gas price in Reynosa, Tamaulipas in August 2005 (U.S. $7.253 per million British Thermal Units), plus 21% of the difference between the current Reynosa price and U.S. $7.253. PEMEX therefore bore the cost of 79% of any increase in import prices of natural gas, which it could not pass on to its retail customers. The decree expired in January 2006. See “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Pricing Decrees.”Decrees” in theForm 20-F.
Other Revenues (principally IEPS benefit), net
Other revenues, net, increased by Ps. 58.3 billion, from Ps. 2.9 billion in 2005 to Ps. 61.2 billion in 2006, primarily due to an increase in revenues resulting from the application of the negative rate of IEPS tax in accordance with the provisions of the Federal Revenue Law for the Fiscal Year of 2006, which permitted


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PEMEX to credit the negative IEPS tax against other taxes and duties payable by PEMEX and resulted in the recognition of a revenue in 2006 in the amount of Ps. 57.3 billion. In 2005, the negative IEPS tax was absorbed by PEMEX.
Comprehensive Financing CostResult
 
Under Mexican FRS, comprehensive financing cost reflects interest income (including gains and losses on certain derivative instruments), interest expense, foreign exchange gain or loss and the gain or loss attributable to the effects of inflation on monetary liabilities and assets. A substantial portion of our indebtedness (79.7% at December 31, 2006) is denominated in foreign currencies, so a depreciation of the peso results in foreign exchange loss and higher interest expense in peso terms.
 
In 2006, comprehensive financing costresult increased by Ps. 18.319.0 billion or 389.4%, from a charge of Ps. 4.74.8 billion in 2005 to a charge of Ps. 23.023.8 billion in 2006, primarily as a result of the following:
 
 •  The peso depreciated against the U.S. dollar at a rate of 1.0% during 2006 (from Ps. 10.7777 per dollar at December 31, 2005 to Ps. 10.8810 per dollar at December 31, 2006), as compared to a 4.3% appreciation of the peso against the U.S. dollar in 2005 (from Ps. 11.2648 per dollar at December 31, 2004 to Ps. 10.7777 per dollar at December 31, 2005), which resulted in net foreign exchange losses of Ps. 2.42.5 billion in 2006, as compared to net foreign exchange gains of Ps. 18.319.0 billion in 2005. The depreciation in 2006 was due mainly to change in the exchange rate of pesos to U.S. dollars, which rose to Ps. 10.8810 per dollar at December 31, 2006 from Ps. 10.7777 per dollar at December 31, 2005. At December 31, 2005, the rate had dropped to Ps. 10.7777 per dollar from Ps. 11.2648 per dollar in 2004.
 
 •  Although the inflation rate rose from 3.33% in 2005 to 4.05% in 2006, our net monetary liabilities decreased by 18.3% (because our monetary assets increased in comparison to our monetary liabilities), resulting in a net gain in monetary position of Ps. 14.314.8 billion 16.5%in 2006, 15.9% lower than the net gain in monetary position in 2005 of Ps. 17.017.6 billion.
 
 •  These increases in comprehensive financing costresult were partially offset by a decrease in net interest expense of Ps. 5.15.3 billion, or 12.8%, from Ps. 40.041.5 billion in 2005 to Ps. 34.936.2 billion in 2006. In 2006, interest expense decreased by Ps. 10.611.0 billion as compared to 2005, while interest income decreased by Ps. 5.55.7 billion as compared to 2005.
 
DutiesTaxes and TaxesDuties
 
Hydrocarbon extraction duties and other duties and taxes (including the IEPS tax) decreased by 3.5%, from Ps. 604.2626.9 billion in 2005 to Ps. 582.9604.8 billion in 2006, largely due to the new fiscal regime applicable as of January 1, 2006 and the fact that the IEPS tax rate was negative in 2006.
 
Income/(Loss)
In 2006, we reported net income of Ps. 45.3 billion on Ps. 1,132.2 billion in total revenues, as compared with a loss of Ps. 79.4 billion on Ps. 957.6 billion in total revenues, net of the IEPS tax, in 2005. The Ps. 124.7 billion increase in income from a loss in 2005 to net income in 2006 resulted from the various factors described above.
Results of Operations of Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies—For the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Sales
Total sales, net of the IEPS tax, were Ps. 945.2 billion in 2005, an increase of 22.3% from total sales in 2004, net of the IEPS tax, of Ps. 772.9 billion. The increase in total sales from 2004 to 2005 resulted primarily from a 26.3% increase in export sales, from Ps. 349.0 billion in 2004 to Ps. 440.7 billion in 2005, due to increases in crude oil export prices and in the volume of exports of petroleum products. In addition, total sales increased due to a 19.0% increase in domestic sales, net of the IEPS tax, in 2005, from Ps. 423.9 billion in 2004 to Ps. 504.6 billion in 2005, due to increased unit prices and higher sales volumes.
Domestic Sales
Domestic sales, net of the IEPS tax, increased by 19.0% in 2005, from Ps. 423.9 billion in 2004 to Ps. 504.6 billion in 2005, due to increases in prices and in the volume of domestic sales of petroleum and


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petrochemical products. Domestic sales of petroleum products increased by 21.2% in 2005, from Ps. 326.7 billion in 2004 to Ps. 396.0 billion in 2005, primarily due to increases in the average domestic sales prices and volumes of our principal petroleum products. The 5.4% increase in the sales volumes of gasoline, from 636.7 thousand barrels per day in 2004 to 671.3 thousand barrels per day in 2005, was primarily due to an increase in the number of vehicles in Mexico. Domestic petrochemical sales (including sales of certain by-products of the petrochemical production process) increased by 16.9%, from Ps. 20.7 billion in 2004 to Ps. 24.2 billion in 2005, due to an increase in the domestic prices of some of the products manufactured by Pemex-Petrochemicals, such as polyethylenes, ethylene oxide and monoethylene glycol, and a production increase of 159 kilotons of vinyl chloride monomer in Pajaritos as compared to 2004 production levels. Sales of natural gas increased by 10.3% in 2005, from Ps. 76.5 billion in 2004 to Ps. 84.4 billion in 2005, as a result of a 25.1% increase in average prices, from U.S. $6.09 per MMBtu in 2004 to U.S. $7.62 per MMBtu in 2005.
Export Sales
In 2005, total consolidated export sales increased by 26.3% in peso terms from Ps. 349.0 billion in 2004 to Ps. 440.7 billion in 2005. Excluding the trading activities of the PMI Group, export sales by the subsidiary entities to the PMI Group and third parties increased by 24.8% in peso terms, from Ps. 292.2 billion in 2004 to Ps. 364.7 billion in 2005. In dollar terms, excluding the trading activities of the PMI Group, export sales (which are dollar-denominated) increased by 35.0% in 2005, from U.S. $23.4 billion in 2004 to U.S. $31.6 billion in 2005. This increase was mainly a result of an increase in crude oil export prices. The trading and export activities of the PMI Group generated additional marginal revenues of Ps. 76.0 billion in 2005, 33.8% higher in peso terms than the Ps. 56.8 billion of additional revenues generated in 2004, mainly due to the increased price of crude oil that we exported. The weighted average price per barrel of crude oil that the PMI Group sold to third parties in 2005 was U.S. $42.71, 37.6% higher than the weighted average price of U.S. $31.05 in 2004.
Crude oil sales by Pemex-Exploration and Production to PMI for export accounted for 89.4% of export sales (excluding the trading activities of the PMI Group) in 2005, as compared to 90.9% in 2004. These crude oil sales increased in peso terms by 22.9% in 2005, from Ps. 265.4 billion in 2004 to Ps. 326.3 billion in 2005, and increased in dollar terms by 32.9% in 2005, from U.S. $21.3 billion in 2004 to U.S. $28.3 billion in 2005. The weighted average price per barrel of crude oil that Pemex-Exploration and Production sold to PMI for export in 2005 was U.S. $42.61, 37.4% higher than the weighted average price of U.S. $31.02 in 2004. The volume of crude oil exports decreased by 2.8%, from 1,870 thousand barrels per day in 2004 to 1,817 thousand barrels per day in 2005, as a result of interruptions in production due to hurricanes in Mexico and in the Gulf of Mexico.
Export sales of petroleum products by Pemex-Refining and Pemex-Gas and Basic Petrochemicals to the PMI Group and third parties, including natural gas liquids, increased from 8.2% of export sales (excluding the trading activities of the PMI Group) in 2004 to 9.6% in 2005. Export sales of petroleum products, including natural gas liquids, increased by 45.4%, from Ps. 24.0 billion in 2004 to Ps. 34.9 billion in 2005, primarily due to an increase in sales volume and export prices of petroleum products. In dollar terms, export sales of petroleum products, including natural gas liquids, increased by 57.9%, from U.S. $1.9 billion in 2004 to U.S. $3.0 billion in 2005.
Petrochemical products accounted for the remainder of export sales in 2004 and 2005. Export sales of petrochemical products (including certain by-products of the petrochemical process) increased by 29.6%, from Ps. 2.7 billion in 2004 to Ps. 3.5 billion in 2005, primarily due to an increase in the volume of benzene and polyethylene exports. In dollar terms, export sales of petrochemical products (including certain by-products of the petrochemical process) increased by 39.4% in 2005, from U.S. $217.1 million in 2004 to U.S. $302.7 million in 2005.
Other Revenues and Expenses
Other revenues, net, increased by Ps. 0.3 billion, or 2.5%, from Ps. 12.0 billion in 2004 to Ps. 12.3 billion in 2005, primarily due to an increase in revenues from our natural gas hedging operations, which was


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partially offset by an increase in costs related to various accidents during 2005 and the recognition of the impairment of fixed assets of Pemex-Petrochemicals. See “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Natural Gas Hedging Operations” and “Item 11—Quantitative and Qualitative Disclosure about Market Risk—Commodity Price Risk.”
Costs and Operating Expenses
Costs of sales, transportation, distribution expenses and administrative expenses increased by 30.7%, from Ps. 342.3 billion in 2004 to Ps. 447.3 billion in 2005. This increase was mainly due to greater product purchases, principally petroleum products such as gasolines, diesel and fuel oil, of Ps. 37.8 billion, or 55.2%, as compared to 2004, an increase in the costs of labor obligations of Ps. 6.8 billion, or 14.2%, as compared to 2004, an increase in costs associated with the acquisition of materials and transportation of Ps. 17.6 billion, or 21.9%, as compared to 2004, an increase in depreciation and amortization costs of Ps. 9.9 billion, or 22%, as compared to 2004 and an increase in exploration costs of Ps. 8.0 billion, or 94%, as compared to 2004.
In 2005, due to price controls imposed by the Mexican Government on gasoline and diesel products sold in the domestic market, we were not able to pass on all of the increases in the prices of our product purchases from producers to our retail prices in Mexico. In addition, a presidential decree that became effective in September 2005 limited our maximum sales price on first-hand and end-user sales of natural gas for industrial use and to local distribution companies to the natural gas price in Reynosa, Tamaulipas in August 2005 (U.S. $7.253 per million British Thermal Units), plus 21% of the difference between the current Reynosa price and U.S. $7.253. PEMEX therefore bore the cost of 79% of any increase in import prices of natural gas, which it could not pass on to its retail customers. See “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Pricing Decrees.”
Comprehensive Financing Cost
Under Mexican FRS, comprehensive financing cost reflects interest income (including gains and losses on certain derivative instruments), interest expense, foreign exchange gain or loss and the gain or loss attributable to the effects of inflation on monetary liabilities and assets. A substantial portion of our indebtedness (80.5% at December 31, 2005) is denominated in foreign currencies, so a depreciation of the peso results in foreign exchange loss and higher interest expense in peso terms.
In 2005, comprehensive financing cost decreased by Ps. 2.9 billion, or 38.2%, from Ps. 7.6 billion in 2004 to Ps. 4.7 billion in 2005, primarily as a result of the following:
•  The peso appreciated against the U.S. dollar at a rate of 4.32% during 2005, as compared to a 0.26% depreciation of the peso against the U.S. dollar in 2004, which resulted in net foreign exchange gains of Ps. 18.3 billion in 2005, as compared to net foreign exchange losses of Ps. 3.7 billion in 2004.
•  The inflation rate decreased from 5.2% in 2004 to 3.3% in 2005, resulting in a net gain in monetary position of Ps. 17.0 billion, 19.0% lower than the net gain in monetary position in 2004 of Ps. 21.0 billion.
•  These decreases in comprehensive financing cost were partially offset by an increase in net interest expense of Ps. 15.1 billion, or 60.6%, from Ps. 24.9 billion in 2004 to Ps. 40.0 billion in 2005. In 2005, interest expense increased by Ps. 20.9 billion as compared to 2004, while interest income increased by Ps. 5.8 billion as compared to 2004. As of July 1, 2005, interest from Pemex Finance, Ltd. is consolidated into our total debt for both U.S. and Mexican FRS purposes.
Duties and Taxes
Hydrocarbon extraction duties and other duties and taxes (including the IEPS tax) increased by 18.5%, from Ps. 510.0 billion in 2004 to Ps. 604.2 billion in 2005, largely due to the 22.3% increase in our net sales revenues, excluding the IEPS tax. We paid Ps. 58.7 billion in excess gains revenue duty in 2005, which


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represented 39.2% of our revenues resulting from the difference between the actual crude oil prices at which Pemex-Exploration and Production sold to PMI, which averaged U.S. $42.61 per barrel for the Mexican weighted crude oil mix, and the threshold crude oil price for 2005 of U.S. $23.00 per barrel. We paid Ps. 36.9 billion in excess gains revenue duties in 2004.
Cumulative Effect of Adoption of New Accounting Standards
In 2004, we adoptedBulletin C-15, “Impairment of the Value of Long-Lived Assets and their Disposal,” which resulted in a Ps. 2.2 billion charge at January 1, 2004 attributable to the cumulative effect of recognition of the impairment of the carrying value of fixed assets, primarily those of Pemex-Exploration and Production. For further information, see Notes 2i. and 7d. to our consolidated financial statements included herein. In 2004, we also adopted the amendments toBulletin D-3, “Labor Obligations,” related to the valuation, presentation and recording of the recognition of remuneration for other post-retirement benefits, which resulted in the recognition of an initial liability related to prior service costs and a charge to income for 2004 in the amount of Ps. 9.1 billion. For further information, see Notes 2l. and 11 to our consolidated financial statements included herein.
 
Effective January 1, 2005, we adopted the provisions ofBulletin C-10 related to the recognition, valuation and disclosure applicable to derivative financial instruments, which resulted in a charge to income of Ps. 460478 million. In 2005, we also adopted additional amendments toBulletin D-3 related to the valuation and disclosure of severance payments, which resulted in the recognition of an initial liability related to prior service costs and a charge to income in 2005 in the amount of Ps. 1.4 billion. See Note 2t.Notes 3l. and 3m. to our consolidated financial statements.
 
Net Income/(Loss)
 
In 2005,2006, we reported a lossnet income of Ps. 79.447.0 billion on Ps. 957.61,103.5 billion in total revenues net of the IEPS tax,sales, as compared with a loss of Ps. 27.482.4 billion on Ps. 785.0982.0 billion in total revenuessales, net of the IEPS tax, in 2004. This 189.8%2005. The Ps. 129.4 billion increase in lossesincome from 2004a loss in 2005 to 2005net income in 2006 resulted from the various factors described above.
 
Liquidity and Capital Resources
 
Equity Structure and the Certificates of Contribution “A”
 
Our total equity as of December 31, 20062007 was Ps. 40.049.9 billion, and our total capitalization (long-term debt plus equity) amounted to Ps. 545.4474.7 billion.


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In March 1990, the Mexican Government exchanged U.S. $7.58 billion worth of external debt of Petróleos Mexicanos with international commercial banks for30-year Collateralized Fixed Rate Bonds Due 2019 and Collateralized Floating Rate Bonds Due 2019 (also called Brady Bonds) issued by the Mexican Government. In exchange for the cancellation of this external debt, Petróleos Mexicanos’ indebtedness to the Mexican Government increased by an amount equal to U.S. $7.58 billion. The new indebtedness was denominated in currencies other than pesos. In December 1990, the Mexican Government and Petróleos Mexicanos agreed to capitalize the indebtedness incurred in March 1990 into Petróleos Mexicanos’ equity as Certificates of Contribution “A.” As a condition to this capitalization, Petróleos Mexicanos agreed to pay a minimum guaranteed dividend to the Mexican Government equal to the debt service on the capitalized debt at the exchange rates in effect at the date the payments arewere made. The total dividend on the Certificates of Contribution “A” iswas approved annually by the Board of Directors of Petróleos Mexicanos after the close of each fiscal year. Each quarter until January 2007, Petróleos Mexicanos made advance payments to the Mexican Government that totaltotaled a prorated portion of the minimum guaranteed dividend.


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From 20022003 to 2006,2007, Petróleos Mexicanos made annual advance payments, which were declared as dividends to the Mexican Government, as follows.
 
                                        
 Year Ended December 31,  Year Ended December 31,
 2002 2003 2004 2005 2006  2003 2004 2005 2006 2007
 (in millions of constant pesos as of December 31, 2006)  (in millions of constant pesos as of December 31, 2007)
Total advance payments to the Mexican Government Ps.11,421  Ps.11,508  Ps.11,169  Ps.15,903  Ps.259  Ps.11,941  Ps.11,589  Ps.16,501  Ps.269  Ps.4,270 
Dividends declared in respect of Certificates of Contribution “A”(1)
  2,625   11,290   11,169   11,067   15,799   11,714   11,589   11,483   16,393   263 
 
 
Note: Numbers may not total due to rounding.rounding
 
(1)In each of the five years ended December 31, 2006,2007 the dividends were approved by the Board of Directors of Petróleos Mexicanos.
Source: PEMEX’s financial statements.
 
In December 1997, Petróleos Mexicanos and the Mexican Government agreed to an equity reduction of the Certificates of Contribution “A” in exchange for a cash payment to the Mexican Government of Ps. 12.12 billion in nominal pesos (U.S. $1.5 billion). Further to that agreement, the Ministry of Finance and Public Credit,SHCP, acting on behalf of the Mexican Government, agreed to a reduction in the minimum guaranteed dividends that it would receive from Petróleos Mexicanos from 1998 through 2006. Since 1999,In each of 2002, 2003, 2004 and 2005, Petróleos Mexicanos scheduled to make a totalmade payments of U.S. $4.9 billion in advance payments$874 million to the Mexican Government in respect of the principal amount of the Certificates of Contribution “A.” In 1999 and 2000, Petróleos Mexicanos paid U.S. $250 million in principal and interest under that arrangement. No advance payments of principal were made in 2001. In each of 2002, 2003, 2004 and 2005, Petróleos Mexicanos paid principal of U.S. $874 million to the Mexican Government. No advance payments of principal were made in 2006, because PEMEX and the Ministry of Finance and Public CreditSHCP agreed to defer the U.S. $392 million payment originally due in December 2006 to January 2007. Following the payment of U.S. $392 million in January 2007, no further advance payments of principal on the Certificates of Contribution “A” are payable. The Mexican Government may require from PEMEX the payment of dividends at any time.
 
On various dates during 2004, the Mexican Government made payments to Petróleos Mexicanos for a total amount of Ps. 34.1 billion, as reimbursement for the infrastructure duty paid by PEMEX during 2004. On November 4, 2004, the Board of Directors of Petróleos Mexicanos approved the increase in the equity of the subsidiary entities for this amount. In accordance with the Federal Revenue Law for the Fiscal Year of 2004, these payments are to be allocated to infrastructure works in exploration, refining, gas and petrochemicals. Pursuant to acomisión mercantil(agency agreement) entered into with Banco Santander Serfín, S.A., as the agent managing the funds, PEMEX transferred a total amount of Ps. 33.7 billion, which was recorded as an increase in the equity of the subsidiary entities. In March 2005, after receiving the necessary approvals from the Ministry of Finance and Public Credit,SHCP, our equity was increased by an additional Ps. 374 million to compensate for foreign exchange losses in 2004 in respect of the transfers made by the Ministry of Finance and Public CreditSHCP as reimbursement for the infrastructure duty that we paid to the Mexican Government in 2004. For further information regarding the infrastructure duty, see “Item 4—Information on the Company—Taxes and Duties—Excess Gains Revenue Duty.”
 
In accordance with the Federal Revenue Law for the Fiscal Year of 2005 and the Federal Expenditures Budget for the Fiscal Year of 2005, the Mexican Government made payments to Petróleos


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Mexicanos as reimbursement for taxes and duties paid in 2005, which increased the equity of the subsidiary entities as shown in the table below:
 
     
  (inIn millions of
 
  nominal pesos) 
 
Excess Gains Duty, in accordance with the Federal Expenditures Budget for the Fiscal Year of 2005  Ps. 22,067 
Other payments pursuant to the Federal Expenditures Budget for the Fiscal Year of 2005  22,163 
     
Increase in equity
  Ps. 44,230 
     


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In accordance with the Federal Expenditures Budget for the Fiscal Year of 2006, the Mexican Government transferred to PEMEX Ps. 45.7 billion in 2006 in reimbursement for the excess gains revenue duty paid by PEMEX in 2006.that year. This transfer of resources was capitalized, increasing the equity of Petróleos Mexicanos and the subsidiary entities by the same amount.
 
In December 2007, the Mexican Government made payments in the amount of Ps. 11,160 million to Petróleos Mexicanos, which was capitalized in equity. This total includes two payments in the amount of Ps. 11,132 million and Ps. 19.7 million, which were received from theFondo sobre Ingresos Excedentes (Excess Revenues Fund or FIEX). PEMEX also capitalized interest in the amount of Ps. 9.3 million, which was related to these excess income payments. This additional payment derived from excess revenues that were paid in accordance with the Federal Law of Budget and Fiscal Responsibility, article 19, fraction IV, clauses b) and c). In addition, in February 2008, the Mexican Government made another payment in the amount of Ps. 2,806.2 million to Petróleos Mexicanos.
Funds from Operating, Financing and Investing Activities
 
During 2006,2007, under Mexican FRS, net funds provided by operating activities were Ps. 131.0217.0 billion, a 117.6%33.0% increase from Ps. 60.2163.1 billion provided in 2005.2006. Funds from net income (which wasloss, which were Ps. 45.318.3 billion in 2006, as2007 (as contrasted with a net lossincome of Ps. 79.447.0 billion in 2005)2006) plus items that did not require cash outlays totaled Ps. 181.9147.1 billion in 2006,2007, as compared to Ps. 40.5198.8 billion in 2005. Financing activities provided an additional Ps. 41.0 billion2006. Reductions in net indebtedness and payments of pensions, seniority benefits and other post-retirement obligations resulted in a net outflow of funds totaling Ps. 106.7 billion in 2006,2007, as compared to a Ps. 59.525.5 billion inflow of funds from financing activities in 2005.2006. During 2006,2007, we applied net funds of Ps. 105.2129.2 billion for net investments at cost in fixed assets (Ps. 100.8134.7 billion of new investments and capitalized interest, Ps. 7.54.5 billion of other inflation effects, less Ps. 3.110.0 billion in dispositions of fixed assets), and Ps. 3.95.8 billion in equity investments, as compared to Ps. 86.3109.1 billion for net investments at cost in fixed assets (Ps. 86.6104.6 billion of new investments and capitalized interest, Ps. 4.97.8 billion of other inflation effects, less Ps. 5.23.2 billion in dispositions of fixed assets) in 2005 and a decrease of Ps. 1.114.2 billion in equity investments.investments in 2006.
 
At December 31, 2006,2007, our cash and cash equivalents totaled Ps. 188.7171.0 billion, as compared to Ps. 125.7195.8 billion at December 31, 2005.2006. Based on past experience, we expect to generate sufficient working capital through:
 
 •  cash flow generated from operations;
 
 •  the issuance ofcertificados bursátiles (peso-denominated publicly-traded notes) in the domestic market;
 
 •  the issuance of other debt securities in the international capital markets;
 
 •  the renewal of existing and the entering into of new lines of credit from international and local commercial banks; and
 
 •  other additional financing activities.
 
On June 30, 2004,September 7, 2007, we established a new syndicated revolving credit facility for an amount of U.S. $1,250$2,500 million. Loans under this facility will be borrowed with interest periods ranging from 1 month up to 6 months, and may be prepaid on any interest payment date. On July 18, 2005, we amended the revolving syndicated credit facility established in June 2004, to reduce the interest rate margins over LIBOR payable and the commitment fee, and to increase by one additional year the maturity of the facility. The facility will mature in 2008 and 2010, and borrowings may be made by either the Pemex Project Funding Master Trust or Petróleos Mexicanos. Both Petróleos Mexicanos and the Pemex Project Funding Master Trust made borrowings under this facility in order to fund short-term cash requirements and working capital needs.
In May 2006, we established a new syndicated revolving credit facility for an amount of U.S. $1,250 million, under which borrowings may be made by either Pemex Project Funding Master Trust or Petróleos Mexicanos. This facility will mature in 2009. Both the Pemex Project Funding Master Trust and Petróleos Mexicanos have made borrowings under this facility in order to fund short term cash requirements and working capital needs.
In August 2004, we established a program to issue up to Ps. 10 billion ofcertificados bursátiles de corto plazo(short-term publicly-traded notes), denominated in pesos in the Mexican market. The program ended in August 2005 and Pemex may renew it if we need additional liquidity facilities.
As of December 31, 2006, we had U.S. $2,500 million in committed lines of credit, all of which was unused. As of2007, the dateoutstanding balance of this report, we have notfacility used any committed lines of credit from our syndicated credits facilities.by the Master Trust was


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U.S. $2,500 million and as of March 31, 2008, the outstanding balance of this facility was U.S. $1,500 million used by the Master Trust and U.S. $1,000 million used by Petróleos Mexicanos.
We have met and expect to meet in the future our cash requirements for working capital, capital expenditures and investments with a combination of funds provided by operations and financing. See “—Financing Activities” below.
 
Commitments for Capital Expenditures and Sources of Funding
 
Our current aggregate commitments for capital expenditures, including both PIDIREGAS and non- PIDIREGAS capital expenditures, total approximately Ps. 148161.8 billion for 2007.2008. For general descriptions of our current commitments for capital expenditures, see “Item 4—Information on the Company—History and Development—Capital Expenditures and Investments.”
 
In 2006,2007, in nominal peso terms, Pemex-Exploration and Production invested Ps. 97.7113.5 billion in 2721 PIDIREGAS and Ps. 4.62.0 billion in other general operating investments and strategic products, for a total of Ps. 102.4115.6 billion in capital expenditures inon exploration and production. In 2007,2008, Pemex-Exploration and Production has 2122 PIDIREGAS in its budget, for which Ps. 114.6124.8 billion has been budgeted. In addition, Pemex-Exploration and Production has budgeted Ps. 2.03.9 billion for non-PIDIREGAS capital expenditures for 2007.2008. For more detail on the expenditures for and purpose of these investments, see “Item 4—Information on the Company—Business Overview—Exploration and Production—Investment in Exploration and Production.”
 
Pemex-Refining invested in one PIDIREGAS project in 20062007 and invested in other general operating projects, strategic planning, acquisition of equipment, research and development and complementary investments for a total of Ps. 15.216.0 billion in capital expenditures in nominal peso terms. In 2007,2008, Pemex-Refining expects to invest Ps. 23.421.6 billion in capital expenditures. Of this amount, Pemex-Refining has budgeted Ps. 15.39.0 billion for four2 PIDIREGAS and Ps. 8.112.6 billion for other non-PIDIREGAS capital expenditures. For more detail on the expenditures for and purpose of Pemex-Refining’s investments, see “Item 4—Information on the Company—Business Overview—Refining—Investments.”
 
Pemex-Gas and Basic Petrochemicals invests in projects primarily related to natural gas and condensates processing, transportation and storage. In 2007,2008, Pemex-Gas and Basic Petrochemicals will invest Ps. 1.31.5 billion in capital expenditures for one PIDIREGAS project at the modular cryogenic plants inof Reynosa. The non-PIDIREGAS capital expenditures for Pemex-Gas and Basic Petrochemicals are expected to total Ps. 3.55.1 billion in 2007.2008. For more detail on the expenditures for and purpose of Pemex-Gas and Basic Petrochemicals’ investments, see “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Investments.”
 
In 2007,2008, Pemex-Petrochemicals willexpects to invest Ps. 1.0 billion752 million in capital expenditures for 3 PIDIREGAS. The non-PIDIREGAS capital expenditures for Pemex-Petrochemicals are expected to total Ps. 1.73.1 billion in 2007.2008. For more detail on the expenditures for and purpose of Pemex-Petrochemicals’sPemex-Petrochemicals’ investments, see “Item 4—Information on the Company—Business Overview—Petrochemicals—Investments.”
Our current commitments for capital expenditures have increased in recent years as compared to previous years. We plan to fund these expenditures through the financing activities in which we have engaged in the past as well as new sources. We have funded and we expect to continue to fund our commitments for PIDIREGAS capital expenditures primarily through the issuance of debt securities in capital markets transactions, inter-company private placements (as described below), commercial bank syndicated loans, bilateral loans from commercial banks and guaranteed loans from export credit agencies. To a lesser extent, we may decide to use Pemex Finance, Ltd. to fund some PIDIREGAS if we consider it advisable in light of market conditions. The securities that we or Pemex Finance, Ltd. issue vary in tenor, amount, currency and type of interest rate. We may issue debt securities in U.S. dollars, Japanese yen, euros, pounds sterling or pesos, among others; these securities may be issued with fixed or floating rates and with maturities of one or more years including perpetual debt securities, depending on market conditions and funding requirements. Commercial bank syndicated loans may be established with single or multiple tranches with varying maturities. Bilateral loans may vary in tenor and range. See also “—Financing Activities” below.
Inter-company private placements are debt securities issued by the Pemex Project Funding Master Trust or by Fideicomiso F/163 and purchased by Petróleos Mexicanos at prevailing market conditions. Under this program, which allows Petróleos Mexicanos to invest part of its cash position in debt securities for use in


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PIDIREGAS, we have been able to obtain significant benefits because the interest rate paid by these entities to Petróleos Mexicanos exceeds the average return on our cash investments. Additionally, the inter-company private placements do not increase our total indebtedness on a consolidated basis since they are eliminated as part of the consolidation process. Petróleos Mexicanos obtained all the required legal and corporate authorizations to establish this program.
As described in “—Financing Activities” below, thus far in 2007 we have issued U.S. $6.0 billion in debt securities through inter-company private placements by the Pemex Project Funding Master Trust to Petróleos Mexicanos, and we expect to issue additional securities under this program over the rest of the year. We have thus far not issued debt securities denominated in pesos orcertificados bursátiles(publicly-traded notes) to date in 20072008 in the domestic market through Fideicomiso F/163. Prior to 2003, Petróleos Mexicanos had never issued debt securities in the domestic market. Because the domestic market has demonstrated significant growth over the past few years, we believe that this market represents a good alternative source of PIDIREGAS funding, offering competitive conditions in terms of tenor, amount and type of interest rates, and as a result we plan to continue issuing such securities in the Mexican domestic market. Additionally, we may fund some PIDIREGAS through commercial bank loans denominated in pesos.
 
Theinversión de disponibilidades(which we refer to as inter-company private placements) are debt securities issued by the Master Trust or by Fideicomiso F/163 and purchased by Petróleos Mexicanos at prevailing market conditions. Under this program, which allows Petróleos Mexicanos to invest part of its cash position in debt securities for use in PIDIREGAS, we have been able to obtain significant benefits because the interest rate paid by these entities to Petróleos Mexicanos exceeds the average return on our cash investments. Additionally, the inter-company private placements do not increase our total indebtedness on a consolidated basis since they are eliminated as part of the consolidation process. Petróleos Mexicanos obtained all the required legal and corporate authorizations to establish this program. Through June 2008, we have issued U.S. $22.2 billion in debt securities through inter-company private placements by the Master Trust to Petróleos Mexicanos and an additional Ps. 42.0 billion through Fideicomiso F/163. We expect to issue additional securities under this program over the rest of the year.
Non-PIDIREGAS investments are funded mainly through our operating revenues, and, to a lesser degree, financing activities. These financing activities consist primarily of loans from export credit agencies. These loans are usually structured with maturities ranging between five and ten years.
A number of our financing agreements contain restrictions on (a) PEMEX’s ability to create liens on its assets to secure external indebtedness, subject to certain exceptions, (b) PEMEX’s ability to enter into forward sales of crude oil or natural gas, receivables financings and advance payment arrangements, subject to certain baskets, and (c) PEMEX’s ability to merge or consolidate with other entities or sell all or substantially all of its assets. In addition, a number of our financing agreements contain events of default, including an event of default if the Mexican Government ceases to control Petróleos Mexicanos or Petróleos Mexicanos or any of Pemex-Exploration and Production, Pemex-Refining or Pemex-Gas and Basic Petrochemicals ceases to have the exclusive right and authority to conduct the petroleum industry on behalf of Mexico. At December 31, 2007 and at the date of this report, PEMEX was not in default on any of its financing agreements.
 
In order to be able to carry out our planned capital expenditure program, we will need to seek financing from a variety of sources, and we cannot guarantee that we will be able to obtain financing on terms that would be acceptable to us. Our inability to obtain additional financing could have an adverse effect on our planned capital expenditure program and result in our being required to limit or defer this program.
 
Financing Activities
 
20072008 Financing Activities.  During the period from January 1 to May 31, 2007, Petróleos Mexicanos obtained U.S. $7.3 million in nominal terms in loans from export credit agencies and2008, the Pemex Project Funding Master Trust obtained U.S. $744.8$335.6 million in nominal terms in loans from export credit agencies for use in financing PIDIREGAS. In addition, we participated in the following activities:
 
 •  On February 2, 2007, Pemex Project FundingJanuary 16, 2008, the Master Trust issued, through an inter-company private placement, U.S. $2,000,000,000 of its Floating Rate Notes due in 2012;2015; the notes were issued under the Pemex Project Funding Master Trust’s Medium-Term Note Program, Series A, and were re-openings of earlier issuances; all of the notes were purchased by Petróleos Mexicanos;
•  on March 16, 2007, the Pemex Project Funding Master Trust issued through an inter-company private placement U.S. $2,500,000,000 of Floating Rate Notes due in 2016, under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos; andMexicanos.
 
 •  On January 28, 2008, the Master Trust repaid U.S. $500,000,000 of the U.S. $2,500,000,000 borrowed through its syndicated revolving credit facility on May 4, 2007,October 25, 2007.
•  On February 7, 2008, Fideicomiso F/163 renegotiated the Pemex Project Fundingmaturity date of the Ps. 22,000,000,000 inter-company private placement issued on December 2006, extending its maturity to December 16, 2013.


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•  On February 7, 2008, Fideicomiso F/163 issued, through an inter-company private placement in Mexico, Ps. 10,000,000,000 of Floating Rate Notes due in 2013; the notes are guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On February 15, 2008, the Master Trust issued, through an inter-company private placement, U.S. $1,500,000,000 of Floating Rate Notes due in 2014,2017, under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos.
 
 •  On February 27, 2008, the Master Trust repaid U.S. $500,000,000 of the U.S. $2,500,000,000 borrowed through its syndicated revolving credit facility on October 25, 2007.
•  On February 29, 2008, Petróleos Mexicanos borrowed U.S.$1,000,000,000 from the syndicated revolving facility referred to above. Under this facility, borrowings may be made by either the Master Trust or Petróleos Mexicanos. Borrowings by the Master Trust are guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On March 28, 2008, Petróleos Mexicanos obtained, in the Mexican domestic market, a bank loan for a total of Ps. 10,000,000,000 at a floating rate; the loan matures in December 2008 and is guaranteed by Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On March 28, 2008, Petróleos Mexicanos obtained, in the Mexican domestic market, a bank loan for a total of Ps. 4,000,000,000 at a floating rate, due in June 22, 2007,2008; the Pemex Project Fundingloan is guaranteed by Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On March 28, 2008, Petróleos Mexicanos obtained, in the Mexican domestic market, a bank loan for a total of Ps. 3,500,000,000 at a floating rate; the loan matures in December 2008; the loan is guaranteed by Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On May 13, 2008, the Master Trust issued, through an inter-company private placement, U.S.$2,000,000,000 $500,000,000 of Floating Rate Notes due in 2020,2021, under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos.
•  On May 19, 2008, the Master Trust issued, through an inter-company private placement, U.S. $500,000,000 of Floating Rate Notes due 2021, under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos.
•  In addition, during the month of June, 2008, the following financial activities have taken place:
•  On June 2, 2008, the Master Trust entered into a Term Loan Agreement with a commercial bank, in the amount of ¥41,900 million (equivalent to U.S. $400 million) in two tranches of ¥20,950 million each, maturing in 2011 and 2014 respectively. This agreement is guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On June 3, 2008, the Master Trust issued, through an inter-company private placement, U.S. $1,000,000,000 of Floating Rate Notes due 2021, under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos.
•  On June 4, 2008, the Master Trust issued U.S. $1,000,000,000 of 5.75% Notes due 2018 and U.S. $500,000,000 of 6.625% Bonds due 2038 under its Medium-Term Note Program, Series A; the notes and bonds are guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
 
The inter-company private placements described above did not increase our consolidated net indebtedness.


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2007 Financing Activities.  During the period from January 1 to December 31, 2007, Petróleos Mexicanos obtained U.S. $7.3 million in nominal terms in loans from export credit agencies and the Master Trust obtained U.S. $1,002.6 million in nominal terms in loans from export credit agencies for use in financing PIDIREGAS. In addition, we participated in the following activities:
•  The Master Trust issued, through inter-company private placements, nine series of floating rate notes under its Medium-Term Note Program, Series A; all of the notes were purchased by Petróleos Mexicanos; the details of each are described below:
Issue Date
Principal AmountMaturity Date
February 2, 2007U.S. $2,000,000,000December 17, 2012
March 16, 2007U.S. $2,500,000,000December 16, 2016
May 4, 2007U.S. $1,500,000,000December 15, 2014
June 22, 2007U.S. $2,000,000,000December 15, 2020
July 27, 2007U.S. $1,000,000,000December 15, 2023
August 24, 2007U.S. $1,000,000,000December 15, 2023
October 12, 2007U.S. $1,000,000,000December 15, 2017
October 26, 2007U.S. $1,000,000,000December 15, 2017
November 26, 2007U.S. $1,697,000,000December 15, 2015
•  On December 13, 2007, Fideicomiso F/163 issued through inter-company private placements Ps. 10,000,000,000 of floating rate debt securities due in 2013, which were purchased by Petróleos Mexicanos.
The intercompany private placements described above did not increase our consolidated net indebtedness.
•  On October 18, 2007, the Master Trust utilized the full amount of its syndicated revolving credit facility of U.S. $2,500,000,000 entered into on September 7, 2007; under this agreement, borrowings may be made by either the Master Trust or Petróleos Mexicanos; the facility bears interest at a floating rate linked to the London Interbank Offered Rate (LIBOR); the facility matures in 2010 and 2012 and each of the tranches can be extended twice for a period of one year. This facility replaces the two previous syndicated revolving credit facilities, each in the amount of U.S. $1,250,000,000. Borrowings by the Master Trust under this facility are guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
•  On October 22, 2007, the Master Trust issued U.S. $1,500,000,000 of 5.75% Notes due 2018 and U.S. $500,000,000 of 6.625% Bonds due 2035 under its Medium-Term Note Program, Series A; the notes and bonds are guaranteed by Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
During the second quarter of 2007, the Pemex Project Funding Master Trust repurchased in the open market a certain amount of its outstanding U.S. dollar-denominated debt securities with maturities between 2008 and 2027, as well as a certain amount of its U.S. dollar-denominated perpetual notes. The total principal amount repurchased in this


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program was equal to U.S. $1,139.7 million in the aggregate. The table below sets forth the results of the open market transactions:
 
                            
     Aggregate Principal
        Aggregate Principal
   
     Amount
      Aggregate Principal
 Amount Repurchased
 Aggregate Principal
 
Title of Purchased
   Amount Outstanding
 in Open Market
 Amount Outstanding
 
Securities
 ISIN before Repurchases Transactions after Repurchases 
   Aggregate Principal
 Repurchased in
 Aggregate Principal
 
   Amount Outstanding
 Open Market
 Amount Outstanding
 
Title of Purchased Securities
 ISIN before Repurchases Transactions after Repurchases 
8.50% Notes due 2008 US706451AA95 U.S. $984,674,000  U.S. $54,595,000  U.S. $930,079,000  US706451AA95 U.S.$984,674,000  U.S.$54,595,000  U.S.$930,079,000 
6.125% Notes due 2008 US70645KAK51  33,742,000   9,911,000   23,831,000  US70645KAK51  33,742,000   9,911,000   23,831,000 
6.125% Notes due 2008 US706451AM34  716,258,000   6,414,000   709,844,000  US706451AM34  716,258,000   6,414,000   709,844,000 
9.375% Notes due 2008 US706451BA86  487,600,000   18,999,000   468,601,000  US706451BA86  487,600,000   18,999,000   468,601,000 
7.875% Notes due 2009 US706451AE18  995,449,000   87,846,000   907,603,000  US706451AE18  995,449,000   87,846,000   907,603,000 
Floating Rate Notes due 2009 USU70577AG35  424,550,000   40,000,000   384,550,000  USU70577AG35  424,550,000   40,000,000   384,550,000 
Floating Rate Notes due 2010 USU70577AJ73  847,676,000   95,505,000   752,171,000  USU70577AJ73  847,676,000   95,505,000   752,171,000 
Floating Rate Notes due 2010 US706451AP64  652,324,000   8,000,000   644,324,000  US706451AP64  652,324,000   8,000,000   644,324,000 
9.125% Notes due 2010 US706451AB78  998,206,000   70,382,000   927,824,000  US706451AB78  998,206,000   70,382,000   927,824,000 
8.00% Notes due 2011 US706451AF82  743,614,000   12,566,000   731,048,000 
8.000% Notes due 2011 US706451AF82  743,614,000   12,566,000   731,048,000 
Floating Rate Notes due 2012 US70645KAR05  496,410,000   62,859,000   433,551,000  US70645KAR05  496,410,000   62,859,000   433,551,000 
7.375% Notes due 2014 US706451AH49  1,747,650,000   196,591,000   1,551,059,000  US706451AH49  1,747,650,000   196,591,000   1,551,059,000 
5.75% Notes due 2015 US706451BF73  1,749,457,000   28,510,000   1,720,947,000 
9.25% Notes due 2018 US706451BB69  339,915,000   5,000,000   334,915,000 
5.750% Notes due 2015 US706451BF73  1,749,457,000   28,510,000   1,720,947,000 
9.250% Notes due 2018 US706451BB69  339,915,000   5,000,000   334,915,000 
8.625% Notes due 2022 US706451AG65  969,990,000   215,756,000   754,234,000  US706451AG65  969,990,000   215,756,000   754,234,000 
9.50% Notes due 2027 US706451BD26  790,497,000   217,164,000   573,333,000 
9.500% Notes due 2027 US706451BD26  790,497,000   217,164,000   573,333,000 
7.75% Perpetual Notes XS0201926663  1,750,000,000   9,598,000   1,740,402,000  XS0201926663  1,750,000,000   9,598,000   1,740,402,000 
On October 10, 2007, the Master Trust launched two sets of tender offers. In the first, the Master Trust offered to purchase for cash any and all of the outstanding principal amounts of certain debt securities issued by the Master Trust (which we refer to as the Any and All Tender Offers). The Master Trust purchased the following securities in its Any and All Tender Offers, which closed in October 2007.
               
          Aggregate
 
    Outstanding
  Aggregate
  Principal
 
    Principal
  Principal
  Amount
 
    Amount
  Amount
  Outstanding
 
    Before
  Tendered and
  After
 
Series of Securities
 ISIN Tender Offers  Not Withdrawn  Tender Offers 
5.750% Notes due 2015 US706451BF73 U.S. $1,720,947,000  U.S. $1,486,575,000  U.S.$234,372,000 
7.375% Notes due 2014 US706451AH49  1,551,059,000   1,188,064,000   362,995,000 
7.375% Notes due 2014 US70645KAM18  210,000   210,000   — 
8.000% Notes due 2011 US706451AF82  731,048,000   548,874,000   182,174,000 
8.000% Notes due 2011 US70645KAE91  6,386,000   820,000   5,566,000 
8.625% Bonds due 2022 US706451AG65  754,234,000   593,989,000   160,245,000 
8.625% Bonds due 2022 US70645JAH59  20,000,000   20,000,000   — 
8.625% Bonds due 2022 US70645KAH23  10,010,000   10,010,000   — 
8.625% Guaranteed Bonds due 2023 US706451BC43  225,395,000   118,888,000   106,507,000 
8.625% Guaranteed Bonds due 2023 US70577AR99  109,000   109,000   — 
91/4% Guaranteed Bonds due 2018
 US706451BB69  334,915,000   227,806,000   107,109,000 
91/4% Guaranteed Bonds due 2018
 USU70577AQ17  457,000   350,000   107,000 
9.50% Guaranteed Bonds due 2027 US706451BD26  573,333,000   354,116,000   219,217,000 
9.50% Guaranteed Bonds due 2027 US706451AW16  385,000   100,000   285,000 
9.50% Guaranteed Bonds due 2027 USU70577A572  6,440,000   150,000   6,290,000 


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In a second tender offer, the Master Trust offered to purchase for cash a portion of the outstanding principal amounts of certain debt securities issued by the Master Trust (which we refer to as the Partial Tender Offers), on the terms and subject to the conditions set forth in its offer to purchase dated October 10, 2007 and the accompanying letter of transmittal. The Master Trust purchased the following securities in its Partial Tender Offers in November 2007.
                       
    Outstanding
           Aggregate
 
    Principal
  Aggregate
        Principal
 
    Amount
  Principal
  Final
     Amount
 
    Before
  Amount
  Principal
     Outstanding
 
    Tender
  Tendered and
  Purchase
  Final
  After
 
Series of Securities
 ISIN Offers  Not Withdrawn  Amount  Factor  Tender Offers 
 
8.50% Notes due 2008 US706451AA95 U.S. $930,079,000  U.S.$585,957,000  U.S.$113,084,000   19.4226%  U.S.$816,995,000 
  US70645JAC62  30,000   30,000   10,000       20,000 
  US70645KAC36  15,296,000   958,000   180,000       15,116,000 
6.125% Notes due 2008 US706541AM34  709,933,000   438,750,000   423,533,000   96.5586%   281,400,000 
  US70645KAK51  23,742,000   16,932,000   16,342,000       12,401,000 
9.375% Guaranteed Notes US706541BA86  468,601,000   350,928,000   173,826,000   49.5679%   294,775,000 
due 2008 USU70577AP34  5,267,000   2,123,000   1,049,000       4,218,000 
7.875% Notes due 2009 US70645JAK88  907,603,000   578,202,000   109,876,000   18.9736%   797,727,000 
  US70645KAG40  4,451,000   1,550,000   293,000       4,158,000 
9.125% Notes due 2010 US706451AB78  927,824,000   477,445,000   374,969,000   78.7345%   552,855,000 
  US70645KAB52  1,594,000   140,000   110,000       1,484,000 
The open market purchases and tender offers described above were part of PEMEX’s ongoing efforts to manage its external liabilities.
 
2006 Financing Activities.  During the period from January 1, 2006 to December 31, 2006, Petróleos Mexicanos obtained U.S. $56.2 million in nominal terms in loans from export credit agencies and the Pemex Project Funding Master Trust obtained U.S. $1,914.2 million in nominal terms in loans from financial institutions for use in financing PIDIREGAS. In addition, we participated in the following financing activities:
 
 •  on January 4, 2006, Petróleos Mexicanos borrowed U.S. $800,000,000 under its U.S. $1.25 billion syndicated revolving facility entered into on July 15, 2005 with a group of international financial institutions; under this agreement, borrowings may be made by either the Pemex Project Funding Master Trust or Petróleos Mexicanos; the facility matures in 2010; this borrowing was made in two tranches, A and B, each in the amount of U.S. $400,000,000; both tranches were repaid on February 3, 2006;
 
 •  the Pemex Project Funding Master Trust issued U.S. $750,000,000 of its 5.75% Notes due in 2015 and U.S. $750,000,000 of its 6.625% Bonds due 2035 on February 2, 2006; the notes and bonds were issued under the Pemex Project Funding Master Trust’s Medium-Term Note program, Series A, are guaranteed by Petróleos Mexicanos and were re-openings of earlier issuances;
 
 •  on February 13, 2006, the Pemex Project Funding Master Trust completed a second exchange of outstanding Petróleos Mexicanos debt securities for new securities issued by the Pemex Project Funding Master Trust, pursuant to which the Pemex Project Funding Master Trust issued U.S. $29,334,000 of its 9.00% Guaranteed Notes due 2007, U.S. $34,289,000 of its 8.85% Guaranteed Notes due 2007, U.S. $54,011,000 of its 93/8% Guaranteed Notes due 2008, U.S. $16,207,000 of its 91/4% Guaranteed Bonds due 2018, U.S. $11,920,000 of its 8.625% Guaranteed Bonds due 2023, U.S. $21,773,000 of its 9.50%


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Guaranteed Bonds due 2027 and U.S. $17,776,000 of its 9.50% Guaranteed Puttable or Mandatory Exchangeable Securities (“POMES(POMESsm”) due 2027, in exchange for an equal principal amount of corresponding 9.00% Guaranteed Notes due 2007, 8.85% Global Guaranteed Notes due 2007, 93/8% Global Guaranteed Notes due 2008, 91/4% Global Guaranteed Bonds due 2018, 8.625% Bonds due 2023, 9.50% Global Guaranteed Bonds due 2027 and 9.50% POMESsm due 2027 (collectively,(which we refer to collectively as the “old securities”)old securities) issued by Petróleos Mexicanos; the old securities were subsequently acquired by Petróleos Mexicanos from the Pemex Project Funding Master Trust;


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 •  the Pemex Project Funding Master Trust entered into a credit agreement in the amount of U.S. $4.25 billion on May 23, 2006 with a group of international financial institutions, to refinance the syndicated facility dated March 22, 2005 with improved financial conditions; this agreement is guaranteed by Petróleos Mexicanos and consists of two separate tranches of U.S. $1.5 billion and U.S. $2.75 billion, which become due in 2011 and 2013, respectively;
 
 •  on June 7 and on June 22, 2006, Petróleos Mexicanos borrowed U.S. $250.0 million and U.S. $1.0 billion, respectively, under its U.S. $1.25 billion syndicated revolving facility entered into on July 15, 2005 referred to above; each borrowing was made in two tranches; the U.S. $1.0 billion borrowed on June 22, 2006 was repaid on July 24, 2006;
 
 •  on June 7, 2006, Petróleos Mexicanos borrowed the full amount of its U.S. $1.25 billion new syndicated revolving facility, entered into with a group of international financial institutions on May 3, 2006; under this agreement, borrowings may be made by either the Pemex Project Funding Master Trust or Petróleos Mexicanos; this borrowing was repaid on October 6, 2006;
 
 •  on June 16, 2006, Fideicomiso F/163 issued a total of Ps. 10 billion in nominal terms of itscertificados bursátiles(publicly-traded (publicly-traded notes) guaranteed by Petróleos Mexicanos in the Mexican domestic market;
 
 •  on September 22, 2006, the Pemex Project Funding Master Trust borrowed U.S. $1.0 billion under its syndicated revolving facility of U.S. $1,250,000,000 entered into on July 15, 2005. The facility was fully repaid in December 2006;
 
 •  on October 31, 2006, the Pemex Project Funding Master Trust reutilized the full amount of its U.S. $1.25 billion syndicated revolving facility entered into with a group of financial institutions on May 3, 2006; the facility was fully repaid in December 2006;
 
 •  on December 28, 2006, the Pemex Project Funding Master Trust issued through an inter-company private placement U.S. $1,000,000,000 of Floating Rate Notes due 2011 and U.S. $2,000,000,000 of Floating Rate Notes due 2012; both notes were issued under the Pemex Project Funding Master Trust’s Medium-Term Note Program, Series A, and were purchased by Petróleos Mexicanos; and
 
 •  on December 29, 2006, Fideicomiso F/163 issued through an inter-company private placement Ps. 22,000,000,000 of floating rate debt securities due in 2008, which were purchased by Petróleos Mexicanos.
 
The inter-company private placements described above did not increase our consolidated net indebtedness.
2005 Financing Activities.  During the period from January 1, 2005 to December 31, 2005, we participated in the following financing activities:
•  Petróleos Mexicanos obtained loans from export credit agencies totaling U.S. $59.9 million;


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•  Petróleos Mexicanos issued, under its short-term peso-denominated publicly-traded notes program, a total of Ps. 16.0 billion in nominal terms of notes in the Mexican domestic market, none of which was outstanding as of December 31, 2005;
•  on October 26, 2005, Petróleos Mexicanos utilized U.S. $800,000,000 from its U.S. $1.25 billion syndicated revolving facility; this utilization was made in two tranches, A and B, each in the amount of U.S. $400,000,000; both tranches were rolled-over on November 25, 2005 and repaid on December 28, 2005;
•  the Pemex Project Funding Master Trust increased the size of its Medium-Term Note program, Series A, from U.S. $11 billion to U.S. $20 billion, and on February 24, 2005, it issued €1 billion of its 5.50% Notes due 2025, guaranteed by Petróleos Mexicanos, under the program;
•  the Pemex Project Funding Master Trust entered into a syndicated credit agreement in the amount of U.S. $4.25 billion on March 22, 2005 with a group of international financial institutions to refinance outstanding amounts of certain syndicated facilities and for new PIDIREGAS financing; this agreement was guaranteed by Petróleos Mexicanos and consisted of two separate tranches, which become due in 2010 and 2012, respectively; this agreement was refinanced in May 2006, as discussed under “—2006 Financing Activities” above;
•  the Pemex Project Funding Master Trust issued U.S. $1,500,000,000 of notes on June 8, 2005, under its Medium-Term Note Program, Series A, in two tranches: U.S. $1,000,000,000 of 5.75% Notes due in 2015 and U.S. $500,000,000 of 6.625% Bonds due 2035, both guaranteed by Petróleos Mexicanos;
•  the Pemex Project Funding Master Trust issued U.S. $175,000,000 of floating rate notes due 2008 on August 31, 2005, bearing interest at a rate per annum equal to LIBOR for a period of one, two, three or six months (at the election of the Pemex Project Funding Master Trust), plus 42.5 basis points, and guaranteed by Petróleos Mexicanos;
•  the Pemex Project Funding Master Trust issued U.S. $750,000,000 of floating rate notes due 2012 on December 1, 2005, under its Medium-Term Note Program, Series A, guaranteed by Petróleos Mexicanos and bearing interest at a rate per annum equal to LIBOR plus 60 basis points;
•  Fideicomiso F/163 issued a total of Ps. 6 billion in nominal terms of its publicly-traded notes denominated inUnidades de Inversión(Units of Investment, or “UDIs”) in the Mexican domestic market on February 1, 2005, which were guaranteed by Petróleos Mexicanos and were issued in a reopening of an earlier issuance. The value of UDIs are calculated daily by Banco de México based on the National Consumer Price Index;
•  Fideicomiso F/163 issued a total of Ps. 15 billion in nominal terms of its publicly-traded notes in the Mexican domestic market on February 11, 2005, guaranteed by Petróleos Mexicanos, consisting of two separate tranches:
•  Ps. 7.5 billion of its publicly-traded notes due February 11, 2010, bearing interest at the91-day Cetes (Treasury bill) rate plus 51 basis points; and
•  Ps. 7.5 billion of its publicly-traded notes due February 11, 2013, bearing interest at the182-day Cetes rate plus 57 basis points;
•  Fideicomiso F/163 issued a total of Ps. 10 billion in nominal terms of its publicly-traded notes in the Mexican domestic market on May 13, 2005, which were guaranteed by


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Petróleos Mexicanos and were reopenings of previous issuances, consisting of two separate tranches:
•  Ps. 5,012.6 million of its publicly-traded notes due February 4, 2010, bearing interest at the91-dayCetes(Treasury bill) rate plus 51 basis points; and
•  Ps. 4,987.4 million of its publicly-traded notes due January 31, 2013, bearing interest at the182-dayCetesrate plus 57 basis points;
•  Fideicomiso F/163 issued a total of Ps. 5,000,000,000 in nominal terms of notes due July 15, 2015, in the Mexican domestic market on July 29, 2005, guaranteed by Petróleos Mexicanos, bearing interest at a fixed rate of 9.91%;
•  Fideicomiso F/163 issued a total of Ps. 4,500,000,000 in nominal terms of notes due July 16, 2015, guaranteed by Petróleos Mexicanos, in the Mexican domestic market on October 21, 2005, through a reopening of an earlier issue, bearing interest at a fixed rate of 9.91%; and
•  Fideicomiso F/163 issued a total of Ps. 5,500,000,000 in nominal terms of notes due October 20, 2011, guaranteed by Petróleos Mexicanos, in the Mexican domestic market on October 21, 2005 at the 91-dayCetes rate plus 35 basis points.
In the period from January 1 to December 31, 2005, Petróleos Mexicanos’ net payments on borrowings totaled U.S. $4.5 billion and were as follows:
•  U.S. $54.9 million in respect of direct loans;
•  U.S. $151.7 million in respect of credit lines from export credit agencies;
•  U.S. $800.0 million in respect of revolving credits;
•  U.S. $3.4 billion in respect of bond issues;
•  U.S. $38.2 million in respect of restructured debt; and
•  U.S. $42.0 million in respect of leases.
In the period from January 1 to December 31, 2005, the Pemex Project Funding Master Trust’s net payments on borrowings totaled U.S. $5.5 billion and were as follows:
•  U.S. $2.3 billion in respect of foreign trade financing;
•  U.S. $660.0 million in respect of project financing;
•  U.S. $500.0 million in respect of bond issues;
•  U.S. $1.9 billion in respect of financing from commercial banks; and
•  U.S. $101.2 million in respect of theConvenio de Derivación de Fondos(Transfer of Funds Agreement) with the Mexican Government.


116

The following table sets forth the analysis of our total indebtedness as of December 31, 20062007 based on short-and long-term debt and fixed or floating rates:
 
     
  In millions
 
  of U.S. dollars 
 
Short-term debt
    
Lines of credit with variable interest rates established under committed credit facilities with various international commercial banks U.S.  $2,7114,377 
Lines of credit with fixed interest rates  3,0172,614 
     
Total short-term debt
 U.S.  $5,7286,991 
     
Long-term debt
Fixed rate instruments
    
Instruments with fixed annual interest rates ranging from 3.23% to 10.61% and maturities ranging from 2008 to 2035 U.S. $27,04820,932
 
Variable rate instruments
    
Drawings under lines of credit based on LIBOR and other variable rates with maturities ranging from 2008 to 2018 U.S. $11,19310,651 
Floating rate notes with maturities ranging from 2008 to 2014  8,2147,513 
     
Total variable rate instruments
 U.S. $19,407
Total long-term debt
46,45518,164 
     
Total long-term debt
U.S. $39,096
Total indebtedness(1)
 U.S. $52,18346,087 
     
 
 
(1)Excludes accrued interest and includes notes payable to contractors.


117122

 
The portion of our total debt at December 31, 20062007 corresponding to borrowings of the Pemex Project Funding Master Trust and the Fideicomiso F/163 was U.S. $53.1$41.1 billion, composed as follows:
 
     
  In millions
 
  of U.S. dollars 
 
Pemex Project Funding Master Trust
    
Long-term debt
    
Instruments with fixed annual interest rates ranging from 3.23% to 10.61%9.5% maturities ranging from 2008 to 2035 U.S.$20,24814,592 
Drawings under lines of credit based on LIBOR and other variable rates maturities ranging from 2008 to 2018  9,8789,528 
Floating rate notes with maturities ranging from 2008 to 2012  2,9252,543 
Obligation to Pemex-Exploration and Production in respect of funds allocated to the Pemex Project Funding Master Trust relating to the sale of accounts receivables by PMI to Pemex Finance, Ltd.(1)
  1,4911,166 
Intercompany private placements at fixed rate(2)
  2,000— 
Intercompany private placements at variable rate(2)
  1,00016,697
 
Short-term debt
    
Lines of credit with variable interest rates established under committed credit facilities with various international commercial banks U.S.$9703,676 
Lines of credit with fixed interest rates  1,5151,779 
Obligation to Pemex-Exploration and Production in respect of funds allocated to the Pemex Project Funding Master Trust relating to the sale of accounts receivables by PMI to Pemex Finance, Ltd.(1)
  377325
Total Master Trust’s indebtedness
50,306 
     
Total Pemex Project Funding Master TrustTrust’s intercompany debt
 U.S.$40,40418,188 
     
Total consolidated borrowings of Master Trust
U.S.$32,118
Fideicomiso F/163
    
Long-term debt
    
Instruments with fixed annual interest rates ranging from 8.38% to 11% and maturities ranging from 2008 to 2019 U.S.$$2,9862,937 
Drawings under lines of credit based on LIBOR and other variable rates and maturities ranging from 2008 to 2014  6,0075,655 
Intercompany private placements at floating rate(2)
  2,0222,945
 
Short-term debt
    
Lines of credit with variable interest rates established under committed credit facilities with various internationalnational commercial banks U.S.$1,556309 
Lines of credit with fixed interest rates  9495
Total Fideicomiso F/163’s indebtedness
11,941
 
     
Total Fideicomiso F/163163’s intercompany debt
  12,6652,945 
     
Total Indebtednessconsolidated borrowings of Fideicomiso F/163
U.S.$8,996
Total intercompany debt
U.S.$21,133
Total consolidated indebtedness of Pemex Project Funding Master Trust and Fideicomiso F/163(3)
 U.S.  $53,068$41,114 
     
 
 
Note: Numbers may not total due to rounding.rounding
 
(1)This amount is not reflected in our consolidated financial statements due to the offsetting effects of the consolidation of the results of both Pemex-Exploration and Production, Pemex Project Funding Master Trust and Pemex Finance, Ltd. (i.e.(i.e., the effects of intercompany indebtedness are eliminated).
 
(2)Intercompany private placements do not increase PEMEX’s total indebtedness, since their balance isbalances are eliminated in the consolidation.
 
(3)Excludes accrued interest and notes payable to contractors.


118123

 
The table below sets forth our total indebtedness as of December 31 for each of the five years from 20022003 to 2006.2007.
 
Total Indebtedness of PEMEX
 
                                           
 Year Ended December 31,(1)  Year Ended December 31,(1) 
 2002 2003 2004 2005 2006    2003 2004 2005 2006 2007 
 (in millions of U.S. dollars)(3)  (in millions of U.S. dollars)(3) 
Domestic Debt in Various Currencies(3)
 U.S.$694  U.S. $2,900  U.S. $6,530  U.S.$10,416  U.S.$10,885      U.S.$2,900  U.S.$6,530  U.S.$10,416  U.S.$10,885  U.S.$9,227 
External Debt(4)
                                            
MYRA(5)
 U.S.$224  U.S. $153  U.S. $77  U.S. $38   —      U.S.  $153  U.S.   $77  U.S.    $38   —   — 
Other direct bank loans(6)  3,674   2,769   1,789   1,186   686       2,769   1,789   1,186   686   3,013 
Securities                                            
Bonds(6)(7)
  11,515   16,285   22,133   25,931   27,583       16,285   22,133   25,931   27,583   20,766 
Commercial paper  433   432   —   —   —       432   —   —   —   — 
                      
Total securities  11,948   16,717   22,133   25,931   27,583       16,717   22,133   25,931   27,583   20,766 
Trade financing(7)(8)
                                            
Acceptance lines  785   540   —   —   —       540   —   —   —   — 
Advances from commercial banks(8)(9)
  2,150   3,323   2,409   4,370   4,310       3,323   2,409   4,370   4,310   4,250 
                      
Total trade financing  2,935   3,863   2,409   4,370   4,310       3,863   2,409   4,370   4,310   4,250 
Purchasing loans(9)
  380   387   366   309   257     
Purchasing loans(10)
  387   366   309   257   171 
Financial leases  279   254   197   153   70       254   197   153   70   — 
Export credit agency loans (project finance)(10)
  2,866   4,636   5,471   6,322   7,439     
Export credit agency loans (project finance)(11)
  4,636   5,471   6,322   7,439   7,434 
Notes payable to contractors  1,330   1,195   1,186   1,068   952       1,195   1,186   1,068   952   1,227 
                      
Total external debt U.S.$23,636  U.S.$29,974  U.S.$33,628  U.S.$39,377  U.S.$41,297      U.S.$29,974  U.S. $33,628  U.S.$39,377  U.S.$41,297  U.S.$36,861 
                      
Total Indebtedness(2)
 U.S.$24,330  U.S.$32,874  U.S.$40,158  U.S.$49,793  U.S.$52,183      U.S.$32,874  U.S.$40,158  U.S.$49,793  U.S.$52,183  U.S.$46,087 
                      
 
Note: Numbers may not total due to rounding.
 
(1)Figures do not include accrued interest. Accrued interest was U.S. $331 million, U.S. $459 million, U.S. $231 million, U.S. $95 million, U.S. $139 million and U.S. $139$5.4 million at December 31, 2002, 2003, 2004, 2005, 2006 and 2006,2007, respectively.
 
(2)Includes U.S. $14.1 billion, U.S. $22.5 billion, U.S. $26.0 billion, U.S. $32.9 billion , U.S. $35.5 billion and U.S. $37.4$32.1 billion of indebtedness of the Pemex Project Funding Master Trust as of December 31, 2002, 2003, 2004, 2005, 2006 and 2006,2007, respectively, and U.S. $1.4 billion, U.S. $5.5 billion, U.S. $9.9 billion, U.S. $10.6 billion and U.S. $10.6$9.0 billion of indebtedness of Fideicomiso F/163 as of December 31, 2003, 2004, 2005, 2006 and 2006,2007, respectively.
 
(3)Indebtedness payable in currencies other than U.S. dollars was first converted into pesos for accounting purposes at the exchange rates set by Banco de México and then converted from pesos to U.S. dollars at the following exchange rates: Ps. 10.3125 = U.S. $1.00 for 2002, Ps. 11.236 = U.S. $1.00 for 2003, Ps.11.2648Ps. 11.2648 = U.S. $1.00 for 2004, Ps. 10.7777 = U.S. $1.00 for 2005, and Ps. 10.8810 = U.S. $1.00 for 2006.2006 and Ps. 10.8662 = U.S. $1.00 for 2007. See Notes 3 and 910 to our consolidated financial statements included herein.
 
(4)Indebtedness payable other than in pesos and owed to persons or institutions having its head office or chief place of business outside Mexico, and payable outside the territory of Mexico.
 
(5)Multi-Year Restructuring Agreement.
 
(6)Includes U.S. $2.5 billion under a syndicated revolving credit facility in 2007.
(7)Includes, in 2004, 2005, 2006 and 2006,2007, issuance by RepCon Lux, S.A. of U.S. $1.37 billion of its 4.5% Guaranteed Exchangeable Bonds due 2011 and in 2005, 2006 and 2006,2007, U.S. $2.3 billion, and U.S. $1.9 billion and U.S. $1.5 billion, respectively, of bonds issued by Pemex Finance, Ltd., respectively. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—2005 “—Financing Activities.”Activities of Pemex Finance, Ltd” below.
 
(7)(8)To finance external trade of crude oil and derivatives.
 
(8)(9)Includes indebtedness of the Pemex Project Funding Master Trust of U.S. $1.9 billion in trade financing advances from commercial banks as of December 31, 2002, U.S. $3.2 billion as of December 31, 2003, U.S. $2.4 billion as of December 31, 2004, U.S. $4.4 billion as of December 31, 2005, and U.S. $4.3 billion as of December 31, 2006.2006 and U.S. $4.25 billion as of December 31, 2007.
 
(9)(10)To finance imports of equipment and spare parts.
 
(10)(11)Includes U.S. $2,771 million, U.S. $4,529 million, U.S. $5,428 million, U.S. $6,285 million, U.S. $7,409 million and U.S. $7,409$7,411 million of indebtedness of the Pemex Project Funding Master Trust as of December 31, 2002, 2003, 2004, 2005, 2006 and 2006,2007, respectively.
Source: Petróleos Mexicanos.Mexicanos.


119124

Financing Activities of Pemex Finance, Ltd.
 
Commencing on December 1, 1998, Petróleos Mexicanos, Pemex-Exploration and Production, PMI and P.M.I. Services, B.V. have entered into several agreements with Pemex Finance, Ltd. Under these contracts, Pemex Finance, Ltd. purchases certain existing PMI accounts receivable for crude oil as well as certain accounts receivable to be generated in the future by PMI related to crude oil. The receivables sold are those generated by the sale of Maya crude oil to designated customers in the United States, Canada and Aruba. The net proceeds obtained by Pemex-Exploration and Production from the sale of such receivables under the agreements are utilized for PIDIREGAS expenditures. Pemex Finance, Ltd. obtains resources for the acquisition of such accounts receivable through the placement of debt instruments in the international markets.
 
On July 1, 2005, we entered into an option agreement with BNP Paribas Private Bank and Trust Cayman Limited to acquire 100% of the shares of Pemex Finance, Ltd. As a result, the financial results of Pemex Finance, Ltd., under Mexican FRS, are consolidated into the financial statements of Petróleos Mexicanos. Consequently, sales of accounts receivable by Pemex Finance, Ltd. have been reclassified as debt. The option to purchase the shares of Pemex Finance, Ltd. can only be exercised once its remaining debt, which was approximately U.S. $1.9$1.53 billion as of December 31, 2006,2007, has been redeemed.
 
As of December 31, 2006,2007, the outstanding debt of Pemex Finance, Ltd. was composed of U.S. $1.9$1.53 billion aggregate principal amount of notes with maturities ranging from 20072008 to 2018 and interest rates ranging between 8.02%8.875% and 10.61%, as well as two series of floating rate notes.
 
20072008 Financing Activities.  On each of February 15 and May 15, 2008, Pemex Finance, Ltd. made payments of U.S. $83.3 million in principal of its notes. Pemex Finance, Ltd. has not incurred any additional indebtedness during 2008.
2007 Financing Activities.  During 2007, Pemex Finance, Ltd. made payments of U.S. $107.5 million and U.S. $112.5$387.0 million in principal onof its notes, respectively.notes. Pemex Finance, Ltd. did not incur any additional indebtedness during the first five months of 2007.
 
2006 Financing Activities.  During 2006, Pemex Finance, Ltd. made payments of U.S. $390$390.0 million in principal of its notes. Pemex Finance, Ltd. did not incur any additional indebtedness during 2006.
 
2005 Financing Activities.  On June 27, 2005, Pemex Finance, Ltd. redeemed the following series of its outstanding notes at a redemption price equal to the principal amount thereof plus accrued interest thereon and a make-whole premium:
SeriesOutstanding Principal Amount
6.55% Notes due 2008U.S. $194,117,647.07
6.30% Notes due 2010U.S. $400,000,000.00
7.33% Notes due 2012U.S. $250,000,000.00
7.80% Notes due 2013U.S. $150,000,000.00
During 2005, Pemex Finance, Ltd. made payments of U.S. $305 million in principal of its notes. On June 28, 2005, Pemex Finance, Ltd. paid U.S. $550 million plus accrued interest to Petróleos Mexicanos in connection with certain subordinated debt obligations. Pemex Finance, Ltd. did not incur any additional indebtedness during 2005.


120

Contractual Obligations and Off-balance Sheet Arrangements
 
Information about our long-term contractual obligations and off-balance sheet arrangements outstanding as of December 31, 20062007 is set forth below. This information is important in understanding our financial position. In considering the economic viability of investment opportunities, we view any source of financing, for example, operating leases or sales of future accounts receivable, as being economically equivalent to consolidated debt.


125

Contractual Obligations as of December 31, 20062007(1)
 
                                        
   Payments due by period    Payments due by period 
   Less than 1
     After
    Less than 1
     After
 
 Total  year 1-3 years 4-5 years 5 years  Total year 1-3 years 4-5 years 5 years 
   (in millions of U.S. dollars)    (in millions of U.S. dollars) 
Contractual obligations recognized in balance sheet:                                        
Long-term debt(2)
 U.S. $51,160.6  U.S.$5,405.9  U.S.$10,808.7  U.S.$12,166.6  U.S.$22,779.5  U.S. $44,863.1  U.S. $6,576.8  U.S. $12,158.1  U.S. $8,699.8  U.S. $17,428.3 
Notes payable to contractors(2)
  952.5   309.6   520.1   122.9   —   1,226.6   416.6   505.4   60.4   244.2 
Capital lease obligations(3)
  70.3   13.2   22.4   22.4   12.3 
Other long-term liabilities:                                        
Dismantlement and abandonment costs obligations(4)
  1,419.6   50.3   183.5   199.3   986.4 
Employee benefit plan(5)
  41,777.2   2,525.0   5,505.0   6,452.0   27,295.2 
Dismantlement and abandonment costs obligations(3)
  1,578.1   104.2   205.5   250.0   1,018.5 
Employee benefit plan(4)
  48,609.6   2,862.2   6,151.0   7,241.1   32,355.3 
                      
Total contractual obligations recognized in balance sheet
  95,380.2   8,304.0   17,039.8   18,963.2   51,073.4   96,277.4   9,959.8   19,020.0   16,251.3   51,046.4 
                      
Other contractual obligations not recognized in liabilities:                                        
PIDIREGAS commitments(6)
  8,356.7   3,478.2   2,459.6   328.6   2,090.3 
Financed Public Works Contracts(7)
  5,760.0   378.1   756.1   756.1   3,869.7 
Nitrogen supply contract(8)
  1,184.9   214.3   263.1   230.5   477.0 
Minimum guaranteed dividends(9)
  392.3   392.3   —   —   — 
PIDIREGAS commitments(5)
  28,168.5   5,090.6   12,727.5   3,478.0   6,872.5 
Financed Public Works Contracts(6)
  640.4   45.7   91.4   91.3   412.0 
Nitrogen supply contract(7)
  1,685.4   181.3   314.1   318.8   871.3 
                      
Total contractual obligations not recognized in liabilities  15,693.9   4,462.9   3,478.8   1,315.2   6,437.0   30,494.4   5,317.6   13,133.0   3,888.1   8,155.8 
                      
Total contractual obligations
 U.S.$111,074.1  U.S. $12,766.9  U.S.$20,518.6  U.S.$20,278.4  U.S.$57,510.4  U.S.$126,771.9  U.S. $15,277.4  U.S.$32,153.0  U.S. $20,139.4  U.S.$59,202.1 
                      
 
 
Note: These figures do not include accrued interest or future interest payments. Numbers may not total due to rounding.
(1)All amounts calculated in accordance with Mexican FRS.
(2)See Note 10 to our consolidated financial statements.
(3)See Note 3e., 3i. and 9 to our consolidated financial statements.
(3)
(4)See Notes 9 and 20 II g.Note 12 to our consolidated financial statements.
(4)
(5)As of December 31, 2007 PEMEX had entered into contracts with various contractors for an approximate amount of Ps. 306,084.6 million (U.S. $28,168.5 million). These contracts are for the development of PIDIREGAS. Figures in the table include only the amounts corresponding to the works pending to be performed by the third-party contractors.
(6)See Note 2h.15c. to our consolidated financial statements.
(5)See Note 11 to our consolidated financial statements.
(6)See Note 12e. to our consolidated financial statements.
(7)See Note 12c.15b. to our consolidated financial statements.
(8)See Note 12a. to our consolidated financial statements.
(9)See Note 14 and 20 I l. to our consolidated financial statements and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Equity Structure and the Certificates of Contribution A.”
 
As of December 31, 2006,2007, we did not have any off-balance sheet arrangements of the type that we are required to disclose under Item 5.E ofForm 20-F.


121

The following tables set forth information regarding the fair value of our derivative contracts in connection with natural gas trading activities as of December 31, 2006:2007:
 
Fair Value of Natural Gas Derivative Contracts
 
(in thousands of U.S. dollars)
 
     
Fair value of contracts outstanding at the beginning of the period U.S.$(455,4315,488)
Contracts realized or otherwise settled during the period  (175,98811,440)
Fair value of new contracts when entered into during the period  5,0471,314 
Other changes in fair values  279,837(16,681)
     
Fair value of contracts outstanding at the end of the period U.S.$5,4411,560.9 
     


126

Fair Value of Natural Gas Derivative Contracts at Period-End by Maturity
 
                     
  Maturity
     Maturity in
  
  less than
 Maturity
 Maturity
 excess of 5
 Total fair
Source of Fair Value 1 year 1-3 years 4-5 years  years value
  (in thousands of U.S. dollars)
 
Prices actively quoted U.S.$527  U.S.$294  U.S.$0  U.S.$0  U.S.$822 
Prices provided by other external sources U.S.$3,750  U.S.$869  U.S.$0  U.S.$0  U.S.$4,620 
Maturity less
Maturity in
than
Maturity
Maturity
excess of 5
Source of Fair Value
1 year1-3 years4-5 yearsyearsTotal fair value
(in thousands of U.S. dollars)
Prices actively quoted(U.S.   $38.33)———(U.S.   $38.33)
Prices provided by other external sourcesU.S.$1,394.17U.S.$205.10——U.S.$1,599.26
 
Results of Operations by Business Segment
 
This section presents results of our operations by business segment, including our central corporate operations and the operations of the consolidated subsidiary companies.


122

Revenue by Business Segment
 
The following table sets forth our trade and intersegment net sales revenues by business segment for the five fiscal years ended December 31, 20062007 as well as the percentage change in sales revenues for the years 20042005 to 2006.2007.
 
                                                        
 Year Ended December 31, 2005
 2006
  Year Ended December 31, 2006
 2007
 
 2002 2003 2004 2005 2006 vs. 2004 vs. 2005  2003 2004 2005 2006 2007 vs. 2005 vs. 2006 
 (in millions of constant pesos at December 31, 2006)  (in millions of constant pesos at December 31, 2007) 
           (%) (%)            (%) (%) 
Exploration and Production
                                                        
Trade sales(1)
  —   —   —   —   —   —   —   —   —   —   —   —   —   — 
Intersegment sales Ps.340,683  Ps.482,533  Ps.603,190  Ps.745,320  Ps.857,769   23.6   15.1  Ps.500,671  Ps.625,864  Ps.773,337  Ps.890,012  Ps.912,295   15.1   2.5 
                      
Total net sales  340,683   482,533   603,190   745,320   857,769   23.6   15.1   500,671   625,864   773,337   890,012   912,295   15.1   2.5 
Refining
                                                        
Trade sales(1)(2)
  302,518   322,080   339,916   367,539   392,220   8.1   6.7   334,187   352,693   381,355   406,963   430,383   6.7   5.8 
Intersegment sales  16,992   26,512   29,054   39,811   44,567   37.0   11.9   27,509   30,146   41,308   46,242   42,229   11.9   (8.7)
                      
Total net sales  319,510   348,592   368,970   407,350   436,787   10.4   7.2   361,696   382,840   422,663   453,206   472,612   7.2   4.3 
Gas and Basic Petrochemicals
                                                        
Trade sales(1)
  69,238   103,557   124,778   139,735   133,664   12.0   (4.3)  107,450   129,468   144,987   138,688   139,963   (4.3)  0.9 
Intersegment sales  31,348   57,461   72,240   85,940   80,049   19.0   (6.8)  59,621   74,956   89,170   83,058   82,941   (6.9)  (0.1)
                      
Total net sales  100,586   161,018   197,018   225,675   213,713   14.5   (5.3)  167,071   204,424   234,158   221,746   222,904   (5.3)  0.5 
Petrochemicals
                                                        
Trade sales(1)
  8,782   12,336   18,090   21,036   20,855   16.3   (0.9)  12,800   18,770   21,827   21,639   21,702   (0.9)  0.3 
Intersegment sales  4,741   6,854   7,919   9,174   9,305   15.8   1.4   7,112   8,217   9,518   9,654   35,942   1.4   272.3 
                      
Total net sales  13,523   19,190   26,009   30,210   30,160   16.1   (0.2)  19,911   26,987   31,345   31,293   57,644   (0.2)  84.2 
Corporate and Subsidiary Companies
                            
Trade sales(1)
  201,768   269,400   348,985   437,973   515,757   25.5   17.8 
Corporate and subsidiary companies
                            
Trade sales(1)(3)
  281,818   364,190   455,660   536,220   543,988   17.7   1.4 
Intersegment sales and eliminations  (393,764)  (573,360)  (712,403)  (880,244)  (991,691)  23.6   12.7   (594,913)  (739,182)  (913,332)  (1,028,969)  (1,073,408)  12.7   4.3 
                      
Total net sales  (191,996)  (303,960)  (363,418)  (442,268)  (475,934)  21.7   7.6   (313,095)  (374,992)  (457,672)  (492,749)  (529,420)  7.7   7.4 
           
Total Net Sales Ps.582,306  Ps.707,373  Ps.831,769  Ps.966,284  Ps.1,062,495   16.2   10.0  Ps.736,254  Ps.865,122  Ps.1,003,831  Ps.1,103,510  Ps.1,136,035   9.9   2.9 
                      
 
 
Note: Numbers may not total due to rounding.
(1)Sales to external customers.
(2)Includes IEPS tax.tax, except in 2006 and 2007, when the IEPS tax rate was negative.
(3)Includes services income.
Source: PEMEX’s financial statements.


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Income by Business Segment
 
The following table sets forth our net income (loss) by business segment for each year in the five-year period ended December 31, 2006,2007, as well as the percentage change in income for the years 20042005 to 2006.2007.
 
                                                        
 Year Ended December 31, 2005
 2006
  Year Ended December 31, 2006
 2007
 
 2002 2003 2004 2005 2006 vs. 2004 vs. 2005  2003 2004 2005 2006 2007 vs. 2005 vs. 2006 
 (in millions of constant pesos at December 31, 2006) (%) (%)  (in millions of constant pesos at December 31, 2007) (%) (%) 
Business Segment
                                                        
Exploration and Production Ps.17,617  Ps.1,268  Ps.(14,698) Ps.(18,988) Ps.73,139   29.2   —  Ps.1,316  Ps.(15,250) Ps.(19,702) Ps.75,888  Ps.19,966   —   (73.7)
Refining  (40,319)  (40,965)  (23,720)  (55,425)  (34,046)  133.7   (38.6)  (42,505)  (24,612)  (57,508)  (35,326)  (45,654)  (38.6)  (29.2)
Gas and Basic Petrochemicals  2,624   8,690   12,529   6,953   6,083   (44.5)  (12.5)  9,017   13,000   7,214   6,312   4,958   (12.5)  (21.5)
Petrochemicals  (13,822)  (16,534)  (13,241)  (17,205)  (17,376)  29.9   1.0   (17,156)  (13,739)  (17,852)  (18,029)  (16,086)  1.0   (10.8)
Corporate and Subsidiary Companies(1)
  6,106   1,570   11,717   5,291   17,452   (54.8)  229.8 
Corporate and subsidiary companies(1)
  1,629   12,157   5,490   18,108   18,508   229.8   2.2 
                      
Total net income/(loss) Ps.(27,794) Ps.(45,971) Ps.(27,413) Ps.(79,374) Ps.45,252   189.6   —  Ps.(47,699) Ps.(28,443) Ps.(82,358) Ps.46,953  Ps.(18,308)  —   — 
                      
 
 
Note: Numbers may not total due to rounding.
(1)Includes intersegment eliminations.
Source:  PEMEX’s financial statements.
2007 Compared to 2006
Exploration and Production
In 2007, Pemex-Exploration and Production’s sales of crude oil and natural gas to the PMI Group increased by 4.4% in peso terms and by 8.8% in U.S. dollar terms, mainly due to an increase in the average sales prices and volumes of our principal petroleum products. The weighted average price of crude oil sold by Pemex-Exploration and Production to the PMI Group for export was U.S. $61.57 in 2007, as compared to U.S. $53.20 in 2006. Intersegment sales increased by 2.5%, principally as a result of the increase in crude oil export prices. Net income related to exploration and production activities decreased by 73.7%, or Ps. 55,922 million, from Ps. 75,888 million in 2006 to Ps.19,966 million in 2007, primarily as a result of an increase in taxes and duties, as well as an increase in operating expenses.
Refining
In 2007, trade sales related to refining activities increased by 5.8%, from Ps. 406,963 million in 2006 to Ps. 430,383 million in 2007, due to an increase in the average sales prices and volumes of our principal petroleum products. Intersegment sales decreased by Ps. 4,013 million, or 8.7%, to Ps. 42,229 million, largely due to the fact that products produced by certain plants at the Cangrejera field began to be produced and commercialized by Pemex-Petrochemicals. In 2007, the total loss related to refining activities was Ps. 45,654 million, 29.2% more than the loss of Ps. 35,325 million in 2006. The loss was primarily due to greater purchases of petroleum products, mainly gasolines and diesel.
Gas and Basic Petrochemicals
In 2007, trade sales related to the natural gas and basic petrochemical business segment increased by 0.9%, from Ps. 138,688 million in 2006 to Ps. 139,963 million in 2007. LPG sales increased by 1.8%, from Ps. 54,691 million in 2006 to Ps. 55,663 million in 2007, principally due to an increase in LPG prices. Natural gas sales increased by 3.9%, from Ps. 79,232 million in 2006 to Ps. 82,295 million in 2007, mainly due to an increase in natural gas prices. Income related to natural gas and basic petrochemicals decreased by 21.5%, or Ps. 1,354 million, from Ps. 6,312 million in 2006 to Ps. 4,958 million in 2007, mainly due to an increase in expenses incurred in connection with natural gas operations.
Petrochemicals
In 2007, trade sales related to the petrochemicals business segment increased by 0.3%, from Ps. 21,639 million in 2006 to Ps. 21,702 million in 2007. Prices and volumes for petrochemicals sold


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domestically increased for a majority of our petrochemical products. In 2007, the volume of petrochemical exports decreased by 26.0%, from 326 thousand tons in 2006 to 241.1 thousand tons in 2007. Losses related to petrochemical activities decreased by 10.8%, from Ps. 18,029 million in 2006 to Ps. 16,086 million in 2007, mainly due to an increase in the volume of imports of methanol, vinyl chloride and xylene.
Corporate and subsidiary companies
In 2007, trade sales relating to PMI’s exports of crude oil and petroleum products to third parties and the trading activities of the PMI Group increased by 1.4% in peso terms, from Ps. 536,220 million in 2006 to Ps. 543,988 million in 2007, as a result of increased prices of the crude oil that we exported. In 2007, net income related to corporate and subsidiary companies after intercompany eliminations, which includes the international trading activities of the PMI Group, increased from Ps.18,108 million in 2006 to Ps.18,508 million in 2007, primarily due to an increase in sales.
 
2006 Compared to 2005
 
Exploration and Production
 
In 2006, Pemex-Exploration and Production’s sales of crude oil and natural gas to the PMI Group increased by 19.3% in peso terms and by 23.0% in U.S. dollar terms, mainly due to an increase in crude oil export prices. The weighted average price of crude oil sold by Pemex-Exploration and Production to the PMI Group for export was U.S. $53.20 in 2006, as compared to U.S. $42.61 in 2005. Intersegment sales increased by 15.1%, principally as a result of the increase in crude oil export prices. Net income related to exploration and production activities increased toby Ps. 73,13995,590 million, from a loss of Ps. 18,98819,702 million in 2005 to income of Ps. 75,888 million in 2006, primarily as a result of a decrease in taxes and duties and an increase in sales of crude oil.
 
Refining
 
In 2006, trade sales related to refining activities increased by 6.7%, from Ps. 367,539381,355 million in 2005 to Ps. 392,220406,963 million in 2006, due to an increase in the average sales prices and volumes of our principal petroleum products. Intersegment sales increased by 11.9%, to Ps. 44,56746,242 million, largely due to an increase in the sales volumes of virgin stock and diesel. In 2006, the total loss related to refining activities was Ps. 34,04635,325 million, 38.6% less than the loss of Ps. 55,42557,509 million in 2005. The decreased loss was primarily due to increases in the average sales pricesgreater purchases of our petroleum products, mainly gasolines and diesel.
 
Gas and Basic Petrochemicals
 
In 2006, trade sales related to the natural gas and basic petrochemical business segment decreased by 4.3%, from Ps. 139,735144,987 million in 2005 to Ps. 133,664138,688 million in 2006. Liquefied petroleum gasLPG sales increased by 4.6%, from Ps. 50,41452,309 million in 2005 to Ps. 52,71054,691 million in 2006, principally due to an increase in liquefied petroleum gasLPG prices. Natural gas sales decreased by 7.7%, from Ps. 82,77085,881 million in 2005 to Ps. 76,36279,232 million in 2006, mainly due to a decrease in natural gas prices and volume. Income related to natural gas and basic petrochemicals decreased by 12.5%, from Ps. 6,9537,214 million in 2005 to Ps. 6,0836,312 million in 2006, mainly due to an increase in expenses incurred in connection with natural gas operations.
 
Petrochemicals
 
In 2006, trade sales related to the petrochemicals business segment decreased by 0.9%, from Ps. 21,03621,827 million in 2005 to Ps. 20,85521,639 million in 2006. Prices and volumes for petrochemicals sold domestically increased for a majority of our petrochemical products. In 2006, the volume of petrochemical exports decreased by 12.1%, from 371 thousand tons in 2005 to 326 thousand tons in 2006. Losses related to petrochemical activities increased by 1.0%, from Ps. 17,20517,852 million in 2005 to Ps. 17,37618,030 million in 2006, mainly due to an increase in the volume of imports of methanol, vinyl chloride and xylene.


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Corporate and Subsidiary Companiessubsidiary companies
 
In 2006, trade sales relating to PMI’s exports of crude oil and petroleum products to third parties and the trading activities of the PMI Group increased by 17.8%17.7% in peso terms, from Ps. 437,973455,660 million in 2005 to Ps. 515,757536,220 million in 2006, as a result of increased prices of the crude oil that we exported and the strengthening of the dollar against the peso. In 2006, net income related to corporate and subsidiary companies after intercompany eliminations, which includes the international trading activities of the PMI Group, increased from Ps. 5,2915,490 million in 2005 to Ps. 17,45218,108 million in 2006, primarily due to an increase in sales.
 
2005 Compared to 2004
Exploration and Production
In 2005, Pemex-Exploration and Production’s sales of crude oil and natural gas to the PMI Group increased by 22.9% in peso terms and by 32.9% in U.S. dollar terms, mainly due to an increase in crude oil export prices. The weighted average price of crude oil sold by Pemex-Exploration and Production to the PMI Group for export was U.S. $42.61 in 2005, as compared to U.S. $31.02 in 2004. Intersegment sales increased


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by 23.6%, principally as a result of the increase in crude oil export prices. The loss related to exploration and production activities increased by 29.2%, or Ps. 4,290 million, from Ps. 14,698 million in 2004 to Ps. 18,988 million in 2005, primarily as a result of an increase in taxes and duties, maintenance expenses and costs related to the labor reserve.
Refining
In 2005, trade sales related to refining activities increased by 8.1%, from Ps. 339,916 million in 2004 to Ps. 367,539 million in 2005, due to an increase in the average sales prices and volumes of our principal petroleum products. Export sales related to refining activities increased by 66.7%, from Ps. 10,065 million in 2004 to Ps. 16,782 million in 2005, as a result of increases in sales of virgin stock. Net of the IEPS tax, domestic sales related to refining activities increased by 23.1%, from Ps. 281,097 million in 2004 to Ps. 346,090 million in 2005, principally due to an increase in the average sales prices and volumes of our principal petroleum products. Intersegment sales increased by 37.0%, to Ps. 39,811 million, largely due to an increase in the sales volumes of liquefied petroleum gas and diesel. In 2005, the total loss related to refining activities was Ps. 55,425 million, 133.7% more than the loss of Ps. 23,720 million in 2004. The increased loss was primarily due to increases in the average prices of our petroleum products imports, which we were not able to pass on to our retail customers for gasoline and diesel products due to price controls imposed by the Mexican Government. See “Item 5—Results of Operations of Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies—For the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004—Costs and Operating Expenses.”
Gas and Basic Petrochemicals
In 2005, trade sales related to the natural gas and basic petrochemical business segment increased by 12.0%, from Ps. 124,778 million in 2004 to Ps. 139,735 million in 2005. Liquefied petroleum gas sales increased by 14.8%, from Ps. 43,919 million in 2004 to Ps. 50,415 million in 2005, principally due to an increase in liquefied petroleum gas prices. The volume of domestic sales of basic petrochemicals increased by 10.1% in 2005, from 931 thousand tons per year in 2004 to 1,025 thousand tons per year in 2005. Natural gas sales increased by 11.0%, from Ps. 74,534 million in 2004 to Ps. 82,770 million in 2005, mainly due to an increase in natural gas prices and volume. Income related to natural gas and basic petrochemicals decreased by 44.5%, to Ps. 6,953 million, mainly due to an increase in expenses incurred in connection with natural gas operations.
Petrochemicals
In 2005, trade sales related to the petrochemicals business segment increased by 16.3%, from Ps. 18,090 million in 2004 to Ps. 21,036 million in 2005. Prices and volumes for petrochemicals sold domestically increased for a majority of our petrochemical products. In 2005, the volume of petrochemical exports increased by 20.5%, from 308 thousand tons in 2004 to 371 thousand tons in 2005. Losses related to petrochemical activities increased by 29.9%, from Ps. 13,241 million in 2004 to Ps. 17,205 million in 2005, mainly due to an increase in the volume of imports of vinyl chloride, ammonia and xylene.
Corporate and Subsidiary Companies
In 2005, trade sales relating to PMI’s exports of crude oil and petroleum products to third parties and the trading activities of the PMI Group increased by 25.5% in peso terms, from Ps. 348,985 million in 2004 to Ps. 437,973 million in 2005, as a result of increased prices of the crude oil that we exported and the strengthening of the dollar against the peso. In 2005, net income related to corporate and subsidiary companies, which includes the international trading activities of the PMI Group, decreased from Ps. 11,717 million in 2004 to Ps. 5,291 million in 2005, primarily due to an increase in costs of sales and operating expenses.


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U.S. GAAP Reconciliation
 
Net income (loss) under U.S. GAAP differs from net income (loss) under Mexican FRS due to several factors, which are differences in methods of accounting for exploration and drilling costs, pension, seniority premiums and post-retirement benefit obligations, accrued vacation, capitalized interest, impairment of fixed assets, depreciation, derivatives, profit in inventory, deferred taxes, reclassification of Pemex Finance, Ltd. net income to minority interest and our investment in Repsol shares. The amounts of these adjustments vary each year. For further information regarding these and other differences between Mexican FRS and U.S. GAAP as they relate to our results, see Note 2021 to our consolidated financial statements included herein.
 
IncomeIncome/(loss) and Equity (Deficit) under U.S. GAAP
 
For the year ended December 31, 2007, our loss under U.S. GAAP was approximately Ps. 32.6 billion, representing a Ps. 14.3 billion increase from the net loss recorded under Mexican FRS. For the year ended December 31, 2006, our net income under U.S. GAAP was approximately Ps. 54.056.7 billion, representing a Ps. 9.49.8 billion increase from the net income recorded under Mexican FRS. For the year ended December 31, 2005, our net loss under U.S. GAAP was approximately Ps. 76.979.8 billion, representing a Ps. 2.5 billion decrease from the net loss recorded under Mexican FRS. For the year ended December 31, 2004, our net loss under U.S. GAAP was approximately Ps. 14.0 billion, representing a Ps. 13.42.6 billion decrease from the net loss recorded under Mexican FRS. For further detail regarding the adjustments related to these amounts, see Note 2021 to our consolidated financial statements included herein.
 
Our equity deficit under U.S. GAAP was approximately Ps. 22.7198.1 billion at December 31, 2006,2007, as compared to an equity deficit of Ps. 116.622.9 billion at December 31, 2005.2006. For further detail regarding the adjustments related to these amounts, see Note 2021 to our consolidated financial statements included herein.
 
Recently Issued Accounting Standards
 
New Mexican FRS Accounting Standards
 
Accounting basis for the preparation of financial information
 
The accompanying consolidated financial statements have been prepared in accordance with Mexican FRS as promulgated by theConsejo Mexicano para la Investigación y Desarollo de Normas de Información Financiera, A.C.(Mexican Financial Reporting Standards Board or “CINIF”)CINIF).
Certain line items from the financial statements as of December 31, 2006 have been reclassified in order to make the presentation of such financial statements comparable to that of the financial statements as of December 31, 2007.
 
Change in accounting standards
 
Effective June 1, 2004, the CINIF assumed responsibility for setting the accounting and reporting standards in México.Mexico. As part of this responsibility, during 2004 and 2005, the CINIF issued several NIFs, which became effective on January 1, 2006.
 
The main objective of Mexican FRS is to achieve the maximum possible harmonization and convergence of Mexican accounting and reporting standards and regulatory practices withNormas Internacionales de InfomacióInformación Financiera (International Financial Reporting Standards or “IFRS”)IFRS).


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The Mexican FRS hierarchy, as in effect as ofsince January 1, 2006, is as follows:
 
 •  The NIFs and the CINIF’s interpretation of the NIFs;
 
 •  the bulletins previously issued by the Comisión de Principios de Contabilidad (Accounting Principles Commission or “CPC”)CPC) of the Instituto Mexicano de Contadores Publicos (Mexican Institute of Public Accountants, or “MIPA”)MIPA), to the extent that they have not been modified, superseded or replaced by the new NIFs; and
 
 •  IFRS when applicable, which supplement the NIFs.
 
The circulars issued by the CPC will continue to have the status of recommendations and will be part of the NIFs until such time as they are repealed or superseded by new NIFs.


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New NIFs issued by the CINIF
 
On January 1, 2007, the following new standardsThe CINIF has issued, by the CINIF became effective, and PEMEX is currently evaluating the effect of the adoption of, these new pronouncements:
 
 •  NIF B-3 “Income statement,FRS B-10 “Effects of inflation,” which incorporates, among other things,supersedes Bulletin B-10 and its five amendments, as well as the related circulars and Interpretation of Financial Reporting Standards (INIF) 2. The principal guidelines established by this FRS include: (1) the change in the value of theunidad de inversión (UDI) may be used to determine inflation for a given period; (2) the election to use inventory replacement costs as well as specific indexation for fixed assets is eliminated; (3) an entity is only required to recognize the effects of inflation when operating in an inflationary economic environment, which exists when accumulated inflation is equal to or higher than 26% in the most recent three-year period; and (4) the accounts of (a) gain or loss from holding non-monetary assets (RETANM), (b) monetary position gains or losses (REPOMO), and (c) deficit/excess in equity restatement will be reclassified to retained earnings, when their unrealized portion is not identified. We estimate that the initial effects of this new approachFRS will result in a charge to classify income, Mexican FRS costsretained earnings and expenses as ordinary and extraordinary. It eliminates special and extraordinary items and establishes that employees’ profit sharing should be presented as an ordinary expense rather than as an item within taxes.a credit to surplus in the restatement of equity of Ps. 178,172 million.
 
 •  NIFFRS D-3 “Employee benefits,” which supersedesBulletin D-3, the portion applicable to Employee Statutory Profit Sharing (ESPS) ofBulletin D-4 and INIF 4. The principal guidelines established by this FRS are: (1) a maximum of five years for amortizing unrecognized/unamortized items, with the option for immediate recognition of actuarial gains or losses in results of operations; (2) the elimination of the recognition of an additional liability and related intangible asset and any related item as a separate element of stockholders’ equity; (3) the inclusion of severance benefits in results of operations; and (4) the presentation of ESPS, including deferred ESPS, in the statement of income as ordinary operations. In addition, FRS D-3 establishes that the asset and liability method required by FRS D-4 should be used for determining deferred ESPS, and that any effects arising from the change are to be recognized in retained earnings, with no restatement of prior years’ financial statements. We are currently evaluating the impact of the initial effects of this new FRS.
•  FRS D-4 “Tax on earnings,” which supersedesBulletin D-4 and Circulars 53 and 54. The principal guidelines established by this FRS are: (1) the reclassification of balance of the cumulative income tax effects resulting from the initial adoption of Bulletin D-4 in 2000 to retained earnings; (2) the recognition of asset taxes as a tax credit (benefit), rather than a tax prepayment; and (3) the transfer of the accounting treatment of ESPS incurred and deferred to FRS D-3, as outlined above. We estimate that the initial effects of this new FRS will not be material.
•  FRS B-2 “Statement of cash flows,” which supersedes Bulletin B-12 and paragraph 33 ofBulletin B-16. The principal guidelines established by this FRS are: (1) the replacement of the statement of changes in financial position with the statement of cash flows; (2) the reporting of cash inflows and cash outflows in nominal currency units, i.e., the effects of inflation are not


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included; (3) the establishment of two alternative preparation methods (direct and indirect), without stating a preference for either method. In addition, cash flows from operating activities are to be reported first, followed by cash flows from investing activities and finally cash flows from financing activities; (4) the reporting of captions of principal items as gross; and (5) the requirement of disclosure of the composition of those items considered cash equivalents.
•  FRS B-15 “Translation of foreign currencies,” which supersedesBulletin B-15. The principal guidelines established by this FRS are: (1) the substitution of the integrated foreign operation and foreign entity concepts for determining recording currency, functional currency and reporting currency, requiring that translation be made based on the economic environment in which the entity operates, regardless of its dependency on a holding company; and (2) the inclusion of translation procedures for those cases where the reporting currency is different from the functional currency.
•  FRS B-13 “Subsequent events,” which requires, among other things, the recognition of assets and liabilities restructuring charges in the period in which they actually take place and the recognition of creditors’ waivers to enforce their right to demand debts in the event of lack of compliance of the entity with debt agreement commitments. Such issues, if applicable, will be disclosed in the notes to the financial statements.
 
 •  NIFFRS C-13 “Related Parties”,Parties,” which extends to the definition and scope of the related parties and increases the disclosure requirements in the notes in whichto the financial statements.
•  NIF D-6 “Capitalization of the Comprehensive Financing Result,” which establishes, among other obligations, the obligation of capitalizing the comprehensive financing result and the rules for its capitalization.
 
New U.S. GAAP Accounting Standards
 
In June 2006,February 2007, the FASB issued FASB InterpretationStatement of Financial Accounting Standards No. 48, “Accounting159,The Fair Value Option for Uncertainty in Income Taxes—Financial Assets and Financial Liabilities—including an interpretationamendment of FASB Statement No. 109,” (“FIN 48”)115(which we refer to as SFAS 159). FIN 48 clarifiesSFAS 159 gives entities the accounting for uncertainty in income taxes by prescribing thresholdsirrevocable option to carry most financial assets and attributes for financial statement recognition and measurement of a tax position taken or expectedliabilities at fair value that are not currently required to be takenmeasured at fair value. If the fair value option is elected, changes in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accountingfair value would be recorded in interim periods, and disclosure. FIN 48earnings at each subsequent reporting date. SFAS 159 is effective foras of an entity’s 2008 fiscal years beginning after December 15, 2006.year. We are currently evaluating the impact the adoption of adopting FIN 48SFAS 159 could have on our financial condition, and results of operations.
In June 2006, the Emerging Issues Task Force (“EITF”) ratified the consensus on EITF IssueNo. 06-3, “How Taxes Collected from Customersoperations and Remitted to Governmental Authorities Should Be Presented in the Income Statement,”(“EITF 06-03”).EITF 06-03 concluded that the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, such as sales, use, value-added and certain excise taxes is an accounting policy decision that should be disclosed in a company’s financial statements. In addition, companies that record such taxes on a gross basis should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant.EITF 06-03 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption ofEITF 06-03 is not expected to impact PEMEX’s financial condition or results of operations.cash flows.
 
In September 2006, the FASB issued SFAS No. 157, “FairFair Value Measurements,” (“Measurement (which we refer to as SFAS 157”)157). This statementSFAS 157 defines fair value, establishes a framework for measuringthe measurement of fair value, in GAAP and expandsenhances disclosures about fair value measurements. SFAS 157 does not require any new fair value measures. SFAS 157 is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. We are required to adopt SFAS 157 beginning on January 1, 2008. SFAS 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of SFAS 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. We are currently evaluating the impact of adopting SFAS 157 on our results of operations and financial position.
In December 2007, the FASB issued SFAS No. 141R,Business Combinations (which we refer to as SFAS 141R) and FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements— an amendment to ARB No. 51 (which we refer to as SFAS 160). SFAS 141R and SFAS 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both SFAS 141R and SFAS 160 are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS 141R and SFAS 160 on our results of operations and financial position.


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In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on IssueNo. 06-4, Accounting for Deferred Compensation and Post-retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (which we refer to asEITF 06-4).EITF 06-4 provides guidance on the accounting for arrangements in which an employer owns and controls an insurance policy and has agreed to share a portion of the cash surrender valueand/or death benefit with the employee. This guidance requires an employer to record a post-retirement benefit, in accordance with FASB Statement No. 106, “Employers’ Accounting for Post-retirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion-1967”, if there is an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the post-retirement period. This guidance is effective for reporting periods beginning after December 15, 2007. We are in the process of assessing the impact of adoptingEITF 06-4 on our results of operations and financial position; however, we currently expect that additional liabilities may be required to be recognized upon implementation of the consensus based on the current terms of certain life insurance arrangements with our executive officers.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (which we refer to as SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2007. PEMEX2008, although early adoption is currently evaluating the impact of adopting SFAS 157 on its financial condition and results of operations.
In September 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” (“FSP AUG AIR-1”). This FSP eliminates theaccrue-in-advance method of accounting for planned major maintenance activities, because it causes the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. The effective date of this FSP is an entity’s first fiscal year beginning after December 15, 2006. PEMEX is currently evaluating the impact of adopting FSP AUG AIR-1 on its financial condition and results of operations.


127

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132 (R),” (“SFAS 158”). Part of this statement requires companies without publicly traded equity securities that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on a prospective basis as of the end of the first fiscal year ending after June 15, 2007. In addition, SFAS 158 requires companies using a measurement date for those plans other than their fiscal year end to change to a fiscal year end measurement date effective for years ending after December 15, 2008. SFAS 158 would impact the recognition of items of amortization and losses for variations in assumptions, currently intangible assets and additional liabilities, in the equity of PEMEX under SFAS 87 and SFAS 106. We believe that the impact of the adoption of SFAS 158 in 2007 will be significant given the unrecognized balance sheet amounts related to pension and seniority premiums and other post retirement benefits referred to above which exist at December 31, 2006 and as reflected in Notes 20Ib. and Ic. to our consolidated financial statements included herein. Nevertheless, the actual impact will not be known until such time as PEMEX completes its evaluation and adopts the standard.
In December 2006, the FASB issued FSPNo. EITF 00-19-2, “Accounting for Registration Payment Arrangements,”(“EITF 00-19-2”).EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5,Accounting for Contingencies.EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.EITF 00-19-2 became effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance ofEITF 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance ofEITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.permitted. We are currently evaluating the impact ofthat adopting EITF 00-19-2SFAS 161 would have on our financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsoperations and Financial Liabilities including an amendment of FASB Statement No. 115,” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 provides entities with the opportunity to mitigate the volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB 157. PEMEX is currently evaluating the impact of adopting SFAS 159 on its financial condition and results of operations.position.
 
Item 6.  Directors, Senior Management and Employees
 
An eleven-member Board of Directors governs Petróleos Mexicanos. The President of Mexico appoints six members, including the Chairperson of the Board of Directors. An amendment to the Organic Law requires that the members of the Board of Directors of Petróleos Mexicanos include the Secretary of the SEMARNAT. The President of Mexico also appoints the Director General of Petróleos Mexicanos. TheSindicato de Trabajadores Petroleros de la República Mexicana(the Petroleum Workers’ Union, which we refer to asor the Union) selects the remaining five directors from among our employees. Alternate directors are authorized to serve on the Board of Directors in place of directors who are unable to attend meetings or otherwise participate in the activities of the Board. The members of the Board of Directors are not appointed for a specific term. The members of the Board of Directors, except for those members selected by the Union, serve subject to the discretion of the President of Mexico.


128

An eight-member board of directors governs each subsidiary entity. Each of these boards consists of the Director General of Petróleos Mexicanos, the Director General of each of the other three subsidiary entities and four additional directors, who are each appointed by the President of Mexico. The Director General of Petróleos Mexicanos serves as Chairman of the board of each subsidiary entity. Neither the members of the boards of directors of the subsidiary entities nor the executive officers are appointed for a specific term. The members of the boards of directors and the Directors General serve subject to the discretion of the President of Mexico.
Effective December 1, 2006, Ms. Georgina Kessel Martínez was appointed Secretary of Energy, and as a result of such appointment, Chairwoman of the Board of Directors of Petróleos Mexicanos. On December 2, 2006, Mr. Jesús Reyes Heroles González Garza was appointed Director General of Petróleos Mexicanos by the President of Mexico, replacing Mr. Luis Ramírez Corzo y Hernández.


129133

The following tables set forth certain information with respect to directors and executive officers of Petróleos Mexicanos and each of the subsidiary entities as of June 1, 2007.18, 2008.
 
Petróleos Mexicanos—Directors and Executive Officers
 
       
Name Position with Petróleos Mexicanos Year Appointed 
 
Ms. Georgina Y. Kessel Martínez Chairwoman of the Board of Directors of Petróleos Mexicanos and Secretary of Energy
Born: 1950
Business experience: Director General of the Casa de Moneda de México; Mexican Mint; Director of the Investment Unit of the Ministry of Finance and Public Credit; and President of the Energy Regulating Commission.
Other board memberships: Chairwoman of Federal Electricity Commission; Chairwoman of Central Light and Power; Banco Nacional de Comercio Exterior, S.N.C.; Nacional Financiera;Financiera, S.N.C.; and Comisión Nacional de Vivienda.		  2006 
Mr. Juan Rafael Elvira Quesada Board Member of Petróleos Mexicanos and Secretary of the Environment and Natural Resources
Born: 1958
Business experience: Assistant Attorney for Industrial Inspection at the Federal Attorney for Environmental Protection;PROFEPA; Undersecretary for Environmental Promotion and Regulations of the Ministry of the Environment and Natural Resources; and Director General of the Primary Sector and Renewable Natural Resources of the Ministry of the Environment and Natural Resources.
Other board memberships: Federal Electricity Commission.		  2006 
Mr. Gerardo Ruiz Mateos Board Member of Petróleos Mexicanos and GeneralHead of the President’s Office
Born: 1965
Business experience: Coordinator of Cabinets and Special Projects of the Presidential Office
Born: 1965
Business experience:President’s Office; Management and Finance Coordinator of Felipe Calderón’s presidential campaign; and President of Linde Pullman México, S.A. de C.V.; and Director General of Automotive Moulding of México, S.A. de C.V.		  2007 


130134

Petróleos Mexicanos—Directors and Executive Officers

       
Name Position with Petróleos Mexicanos Year Appointed 
 
Mr. Eduardo Sojo Garza Aldape Board Member of Petróleos Mexicanos and Secretary of Economy
Born: 1956
Business experience: Economic Advisoradvisor of Felipe Calderón’s presidential campaign; Liaison coordinator with the Federal Public Administration for the transition team of thePresident-elect; Head of the President’s Office for Public Policy and Coordinator of the Economic Cabinet.
Other board memberships: Aeropuertos y Servicios Auxiliares; Baja Bulk Carriers; Banco del Ahorro Nacional y Servicios Financieros, S.N.C.; Chairman of the Banco Nacional de Comercio Exterior, S.N.C.; Caminos y Puentes Federales y Servicios Conexos; Chairman of the Centro Nacional de Metrología; Federal Electricity Commission; Comisión Intersecretarial de Desincorporación; Comisión Intersecretarial de Gasto-Financiamiento; Comisión Intersecretarial de Política Industrial; Comisión Intersecretarial de Precios y Tarifas de los Bienes y Servicios de la Administración Pública Federal; Comisión Intersecretarial para la Transparencia y el Combate a la Corrupción de la Administración Pública Federal; Chairman of the Comisión Nacional de Inversiones Extranjeras; Consejo General de Investigación Científica y Desarrollo Tecnológico; Chairman of the Consejo Nacional para la Competitividad de la Micro, Pequeña y Mediana Empresa; Chairman of the Fondo para la Micro, Pequeña y Mediana Empresa; Chairman of the Consejo Nacional de Ciencia y Tecnología; Fideicomiso del Fondo Institucional para el Fomento de la Ciencia, el Fomento de la Tecnología y el Fomento, Desarrollo y Consolidación de Científicos y Tecnólogos; Fondo Sectorial de Ciencia y Tecnología para el Desarrollo Económico; Chairman of the Instituto Mexicano de la Propiedad Industrial; Servicio Postal Mexicano; Nacional Financiera, S.N.C.; Chairman of the Servicio Geológico Mexicano; Telecomunicaciones de México; Chairman of Exportadora de Sal, S.A. de C.V.; and Chairman of Transportadora de Sal, S.A. de C.V.		  2007 

131135

Petróleos Mexicanos—Directors and Executive Officers

       
Name Position with Petróleos Mexicanos Year Appointed 
 
Mr. Luis Téllez Kuenzler Board Member of Petróleos Mexicanos and Secretary of Communications and Transportation
Born: 1958
Business experience: Co-Director of the Carlyle Group;Group Mexico; Executive VicepresidentVice President of Grupo Desc, S.A. de C.V.; and Secretary of Energy.
Other board memberships:
Chairman of Aeropuertos y Servicios Auxiliares; Chairman of Caminos y Puentes Federales de Ingresos y Servicios Conexos; Chairman of Servicio Postal Mexicano; Banco Nacional de Obras y Servicios Públicos, S.N.C.; Notimex; Consejo Mexicano para el Desarrollo Rural Sustentable; Consejo Nacional de Vivienda; Televisión Metropolitana, S.A. de C.V., Canal 22; Estudios Churubusco Azteca, S.A. de C.V.; Instituto Mexicano de Cinematografía; and Comisión Nacional de las Zonas Áridas.		  2007 

136

Petróleos Mexicanos—Directors and Executive Officers
NamePosition with Petróleos MexicanosYear Appointed
Mr. Agustín Guillermo Carstens Carstens Board Member of Petróleos Mexicanos and Secretary of Finance and Public Credit
Born: 1958		2007

Business experience: Deputy Managing Director of the International Monetary Fund; Undersecretary of the Ministry of Finance and Public Credit; and several positions such as Director General of Economic Research, Treasurer and CoordinatorChief of Staff of the Governor’s Advisors inGovernor of Banco de México.
Other board memberships: Chairman of Agroasemex, S.A., Instituto Nacional de Seguros; Chairman of Banco del Ahorro Nacional y Servicios Financieros, S.N.C.; Chairman of Banco Nacional de Comercio Exterior, S.N.C.; Chairman of Banco Nacional de Obras y Servicios Públicos, S.N.C.; Comisión Nacional Bancaria y de Valores; Comisión Nacional de Seguros y Fianzas;
Chairman of Banco Nacional del Ejército, Fuerza Aérea y Armada, S.N.C.; Chairman of Diconsa, S.A. de C.V.; Chairman of Nacional Financiera, S.N.C.; Chairman of Sociedad Hipotecaria Federal, S.N.C.; Aeropuertos y Servicios Auxiliares; Chairman of Caminos y Puentes Federales de Ingresos y Servicios Conexos; Chairman of Casa de Moneda de México; Federal Electricity Commission; Chairman of Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros; Chairman of Financiera Rural;

132

Petróleos Mexicanos—Directors and Executive Officers

NamePosition with Petróleos MexicanosYear Appointed
Fondo de Cultura Económica; Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado; Instituto de SeguridadMexicano del Seguro Social; Instituto para la Protección al Ahorro Bancario; Chairman of Servicio de Administración y Enajenación de Bienes; Chairman of Servicio de Administración Tributaria; Chairman of Comisión Intersecretarial de Desincorporación; Chairman of Comisión Intersecretarial de Gasto Financiamiento; Comisión Intersecretarial de Política Industrial; Comisión de Transparencia y Combate a la Corrupción en la Administración Pública Federal; Comisión Nacional de Inversiones Extranjeras; Consejo Nacional de Infraestructura; Governor for Mexico of Banco Interamericano de Desarrollo;Inter-American Development Bank; Governor for Mexico of Corporación Interamericana de Inversiones;Inter-American Investment Corporation; Governor for Mexico of Banco Interamericano de Reconstrucción y Fomentothe International Bank for Reconstruction and Development (World Bank); Governor for Mexico of International Development Association; Governor for Mexico of the Multilateral Investment Guarantee Agency of the World Bank; Governor for Mexico of Organismo Multilateral de Garantía de Inversiónthe Caribbean Development Bank; and Chairman of the World Bank; and Governor for MexicoForeign Exchange Commission of Banco de Desarrollo del Caribe.México.2007

137

Petróleos Mexicanos—Directors and Executive Officers
   
NamePosition with Petróleos MexicanosYear Appointed
 
Mr. Fernando Pacheco Martínez Board Member of Petróleos Mexicanos and Union Representative
Born: 1952
Business experience: Exterior and Propaganda Secretary of the Union; Internal and Agreements Secretary of the Union; and General Secretary of Section 24 of the Union.		  2007 
Mr. Jorge Wade González Board Member of Petróleos Mexicanos and Union Representative
Born: 1947
Business experience: Union commissioner of Petróleos Mexicanos.		  2007 
Mr. Luis Ricardo Aldana Prieto Board Member of Petróleos Mexicanos and Union Representative
Born: 1954
Business experience: Senator of the LIXthLegislature; Chairman of the General Supervision Board of the General Executive Committee of the Union; and Treasury Secretary of the General Executive Committee of the Union.		  2001 
Mr. Héctor Manuel Sosa Rodríguez Board Member of Petróleos Mexicanos and Union Representative
Born: 1964
Business experience: General Secretary of Section 34 of the Union; Exterior Secretary of the Union; and Internal Secretary of the Union.		  2007 
Mr. Pedro García BarabataBoard Member of Petróleos Mexicanos and Union Representative
Born: 1957
Business experience: Union commissioner of Petróleos Mexicanos.		2007
Mr. Jesús Federico Reyes Heroles González GarzaDirector General / Chief Executive Officer
Born: 1952
Business experience: Executive President of GEA Structura; Mexican Ambassador to the United States; and Secretary of Energy.
Other board memberships: Chairman of the Instituto Mexicano del Petróleo.		2006
Mr. Esteban Levin BalcellsChief Financial Officer
Born: 1972
Business experience: Deputy Director of Finance and Treasury of Petróleos Mexicanos; Acting Deputy Director of the Financial Information Systems of Petróleos Mexicanos; Chief of Staff of the Corporate Financial Office of Petróleos Mexicanos; and Associate Consultant and Engagement Manager of McKinsey & Co.
Other board memberships: Instituto Mexicano del Petróleo; Instalaciones Inmobiliarias para Industrias, S.A. de C.V.; and I.I.I. Servicios, S.A. de C.V.		2006

133138

Petróleos Mexicanos—Directors and Executive Officers

       
Name Position with Petróleos Mexicanos Year Appointed 
Mr. Pedro García BarabataBoard Member of Petróleos Mexicanos and Union Representative
Born: 1957
Business experience: Union commissioner of Petróleos Mexicanos		2007
Mr. Jesús Federico Reyes Heroles González Garza
Director General / Chief Executive Officer
Born: 1952
Business experience: Executive President of GEA Structura; Mexican Ambassador to the United States; and Secretary of Energy.
Other board memberships: Instituto Mexicano del Petróleo.
2006
Mr. Esteban Levin BalcellsChief Financial Officer
Born: 1972
Business experience: Deputy Director of Finance and Treasury of Petróleos Mexicanos; Chief of Staff of the Corporate Financial Office of Petróleos Mexicanos; Acting Deputy Director of the Financial Information Systems of Petróleos Mexicanos; and Associate Consultant and Engagement Manager of McKinsey & Co.		2006 
Ms. Martha Alicia Olvera Rodríguez Deputy Director of Programming and Budgeting
Born: 1954
Business experience: Associate Managing Director of Planning and Financial Programming of Petróleos Mexicanos; Associate Managing Director of Budget Control of Petróleos Mexicanos; and Deputy Manager of Programs Integration of Petróleos Mexicanos.		  2002 
Mr. Mauricio Alazraki Pfeffer Deputy Director of Finance and Treasury
Born: 1965
Business experience: Associate Managing Director of Finance of Petróleos Mexicanos; Deputy Manager of Capital Markets of Petróleos Mexicanos; and Manager of Corporate Finance for Latin America of West Merchant Bank, Ltd.		  2006

134

Petróleos Mexicanos—Directors and Executive Officers

NamePosition with Petróleos MexicanosYear Appointed
 
Mr. Víctor M. Cámara Peón Deputy Director of Financial Information Systems
Born: 1943
Business experience: Advisor of the Chief Financial Officer;Officer of Petróleos Mexicanos; Director of Control and Operational Risk of Banco Nacional de México, S.A.; and Director General of Human Resources of Banco Nacional de México, S.A.; and Administrative Director of Banco Nacional de México, S.A.
Other board memberships: Intermarítima Maya, S.A. de C.V.; Grupo Roche, S.A. de C.V.; Comercial Salinera de Yucatán, S.A. de C.V.; Infraestructura Maya Peninsular, S.A. de C.V.; and Industria Salinera de Yucatán, S.A. de C.V.  2003 
Mr. Fausto Barajas CummingsVacant Deputy Director of Economic Planning
Born: 1972
Business experience: Associate Managing Director of Planning and Economic Performance Evaluation of Petróleos Mexicanos; Consultant of McKinsey & Co.; and Advisor of the Secretary of Energy.		  2006 
Mr. José Manuel Carrera Panizzo Deputy Director of Risk Management
Born: 1969
Business experience: Manager of Foreign Exchange, Metals, Coins and International Agreements of Banco de México; Research Officer of Markets Analysis and Evaluation of Banco de México; and Foreign Exchange AnalystTrader of Banco de México.		  2001 
Mr. Rosendo Villarreal Dávila Corporate Director of Management
Born: 1942
Business experience: Head of the Internal Control Body of the SFP; Senator of the LVIth and LVIIth Legislature; and Mayor of Saltillo, State of Coahuila.
Other board memberships: Transportes Villarreal Berlanga, S.A. de C.V.		  2005 
Mr. Lamberto Alonso Calderón Deputy Director of Labor Relations
Born: 1953
Business experience: Advisor “A” of the Deputy Director of Finance and Management of Pemex-Refining; Chief of Commercial Performance and Control Procedures Unit of Pemex-Refining; and Chief of Management Unit of Pemex-Refining.		  2005 

139

Petróleos Mexicanos—Directors and Executive Officers
NamePosition with Petróleos MexicanosYear Appointed
Mr. José Néstor García Reza General Counsel
Born: 1965
Business experience: Head of Legal Advising Office of Pemex-Exploration and Production; Chief of the Legal Unit of Pemex-Exploration and Production; and Legal Director of Banca Quadrum, S.A.		  2005 

135

Petróleos Mexicanos—Directors and Executive Officers

NamePosition with Petróleos MexicanosYear Appointed
Mr. José Salazar Ilarregui RuffinoIgnacio López Rodríguez Deputy Director of Corporate Services
Born: 19521971
Business experience: TechnicalPrivate Secretary of the Corporate Director of Telecomunicaciones de MéxicoManagement of Petróleos Mexicanos; Advisor of the Ministry of Communications and Transportation; Vice President of Information Technology of Corporación Novavisión S. de R.L.; andCorporate Director of TechnologyManagement of Cablevisión,
S.A. de C.V.Petróleos Mexicanos; and Technical Coordinator of the Corporate Director of Management of Petróleos Mexicanos.		  20052007 
Mr. Víctor Manuel Vázquez Zárate Deputy Director of Health Services
Born: 1943
Business experience: Associate Managing Director of Medical Services of Petróleos Mexicanos; Administrative Deputy Manager of Petróleos Mexicanos; and Director of Central South High Specialty Hospital of Petróleos Mexicanos.		  2000 
Mr. Marco Antonio Murillo Soberanis Deputy Director of Human Resources
Born: 1959
Business experience: Corporate Associate Managing Director of Human Resources of Petróleos Mexicanos; Chief of the Process and Information Unit of Petróleos Mexicanos; ChiefLeader of Planning and EvaluationHuman Resources Unit of Petróleos Mexicanos.		  2005 
Mr. Emilio del Bosque González Corporate Deputy Director of Equity Management
Born: 1947
Business experience: Strategy and Negotiations Consultant; Corporate Director of Supplying of Grupo Industrial Saltillo, S.A. de C.V.; and Director of Purchases of CIFUNSA, S.A. de C.V.
Other board memberships: Instalaciones Inmobiliarias para Industrias, S.A. de C.V.; and I.I.I. Servicios, S.A. de C.V.		  2006 
Mr. Raúl Alejandro Livas Elizondo Corporate Director of Operations
Born: 1966
Business experience: Chief Executive PresidentOfficer of MxV México Capital Ventures, S. de R.L. de C.V.; Director of Management and Business Development of Intellego, S.C.; and Partner-Consultant of GEA Grupo de Economistas y Asociados, S.C.		  2007 
Mr. Manuel Reynaud AveleyraDeputy Director of Business Process and Technological Infrastructure
Born: 1954
Business experience: Chairman and Director General of PAGOSS, S.A. de C.V.; Chairman and Director General of Procesar, S.A. de C.V.; and Director General of Afore Santander Mexicano, S.A. de C.V. Other board memberships: Chairman and Director General of PAGOSS, S.A. de C.V.		2008

136140

Petróleos Mexicanos—Directors and Executive Officers

       
Name Position with Petróleos Mexicanos Year Appointed 
 
Mr. Rolando Alejandro Hernández AlbínDeputy Director of Business Process and Technological Infrastructure
Born: 1953
Business experience: Director and Partner of Tecnofín Comercio Electronico S.A. de C.V.; Information Systems Director of Registro Nacional de Vehículos; and Systems Integration Director of SHL Systemhouse, S.A. de C.V.		2007
Other board memberships: Director/Partner of Tecnofín Comerico Electronico, S.A. de C.V.; and Alternate Director of Grupo Financiero Monex, S.A. de C.V.
Mr. Guillermo Ruiz Gutiérrez Deputy Director of Strategy and Operative Planning
Born: 1959
Business experience: Deputy Director of Operations Evaluation of Pemex-Refining; Associate Managing Director of Pemex-Refining; Manager;Operations and SuperintendentEvaluation of Petróleos Mexicanos; and Deputy Manager of Economic Studies of Petróleos Mexicanos.		  2004 
Mr. Alejandro Martínez Sibaja Deputy Director of OperationsOperation and Strategy Execution
Born: 1956
Business experience: Commercial Associate Managing Director of Transportation of Pemex-Gas and Basic Petrochemicals; Associate Managing Director of Programming and Analysis of Pemex-Gas and Basic Petrochemicals; and Associate Managing Director of Operations of PMI.
Other board memberships: Gasoductos de Chihuahua, S.A.		  2005 
Mr. Guillermo Camacho Uriarte Deputy Director of Operative Discipline, Safety, Health and Environmental Protection
Born: 1954
Business experience: Corporate Associate Managing Director of Regulations of Petróleos Mexicanos; Associate Managing Director of Industrial Safety and Environmental Protection of Petróleos Mexicanos; and Head of the Quality Systems Auditing Unit of Petróleos Mexicanos.		  2007 
Mr. Raúl Mendoza Mata Deputy Director of Supplies
Born: 1941
Business experience: Associate Managing Director of Technical and Administrative ProblemsDisputes of Petróleos Mexicanos; Advisor of the Deputy Director of Engineering and Strategic Works Development of Pemex-Exploration and Production; and Deputy Manager of Engineering of Pemex-Exploration and Production.		  2007 

137

Petróleos Mexicanos—Directors and Executive Officers

NamePosition with Petróleos MexicanosYear Appointed
Mr. FrancisoFrancisco Fernández Lagos Acting Deputy Director of Pipeline Transportation System Coordination
Born: 1955
Business experience: Associate Managing Director of Maintenance Management of Pemex-Exploration and Production; Associate Managing Director of Pipelines Maintenance of Pemex-Exploration and Production; and Deputy Manager of Maintenance (South region) of Pemex-Exploration and Production.		  20072008

141

Petróleos Mexicanos—Directors and Executive Officers
 
NamePosition with Petróleos MexicanosYear Appointed
Mr. Pedro Ismael Hernández Delgado(1)(
 Acting Deputy Director of Maintenance Coordination
Born: 1957
Business experience: Associate Managing Director of Tracking the Industrial Safety and Environmental Protection System of Petróleos Mexicanos; Associate Managing Director of Refineries Maintenance of Pemex-Refining; and Associate Managing Director of Infrastructure Development of Pemex-Refining. Other board memberships: Corporación Mexicana de Investigación en Materiales, S.A. de C.V. (Alternate)		  2006 
Mr. Ernesto Ríos MonteroJorge José Borja Navarrete Acting Corporate Director of Engineering and Project Development and Deputy Director of Engineering
Born: 19361943
Business experience: Director General of Consultoría Empresarial Ejecutiva,ICA Flour Daniel, S. de R.L. de C.V.; Executive Vicepresident of Empresas ICA, S.A. de C.V.; Executive Vice Presidentand Director General of Operations of Grupo BufeteICA Industrial, S.A.; Vice President of Engineering of Grupo Bufete Industrial, S.A.
Other board memberships: Instituto Mexicano del Petróleo (Alternate). de C.V.		  20062007 
(Vacant)VacantDeputy Director of Engineering
Mr. Luis Felipe Luna Melo Deputy Director of Planning, Evaluation and Control Coordination
Born: 1956
Business experience: Deputy Director of Natural Gas of Pemex-Gas and Basic Petrochemicals; President of P.M.I. Norteamérica, S.A. de C.V.; and Deputy Manager of Analysis of PMI.		  2007 
Mr. Francisco Guillermo Iturbide Ruiz Deputy Director of Contracts
Born: 19551951
Business experience: Associate Managing Director of Contracts of Pemex-Exploration and Production; Associate Managing Director of Management and Services of Pemex-Exploration and Production; and Deputy Manager of Biddings and Contracts of Pemex-Exploration and Production.		  2005 
Mr. Genaro Ceballos Bravo Deputy Director of Industrial Plants Projects
Born: 1956
Business experience: Associate Managing Director of Projects ‘C’ of Petróleos Mexicanos; Associate Managing Director of Projects and Construction of Pemex-Gas and Basic Petrochemicals andPetrochemicals; Vice President of Projects of P.M.I. Holdings North America, Inc.; and Deputy Manager of Works Supply Planning of Petróleos Mexicanos.		  2005 
Mr. José Fortunato Álvarez EnríquezHead of the Internal Control Body
Born: 1937
Business experience: Regional Delegate of the Instituto Mexicano del Seguro Social in Baja California and San Luis R.C. Sonora; Head of the Internal Control Body of the Instituto para la Protección al Ahorro Bancario; and Federal Delegate in Baja California of the Ministry of Social Development.		2007

((1) Ismael Hernández Amor, President of PMI Holding North America, Inc., is the half-brother of Mr. Pedro Ismael Hernández Delgado

138142

Petróleos Mexicanos—Directors and Executive Officers

       
Name Position with Petróleos Mexicanos Year Appointed 
Mr. José Fortunato Álvarez EnríquezHead of the Internal Control Body
Born: 1937
Business experience: Regional delegate of the Instituto Mexicano del Seguro Social in Baja California and Sonora; Head of the Internal Control Body of the Instituto para la Protección al Ahorro Bancario; and Federal Delegate in Baja California of the Ministry of Social Development.		2007 
Mr. Juan Adrián Puig Márquez Head of Liabilities Area and Head of Complaints Area
Born: 1958
Business experience: Head of Liabilities and Head of Complaints Area of the Comisión Nacional Bancaria y de Valores; Legal Advisor of Ochoa, Esquivel, S.C.; and Independent Legal Advisor of Banco Promotor del Norte, S.A., Grupo Financiero Pronorte.		  2006 
Mr. Benjamín Hedding Galeana Head of Control and Evaluation Auditing and Support to Good Governance
Born: 1945
Business experience: Head of Control and Evaluation Auditing and Support to Good Governance of the Comisión Nacional Bancaria y de Valores; Coordinator of the Colonial Cities and Urban Centers Program of the Ministry of Tourism; and Chief Executive Officer of Electric Transportation Services of the Federal District Department.		  2005 
Mr. Héctor Aguiñaga Pérez Head of the Internal Auditing Area
Born: 1950
Business experience: National Director of Management Assurance Services of KPMG Cárdenas Dosal, S.C.; General Auditor of Pan-American Beverages, Inc.; and General Auditor of Sears Roebuck, S.A. de C.V.		  2004 
Mr. Mariano Ruiz-Funes Macedo Chief of Staff of the Director General
Born: 1958
Business experience: Director General of GEA Grupo de Economistas y Asociados, S.C.; Partner Director and Board Member of GEA Grupo de Economistas y Asociados, S.C.; and Independent Board member of Seguros Mapfre-Tepeyac, S.A. Other board memberships: Instalaciones Inmobiliarias para Industrias, S.A. de C.V.; and I.I.I. Servicios, S.A. de C.V.		  2007 

139

Petróleos Mexicanos—Directors and Executive Officers

NamePosition with Petróleos MexicanosYear Appointed
Mr. Roberto Ortega Lomelín Executive Coordinator to the General Direction
Born: 1950
Business experience: Partner/Founder of Grupo de Asesoría Estratégica; Administrative Official of the Ministry of Energy; and Assistant Director of Promotion and Technical Assistance of Banco Nacional de Obras y Servicios Públicos, S.N.C.		  2007 
Vacant Executive Advisor to the General Direction    

143

Petróleos Mexicanos—Directors and Executive Officers
NamePosition with Petróleos MexicanosYear Appointed
Mr. Raoul Mauricio Capdevielle Orozco Technical Secretary of the Director General
Born: 1943
Business experience: Deputy Comptroller of Liabilities and Citizen Service of Petróleos Mexicanos; Legal Coordinator of Instalaciones Inmobiliarias para Industrias, S.A. and I.I.I. Servicios, S.A. de C.V.; and Legal Director of Concessions of Triturados BalsáticosBasálticos y Derivados, S.A. de C.V.		  2001 

140144

Pemex-Exploration and Production—Directors and Executive Officers
 
       
Name Position with Pemex-Exploration and Production Year Appointed 
 
Mr. Jesús Reyes Heroles González Garza Chairman of the Board of Pemex-Exploration and Production (refer to Petróleos Mexicanos)  2006 
Mr. José Antonio Ceballos Soberanis Board Member of Pemex-Exploration and Production (refer to Pemex-Refining)  2007 
Mr. Roberto Ramírez Soberón Board Member of Pemex-Exploration and Production (refer to Pemex-Gas and Basic Petrochemicals)  2006 
Mr. Rafael Beverido Lomelín Board Member of Pemex-Exploration and Production (refer to Pemex-Petrochemicals)  2001 
Mr. Mario Gabriel Budebo Board Member of Pemex-Exploration and Production and Undersecretary of Hydrocarbons of the Ministry of Energy
Born: 1963
Business experience: President of the Comisión Nacional del Sistema de Ahorro para el Retiro; Chief of Staff of the Secretary of Finance and Public Credit; and General Coordinator of Revenues Policy of the Ministry of Finance and Public Credit.
Other board memberships: Banco Nacional de Comercio Exterior, S.N.C.(Alternate); and Nacional Financiera, S.N.C. (Alternate).		  2007 
VacantBoard Member of Pemex-Exploration and Production
Mr. Ernesto Javier Cordero ArroyoDionisio Arturo Pérez-Jácome Friscione Board Member of Pemex-Exploration and Production and Undersecretary of Disbursements of the Ministry of Finance and Public Credit
Born: 19681967
Business experience: Advisor Coordinator and Public PolicyChief of Staff of the President’s Office; Coordinator of Felipe Calderón’s presidential campaign; Director General of Fundación Desarollo Humano Sustentable; Undersecretary of Energy Planning and Technological Development ofEconomy Policy at the Ministry of Energy; and Chief of Technical Advisor and Institutional LiaisonPublic Policy Unit of the MinistryTransition Team of Energy.
President Elect; Director of Mercer Management Consulting; and President of the Energy Regulatory Commission. Other board memberships: Federal Electricity Commission (Alternate); Central Light and Power; Banco Nacional de Obras y Servicios Públicos, S.N.C.; Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado; and Banco Nacional de Comercio Exterior, S.N.C.; Exportadora de Sal, S.A.; and Transportadora de Sal, S.A.		2007


141

Pemex-Exploration and Production—Directors and Executive Officers

NamePosition with Pemex-Exploration and ProductionYear Appointed
Mr. Dionisio Pérez-Jácome FriscioneBoard Member of Pemex-Exploration and Production and Chief of Staff of the Presidential Office
Born: 1967
Business experience: Partner-Director of Mercer Management Consulting; President of the Energy Regulatory Commission; and Executive Director of the State Managing Committee to capitalize non-basic petrochemical companies of the Ministry of Energy.		  2007 
Mr. Raúl Alejandro Livas Elizondo Board Member of Pemex-Exploration and Production (refer to Petróleos Mexicanos)  2007 
Mr. Carlos Arnoldo Morales Gil Director General
Born: 1954
Business experience: Deputy Director of Planning and Evaluation of Pemex-Exploration and Production; Deputy Director (Southern region) of Pemex-Exploration and Production; and Associate Managing Director of Planning of Pemex-Exploration and Production.		  2006 


145

Pemex-Exploration and Production—Directors and Executive Officers
NamePosition with Pemex-Exploration and ProductionYear Appointed
Mr. Sergio Aceves Borbolla Deputy Director of Engineering and Strategic Works Development
Born: 1959
Business experience: Associate Managing Director of Projects (Northeastern Marine region) of Petróleos Mexicanos;Pemex-Exploration and Production; Associate Managing Director of Construction of Pemex-Exploration and Production; and Head of Transition Projects of Pemex-Exploration and Production.		  2005 
Mr. Vinicio Suro Pérez Deputy Director of Planning and Evaluation
Born: 1956
Business experience: Associate Managing Director of Hydrocarbon Reserves of Pemex-Exploration and Production; Chief of the Hydrocarbon Reserves Unit of Pemex-Exploration and Production; and Specialists Coordinator of Pemex-Exploration and Production.		  2006 
Mr. J. Javier Hinojosa Puebla Deputy Director (Northeastern Marine region)
Born: 1958
Business experience: Coordinator of the Executive Commercial Operative Coordination of Pemex-Exploration and Production; Associate Managing Director of Analysis and Technical Operative Evaluation (Southern region) of Pemex-Exploration and Production; and Associate Managing Director of Production (Southern region) of Pemex-Exploration and Production.		  2003 

142

Pemex-Exploration and Production—Directors and Executive Officers

NamePosition with Pemex-Exploration and ProductionYear Appointed
Mr. Jorge Antonio Fernández Venegas Deputy Director (Northern region)
Born: 1953
Business experience: Manager of Integral Veracruz Business Unit (Northern region) of Pemex-Exploration and Production; Manager of Bellota-Chinchorro Production Business Unit (Southern region) of Pemex-Exploration and Production; and Manager of Luna Production Business Unit (Southern region) of Pemex-Exploration and Production.		  2007 
Mr. Jesús Hernández San Juan Deputy Director of Distribution and Trading
Born: 1955
Business experience: Associate Managing Director of Transport and Distribution of Hydrocarbons of Pemex-Exploration and Production; Deputy Manager of Transport and Distribution of Gas and Condensates of Pemex-Exploration and Production; and Chief of the Compression Systems Department of Pemex-Exploration and Production.		  2006 

146

Pemex-Exploration and Production—Directors and Executive Officers
NamePosition with Pemex-Exploration and ProductionYear Appointed
Mr. Rogelio Bartolomé Morando Sedas Deputy Director of Industrial Safety and Environmental Protection (formerly named as Deputy Director of Industrial Safety, Environmental Protection and QualityQuality)
Born: 1946
Business Experience: Advisor of the Corporate Director of Industrial Safety and Environmental Protection of Petróleos Mexicanos; Director General of Industrias Tecnos, S.A. de C.V.; and Plant Manager of Dupont, S.A. de C.V.		  
2003		 
Mr. Teódulo Gutiérrez Acosta Technical Deputy Director of Exploitation (formerly named Deputy Director of Technical Coordination of ExploitationExploitation)
Born: 1944
Business Experience: Deputy Director (Southerrn region) of Pemex-Exploration and Production; Deputy Director of Human Resources, Competitiveness and Innovation of Pemex-Exploration and Production; and Associate Managing Director of Professional Development of Pemex-Exploration and Production; and Associate Managing Director of Technological Development of Production of Pemex-Exploration and Production.		  2007

143

Pemex-Exploration and Production—Directors and Executive Officers

NamePosition with Pemex-Exploration and ProductionYear Appointed
 
Mr. Manuel de Jesús Alegría Constantino Deputy Director of Marine Services Coordination
Born: 1951
Business experience: Associate Managing Director of Supply Strategies of Pemex-Exploration and Production; Acting Associate Managing Director of Management and Finance (Northern region) of Pemex-Exploration and Production; and Deputy Manager of Material Resources (Northern region) of Pemex-Exploration and Production.		  2006 
Mr. Jorge Collard de la Rocha Deputy Director of Management and Finance
Born: 1951
Business experience: Acting Deputy Director of Supplies of Petróleos Mexicanos; Chief Financial Officer of Banco Nacional de Obras y Servicios Públicos, S.N.C.; and Director General of Programming and Budget of Energy and Infrastructure of the Ministry of Finance and Public Credit.		  2005

147

Pemex-Exploration and Production—Directors and Executive Officers
NamePosition with Pemex-Exploration and ProductionYear Appointed
 
Mr. Ricardo Palomo Martínez Deputy Director of Drilling and Well Maintenance Unit
Born: 1954
Business experience: Deputy Director (Southwestern Marine region) of Pemex-Exploration and Production, Manager of Burgos Production Asset of Pemex-Exploration and Production; and Associate Managing Director of Integral Project of Burgos basin.		  2005 
Mr. Luis Sergio Guaso Montoya Deputy Director of New Models of Execution
Born: 1963
Business Experience: Associate Managing Director of Economic Analysis of Pemex-Exploration and Production; Associate Managing Director of Investment Resources of Pemex-Exploration and Production; Economic Advisor of P.M.I. Holdings North America, Inc.		  2003 
Mr. Francisco Javier Barraza Rodríguez Deputy Director of Technology Information Coordination
Born: 1943
Business experience: Technical Support on Documental Technology of ImaxServ;Imaserve; Director of Administrative Systems of Scotiabank Inverlat, S.A.; and External Consultant on Administrative Systems of Banco Nacional de México, S.A.Systems.		  2003

144

Pemex-Exploration and Production—Directors and Executive Officers

NamePosition with Pemex-Exploration and ProductionYear Appointed
 
Mr. Pedro Silva López Deputy Director (Southwestern Marine region)
Born: 1953
Business experience: Deputy Director of Operations Coordination of Petróleos Mexicanos; Executive Director of Strategic Gas ProgramSGP of Pemex-Exploration and Production; and Associate Managing Director of Strategic Planning of Pemex-Exploration and Production.		  2005 
Mr. José Serrano Lozano Deputy Director (Southern region)
Born: 1956
Business Experience: Manager of Integral Samaria-Luna Business Unit (Southern region) of Pemex-Exploration and Production; Manager of Integral Burgos Business Unit (Northern region) of Pemex-Exploration and Production; and Associate Managing Director of Planning (Northern region) of Pemex-Exploration and Production.		  2007 

148

Pemex-Exploration and Production—Directors and Executive Officers
NamePosition with Pemex-Exploration and ProductionYear Appointed
Mr. José Antonio Escalera Alcocer Technical Deputy Director of Exploration (formerly named as Deputy Director of Technical Coordination of ExplorationExploration)
Born: 1958
Business Experience: Manager of Integral Burgos Business Unit (Northern region) of Pemex-Exploration and Production; Manager of Integral Poza Rica - Altamira Business Unit (Northern region) of Pemex-Exploration and Production; and Associate Managing Director of Diagnosis and Risk Analysis of Pemex-Exploration and Production.
Other board memberships: Compañía Mexicana de Exploraciones, S.A. de C.V.		  2007 
Mr. José Aurelio Loyo FernándezNéstor Martínez Romero Acting Deputy Director of Human Resources, Competitiveness and Innovation
Born: 19511959
Business experience: Associate Managing Director of Operative PlanningDevelopment and Compensation of Pemex-Exploration and Production; Associate Managing Director of Investment Evaluation in ExplorationNegotiation and Technological Transfer of Pemex-Exploration and Production; and Asset Manager of Muspac ProductionAnalyst of Pemex-Exploration and Production.		  20062008 
Mr. Raúl Carrera PliegoKarim Elías Bobadilla Acting Head of the Internal Control Body
Born: 19541971
Business Experience: Head of Liabilities of the Internal Control Body of Pemex-Exploration and Production; Advisor of the Undersecretary of Attention to the Citizen and Regulations of the SFP; and Assistant Director General of Management of the Secretaría de Contraloría y Desarrollo Administrativo.President’s Office; Leader of Government Banking of Grupo Financiero HSBC; and Executive of Commercial Banking of Grupo Financiero HSBC.		  2007 

145149

Pemex-Refining—Directors and Executive Officers
 
       
Name Position with Pemex-Refining Year Appointed 
 
Mr. Jesús Reyes Heroles González Garza Chairman of the Board of Pemex-Refining (refer to Petróleos Mexicanos)  2006 
Mr. Roberto Ramírez Soberón Board Member of Pemex-Refining (refer to Pemex-Gas and Basic Petrochemicals)  2006 
Mr. Carlos A. Morales Gil Board Member of Pemex-Refining (refer to Pemex-Exploration and Production)  2006 
Mr. Rafael Beverido Lomelín Board Member of Pemex-Refining (refer to Pemex Petrochemicals)  2001 
Mr. Jordy H.Hernán Herrera Flores Board Member of Pemex-Refining and Undersecretary of Energy Planning and Technological Development of the Ministry of Energy
Born: 1972
Business experience: Partner and founder of Alimentos Iberoamericanos, S.A. de C.V.; Director General of the Investments Promotion Unit of the Ministry of Energy; and Private Secretary of the Ministry of Energy.
Other board memberships: ChairmanEnergy; and Private Secretary of Institutothe Director General of Banco Nacional de Investigaciones Nucleares; Centro de InvestigaciónObras y Docencia Económicas; Comisión Intersecretarial de Cambio Climático (Alternate); Consejo Nacional de Ciencia y Tecnología; Instituto de Investigaciones Eléctricas; Comisión Nacional para el Ahorro de Energía (Alternate); Comisión Ambiental Metropolitana (Alternate); Consejo Nacional para la Competitividad de la Micro, Pequeña y Mediana Empresa (Alternate); Comisión Intersecretarial para el Desarrollo Rural Sustentable (Alternate); Comisión Nacional de Inversiones Extranjeras (Alternate); and Comisión Nacional del Agua (Alternate).Servicios Públicos, S.N.C.		  2007 
Mr. Ernesto Cordero ArroyoVacant Board Member of Pemex-Refining (refer to Pemex-Exploration and Production)  2007 
Mr. Dionisio Arturo Pérez-Jácome Friscione Board Member of Pemex-Refining (refer to Pemex-Exploration and Production)  2007 
Mr. Roberto Ortega Lomelín Board Member of Pemex-Refining (refer to Petróleos Mexicanos)  2007 
Mr. José Antonio Ceballos Soberanis Director General
Born: 1943
Business experience: Director General of Instituto Mexicano del Petróleo; Corporate Director of Operations of Petróleos Mexicanos; and Director General of Pemex-Exploration and Production.
Other board memberships: Instituto Mexicano del Petróleo.		  2006


146

Pemex-Refining—Directors and Executive Officers

NamePosition with Pemex-RefiningYear Appointed
 
Mr. Moisés Ithuriel Orozco García Deputy Director of Trading
Born: 1968
Business experience: Executive Advisor to the Director General Office of Petróleos Mexicanos; Corporate Director of Management of Petróleos Mexicanos; and Associate Managing Director of Strategic Planning of Petróleos Mexicanos.		  2007 
Mr. Mario Nieto Garza Deputy Director of Distribution
Born: 1955
Business experience: Deputy Director of Pipelines of Pemex-Gas and Basic Petrochemicals; Deputy Director of Pipeline Transportation System Coordination of Petróleos Mexicanos; and Associate Managing Director of Daily Operation Tracking of Petróleos Mexicanos.		  2007 


150

Pemex-Refining—Directors and Executive Officers
NamePosition with Pemex-RefiningYear Appointed
Mr. José Antonio Gómez Urquiza de la Macorra Deputy Director of Finance and Management
Born: 1951
Business experience: Director General of Cámara de la Industria del Hierro y del Acero; Deputy Director of Management of Delegación Benito Juárez in Mexico City; and Federal Congressman of the LVthLVth Legislature.		  2003 
Mr. Rodrigo Favela Fierro Deputy Director of Planning, Coordination and Evaluation
Born: 1965
Business experience: Associate Managing Director of Strategic Planning of Petróleos Mexicanos; Associate Managing Director of Operations Evaluation of Petróleos Mexicanos; and CoordinatorChief of Planning AdvisorsStaff of Pemex-Refining.		  2007 
Mr. Antonio Álvarez Moreno Deputy Director of Industrial Safety and Environmental Protection Auditing
Born: 1958
Business experience: Associate Managing Director of Industrial Safety and Occupational Health of Petróleos Mexicanos; Chief of the Industrial Safety and Environmental Protection Unit of Refinery “Ing. Antonio M. Amor” of Pemex-Refining; and Acting Consultant of Industrial Safety and Environmental Protection of Pemex-Refining.		  2007 

147

Pemex-Refining—Directors and Executive Officers

NamePosition with Pemex-RefiningYear Appointed
Mr. Francisco Gabriel Toscano Martínez Deputy Director of Production
Born: 1949
Business experience: Associate Managing Director of “Francisco I. Madero” Refinery of Pemex-Refining; Associate Managing Director of “Héctor R. Lara Sosa” Refinery ofPemex-Refining; and Regional Associate Managing Director of “Miguel Hidalgo” Refinery of Pemex-Refining.		  2006 
Mr. Isaías Nicolás Navarro Román Deputy Director of Storage and Allotment
Born: 1936
Business experience: Deputy Director of Industrial Safety, Occupational Health and Sustainable Development of Petróleos Mexicanos; General Coordinator for Safety and Environmental Protection Systems in Pemex-Gas and Basic Petrochemicals; and Industrial Safety and Environmental Protection Auditor in Pemex-Gas and Basic Petrochemicals.		  2007 

151

Pemex-Refining—Directors and Executive Officers
NamePosition with Pemex-RefiningYear Appointed
Ms. Alicia Pineda y Mitolo Head of the Internal Control Body
Born: 1947
Business experience: Head of the Internal Control Body of Federal Competition Commission; Head of the Internal Control Body of the Ministry of Foreign Affairs; and Internal Comptroller of the Sistema Nacional para el Desarrollo de la Familia.		  2007 

148152

Pemex-Gas and Basic Petrochemicals—Directors and Executive Officers
 
       
Name Position with Pemex-Gas and Basic Petrochemicals Year Appointed 
 
Mr. Jesús Reyes Heroles González
Garza		 
Chairman of the Board of Pemex-Gas and Basic Petrochemicals (refer to Petróleos Mexicanos)		  
2006		 
Mr. Carlos A. Morales Gil Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex-Exploration and Production)  2006 
Mr. José Antonio Ceballos Soberanis Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex-Refining)  2006 
Mr. Rafael Beverido Lomelín Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex-Petrochemicals)  2001 
Mr. Mario Gabriel Budebo Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex- Exploration and Production)  2007 
Mr. Ernesto Cordero ArroyoVacant Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex-Exploration and Production)  2007 
Mr. Dionisio Arturo Pérez-Jácome Friscione Board Member of Pemex-Gas and Basic Petrochemicals (refer to Pemex-Exploration and Production)  2007 
Mr. Roberto Ortega Lomelín Board Member of Pemex-Gas and Basic Petrochemicals (refer to Petróleos Mexicanos)  2007 
Mr. Roberto Ramírez Soberón Director General
Born: 1950
Business experience: Deputy Director of Planning of Pemex-Gas and Basic Petrochemicals; Commercial Associate Managing Director;Director of Pemex-Gas and Basic Petrochemicals; and Associate Managing Director of Urban DistributionControl and Measuring of Pemex-Gas and Basic Petrochemicals.		  2006 
Mr. Salvador Ortiz Vértiz Deputy Director of PlanningNatural Gas
Born: 1949
Business experience: Deputy Director of Planning of Pemex-Gas and Basic Petrochemicals; General Coordinator of Mining of the Ministry of Economy; and Assistant Director and Deputy Director of Sectorial Studies for Grupo Financiero Banamex-Accival, S.A.; and Senior Advisor to Energy Sector and Basic Industries of Grupo Financiero Banamex-Accival, S.A.		  2007 
Mr. Miguel Francisco Bueno
Fernández		 
Acting Deputy Director of LiquifiedLiquefied Gas and Basic Petrochemicals
Born: 1953
Business experience: Associate Managing Director of Operations of Pemex-Gas and Basic Petrochemicals; Associate Managing Director of Business Planning of Pemex-Gas and Basic Petrochemicals; and Associate Managing Director of Liquefied Gas Trading of Pemex-Gas and Basic Petrochemicals.		  
2007		 


149153

Pemex-Gas and Basic Petrochemicals—Directors and Executive Officers

       
Name Position with Pemex-Gas and Basic Petrochemicals Year Appointed 
 
Mr. Luis Felipe Luna MeloMs. Gabriela Torres Ramírez Deputy Director of Natural GasPlanning
Born: 19561954
Business experience: Commercial RepresentativeChief of Staff of the Director General of Pemex-Gas and Basic Petrochemicals; Consul General of Mexico in TokyoSan Diego (California) of the Ministry of Foreign Affairs; and Deputy ManagerDirector General of AnalysisEconomic Liaisons with Latin America and the Caribbean of PMI; and Presidentthe Ministry of P.M.I. Norteamérica, S.A. de C.V.Foreign Affairs.		  19962007 
Mr. Agustín Castro Pérez Deputy Director of Management and Finance
Born: 1962
Business experience: Associate Managing Director of Evaluation and Information of Pemex-Gas and Basic Petrochemicals; Associate Managing Director of ProgrammingPlanning of Pemex-Gas and Basic Petrochemicals; and Deputy Manager of Information of Pemex-Gas and Basic Petrochemicals.
Other board memberships: Instalaciones Inmobiliarias para Industrias, S.A. de C.V.; I.I.I. Servicios, S.A. de C.V.; and Gasoductos de Chihuahua, S. de R.L. de C.V.		  2006 
Mr. Armando R. Arenas Briones Deputy Director of Production
Born: 1948
Business experience: Associate Managing Director and Superintendent of Nuevo Pemex petrochemical complex; and General Coordinator of Acquisitions Engineering of Petróleos Mexicanos.		  1996 
Mr. Víctor Domínguez Cuellar Acting Deputy Director of Pipelines
Born: 1959
Business experience: Associate Managing Director of Planning and Evaluation of Pemex-Gas and Basic Petrochemicals; Deputy Manager of Planning of Pemex-Gas and Basic Petrochemicals; and General Superintendent of Electromechanic Processes and Public Works of Pemex-Exploration and Production. Other board memberships: Gasoductos de Chihuahua, S. de R.L. de C.V.; Gasoductos de Tamaulipas, S. de R.L. de C.V.; Gasoductos Servicios, S. de R.L. de C.V.; and TDF, S. de R.L. de C.V.		  2007 
Mr. Francisco Arturo García Agraz
Sánchez		 
Head of the Internal Control Body
Born: 1961
Business experience: Regulatory Comptroller Director of Banco Santander, S. A., Institución de Banca Múltiple, Grupo Financiero Santander; Director General of Estrategia Corporativa, S.A.; and Associate of Goodrich, Riquelme y Asociados, S.C.		  
2007		 

150154

Pemex- Petrochemicals—Directors and Executive Officers
 
       
Name Position with Pemex-Petrochemicals Year Appointed 
 
Mr. Jesús Reyes Heroles González
Garza		 
Chairman of the Board of Pemex-Petrochemicals (refer to Petróleos Mexicanos)		  
2006		 
Mr. Roberto Ramírez Soberón Board Member of Pemex-Petrochemicals refer to Pemex-Gas and Basic Petrochemicals)  2006 
Mr. José Antonio Ceballos Soberanis Board Member of Pemex-Petrochemicals (refer to Pemex-Refining)  2006 
Mr. Carlos A. Morales Gil Board Member of Pemex-Petrochemicals (refer to Pemex-Exploration and Production)  2006 
Mr. Jordy H.Hernán Herrera Flores Board Member of Pemex-Petrochemicals (refer to Pemex-Refining)  2007 
Mr. Ernesto Cordero ArroyoVacant Board Member of Pemex-Petrochemicals (refer to Pemex-Exploration and Production)  2007 
Mr. Dionisio Arturo Pérez-Jácome Friscione Board Member of Pemex-Petrochemicals (refer to Pemex-Exploration and Production)  2007 
Mr. Raúl Alejandro Livas Elizondo Board Member of Pemex-Petrochemicals (refer to Petróleos Mexicanos)  2007 
Mr. Rafael Beverido Lomelín Director General
Born: 1942
Business experience: Director General and other positions inof Industrias Negromex, S.A. de C.V.; Director General of Housmex Inc.; and several positions in Grupo DESC,
Director General of Hules Mexicanos, S.A. de C.V.		  2001 
Mr. Lorenzo Aldeco Ramírez Deputy Director of TradingPlanning
Born: 1955
Business experience: Deputy Director of OperationsTrading of Pemex-Petrochemicals; Deputy Director of PlanningOperations of Pemex-Petrochemicals; and Operations ManagerDeputy Director of Servicios de Operaciones de Nitrógeno, S.A. de C.V.Planning of Pemex-Petrochemicals.		  2005
Mr. Abraham Klip MoshinskyDeputy Director of Planning
Born: 1956
Business Experience: Consultant of Pemex-Petrochemicals’ project of the Instituto Mexicano del Petróleo; Director General and Partner of Blindajes Automundo, S.A. de C.V.; and Assistant Director of Carrocerías y Adaptaciones Automotrices, S.A. de C.V.		20022007 
Mr. Mario Hugo González
Petrikowsky		 
Deputy Director of Management and Finance
Born: 1937
Business experience: Associate Managing Director of Budgeting of Petróleos Mexicanos; Advisor to the Deputy Direction of ProgrammingPlanning and Budgeting of Petróleos Mexicanos; and Deputy Director of Planning of Pemex-Petrochemicals.		  
2001


151

NamePosition with Pemex-PetrochemicalsYear Appointed
 
Mr. Francisco Arturo Arellano Urbina Deputy Director of Operations
Born: 1946
Business experience: Director of Petroquímica Cangrejera, S.A. de C.V.; Director General of Micosa División Construcciones, S.A. de C.V.; and Director General of RCR Ingenieros Asociados, S.A. de C.V.		  2005 
Mr. Carlos Xavier Pani Espinosa Deputy Director of Trading
Born: 1947
Business experience: Executive Director of Petrochemical Projects
Born: 1947
Business experience: of Pemex-Petrochemicals; Deputy Director of Trading of Pemex-Refining; and Deputy Director of Trading of Pemex-Petrochemicals; and Director General of C.P. Estrategia y Servicios, S.A. de C.V.Pemex-Petrochemicals.		  2007


155

NamePosition with Pemex-PetrochemicalsYear Appointed
 
Mr. Héctor Alberto Acosta Félix Head of the Internal Control Body
Born: 1969
Business experience: Internal Comptroller in the Federal Competition Commission; Internal Comptroller in the Ministry of Energy; and Chief of Staff of the Secretary of the Public Function.		  2007 
 
Compensation of Directors and Officers
 
For the year ended December 31, 2006,2007, the aggregate compensation of executive officers of Petróleos Mexicanos and the subsidiary entities (81(82 persons) paid or accrued in that year for services in all capacities was approximately Ps. 249.3192.4 million. Members of the boards of directors of Petróleos Mexicanos and the subsidiary entities do not receive compensation for their services.
 
Board Practices
 
Neither the members of the boards of directors nor the executive officers of Petróleos Mexicanos and the subsidiary entities are appointed for a specific term. The members of the boards of directors, except for those selected by the Union, and the Directors General of Petróleos Mexicanos and the subsidiary entities serve subject to the discretion of the President of Mexico.
 
Audit Committee
 
As we currently do not have an audit committeeOn August 31, 2007, the Ministry of Energy and the SFP adopted the Guidelines for the integration and operation of the BoardIndependent Audit Committees in Petróleos Mexicanos, Federal Electricity Commission and Central Light and Power (as amended, the Guidelines for the Independent Audit Committee), which were created to ensure that accounting and financial information is prepared in accordance with applicable law and the Mexican FRS, as well as to provide verification that such information is properly filed with Mexican and foreign entities. The Independent Audit Committee is made up of Directors,three voting members who are designated by the entire BoardSFP. At least one of Directorsthe members is required to be a “financial expert” in accordance with these Guidelines. See “Item 16A—Audit Committee Financial Expert”. The selection of committee members is based on the experience, competence and professional reputation of the candidates. Each member must be independent from Petróleos Mexicanos within the meaning of the Guidelines for the Independent Audit Committee and demonstrate technical expertise in relation to the audit committee’s functions.

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The Independent Audit Committee of Petróleos Mexicanos is presently acting as our audit committee within the meaning of Section 3(a)(58)(B)consists of the Exchange Act.following members, who were appointed by the SFP on March 18, 2008:
Position with the Independent
Audit Committee of Petróleos
NameMexicanosYear of Expiration
Mr. Felipe César Mellado FloresChairman.
Born: 1950
Business experience: Assistant Director General of Grupo Azucarero México, S.A. de C.V.; Director General of Management and Finance of Grupo Industrial Saltillo, S.A.B. de C.V.; Director General of Electrodomestic Division of Grupo Industrial Saltillo, S.A.B. de C.V.
Board memberships: Aguas de Saltillo, S.A. de C.V.; Instituto Tecnológico y de Estudios Superiores de Monterrey Campus Saltillo; Cámara Nacional de la Industria de Transformación in Coahuila (Southeastern region); and Centro Empresarial Coahuila Sureste.		2012
Mr. Ricardo Samaniego BreachMember.
Born: 1953
Business experience: Director of the Applied Economy and Public Policies Center of the Instituto Tecnológico Autónomo de México; Chief of Staff of the Secretary of Energy; and Head of the Energy Operations Unit of the Ministry of Energy.		2011
Mr. Fernando Vilchis PlatasMember and Financial Expert.
Born: 1930
Business experience: Partner of Martín Marmolejo y Asociados; Advisor of the Undersecretaries of Public-Sector Entities, Mines, Basic Industry and Energy of the Ministry of Energy; and Partner of PricewaterhouseCoopers, S.C.
Board memberships: Horton International; and Reider y Asociados.		2010
The Independent Audit Committee is required to, among other things:
•  supervise the processes of formulating, compiling and disclosing accounting and financial information and ensure that the financial statements conform to applicable accounting standards and auditing rules;
•  approve the selection and appointment of the external auditor;
•  supervise the preparation and issuance of the auditor’s report on our financial statements;
•  ensure that we hire external auditors that are independent;
•  provide an opinion on the appropriateness of retaining the external auditor to perform non-audit services, when necessary, in order to avoid a conflict of interest as to the external auditor’s independence;


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•  provide an opinion regarding the administration’s work policy, valuation and risk management as they relate to the operational and financial condition of the entity;
•  propose improvements to the system of internal control, including technological and informational improvements;
•  propose ways to address significant findings arising from audits and internal control processes;
•  periodically, or at the request of governmental or other supervisory authorities, report on the results of the committee’s work;
•  propose revisions and modifications to the Guidelines for the Independent Audit Committee;
•  obtain information from PEMEX, as is necessary for the committee to complete its work;
•  devise, approve and, when necessary, modify committee procedures; and
•  resolve any issues presented to the committee for its consideration.
 
Employees
 
Excluding employees of the PMI Group and including those employed by us on a temporary basis, at December 31, 2006,2007, Petróleos Mexicanos and the subsidiary entities had 141,275141,146 employees, as compared with 139,171141,275 at December 31, 2005.2006. During 2006,2007, Petróleos Mexicanos and the subsidiary entities employed

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an average of 15,77414,528 temporary employees. The following table sets forth the number of employees of Petróleos Mexicanos, the subsidiary entities and the PMI Group at year-end for the past five years.
 
                                                
 At December 31, 2006
  At December 31, 2007
 
 2002 2003 2004 2005 2006 % of Total  2003 2004 2005 2006 2007 % of Total 
Pemex-Exploration and Production  46,322   47,975   48,371   48,767   49,045   34.8 
Pemex-Refining  47,341   46,692   44,899   45,335   45,494   32.2   46,692   44,899   45,335   45,494   44,811   31.7 
Pemex-Exploration and Production  44,658   46,322   47,975   48,371   48,767   34.5 
Pemex-Petrochemicals  14,360   14,203   13,895   13,939   14,045   9.9   14,203   13,895   13,939   14,045   13,823   9.8 
Pemex-Gas and Basic Petrochemicals  11,977   12,104   11,923   12,018   12,562   8.9   12,104   11,923   12,018   12,562   12,397   8.8 
Petróleos Mexicanos  18,798   18,894   19,030   19,508   20,407   14.5   18,894   19,030   19,508   20,407   21,070   14.9 
                          
Total  137,134   138,215   137,722   139,171   141,275   100.0   138,215   137,722   139,171   141,275   141,146   100.0 
                          
PMI Group  330   318   320   312   307       336   336   327   322   320     
 
Source: Petróleos Mexicanos.Mexicanos and PMI Group.
 
The Union represents approximately 80.1% of the work force of Petróleos Mexicanos and the subsidiary entities. Union members are our employees and they elect their own leadership from among their ranks. Since the Union’s official establishment in 1938, we have experienced no labor strikes, and although we have experienced work stoppages for short periods of time, none of these stoppages has had a significant material adverse effect on our operations. However, there was an investigation and judicial proceeding relating to certain alleged improper diversions of federal funds by Union officials, which resulted in an offer by the Union to pay to us, over a period of years, Ps. 1,580 million in nominal terms for the amounts allegedly diverted from us. See “Item 8—Financial Information—Legal Proceedings—Mexican Government Audits and Other Investigations.”
 
Our relationship with our employees is regulated by theLey Federal del Trabajo(Federal Labor Law) and a collective bargaining agreement between Petróleos Mexicanos and the Union. The collective bargaining agreement regulates extensively all aspects of the relationship of Petróleos Mexicanos and the subsidiary entities with their employees. The collective bargaining agreement is subject to renegotiation every two years, although salaries are reviewed annually.


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On August 25, 2005,July 17, 2007, Petróleos Mexicanos and the Union executed a new collective bargaining agreement that became effective retroactively on August 1, 2005, in accordance with the terms of an extension granted during the negotiation process.2007. The terms of the new agreement provide for a 4.1%4.25% increase in wages and a 1.9%1.6% increase in other benefits. By its terms, thisthe new collective bargaining agreement is scheduled to expire on July 31, 2007. On June 7, 2007, Petróleos Mexicanos and the Union set up a commission to negotiate the terms and conditions of a new collective bargaining agreement that is scheduled to become effective on August 1, 2007.2009.
 
In accordance with the collective bargaining agreement and the Federal Labor Law, Petróleos Mexicanos and the subsidiary entities are under an obligation to pay seniority premiums to retiring employees and pension and death benefits to retired employees or their survivors. Retirees are entitled to receive increases in their pensions whenever salary increases are granted to current employees. We also provide health and medical benefits to employees, retired employees and their families and, subject to our overall budgetary constraints, we provide an interest-rate subsidy on employees’ mortgage loans.
 
On November 5, 1997, the Ministry of Finance and Public CreditSHCP and the Board of Directors of Petróleos Mexicanos authorized the formation of a trust called the Pemex Labor Fund. This fund is a vehicle to fund labor liabilities, current pension payments and seniority premiums. We have designed a contribution plan to increase the funds held in this trust and to continue to make payments on outstanding labor and pension liabilities. Our contributions to the Pemex Labor Fund amounted to Ps. 1,94318,429 million in 2004,2006 and Ps. 14,52325,108 million in 2005 and Ps. 17,796 million in 2006.2007.


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Item 7.  Major Shareholders and Related Party Transactions
 
Major Shareholders
 
Petróleos Mexicanos and the subsidiary entities have no shareholders because they are decentralized public entities of the Mexican Government. The Mexican Government closely regulates and supervises our operations; it incorporates the annual budget and financing programs of Petróleos Mexicanos and the subsidiary entities into its consolidated annual budget, which it submits to the Mexican Congress for its approval.
 
Mexican Government secretaries hold a majority of the seats on the Board of Directors of Petróleos Mexicanos, and the Secretary of Energy is the Chairperson of the Board of Petróleos Mexicanos. The SFP appoints our external auditors and thePetróleos Mexicanos’ three audit committee members. The Director General of Petróleos Mexicanos is a member of the President of Mexico’s cabinet. See also “Item 3—Key Information—Risk Factors—Risk Factors Related to the Relationship between PEMEX and the Mexican Government” and “Item 10—Additional Information—Share Capital.”
 
Related Party Transactions
 
Under Article 8, Section XI of theLey Federal de Responsabilidades Administrativas de los Servidores Públicos(Federal Law of Administrative Responsibilities of Public Officials), which applies to all of our employees, our employees are obliged to “recuse themselves from intervening in any way in the attention to, processing or resolution of matters in which they might have personal, family or business interest, including those where some benefit can result for themselves, their spouse, blood or affinity relatives up to the fourth degree, or civil relatives, or for third parties with which they have professional, labor, or business relations, or for partners or partnerships where the public officials or the persons referred above are or have been members of.”
 
As an employee benefit, we offer salary advances to all of our eligible Union and non-Union workers, including our executive officers, pursuant to the programs set forth in the collective bargaining agreement and in theReglamento de Trabajo del Personal de Confianza de Petróleos Mexicanos y Organismos Subsidiarios(Employment Regulation of White Collar Employees of Petróleos Mexicanos and Subsidiary Entities), respectively. The salary advances, which are non-interest bearing, are offered to each eligible employee in an amount up to a maximum of four months salary and are repaid through salary deductions in equal installments over a period of either one or two years, as elected by the employee. Most of our employees take advantage of this benefit. The largest amount of salary advances outstanding to executive officers during 20062007 was Ps. 27.617.6 million. As of May 31, 2007,June 15, 2008, the aggregate amount of salary advances outstanding to our executive officers was Ps. 23.018.2 million.


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Mr. Luis Santos Aranda, thebrother-in-law of Mr. Eduardo Sojo Garza Aldape, the Secretary of the Economy and a board member of Petróleos Mexicanos since February 2007, Mr. Máximo Santos Sánchez, thefather-in-law of Mr. Sojo and Mrs. Lourdes Santos Aranda, the wife of Mr. Sojo, own approximately 58%, 24%, and 18%, respectively, of shares of Servicio Grupsa, S.A. de C.V. (“Grupsa”)(Grupsa), a company located in León, Guanajuato. In July 2003, Grupsa entered into a franchise agreement with Pemex-Refining to sell and purchase gasoline and other products, and to perform other related activities. The franchise agreement that Grupsa entered into with Pemex-Refining represents a standard form of franchise agreement, containing the standard terms and conditions applicable to all of Pemex-Refining’s franchisees.
Since January 2005, Messrs. Rosendo Villarreal Berlanga, David Villarreal Berlanga, and Ms. Gabriela Villarreal Berlanga, children of Mr. Rosendo Villarreal Dávila, Corporate Director of Management of Petróleos Mexicanos, have owned in the aggregate approximately 50% of the shares of Servicios Sierra de Arteaga, S.A. de C.V., a company located in Arteaga, Coahuila. In October 2007, Servicios Sierra de Arteaga, S.A. de C.V. entered into a franchise agreement with Pemex-Refining to sell and purchase gasoline and other products, and to perform other related activities. The franchise agreement that Servicios Sierra de Arteaga, S.A. de C.V. entered into with Pemex-Refining represents a standard form of franchise agreement, containing the standard terms and conditions applicable to all of Pemex-Refining’s franchisees.
 
Item 8.  Financial Information
 
Legal Proceedings
 
In the ordinary course of our business, we are named in a number of lawsuits of various types. We evaluate the merit of each claim and assess the likely outcome, accruing a contingent liability when an unfavorable decision is probable and the amount is reasonably estimable. Other than as disclosed below, we do not believe a materially unfavorable outcome is probable for any known or pending lawsuits or threatened


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litigation for which we have not made any accruals. As ofAt December 31, 2006,2007, the amount claimed in connection with these lawsuits totaled approximately Ps. 39.2 billion. At December 31, 2007, we had accrued a reserve of Ps. 10.5 billion for the contingent liability accrued for the lawsuitsliabilities described below was Ps. 9,717 million.below.
 
Labor-Related Proceedings
 
We are a party to various legal actions involving labor claims of former and present employees. These labor disputes relate to severance payments, life insurance benefits, extensions of labor contracts, level of wages, improper termination and employee housing. We do not expect these lawsuits to have a material adverse effect on our financial condition or future results of operations.
 
For information on our negotiations with the Union and collective bargaining agreements, see “Item 6—Directors, Senior Management and Employees—Employees.”
 
Mexican Government Audits and Other Investigations
 
In 2001, the SFP conducted an audit of our operations in 2000 and previous years. In the audit, SFP identified a series of transactions between PEMEX and the Union during 2000, which we believe involved illicit behavior. We describe the transactions, allegations and related proceedings below.
On January 21, 2002, the SFP announced that it had submitted a criminal complaint to theProcuraduría General de la República(the Office of the Federal Attorney General) for the diversion of Ps. 1,580 million in federal funds from us to the Union from March 2000 to October 2000. The SFP has alleged that the payments were not properly made under applicable Mexican laws and government regulations.
 
In addition, the Office of the Federal Attorney General filed charges against certain of our former officers, charging them with exceeding the scope of their corporate powers in executing the several transactions under investigation. On March 20, 2002, Petróleos Mexicanos filed three criminal complaints with the Office of the Federal Attorney General requesting prosecution principally of Rogelio Montemayor Seguy (former Director General), Carlos Juaristi Septién (former Corporate Management Director) and Juan José Domene Berlanga (former Chief Financial Officer) for actingto illegally outside the scope of their corporate powers and without the consent of the Board of Directors of Petróleos Mexicanos, our general counsel or the Mexican Government, illegally divertingdivert to the Union and certain of its representatives a total of Ps. 1,660 million (which includes the Ps. 1,580 million previously identified by the SFP in its complaint). On that same
As of the date of this report, the Office of the Federal Attorney General filedhas closed its investigations and charges have been dismissed against Manuel Gómezperalta Damirón (also a former Corporate Management Director) for the alleged commission of the crime of embezzlement in connection with the aforementioned diversion of funds to the Union. The criminal prosecution against Mr. Manuel Gómezperalta Damirón was concluded when theSegundo Tribunal Unitario en Materia Penal (Second Unitary Criminal Court) granted anamparo(constitutional relief) against the imprisonment writ against him.
Mr. Montemayor resigned from PEMEX effective November 30, 2000. Messrs. Juaristi and Domene ended their affiliation with PEMEX in February 2001 as a result of the change in administration. In May 2002, a Mexican federal judge issued arrest warrants against these and certain other former officers of Petróleos Mexicanos for embezzlement and unlawful use of their corporate powers and privileges.
On November 29, 2006, the Office of the Federal Attorney General closed its investigation against Mr. Luis Ricardo Aldana Prieto, who is a member of the Board of Directors of Petróleos Mexicanos as a representativerepresentatives of the Union for his alleged commission of embezzlement and improper exercise of his corporate powers.
In July 2003, the Office of the Federal Attorney General closed its investigation against Messrs. Montemayor, Juaristi and Domene with regard to the charges of money laundering and organized crime, on the grounds that it had insufficient proof to support these charges. The charges of electoral embezzlement, wrongful use of powers and, in the case of Messrs. Juaristi and Domene, improper exercise of a public service, have been dismissed by the federal courts of Mexico for failure to providesince there was not sufficient proof to support these charges. On November 16, 2006, after anamparowas granted in favor of Mr. Rogelio Montemayor Seguy, the charge for embezzlement was dismissed for failure to provide sufficient proof to


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support the charges. As of the date of this report,The only pending proceeding is an imprisonment writ against Mr. Alberto Gheno Ortiz (former Associate Managing Director of Budgetary Control) for the alleged commission of embezzlement is still pending.embezzlement. On May 10, 2005, the SFP announced it had fined the former Director General


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of Petróleos Mexicanos and four other former officers for a total of Ps. 2.8 billion and banned each of them plus a sixth former officer, who was not fined, from holding public office for varying periods of time. This decision has been appealed by some of these former officers and final resolution of the matter is pending.
 
A Mexican judge issued two arrest warrants in September and October 2003 and issued formal imprisonment writs in October 2003 against Carlos Romero Deschamps, General Secretary ofIn August 2005, the Union in connection withcompleted the investigation, commencing the criminal trial against him. The criminal prosecution against Mr. Carlos Romero Deschamps was concluded when theSegundo Tribunal Unitario en Materia Penal del Primer Circuito(Second Unitary Criminal Courtpayment to Petróleos Mexicanos of the First Circuit) granted anamparoagainst the imprisonment writ against him.
The Union has offered to pay, over a period of years, Ps. 1,580 million, to usin nominal pesos, for the amounts allegedly diverted from us through the transactions under investigation. This offer was accepted by the Board of Directors of Petróleos Mexicanos on September 1, 2003. The amounts that we have received as restitutiondiverted. These payments have been appropriately recorded as a gain in the period in which cash was received, in accordance with both Mexican FRS and U.S. GAAP.
 
Since learning from SFP about the illegal diversion of funds, we have been cooperating with SFP and the Office of the Federal Attorney General to prosecute the responsible persons. In addition, a number of initiatives were announced and certainCertain rules have been enacted in order to promote a culture of ethics and prevent corruption in our daily operations. On July 31, 2002, aCódigo de Ética de los Servidores Públicos de la Administración Pública Federal(Code of Ethics for Public Servants of the Federal Public Administration) was published in the Official Gazette of the Federation, containing rules to promote legality, honesty, integrity, loyalty, impartiality and efficiency in the performance of public work by public officers. On October 3, 2003, we announced a corporate code of conduct for Petróleos Mexicanos and the subsidiary entities,el Código de Conducta de Petróleos Mexicanos y Organismos Subsidiarios(the Code of Conduct of Petróleos Mexicanos and the Subsidiary Entities) that defines the code of conduct expected from all workers inemployees of Petróleos Mexicanos and its subsidiary entities in the daily performance of their duties, and which is designed to promote transparency and prevent abuses. In addition, on May 12, 2004, the Board of Directors of Petróleos Mexicanos adopted a Code of Ethics for our chief executive officer, chief financial officer, chief accounting officer and all other employees performing similar functions in Petróleos Mexicanos, the subsidiary entities and the subsidiary companies. For more information on this Code of Ethics, see “Item 16B—Code of Ethics.” We expect that these efforts will result in a more effective system of internal controls.
 
In October 2000, in accordance with Article 73 ofJuly 2007, the Acquisitions, Leasing and Public Sector Services Law, Pemex-Refining settled a legal dispute with Productos Ecológicos S.A. de C.V. (“Proesa”) relating to the early termination of a long-term MTBE supply and services contract involving an MTBE plantSFP announced that was never built before the International Court of Arbitration of the International Chamber of Commerce (the “ICA”). Proesa’s initial claim against Pemex-Refining was for approximately U.S. $650 million. However, after discussion and negotiation in private arbitration proceedings, Pemex-Refining agreed to settle the dispute for a total amount of approximately U.S. $146.5 million (U.S. $127 million plus taxes). The settlement was formalized by an agreement between Pemex-Refining and Proesa, dated October 16, 2000, and fully paid on the same date; the full payment was recorded as an expense in 2000. Pemex-Refining submitted a criminal complaint to the Office of the Federal Attorney General against former officers of Pemex-Refining in connection with this matter.
The Office of the Federal Attorney General filed charges against these officers for unlawful use of their corporate powers and privileges. A federal judge subsequently issued formal imprisonment writs against former officersit had fined Mr. Mario Willars Andrade (former DirectorRaúl Muñoz Leos,ex-Director General of Pemex-Refining), Mr. Luis Ricardo Bouchot Guerrero (former Chief of the Legal Unit of Pemex-Refining)Petróleos Mexicanos and Mr. Cuauhtémoc Arce Herce (a former employeeJuan Carlos Soriano Rosas, ex- General Counsel of Pemex-Refining). TheJuzgado Séptimo de Distrito de Procesos Penales Federales(Seventh District Court of Federal Criminal Prosecutions) granted anamparoagainst the imprisonment writs


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against Mr. Willars and Mr. Bouchot. The evidentiary stage in the proceeding against Mr. Arce concluded and he was released on bail. TheTribunal Colegiado de Circuito en Materia Penal(Joint Criminal Circuit Court) denied a motion filed by Pemex-Refining and confirmed a judgment in favor of Mr. Arce without setting an amount for damages. On September 30, 2004, the SFP fined the Pemex-Refining employees named above for a total amount ofPetróleos Mexicanos Ps. 1,390.3862.2 million each and banned each of them from holding public office for 20 years. Mr. Arce filed an amparo againstten years for allegedly breaking budgetary laws and regulations in connection with a side agreement (No. 10275/04) dated August 1, 2004, between Petróleos Mexicanos and the Union. On August 25, 2005, Petróleos Mexicanos and the Union amended this resolution, which was deniedside agreement in order to make certain adjustments required by applicable regulations. These penalties have been appealed by theJuzgado Quinto de Distrito en Materia Administrativa(Fifth Administrative District Court) in Mexico City. Mr. Arce filed former officers and a nullity claim before thePrimera Sala del Tribunal Federal de Justicia Fiscal y Administrativa(First Divisionfinal resolution of the Fiscal and Administrative Federal Justice Court) against this sanction, which was granted on September 12, 2006. On November 15, 2006, the SFP filed a motion to review this resolution before theTercer Tribunal Colegiado en Materia Administrativa del Primer Circuito(Third Joint Administrative Court of the First Circuit) which was denied on April 11, 2007 and the resolution in favor of Mr. Arce was confirmed.matter is pending.
 
Actions Against the Illicit Market in Fuels in Mexico
 
In association with the Ministry of Finance and Public CreditSHCP and the Ministry of Energy, PEMEX has introduced a number of measures to combat the illegal trade in fuels. This illegal trade is primarily the product of theft from our pipelines or our installations and the smuggling of products used to alter fuels. In connection with the implementation of these measures, the Federal Criminal Code was modified on April 29, 2004 to include as a high crime the theft or exploitation of hydrocarbons or its derivatives without consent or authorization. We maintain oversight of our nationwide pipeline system and report any unlawful activity about which we are aware to the appropriate local or federal authorities.
 
Pemex-Refining has been implementing several measuresimplemented a comprehensive strategic initiative to prevent and fightcombat the illicit market in fuels, including the installation of a system that allows us to detect and locate leaks from pipelines, the utilization of satellite monitoring of tankers and a system of 24 mobile laboratories to analyze the quality of fuels in over 7,000 retail service stations in Mexico. During 2005, 134including:
•  a proposal to modify the Federal Criminal Codes (Código Penal Federal,Código Federal de Procedimientos Penales,Código Fiscal de la FederaciónandLey Federal Contra la Delincuencia Organizada) in order to facilitate locating those responsible for criminal activity. This proposal is currently under evaluation by the Mexican Congress;
•  improvements in the handling of fuels inside our facilities and supervision of the operating controls related to fuels, such as:
–  the use of a specialized electronic surveillance device that is inserted into the pipelines, which senses, records and locates irregularities and other corrosion, and helps locate holes from which fuel products could be taken illegally;


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–  the creation of “vulnerability maps” of our facilities, which highlight those areas most vulnerable to security breaches and where the implementation of additional safety measures is recommended;
–  the implementation of satellite monitoring of our tankers to keep track of their location at all times; and
–  the implementation of a video monitoring system, which has been installed in 66 of the 77 storage and distribution terminals that operates together with a system of 24 mobile laboratories to analyze the quality of fuels in over 8,000 retail service stations in Mexico.
In 2007, we detected 296 illicit entries, were detected andas compared to 204 during 2006, 204 illicit entries were detected. PEMEX2006. Pemex-Refining has installed more accurateprecise measurement instruments in the principal transfer locations among refineries, maritimemarine terminals, storage facilities, distributors, suppliers and customers in order to measurewith the objective of measuring volumes and generategenerating product balance reports. A Terminal Monitoring and Control System has been installed in 11 of the 77 storage and distribution terminals of PEMEX.reports for Pemex-Refining. The illicit market in fuels impacts our results of operations due to the loss of revenuerevenues that would have been generated byfrom the sale of such products, the production cost of which is already included in our cost of sales. The preventive actions described above have resulted in a reduction of this illegal trade and an increase in our sales volumes. Pemex-Refining applies Bernoulli’s principle to estimate missing volumes of product in our pipeline system, and such estimates are based on the monitoring of the flow of fluids and the use of reports of pressure drops. The application of this principle in 2006 and 2007 has allowed us to determine that, although the number of illicit entries has increased, the total missing volume has decreased.
 
Civil Actions
In March 2000, Construcciones Industriales del Golfo, S.A. de C.V. filed a claim before theJuzgado Primero de Distrito en Materia Civil(First Civil District Court) in Mexico City for U.S. $79 million plus interest against Pemex-Refining and Petróleos Mexicanos, arguing that work under a construction agreement had been concluded, but that it had not received payment on the contract. Following a ruling in favor of Construcciones Industriales del Golfo, S.A. de C.V., a total amount of Ps. 66.7 million was deposited before the court by Pemex-Refining on August 25, 2005. On October 2, 2006, a judicial agreement was executed between the parties to settle all accrued interest owed by Pemex-Refining. Therefore, this claim has concluded.
 
In September 2001, CONPROCA, the construction company performing construction and maintenance services for Pemex-Refining’s Cadereyta refinery, filed a claim for arbitration before the ICAInternational Court of Arbitration of the International Chamber of Commerce (ICA) againstPemex-Refining and Petróleos Mexicanos (No. 11760/KGA) related to expenses incurred by CONPROCA in providing those services. The claim filed by CONPROCA was for U.S. $633.1 million, and Pemex-Refining and Petróleos Mexicanos filed a counterclaim in the amount of U.S. $907.7 million. On June 13, 2006,$907.0 million (including value added tax). The evidentiary and pleading stages of the procedural schedule was amended. On July 13, 2006, the parties filed their comments to the opinion issued by the expert designated by the ICA. On August 13, 2006, each party filed its response to the comments filed by the other party. On September 7, 2006, the ICA informedproceedings were concluded in April 2007. The arbitration panel notified the parties that the expert’s opinionit would not be modified. On September 15, 2006, the parties filed their witnesses’ written declarations and additional experts’ opinions


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regarding the claims and counterclaims. On October 13, 2006, the parties filed their briefs, which included all issues to be discussed at the second liability hearing. The second liability hearing was held in January 2007 to evaluate evidence about the claims and counterclaims filed by the parties. On January 20 and 21, 2007, the Cadereyta Refinery, El Tejar pumping station and a cross-section valve on the border of La Antigua River were inspected by the ICA and its experts. On April 4, 2007, the parties filed their pleadings in connection with the hearing. The arbitration panel will issue a partial or provisionalan award on this matter and onceon March 31, 2008. As of the date of this report, the award has not been issued. Once the award is issued, a hearing on damages will be held.
 
In April 2004, Construcciones Industriales del Golfo, S.A. de C.V. filed a claim before theJuzgado Décimo de Distrito en Materia Civil(Tenth Civil District Court) in a Mexican courtMexico City for breach of contract against Pemex-Exploration and Production and Petróleos Mexicanos (No. 40/2004-VIII) in connection with the removal of deposits in the Salamanca refinery. The claim seeks an award of approximately Ps. 15.2 million for work performed and not paid and approximately U.S. $219.6 million forin damages. In May 2004,On September 28, 2007, a judgment was issued in favor of Pemex-Exploration and Production. The plaintiff filed an appeal against this judgment, which was denied on January 21, 2008. After constitutional relief known asamparosfiled by the parties were denied, the judgment issued in favor of Pemex-Exploration and Production and Petróleos Mexicanos responded by arguing that the court did not have jurisdiction over the claim, which motion was denied. The parties filed their documentary evidence. As of the date ofconfirmed. Therefore, this report, a final judgment is still pending.case has concluded.
 
As of the date of this report, twoonly one of the several claims filed by a group of Congressmen from the LIX th Legislature related to the FPWC program (see “Item 4—Information on the Company—Business Overview—Pemex-Exploration and Production—Financed Public Works Contracts”) remainremains pending. These claims do not seek monetary damages as relief; rather, the plaintiffs seek to prevent the performance of the FPWCs through a declaration that they are void because they violated Article 27 of the Political Constitution of the United Mexican States. However, if any of the FPWCs is declared void, the contractor party to such FPWC may sue for damages.
In the first case, the civil claim seeks to void the FPWC entered into between Pemex-Exploration and Production and Repsol Exploración México, S.A. de C.V. forobtained favorable judgments in the Reynosa-Monterrey natural gas production block. On May 6, 2004, prior to acknowledging receipt of the claim, the judge made a motion to require Pemex-Exploration and Production to fulfill certain requirements in connection with the aforementioned FPWC. On July 27, 2004, Pemex-Exploration and Production provided the court with certain information that had been requestedother similar claims filed by the presiding judge, who subsequently acknowledged receipt of the claim.Pemex-Exploration and Production filed a motion arguing that the court lacked jurisdiction, which was denied. Pemex-Exploration and Production also filed a motion arguing that the plaintiffs lacked standing, which was granted on June 10, 2005. This decision was appealed by the plaintiffs, and the appeal was subsequently denied. TheSegundo Tribunal Unitario en Materias Civil y Administrativa(Second Unitary Civil and Administrative Court) granted jurisdiction to theJuzgado Décimo Primero de Distrito en Materia Civil (Eleventh Civil District Court). Pemex-Exploration and Production requested that this court determine that all previous judicial resolutions be declared void. Because the court did not declare void all previous judicial resolutions, Pemex-Exploration and Production filed anamparobefore theTribunal Unitario en Materia Civil y Administrativa(Unitary Civil and Administrative Court) in Mexico City. On October 11, 2006, the constitutional hearing was held and theamparowas granted.these plaintiffs.
 
The second caseThis remaining claim (No. 226/2004) is related to the FPWC entered into between Pemex-Exploration and Production and PTD Servicios Múltiples, S. de R.L. de C.V. for the Cuervito natural gas production block. Theblock filed before theJuzgado Noveno de Distrito en Materia Civil del Distrito Federal(Ninth Civil District Court) in Mexico City issuedCity. The claim does not seek monetary damages as relief, but instead seeks to prevent the performance of this FPWC through a decision declaringdeclaration that it is void based on the plaintiffs did not have standing. An appeal was filed by the plaintiffs, which was denied on April 3, 2006. The plaintiffs filed anamparobefore theSexto Tribunal Colegiado en Materia Civil del Primer Circuito(Sixth Civil Joint Courtalleged Article 27 of the First Circuit) against the decision that denied their appeal. On November 24, 2006, the Sixth Civil Joint CourtPolitical


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Constitution of the First Circuit grantedUnited Mexican States. However, if it is declared void, the contractor party to this FPWC may sue for damages.
On December 12, 2007, Pemex-Exploration and Production was summoned after anamparoto the plaintiffs and determined that the decision issued appeal filed by thePrimer Tribunal Unitario(First Unitary Court) exceeded the scope of the appeal since it analyzed the lack of capacity and standing of the plaintiffs when only the lack of capacity was at issue and ordered a new decision be issued. In response to the decision of the Sixth Civil Joint Court of the First Circuit, PTD Servicios Múltiples, S. de R.L. de C.V. and Petróleo Brasileiro México, S. de R.L. de C.V. filed an appeal before the Supreme Court of Justice. The First Unitary Court decided that the lack of standing motion was groundless. In response,denied. On December 13, 2007, Pemex-Exploration and Production filed anamparoas a third injured party beforemotion arguing a lack of standing on theSegundo Tribunal Unitario en Materia Civil y Administrativa del Primer Circuito


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(Second Unitary Civil and Administrative Court part of the First Circuit).plaintiffs due to the termination of their positions as Congressmen. On February 21, 2007,May 15, 2008, the judge decided that the plaintiffs have standing. As of the date of this report,motion was denied and Pemex-Exploration and Production has not been summoned.filed an appeal against this resolution, which was accepted. On June 2, 2008, Pemex-Exploration and Production responded the claim. The trial is suspended until the appeal in connection with the standing of the plaintiffs is resolved.
 
In December 2003, Unión de Sistemas Industriales, S.A. de C.V. filed a claim in theJuzgado Tercero de Distrito en Materia Civil(Third District Civil Court) in Mexico City against Pemex-Refining seeking approximately Ps. 393.1 million (No. 202/2003) for, among other things, work performed and not paid under a construction agreement. In January 2004, Pemex-Refining filed a motion arguing that the court lacked jurisdiction, and on June 4, 2004, the judge granted the motion and remitted the claim to an administrative judge. Following a successful appeal by Unión de Sistemas Industriales, S.A. de C.V., the judge pronounced that the claim had to be remitted again to the initial Mexican civil court. Pemex-Refining appealed this decision, which was denied. In October 2004, Pemex-Refining responded to this claim, and the case is in the evidentiary stages as of the date of this report. Expert evidence is still pending.
 
In July 2000, Petroquímica Cosoleacaque, S.A. de C.V. (“PECOSA”,(PECOSA, which has since been merged into Pemex-Petrochemicals) filed a claim (No. 18/2000) against Afianzadora Insurgentes, S.A. de C.V. and Fianzas México Bital, S.A. before theJuzgado Décimo de Distrito(Tenth District Court) in Coatzacoalcos, Veracruz. The claim seeks an award of approximately U.S. $100Ps. 218.8 million for a surety bond granted in favor of Agronitrogenados, S.A. de C.V., an ammonia customer of PECOSA. In June 2004, a judgment was entered in favor of PECOSA. In October 2004, Afianzadora Insurgentes, S.A. de C.V. and Fianza México Bital, S.AS.A. appealed this decision. On November 9, 2005, the appeal filed by the plaintiffs was denied and the judgment entered in favor of PECOSA was confirmed. The plaintiffs filed anamparoagainst this decision before theSegundo Tribunal Colegiado del Décimo Circuito(Second Joint Court of the Tenth Circuit). in Villahermosa, Tabasco. On December 7, 2006, the Court denied theamparoand issued a new judgment in favor of Pemex-Petrochemicals. Pemex-Petrochemicals is planning to file a writ requesting that the Court ask theComisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros(the National Commission for the Protection and Defense of the Financial Services Users) to collect the amount due by the defendants. The defendants filed a newtwoamparoamparos(No. 54/2007 and No. 55/2007) against the judgment dated December 7, 2006. A resolution2006, which were denied on April 3, 2008. The complaint (41/2007) filed by Afianzadora Insurgentes, S.A. de C.V. was accepted and the interests included in the judgment were modified but the remainder of the judgment was confirmed. On April 28, 2008, Pemex-Petrochemicals requested the judge of the Tenth District Court in Veracruz to release Ps. 198.8 million deposited by Afianzadora Insurgentes, S.A. de C.V. As of the date of this matterreport, a resolution in connection with the payment of interest, expenses and value added tax related to this claim is still pending.
 
In December 2004, Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. (“COMMISA”)(COMMISA) filed a claim before the ICA against Pemex-Exploration and Production (arbitration related to projectNo. IPC-01) for, among other things, the breach of a construction agreement in connection with two platforms in the Cantarell complex. In December 2004, the judge acknowledged receiptThe detailed claim filed by COMMISA on January 26, 2007 seeks damages of the claimU.S. $292 million and Ps. 37.5 million. Pemex-Exploration and Production designated its arbitrator. This designation was appealed by COMMISA. On February 25, 2005, Pemex-Exploration and Productionhas responded to the claim and filed a counterclaim against COMMISA. On March 25, 2005, COMMISA, responded to the counterclaim. On March 20, 2006, a hearing was held to determine the jurisdiction of the ICA, the standing of the parties and the precautionary and provisional measures requested by COMMISA. COMMISA filed anamparobefore theJuzgado Décimocuarto de Distrito en Materia Administrativa (Fourteenth District Administrative Court) against the rescission of the construction agreement described above. In August 2005, theamparowas denied and COMMISA appealed that decision. On May 17, 2006, theSexto Tribunal Colegiado en Materia Administrativa del Primer Circuito(Sixth Joint Administrative Court of the First Circuit) determined that Pemex-Exploration and Production should be considered an authority for purposes of theamparoand that the Supreme Court of Justice has jurisdiction to hear the claim. In a separate proceeding, the Supreme Court of Justice denied the request for anamparofiled by COMMISA alleging the unconstitutionality of the Law of Acquisitions, Leasing and Services of the Public Sector. The Supreme Court of Justice remanded the case to the Joint Circuit Court for resolution of the issues raised by theamparo. Resolution of this matter is still pending as of the date of this report. On November 28, 2006 the ICA issued a preliminary award declaring its jurisdiction. On January 26, 2007, Pemex-Exploration and Production filed a detailed counterclaim seeking U.S. $125.9 million and Ps. 41.5 million. Pemex-Exploration and Production is required to file amillion in damages. On August 10, 2007, each party filed its response to the detailed claim and counterclaim, respectively. On September 10, 2007, both parties filed bytheir replies, in which COMMISA before June 11, 2007. Based onmodified its detailed claim COMMISAand is, as of the date of this report, seeking U.S.$292 $319.9 million and Ps. 37.537.2 million. On October 10, 2007, the parties filed their rejoinders. A hearing was held in which each party presented its case to the panel and filed its evidence. On February 15, 2008, the parties filed their pleadings. The final award is expected to be issued before August 31, 2008 in accordance with an extension issued by the ICA on May 7, 2008.
 
In January 2005, COMBISA, S. de R.L. de C.V. (“COMBISA”)(COMBISA) filed a claim before the ICA against Pemex-Exploration and Production (arbitration related to projectNo. IPC-22) seeking approximately U.S. $235.8 million plus interest for, among other things, the breach of a construction agreement in connection with three platforms in the Cantarell complex. In April 2005,On July 23, 2007 a final award was made. COMBISA was ordered to pay U.S. $4.6 million and Pemex-Exploration and Production respondedwas ordered to pay U.S. $61.3 million as well as financial expenses and the claim and filed a counterclaim againstcorresponding value added tax. Both parties requested an additional decision to clarify this final award. On November 16, 2007, the ICA modified the award such that under this


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additional award the total amount owed to COMBISA seeking approximately U.S. $12.3 million. In May 2005, COMBISA responded to the counterclaim. On February 23, 2006, the ICA ruled that the exceptions filed by the parties would be resolved in the final award. In April 2006, the ICA requested that COMBISA correct its detailed petition of the claim filed in March 2006, since it did not include the appropriate attachments.was corrected and Pemex-Exploration and Production respondedwas ordered to this detailed petition on May 26, 2006pay U.S. $61.6 million as well as financial expenses and on June 26, 2006, COMBISA filed a reply with the ICA. On July 26, 2006,corresponding value added tax. The total amount owed to Pemex-Exploration and Production filedwas ratified. On January 30, 2008, Pemex-Exploration and Production and COMBISA executed a rejoinder. The arbitral hearing ended on December 1, 2006. The parties filed their concluding briefs on January 31, 2007. A final decision is still pending.settlement agreement under which Pemex-Exploration and Production agreed to pay U.S. $84.6 million (plus value added tax) and COMBISA agreed to pay U.S. $4.6 million (plus value added tax). This claim, which was initially for a total amount of U.S. $235.8 million, concluded with a payment of U.S. $92.0 million in favor of COMBISA.
 
In February 2005, COMMISA filed a claim before the ICA against Pemex-Exploration and Production (arbitration related to projectNo. IPC-28) seeking approximately U.S. $142.4 million and Ps. 40.2 million for, among other things, the breach of an agreement in connection with two vessels named Bar Protector and Castoro 10 in the Cantarell complex.complex and additional work performed. In May 2005, Pemex-Exploration and Production responded to the claim and filed a counterclaim against COMMISA, seeking approximately U.S. $2.1COMMISA. On February 11, 2008, Pemex-Exploration and Production was notified of an award under which Pemex-Exploration and Production was ordered to pay Ps. 10.9 million and Ps. 488,000. In January 2006,U.S. $75.1 million (plus value added tax) and U.S. $200,000 for arbitration expenses as well as interest and financial expenses. COMMISA filed a detailed motionrequest to execute this award before the Federal District Court in the District of its claim. InColumbia (United States of America), which was notified to Pemex-Exploration and Production on March 2006,19, 2008. On May 21, 2008, Pemex-Exploration and Production filed its response to this detailed motion.a request seeking the abandonment of the trial filed by COMMISA. On AprilJune 5, 20062008, COMMISA filed its reply anda response objecting this request. Pemex-Exploration and Production filed its rejoindera reply on June 18, 2008. On May 9, 2006. A7, 2008, Pemex-Exploration and Production filed a request (No. 158/2008) before theJuzgado Octavo de Distrito en Material Civil(Eighth Civil District Court) in the Federal District, seeking that the award is declared void. On May 20, 2008, COMMISA filed a response to this request. On June 13, 2008, a final hearing was held during the first week of June 2006 in which the parties presented their cases before the ICA, including testimonial evidence. On March 12, 2007, the proceeding to furnish additional evidence concluded. A final decision is still pending asheld. As of the date of this report.
In May 2005, Ech Offshore, S. de R.L. de C.V. filed a claim before the ICA against Pemex-Exploration and Production seeking approximately Ps. 106.8 million and U.S. $36.5 million for, among other things, the suspension of shipments due to the termination of a public works contract executed between the parties. The parties presented their cases before the ICA in a hearing held in March 2006. On April 12, 2006, the parties filed their allegations with the ICA. On July 17, 2006report, a final award was issued in favor of Pemex-Exploration and Production and each party had to pay U.S. $250,000 for arbitration expenses. Therefore, this proceeding has concluded.resolution is still pending.
 
On December 7, 2005, Pemex-Refining was summoned before theJuzgado Quinto de Distrito en Materia Civil(Fifth Civil District Court) in the Federal District in connection with a claim filed by Asociación de Transportistas al Servicio de Petróleos Mexicanos, Clientes o Empresas Substitutos, A.C. (No. 262/2005-II) seeking approximately Ps. 1,648 million in damages for, among other claims, the suspension of an existing tank truck transportation agreement. On May 19, 2006, Pemex-Refining filed its response to the claim. As of this date, the trial has been suspended due to an appeal filed by Pemex-Refining fromMarch 7, 2008 a decision dated September 5, 2006,final hearing was held in which documentary evidenceboth parties filed by Pemex-Refiningtheir final allegations. A final judgment was rejected.issued on June 6, 2008 in which payments for damages were denied.
 
On December 15, 2005, the same plaintiff filed an additional claim before the Fifth Civil District Court in the Federal District (No. 271/2005-I), asserting that Pemex-Refining should authorize the plaintiff to replace tank trucks older than ten years, register these new tank trucks and assign a cargo to each of them pursuant to the above-mentioned transportation agreement. On May 22, 2006,January 23, 2008 a final hearing was held in which both parties filed their final allegations. A final judgment against Pemex-Refining was issued on April 29, 2008. Pemex-Refining filed its response to the claim. Evidencean appeal which was filed by the parties. A final hearing is still pending asaccepted on May 14, 2008. As of the date of this report.report, a final resolution is still pending.
Another civil claim was filed by Asociación de Transportistas al Servicio de Petróleos Mexicanos, Clientes o Empresas Sustitutas, A.C. against Pemex-Refining (No. 295/2007) before theJuzgado Quinto de Distrito en Materia Civil(Fifth Civil District Court) in the Federal District, seeking a judgment declaring the breach of a services agreement dated March 26, 1993 and monetary damages, among other claims. On October 31, 2007, Pemex-Refining was summoned and a precautionary measure was granted to the plaintiff requesting Pemex-Refining to replace tank trucks and grant the appropriate authorizations. On November 5, 2007, Pemex-Refining filed a motion stating that the court lacked jurisdiction. On May 16, 2008, this exception was denied. Pemex-Refining filed a response to this claim on May 27, 2008. The trial is in the evidentiary stage. On November 6, 2007, anamparowas filed by Pemex-Refining against the precautionary measure, which was granted by the Fifth Civil District Court on March 5, 2008.
In January 2006, Tejas Gas de Toluca, S. de R.L. de C.V. commenced an arbitration proceeding against Gas Natural México S.A. de C.V. (GNM) and Pemex-Gas and Basic Petrochemicals, seeking, among other things, compliance with a transportation agreement and its amendments dated February 2001 and


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November 2001. This agreement was entered into for the operation of the Palmillas-Toluca pipeline. In February 2008, several hearings were held in which the claims and counterclaims were presented to the arbitration panel. On February 26, 2008, the initial arbitration report was executed and a provisional arbitration calendar was agreed among the parties. On May 29, 2008, the parties filed their detailed claims and counterclaims and their evidences.
 
On March 31,August 16, 2006 Petroquímica Cangrejera, S.A. de C.V., Petroquímica Pajaritos,twoamparos(No. 723/2006 and No. 724/2006) were filed by Minera Carbonífera Río Escondido, S.A. de C.V. and Petroquímica Morelos,Minerales Monclova, S.A. de C.V. (eachfor the alleged violation of whichits constitutional rights as a result of the execution of development, infrastructure and maintenance works in non-associated gas fields under a public works contract (No. 414105826) and a modification of the Regulatory Law. The purpose of this contract is to explore non-associated gas in the same fields where the plaintiffs have since been merged into Pemex-Petrochemicals) were notifiedtheir mining concessions. The plaintiffs argue they have a right to exploit gas found in the fields located in the area of their mining concessions. As of the date of this report, a final judgment is still pending. An expert’s opinion on geology to be filed by Pemex-Exploration and Production and a constitutional hearing are still pending.
In August 2007, a civil claim was filed by Leoba Rueda Nava against Petróleos Mexicanos and Pemex-Refining before theJuzgado Decimocuarto de Distrito del Décimo Circuito(Fourteenth District Court of the Council ofTenth Circuit) in Coatzacoalcos, Veracruz of an alleged underpayment of certain real estate taxes in the amount ofseeking approximately Ps. 1,846.7 million. On December 22, 2006, a settlement1,200 million for, among other things, civil liability and damages resulting from the pollution of land used to store oil waste in accordance with an agreement forentered into in 1987 by and among Leoba Rueda Nava, Petróleos Mexicanos and Pemex-Refining. As of the real estate taxes was executed betweendate of this report, the partiestrial is in evidentiary stages. Judicial inspection, confession and Pemex-Petrochemicals paid Ps. 76 million to the Council of Coatzacoalcos, Veracruz. The agreement wastestimonial evidence have been filed in court to conclude the administrative proceedings.and experts’ opinions are still pending.
 
In January 1993, Pemex-Refining entered into a joint venture with Impulsora Jalisciense, S.A. de C.V. (“Impulsora”)(Impulsora) to establish a new company called Mexicana de Lubricantes, S.A. de C.V. (“MexLub”)(Mexicana de Lubricantes), which manufactures, bottles, and distributes PEMEX’s automotive and industrial lubricants and greases. Pemex-Refining has a 49% participation in this venture, which has contributed to PEMEX’s increased participation in


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the lubricants market both in Mexico and abroad. Currently, Pemex-Refining is involved in certain litigation and administrative proceedings in connection with this joint venture, including the following:
 
 •  On December 5, 2005, Impulsora filed anamparo (No. 1519/2005) before theJuzgado Quinto de Distrito en Materia Administrativa(Fifth (Fifth Administrative District Court) in the state of Jalisco in connection with a constitutional claim related to a proposed model franchise agreement whichto be executed by Pemex-Refining with the service stations. This proceeding has been joined with a pending proceeding filed by Bardahl de México, S.A. de C.V. (Bardahl), a competitor in the lubricants market.market, which claims that it is the owner of the “Mexlub” trademark. Bardahl seeks a ruling under which it would be permitted to sell its products in the service stations of Mexico, thereby eliminating the exclusive right of Mexicana de Lubricantes to sell its lubricants. As of the date of this report, a constitutional hearing on these matters is still pending.
 
 •  On December 26, 2005, Pemex-Refining filed a commercial claim (No. 127/2005) against MexLubMexicana de Lubricantes before theJuzgado Segundo de Distrito en Materia Civil(Second (Second Civil District Court) in the state of Jalisco to compel Impulsora to convene a general shareholders’ meeting. On June 29, 2007, a judgment was issued in favor of Pemex-Refining. Mexicana de Lubricantes was ordered to convene a general shareholders’ meeting but it was not ordered to pay for any damages. Both parties appealed this judgment before the Primer Tribunal Unitario del Tercer Circuito (First Unit Court of the Third Circuit). As of the date of this report, a final judgmentthe resolution of these appeals is still pending.
 
 •  On June 7, 2006, Pemex-Refining filed a criminal complaint before the Office of the Federal Attorney General for fraud allegedly committed by members of the board of directors of MexLub.Mexicana de Lubricantes. As of the date of this report, the matter is still under investigation.
 
 •  On October 17, 2006, Pemex-Refining filed a commercial claim (No. 222/2006) against Impulsora before theJuzgado Octavo de Distrito en Materia Civil(Eighth (Eight Civil District Court) in Mexico City, pursuant to which Pemex-Refining is seeking to enforce its contractual right to exercise a


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purchase option of the MexLubMexicana de Lubricantes shares owned by Impulsora. Impulsora has filed a counterclaim asserting that Pemex-Refining does not have such right under the relevant agreement. On June 20, 2007, Pemex-Refining filed a response to this counterclaim. The trial is currently in the evidentiary stage. Pemex-Refining filed an expert’s opinion on shares valuation. An accounting report is still pending the delivery of certain documentation by the external auditor of Mexicana de Lubricantes, to Pemex-Refining’s expert.
•  On March 28, 2008, Mexicana de Lubricantes filed a commercial claim (No. 28/2007) against Pemex-Refining before the Juzgado Primero de Distrito en Materia Civil (First District Civil Court) in the Federal District seeking, among other things, a judicial judgment declaring null and void any advance termination or cancellation of the following agreements executed between Mexicana de Lubricantes and Pemex-Refining: (i) a license and trademark contract; (ii) a basic greases supply contract; and (iii) a contract for the manufacture of lubricants and greases for Petróleos Mexicanos and the subsidiary entities. Pemex-Refining filed its response to this claim on April 10, 2008. Mexicana de Lubricantes filed a motion arguing that the authorized representative of Pemex-Refining did not have the authority to represent Pemex-Refining. Both parties have filed their evidence. On May 30, 2008 Pemex-Refining filed its allegations and as of the date of this report, a resolution is still pending.
 
 •  In addition, to otherthere is an administrative proceedingsproceeding before the Federal Competition Commission of Competition (the “Commission”), onunder which several claims have been filed. On July 10, 2003, the Federal Competition Commission issued a resolution(No. IO-62-97)10-62-97) (the “Resolution”)Resolution) prohibiting Pemex-Refining from engaging in anti-competitive practices as a result of the exercise of a contractual right of exclusivity under certain agreements, including the obligation to amend such agreements in order to eliminate the obligations of service stations to sell exclusively those lubricants authorized by Pemex-Refining. The Resolution originally imposed a six-month compliance deadline, and included the imposition of a fine on Pemex-Refining of 1,500 daily minimum wages units per day until such agreements were brought into compliance. ThoughOn January 15, 2008, the Federal Competition Commission requested that Pemex-Refining isprovide evidence of its compliance with the Resolution. Pemex-Refining argued that it was not contestingable to comply with the Resolution due to a suspension granted to Bardhal. On April 10, 2008, the compliance period is currently suspended as a result ofCommission announced that Pemex-Refining was required to comply with the resolution within 15 days. On January 10, 2008, Pemex-Refining filed an administrative appealamparo (No. 46/2008 VI.) against this resolution before the Juzgado Sexto de Distrito en Materia Administrativa (Sixth Administrative District Court) in the Federal District. On April 30, 2008, the judge issued a resolution declaring the Resolution unconstitutional, but the ruling was limited to the Resolution and did not include the Ley Federal de Competencia Económica, as requested also by Pemex-Refining. Pemex-Refining filed a suspension, which was granted on May 6, 2008. On May 20, 2008, Mexicana de Lubricantes and Impulsora filed a motion in this proceeding as third parties. On May 27, 2008, the Federal Competition Commission filed bya revision motion. On May 29, 2008, Mexicana de Lubricantes and Impulsora the resolution of which is still pending.also filed revised motions.
 
Dividends
 
In March 1990, as a result of the implementation of the1989-92 Financing Package for Mexico, our commercial bank creditors exchanged U.S. $7.58 billion of Petróleos Mexicanos’ external indebtedness for Brady Bonds issued by the Mexican Government. At the same time, Petróleos Mexicanos’ indebtedness to the Mexican Government was increased by the same amount; the new indebtedness was denominated in currencies other than pesos. In December 1990, the Mexican Government and Petróleos Mexicanos agreed to capitalize this indebtedness, converting it into Certificates of Contribution “A.” As a condition of this capitalization, Petróleos Mexicanos agreed to pay a minimum guaranteed dividend to the Mexican Government equal to the debt service on the capitalized debt. The Board of Directors of Petróleos Mexicanos approves the total dividend on the Certificates of Contribution “A” after the end of each fiscal year, although Petróleos Mexicanos pays an amount equal to the minimum guaranteed dividend to the Mexican Government in monthly


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advance payments during the year. During 2002, 2003, 2004, 2005, 2006 and 2006,2007, Petróleos Mexicanos made advance payments to the Mexican Government in the aggregate of Ps. 11,42111,941 million, Ps. 11,50811,589 million, Ps. 11,16916,501 million, Ps. 15,903269 million and Ps. 2594,260 million, respectively, towards the minimum guaranteed dividends for those years. On January 2, 2007, PEMEX made its lastfinal advance payment of minimum guaranteed dividends individends. PEMEX does not have a dividend policy; the amount of U.S. $392 million.Mexican Government may require PEMEX to make dividend payments at any time. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Equity Structure and the Certificates of Contribution ‘A.” ’ ”


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Item 9.  The Offer and Listing
 
Trading in the debt securities issued by Petróleos Mexicanos and the Pemex Project Funding Master Trust takes place primarily in the over-the-counter market. All the debt securities issued by Petróleos Mexicanos and the Pemex Project Funding Master Trust that are registered pursuant to the Securities Act are also listed on the Luxembourg Stock Exchange and traded on the Euro MTF, the alternative market of the Luxembourg Stock Exchange.
 
Item 10.  Additional Information
 
Memorandum and Articles of Association
 
The Mexican Congress established Petróleos Mexicanos by a decree dated June 7, 1938, effective July 20, 1938. None of Petróleos Mexicanos or the subsidiary entities has bylaws or articles of association. On July 17, 1992, the Mexican Congress created the subsidiary entities out of operations that had previously been directly managed by Petróleos Mexicanos. Petróleos Mexicanos and its four subsidiary entities, Pemex-Exploration and Production, Pemex-Refining, Pemex-Gas and Basic Petrochemicals and Pemex-Petrochemicals, are decentralized public entities of the Mexican Government, and each is a legal entity empowered to own property and carry on business in its own name. The activities of Petróleos Mexicanos and the subsidiary entities are regulated by the Political Constitution of the United Mexican States, the Regulatory Law, the Organic Law, regulations issued pursuant to the Regulatory Law and other federal laws and regulations. See “Item 4—Information on the Company—History and Development.” Six members of the Board of Directors of Petróleos Mexicanos, including the Chairperson, are appointed by the President of Mexico. Our Union selects the remaining five directors from among employees of Petróleos Mexicanos and the subsidiary entities. An eight-member board of directors governs each subsidiary entity. Each of these boards consists of the Director General of Petróleos Mexicanos, the Director General of each of the other three subsidiary entities and four additional directors, who are each appointed by the President of Mexico. The members of the boards of directors of Petróleos Mexicanos and each of the subsidiary entities are not appointed for a specific term, and, except for those members selected by the Union, they serve subject to the discretion of the President of Mexico.
 
Under the Federal Law of Administrative Responsibilities of Public Officials, our directors are obligated to abstain from voting on a proposal, arrangement or contract in which they have a personal, family or business interest. Our directors do not receive compensation for their services as members of the boards of directors of Petróleos Mexicanos and the subsidiary entities, nor do they have the power to vote compensation to themselves or any other member of the board. Under the Federal Law of Administrative Responsibilities of Public Officials, our directors have to perform their duties without obtaining or attempt to obtain additional benefits to those granted by law. Therefore, our directors do not have borrowing powers exercisable by themselves. There is no requirement for early retirement for our directors.
 
Material Contracts
 
On November 10, 1998, Petróleos Mexicanos, The Bank of New York and The Bank of New York (Delaware) entered into a Trust Agreement, which created the Pemex Project Funding Master Trust and designated The Bank of New York as Managing Trustee and The Bank of New York (Delaware) as Delaware Trustee. On the same date, Petróleos Mexicanos, the subsidiary entities (except for Pemex-Petrochemicals) and the Pemex Project Funding Master Trust, acting through The Bank of New York, entered into an Assignment and Indemnity Agreement. This agreement provides for the assignment by these subsidiary entities to the Pemex Project Funding Master Trust of certain payment obligations


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relating to PIDIREGAS, the arrangement by Petróleos Mexicanos of financing on behalf of the Pemex Project Funding Master Trust to meet such payment obligations, the payment by Petróleos Mexicanos and such subsidiary entities to the Pemex Project Funding Master Trust of the amounts necessary to meet the Pemex Project Funding Master Trust’s obligations under such financings and the indemnification of the Pemex Project Funding Master Trust by Petróleos Mexicanos and these subsidiary entities. The Trust Agreement was amended on November 17, 2004, December 22, 2004 and August 17, 2006 and the Assignment and Indemnity Agreement was amended on August 17, 2006. The purpose of the August 17, 2006 amendment was to include Pemex-Petrochemicals as a party to the Assignment and Indemnity Agreement.


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On December 30, 2004, the Pemex Project Funding Master Trust and Petróleos Mexicanos entered into an Indenture with Deutsche Bank Trust Company Americas (“Deutsche Bank”)(Deutsche Bank), as Trustee. This agreement provides for the issuance by the Pemex Project Funding Master Trust from time to time of unsecured debt securities. These issuances are unconditionally guaranteed by Petróleos Mexicanos. Pursuant to a Guaranty Agreement, dated as of July 29, 1996, Petróleos Mexicanos’ obligations are jointly and severally guaranteed by Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals.
 
On February 11, 2005, the Pemex Project Funding Master Trust increased the aggregate amount of debt securities issuable under its Medium-Term Notes program to U.S. $20,000,000,000. Following the increase and pursuant to the December 2004 Indenture referred to above, the Pemex Project FundingMaster Trust has issued various new series of securities. On February 23, 2007 and October 11, 2007, the Master Trust further increased the aggregate amount of debt securities issuable under its Medium-Term Notes program to U.S. $30,000,000,000 and U.S. $40,000,000,000, respectively. Following these increases and pursuant to the December 2004 Indenture referred to above, the Master Trust has issued various new series of securities. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”
 
As of December 31, 20052006 and 2006,2007, we have entered into contracts with various contractors for an approximate amount of Ps. 235,98593,621 million and Ps. 90,929306,085 million, respectively. These contracts are for the development of PIDIREGAS and are therefore subject to standards required in NIF-09-B,NG-09-B, which is a Mexican accounting guideline that outlines specific accounting and budgetary treatment applicable to PIDIREGAS. For an explanation of NG-09-B, see “Item 4—Information on the Company—History and Development—Capital Expenditures and Investment” and Note 2d.3c. to our consolidated financial statements included herein.
 
Exchange Controls
 
Mexico has had a free market for foreign exchange since 1991, and the Mexican Government has allowed the peso to float freely against the U.S. dollar since December 1994. The Mexican Government has announced that it does not intend to change its floating exchange rate policy, in the next five years, but there is no guarantee that the Mexican Government will not change this policy. See “Item 3—Key Information—Exchange Rates” and “Item 3—Key Information—Risk Factors—Considerations Related to Mexico.”
 
Taxation
 
The 1997 Securities, the 1998 Securities, the 1999 Securities, the 2001 Securities, the 2003 Securities, the 2004 Securities and the 2006 Securities
 
Pursuant to a registration statement onForm F-4 (FileNo. 333-7796), which was declared effective by the SEC on October 17, 1997, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $600,000,000 of 8.85% Global Guaranteed Notes due 2007 and up to U.S. $400,000,000 of 9.50% Global Guaranteed Bonds due 2027. These securities are collectively referred2027, which we refer to as the 1997 Securities.
 
Pursuant to a registration statement onForm F-4 (FileNo. 333-9310), which was declared effective by the SEC on August 24, 1998, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $350,000,000 of 83/8% Global Guaranteed Notes due 2005 and up to U.S. $350,000,000 of 91/4% Global Guaranteed Bonds due 2018. These securities are collectively referred2018, which we refer to as the 1998 Securities.
 
Pursuant to a registration statement onForm F-4 (FileNo. 333-10906), which was declared effective by the SEC on October 1, 1999, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining


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and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $600,000,000 of 93/8% Notes due December 2, 2008, Puttable at Par on December 2, 2001 (the Puttable Notes). Pursuant to a registration statement onForm F-4 (FileNo. 333-10706), which was declared effective by the SEC on October 1, 1999, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $500,000,000 of 9.50% Puttable or Mandatorily Exchangeable Securities (POMESSMsm) due 2027. The securities registered in 1999 under these two registration statements are collectively referred to as the 1999 Securities. All outstanding POMESsm were, on March 16, 2006, mandatorily exchanged for 9.50% Global Guaranteed Bonds due 2027.


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Pursuant to a registration statement onForm F-4 (FileNo. 333-13812), which was declared effective by the SEC on August 29, 2001, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $1,000,000,000 of 8.50% Notes due 2008 and up to U.S. $1,000,000,000 of 9.125% Notes due 2010. These securities are collectively referred to as the 2001 Securities.
 
Pursuant to a registration statement onForm F-4 (FileNo. 333-102993) which was declared effective by the SEC on February 14, 2003, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basis Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $600,000,000 of 6.50% Notes due February 1, 2005. Pursuant to a registration statement onForm F-4 (FileNo. 333-103197), which was declared effective by the SEC on February 24, 2003, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $750,000,000 of 8.00% Notes due 2011, up to U.S. $1,000,000,000 of 7.875% Notes due 2009, up to U.S. $500,000,000 of 8.625% Bonds due 2022 and up to U.S. $1,000,000,000 of 7.375% Notes due 2014. Pursuant to a registration statement onForm F-4 (FileNo. 333-107905), which was declared effective by the SEC on August 21, 2003, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $750,000,000 of 6.125% Notes due 2008, up to U.S. $510,154,000 of 8.625% Bonds due 2022 and up to U.S. $757,265,000 of 7.375% Notes due 2014. Pursuant to a registration statement onForm F-4 (FileNo. 333-103197), which was declared effective by the SEC on August 21, 2003, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $36,977,000 of 8.00% Notes due 2011 and up to U.S. $24,692,000 of 7.875% Notes due 2009. Pursuant to a registration statement onForm F-4 (FileNo. 333-108257), which was declared effective by the SEC on August 28, 2003, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $9,841,000 of 9.125% Notes due 2010. The securities registered in 2003 under these registration statements are collectively referred to as the 2003 Securities.
 
Pursuant to a registration statement onForm F-4 (FileNo. 333-118373), which was declared effective by the SEC on August 31, 2004, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $36,296,000 of 8.50% Notes due 2008, U.S. $18,095,000 of 7.375% Notes due 2014 and up to U.S. $47,085,000 of 8.625% Bonds due 2022. The securities registered in 2004 under these registration statements are collectively referred to as the 2004 Securities.
 
Pursuant to a registration onForm F-4 (FileNo. 333-126941), which was declared effective by the SEC on January 13, 2006, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $158,353,000 of 9.00% Notes due 2007, U.S. $399,619,000 of 8.85% Notes due 2007, U.S. $439,011,000 of 93/8% Notes due 2008, U.S. $324,220,000 of 91/4% Bonds due 2018, U.S. $228,735,000 of 8.625% Bonds due 2023, U.S. $354,477,000 of 9.50% Bonds due 2027, U.S. $403,746,000 of POMESSMsm due 2027, U.S. $1,000,000,000 of 5.75% Notes due 2015 and U.S. $500,000,000 of 6.625% Guaranteed Bonds due 2035. Pursuant to a registration onForm F-4 (FileNo. 333-126948), which was declared effective by the SEC on January 13, 2006, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $91,647,000 of 9.00% Notes due 2007, U.S. $200,381,000 of 8.85% Notes due 2007, U.S. $159,229,000 of 93/8% Notes due 2008, U.S. $25,780,000 of 91/4% Bonds due 2018, U.S. $21,265,000 of 8.625% Bonds due 2023, U.S. $45,523,000 of 9.50% Bonds due 2027, U.S. $96,254,000 of POMESSMsm due 2027. All outstanding POMES registered under these registration statements were, on March 15, 2006,


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mandatorily exchanged for 9.50% Bonds due 2027. Pursuant to a registration statement onForm F-4 (FileNo. 333-136674), which was declared effective by the SEC on November 3, 2006, the Pemex Project Funding Master Trust, Petróleos Mexicanos, Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals registered pursuant to the Securities Act of 1933 up to U.S. $759,254,000 of 5.75% Notes due 2015 and U.S. $751,995,000 of


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6.625% Guaranteed Bonds due 2035. These securities are collectively referred to as the 2006 Securities, and together with the 1997 Securities, the 1998 Securities, the 1999 Securities, the 2001 Securities, the 2003 Securities and the 2004 Securities, are collectively referred as the “Registered Securities”)Registered Securities).
 
Taxation Generally
 
The following summary contains a description of the principal Mexican and U.S. federal income tax consequences of the ownership and disposition of the Registered Securities, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to invest in, or dispose of, the Registered Securities.
 
This summary is based on the federal tax laws of Mexico and the United States in force on the date of thisForm 20-F, including the provisions of the income tax treaty between the United States and Mexico together with related protocols (which are subject to change), and does not describe any tax consequences arising under the laws of any state or municipality in Mexico, the United States or any other jurisdiction, or the laws of any taxing jurisdiction other than the federal laws of Mexico and the United States.
 
Mexico has also entered into, or is negotiating, tax treaties with various countries that may have effects on holders of Registered Securities. This summary does not discuss the consequences (if any) of such treaties.
 
Each holder or beneficial owner of Registered Securities should consult its tax advisor as to the Mexican, United States or other tax consequences of the ownership and disposition of those securities, including the effect of any foreign, state or municipal tax laws, and the consequences of the application of any tax treaty to which Mexico is a party.
 
Mexican Taxation
 
This summary of certain Mexican federal tax considerations refers only to holders of Registered Securities that are not residents of Mexico for Mexican tax purposes and that will not hold the Registered Securities or a beneficial interest therein through a permanent establishment for tax purposes (we refer to any such non-resident holder as a Foreign Holder). For purposes of Mexican taxation, an individual is a resident of Mexico ifhe/she has establishedhis/her domicile in Mexico. When an individual also has a place of residence in another country, that individual will be considered a resident of Mexico for tax purposes, if such individual hashis/her center of vital interest in Mexico. An individual would be deemed to havehis/her center of vital interest in Mexico if, among other things, (a) more than 50% ofhis/her total income for the year derives from Mexican sources, or (b) his/her principal center of professional activities is located in Mexico.
 
A legal entity is a resident of Mexico if:
 
 •  it has been incorporated under the laws of Mexico;
 
 •  it maintains the principal administration of its business in Mexico; or
 
 •  it has established its effective management in Mexico.
 
A Mexican national is presumed to be a resident of Mexico unless such person can demonstrate to the contrary. If a legal entity or individual has a permanent establishment in Mexico, such permanent establishment shall be required to pay taxes in Mexico on income attributable to such permanent establishment in accordance with Mexican federal tax law.
 
Taxation of Interest.  Under the Mexican Income Tax Law and rules issued by the Ministry of Finance and Public CreditSHCP applicable to PEMEX, payments of interest (which is deemed to include any amounts paid in excess of the original issue price of the securities), made by a Mexican issuer (including Petróleos Mexicanos and the Pemex Project Funding Master Trust) in


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respect of notes or bonds and other debt


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securities to a Foreign Holder will generally be subject to a Mexican withholding tax assessed at a rate of 4.9%, if the following requirements are met:
 
 •  the relevant notes or bonds are registered with the Special Section of the National Registry of Securities maintained by the National Banking and Securities Commission;
 
 •  the notes or bonds are placed outside of Mexico through banks or brokerage houses in a country that has entered into a treaty to avoid double taxation with Mexico; and
 
 •  the issuer duly complies with the information requirements established in the general rules issued by the Ministry of Finance and Public CreditSHCP for such purposes.
 
If the effective beneficiaries, directly or indirectly, individually or jointly with related parties, receive more than 5% of the interest paid on the notes or bonds and are holders, directly or indirectly, individually or jointly, with related parties of more than 10% of the voting stock of the issuer or entities 20% or more of whose stock is owned directly or indirectly, individually or jointly, by parties related to the issuer, the withholding tax rate applicable to payment of interest on the notes or bonds may be significantly higher.
 
Payments of interest made by Petróleos Mexicanos, the Pemex Project Funding Master Trust (in the case of Registered Securities issued by it) or Pemex-Exploration and Production, Pemex-Refining or Pemex-Gas and Basic Petrochemicals in respect of the Registered Securities to non-Mexican pension or retirement funds will be exempt from Mexican withholding taxes, provided that:
 
 •  such fund is duly organized pursuant to the laws of its country of origin and is the effective beneficiary of the interest payment;
 
 •  the income from such interest payment is exempt from income tax in such country of residence; and
 
 •  such fund is registered with the Ministry of Finance and Public CreditSHCP for that purpose.
 
Additional Amounts.  Petróleos Mexicanos, the Pemex Project Funding Master Trust (in the case of Registered Securities issued by it), Pemex-Exploration and Production, Pemex-Refining and Pemex-Gas and Basic Petrochemicals have agreed, subject to specified exceptions and limitations, to:
 
 •  pay Additional Amounts (as defined in the Indenture dated September 18, 1997, between Petróleos Mexicanos and Deutsche Bank (the 1997 Indenture)) to the holders of the 1997 Securities in respect of the Mexican withholding taxes mentioned above;
 
 •  pay Additional Amounts (as defined in the Indenture dated August 7, 1998, between Petróleos Mexicanos and Deutsche Bank (the 1998 Indenture)) to the holders of the 1998 Securities in respect of the Mexican withholding taxes mentioned above;
 
 •  pay Additional Amounts (as defined in the Indenture dated as of July 31, 1999, between Petróleos Mexicanos and Deutsche Bank) to the holders of the Puttable Notes;
 
 •  pay Additional Amounts (as defined in the Indenture dated as of July 15, 1999, between Petróleos Mexicanos and Deutsche Bank) to the holders of the POMESSM in respect of the Mexican withholding taxes described above;
•  pay Additional Amounts (as defined in the Indenture dated as of July 31, 2000, among the Pemex Project Funding Master Trust, Petróleos Mexicanos and Deutsche Bank) to the holders of the 2001 Securities, the 2003 Securities and the 2004 Securities in respect of the Mexican withholding taxes described above; and
 
 •  pay Additional Amounts (as defined in the Indenture dated as of December 30, 2004, among the Pemex Project Funding Master Trust, Petróleos Mexicanos and Deutsche Bank) to the holders of the 2006 Securities in respect of the Mexican withholding taxes described above.
 
If Petróleos Mexicanos or the Pemex Project Funding Master Trust (in the case of Registered Securities issued by it) pays Additional Amounts in respect of such Mexican withholding taxes, any refunds


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received with respect to such Additional Amounts will be for the account of Petróleos Mexicanos or the Pemex Project Funding Master Trust, as applicable.
 
Holders or beneficial owners of the Registered Securities may be requested to provide certain information or documentation necessary to enable Petróleos Mexicanos, the Pemex Project Funding Master Trust (in the case of


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Registered Securities issued by it), Pemex-Exploration and Production, Pemex-Refining or Pemex-Gas and Basic Petrochemicals to establish the appropriate Mexican withholding tax rate applicable to such holders or beneficial owners. In the event that the specified information or documentation concerning the holder or beneficial owner, if requested, is not provided on a timely basis, the obligation of Petróleos Mexicanos, the Pemex Project Funding Master Trust (in the case of Registered Securities issued by it), Pemex-Exploration and Production,Pemex-Refining or Pemex-Gas and Basic Petrochemicals to pay Additional Amounts may be limited.
 
Taxation of Dispositions.  Capital gains resulting from the sale or other disposition of the Registered Securities by a Foreign Holder will not be subject to Mexican income or withholding taxes.
 
Other Mexican Tax Considerations.  Under the Income Tax Law, any discount received by anon-resident upon purchase of the notes or bonds from a Mexican resident or a non-resident with a permanent establishment in Mexico, is deemed interest income, and therefore, subject to taxes in Mexico. Such interest income results from the difference between the face value (plus accrued interest not subject to withholding) and the purchase price of such notes or bonds.
 
Transfer and Other Taxes.  There are no Mexican stamp, registration, or similar taxes payable by a Foreign Holder in connection with the purchase, ownership or disposition of the Registered Securities. A Foreign Holder of the Registered Securities will not be liable for Mexican estate, succession, gift, inheritance or similar tax with respect to such securities.
 
United States Taxation
 
This summary of certain U.S. federal income tax considerations deals principally with persons that hold the Registered Securities as capital assets and whose functional currency is the United States dollar. As used in this section “Taxation,” the term “United States Holder” means an individual who is a citizen or resident of the United States, a U.S. domestic corporation or any other person that is subject to U.S. federal income taxation on a net income basis in respect of its investment in the Registered Securities.
 
This summary does not purport to be a comprehensive description of all the tax considerations that may be relevant to any particular investor, including tax considerations that arise from rules of general application or that are assumed to be known to investors. This summary generally does not address the tax treatment of holders that may be subject to special tax rules, such as banks, insurance companies, tax-exempt organizations, dealers in securities or currencies, certain short-term holders of Registered Securities, traders in securities electing to mark to market, or persons that hedge their exposure in the Registered Securities or hold the Registered Securities as a position in a “straddle” for tax purposes or as part of a “synthetic security” or a “conversion transaction” or other integrated investment comprised of such securities and one or more other investments, nor does it address the tax treatment of holders that did not acquire the Registered Securities at their issue price as part of the initial distribution. Investors who purchased the Registered Securities at a price other than the issue price should consult their tax advisor as to the possible applicability to them of the amortizable bond premium or market discount rules. United States Holders should be aware that the U.S. federal income tax consequences of holding the Registered Securities may be materially different for investors described in the prior sentence, including as a result of recent changes in law applicable to investors with short holding periods or that engage in hedging transactions.
 
Taxation of Interest and Additional Amounts.  A United States Holder will treat the gross amount of interest and Additional Amounts (i.e., without reduction for Mexican withholding taxes) as ordinary interest income in respect of the Registered Securities. Mexican withholding taxes paid at the appropriate rate applicable to the United States Holder will be treated as foreign income taxes eligible for credit against such United States Holder’s U.S. federal income tax liability, subject to generally applicable limitations and conditions, or, at the election of such United States Holder, for deduction in computing such United States


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Holder’s taxable income. Interest and Additional Amounts will constitute income from sources without the United States and generally will be treated separately along with other items of “passive” income for purposes of determining the credit for foreign income taxes allowed under the Code.
 
The calculation of foreign tax credits and, in the case of a United States Holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a United States


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Holder’s particular circumstances. United States Holders should consult their own tax advisors regarding the availability of foreign tax credits and the treatment of Additional Amounts.
 
Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a United States Holder’s expected economic profits is insubstantial. United States Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.
 
Taxation of Dispositions.  Upon the sale, exchange or retirement of a Registered Security, a United States Holder will generally recognize a gain or loss equal to the difference between the amount realized (less any amounts attributable to accrued and unpaid interest not previously includible in gross income, which will be taxable as ordinary income) and the holder’s tax basis in such security. Gain or loss recognized by a United States Holder on the sale, redemption or other disposition of the Registered Securities generally will be long-term capital gain or loss if, at the time of disposition, the securities have been held for more than one year. Long-term capital gain realized by an individual United States Holder is generally taxed at lower rates than short-term capital gains or ordinary income.
 
Non-United States Holders.  Holders of the Registered Securities that are, with respect to the United States, non-resident aliens or foreign corporations(Non-United States Holders) will not be subject to U.S. federal income taxes, including withholding taxes, on payments of interest on the securities so long as the requirements described under “Backup Withholding and Information Reporting” are satisfied, unless such income is effectively connected with the conduct by theNon-United States Holder of a trade or business in the United States.
 
The gain realized on any sale or exchange of the Registered Securities by aNon-United States Holder will not be subject to U.S. federal income tax, including withholding tax, unless (1) such gain is effectively connected with the conduct by the holder of a trade or business in the United States or (2) in the case of gain realized by an individual holder, the holder is present in the United States for 183 days or more in the taxable year of the sale and either (A) such gain or income is attributable to an office or other fixed place of business maintained in the United States by such holder or (B) such holder has a tax home in the United States.
 
A Registered Security held by an individual holder who at the time of death is a non-resident alien will not be subject to United States federal estate tax.
 
Backup Withholding and Information Reporting.  The principal paying agent for each of the Registered Securities will be required to file information returns with the Internal Revenue Service with respect to payments made to certain United States Holders of those securities. In addition, certain United States Holders may be subject to a backup withholding tax in respect of such payments, unless they (1) provide their accurate taxpayer identification numbers to the principal paying agent and certify that they are not subject to backup withholding or (2) otherwise establish an exemption from the backup withholding tax.Non-United States Holders may be required to comply with applicable certification procedures to establish that they are not United States Holders in order to avoid the application of such information reporting requirements and backup withholding tax.
 
Documents on Display
 
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports, including annual reports onForm 20-F, and other information with the SEC. These materials, including this annual report, and the exhibits thereto, may be inspected and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information on the public reference rooms. In addition, any


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filings we make electronically with the SEC will be available to the public over the Internet at the SEC’s web site athttp://www.sec.gov.


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Item 11.  Quantitative and Qualitative Disclosures about Market Risk
Item 11.  Quantitative and Qualitative Disclosures about Market Risk
 
Risk Management and Financial Instruments
 
We face significant market risks as part of our normal business operations as a result of the fluctuation of the prices of the commodities we produce and trade, of the valuevalues of the foreign currencycurrencies in which some of our liabilities are denominated and of the interest rates of our debt obligations. Managing risk exposure is a high priority for our senior management and risk management committee, which is composed of representatives of Petróleos Mexicanos and the subsidiary entities, Banco de México, the Ministry of Finance and Public CreditSHCP and PMI.
 
During 2001, the Board of Directors of Petróleos Mexicanos approved a restructuring of the risk management area and created the Risk Management Deputy Direction. The objectives of this area are to create value by aligning the supply of internal and external capital with the demand for funds for operations and investment projects, to develop the financial and operational risk management strategy for Petróleos Mexicanos and the subsidiary entities and to establish institutional regulations consistent with a consolidated risk management approach.
 
We also established a risk management corporate governance framework, by updating our Risk Management General Policies, modifying the operation rules of the Risk Management Committee and creating the Risk Management General Guidelines, in accordance with an integrated and consolidated risk management approach aimed at managing the volatility inherent in these normal business exposures. In accordance with these policies, we enter into various transactions using derivative financial and commodity instruments, including conventional exchange-traded derivative instruments such as futures and options, as well asover-the-counter instruments such as swaps, options and forward contracts.
 
Commodity Price Risk
 
Crude Oil
 
Our exports and domestic sales are related to international hydrocarbon prices, thus exposing us to fluctuations in international markets. We share this risk with the Mexican Government through our current fiscal regime. In order to mitigate this risk, in the past, the Mexican Government, along with PEMEX, has participated with the major international oil producers to improve international oil prices by reducing crude oil exports volumes. See “Item 5—Operating and Financial Review and Prospects—Export Agreements.”
 
Over the past few years, PMI entered into several long-term Maya crude oil supply agreements. Under these agreements, PMI provides purchasers with certain support mechanisms to protect, under certain adverse market conditions, the investments the purchasers made in accordance with the agreements. Given the conditions of crude oil markets, placing additional volumes of crude oil in more refineries that are able to process the heavy crude oil that Pemex-Exploration and Production produces supports the overall average price of crude oil exports. We perceive the risk under these agreements as manageable, without the need for hedging instruments, since in the worst-case market scenario the expected additional value derived from crude oil exports should exceed the expected cost of the support mechanisms. Nonetheless, sinceSince December 2002, we have implemented short-term oil price hedging strategies through the use of options to hedge against potential decreases in short-term prices of crude oil. The applicable strategy is designed taking into account, among other things, financial requirements established by the Mexican Government, our financial condition and cash flow, theour annual budget and international market prices. In September 2004, we entered into a short-term oil price hedging strategy through the use of options for approximately 7% of our total crude oil production for 2004; these options expired on December 31, 2004 and were not exercised. During February and March 2005, we entered into a new hedging strategy for approximately 7% of our total crude oil production for 2005; these options expired on November 30, 2005 and were not exercised. We have not hedged any of our crude oil production for the year 2006, 2007 or 2007.2008.


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Petroleum Products
 
We balance our overall petroleum product supply and demand through P.M.I. Trading, Ltd., managing only those market exposures associated with our immediate operational program and P.M.I. Trading, Ltd. third-party operations in the international market. To this end, we use the full range of conventional oil price-relatedand refined products financial and commodity derivatives available in the oil markets. Our benchmark for petroleum product commercial activities is the prevailing market price. As of December 31, 2006, the capital atmarketplace in order to protect our profits by hedging our positions. PMI manages its portfolio risk as measured against the above-mentioned benchmark was U.S. $14.4 million.by performing daily valuations and risk assessment processes and applies mitigation strategies when required.
 
Natural Gas
 
As described above under “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Hedging Operations” during the fourth quarter of 2003, the Ministry of Energy announced a natural gas hedging program for 2004 through 2006. This program, which represents approximately 20% of the total volume of natural gas sales to our industrial customers, was implemented, since April 2006, in order to fixhedge the price forrisk that Pemex-Gas and Basic Petrochemicals assumes under its hedging program, Pemex-Gas and Basic Petrochemicals has


174

transferred the aforementioned period to the natural gas consumers. We decided to change our traditionaloperational risk profilethrough swaps and options instruments through its subsidiary MGI Supply Ltd. MGI Supply Ltd. settles these transactions with respect to natural gas,international counterparties in order to mitigatetransfer the volatility of the revenues derived from the sales of this product. This strategy ended in December 2006 and was not renewed.risk to them. For more information on this program, see “Item 4—Information on the Company—Business Overview—Gas and Basic Petrochemicals—Hedging Operations.”
 
Exchange Rate and Interest Rate Risks
 
A significant amount of our revenues is derived from exports of crude oil and petroleum products, which are priced and payable in U.S. dollars. Moreover, our revenues net of the IEPS tax from domestic sales of petroleum products and petrochemicals are related to the international dollar-denominated prices of these products. By contrast, most of our costs of sales and other expenses, other than hydrocarbon duties and investment, are payable in pesos and are not linked to the U.S. dollar. As a result, the peso’s depreciation against the U.S. dollar increases our income in peso terms. Appreciation of the peso relative to the U.S. dollar has the opposite effect. We perceive this risk as manageable, without the need for hedging instruments, because most of our investments and debt issuances are made in U.S. dollars and, therefore, the impact of the fluctuation in the exchange rate between the U.S. dollar and the peso on our revenues is offset by its impact on our obligations.
 
Most of our debt is denominated in U.S. dollars or pesos. However, we borrow in currencies other than pesos or the U.S. dollar. Therefore, fluctuations in non-dollar currencies (other than pesos) can increase our costs of funding. Since 1991, Petróleos Mexicanos has entered into currency swaps to hedge against movements in exchange rates when it borrows in currencies other than U.S. dollars. In 2004, 2005, 2006 and 2006,2007, the Pemex Project Funding Master Trust entered into various cross-currency swaps to hedge currency risk arising from debt obligations denominated in euros, pounds sterling and Japanese yen issued by the Pemex Project Funding Master Trust. As of December 31, 2006,2007, the aggregate notional amount of the swaps entered into in 2004, 2005, 2006 and 20062007 was U.S. $1,078.6 million, U.S. $1,322.8 million, U.S. $170.9 million and U.S. $170.9$239.8 million, respectively, for a total outstanding position on currency swaps at year-end 20062007 of U.S. $7,150.6$6,046.0 million. Additionally, the Fideicomiso F-163 entered into a cross-currency swap to hedge currency risk arising from debt obligations denominated in UDI for a total notional amount of Ps. 11,901.7 million. During 2007,2008, the Pemex Project Funding Master Trust has entered into cross-currency swaps to hedge currency risk arising from debt obligations denominated in Japanese yen for a total notional amount of U.S. $20.9$27.4 million. As described above, most of our revenues are either in U.S. dollars or indexed to the U.S. dollar and our policy in terms of debt issuance is to either place debt in pesos or U.S. dollars or swap other currencies back to U.S. dollar terms. As a result of this policy, we believe that our debt portfolio sensitivity to currencies other than the peso or U.S. dollar is negligible. In 2002, 2004 and 2005 the Pemex Project Funding Master Trust entered into cross-currency swaps to hedge its exposure in Japanese yen and euro, with termination dates in 2023, 2016 and 2025. Given the long-term nature of these obligations, the swaps used to hedge these risks include an option linked to a well-defined set of credit default events. In case such an event occurs, the swaps terminate without any payment obligation by either party. These swaps have a notional amount of U.S. $241.4 million, U.S. $1,028.5 million and U.S. $1,322.8 million, respectively.


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In November 2004, the Pemex Project Funding Master Trust and in March 2005, Petróleos Mexicanos settled a portion of thetheir cross-currency swap positions with a positive mark-to-market value, collecting U.S. $541.2 million and U.S. $303.8 million, respectively. Simultaneously, both the Pemex Project Funding Master Trust and Petróleos Mexicanos entered into a number of new cross-currency swaps at the then prevailing market conditions.
 
Effective January 1, 2003, due to the adoption ofBulletin B-10, we have ceased to capitalize our debt-relatedWe recorded a total net foreign exchange losses on our balance sheet. Prior to this date, we had capitalized our debt-related foreign exchange losses on our balance sheet, but only up to the increasegain of Ps. 19,032 million in the restated value of our fixed assets in the same period. We recorded2005, total net foreign exchange losses of Ps. 3,732 million in 2004 and Ps. 2,3812,471 million in 2006, and a total net foreign exchange gainloss of Ps. 18,3421,435 million in 2005.2007.
 
Interest Rate Risk
 
We are exposed to fluctuations in interest rates on short and long-term floating rate instruments. We are predominantly exposed to U.S. dollar LIBOR interest rates because our borrowings are primarily denominated in, or swapped into, U.S. dollars. We use derivative instruments as described below to achieve a desired mix of fixed and floating rate instruments in our debt portfolio. As of December 31, 2006,2007, approximately 42%51% of our total net debt outstanding consisted of floating rate debt.


175

Interest Rate Swaps
 
Under interest-rate swap agreements, we are obligated to make payments based on a fixed interest rate and are entitled to receive payments based on either the floating six-month LIBOR or the Mexican Interbank Interest Rate (TIIE) for peso-denominated swaps. Some interest rate swaps have as their underlying rate not the TIIE, but a rate referenced to or calculated from the TIIE. As of December 31, 2006,2007, Petróleos Mexicanos was a party to interest-rate swap agreements with a notional amount of U.S.$2,030.991,768.0 million, with an average fixed interest rate of approximately 4.94% in U.S. dollars and 10.85%11.01% in pesos and a weighted average term of approximately 4.263.31 years. In 20062007 and 2007,2008, we have not entered into any interest-rate swap agreements.
 
The market value of Petróleos Mexicanos’ foreign exchange and interest rate derivatives position was negative Ps. 5,703.1 million as of December 31, 2005 and negative Ps. 132.0 million as of December 31, 2006.2006 and positive Ps. 3,082.1 million as of December 31, 2007.
 
The effects on the consolidated statements of income of entering into swap transactions designated as hedges are recorded as incurred and when the precise settlement amounts are known. The effects on the consolidated statements of income of derivative instruments not designated as hedges are recognized in earnings according to changes in their fair value. Such amounts are included in the consolidated statements of income within the “Interest, net” caption. See Note 10 to our consolidated financial statements included herein.
 
When derivative results are favorable to Petróleos Mexicanos, it faces the risk that counterparties will not pay their obligations. To minimize this risk, Petróleos Mexicanos monitors counterparties’ creditworthiness and exposure to derivative instruments. Petróleos Mexicanos also deals exclusively with major financial institutions and maintains a diversified portfolio.
 
Equity Swap
 
At December 31, 2003,Between 1994 and 2004, Petróleos Mexicanos held twoentered into several equity swaps with respect to shares of Repsol. In 1994, Petróleos Mexicanos entered into an equity swap, which was restructured inFebruary and March 2000, resulting in a swap2008, we re-entered swaps with one month maturities with respect to 26,427,7811,250,415 Repsol shares divided in three tranches, having one-, two- and three-year maturities. In addition, in January 2000, Petróleos Mexicanos entered into a second equity swap with respect to 13,679,704 Repsol shares maturing in three years. These swaps matured in January 2004 and they were not renewed.shares.


171

Instruments Entered into for Trading Purposes
 
Petróleos Mexicanos enters into derivative transactions with the sole purpose of hedging financial risks related to its operations, assets or liabilities. Nonetheless, some of these transactions do not qualify for accounting treatment as hedges and are recorded in the financial statements as entered into for trading purposes, despite the fact that the profits or losses are offset by the profits or losses of the positions to which they relate.
 
As part of our client-based approach, we offer natural gas derivatives to our clients. As mentioned above,Since our benchmark is the market price; therefore,price, we enter into derivative transactions with the opposite position in order to offset the effect of the derivatives offered to our clients. NeitherBulletin C-10 nor SFAS No. 133 allows derivative positions to serve as hedges for other derivatives. Therefore, these operations are treated for accounting purposes as entered into for trading purposes. However, given that they have offsetting effects, we are only exposed to the basis risk arising from the difference between the index offered to clients and the underlying index related to the offsetting position.
 
The following tables set forth our portfolio of debt and derivative financial instruments as of December 31, 2006.2007. It should be noted that:
 
 •  for debt obligations, this table presents principal cash flows and related weighted average interest rates for fixed and variable rate debt;
 
 •  for interest-rate swaps and other derivatives, this table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates;


176

 •  weighted average variable rates are based on implied forward rates in the yield curve at the reporting date;
 
 •  fair values are obtained from market quotes received from market sources such as Reuters Telerate and Bloomberg;
 
 •  where quotes are not available, fair value is calculated internally, discounting from the corresponding zero coupon yield curve in the original currency;
 
 •  for all instruments, the tables show the contract terms in order to determine future cash flows categorized by expected maturity dates;
 
 •  the information is presented in equivalents of the peso, which is our reporting currency; and
 
 •  each instrument’s actual cash flows are denominated in U.S. dollars or other foreign currencies as indicated in parentheses.


172177

Quantitative Disclosure of Market Risk (Interest Rate Sensitivity) as of December 31, 20062007(1)
 
                                                                
 Year of Expected Maturity Date  Year of Expected Maturity Date 
             Total
                Total
   
             Carrying
                Carrying
   
 2007 2008 2009 2010 2011 Thereafter Value Fair Value  2008 2009 2010 2011 2012 Thereafter Value Fair Value 
 (in thousands of nominal pesos)  (in thousands of nominal pesos) 
Liabilities
                                                                
Outstanding debt                                                                
Fixed rate (U.S. dollars)  17,186,531   33,817,143   36,775,318   15,620,976   24,692,926   87,062,411   215,155,305   239,973,242   25,066,345   34,679,676   10,969,650   18,788,719   1,202,626   60,088,474   150,795,491   166,017,227 
Average Interest Rate(%)                          7.6256%      —   —   —   —   —   —   7.4987%    
 
Fixed rate (Japanese yen)  1,904,417   2,019,756   2,019,756   1,162,535   524,943   5,184,790   12,816,197   13,735,599   2,310,201   2,443,282   1,529,726   850,233   850,233   6,270,637   14,254,312   15,293,656 
Average Interest Rate(%)                          2.5299%      —   —   —   —   —   —   2.5521%    
Fixed rate (British pounds)  —   —   —   —   —   8,522,440   8,522,440   9,316,288 
 
Fixed rate (Pounds)  —   —   —   —   —   8,642,960   8,642,960   9,199,394 
Average Interest Rate(%)                          7.5000%      —   —   —   —   —   —   7.5000%    
 
Fixed rate (Pesos)  1,027,500   1,027,500   0   6,172,000   2,000,000   23,296,813   33,523,813   31,114,419   1,027,500   —   6,172,000   2,000,000   2,000,000   21,745,244   32,944,744   30,547,752 
Average Interest Rate(%)                          9.3574%      —   —   —   —   —   —   6.2618%    
 
Fixed rate (Euro)  12,711,765   758   758   10,744,358   758   33,665,250   57,123,647   60,184,433   840   840   11,908,290   840   840   37,311,352   49,223,002   49,236,616 
Average Interest Rate(%)                          6.4560%      —   —   —   —   —   —   6.1326%    
                                  
Total fixed rate debt  32,830,213   36,865,157   38,795,832   33,699,869   27,218,627   157,731,704   327,141,402   354,323,981   28,404,886   37,123,798   30,579,666   21,639,792   4,053,699   134,058,667   255,860,509   270,294,645 
                                  
 
Variable rate (U.S. dollars)  12,586,181   13,232,581   15,278,123   25,500,577   25,332,922   64,978,048   156,908,432   159,736,059   42,560,947   16,385,418   25,658,523   26,321,621   32,075,153   35,487,688   178,489,350   180,715,506 
Variable rate (Swiss francs)                              — 
Variable rate (Euro)  —   1,479,628   —   —   —   —   1,479,628   1,735,801   1,639,916   —   —   —   —   —   1,639,916   1,742,687 
Variable rate (pesos)  16,916,944   3,916,944   13,944,445   13,912,600   8,300,000   25,287,400   82,278,333   84,048,707   3,361,389   13,944,444   13,912,600   8,300,000   2,800,000   22,487,400   64,805,833   66,028,634 
                                  
Total variable rate debt  29,503,125   18,629,153   29,222,568   39,413,177   33,632,922   90,265,448   240,666,393   245,520,567   47,562,252   30,329,862   39,571,123   34,621,621   34,875,153   57,975,088   244,935,099   248,486,827 
                                  
Total Debt  62,333,338   55,494,310   68,018,400   73,113,046   60,851,549   247,997,152   567,807,795   599,844,547   75,967,138   67,453,660   70,150,789   56,261,413   38,928,852   192,033,755   500,795,608   518,781,472 
                                  
Note: Numbers may not total due to rounding.
 
(1)The information in this table has been calculated using exchange rates at December 31, 20062007 of Ps. 10.881010.8662 = U.S. $1.00; Ps. .09130.0973 = 1.00 Japanese yen; Ps. 21.306121.6074 = 1.00 British pound; and Ps. 14.324815.8766 = 1.00 Euro.
Source: Petróleos Mexicanos.


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Quantitative Disclosure of Market Risk (Interest Rate and Currency Risk) as of December 31, 20062007(1)
 
Derivative financial instruments held or issued for purposes other than trading:
 
                                
 Year of Expected Maturity Date 
                                             Total
   
 Year of Expected Maturity Date              Notional
   
             Total
    2008 2009 2010 2011 2012 Thereafter Amount Fair Value(2) 
             Notional
 Fair
  (in thousands of nominal pesos) 
 2007 2008 2009 2010 2011 Thereafter Amount Value(2) 
 (in thousands of nominal pesos)  
Hedging Instruments
                                                                
  
Interest Rate Swaps (U.S. Dollar)                                                                
  
Variable to Fixed  413,559   413,559   413,559   413,559   —   —   1,654,235   10,787   412,996   412,996   412,996   —   —   —   1,238,989   (13,681)
  
Average pay rate  4.94%  4.94%  4.94%  4.94%  —   —           4.94%  4.94%  4.94%  —   —   —   4.94%  n.a. 
  
Average receive rate  5.39%  5.05%  4.90%  4.94%  —   —           4.75%  3.54%  3.66%  —   —   —   3.98%  n.a. 
  
Interest Rate Swaps (Mexican Pesos)                                                                
  
Variable to Fixed  2,472,500   2,472,500   5,000,000   600,000   1,200,000   8,700,000   20,445,000   (2,188,440)  2,472,500   5,000,000   600,000   1,200,000   1,200,000   7,500,000   17,972,500   (1,439,470)
  
Average pay rate  10.51%  10.52%  10.83%  10.94%  10.94%  11.03%          10.62%  10.83%  10.95%  11.01%  11.19%  11.48%  11.01%  n.a. 
  
Average receive rate  7.40%  7.41%  7.55%  7.69%  7.88%  8.09%          8.14%  8.30%  8.40%  8.56%  8.73%  8.86%  8.50%  n.a. 
  
Cross Currency Swaps                                                                
  
Receive Euro /                                                                
 ��  
Pay U.S. dollars  12,759,477   1,503,229   —   10,641,618   —   32,646,264   57,550,588   1,731,648   1,501,184   —   10,627,144   —   —   32,601,860   44,730,188   3,549,308 
  
Receive Japanese Yen/                                                                
  
Pay U.S. dollars  1,857,786   1,978,034   1,978,034   1,150,819   575,294   5,288,063   12,828,029   (933,726)  2,130,189   2,262,363   1,436,274   861,532   861,532   5,997,946   13,549,835   (355,956)
  
Receive British pounds/                                
Receive Pounds/                                
  
Pay U.S. dollars  —   —   —   —   —   7,427,262   7,427,262   1,247,753   —   —   —   —   —   7,417,159   7,417,159   1,120,775 
  
Non-Hedging Instruments
                                
Receive UDI/                                
 
Pay Mexican peso  —   —   —   —   —   11,901,650   11,901,650   221,101 
 
                                
 
Non-Hedging Instruments(3)
                                
  
Interest Rate Swaps                                                                
  
Variable to fixed  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   — 
  
Average pay rate(%)  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   n.a. 
  
Average receive rate(%)  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   n.a. 
  
Total  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   — 
Note:  
Notes:  Numbers may not total due to rounding.
n.a. = Not applicable.
 (1) The information in this table has been calculated using exchange rates at December 31, 20062007 of Ps. 10.881010.8662 = U.S. $1.00.
 (2) Positive numbers represent a favorable fair value to PEMEX.
(3) As of December 31, 2007, all derivative financial instruments held by PEMEX qualified as hedging instruments.
 
Item 12.  Description of Securities Other than Equity Securities
 
Not applicable.


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PART II
 
Item 13.  Defaults, Dividend Arrearages and Delinquencies
 
Not applicable.
 
Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds
 
Not applicable.
 
Item 15.  Controls and Procedures
 
Disclosure Controls and Procedures
(a)  Disclosure Controls and Procedures
 
We carried out an evaluation under the supervision and with the participation of our management, including our Director General and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)Exchange Act)) as of December 31, 2006.2007. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only provide reasonable assurance of achieving their control objectives.
 
Based upon our evaluation, our Director General and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 20062007 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Director General and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.disclosures.
 
Remediation of Material Weakness in Internal Control over Financial Reporting
(b)  Management’s annual report on internal control over financial reporting
 
As previously reported in our annual report onForm 20-FManagement is responsible for the fiscal year ended December 31, 2005, as amended, we had identified a material weakness inestablishing and maintaining adequate internal control over financial reporting with respectas defined inRules 13a-15(f) and15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the condensed consolidating financial informationstatements for Petróleos Mexicanos, the subsidiary guarantors, the non-guarantor subsidiariesexternal purposes in accordance with Mexican FRS. Our internal control over financial reporting includes those policies and the Master Trust presented in the notes to our consolidated financial statements. Our remediation activities included the following:procedures that:
 
 •(1) In December 2005, we reassignedpertain to the rolesmaintenance of records that, in reasonable detail, accurately and responsibilities of personnel infairly reflect the accounting department to ensure that the personnel responsible for the preparationtransactions and dispositions of the financial information are not also responsible for the supervision and reviewassets of the financial information and the authorization of its release.PEMEX;
 
 •(2) During 2006, we implemented effective procedures designedprovide reasonable assurance that transactions are recorded as necessary to ensure a consistentpermit preparation of financial statements in accordance with Mexican FRS, including the reconciliation to U.S. GAAP in accordance with Item 18 ofForm 20-F, and effective processthat receipts and expenditures of preparationPEMEX are being made only in accordance with authorizations of management and documentationdirectors of the condensed consolidating financial information presented in the notes to our consolidated financial statements. In particular, we formalized specific controls, proceduresrelevant entity; and requirements for preparing and documenting the condensed consolidating financial information relating to Petróleos Mexicanos, the subsidiary guarantors, the non-guarantor subsidiaries and the Master Trust through the preparation of handbooks. These controls over financial reporting are designed to ensure that the condensed consolidating financial statements presented in the notes to our consolidated financial statements are appropriately prepared and presented in our consolidated financial statements.
 
 •(3) In 2006, we also strengthenedprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of PEMEX’s assets that could have a material effect on our supervision and review of the preparation and presentation of our condensed consolidating financial information through compliance with the roles and responsibilities described above and through increased monitoring during the preparation and supervision phases before final authorization of this information for its release.
• In 2006, we also implemented and performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements are prepared in accordance with Mexican FRS.statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of


174180

Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework and the Control Objectives for Information and Related Technology (COBIT) created by the IT Governance Institute.
Management relied on Auditing Standards No. 2 and 5 of the PCAOB in order to create an appropriate framework to evaluate the effectiveness of the design and operation of PEMEX’s internal control over financial reporting.
Based on our assessment and those criteria, management has concluded that the actions taken above have remediated the previously reported material weakness in itsPEMEX maintained effective internal control over financial reporting as of December 31, 2007.
(c)  Attestation report of the independent registered public accounting firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting. Accordingly, PEMEX’s management believesManagement’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that the financial statements includedpermit us to provide only management’s report in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.annual report.
 
Changes in Internal Control over Financial Reporting
(d)  Changes in internal control over financial reporting
 
The activities noted above with respect to the remediation of the material weakness represent changesThere has been no change in our internal control over financial reporting during 20062007 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
 
Item 16A.  Audit Committee Financial Expert
 
We do not currently have an audit committeeThe Guidelines for the Independent Audit Committee require that at least one of our Board of Directors. Thus, the entire Board of Directors of Pétroleos Mexicanos is presently acting as our audit committee as specified by Section 3(a)(58)(B) of the Exchange Act. We believe that the members of our Board of Directors have sufficient financial and other experience to perform their acting responsibilities as members of the audit committee. Notwithstanding the board members’ financial and other experience, the audit committee does not include a “financial expert” as that term is strictly defined in the rules promulgated under the Sarbanes-Oxley Act of 2002. Further, we do not have the power to appoint a financial expert to our board as the members of the boardsAudit Committee of directors, except for those selected by the Union, serve subject to the discretionPetróleos Mexicanos qualifies as an “audit committee financial expert”. Mr. Fernando Vilchis Platas, Member of the President of Mexico. See “Item 6—Directors, Senior Management and Employees.” Because we do not have securities listed or quoted on a U.S. exchange, we are not required to comply with the independence requirements established byRule 10A-3 of the Exchange Act. However, we are voluntarily considering the establishment of an independentIndependent Audit Committee in Petróleos Mexicanos qualifies as audit committee as partfinancial expert and is independent, within the meaning of our efforts to implement best practices in corporate governance.this Item 16A.
 
Item 16B.  Code of Ethics
 
We have adopted a code of ethics, as defined in Item 16B ofForm 20-F under the Exchange Act. Our Code of Ethics applies to our chief executive officer, chief financial officer, chief accounting officer and all other employees performing similar functions in PétroleosPetróleos Mexicanos, the subsidiary entities and the subsidiary companies. Our Code of Ethics is available on our website athttp://www.pemex.com. If we amend the provisions of our Code of Ethics that apply to our chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address.
 
In addition, all of our employees are currently also subject to theCódigo de Etica de los Servidores Públicos de la Administración Pública Federal(the Code of Ethics for Federal Public Officials of the Federal Public Administration), which was issued by SFP in July 2002 pursuant to the requirements of theLey Federal de Responsabilidades Administrativas de los Servidores Públicos(Federal Law of Administrative Responsibilities of Public Officials) in order to establish clear rules to promote and enforce legal and ethical standards of conduct and to prevent corruption and corporate abuses by Mexican public officials. See “Item 8—Financial Information—Legal Proceedings—Mexican Government Audits and Other Investigations” for more information.


175

 
Item 16C.  Principal Accountant Fees and Services
Change in Independent Auditors
The Board of Directors of Petróleos Mexicanos, in its meeting held on December 4, 2007, approved the execution of auditing services by KPMG Cárdenas Dosal, S.C., which was appointed by the SFP as external auditor of the financial statements of Petróleos Mexicanos and of the consolidated financial statements of Petróleos Mexicanos and its subsidiary entities prepared in accordance withNormas y Principios Básicos de


181

Contabilidad Gubernamental (Governmental Accounting Standards) replacing PricewaterhouseCoopers, S.C, which rendered those services until the 2006 fiscal year. The reason for this change is that the maximum period stated for external auditors firms to render their services to a public entity was completed in accordance with the Guidelines applicable to the selection, designation and evaluation of the external auditors’ performance auditing entities of the Mexican Government, issued by the SFP.
The Board of Directors of Petróleos Mexicanos also approved KPMG Cárdenas Dosal, S.C., as appointed by the SFP, to audit the consolidated financial statements of Petróleos Mexicanos, subsidiary entities and subsidiary companies prepared in accordance with Mexican FRS, as well as performs other related services associated with the auditing of such consolidated financial statements.
 
Audit and Non-Audit Fees
 
The following table sets forth the fees billed and billable to us by our independent auditors, PricewaterhouseCoopers, S.C., who served as our external auditors for our fiscal years ended December 31, 2001 through 2006, during the fiscal years ended December 31, 20052006 and 2006:2007:
 
                
 Year ended December 31,  Year ended December 31, 
 2005 2006  2006 2007 
 (in thousands of nominal pesos)  (in thousands of nominal pesos) 
Audit fees Ps.31,468  Ps.29,831  Ps.29,831  Ps.10,646 
Audit-related fees  813   791   791   — 
Tax fees  2,086   2,429   2,429   96 
Other fees  0   22,303   22,303   — 
          
Total fees Ps.34,367  Ps.55,354  Ps.55,354  Ps.10,742 
          
 
Audit fees in the above table are the aggregate fees billed and billable by PricewaterhouseCoopers, S.C. in connection with the audit of our annual financial statements, the review of our interim financial statements, services provided in connection with statutory and regulatory filings, comfort letters, statutory audits and consents. In 2007, these fees represent are the aggregate fees billed by PricewaterhouseCoopers, S.C. in connection with the audit of annual financial statements of some of our foreign subsidiary companies.
 
Audit-related fees in the above table are the aggregate fees billed by PricewaterhouseCoopers, S.C. for special purpose audits performed in accordance with the instructions of the SFP, which were performed pursuant to agreed upon procedures.
 
Tax fees in the above table are fees billed by PricewaterhouseCoopers, S.C. for tax compliance services, which generally involved the review of original and amended tax returns and claims for tax refunds.
 
Other fees in the above table are fees billed by PricewaterhouseCoopers, S.C. related to the review of our internal control structure as part of our preparation to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
 
The following table sets forth the fees billed and billable to us by our new independent auditors, KPMG Cárdenas Dosal, S.C. during the fiscal year ended December 31, 2007:
Year ended December 31, 2007
(in thousands of nominal pesos)
Audit feesPs.23,597
Audit-related fees1,359
Tax fees1,580
Other fees3,194
Total feesPs.29,730


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Audit fees in the above table are the aggregate fees billed and billable by KPMG Cárdenas Dosal, S.C. in connection with the review of our annual financial statements in 2007, services provided in connection with statutory and regulatory filings and statutory audits.
Audit-related fees in the above table are the aggregate fees billed by KPMG Cárdenas Dosal, S.C. for special purpose audits performed in accordance with the instructions of the SFP, which were performed pursuant to agreed upon procedures.
Tax fees in the above table are fees billed by KPMG Cárdenas Dosal, S.C. for tax compliance services, which generally involved the review of original and amended tax returns and claims for tax refunds.
Other fees in the above table are fees billed by KPMG Cárdenas Dosal, S.C. related to (i) the issuance of a review report, in accordance with the Standard for Assurance Engagements (ISAE 3000): Assurance Engagements other than Audits or Reviews of Historical Financial Information developed by International Auditing and Assurance Standards Board in connection with PEMEX’s sustainability report, (ii) the issuance of compliance reports for social security authorities in Mexico, and (iii) an agreed upon procedures report in order to comply with a contract entered into by a subsidiary company.
Audit Committee Approval Policies and Procedures
 
In accordance with Mexican regulations, for governmental entities such as PEMEX, the SFP appoints the external auditors of Petróleos Mexicanos and the subsidiary entities through a competitive bidding process on an annual basis to audit our financial statements in accordance with the Mexican Financial ReportingGovernmental Accounting Standards applicable to Mexican public sector entities. The auditors selected by the SFP to audit these financial statements subsequently audit financial statements in accordance with Mexican FRS, including their reconciliation to U.S. GAAP. The Board of Directors of Petróleos Mexicanos reviews and ratifies the engagement of the external auditors by the SFP.
The SFP periodically assigns new external auditors to Petróleos Mexicanos and the subsidiary entities. PricewaterhouseCoopers S.C. was assigned as external auditor for Petróleos Mexicanos and the subsidiary entities on May 9, 2002. PricewaterhouseCoopers S.C. completed the maximum time period for an external auditor to render services to a Mexican public sector entity, pursuant to the Guidelines for the selection, designation and evaluation of external auditors’ performance in auditing entities of the Mexican Government.
Once such term ended, as indicated above, the SFP and the Board of Directors of Petróleos Mexicanos appointed KPMG Cárdenas Dosal, S.C. as the external auditor of Petróleos Mexicanos’ financial statements and the consolidated financial statements of Petróleos Mexicanos and the subsidiary entities.
Beginning in 2008, the Independent Audit Committee of Petróleos Mexicanos will approve the selection and appointment of the external auditors of Petróleos Mexicanos and supervise the preparation and issuance of the external auditor’s report on our financial statements, in accordance with the Guidelines for the Independent Audit Committee. See “Item 6—Directors, Senior Management and Employees—Audit Committee.”
 
Item 16D.  Exemptions from the Listing Standards for Audit Committees.Committees
 
Not applicable.
 
Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers.Purchasers
 
Not applicable.


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PART III
 
Item 17.  Financial Statements.
 
Not applicable.
 
Item 18.  Financial Statements.
 
See pages F-1 through F-105,F-100, incorporated herein by reference.
 
Item 19.  Exhibits.
 
Documents filed as exhibits to thisForm 20-F:
 
     
 1.1 Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(the Organic Law of Petróleos Mexicanos and Subsidiary Entities), as amended effective January 1, 1994 (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ Registration Statement on Form F-1 (File No. 33-86304) on November 14, 1994 and incorporated by reference herein).
 1.2 Reglamento de la Ley Orgánica de Petróleos Mexicanos(Regulations to the Organic Law of Petróleos Mexicanos), together with an English translation (previously filed as Exhibit 3.2 to Petróleos Mexicanos’ Registration Statement on Form F-1 (File No. 33-86304) on November 14, 1994 and incorporated by reference herein).
 1.3 Reglamento de Gas Natural(Natural Gas Regulation), effective November 9, 1995 together with an English translation (previously filed as Exhibit 1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 1996 and incorporated by reference herein).
 1.4 Decreto por el que se Reforma la Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(Decree that Amends the Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs), effective November 14, 1996 (previously filed as Exhibit 1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1997 and incorporated by reference herein).
 1.5 Decreto por el que se adiciona el Reglamento de la Ley Orgánica de Petróleos Mexicanos(Decree that adds to the Regulations to the Organic Law of Petróleos Mexicanos), together with an English translation, effective April 30, 2001 (previously filed as Exhibit 1.5 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 2001 and incorporated by reference herein).
 1.6 Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(the Organic Law of Petróleos Mexicanos and Subsidiary Entities), as amended effective January 16, 2002 (English translation) (previously filed as Exhibit 1.6 to Amendment No. 1 to Petróleos Mexicanos’ annual report on Form 20-F/A (File No. 0-99) on November 15, 2002 and incorporated by reference herein).
 1.7 Decreto por el que se adicionan dos párrafos al artículo 6o. de la Ley Reglamentaria del artículo 27 Constitucional en el Ramo del Petróleo y se reforma el tercer párrafo y adiciona un último párrafo al artículo 3o de la Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(Decree that adds two paragraphs to Article 6 of the Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs and amends the third paragraph and adds a last paragraph to Article 3 of the Organic Law of Petróleos Mexicanos and Subsidiary Entities) together with an English translation, effective January 13, 2006 (previously filed as Exhibit 1.7 to Petroleós Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 2006 and incorporated by reference herein).
 2.1 Indenture, dated as of September 18, 1997, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-7796) on October 17, 1997 and incorporated by reference herein).
 2.2 Indenture, dated August 7, 1998, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 on August 11, 1998 and incorporated by reference herein).
 2.3 Indenture, dated July 15, 1999, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-10706) on August 23, 1999 and incorporated by reference herein).
     
 1.1 Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(Organic Law of Petróleos Mexicanos and Subsidiary Entities), as amended effective January 1, 1994 (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ Registration Statement on Form F-1 (File No. 33-86304) on November 14, 1994 and incorporated by reference herein).
 1.2 Reglamento de la Ley Orgánica de Petróleos Mexicanos(Regulations to the Organic Law of Petróleos Mexicanos), together with an English translation (previously filed as Exhibit 3.2 to Petróleos Mexicanos’ Registration Statement on Form F-1 (File No. 33-86304) on November 14, 1994 and incorporated by reference herein).
 1.3 Reglamento de Gas Natural(Natural Gas Regulation), effective November 9, 1995 together with an English translation (previously filed as Exhibit 1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 1996 and incorporated by reference herein).
 1.4 Decreto por el que se Reforma la Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(Decree that Amends the Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs), effective November 14, 1996 (previously filed as Exhibit 1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1997 and incorporated by reference herein).
 1.5 Decreto por el que se adiciona el Reglamento de la Ley Orgánica de Petróleos Mexicanos(Decree that adds to the Regulations to the Organic Law of Petróleos Mexicanos), together with an English translation, effective April 30, 2001 (previously filed as Exhibit 1.5 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 2001 and incorporated by reference herein).
 1.6 Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(Organic Law of Petróleos Mexicanos and Subsidiary Entities), as amended effective January 16, 2002 (English translation) (previously filed as Exhibit 1.6 to Amendment No. 1 to Petróleos Mexicanos’ annual report on Form 20-F/A (File No. 0-99) on November 15, 2002 and incorporated by reference herein).
 1.7 Decreto por el que se adicionan dos párrafos al artículo 6o. de la Ley Reglamentaria del artículo 27 Constitucional en el Ramo del Petróleo y se reforma el tercer párrafo y adiciona un último párrafo al artículo 3o de la Ley Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(Decree that adds two paragraphs to Article 6 of the Regulatory Law to Article 27 of the Political Constitution of the United Mexican States Concerning Petroleum Affairs and amends the third paragraph and adds a last paragraph to Article 3 of the Organic Law of Petróleos Mexicanos and Subsidiary Entities) together with an English translation, effective January 13, 2006 (previously filed as Exhibit 1.7 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 2006 and incorporated by reference herein).
 2.1 Indenture, dated as of September 18, 1997, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-7796) on October 17, 1997 and incorporated by reference herein).
 2.2 Indenture, dated August 7, 1998, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 on August 11, 1998 and incorporated by reference herein).
 2.3 Indenture, dated July 31, 1999, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-10706) on September 29, 1999 and incorporated by reference herein).
 2.4 Indenture, dated as of July 31, 2000, among Master Trust, Petróleos Mexicanos and Bankers Trust (previously filed as Exhibit 2.5 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 2001 and incorporated by reference herein).
 2.5 Indenture, dated as of February 3, 2003, between Petróleos Mexicanos and Deutsche Bank Trust Company Americas (previously filed as Exhibit 4.7 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-102993) on February 12, 2003 and incorporated by reference herein).


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 2.4 Indenture, dated July 31, 1999, between Petróleos Mexicanos and Bankers Trust Company (previously filed as Exhibit 4.1 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-10706) on September 29, 1999 and incorporated by reference herein).
 2.5 Indenture, dated as of July 31, 2000, among Pemex Project Funding Master Trust, Petróleos Mexicanos and Bankers Trust (previously filed as Exhibit 2.5 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 28, 2001 and incorporated by reference herein).
 2.6 Indenture, dated as of February 3, 2003, between Petróleos Mexicanos and Deutsche Bank Trust Company Americas (previously filed as Exhibit 4.7 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-102993) on February 12, 2003 and incorporated by reference herein).
 2.7 Indenture, dated as of December 30, 2004 among Pemex Project Funding Master Trust, Petróleos Mexicanos and Deutsche Bank Trust Company Americas (previously filed as Exhibit 2.7 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.8 Fiscal Agency Agreement between Petróleos Mexicanos and Bankers Trust, dated as of June 16, 1993, and amended and restated as of February 26, 1998 (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 29, 2000 and incorporated by reference herein).
 2.9 Trust Agreement, dated as of November 10, 1998, among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 2.10 Amendment No. 1, dated as of November 17, 2004, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 2.10 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.11 Amendment No. 2, dated as of December 22, 2004, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 2.11 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.12 Amendment No. 3, dated as of August 17, 2006, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 3.4 to the Petróleos Mexicanos Registration Statement on Form F-4/A (File No. 333-136674) on October 27, 2006 and incorporated by reference herein).
 2.13 Assignment and Indemnity Agreement, dated as of November 10, 1998, among Petróleos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación, Pemex-Gas y Petroquímica Básica and Pemex Project Funding Master Trust, (previously filed as Exhibit 3.2 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 2.14 Amendment No. 1, dated as of August 17, 2006, to the Assignment and Indemnity Agreement among Petróelos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación, Pemex-Gas y Petroquímica Básica and Pemex Project Funding Master Trust, (previously filed as Exhibit 4.7 to the Petróleos Mexicanos Registration Statement on Form F-4/A (File No. 333-136674) on October 27, 2006 and incorporated by reference herein).
 2.15 Guaranty Agreement, dated July 29, 1996, among Petróleos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación and Pemex-Gas y Petroquímica Básica (previously filed as Exhibit 4.4 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-7796) on October 17, 1997 and incorporated by reference herein).
The registrant agrees to furnish to the Securities and Exchange Commission, upon request, copies of any instruments that define the rights of holders of long-term debt of the registrant that are not filed as exhibits to this annual report.
 4.1 Agreement for the Financial Strengthening of Petróleos Mexicanos between the Federal Government of Mexico and Petróleos Mexicanos, together with a summary in English (previously filed as Exhibit 10.1 to Petróleos Mexicanos’ Registration Statement on Form F-1 (File No. 33-86304) on November 14, 1994 and incorporated by reference herein).
 4.2 Amendment to the Agreement for the Financial Strengthening of Petróleos Mexicanos between the Federal Government of Mexico and Petróleos Mexicanos, dated December 18, 1997, together with an English translation (previously filed as Exhibit 10.1 to Amendment No. 1 to Petróleos Mexicanos’ annual report on Form 20-F/A (File No. 0-99) on July 20, 1998 and incorporated by reference herein).
     
 2.6 Indenture, dated as of December 30, 2004 among Master Trust, Petróleos Mexicanos and Deutsche Bank Trust Company Americas (previously filed as Exhibit 2.7 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.7 Fiscal Agency Agreement between Petróleos Mexicanos and Bankers Trust, dated as of June 16, 1993, and amended and restated as of February 26, 1998 (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 29, 2000 and incorporated by reference herein).
 2.8 Trust Agreement, dated as of November 10, 1998, among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 3.1 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 2.9 Amendment No. 1, dated as of November 17, 2004, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 2.10 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.10 Amendment No. 2, dated as of December 22, 2004, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 2.11 to Petróleos Mexicanos’ Annual Report on Form 20-F on June 30, 2005 and incorporated by reference herein).
 2.11 Amendment No. 3, dated as of August 17, 2006, to the Trust Agreement among The Bank of New York, The Bank of New York (Delaware) and Petróleos Mexicanos (previously filed as Exhibit 3.4 to the Petróleos Mexicanos Registration Statement on Form F-4/A (File No. 333-136674) on October 27, 2006 and incorporated by reference herein).
 2.12 Assignment and Indemnity Agreement, dated as of November 10, 1998, among Petróleos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación, Pemex-Gas y Petroquímica Básica and Master Trust, (previously filed as Exhibit 3.2 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 2.13 Amendment No. 1, dated as of August 17, 2006, to the Assignment and Indemnity Agreement among Petróleos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación, Pemex-Gas y Petroquímica Básica and Master Trust, (previously filed as Exhibit 4.7 to the Petróleos Mexicanos Registration Statement on Form F-4/A (File No. 333-136674) on October 27, 2006 and incorporated by reference herein).
 2.14 Guaranty Agreement, dated July 29, 1996, among Petróleos Mexicanos, Pemex-Exploración y Producción, Pemex-Refinación and Pemex-Gas y Petroquímica Básica (previously filed as Exhibit 4.4 to Petróleos Mexicanos’ Registration Statement on Form F-4 (File No. 333-7796) on October 17, 1997 and incorporated by reference herein).
     The registrant agrees to furnish to the Securities and Exchange Commission, upon request, copies of any instruments that define the rights of holders of long-term debt of the registrant that are not filed as exhibits to this annual report.
 4.1 Receivables Purchase Agreement, dated as of December 1, 1998, by and among Pemex Finance, Ltd., P.M.I. Comercio Internacional, S.A. de C.V., P.M.I. Services, B.V. and Pemex-Exploración y Producción. (previously filed as Exhibit 3.3 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 7.1 Computation of Ratio of Earnings to Fixed Charges.
 8.1 For a list of subsidiaries, their jurisdiction of incorporation and the names under which they do business, see “Consolidated Structure of PEMEX” on page 4.
 10.1 Consent letter of Ryder Scott Company, L.P.
 10.2 Consent letters of Netherland, Sewell International, S. de R.L. de C.V.
 10.3 Consent letter of DeGolyer and MacNaughton.
 12.1 CEO Certification pursuant to Rule 13a-14(a)/15d-14(a).
 12.2 CFO Certification pursuant to Rule 13a-14(a)/15d-14(a).
 13.1 Certification pursuant to Rule 13a-14(b)/15d-14(b) and 18 U.S.C. § 1350.

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 4.3 Receivables Purchase Agreement, dated as of December 1, 1998, by and among Pemex Finance, Ltd., P.M.I. Comercio Internacional, S.A. de C.V., P.M.I. Services, B.V. and Pemex-Exploración y Producción. (previously filed as Exhibit 3.3 to Petróleos Mexicanos’ annual report on Form 20-F (File No. 0-99) on June 30, 1999 and incorporated by reference herein).
 4.4 Transfer of Funds Agreement, dated as of November 24, 2000, among Pemex Project Funding Master Trust, Petróleos Mexicanos and the Federal Government (English translation) (previously filed as Exhibit 4.4 to Amendment No. 1 to Petróleos Mexicanos’ annual report on Form 20-F/A (File No. 0-99) on November 15, 2002 and incorporated by reference herein).
 8.1 For a list of subsidiaries, their jurisdiction of incorporation and the names under which they do business, see “Consolidated Structure of PEMEX” on page 3.
 10.1 Consent letter of Ryder Scott Company, L.P.
 10.2 Consent letters of Netherland, Sewell International, S. de R.L. de C.V.
 10.3 Consent letter of DeGolyer and MacNaughton.
 12.1 CEO Certification pursuant to Rule 13a-14(a)/15d-14(a).
 12.2 CFO Certification pursuant to Rule 13a-14(a)/15d-14(a).
 13.1 Certification pursuant to Rule 13a-14(b)/15d-14(b) and 18 U.S.C. § 1350.

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SIGNATURE
 
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
PETRÓLEOS MEXICANOS
 
 By: /s/  Esteban Levin Balcells
Name: Esteban Levin Balcells
Title: Chief Financial Officer
 
Date: July 2, 2007June 30, 2008


180186

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 2005 AND 20042005
 

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2007, 2006 2005 AND 20042005
 
INDEX
 
   
Contents
 
Page
 
Report of KPMG Cárdenas Dosal, S.C., Registered Public Accounting Firm
F-2
Report of PricewaterhouseCoopers, Registered Public Accounting Firm F1 and F2F-3
Consolidated financial statements  
Consolidated balance sheets
 F3F-4
Consolidated statement of operations
 F4F-5
Consolidated statements of changes in equity
 F5F-6
Consolidated statements of changes in financial position
 F6F-7
Notes to the consolidated financial statements
 F-7F-8 through F-105F-100


F-1

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the General Comptroller’s Office
And the Board of Directors of
Petróleos Mexicanos:
We have audited the accompanying consolidated balance sheet of Petróleos Mexicanos, Subsidiary Entities and Subsidiary Companies (“PEMEX”) as of December 31, 2007 and the related consolidated statements of operations, changes in equity and changes in financial position for the year ended December 31, 2007. These consolidated financial statements are the responsibility of the management of PEMEX. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in Mexico and with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PEMEX as of December 31, 2007 and the consolidated results of their operations, the changes in their equity and the changes in their financial position for the year ended December 31, 2007 in conformity with Mexican Financial Reporting Standards.
Mexican Financial Reporting Standards vary in certain significant respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 21 to the consolidated financial statements.
KPMG Cárdenas Dosal, S. C.
/s/  Eduardo Palomino
Eduardo Palomino
Mexico City, Mexico
April 11, 2008, except as to note 21, 22 and 23
which are as of June 26, 2008.


F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Mexico City, Mexico, June 29, 2007
 
To the General Comptroller’s Office

and the Board of Directors of

Petróleos Mexicanos:
 
We have audited the accompanying consolidated balance sheetssheet of Petróleos Mexicanos, Subsidiary Entities and Subsidiary Companies (collectively, “PEMEX”) as of December 31, 2006, and 2005, and the related consolidated statements of operations, changes in equity and changes in financial position for each of the threetwo years in the period ended December 31, 2006. These financial statements are the responsibility of the management of PEMEX. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted in MéxicoMexico and with the Standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures contained in the consolidated financial statements. An audit also includes assessing the standards of financials information used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As described in Note 2l.3l. to the consolidated financial statements, effective January 1, 2005, PEMEX adopted the amendments toBulletin D-3, “Labor Obligations”, issued by the Mexican Institute of Public Accountants (“MIPA”), which establishes the rules for valuation and recording of liabilities arising from other severance payments paid to employees upon dismissal. As of January 1, 2005, the adoption of these amendments resulted in a charge of Ps. 1,376,147,000,1,427,872,000, which is presented in the consolidated statement of operations as a cumulative effect of adoption of new accounting standards.
 
As described in Note 2t.3m. to the consolidated financial statements, effective January 1, 2005, PEMEX adopted the provisions ofBulletin C-10, “Derivative Financial Instruments and Hedging Operations”, issued by the MIPA, which establishes the criteria for valuation, recording and disclosure applicable to derivative financial instruments for hedging and to embedded derivatives. As of January 1, 2005, the adoption of these provisions resulted in the recognition of an initial cumulative charge of Ps. 460,675,000,477,996,000, recognized in the consolidated statement of operations as a cumulative effect of adoption of new accounting standards.
As described in Note 21. to the consolidated financial statements, effective January 1, 2004, PEMEX adopted the amendments toBulletin D-3, “Labor Obligations”, issued by the MIPA. These amendments set forth additional valuation and disclosure requirements for the recognition of post-retirement obligations. As of January 1, 2004, the adoption of these amendments resulted in the recognition of an initial liability related to prior service costs and a charge to income for 2004, in the amount of Ps. 9,080,142,000, which is presented in the consolidated statement of operations as a cumulative effect of adoption of new accounting standards.
As described in Note 2e. to the consolidated financial statements, effective January 1, 2004, the Board of Directors of PEMEX approved a change in the accounting policy for recognition of well exploration and drilling expenses to the successful efforts method of accounting. As a result, the oil-field exploration and depletion reserve was discontinued. The change in the accounting policy for recognizing exploration and drilling costs had no effect on the consolidated financial statements upon adoption, since at December 31, 2003, the specific oil-field exploration and depletion reserve had been entirely utilized.
As described in Note 2i. to the consolidated financial statements,Bulletin C-15, “Impairment of the Value of Long-Lived Assets and their Disposal”, issued by the MIPA, became effective January 1, 2004. PEMEX calculated an impairment of the value of long-lived assets at January 1 and December 31, 2004, and determined a cumulative effect of Ps. 2,176,369,000 and an impairment charge for the year of Ps. 1,776,861,000, respectively. The initial effect is presented in the consolidated statement of operations as a


F-1

cumulative effect of adoption of new accounting standards and the impairment charge for the year is presented in the consolidated statements of operations under costs and operating expenses.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PEMEX at December 31, 2006 and 2005 and the consolidated results of their operations, changes in equity and changes in financial position for each of the threetwo years in the period ended December 31, 2006, in conformity with Mexican Financial Reporting Standards.
 
Mexican Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of said differences is presented in Note 2021 to the consolidated financial statements.
 
PricewaterhouseCoopers
 
/s/  Ariadna L. Muñiz Patiño
Ariadna L. Muñiz Patiño
Public Accountant


F-2F-3

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
 
(Notes 1, 2 and 3)CONSOLIDATED BALANCE SHEETS
(In thousands of Mexican pesos as of December 31, 20062007, purchasing power and in thousands of U.S. dollars)
 
             
  2006  2006  2005 
  (Unaudited)       
 
ASSETS:            
Current assets:            
Cash and cash equivalents (Note 4) U.S.$17,340,670  Ps.188,683,832  Ps.125,724,053 
             
Accounts, notes receivable and other—Net (Note 5)  12,149,061   132,193,937   122,658,384 
Inventories—Net (Note 6)  5,497,228   59,815,339   52,632,561 
Derivative financial instruments (Note 10)  388,825   4,230,800   3,614,378 
             
   18,035,114   196,240,076   178,905,323 
             
Total current assets  35,375,784   384,923,908   304,629,376 
             
Investments in shares (Note 8)  2,901,762   31,574,076   27,642,009 
Properties, plant and equipment—Net (Note 7)  65,296,223   710,488,205   669,307,823 
Intangible asset derived from the actuarial computation of labor obligations (Note 11)  6,775,467   73,723,853   79,770,331 
Other assets—Net  369,858   4,024,414   3,468,416 
             
Total assets U.S.$110,719,094  Ps.1,204,734,456  Ps.1,084,817,955 
             
 
LIABILITIES:
Current liabilities:            
Current portion of long-term debt (Note 9) U.S.$5,867,155  Ps.63,840,513  Ps.37,558,056 
Suppliers  3,286,353   35,758,809   32,215,474 
Accounts and accrued expenses payable  1,292,476   14,063,436   10,803,337 
Taxes payable  3,986,411   43,376,135   70,761,756 
Derivative financial instruments (Note 10)  1,184,422   12,887,695   19,804,143 
             
Total current liabilities  15,616,817   169,926,588   171,142,766 
             
Long-term liabilities:            
Long-term debt (Note 9)  46,454,780   505,474,457   521,923,673 
Reserve for dismantlement and abandonment activities, sundry creditors and others (Note 2h. and 2j.)  2,791,233   30,371,411   26,762,274 
Reserve for retirement payments, pensions and seniority premiums (Note 11)  41,777,191   454,577,611   390,890,192 
Deferred taxes (Note 2y.)  407,189   4,430,625   2,057,891 
             
Total long-term liabilities  91,430,393   994,854,104   941,634,030 
             
Total liabilities  107,047,210   1,164,780,692   1,112,776,796 
             
Commitments and contingencies (Notes 12 and 13)            
EQUITY (Note 14):            
Certificates of Contribution “A”  8,587,941   93,445,382   93,445,382 
             
Mexican Government increase in equity of Subsidiary Entities  11,806,608   128,467,704   81,505,115 
Surplus in restatement of equity  14,162,370   154,100,745   150,183,353 
Effect on equity from labor obligations  (4,280,485)  (46,575,957)  (28,387,730)
Derivative financial instruments  (156,096)  (1,698,482)  (6,781,520)
             
Accumulated losses:            
From prior years  (30,607,279)  (333,037,804)  (238,549,139)
Net income (loss) for the year  4,158,825   45,252,176   (79,374,302)
             
   (26,448,454)  (287,785,628)  (317,923,441)
             
Total equity (deficit)  3,671,884   39,953,764   (27,958,841)
             
Total liabilities and equity (deficit) U.S.$110,719,094  Ps.1,204,734,456  Ps.1,084,817,955 
             
The accompanying notes are an integral part of these consolidated financial statements.


F-3

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF OPERATIONS
(Notes 1, 2 and 3)
(In thousands of Mexican pesos as of December 31, 2006 purchasing power and in thousands of U.S. dollars)
                 
  2006  2006  2005  2004 
  (Unaudited)          
 
Net sales:                
Domestic U.S.$50,247,035  Ps.546,737,992  Ps.525,582,776  Ps.482,783,367 
Export  47,399,757   515,756,752   440,700,886   348,985,898 
                 
   97,646,792   1,062,494,744   966,283,662   831,769,265 
Other revenues—Net  6,409,473   69,741,475   12,316,876   11,993,307 
                 
Total revenues  104,056,265   1,132,236,219   978,600,538   843,762,572 
                 
Costs of sales and operating expenses:                
Cost of sales  37,046,731   403,105,475   375,816,940   283,969,084 
Transportation and distribution expenses  2,207,406   24,018,790   22,798,899   18,896,087 
Administrative expenses  4,964,809   54,022,083   48,697,351   39,466,726 
                 
Total cost and operating expenses  44,218,946   481,146,348   447,313,190   342,331,897 
                 
Comprehensive financing cost:                
Interest—Net  (3,205,953)  (34,883,974)  (39,997,445)  (24,862,817)
Exchange (loss) gain—Net  (218,829)  (2,381,079)  18,342,105   (3,731,785)
Gain on monetary position  1,312,595   14,282,349   16,994,452   21,016,352 
                 
   (2,112,187)  (22,982,704)  (4,660,888)  (7,578,250)
                 
Income before taxes, duties and cumulative effect of adoption of new accounting standards  57,725,133   628,107,167   526,626,460   493,852,425 
                 
Taxes and duties (Note 17):                
Hydrocarbon extraction duties and others  51,994,678   565,754,090   518,570,670   412,208,362 
Excess gain duties  728,415   7,925,886   58,664,538   36,980,005 
Hydrocarbon income tax  435,328   4,736,803   2,057,889   — 
Income tax  407,886   4,438,212   3,837,429   2,001,458 
Special tax on production and services (IEPS Tax)  —   —   21,033,414   58,819,245 
                 
   53,566,307   582,854,991   604,163,940   510,009,070 
                 
Cumulative effect of adoption of new accounting standards (Notes 2i., 2l. and 2t.)  —   —   (1,836,822)  (11,256,511)
                 
Net income (loss) for the year U.S. $4,158,825  Ps.45,252,176  (Ps.79,374,302) (Ps.27,413,156)
                 
             
  2007  2007  2006 
  (Unaudited)       
 
ASSETS:            
Current assets:            
Cash and cash equivalents (Note 5) U.S. $15,736,617  Ps.170,997,240  Ps.195,776,457 
             
Accounts, notes receivable and other — Net (Note 6)  13,943,286   151,510,543   137,163,105 
Inventories — Net (Note 7)  8,571,822   93,143,136   62,063,798 
Derivative financial instruments (Note 11)  1,188,075   12,909,868   4,389,836 
             
   23,703,183   257,563,547   203,616,739 
             
Total current assets  39,439,800   428,560,787   399,393,196 
             
Investments in shares of non consolidated subsidiaries and affiliates (Note 8)  3,042,770   33,063,354   32,760,946 
Properties, plant and equipment — Net (Note 9)  73,056,399   793,845,453   737,195,457 
Intangible asset derived from the actuarial computation of labor obligations (Note 12)  6,626,864   72,008,835   76,495,133 
Other assets — Net  257,880   2,802,177   4,175,692 
             
Total assets U.S. $122,423,713  Ps.1,330,280,606  Ps.1,250,020,424 
             
             
LIABILITIES:            
Current liabilities:            
Current portion of long-term debt (Note 10) U.S. $6,998,778  Ps.76,050,128  Ps.66,240,278 
Suppliers  3,233,728   35,138,344   37,102,983 
Accounts and accrued expenses payable  1,665,488   18,097,530   14,592,081 
Taxes payable  13,490,765   146,593,355   45,006,644 
Derivative financial instruments (Note 11)  1,250,160   13,584,495   13,372,143 
             
Total current liabilities  26,638,919   289,463,852   176,314,129 
Long-term liabilities:            
Long-term debt (Note 10)  39,096,323   424,828,472   524,475,242 
Reserve for sundry creditors and others  2,895,883   31,467,252   31,513,072 
Reserve for labor obligations (Note 12)  48,609,566   528,201,272   471,665,183 
Deferred taxes (Note 18i.)  590,077   6,411,897   4,597,172 
             
Total liabilities  117,830,768   1,280,372,745   1,208,564,798 
             
EQUITY (Note 14):            
Certificates of Contribution “A”  8,922,897   96,957,993   96,957,993 
Mexican Government increase in equity of Subsidiary Entities  13,294,217   144,457,629   133,296,805 
Surplus in the restatement of equity  16,430,011   178,531,795   159,893,393 
Effect on equity from labor obligations (Note 12)  (4,763,352)  (51,759,539)  (48,326,747)
Derivative financial instruments (Note 11)  (101,749)  (1,105,629)  (1,762,328)
             
   33,782,024   367,082,249   340,059,116 
             
Accumulated losses:            
From prior years  (27,504,262)  (298,866,819)  (345,556,695)
Net income (loss) for the year  (1,684,817)  (18,307,569)  46,953,205 
             
   (29,189,079)  (317,174,388)  (298,603,490)
             
Total equity  4,592,945   49,907,861   41,455,626 
             
Commitments and contingencies (Notes 15 and 16)  —   —   — 
             
Total liabilities and equity U.S. $122,423,713  Ps.1,330,280,606  Ps.1,250,020,424 
             
 
The accompanying notes are an integral part of these consolidated financial statements.


F-4

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of Mexican pesos as of December 31, 2007, purchasing power and in thousands of U.S. dollars)
                 
  2007  2007  2006  2005 
  (Unaudited)          
 
Net sales:                
Domestic U.S. $54,485,281  Ps.592,047,961  Ps.567,289,873  Ps.545,339,433 
                 
Export  49,964,740   542,926,858   535,144,048   457,266,832 
Services income  97,606   1,060,609   1,075,947   1,224,808 
                 
Total revenues  104,547,627   1,136,035,428   1,103,509,868   1,003,831,073 
Cost of sales  42,394,374   460,665,742   418,258,210   389,943,899 
                 
Gross income  62,153,253   675,369,686   685,251,658   613,887,174 
                 
General expenses:                
Transportation and distribution expenses  2,282,172   24,798,539   24,921,656   23,655,910 
Administrative expenses  5,534,636   60,140,465   56,052,773   50,527,884 
                 
Total general expenses  7,816,808   84,939,004   80,974,429   74,183,794 
                 
Operating income  54,336,446   590,430,682   604,277,229   539,703,380 
                 
Other revenues (principally IEPS benefit) — Net (Note 18h.)  7,640,114   83,019,010   61,213,533   2,896,394 
                 
Comprehensive financing result:                
Interest — Net  (2,896,873)  (31,478,006)  (36,195,263)  (41,500,949)
Exchange (loss) gain — Net  (132,048)  (1,434,868)  (2,470,584)  19,031,585 
Gain on monetary position  1,184,064   12,866,287   14,819,222   17,633,273 
                 
   (1,844,857)  (20,046,587)  (23,846,625)  (4,836,091)
                 
Profit sharing in non-consolidated subsidiaries and affiliates (Note 8)  510,303   5,545,054   10,073,577   8,658,665 
                 
Income before taxes and duties  60,642,006   658,948,159   651,717,714   546,422,348 
                 
Hydrocarbon extraction duties and others (Note 18)  61,474,951   667,999,120   587,020,786   538,063,741 
Excess gain duties (Note 18d.)  —   —   8,223,820   60,869,738 
Hydrocarbon income tax (Note 18i.)  554,965   6,030,367   4,914,859   2,135,245 
Income tax (Note 18k.)  296,906   3,226,241   4,605,044   3,981,678 
Special tax on production and services (IEPS Tax) (Note 18h.)  —   —   —   21,824,060 
                 
   62,326,822   677,255,728   604,764,509   626,874,462 
                 
Cumulative effect of adoption of new accounting standards (Notes 3l. and 3m.)  —   —   —   (1,905,868)
                 
Net (loss) income for the year (U.S.$1,684,816) (Ps.18,307,569) Ps.46,953,205  (Ps.82,357,982)
                 
The accompanying notes are an integral part of these consolidated financial statements.


F-5

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS
ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
(In thousands of Mexican pesos as of December 31, 2007, purchasing power and in thousands of U.S. dollars)
 
                                 
     Mexican
                   
     Government
                   
     increase
  Surplus
     Effect
  Retained earnings
    
     in equity of
  in the
  Derivative
  on equity
  (Accumulated losses)    
  Certificates of
  Subsidiary
  restatement
  financial
  from labor
  From prior
  For the
    
  Contribution ‘‘A”  Entities  of equity  instruments  obligations  years  year  Total 
 
Balances as of December 31, 2004 Ps.96,957,993  Ps.36,411,340  Ps.147,644,457  Ps.—  (Ps.7,782,166)  (Ps. 207,589,715) (Ps.28,443,617) Ps.37,198,292 
Transfer to prior years’ accumulated losses  —   —   —       —   (28,443,617)  28,443,617   — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on June 10, 2006 (Note 14)  —   —   —   —   —   (11,482,869)  —   (11,482,869)
Increase in equity of the Subsidiary Entities made by the Mexican Government (Note 14)      48,157,553                       48,157,553 
Comprehensive loss for the year (Note 13)          8,184,288   (7,036,437)  (21,672,659)  —   (82,357,982)  (102,882,790)
                                 
Balances as of December 31, 2005  96,957,993   84,568,893   155,828,745   (7,036,437)  (29,454,825)  (247,516,201)  (82,357,982)  (29,009,814)
Transfer to prior years’ accumulated losses  —   —   —   —   —   (82,357,982)  82,357,982   — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on May 18th, 2005 (Note 14)
  —   —   —   —   —   (16,392,606)  —   (16,392,606)
Increase in equity of the Subsidiary Entities made by the Mexican Government      48,727,912                       48,727,912 
Comprehensive income for the year (Note 13)          4,064,648   5,274,109   (18,871,922)  710,094   46,953,205   38,130,134 
                                 
Balances as of December 31, 2006  96,957,993   133,296,805   159,893,393   (1,762,328)  (48,326,747)  (345,556,695)  46,953,205   41,455,626 
Transfer to prior years’ accumulated losses  —   —   —   —   —   46,953,205   (46,953,205)  — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on August 29, 2007 (Note 14)  —   —   —   —   —   (263,329)  —   (263,329} 
Increase in equity of the Subsidiary Entities made by the Mexican Government (Note 14)  —   11,160,824   —   —   —   —   —   11,160,824 
Comprehensive loss for the year (Note 13)  —   —   18,638,402   656,699   (3,432,792)  —   (18,307,569)  (2,445,260)
                                 
Balances as of December 31, 2007
 Ps.96,957,993  Ps.144,457,629  Ps.178,531,795  (Ps.1,105,629) (Ps.51,759,539)  (Ps. 298,866,819) (Ps18,307,569) Ps.49,907,861 
                                 
Unaudited
 U.S.$8,922,897  U.S.$13,294,217  U.S.$16,430,011  (U.S.$101,749) U.S.$4,763,352  (U.S.$  27,504,262) (U.S.$1,684,817) U.S.$4,592,945 
                                 
The accompanying notes are an integral part of these consolidated financial statements.


F-6

(Notes 1, 2 and 14)PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In thousands of Mexican pesos as of December 31, 20062007, purchasing power and in thousands of U.S. dollars)
 
                                 
        Mexican
                
        Government
                
        increase
        Retained earnings
    
  Certificates of
  Surplus in
  in equity of
  Derivative
  Effect on equity
  (Accumulated losses)    
  Contribution
  restatement
  Subsidiary
  financial
  from labor
  From prior
       
  ‘‘A”  of equity  Entities  instruments  obligations  years  For the year  Total 
 
Balances at December 31, 2003 Ps.93,445,382  Ps.147,324,248  Ps.—  Ps.—  Ps.—  (Ps.142,930,294) (Ps.45,969,705) Ps.51,869,631 
Transfer to prior years’ accumulated losses                      (45,969,705)  45,969,705   — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on May 12, 2004                      (11,169,118)      (11,169,118)
Increase in equity of the Subsidiary Entities made by the Mexican Government          35,092,223                   35,092,223 
Comprehensive (loss) for the year (Note 15)      (5,028,681)          (7,500,232)      (27,413,156)  (39,942,069)
                                 
Balances at December 31, 2004  93,445,382   142,295,567   35,092,223   —   (7,500,232)  (200,069,117)  (27,413,156)  35,850,667 
Transfer to prior years’ accumulated losses                      (27,413,156)  27,413,156   — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on May 18, 2005                      (11,066,866)      (11,066,866)
Increase in equity of the Subsidiary Entities made by the Mexican Government          46,412,892                   46,412,892 
Comprehensive income (loss) for the year (Note 15)      7,887,786       (6,781,520)  (20,887,498)      (79,374,302)  (99,155,534)
                                 
Balances at December 31, 2005  93,445,382   150,183,353   81,505,115   (6,781,520)  (28,387,730)  (238,549,139)  (79,374,302)  (27,958,841)
Transfer to prior years’ accumulated losses                      (79,374,302)  79,374,302   — 
Minimum guaranteed dividends paid to the Mexican Government approved by the Board of Directors on May 18, 2006                      (15,798,732)      (15,798,732)
Increase in equity of the Subsidiary Entities made by the Mexican Government          46,962,589                   46,962,589 
Comprehensive income (loss) for the year (Note 15)      3,917,392       5,083,038   (18,188,227)  684,369   45,252,176   36,748,748 
                                 
Balances at December 31, 2006
 Ps.93,445,382  Ps.154,100,745  Ps.128,467,704  (Ps.1,698,482) (Ps.46,575,957) (Ps.333,037,804) Ps.45,252,176  Ps.39,953,764 
                                 
Unaudited
 U.S.$8,587,941  U.S.$14,162,370  U.S.$11,806,608  U.S. $156,096  U.S.$4,280,485  U.S.$30,607,279  U.S.$4,158,825  U.S.$3,671,884 
                                 
                 
  2007  2007  2006  2005 
  (Unaudited)          
 
Operating activities:
                
Net (loss) income for the year (U.S.$1,684,817) (Ps.18,307,569) Ps.46,953,205  (Ps.82,357,982)
Charges to operations not requiring the use of funds:                
Depreciation and amortization  6,680,506   72,591,718   65,672,189   56,995,357 
Reserve for labor obligations cost  7,850,662   85,306,866   74,493,349   63,787,616 
Profit sharing in non-consolidated subsidiaries and affiliates  510,302   5,545,054   10,073,577   8,658,665 
Deferred taxes  177,417   1,927,847   904,162   2,135,247 
Impairment on fixed assets  —   —   703,247   1,432,691 
                 
   13,534,070   147,063,916   198,799,729   50,651,594 
Funds generated (used) in operation activities:                
Accounts, notes receivable and other  (1,320,373)  (14,347,438)  (37,177,837)  9,930,406 
Inventories  (1,155,331)  (12,554,059)  (2,678,038)  (6,527,714)
Intangible asset derived from the actuarial computation of labor obligations  —   —   23,316,114   (14,672,035)
Other assets  126,403   1,373,515   (576,898)  — 
Suppliers  (180,803)  (1,964,639)  3,676,529   6,291,447 
Accounts payable and accrued expenses  365,779   3,974,633   3,382,644   (14,317,686)
Taxes payable  9,348,872   101,586,711   (26,857,283)  24,181,434 
Reserve for sundry creditors and others  (4,217)  (45,820)  3,744,807   (1,203,805)
Derivative financial instruments  (747,287)  (8,120,165)  (2,541,921)  16,798,338 
                 
Funds provided by operating activities  19,967,113   216,966,654   163,087,846   71,131,979 
                 
Financing activities:
                
Minimum guaranteed dividends paid to the Mexican Government  (24,234)  (263,329)  (16,392,606)  (11,482,869)
(Decrease) Increase in Debt — Net  (8,267,556)  (89,836,920)  10,202,873   65,892,138 
Increase in equity of Subsidiary Entities  1,027,114   11,160,824   48,727,912   48,157,553 
Retirement, seniority premiums and other post-retirement benefits payments  (2,550,779)  (27,717,270)  (17,042,349)  — 
Sale of future accounts receivable  —   —   —   (40,871,801)
                 
Funds (used in) provided by financing activities  (9,815,455)  (106,656,695)  25,495,830   61,695,021 
                 
Investing activities:
                
Investment in shares  (538,133)  (5,847,462)  (14,153,450)  (7,485,420)
Increase in fixed assets — Net  (11,893,920)  (129,241,714)  (109,103,789)  (89,577,399)
                 
Funds used in investing activities  (12,432,053)  (135,089,176)  (123,257,239)  (97,062,819)
                 
Net (decrease) increase in cash and cash equivalents  (2,280,395)  (24,779,217)  65,326,437   35,764,181 
Cash and cash equivalents at beginning of the year  18,017,012   195,776,457   130,450,020   94,685,839 
                 
Cash and cash equivalents at end of the year U.S.$15,736,617  Ps.170,997,240  Ps.195,776,457  Ps.130,450,020 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


F-5F-7

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Notes 1 and 2)
(In thousands of Mexican pesos as of December 31, 2006 purchasing power and in thousands of U.S. dollars)
                 
  2006  2006  2005  2004 
  (Unaudited)          
 
Operating activities:
                
Net income (loss) for the year U.S.$4,158,825  Ps.45,252,176  (Ps.79,374,302) (Ps.27,413,156)
Charges to operations not requiring the use of funds:                
Depreciation and amortization  5,816,837   63,293,005   54,930,519   45,051,417 
Reserve for retirement payments, pensions and indemnities  6,598,162   71,794,590   61,476,707   57,042,564 
Deferred taxes  80,085   871,405   2,057,891   — 
Impairment  62,289   677,770   1,380,787   3,953,224 
                 
   16,716,198   181,888,946   40,471,602   78,634,049 
Variances in:                
Accounts, notes receivable and other  (876,349)  (9,535,554)  9,570,646   (52,816,711)
Inventories  (237,204)  (2,581,018)  (6,291,227)  (7,375,692)
Intangible asset derived from the actuarial computation of labor obligations and other assets  504,593   5,490,480   5,555,094   35,376,579 
Suppliers  325,644   3,543,335   6,063,519   (11,783,951)
Accounts payable and accrued expenses  299,614   3,260,099   (13,798,982)  16,300,683 
Taxes payable  (2,378,852)  (25,884,292)  23,305,385   6,011,174 
Reserve for dismantlement and abandonment activities, sundry creditors and others  331,692   3,609,139   (1,160,193)  5,623,264 
Effect on equity from labor obligations  (1,671,558)  (18,188,227)  (20,887,498)  (7,500,232)
Reserve for retirement payments, pensions and indemnities and others  (745,076)  (8,107,171)  1,191,910   (52,032,817)
Derivative financial instruments  (225,148)  (2,449,832)  16,189,765   — 
                 
Funds provided by operating activities  12,043,554   131,045,905   60,210,021   10,436,346 
                 
Financing activities:
                
Minimum guaranteed dividends paid to the Mexican Government  (1,451,956)  (15,798,732)  (11,066,866)  (11,169,118)
Debt—Net  903,707   9,833,241   63,504,986   63,768,535 
Increase in equity of Subsidiary Entities  4,316,018   46,962,589   46,412,892   35,092,223 
Sale of future accounts receivable  —   —   (39,391,090)  (6,366,787)
                 
Funds provided by financing activities  3,767,769   40,997,098   59,459,922   81,324,853 
                 
Investing activities:
                
Increase in fixed assets—Net  (9,663,740)  (105,151,157)  (86,332,173)  (83,450,801)
(Increase) decrease in investment in shares  (361,370)  (3,932,067)  1,130,740   — 
                 
Funds used in investing activities  (10,025,110)  (109,083,224)  (85,201,433)  (83,450,801)
                 
Net increase in cash and cash equivalents  5,786,213   62,959,779   34,468,510   8,310,398 
Cash and cash equivalents at beginning of the year  11,554,457   125,724,053   91,255,543   82,945,145 
                 
Cash and cash equivalents at end of the year U.S.$17,340,670  Ps.188,683,832  Ps.125,724,053  Ps.91,255,543 
                 
The accompanying notes are an integral part of these consolidated financial statements.


F-6

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
These financial statements have been translated from the Spanish language for the convenience of the reader.
NOTE 1 —APPROVAL:
On April 11, 2008, the attached consolidated financial statements and the notes thereto were authorized by the following officers: Public Accountant Víctor M. Cámara Peón, Deputy Director of Financial Information Systems and Public Accountant Enrique Díaz Escalante, Associate Managing Director of Accounting.
These consolidated financial statements and the notes thereto will be submitted for approval to the Board of Directors of Petróleos Mexicanos in a meeting scheduled for April 29, 2008, where it is expected that the Board will approve such statements pursuant to the terms Article 104 Fraction III, paragraph a, of the Mexican Securities Market Law, of Article 33 Fraction I, paragraph a section 3 and of Article 78 of the general provisions applicable to Mexican securities issuers and other participants of the securities market.
NOTE 1—2 — STRUCTURE AND BUSINESS OPERATIONS OF PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES:
 
Following the nationalization of the foreign-owned oil companies then operating in the United Mexican States (“Mexico”), Petróleos Mexicanos was created by aon June 7, 1938, and began operations on July 20, 1938. A decree of the Mexican Congress dated June 7, 1938 and effective July 20, 1938.stated the foreign-owned oil companies in operation at that time in the United States of Mexico (Mexico) were thereby nationalized. Petróleos Mexicanos and its four Subsidiary Entities (as defined below) are decentralized public entities of the Federal Government of Mexico (the “Mexican Government”) and together comprise the Mexican state oil and gas company.
 
The operations of Petróleos Mexicanos and the Subsidiary Entities are regulated by theConstitución Politica de los Estados Unidos Mexicanos (Political Constitution of the United Mexican States, or the “Mexican Constitution”), theLey Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(RegulationRegulatory Law to Article 27 of the Political Constitution of the United Mexican States concerning Petroleum affairs, or the “Regulatory Law”), effective on November 30, 1958, as amended effective on May 12, 1995, November 14, 1996 and January 13, 2006, and theLey Orgánica de Petróleos Mexicanos y Organismos Subsidiarios(the Organic Law of Petróleos Mexicanos and Subsidiary Entities, or the “Organic Law”), effective on July 17, 1992, as amended effective on January 1, 1994, January 16, 2002 and January 13, 2006. Under the Organic Law and related regulations, Petróleos Mexicanos is entrusted with the central planning activities and the strategic management of Mexico’s petroleum industry. For purposes of these financial statements, capitalized words carry the meanings attributed to them herein or the meanings as defined in the Mexican Constitution or the Organic Law.
 
The Organic Law establishes a structure that consists of decentralized legal entities of a technical, industrial and commercial nature, with their own corporate identity and equity and with the legal authority to own property and conduct business in their own names. The Subsidiary Entities are controlled by and have characteristics of subsidiaries of Petróleos Mexicanos. The Subsidiary Entities are:
 
Pemex-Exploración y Producción (Pemex-Exploration(“Pemex-Exploration and Production)Production”);
Pemex-Refinación (Pemex-Refining)(“Pemex-Refining”);
Pemex-Gas y Petroquímica Básica (Pemex-Gas(“Pemex-Gas and Basic Petrochemicals)Petrochemicals”); and
Pemex-Petroquímica (Pemex-Petrochemicals)(“Pemex-Petrochemicals”).
 
The strategic activities entrusted to Petróleos Mexicanos and the Subsidiary Entities by the Organic Law, other than those entrusted to Pemex-Petrochemicals, can be performed only by Petróleos Mexicanos and


F-8

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
the Subsidiary Entities and cannot be delegated or subcontracted. Pemex-Petrochemicals is an exception and may delegateand/or subcontract certain work.activities.
 
The principal objectives of the Subsidiary Entities are as follows:
 
 I. Pemex-Exploration and Production explores for and produces crude oil and natural gas; additionally, this entity transports, stores and markets such products;
 II. Pemex-Refining refines petroleum products and derivatives thereof that may be used as basic industrial raw materials; additionally, this entity stores, transports, distributes and markets such products and derivatives;
 
 III. Pemex-Gas and Basic Petrochemicals processes natural gas, natural gas liquids and derivatives thereof that may be used as basic industrial raw materials, and stores,


F-7

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

transports, distributes and markets such products; additionally, this entity stores, transports, distributes and markets Basic Petrochemicals; and

 
 IV. Pemex-Petrochemicals engages in industrial petrochemical processing and stores, distributes and markets Secondary Petrochemicals.
 
At its formation, Petróleos Mexicanos assigned to the Subsidiary Entities all the assets and liabilities needed to carry out these activities; these assets and liabilities were incorporated into the Subsidiary Entities’ initial capital contribution. Additionally, Petróleos Mexicanos assigned to the Subsidiary Entities all the personnel needed for their operations, and the Subsidiary Entities assumed all the related labor liabilities. There waswere no changechanges in the carrying value of assets and liabilities upon their contribution by Petróleos Mexicanos to the Subsidiary Entities.
 
The principal distinction between the Subsidiary Entities and the Subsidiary Companies (as defined below) is that the Subsidiary Entities are decentralized public entities created by Article 3 of the Organic Law, whereas the Subsidiary Companies are companies that have been formed in accordance with the general corporations law of each of the respective jurisdictions in which they are incorporated, and are managed as any other private corporations subject to the general corporations law in their respective jurisdictions.
 
As used herein, “Subsidiary Companies” include those companies listed in Note 2c. below, which are defined as (a) those companies which are not Subsidiary Entities but in which Petróleos Mexicanos has more than a 50% ownership investment and effective control, (b) the Pemex Project Funding Master Trust (the “Master Trust”), a Delaware statutory trust, (c) Fideicomiso Irrevocable de Administración No. F/163 (“Fideicomiso F/163”), a Mexican statutory trust incorporated in 2003 in Mexico (both the Master Trust and Fideicomiso F/163 are controlled by Petróleos Mexicanos) (d) RepCon Lux, S.A., a Luxembourg finance vehicle whose debt inis guaranteed by Petróleos Mexicanos (“RepCon Lux”) and (e) effective July 1, 2005, Pemex Finance, Ltd. (“ Pemex Finance”).
Petróleos Mexicanos also guarantees the debt of the Master Trust. This guarantee, when taken together with the Indenture pursuant to which the Master Trust issues debt securities, the Trust Agreement constituting the Master Trust, and Petróleos Mexicanos’ obligations to pay all fees and expenses of the Master Trust, constitutes a full and unconditional guarantee by Petróleos Mexicanos of the Master Trust’s obligations under its debt securities.
 
“Non-consolidated subsidiary companies,” as used herein, means (a) those non-material subsidiary companies which are not Subsidiary Entities or Subsidiary Companies, as defined above in this note that areand (b) those companies in which PEMEX has 50% or less does ownership investment and not consolidated and are accounted for under the cost method or equity method (see Note 2).have effective control.
 
Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies are referred to as “PEMEX.”
 
On September 14, 2004, the authorities authorized the procedures to merge Pemex-Petrochemicals and its subsidiaries. At anthe extraordinary Board of Directors’ meeting held on February 9, 2006, the merger was formalized with Pemex-Petrochemicals as the surviving company, which acquired the rights and


F-9

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
obligations of its merged subsidiaries on April 30, 2006, while the subsidiary companies became petrochemical complexes operating as part of the surviving entity. The foregoing had no effect on the preparation of these consolidated financial statements.


F-8

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

NOTE 2—3 —SIGNIFICANT ACCOUNTING POLICIES:

 
The preparation of the financial statements requires the use of estimates and assumptions made by PEMEX’s management that affect the recorded amounts of assets and liabilities and the disclosures of contingent assets and liabilities as well as the recorded amounts of income and expenses during the year. The important items subject to such estimates and assumptions include the book value of properties, plant and equipment; the valuation of the allowance for doubtful accounts, inventories and work in progress and the valuation of financial instruments and of the assets and liabilities related to labor obligations. Actual results could differ from those estimates.
References in these financial statements and related notes to “pesos” or “Ps.” refers to Mexican pesos and “dollars” or “U.S.$” refers to dollars of the United States of America.
For accounting purposes the functional currency of PEMEX is the Mexican peso.
Below is a summary of the principal accounting policies followed by PEMEX in the preparation of these consolidated financial statements, including the concepts, methods and criteria pertaining to the effects of inflation on the financial information, are summarized below:
 
a.Accounting basis for the preparation of financial information
The accompanying consolidated financial statements for the years ended December 31, 2002, 2003, 2004 and 2005 were prepared in accordance with Mexican Generally Accepted Accounting Principles (“Mexican GAAP”). Our consolidated financial statements for the year ended December 31, 2006 were prepared in accordance withNormas de Información Financiera(Mexican Financial Reporting Standards or “Mexican FRS” or “NIFs”), which replaced Mexican GAAP. NIFs are promulgated by theConsejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera, A.C.(Mexican Financial Reporting Standards Board or “CINIF”). In this document, unless otherwise stated, we use the term Mexican FRS to mean (1) Mexican GAAP for periods ending prior to January 1, 2006 and (2) NIF for periods ending on or after January 1, 2006.
Effective June 1, 2004, the CINIF assumed responsibility for setting the accounting and reporting standards in México. As part of this responsibility, during 2004 and 2005, the CINIF issued several NIFs, which became effective on January 1, 2006.
The main objective of Mexican FRS is to achieve the maximum possible harmonization and convergence of Mexican accounting and reporting standards and regulatory practices withNormas Internacionales de Infomación Financiera (International Financial Reporting Standards or “IFRS”).
The Mexican FRS hierarchy, in effect as of January 1, 2006, is as follows:
• The NIFs and the CINIF’s interpretation of the NIFs;
• the bulletins previously issued by theComisión de Principios de Contabilidad(Accounting Principles Commission or “CPC”) of theInstituto Mexicano de Contadores Publicos(Mexican Institute of Public Accountants, or “MIPA”), to the extent that they have not been modified, superseded or replaced by the new NIFs; and
• IFRS when applicable, which supplement the NIFs.
The circulars issued by the CPC will continue to have the status of recommendations and will be part of the NIFs until such time as they are repealed or superseded by new NIFs.
On June 27, 2007, the Accounting Management of Petróleos Mexicanos approved these consolidated financial statements and their notes for release.
b.Effects of inflation on the financial information
 
PEMEX recognizes the effects of inflation in accordance with Governmental Standard (“NG”) 06-BIS “A” Section C, which establishes the obligation for PEMEX to adoptBulletin B-10 ofNormas de Información Financiera(Mexican FRS, “RecognitionFinancial Reporting Standards or “Mexican FRS” or “NIF’s”), “Effects of the Effects of Inflation on Financial Information”Inflation”(“Bulletin B-10”). All periods presented herein are presented in accordance withBulletin B-10.


F-9

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures statedThe amounts shown in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The recognition ofthe accompanying consolidated financial statements include the effects of inflation in accordance withBulletin B-10 consists of, among other things, the restatement of non-monetary assets using inflation factors based on the Mexican National Consumer Price Index (“NCPI”) (including the restatement of fixed assets with consideration of value in use), the recognition in the consolidated statement of operations of comprehensive financing cost (including the determination of gains or losses in monetary position), the restatement of equity accounts and the presentation of the financial statements for all periods in constant pesos with purchasing power at the latest balance sheet date. Consequently, the amounts shown in the accompanying financial statementsinformation and these notes are expressed in thousands of constant Mexican pesos as of December 31, 2006. The December 31, 2006 restatement factors applied to the consolidated financial statements at December 31, 2005 and 2004 were 4.05% and 7.38%, respectively, which correspond to inflation from January 1, 2006 and 2005 through December 31, 2006, respectively,2007, based on the NCPI.Mexican National Consumer Price Index (“NCPI”). The indexes used for the recognition of inflation were as follows:
         
     Inflation
 
December 31,
 NCPI  for the Year 
 
2007  125.5640   3.76%
2006  121.0150   4.05%
2005  116.3010   3.33%
 
c.b.  Consolidation
 
The consolidated financial statements include the accounts of Petróleos Mexicanos, the Subsidiary Entities and the Subsidiary Companies. All significant intercompany balances and transactions have been eliminated in the consolidation.
 
The consolidated Subsidiary Companies are as follows: P.M.I. Comercio Internacional, S.A. de C.V. (“PMI”PMI CIM”); P.M.I. Trading Ltd. (“PMI Trading”); P.M.I. Holdings North America, Inc. (“PMI HNA”); P.M.I. Holdings Petróleos España (“HPE”); P.M.I. Holdings B.V. (“PMI HBV”); P.M.I. Norteamérica, S.A. de C.V. (“PMI NASA”); Kot Insurance Company AG;AG (“KOT”); Integrated Trade Systems, Inc. (“ITS”); P.M.I. Marine Ltd;Ltd (“PMI Mar”); P.M.I. Services, B.V. (“PMI-SHO”); Pemex Internacional España, S.A. (“PMI-


F-10

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SES”); Pemex Services Europe Ltd. (“PMI-SUK”); P.M.I. Services North America, Inc. (“PMI-SUS”); Mex Gas International, Ltd. (“MGAS”); the Master Trust; Fideicomiso F/163; RepCon Lux and effective July 1, 2005, Pemex Finance.
Effective July 1, 2005, Petróleos Mexicanos entered into an option agreement with BNP Paribas Private Bank and Trust Cayman Limited to acquire 100% of the shares of Pemex Finance. As a result, the financial results of Pemex Finance, have been consolidated into these financial statements of Petróleos Mexicanos since that date. Consequently, sales of accounts receivable by Pemex Finance have been reclassified as documented debt (see Note 9). The consolidation of Pemex Finance has not had a material effect on the consolidated financial statements of PEMEX as of December 31, 2006. The debt issued by Pemex Finance is included in PEMEX’s debt as of December 31, 2005 and 2006, while at December 31, 2004, the balances between PEMEX and Pemex Finance were presented with the line item “Sale of future accounts receivable.”Ltd.
 
The financial statements of foreign Subsidiary Companies classified as integrated foreign operations, as defined by Mexican FRS, are translated into Mexican pesos on the following basis: a) monetary items, at the rate of exchange in effect at the closeend of the period; b) non-monetary items, at the historical exchange rate; c) income and expense items, at the average exchange rate for each month in the period;year; and d) the effect of changes in exchange rates is recorded in comprehensive financing cost.equity. The financial statements in pesos are restated at the close of the period in accordance with the provisions ofBulletin B-10.
 
The financial statements of other foreign Subsidiary Companies are translated using the exchange rate effective at year end for allmonetary assets and liabilities, the historical exchange rate for non-monetary items in the balance sheets as of December 31, 2006 and 2005 and the average exchange rate for income and expense items for the years ended December 31, 2006, 2005 and


F-10

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousandsstatements of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

2004.operations items. The effects of changes in the applicable exchange rates are included directly in stockholders’ equity as “Surplus in restatement of equity.”
 
CertainInvestment in non-consolidated subsidiary companies and affiliates are accounted for in accordance with paragraph (h) of this note. Other non-material subsidiary companies and affiliates are valued at cost and, based upon their relative importance to the total assets and income of PEMEX, were not consolidated and are accounted for under the cost method or the equity method.
 
d.c.  Long-term productive infrastructure projects (PIDIREGAS)
 
The investment in long-term productive infrastructure projects (“PIDIREGAS”) and related liabilities are initially recorded in accordance with NG-09-B, applicable toEntidades Paraestatales de la Administración Pública Federal(“State-owned Entities of the Federal Public Administration)Administration”), which mandatesrequires recording only those liabilities maturing in less than two years.
 
For the purposes of these consolidated financial statements and in accordance with Mexican FRS, all accounts related to PIDIREGAS were incorporated into the consolidated financial statements for the years ended December 31, 2007, 2006 2005 and 2004.2005. All effects of NG-09-B are therefore excluded.eliminated.
 
The main objective of the Master Trust and of Fideicomiso F/163 is to administer financial resources related to PIDIREGAS that have been designated by PEMEX for that purpose.
 
e.d.  Exploration and drilling costs and specific oil-field exploration and depletion reserve
 
Effective January 1, 2004, the Board of Directors of PEMEX approved a change in the accounting policy for the recognition of well exploration and drilling expenses to the successful efforts method of accounting. The change in accounting policy for recording well exploration and drilling expenses had no effect on the consolidated financial statements, since at December 31, 2003, the specific oil-field exploration and depletion reserve had been entirely utilized.
Underuses the successful efforts method of accounting for oil and gas exploration costs, explorationcosts. Exploration costs are charged to income when incurred, except that exploratory drilling costs are included in fixed assets, pending determination of proven reserves. Exploration wells more than 12 months old are expensed unless (a) (i) they are in an area requiring major capital expenditure before production can begin, (ii) commercially productive quantities of reserves have been found, and (iii) they are subject to further exploration or appraisal activity in that either drilling of additional exploratory wells is under way or firmly planned for the near future, or (b) proved reserves are recorded within 12 months following the completion of exploratory drilling. Expenses pertaining to the drilling of development wells are capitalized, whether or not successful.
 
Management makes annualsemi-annual assessments of the amounts included within fixed assets to determine whether capitalization is initially appropriate and can continue. Exploration wells capitalized beyond 12 months are subject to additional scrutiny as to whether the facts and circumstances have changed and therefore whether the conditions described in clauses (a) and (b) of the preceding paragraph no longer apply.
f.Marketable securities
Marketable securities include investments in debt and equity securities and have been classified on the basis of their intended use at the date of acquisition as debt instruments to be held to


F-11

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

maturity, financial instruments for trading and financial instruments available for sale. These financial instruments are initially recorded at acquisition cost, and are subsequently valued as follows (see Note 10):
i. Debt instruments to be held to maturity are valued at acquisition cost and are subsequently reduced by the amortization of any premiums or increased by the amortization of any discounts over the term of the debt instrument, in proportion to the outstanding balance. Any loss in value is recognized in the statement of operations at the end of each period.
ii. Financial instruments held for trading and available for sale are valued at fair value, which is similar to market value. The fair value is the value at which a financial asset can be exchanged or a financial liability can be liquidated between interested and willing parties in an arm’s-length transaction. The effect of the valuation of financial instruments is recorded in income for the year.
 
e.  Reserve for abandonment cost of wells
The reserve for abandonment cost of wells (plugging and dismantling), as of December 31, 2007 and 2006 was Ps.17,148,400 and Ps.16,027,307, respectively, and is included as operative reserve in long-term liabilities.
The carrying value of these assets is subject to an annual impairment assessment. (see Note 9).
f.  Cash and cash equivalents
Cash and cash equivalents consist of checking accounts, foreign currency and other highly liquid instruments. As of the date of these consolidated financial statements, earned interest income and foreign exchange gains or losses are included in the results of operations, under comprehensive financing result.
g.Inventory valuationand cost of sales
 
Inventories are valued as follows:
 
 I. Crude oil and its derivatives thereof for export: at net realizable value, determined on the basis of average export prices at December 31, 2006 and 2005, less a provision for distribution expenses and shrinkage.year end.
 
 II. Crude oil, natural gas and itstheir derivatives thereof for domestic sale: at cost, as calculated based on net realizable value, in accordance with international market prices.prices at year end.
 
 III. The refined products inventories: at their acquisition or production cost calculated in accordance with crude oil costs and auxiliary materials.
IV. Gas and petrochemicals: at direct standard cost of such products without exceeding their market value.
V. Materials spare parts and supplies:fittings: at the last purchase price.price without exceeding their market value.
 IV.VI. Materials in transit: at acquisition cost.
 
PEMEX records the necessary allowances for inventory impairment arising from obsolescence, slow moving inventory and other factors that may indicate that the realization value of inventory may be lower than the recorded value.
Cost of sales is determined by adding to inventories at the beginning of the year the operating cost of oil fields, refineries and plants (including internally-consumed products), the cost of refined and other products, and deducting the value of inventories at the end of the year. The resulting amount is adjusted for inflation based on factors derived from the NCPI. Cost of sales also includes the depreciation and amortization expense associated with assets used in operations as well as the expense associated with the reserve for abandonment cost of wells.
h.Investment in shares of non-consolidated subsidiary companies affiliates companies
Certain non-material non-consolidated subsidiary companies are accounted for under the equity method (see Note 2).
Investments in shares in which PEMEX holds 50% or less of the issuer’s capital stock are recorded at cost and adjusted for inflation using factors derived from the NCPI.


F-12

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
i.  Properties, plant and equipment
 
PEMEX’s assetsProperties, plant and equipment are initially recorded at acquisition cost and adjusted using factors derived from the NCPI. The restated amounts must not exceed the asset market value or construction cost. Interest pertaining to fixedreplacement cost (see Note 9).
Beginning January 1, 2007, assets inacquired during the construction or installation phase is capitalizedof a project include the comprehensive financing result associated with assets as part of the asset cost. Asvalue of December 31,assets. Until 2006, interest and 2005,foreign exchange losses or gains associated with these assets are expressed at their inflation restated value, determined by applying factors computed from the NCPI.were also included. (see paragraph (y) of this Note).
 
Depreciation is calculated using the straight-line method of accounting based on the expected useful lives of the assets, based on calculations from independent appraisals. Depreciation rates are applied to


F-12

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

the inflation restated value of the assets. Asset depreciation begins the month after the asset is placed into service. The depreciation rates used by PEMEX are as follows:
 
            
 % Years  % Years
Buildings  3   33  3 33
Plants and drilling equipment  3 – 5   20 – 33  3-5 20-33
Furniture and fixtures  10   10  10-25 4-10
Offshore platforms  4   25  4 25
Transportation equipment  4 – 20   5 – 25  4-20 5-25
Pipelines  4   25  4 25
Software/computers  10 – 25   4 – 10  10-25 4-10
 
Related gains or losses from the sale or disposal of fixed assets are recognized in income for the period in which they are incurred. PEMEX amortizes its well assets using the units-of-production (“UOP”) method. The amount to be recognized as amortization expense is calculated based upon the number of equivalent barrels of crude oil extracted from each specific field as compared to the field’s total proved developed reserves.
 
TheReglamento de Trabajos Petroleros (“(“Petroleum Works Law”) provides that once a well turns out to be dry, is invaded with salt water, is abandoned due to mechanical failure or when the well’s production has been depleted such that abandonment is necessary due to economic unfeasibility of production, it must be plugged to ensure the maintenance of sanitary and safe conditions and to prevent the seepage of hydrocarbons to the surface. All activities required for plugging a well are undertaken for the purpose of properly and definitively isolating the cross formations in the perforation that contains oil, gas or water, in order to ensure that hydrocarbons do not seep to the surface. This law also requires that PEMEX obtainsobtain approval from the Ministry of Energy for the dismantlement of hydrocarbon installations, either for the purpose of replacing them with new installations or for permanent retirement.
 
The costs related to wells subject to abandonment and dismantlement are recorded at their present values as liabilities on a discounted basis when incurred, which is typically at the time the wells first start drilling. The amounts recorded for these obligations are initially recorded by capitalizing the respective costs. Over time the liabilities will be accreted by the change in their present value during each period and the initial capitalized costs will be depreciated over the useful lives of the related assets based on the UOP method. In the case of the non-producing wells subject to abandonment and dismantlement, the full dismantlement and abandonment cost has beenis recognized at the end of each period.
 
The carrying value of these long-lived assets is subject to an annual impairment assessment (see Notes 2i.3j. and 7)9).
i.Impairment of the value of long-lived assets
Effective January 1, 2004, PEMEX adoptedBulletin C-15, “Impairment of the Value of Long-Lived Assets and their Disposal,” issued by the MIPA(“Bulletin C-15”). PEMEX recognized impairment in the value of long-lived assets as of January 1, 2004 and for the year ended December 31, 2004 with an initial effect of adoption and a subsequent impairment charge for the year of Ps. 2,176,369 and Ps. 1,776,861, respectively. The initial adoption effect was presented in the consolidated statement of operations of 2004 as a


F-13

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

cumulative effect of adoption of a new accounting standard, and, starting in 2005, any impairment of assets is presented in the consolidated statement of operations within costs and operating expenses.
j.  Impairment of the value of long-lived assets
 
PEMEX evaluates periodically the impairmentvalues of long-lived assets wheneverto determine whether there are events or circumstances indicating that the book valueis any indication of a given asset may notpotential impairment. Recoverability of assets to be recoverable. In order to analyze impairment, PEMEX makesheld and used is measured by a comparison for each of the cash-generating units,carrying amount of the book value of the long-lived assets and the estimatedan asset to future value (discounted) of the cash flowsnet revenues expected to be generated by such long-lived assets.the asset. If the bookcarrying amount of an asset exceeds its estimated net revenues, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. During 2007, no impairment charge was recognized by PEMEX. At December 31, 2006 and 2005, PEMEX recorded an impairment charge related to long-lived assets exceeds the estimated recoverable value, a charge is made to income for the period for an impairment loss. This calculation is made at the end of each fiscal year,Ps. 703,247 and in accordance withBulletin C-15, the impairment recorded can be reversed in subsequent periods if the subsequent impairment analysis does not indicate a loss in such future periodsPs. 1,432,691, respectively. (see Note 7)9d.).
 
j.k.  Liabilities, provisions, contingent assets and liabilities and commitmentsAccruals
 
PEMEX’s liabilities representPEMEX recognizes, based on management estimates, accruals for those present obligations for which the transfer of assets or the rendering of services is probable and arises as a consequence of past events, primarily the liability provisions recognizedpayment of salaries and other employee payments as well as environmental liabilities, in the balance sheet representcertain cases, such amounts are recorded at their present obligations whose settlement will likely require the use of economic resources in an amount that is estimable. These provisions have been recorded, based on management’s best estimate of the amount needed to satisfy the liability; however, actual results could differ from the provisions recognized.value.
 
k.l.  Foreign currency balances and transactionsLabor obligations
 
Transactions denominated in foreign currencyThe accumulated benefits related to pensions, seniority premiums, other post-retirement benefits, and employment termination for causes other than restructuring, to which all employees are entitled are recorded atin the respective exchange rates prevailing on the day on which the transactions are entered. Monetary assets and liabilities in foreign currencies are stated in pesos at the rates in effect at the balance sheet date and published by theSecretaría de Hacienda y Crédito Público(Ministry of Finance and Public Credit, or “SHCP”). Foreign exchange losses and gains are charged and credited, respectively, to income. This resulted in net exchange gains (losses) credited (charged) to income of Ps. (2,381,079), Ps. 18,342,105 and Ps. (3,731,785) in 2006, 2005 and 2004, respectively.
l.Retirement benefits, pensions and seniority premiums
In accordance with theLey Federal del Trabajo(“Federal Labor Law”) and pursuant to collective bargaining agreements, seniority premium benefits to which every employee is entitled upon termination of employment, and the pension obligations arising from the employee retirement plans, to which employees do not contribute, are recorded at the cost ofstatement for the year in which employees rendered services in accordance with actuarial valuations, that useusing the projected unit-credit method. PEMEX includesmethod (see Note 12). The amortization of the effectprior service cost of its labor obligationssuch services, which has not been recognized, is based on the employees’ remaining average years of services. As of December 31, 2007, the remaining average years of services of PEMEX’s employees participating in these consolidated financial statements in accordance with the standards established byBulletin D-3, “Labor Obligations” (“Obligaciones Laborales”) of Mexican FRS issued by the MIPA(“Bulletin D-3”).plan was approximately 11 years.
 
BeginningThe plan for other post-retirement benefits includes cash to retired personnel and their dependents for gas, gasoline and necessities, as well as medical services that are provided using PEMEX’s infrastructure. (See Note 12).
Effective on January 1, 2005, PEMEX adopted the amendments ofBulletin D-3, which provide additional valuation and disclosure requirements for recognizing severance payments paid to employees upon dismissal. The adoption of these provisions resulted in the recognition of an initial liability related to prior service costs in the amount of Ps. 1,376,1471,427,872 and a charge to income upon adoption forin the same amount, which is presented in the consolidated statement of operations as part of the cumulative effect of adoption of new accounting standards.


F-14

m.  Derivative financial instruments and hedging operations
 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousandsAs of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Effective January 1, 2004,2005, PEMEX adopted the amendments toprovisions ofBulletin D-3C-10, related to“Derivative Financial Instruments and Hedging Operations”(“Bulletin C-10”) issued by the valuation, presentation and recordingMexican Institute of Public Accountants, which provide expanded guidance for the recognition, of remuneration for other post-retirement benefits.valuation and disclosure applicable to derivative financial instruments designed as hedges and embedded derivatives. The adoption of these provisions resulted in the recognition of an initial cumulative effect forto the recognitioncomprehensive loss in equity of prior services remuneration for other post-retirement benefits as of January 1, 2004 in an amount equal to Ps. 9,080,142, which was recorded as6,824,799 and a charge to income andfor the year of Ps. 477,996, which is presented in the consolidated statement of operations as part of the cumulative effect of adoption of new accounting standards.
The plan for other post-retirement benefits includes support given in the form of cash to retired personnel and their dependents for gas, gasoline and basic supplies, as well as medical servicesstandards (see Note 11).
As of December 31, 2007 and 2006, derivative financial instruments shown in the balance sheet are recorded at their fair value in accordance with the provisions ofBulletin C-10 (see Note 11).


F-14

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
m.n.  EquityFinancial instruments with characteristics of liability, equity or both
 
CertificatesFinancial instruments issued by PEMEX with characteristics of Contribution “A,”equity or liabilities, or both, are recorded at the Mexican Government increasetime of issuance as a liability, equity or both, depending on the components involved. Initial costs incurred in the issuance of those instruments are assigned to liabilities and equity in the same proportion as the amounts of Petróleos Mexicanostheir components. Gains or losses related to the components of financial instruments classified as liabilities are recorded as part of comprehensive financing result. The distribution of profits to the owners of the components of financial instruments classified as equity is charged to equity.
o.  Restatement of equity, other contributions and retained earnings
The restatement of equity, other contributions and the Subsidiary Entities, accumulated losses and other equity accounts represent the value of these items stated in terms of purchasing power at the most recent balance sheet date, and areis determined by applying factors derived from the NCPI from the dates of contributions to the historical amounts.most recent year end.
 
n.p.  Cumulative effect of the Hydrocarbon tax
The cumulative effect from the hydrocarbon reserve tax represents the effect from the initial recognition of cumulative deferred taxes.
q.  Surplus in the restatement of equity
 
The surplus in the restatement of equity at December 31, 2006 and 2005 is composed ofrelated to the cumulative results from the initial net monetary position and the results from holding non-monetary assets (mainly inventories and properties and equipment), restated in Mexican pesos with purchasing power as of the most recent balance sheet date.
 
o.Result on monetary positionr.  
The result on monetary position represents the gain or loss, measured in terms of the NCPI, on net monthly monetary assets and liabilities for the year, expressed in Mexican pesos of purchasing power as of the most recent balance sheet date. The inflation rates were 4.05%, 3.33% and 5.19%, in 2006, 2005 and 2004, respectively. Monetary position losses and gains are charged and credited, respectively, to income.
p.Cost of sales
Cost of sales is determined by adding to inventories at the beginning of the year the operating cost of oil fields, refineries and plants (including internally-consumed products), the purchase cost of refined and other products, and deducting the value of inventories at the end of the year. The amount thus determined is restated to period end purchasing power based on NCPI factors. Cost of sales also includes the depreciation and amortization expense associated with assets used in operations as well as the expense associated with the reserve for future dismantlement and abandonment costs.
q.Taxes and federal duties
 
Petróleos Mexicanos and the Subsidiary Entities are subject to special tax laws, which are based mainly on petroleum production, price forecasts and revenues from oil and refined products. Petróleos Mexicanos and the Subsidiary Entities are not subject to theLey del Impuesto Sobre la Renta (“Income Tax Law”) or, theLey del Impuesto al Activo(“Asset Tax Law”). Some of or the Subsidiary Companies are subject to


F-15

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

the Income Tax Law and Asset Tax Law. Petróleos Mexicanos, the Subsidiary Entities and some of the Subsidiary Companies are also subject to theLey del Impuesto al Valor AgregadoEmpresarial a Tasa Única(Value Added Tax, or “VAT”“Flat Rate Business Tax”) (see Note 17)18).
 
r.s.  Special Tax on Production and Services (IEPS Tax)
 
The IEPS Tax charged to customers is a tax on the domestic sales of gasoline and diesel. The applicable rates depend on, among other factors, the product, producer’s price, freight costs, commissions and the region in which the respective product is sold. If the retail price to PEMEX customers is below international prices, a negative IEPS tax rate results due to the subsidy given to PEMEX customers. Until December 31, 2005, the IEPS Tax collected from customers was presented as part of “Net domestic sales,” and the payment to the Government was deducted after “Income before taxes on production and services, and cumulative effect of adoption of new accounting standards”. Until December 31, 2005, negative IEPS Tax, when generated, was absorbed by PEMEX. However, on January 1, 2006 the new Federal Revenue Law became effective, which allows PEMEX to offset the negative IEPS Tax against IEPS Tax payable and other taxes and duties payable by PEMEX (see Note 17).
 
s.t.  Revenue recognition
 
For all export products, risk of loss and ownership title is transferred upon shipment, and thus PEMEX records sales revenue upon shipment to customers abroad. In the case of certain domestic sales in which the customer takes product delivery at a PEMEX facility, sales revenues are recorded at the time delivery is taken. For domestic sales in which PEMEX is responsible for product delivery, risk of loss and ownership is transferred at the delivery point, and PEMEX records sales revenue upon delivery.
 
t.Derivative financial instruments and hedging operationsu.  
Effective January 1, 2005, PEMEX adopted the provisions ofBulletin C-10, “Derivative Financial Instruments and Hedging Operations” issued by the MIPA(“Bulletin C-10”), which provides expanded guidance for the recognition, valuation and disclosure applicable to derivative financial instruments, including instruments designed as hedges and embedded derivatives. The adoption of these provisions resulted in the recognition of an initial cumulative effect of a charge to comprehensive loss in equity of Ps. 6,824,799 and a charge to income for the year of Ps. 460,675, which is presented in the consolidated statement of operations as part of the cumulative effect of the adoption of new accounting standards.
As of December 31, 2006 and 2005, derivative financial instruments shown in the balance sheet are valued at fair value, in accordance with the rules established byBulletin C-10 (see Note 10).
u.Financial instruments with characteristics of liability, equity or both
Financial instruments issued by PEMEX with characteristics of equity or liabilities, or of both, are recorded at the time of issuance as a liability, equity or as both, depending on the components involved. Initial costs incurred in the issuance of those instruments are assigned to liabilities and equity in the same proportion as the amounts of their components. Gains or losses pertaining to the components of financial instruments classified as liabilities are recorded as part of comprehensive financing cost. The distribution of profits to the owners of the components of financial instruments classified as equity is charged directly to an


F-16

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

equity account. As of December 31, 2006 and 2005, PEMEX did not have any financial instruments issued with characteristics of both equity and liabilities.
v.Use of estimates
The preparation of the financial statements requires the use of estimates. PEMEX’s management makes estimates and assumptions that affect the amounts and the disclosures presented as of the date of the consolidated financial statements. Actual results could differ from those estimates.
w.Comprehensive income (loss)result
 
Comprehensive income (loss)result represents the sum of net income (loss) for the period plus the effect of inflation restatement, the net effect of exchange rate fluctuations, the effect of the valuation of financial


F-15

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
instruments designated as cash flow hedges, the equity effect of the labor reserve and items required by specific accounting standards to be reflected in equity but which do not constitute equity contributions, reductions or distributions, and is restated on the basis of NCPI factors (see Note 15)13).
 
x.v.  Comprehensive financing costresult
 
Comprehensive financing costresult includes all types of financial gains or losses resulting from the real cost of financing in an inflationary environment, such as net interest income and expenses, (including the effects of valuation on financial instruments), netexpense, foreign exchange gains orand losses, monetary position gains and losses and netvaluation effects of financial instruments, reduced by the amounts capitalized.
Transactions in foreign currency are recorded at the exchange rate prevailing on the date of execution or settlement. Foreign currency assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Exchange differences arising from assets and liabilities denominated in foreign currencies are recorded in operations for the year.
Monetary position gains and losses are determined by multiplying the difference between monetary assets and liabilities at the beginning of each month, including deferred taxes, by inflation rates through year end. The aggregate of these results represents the monetary gain or losses on monetary positions.loss for the year arising from inflation, which is reported in operations for the year.
 
y.w.  Contingencies
Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount thereof can be reasonably estimated. When a reasonable estimation cannot be made, qualitative disclosure is provided in the notes to the consolidated financial statements. Contingent revenues, earnings or assets are not recognized until realization is assured (see Note 16).
x.  Deferred taxes
 
Deferred taxes are recorded based on the assets and liabilities method of accounting with a comprehensive approach method, which consists of the recognition of deferred taxes for operating loss and credit carry forwards andby applying the tax rate to the temporary differences between accounting and the tax basis of assets and liabilities. Based on the new fiscal regime enacted in 2005 and applicable to Petróleos Mexicanos and the Subsidiary Entities effective January 1, 2006, Pemex-Gas and Basic Petrochemicals established a deferred tax liability primarily as the result of temporary differences related to advance customer payments, liability provisionsadvances from customers, accruals and fixed assets. In addition, certain Subsidiary Companies have historically recorded deferred tax liabilities based on concepts similar to those discussed above (see Note 17)18).
 
y.  Accounting changes
The FRS B-3,Statement of Income, issued by the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financieraor “CINIF”) became effective beginning January 1, 2007. Accordingly, the accompanying statement of income for 2006, has been modified for reporting as provided under this FRS, which, together with theInterpretación a las Normas de Información Financiera(Interpretation of Financial Reporting Standards or “INIF”) 4, modified the general guidelines for the presentation and structure of the statement of income, eliminating the special and extraordinary items classifications.
In addition, this FRS requires that ordinary costs and expenses be classified based on their purpose, function, or a combination of both. Since PEMEX is an industrial entity, ordinary costs and expenses are classified in order to present the gross income margin.


F-16

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
FRS D-6,Capitalization of Comprehensive Financial Results(“CFR”) issued by the CINIF, became effective beginning January 1, 2007. This FRS establishes the requirement to capitalize CFR attributable to certain assets having an extended acquisition period prior to being put into use (see Note 9a.)
Certain line items in the consolidated financial statements as of December 31, 2006 have been reclassified in order to make the presentation comparable to the corresponding line items in the consolidated financial statements as of December 31, 2007.
In addition certain reclassifications have been made to 2006 and 2005 amounts presented in the consolidated financial statements and related notes to conform such amounts and disclosures to the December 31, 2007 consolidated financial statement presentation.
z.Convenience translation
 
United States dollar (“U.S. dollar”) amountsdollars shown in the balance sheets, the statements of operations, the statements of changes in equity and statements of changes in financial position have been included solely for the convenience of the reader. Such amounts are translated from pesos, as a matter of arithmetic computation only, at the exchange rate for the settlement of obligations in foreign currencies provided byBanco de Méxicoand the SHCP at December 31, 20062007 of 10.88110.8662 pesos per one U.S. dollar. Translations herein should not be construed as a representation that the peso amounts have been or could be converted into U.S. dollars at the foregoing rate or any other rate.


F-17

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

NOTE 3—4 —FOREIGN CURRENCY POSITION:EXPOSURE:
 
AtAs of December 31, 20062007 and 2005,2006, the consolidated financial statements of PEMEX included the following assets and liabilities denominated in foreign currencies (which are translated into Mexican pesos at the 2006 and 2005 year-end exchange rates listed below):were as follows:
 
                     
  Amounts in foreign currency
       
  (Thousands)       
        Asset (liability)
  Year-end
    
  Assets  Liabilities  position  Exchange rate  Amounts in pesos 
 
2006:
                    
U.S. dollars  20,872,208   (46,944,810)  (26,072,603)  10.8810   (Ps. 283,695,983)
Japanese yen  —   (150,040,948)  (150,040,948)  0.0913   (13,698,738)
Pounds sterling  711   (401,812)  (401,101)  21.3061   (8,545,898)
Euros  23,635   (4,201,854)  (4,178,219)  14.3248   (59,852,151)
Swiss Francs  562,443   (443,338)  119,105   8.9064   1,060,797 
                     
Total liability position, before foreign currency hedging (Note 10)                  (Ps. 364,731,973)
                     
                                        
 Amounts in foreign currency
      Amounts in foreign currency
     
 (Thousands)      (Thousands)     
     Asset (liability)
 Year-end
        Net liability
 Year-end
 Amounts in
 
 Assets Liabilities position Exchange rate Amounts in pesos  Assets Liabilities position Exchange rate pesos 
2005:(1)
                    
2007:
                    
U.S. dollars  14,621,145   (37,879,912)  (23,258,767)  10.7777   (Ps. 250,676,013)  16,950,060   (30,083,877)  (13,133,817)  10.8662  (Ps.142,714,682)
Japanese yen  —   (144,171,281)  (144,171,281)  0.0914   (13,177,255)  —   (142,217,370)  (142,217,370)  0.0973   (13,837,750)
Pounds sterling  262   (453,455)  (453,193)  18.5247   (8,395,264)  230   (402,411)  (402,181)  21.6074   (8,690,086)
Euros  4,732   (4,240,207)  (4,235,475)  12.7080   (53,824,416)  9,371   (5,932,198)  (5,922,827)  15.8766   (94,034,355)
Austrian shillings  —   (86)  (86)  8.1744   (703)
Swiss francs  —   (41)  (41)  8.1779   (335)  —   (260)  (260)  9.5957   (2,495)
Canadian dollars  2   —   2   9.2330   18 
Currency Danish crowns  —   (250)  (250)  2.0075   (502)
      
Total liability position, before foreign currency hedging (Note 10)                  (Ps. 326,073,968)
Total liability position, before foreign currency hedging                 (Ps.259,279,870)
      
 
                    
 Amounts in foreign currency
     
 (Thousands) Year-end
   
     Net liability
 Exchange
 Amounts
 
 Assets Liabilities position rate in nominal pesos 
2006:(1)
                    
U.S. dollars  20,872,208   (46,944,810)  (26,072,603)  10.8810  (Ps.283,695,982)
Japanese yen  —   (150,040,948)  (150,040,948)  0.0913   (13,698,739)
Pounds sterling  711   (401,812)  (401,101)  21.3061   (8,545,898)
Euros  23,635   (4,201,854)  (4,178,219)  14.3248   (59,852,152)
Swiss francs  562,443   (443,338)  119,105   8.9064   1,060,797 
   
Total liability position, before foreign currency hedging                 (Ps.364,731,974)
   
 
(1)The figures of December 31, 20052006 in pesos are stated in thousands of Mexican pesos as of December 31, 20052006 purchasing power (nominal value). Furthermore, as of December 31, 2007 and 2006, PEMEX had foreign exchange hedging instruments, which are discussed in Note 11.


F-18

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 
NOTE 4—5 —CASH AND CASH EQUIVALENTS:
 
At December 31, cash and cash equivalents were as follows:
 
                
 2006 2005  2007 2006 
Cash on hand and in banks Ps.92,291,206  Ps.46,380,413  Ps.64,578,352  Ps.95,760,432 
Marketable securities(1)
  96,392,626   79,343,640   106,418,888   100,016,025 
          
 Ps. 188,683,832  Ps. 125,724,053  Ps.170,997,240  Ps.195,776,457 
          


F-18

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
(1)Market securities include high liquid and low risk investments with maturities of three months or shorter.
 
NOTE 5—6 —ACCOUNTS, NOTES RECEIVABLE AND OTHER:
 
At December 31, accounts, notes receivable and other receivables were as follows:
 
         
  2006  2005 
 
Sales-domestic Ps.33,471,153  Ps.36,456,907 
Sales-export  18,914,468   13,421,256 
Negative IEPS Tax pending to be credited (Note 17)  12,888,490   — 
Advance payments to Mexican Government of minimum guaranteed dividends (Note 14)  259,245   15,902,901 
Specific funds—Trade Commission (Note 14)  34,300,437   27,939,631 
Employees and officers  3,059,881   2,836,782 
Hydrocarbon excess extraction duties payment  1,450,653   — 
Other accounts receivable(1)
  30,426,900   28,712,207 
         
   134,771,227   125,269,684 
Less allowance for doubtful accounts  (2,577,290)  (2,611,300)
         
  Ps. 132,193,937  Ps. 122,658,384 
         
         
  2007  2006 
 
Domestic customers Ps.40,506,098  Ps.34,729,334 
Export customers  25,430,178   19,625,463 
Negative IEPS Tax pending to be credited (Note 18)  32,943,613   13,372,968 
Advance payments to Mexican Government of minimum guaranteed dividends (Note 14)  4,270,225   268,990 
Specific funds (Note 14)  11,858,575   35,589,790 
Employees and officers  3,648,372   3,174,902 
Tax credits  4,035,632   1,505,183 
Other accounts receivable  30,308,784   31,570,645 
         
   153,001,477   139,837,275 
Less allowance for doubtful accounts  (1,490,934)  (2,674,170)
         
  Ps. 151,510,543  Ps. 137,163,105 
         
(1)Other accounts receivable include miscellaneous items such as sundry debtor accounts and other recoverable taxes.
 
NOTE 6—7 —INVENTORIES:
 
At December 31, inventories were as follows:
 
                
 2006 2005  2007 2006 
Crude oil, refined products, derivatives and petrochemical products Ps.54,738,456  Ps.45,884,931  Ps.87,971,050  Ps.56,796,075 
Materials and supplies in stock  6,431,400   5,751,079   6,370,017   6,673,156 
Materials and products in transit  289,250   2,758,264   148,376   300,123 
          
  61,459,106   54,394,274   94,489,443   63,769,354 
Less allowance for slow-moving and obsolete inventory  (1,643,767)  (1,761,713)  (1,346,307)  (1,705,556)
          
 Ps. 59,815,339  Ps. 52,632,561  Ps. 93,143,136  Ps. 62,063,798 
          


F-19

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

NOTE 7—8 —INVESTMENT IN SHARES OF NON-CONSOLIDATED SUBSIDIARIES AND ASOCCIATED:
The investments in shares of non-consolidated subsidiaries affiliates and others were as follows:
             
  Percentage of
  Carrying Value at December 31, 
Subsidiaries and Affiliates Shares:
 Investment  2007  2006 
 
Repsol YPF, S.A.(1)
  5.00% Ps. 23,146,258  Ps. 23,192,819 
Deer Park Refining Limited(2)
  50.00%  7,113,824   5,924,890 
Instalaciones Inmobiliarias para Industrias, S.A. de C.V.   100.00%  1,122,215   1,110,643 
Servicios Aéreos Especializados Mexicanos, S.A. de C.V.   49.00%  5,147   5,147 
Other-net      1,675,910   2,527,447 
             
Total investments     Ps.33,063,354  Ps.32,760,946 
             
             
  For the Year Ended December 31, 
Profit Sharing in Non-Subsidiaries and Affiliates:
 2007  2006  2005 
 
Repsol YPF, S.A.(1) Ps.588,729  Ps.3,621,872  Ps.2,610,657 
Deer Park Refining Limited(2)  4,944,329   6,419,178   6,004,199 
Instalaciones Inmobiliarias para Industrias, S.A. de C.V.   11,996   32,527   43,809 
             
Total profit sharing Ps.5,545,054  Ps.10,073,577  Ps.8,658,665 
             
(1)PEMEX owned 59,884,453 and 59,404,128 shares of Repsol YPF, S.A. at December 31, 2007 and 2006, respectively.
(2)PMI NASA has a 50% joint venture with Shell Oil Company, through which it owns a 50% interest in a petroleum refinery located in Deer Park, Texas. The investment is accounted for under the equity method. During 2007, 2006 and 2005, PEMEX recorded Ps. 4,944,329, Ps. 6,419,178 and Ps. 6,004,199 of profits, respectively, related to its equity in the results of the joint venture, which has been recorded under “profit sharing in non-consolidated subsidiaries and affiliates” in the statement of operations. In 2006 and 2005, PEMEX paid the joint venture Ps. 11,078,973 and Ps. 10,742,295, respectively, for the processing of crude oil. As of December 31, 2006 the contract between PMI NASA and Pemex-Refining, was concluded and it was not renewed.


F-20

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
NOTE 9 —PROPERTIES, PLANT AND EQUIPMENT:
 
At December 31, components of properties, plant and equipment were as follows:
 
                
 2006 2005  2007 2006 
Plants Ps. 344,419,538  Ps. 332,328,082  Ps.379,268,733  Ps.357,366,268 
Pipelines  268,770,356   252,562,684   296,304,941   278,873,434 
Wells  397,573,306   350,004,307   466,157,259   412,518,087 
Drilling equipment  21,553,774   21,944,422   22,226,019   22,363,980 
Buildings  40,681,076   40,452,191   47,681,968   42,210,278 
Offshore platforms  134,179,581   119,387,232   160,543,843   139,223,391 
Furniture and equipment  33,548,608   32,376,054   36,440,294   34,809,700 
Transportation equipment  13,500,746   13,567,567   14,146,501   14,008,239 
          
  1,254,226,985   1,162,622,539   1,422,769,558   1,301,373,377 
Less:                
Accumulated depreciation and amortization  (668,178,314)  (608,705,704)  (760,177,709)  (693,295,137)
          
  586,048,671   553,916,835 
Net value  662,591,849   608,078,240 
Land  40,637,328   41,233,532   39,842,669   42,164,885 
Construction in progress  83,029,129   73,469,717   90,720,481   86,150,194 
Fixed assets to be disposed of  773,077   687,739   690,454   802,138 
          
Total Ps.710,488,205  Ps.669,307,823  Ps.793,845,453  Ps.737,195,457 
          
 
 a) For the years ended December 31, 2006, 2005 and 2004,PEMEX capitalized interest costs associated with fixed assets in the construction or installation phase that were capitalizedof property, plant and equipment, totaling Ps. 6,996,305 and Ps. 5,541,036, as of December 31, 2007 and 2006, respectively. Starting in 2007, as part of thosethe adoption of NIF-6, PEMEX capitalized Ps 5,350,849 of comprehensive financing costs related to qualified fixed assets, totaled Ps. 6,742,842, Ps. 5,340,243 and Ps. 4,666,343, respectively.as these costs were directly related to investments during the acquisition phase of a project.
 
 b) DepreciationTotal depreciation of fixed assets and amortization of wells for the periodsyears ended December 31, 2007, 2006 2005 and 2004 recorded in operating costs and expenses2005 were Ps. 63,293,005,72,591,718, Ps. 54,930,51965,672,189 and Ps. 45,051,417,Ps.56,995,357, respectively, which included Ps. 489,944, Ps. 1,321,071 and Ps. 337,914, respectively,includes amortization costs related to dismantlement and abandonment costs.cost for the years ended December 31, 2007, 2006 and 2005 of Ps. 2,554,062, Ps. 508,361 and Ps. 1,370,730, respectively.
 
 c) As of December 31, 20062007 and 2005,2006, the capitalized provisionportion related to dismantlement and abandonment costs, net of accumulated amortization, and determined based on the present value (discounted) of the projectedproject cost, was Ps. 10,045,69617,148,400 and Ps. 10,348,721,16,027,307, respectively.
 
 d) During 2007 PEMEX performed its impairment review of the value of long-live assets and concluded that there was no impairment for the year. As of December 31, 2006 and 2005, PEMEX has recognized cumulative impairment charges in the value of the long-lived assets amounting to Ps. 14,065,10714,593,955 and Ps. 13,387,337,13,890,780, respectively. Impairment for the periods ended December 31, 2006, 2005 and 2004 recorded in operating costs and expenses was Ps. 677,770, Ps. 1,380,787 and Ps. 3,953,244, respectively.(see Note 3j.).

NOTE 10 —DEBT:
Under theLey General de Deuda Pública(“General Law of Public Debt”), theSecretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit or “SHCP”) authorizes the Mexican


F-20F-21

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

NOTE 8—INVESTMENT IN SHARES:
 
The investmentsGovernment entities, in affiliatedthis case Petróleos Mexicanos and other companies’ shares,the Subsidiary Entities, to negotiate and execute external financing agreements, defining the requirements that must observed in each case.
In addition, PEMEX is authorized to enter into and manage public debt of the Mexican Government and to guarantee these transactions to international organizations of which are unconsolidated,Mexico is part of and to national and international public and private entities.
In 2007, significant financing activities of Petróleos Mexicanos were as follows:
 
           
  Percentage of
 Carrying value at December 31, 
  Investment 2006  2005 
 
Repsol YPF, S.A.(1)
 5.00 Ps.22,352,585  Ps.19,320,068 
Deer Park Refining Limited(2)
 50.00  5,710,242   5,566,888 
Instalaciones Inmobiliarias para Industrias,
S.A. de C.V.(2)
 100.00  1,070,406   1,064,134 
Servicios Aéreos Especializados Mexicanos,
S.A. de C.V.(2)
 49.00  152,782   20,340 
Other    2,288,061   1,670,579 
           
Total investments   Ps. 31,574,076  Ps. 27,642,009 
           
Petróleos Mexicanos obtained U.S.$7,310 under lines of credit granted by export credit agencies. These loans bear interest at fixed and variable rates with various maturity dates through 2012.
 
During 2007, the Master Trust undertook the following financing activities for PIDIREGAS:
(1)a. Securities available for sale.The Master Trust obtained credit lines from export credit agencies totaling U.S.$1,002,629.
(2)
b. AccountedDuring the second quarter of 2007, the Master Trust repurchased, in the open market certain amount of its outstanding U.S. dollar-denominated debt securities with maturities between 2008 and 2027. The total principal amount repurchased in this program was equal to U.S.$1,139,696. These securities were cancelled after their repurchase.
c. On October 18, 2007, the Master Trust utilized the full amount of its syndicated revolving credit facility in the amount of U.S.$2,500,000. This credit line was signed on September 14, 2007; it may be used either by Petróleos Mexicanos or the Master Trust; the credit line consists of two tranches, A and B, with terms of three and five years, respectively and bears interest at rates of LIBOR plus 20 basis points for using equity method.tranche A and 25 basis points for tranche B; and matures in 2010 and 2012, respectively; and each of the tranches may be extended twice, by one year. This credit line replaces the two previously syndicated revolving credit lines, each in the amount of U.S.$1,250,000.
d. On October 22, 2007, the Master Trust issued notes for the amount of U.S.$2,000,000, of which U.S.$1,500,000 notes were issued at a coupon rate of 5.75% due in 2018 and U.S.$500,000 bonds at a coupon rate of 6.625%, due in 2035. This issuance was a second reopening of an issuance which took place on June 8, 2005.
PEMEX owned 59,404,128 and 58,935,349 shares of Repsol YPF, S.A. at December 31, 2006 and 2005, respectively, which were valued at their market price.
PMI NASA has a 50% joint venture with Shell Oil Company, in which it owns a 50% interest in a petroleum refinery located in Deer Park, Texas. The investment is accounted for under the equity method of accounting. During 2006, 2005 and 2004, PEMEX recorded Ps. 5,974,974, Ps. 5,786,677 and Ps. 3,475,161 of profits, respectively, related to its interest in the joint venture, which has been recorded in the line item “Other revenues” in the statement of operations. In 2006, 2005 and 2004, PEMEX paid the joint venture Ps. 10,677,602, Ps. 10,353,421 and Ps. 8,212,954, respectively, for the processing of crude oil.
 
NOTE 9—DEBT:e. During the fourth quarter of 2007, the Master Trust repurchased in the open market U.S.$5,763,333, of notes, which represent a part of its own debt in notes with maturities between 2008 and 2027, as well as certain amount of its U.S. dollar-denominated perpetual notes. These securities were cancelled after their repurchase.
Petróleos Mexicanos and the Master Trust have individual credit lines with U.S. $194,698 and U.S. $1,627,704, respectively, available as of December 31, 2006 in addition to a revolving line of credit in the amount of U.S. $2,500,000 that may be utilized by either Petróleos Mexicanos or the Master Trust, of which the full amount was available to be drawn as of December 31, 2006.
 
In 2006, significant financing activities of Petróleos Mexicanos were as follows:
 
 a. Petróleos Mexicanos obtained U.S. $56,241 incredit lines of credit granted byfrom export credit agencies.agencies totaling U.S.$56,241. These loans bear interest at fixed and variable rates with various maturity dates through 2012;2012.
 
 b. Petróleos Mexicanos drew a total amount of U.S. $3,300,000$3,300,000 of under its revolving credit lines. These credit lines may be utilized by Petróleos Mexicanos and the Master Trust;Trust.
 
 c. On February 13, 2006, the Master Trust completed an exchange offer pursuant to which the Master Trust issued notes with a principal amount totaling U.S. $185,310$185,310 in exchange for an equal principal amount of notes previously issued by Petróleos Mexicanos, through a reopening of an original exchange offer made in December 2004. As a result of this second exchange, the Master


F-21F-22

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 second exchange, the Master Trust issued new notes and subsequently received cash payments from Petróleos Mexicanos upon the cancellation of the Petróleos Mexicanos notes acquired by the Master Trust. The cash payments were made on the following dates and in the following amounts:
Cash payments were made on the following dates and in the following amounts:
 
     
June 1, 2006 U.S.$41,254 
June 2, 2006  54,011 
August 3, 2006  90,045 
     
Total U.S.$ 185,310 
     
 
The portion of the cash payments to be made over time is equal to the difference between the market value of the debt securities and the par value of those securities (the “Inter-Company Premium”). The Inter-Company Premium is payable in five equal annual installments. Interest on the unpaid amount of the Inter-Company Premium accrues from the date of purchase at an annual rate equal to the three-month U.S. dollar LIBOR plus 0.35%, and is payable quarterly in arrears. The 2006 Inter-Company Premium totaled U.S. $21,805.
In November 2006, the 2006 Inter-Company Premium was consolidated into the 2005 Inter-Company Premium (described below in this note) of U.S. $432,349. As a result, the outstanding Inter-Company Premium as of December 31, 2006 is U.S. $367,685 in favor of the Pemex Project Funding Master Trust. During 2006, Petróleos Mexicanos paid the Pemex Project Funding Master Trust U.S. $86,470 of the principal amount of the Inter-Company Premium and U.S. $21,283 of interest on the Inter-Company Premium.
During 2006, the Master Trust undertook the following financing activities for PIDIREGAS:
 
 a. The Master Trust obtained credit lines from export credit agencies totaling U.S. $1,914,184 (Ps. 20,828,236)$1,914,184 and U.S. $4,250,000 (Ps. 46,244,250)$4,250,000 by refinancing a syndicated loan in two tranches of U.S. $1,500,000 (Ps. 16,321,500)$1,500,000 and U.S. $2,750,000 (Ps. 29,922,750)$2,750,000 due in five and seven years, respectively.
 b. On February 2, 2006, the Master Trust reopened two series of notes issued on June 8, 2005 under its Medium-Term Notes Program Series A in two tranches: U.S. $750,000$750,000 of 5.75% Notes due in 2015, and U.S. $750,000$750,000 of 6.625% Notes due in 2035, both of which are guaranteed by Petróleos Mexicanos.
 
 c. The Master Trust drew a total aggregate amount of U.S. $2,250,000$2,250,000 of its revolving credit lines guaranteed by Petróleos Mexicanos. These credit lines may be utilized by Petróleos Mexicanos and the Master Trust.
 
During 2006, the Fideicomiso F/163 undertook the following financing activity:
 
On June 16, 2006, the Fideicomiso F/163 issued publicly-traded notes (certificados bursatiles) in the amount of Ps. 10,000,000 (in nominal terms), due in seven years, with a monthly interest rate ofTasa de Interés Interbancaria de Equilibrio(the Mexican Interbank Interest Rate or “TIIE”) less 0.07% and guaranteed by Petróleos Mexicanos.


F-22

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

In 2005, significant financing activities were as follows:
a.  Petróleos Mexicanos obtained U.S. $59,882 (Ps. 651,576) in loans from export credit agencies. These loans bear interest at fixed and variable rates with various maturity dates through 2013.
b.  Petróleos Mexicanos issued short-term certificates totaling Ps. 16,000,000 (in nominal terms). All of these short-term certificates, as well as the balance as of December 31, 2004 of Ps. 2,000,000, were repaid during 2005.
c.  On October 26, 2005, Petróleos Mexicanos drew down U.S. $800,000 from its U.S. $1,250,000 syndicated revolving facility in two tranches, each in the amount of U.S. $400,000; these funds were repaid on December 28, 2005.
During 2005, the Master Trust undertook the following financing activities for PIDIREGAS:
a.  The Master Trust obtained credit lines from export credit agencies totaling U.S. $1,617,500 (Ps. 17,600,017) and U.S. $4,250,000 (Ps. 46,244,250) from a syndicated loan.
b.  On February 24, 2005, the Master Trust issued €1,000,000 (Ps. 14,324,800) of 5.50% Notes due 2025, guaranteed by Petróleos Mexicanos, under its Medium-Term Notes Program, Series A;
c.  On June 8, 2005, the Master Trust issued U.S. $1,500,000 (Ps. 16,321,500) under its Medium-Term Note Program, Series A, in two tranches: U.S. $1,000,000 (Ps. 10,881.000) of 5.75% Notes due 2015 and U.S. $500,000 (Ps. 5,440,500) of 6.625% Notes due 2035, both of which are guaranteed by Petróleos Mexicanos.
d.  On August 31, 2005, the Master Trust issued U.S. $175,000 (Ps. 1,904,175) of Floating Rate Notes due 2008, which bear interest at a rate per annum equal to LIBOR for a period of one, two, three or six months (at the election of the Master Trust), plus 42.5 basis points, and are guaranteed by Petróleos Mexicanos.
e.  On December 1, 2005, the Master Trust issued U.S. $750,000 (Ps. 8,160,750) of Floating Rate Notes due 2012 under its Medium-Term Note Program, Series A, which bear interest at the rate of three month LIBOR plus 60 basis points, and are guaranteed by Petróleos Mexicanos.
In addition, the following financing activities were undertaken during 2005:
a.  During 2005, the Master Trust delivered to Petróleos Mexicanos certain of the debt securities of Petróleos Mexicanos in exchange for cash payments, a portion of which will be made over time, equal to the market value of the relevant debt securities at the time of such delivery. The Master Trust had acquired these debt securities in its December 2004 exchange offer. The cash payments made by Petróleos Mexicanos at the time of acquisition of the debt securities was equal to the par value of such debt securities, plus accrued


F-23

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

interest. Set forth below is the date of acquisition of the debt securities, as well as the cash payments made on such date:

Par value of debt
Date of acquisitionsecurities
April 29, 2005U.S.$803,365
May 20, 2005678,697
July 6, 2005826,099
TotalU.S.$2,308,161
The 2005 Inter-Company Premium totaled U.S. $432,349. The total amount of interest paid by Petróleos Mexicanos on the Inter-Company Premium in 2005 was equal to U.S. $7,224.
b.  In March 2005, the Master Trust obtained a syndicated loan in the amount of U.S. $4,250,000. U.S. $2,020,800 related to new indebtedness, and the remaining U.S. $2,229,200 was used to refinance other syndicated credits.
c.  Of the U.S. $1,500,000 issued by the Master Trust on June 8, 2005, only U.S. $529,800 is considered new indebtedness, as the remaining U.S. $970,200 was used to refinance amounts prepaid under the Funds Derivative Agreement between Pemex-Exploration and Production and the Master Trust, arising from the redemption by Pemex Finance of four series of its outstanding notes in June 2005.
During 2005, the Fideicomiso F/163 undertook the following financing activities:
a.  On February 1, 2005, Fideicomiso F/163 issued, under its expanded Ps. 70,000,000 peso-denominated publicly-traded notes (certificados bursatiles) program, approved by theComisión Nacional Bancaria y de Valores(the National Banking and Securities Commission or the “CNBV”), denominated inUnidades de Inversión (Units of Investment, or “UDI”) in the amount of UDI 1,697.6 million (Ps. 6,000,000) (in nominal terms) in the Mexican domestic market, with maturity in 2019, and guaranteed by Petróleos Mexicanos.
b.  On February 11, 2005, Fideicomiso F/163 issued, under its expanded Ps. 70,000,000 peso-denominated publicly-traded notes (certificados bursatiles) program, approved by the CNBV, a total of Ps. 15,000,000 of notes in the Mexican domestic market, guaranteed by Petróleos Mexicanos, consisting of two tranches: one of Ps. 7,500,000 of its notes due February 11, 2010, bearing interest at the91-dayCertificados de la Tesorería de la Federación(Mexican Government Treasury Bonds or “Cetes”) rate plus 51 basis points; and the other one of Ps. 7,500,000 of its notes due February 11, 2013, bearing interest at the182-dayCetesrate plus 57 basis points.
c.  On May 13, 2005, Fideicomiso F/163 issued, under its expanded Ps. 110,000,000 peso-denominated publicly-traded notes (certificados bursatiles) program, approved by the CNBV, a total of Ps. 10,000,000 of notes in the Mexican domestic market, guaranteed by Petróleos Mexicanos, consisting of two tranches: one of Ps. 5,012,600 of its notes due February 4, 2010, bearing interest at the91-dayCetes rate plus 51 basis points; and the


F-24

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

other one of Ps. 4,987,400 of its notes due January 31, 2013, bearing interest at the182-dayCetes rate plus 57 basis points.

d.  On July 29, 2005, Fideicomiso F/163 issued, under its Ps. 110,000,000 peso-denominated publicly-traded notes (certificados bursatiles) program, approved by the CNBV, a total of Ps. 5,000,000 of notes due 2015 in the Mexican domestic market, guaranteed by Petróleos Mexicanos, bearing interest at a fixed rate of 9.91%.
e.  On October 21, 2005, Fideicomiso F/163 issued, under its Ps. 110,000,000 Publicly Traded Notes Program, approved by CNBV, a total of Ps. 4,500,000 of notes due 2015 in the Mexican domestic market, guaranteed by Petróleos Mexicanos, bearing interest at a fixed rate of 9.91%.
f.  On October 21, 2005, Fideicomiso F/163 issued, under its Ps. 110,000,000 Publicly Traded Notes Program, approved by CNBV, a total of Ps. 5,500,000 of notes due 2011 in the Mexican domestic market, guaranteed by Petróleos Mexicanos, bearing interest at the91-dayCetesrate plus 35 basis points.
In 1983, 1985, 1987, and 1990, Petróleos Mexicanos, together with the Mexican Government, entered into various agreements with the international banking community for restructuring their debt. As a result of the final agreement, the remaining balance of the restructured Mexican Government debt retained principally the same interest conditions as had been negotiated in 1987. Theagreed-upon periods of amortization included a provision for division of the debt into two main portions with amortization over 52 and 48 quarters, respectively. The first amortization period began in 1994 and the second began in 1995; both periods ended in December 2006.
Each year, the SHCP approves Petróleos Mexicanos and the Subsidiary Entities’ annual budget and the annual financing program. The Mexican Government incorporates Petróleos Mexicanos and the Subsidiary Entities’ annual budget and annual financing program into the budget of the Mexican Government, which the Mexican Congress must approve each year. PEMEX’s debt is not an obligation of, and is not guaranteed by, the Mexican Government. However, under theLey General de Deuda Pública(the “General Law of Public Debt”), Petróleos Mexicanos and the Subsidiary Entities’ foreign debt obligations must be approved by, and registered with, the SHCP and are considered Mexican external public debt. Although Petróleos Mexicanos’ debt is not guaranteed by the Mexican Government, Petróleos Mexicanos’ external debt has receivedpari passu treatment in previous debt restructurings.
 
Various credit facilities require compliance with various operating covenants which, among other things, place restrictions on the following types of transactions:
 
 • The sale of substantial assets essential for the continued operations of the business;
 
 • Liens against its assets; and
 
 • Transfers, sales or assignments of rights to payment under contracts for the sale of crude oil or gas not yet earned, accounts receivable or other negotiable instruments.
 
As of December 31, 20062007 and 2005,2006, PEMEX was in compliance with the operating covenants described above.


F-25F-23

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
As of December 31, 20062007 and 2005,2006, long-term debt was as follows:
 
                      
                                 December 31, 2007 December 31, 2006 
     December 31, 2006 December 31, 2005          Foreign
   Foreign
 
     Pesos
 Foreign currency
 Pesos
 Foreign currency
      Pesos
 currency
 Pesos
 currency
 
 Rate of Interest(1) Maturity (thousands) (thousands) (thousands) (thousands)  
Rate of Interest(2)
 Maturity (Thousands) (Thousands) (Thousands) (Thousands) 
U.S. dollars:
                                                
Unsecured loans Variable and LIBOR plus 0.8125%  2006  Ps.—   —  Ps.1,201,788   107,163 
Unsecured loans Variable and LIBOR plus 0.8125%  2006   —   —   379,978   33,883 
Bonds Fixed from 4.5% to 10.61% and LIBOR plus 0.425% to 8.875%  Various to 2035   230,275,593   21,163,109   225,187,544   20,079,940  Fixed from 4.75% to 9.5% and LIBOR plus 0.425% to 1.8%  Various to
2035		  Ps.163,225,526   12,119,761  Ps.238,931,860   21,163,109 
Financing assigned to PIDIREGAS Fixed from 3.23% to 7.69% and LIBOR plus 0.03% to 2.25%  Various to 2017   73,848,945   6,786,963   64,006,691   5,707,467  Fixed from 3.23% to 7.69% and LIBOR plus 0.02% to 2.25%  Various to
2017		   72,163,251   6,641,075   76,624,927   6,786,963 
Purchasing loans and project financing Fixed from 3.32% to 7.28% and LIBOR plus 0.0625%
to 2%		  Various to 2014   3,112,247   286,026   3,873,874   345,433  Fixed from 3.32% to 5.04% and LIBOR plus 0.0625% to 2%  Various to
2014		   2,108,662   194,057   3,229,236   286,026 
Leasing contracts Fixed from 8.05% to 9.91%  Various to 2012   764,893   70,296   1,710,827   152,554  Fixed from 8.05% to 9.91%  Various to
2012		   —   —   793,645   70,296 
Credit lines LIBOR plus 0.20% and 0.25%  Various to
2023		   27,165,500   2,500,000   —   — 
External trade loans LIBOR plus 0.5% to 0.9%  Various to 2012   46,897,110   4,310,000   49,007,594   4,370,000  LIBOR plus 0.325% to 0.475%  Various to
2013		   46,181,350   4,250,000   48,659,972   4,310,000 
Bank loans Fixed from 5.44% to 5.58% LIBOR plus 0.55% to 1.9%  Various to 2018   6,800,625   625,000   11,607,062   1,035,000  Fixed from 5.44% to 5.58% and LIBOR plus 0.7% to 1.9%  Various to
2013		   5,107,114   470,000   7,056,260   625,000 
                    
Total financing in U.S. dollars            361,699,613   33,241,394   356,975,358   31,831,440         315,951,403   26,174,893   375,295,900   33,241,394 
         
Euros:
                                                
Bonds Fixed from 5.5% to 7.75%, and floating of 9.1045%  Various to 2025   58,597,515   4,090,634   54,090,836   4,090,634  Fixed from 5.5% to 6.62%, and floating of 8.21467%  Various to
2025		   50,857,376   3,203,291   60,800,196   4,090,634 
Unsecured loans, banks and project financing Fixed from 2% LIBOR plus 0.8125%  2006 and 2014   5,760   402   18,829   1,424  Fixed from 2%  2016   5,544   349   5,977   402 
                    
Total financing in Euros            58,603,275   4,091,036   54,109,665   4,092,058         50,862,920   3,203,640   60,806,173   4,091,036 
                  
Japanese yen:
                                                
Direct loans Fixed from 4.2%  2009   658,825   7,216,043   915,040   9,621,390  Fixed from 4.2%  2009   468,081   4,810,695   683,590   7,216,043 
Bonds Fixed from 3.5%  2023   2,739,000   30,000,000   2,853,141   30,000,000  Fixed from 3.5%  2023   2,919,000   30,000,000   2,841,959   30,000,000 
Project financing Fixed from 2.9% to 2.9081% and PRIME in yen  Various to 2017   9,418,372   103,158,512   9,537,659   100,285,864  Prime 2.9081% and Fixed from 1% to 2.4%  Various to
2017		   10,871,232   111,729,003   9,772,409   103,158,512 
                    
Total financing in Yen            12,816,197   140,374,555   13,305,840   139,907,254         14,258,313   146,539,698   13,297,958   140,374,555 
                  
Sterling pound:
                      
Bonds Fixed 7.5%  2013   8,642,960   400,000   8,842,798   Various 
Pesos:
                      
Certificates TIIE less 0.07% and CETES plus 0.35% to 0.65%  Various to
2019		   81,918,416       98,019,896     
Syndicated bank loans TIIE plus 0.35% and fixed from 8.4%  2008   3,500,000       7,263,130     
Project financing and syndicated bank loans Fixed from 11% and TIIE plus 0.4% to 0.48%  Various to
2012		   12,333,333       14,872,123     
     
Total financing in pesos        97,751,749       120,155,149     
     
Total principal in pesos(1)
        487,467,345       578,397,978     
Plus: Accrued interest        58,565       1,563,831     
Notes payable to contractors        13,352,690       10,753,711     
     
Total principal and interest        500,878,600       590,715,520     
     
Less: Short-term maturities        71,499,353       62,745,288     
Current portion of notes payable to contractors        4,550,775       3,494,990     
     
Total short-term debt        76,050,128       66,240,278     
     
Long-term debt       Ps.424,828,472      Ps.524,475,242     
     
                             
            2013 and
  
  2008 2009 2010 2011 2012 Thereafter Total
 
Maturity of the principal outstanding for each of the years ending December 31, Ps.76,050,128  Ps.67,453,662  Ps.70,150,790  Ps.56,261,413  Ps.38,928,853  Ps.192,033,754  Ps.500,878,600 
                             
Notes to table:
(1)Includes financing from foreign banks of Ps. 355,682,481 and Ps. 418,347,126 as of December 31, 2007 and 2006, respectively.
(2)As of December 31, 2007 and 2006 the rates were as follows: LIBOR, 4.59625% and 5.37%, respectively; the Prime rate in Japanese yen, 1.875% and 1.625%, respectively; theCetesrate, 7.62% for 91 days and 7.71% for 182 days and 7.17% for 91 days and 7.20% for 182 days, respectively; TIIE 7.37% and 8.95%, respectively.


F-26F-24

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
                             
        December 31, 2006  December 31, 2005    
        Pesos
  Foreign currency
  Pesos
  Foreign currency
 
  Rate of Interest(1)  Maturity  (thousands)  (thousands)  (thousands)  (thousands) 
 
                             
Other currencies(2)
 Fixed rate from 7.5% to 14.5% and LIBOR plus 0.8125%  Various to 2013   8,522,440   Various   8,674,975   Various 
Pesos:
                            
Certificates Fixed from 8.38% to 9.91% and CETES plus 0.35% to 0.67%  Various to 2019   94,468,813       87,063,477     
Syndicated bank loans TIIE plus 0.35% and fixed from 8.4%  2008   7,000,000             
Project financing and syndicated bank loans Fixed from 8.4% to 11%, TIIE plus 0.2% to 0.48%  Various to 2012   14,333,333       26,302,362     
                       
Total financing in pesos              115,802,146       113,365,839     
                             
Total principal in pesos(3)
              557,443,471       546,431,677     
Plus: Accrued interest              1,507,175       1,069,725     
Notes payable to contractors              10,364,124       11,980,327     
                             
Total principal and interest              569,314,770       559,481,729     
Less: Short-term maturities              60,472,140       34,827,384     
Current portion of notes payable to contractors              3,368,373       2,730,672     
                             
Total short-term debt              63,840,513       37,558,056     
                             
Long-term debt             Ps.505,474,257      Ps.521,923,673     
                             
                             
                             
  2007  2008  2009  2010  2011  2012 and thereafter  Total 
 
Maturity of the principal outstanding for each of the years ending December 31, Ps.58,964,965   Ps.52,501,480  Ps.65,351,672  Ps.71,776,853  Ps.60,851,549  Ps.247,997,152  Ps.557,443,671 
                             
Notes to table:
(1)As of December 31, 2006 and 2005 the rates were as follows: LIBOR, 5.37% and 4.70%, respectively; the Prime rate in Japanese yen, 1.625% and 1.375%, respectively; theCetesrate, 7.17% for 91 days and 7.20% for 182 days and 8.81% for 91 days and 8.66% for 182 days, respectively; TIIE 7.37% and 8.95%, respectively.
(2)Balance includes debt denominated in Pounds sterling and Swiss francs, carrying different interest rates.
(3)Includes financing from foreign banks of Ps. 403,191,170 and Ps. 393,254,255 as of December 31, 2006 and 2005, respectively.


F-27

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
Beginning in 2005, notes payable to contractors are included within long-term debt. The total amountsamount of notes payable to contractors at December 31, 20062007 and December 31, 20052006 are set forth below:as follows:
 
                
 2006 2005  2007 2006 
Total notes payable to contractors(3)(4)
 Ps.10,364,124  Ps. 11,980,327  Ps.13,352,690  Ps.10,753,711 
Less: Current portion of notes payable to contractors  (3,368,373)  (2,730,672)  4,550,775   3,494,990 
          
Notes payable to contractors (long-term) Ps.6,995,751  Ps.9,249,655  Ps.8,801,915  Ps.7,258,721 
          
 
 
(1)On November 26, 1997, Petróleos Mexicanos and Pemex-Refining entered into a financed public works contract and a unit-price public works contract with Consorcio Proyecto Cadereyta Conproca, S.A. de C.V. The related contracts are for the reconfiguration and modernization of the Ing. Héctor R. Lara Sosa refinery in Cadereyta, N.L.
The original amount of the financed public works contract was U.S. $1,618,352 (Ps. 17,609,288)$1,618,352 , plus a financing cost of U.S. $805,648 (Ps. 8,766,256)$805,648 , due in twenty semi-annual payments of U.S. $121,200 (Ps. 1,318,777).$121,200. The original amount of the unit-price public works contract was U.S. $80,000 (Ps. 870,480),$80,000, including a financing cost of U.S. $47,600 (Ps. 517,936)$47,600 payable monthly based on the percentage of completion. At December 31, 20062007 and 2005,2006, the outstanding balances of the respective contracts were Ps. 7,890,2045,854,295 and Ps. 10,054,415,8,186,797, respectively.
 
(2)On June 25, 1997, PEMEX entered into a10-year service agreement with a contractor for a daily fee of U.S. $82.50$82.50 for the storage and loading of stabilized petroleum by means of a floating system (“FSO”). At December 31, 20062007 and 2005,2006, the outstanding balances were Ps. 512,048242,888 and Ps. 766,445,531,296, respectively.
 
(3)PEMEX has Financed Public Works Contracts (“FPWC”) (formerly known as Multiple Services Contracts or “MSCs”) pursuant to which the hydrocarbons and construction in progress are property of PEMEX. Pursuant to the FPWC, the contractors manage the work in progress, classified as development, infrastructure and maintenance. As of December 31, 20062007 and 2005,2006, PEMEX has an outstanding payable amount of Ps. 1,916,8723,228,735 and Ps. 1,159,466,2,035,618, respectively.
(4)During 2007, a Floating Production Storage and Offloading (“FPSO”) vessel was purchased. The investment in the vessel totaled U.S.$723,575, of which U.S.$352,996 were paid in 2007 and the remaining amount of U.S.$370,579 (Ps.4,026,772) as of December 31, 2007, will be paid over a period of 15 years.
 
NOTE 10—11 —FINANCIAL INSTRUMENTS:
 
PEMEX’s cash flows arising from its commercial and financial activities are exposed to the volatility of interest rates, currency exchange rates and hydrocarbon prices in the national and international markets.
 
PEMEX uses derivative financial instrumentsIn order to managesupervise and control these market risks andmitigate the potential deviations of its cash flows, PEMEX has adopted a General Risk Management Policies and Procedures that includeframework, which includes the regulation of derivative financial instruments.
 
Each Subsidiary Entity using derivative financial instruments has also adopted specific guidelines and policies to manage their respective risks. The guidelines established byWithin this framework, the Subsidiary Entities operate within PEMEX’s risk management structure.
The General Risk Management Policies and ProceduresGuidelines are presented toproposed by the Risk Management Committee for its approval and toapproved by the Board of Directors for its authorization.Directors.
 
TheFunctions for the Risk Management Committee has, among its functions,(the “Committee”) include the authorization of the general strategies of risk management. ItThe committee is comprised of representatives of PEMEX, the Central Bank of Mexico, the SHCP and PMI.PMI CIM.
 
In 2001, the Board of Directors approved a restructuring of the risk management area and createdAdditionally the Risk Management Deputy Direction, whose objective isDirector designs and proposes to develop the financialCommittee the institutional regulations and catastrophic operational risk management strategystrategies for PEMEX and to establish institutional regulations consistent with a consolidated risk management approach.


F-28

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004managing financial market risk.
 
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(i) Credit risk
PEMEX is subject to credit risk through trade receivables. To monitor this risk, PEMEX has established an internal credit committee to monitor credit policies and procedures.
PEMEX closely monitors extensions of credit and has never experienced significant credit losses. PEMEX invests its excess cash in low-risk, liquid instruments which are placed with a wide array of institutions. The bulk of operations are carried out with domestic customers whose operations are industry-related, although PEMEX also has customers located abroad, primarily in the United States.
(ii) Counterparty risk from the use of derivative financial instruments
(i)  Counterparty risk from the use of derivative financial instruments
 
PEMEX is exposed to credit risk (or repayment) risk through the use of derivative financial instruments. Ifrepayment risk) when the market value of these instruments is positive PEMEX(favorable for PEMEX) since it faces a repayment risk if the counterparty fails to fulfill its performance obligations. When the fair value of a derivative contract is negative, PEMEX owes this amountthe risk belongs to the counterparty,counterparty.


F-25

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and therefore, faces no repayment risk.in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
In order to minimize the creditthis risk, in derivative financial instruments, PEMEX only enters into transactions with high credit quality counterparties (i.e., those ratedbased on credit ratings from rating agencies such as such by agencies like Standard & Poors and Moody’s).Moodys.
 
PEMEX enters intoPEMEX’s derivative transactions underare generally executed on the basis of standard agreements internationally accepted and in general, collateral for debt-relatedfinancial derivative financial instrumentstransactions is neither provided nor received.
 
(iii) Interest rate risk management
(ii)  Interest rate risk management
 
PEMEX is exposed to fluctuations onin the interest rate curves ofrates applicable to different currencies. The predominant exposure is to LIBOR in U.S. dollars, and to Mexican interest rates of reference in pesos, due to the fact that most of its debt is denominated in U.S. dollars or hedged to U.S. dollars by the use of swaps or denominated in pesos.through currency swaps. The use of derivative financial instruments allows PEMEX to obtain an acceptable composition of fixed and variable rates in the debt portfolio.
 
The derivative financial instruments used in PEMEX’s hedging transactions consist principally of fixed-floating interest rate swaps, and under these instruments PEMEX has the right to receive payments based on LIBOR or Mexican interest rates (TIIE) and is entitled to pay a fixed rate.
 
(iv) Exchange rate risk management
(iii)  Exchange rate risk management
 
Since a significant amount of PEMEX’s revenues is denominated in U.S. dollars, PEMEX generally obtains loans in U.S. dollars. However, PEMEX also borrows in currencies other than the U.S. dollar in order to take advantage of the existing financing conditions of these foreign currencies.
 
PEMEX has entered into currency swaps transactions as a hedging strategy against exchange fluctuations of the debt issued in currencies other than the U.S. dollar.dollars.
 
(v) Commodity price risk management
Petroleum products:
PEMEX balances its overall petroleum product supply and demand through PMI Trading Ltd., managing only those exposures associated with short-term operations. To this end, PEMEX uses a full range


F-29

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

of conventional oil price-related financial and commodity derivatives available in the oil markets. PEMEX’s benchmark for petroleum product commercial activities is the prevailing market price.
(iv)  Commodity price risk management
 
Natural gas:
 
Pemex-Gas and Basic PetrochemicalsPEMEX offers to its customers derivative financial instruments as a value added service and PEMEX provides various hedging contracts to its customers in order to give them the option of protecting themselves against fluctuations in the price of its products.
As part of the policies of the Mexican Government for promoting economic growth, during the fourth quarter of 2003, the Ministry of Energy announced a new program for hedging natural gas prices The risk that PEMEX could offeracquires under these contracts is transferred to domestic customers for the years 2004financial counterparties through 2006. Sales under this program represented approximately 20% of all of PEMEX’s domestic industrial natural gas sales. The program concluded in December 31, 2006 and it was not renewed.its MGI Supply Ltd. Subsidiary.
 
Crude oil:
 
Due to its fiscal regime, PEMEX transfers most of its risk related to crude oil prices to the Mexican Government. As a consequence, PEMEX generally does not enter into long-term hedging transactions against fluctuations in crude oil prices. During 2005, PEMEX entered into a short-term oil price hedging strategy by purchasing options that would guarantee a minimum price for approximately 7% of the total crude oil production for the year. During2007 and 2006, PEMEX did not enter into any crude oil price hedging transactions.
 
(vi) Fair value of derivative financial instruments
(v)  Fair value of derivative financial instruments
 
The fair value of derivative financial instruments is sensitive to movements in the underlying market rates and variables. PEMEX monitors the fair value of derivative financial instruments on a periodic basis. Fair values are calculated for each derivative financial instrument, and representsrepresent the price at which one party would assume the rights and duties of another party. Fair values of financial derivatives have been calculated using common market valuation methods with reference to available market data as of the balance sheet date.
The fair value for interest rate, exchange rate and hydrocarbon derivative instruments is determined by discounting future cash flows at fair value as of the balance sheet date, using market quotations for the instrument’s remaining life.
Prices for options are calculated using standard option-pricing models commonly used in the international financial market.
Exchange-traded energy futures contracts are valued individually at daily settlement prices quoted on the futures markets.
(vii) Embedded derivatives
With respect to the exchangeable bonds issued by RepCon Lux, PEMEX has determined that the option holders’ right to exchange their exchangeable bonds for shares of Repsol YPF, S.A. is an embedded derivative. Accordingly, this embedded derivative had to be separated from the underlying debt instrument, recorded at fair value and accounted for separately within the balance sheet.


F-30F-26

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(viii) Operations
• The fair value for interest rate, exchange rate and hydrocarbon derivative instruments is determined by discounting future cash flows as of the balance sheet date, using market quotations for the instrument’s remaining life.
• Prices for options are calculated using standard option-pricing models commonly used in the international financial market.
• Exchange-traded energy futures contracts are valued individually at daily settlement prices quoted on the futures markets.
(vi)  Embedded derivatives
As of December 31, 2007, PEMEX recognized a net gain of Ps. 5,990,399 recorded in comprehensive financial result, as a result of the foreign currency embedded derivatives detected from contracts denominated in currencies other than the functional currency of PEMEX and its counterparties. These embedded derivatives have been modeled and valued as multiple currency forwards, by using models and inputs commonly used in the market and based on the expected exchange rates between Mexican pesos and the currency of each contract. If expected exchange rates as of the balance sheet date appreciate with derivative financial instrumentsrespect to those observed at the signing date of each contract, the positive effects will increase.
(vii)  Operations with derivative financial instruments
 
PEMEX enters into derivative financials transactions with the sole purpose of hedging financial risks related to its operations, assets, or liabilities. Nonetheless, some of these transactions do not qualify for hedge accounting and therefore are recorded in the financial statements as non-hedges, despite the fact that their profits or lossescash flows are offset by the profits or lossescash flows of the positions to which they relate.
 
PEMEX seeks to mitigate the impact of market risk in its financials statements, through the establishment of a liability structure consistent with its expected operative cash flows.
As a result, PEMEX seeks to eliminate exchange rate risk of the debt issued in currencies other than pesos or U.S. dollars by entering derivative financial instruments contracts.
Likewise, the applicable accounting rules for the derivative financial instruments, establish that a derivative can notcannot be designated as a hedge of another derivative; therefore, the derivatives offered by PEMEX to its clients, as a value added service, as well as those entered into with the opposite position in order to offset that effect, are treated for accounting purposes as non-hedges.
 
As of December 31, 20062007 and 2005,2006, the fair value of the derivative instruments was Ps. (8,656,895)(Ps. 6,665,027) and Ps. (16,189,765)(Ps. 8,982,308), respectively. These amounts include the derivative instruments designated as cash flow hedges and their fair value of Ps. (1,698,482)(Ps. 977,664) and Ps. (6,781,520)(Ps. 1,705,290), respectively, that were recorded under other comprehensive loss.


F-27

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
The following table shows the fair value and the notional amount of the over-the-counter derivative instruments, outstanding as of December 31, 20062007 and 2005,2006, which are designated as cash flow hedges:
 
                 
  2006  2005 
  Notional Value  Fair Value  Notional Value  Fair Value 
 
Interest rate swaps:                
Pay fixed/ receive variable Ps.17,099,235  (Ps.1,809,891) Ps.18,202,213   (Ps.1,486,394)
                 
Natural gas swaps:                
Pay variable / receive fixed Ps.—  Ps.—  Ps.4,635,666   (Ps.5,116,153)
                 
                 
  2007  2006 
  Notional Value  Fair Value  Notional Value  Fair Value 
 
Interest rate swaps:                
Pay fixed/receive variable Ps.14,211,489  (Ps.1,267,432) Ps.17,741,995  (Ps.1,877,925)
                 
Cross-currency swaps:                
Pay Mexican Peso/receive UDI Ps.11,901,650  Ps.221,101  Ps.—  Ps.— 
                 
 
Derivative instruments designated as cash flow hedges that have the same critical characteristics as the item being hedged are considered to be highly effective.
 
In light of the foregoing, these instruments do not have an impact in earnings due to hedge inefficiency, and their fair value is recognized in its entirety as part of equity through other comprehensive income. The fair value of these instruments is reclassified into earnings at the same time as the hedged item cash flows affect earnings.
 
If a derivative instrument designated as a cash flow hedge is not effective, the ineffectiveness portion of its fair value has an impact on earnings and the effective portion is recorded as part of equity through other comprehensive income and is reclassified into earnings, while the hedged items cash flows affect earnings.
When a cash flow hedge is no longer effective, the accumulated gains or losses that were recorded in other comprehensive income have to remain in this account and be reclassified into earnings at the same time as the hedge item cash flows affect earnings; however, from that date forward, the derivative instrument will lose the hedge accounting treatment.
As of December 31, 20062007, only one interest rate swap initially designated as a cash flow hedge had lost its hedge accounting treatment.effectiveness.
 
As of December 31, 2006,2007, a net loss of Ps. 701,3431,479,284 was reclassified from other comprehensive income into earnings and it is estimated that in 20072008 a net loss of Ps. 516,792812,620 will be reclassified from other comprehensive income into earnings.


F-31F-28

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The following table shows the fair value and the notional amount of the exchange-traded derivative instruments contracted in recognized markets as of December 31, 2006 and 2005 that were treated for accounting purposes as non-hedges:
                 
  2006  2005 
  Notional Value  Fair Value  Notional Value  Fair Value 
 
Natural gas futures:                
Purchase Ps.       —  Ps.     —  Ps.     633  Ps.    38 
Sale  —   —   656   191 
                 
 
The following table shows the fair value and the notional amount of over-the-counter derivative instruments as of December 31, 20062007 and 20052006 that were treated for accounting purposes asnon-hedges:
 
                     
  2006  2005    
  Notional Value  Fair Value  Notional Value  Fair Value    
 
Interest rate swaps pay fixed / receive variable Ps.5,000,000  (Ps.367,762) Ps.5,202,665  (Ps.276,781)    
Cross-currency swaps:                    
Pay U.S. Dollar / receive Euros Ps.57,550,588  Ps.1,731,648  Ps.59,314,777  (Ps.3,617,834)    
Pay U.S. Dollar / receive Japanese Yen  12,828,029   (933,726)  13,095,199   (904,993)    
Pay U.S. Dollar / receive Ponds Sterling  7,427,262   1,247,753   8,734,061   279,372     
                     
Natural gas swaps:                    
Pay fixed / receive variable Ps.5,477,147  Ps.11,484,333  Ps.8,406,741  Ps.1,023,952     
Pay variable / receive fixed  6,426,491   (11,453,356)  5,495,298   (952,228)    
Pay variable / receive variable  2,403   (3,611)  2,330,814   (70,853)    
                     
Natural gas options:                    
Put     Ps.31,165      (Ps.2,364)    
Call      678       927     
Spread      —       9,036     
                     
                 
  2007  2006 
  Notional Value  Fair Value  Notional Value  Fair Value 
 
Interest rate swaps pay fixed/receive variable Ps.5,000,000  (Ps.185,719) Ps.5,187,950  (Ps.381,586)
Cross-currency swaps:                
Pay U.S. Dollar/receive Euros  44,730,188   3,549,308   59,713,915   1,796,741 
Pay U.S. Dollar/receive Japanese Yen  13,549,835   (355,956)  13,310,235   (968,825)
Pay U.S. Dollar/receive Ponds Sterling  7,417,159   1,120,775   7,706,453   1,294,656 
                 
Natural gas swaps:                
Pay fixed/receive variable Ps.5,163,787  Ps.202  Ps.5,683,033  Ps.11,916,029 
Pay variable/receive fixed  5,185,476   16,882   6,668,063   (11,883,888)
Pay variable/receive variable  472   470   2,493   (3,747)
                 
Natural gas options:                
Put                
Purchase     Ps.73,261      Ps.31,953 
Sale      (74,064)     384 
Call                
Purchase      361,510       117,280 
Sale      (361,300)      (116,576)
                 
 
 
Note: The exchange rates as of December 31, 20062007 and 20052006 were Ps. 10.881010.8662 and Ps. 10.777710.8810 per U.S. dollar, respectively.
 
As of December 31, 20062007 and 2005,2006, PEMEX recognized a net (loss) and a net profit (loss) of (Ps. 514,893) and Ps. 883,576 and (Ps. 5,405,850)916,790, respectively, in the comprehensive financing cost related to operations with derivative financial instruments treated for accounting purposes as non-hedges.

As of December 31, 2007, PEMEX recognized a net loss of Ps. 702,173, in other revenues related to operations with derivative financial instruments treated for accounting purposes as non-hedges.


F-32F-29

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The estimated fair value of financial instruments other than derivatives for which it is practicable to estimate their value, as of December 31, 20062007 and 2005,2006, in nominal terms, is as follows:
 
                                
 2006 2005  2007 2006 
 Carrying value Fair value Carrying value Fair value  Carrying Value Fair Value Carrying Value Fair Value 
Assets:                                
Cash and cash equivalents Ps.188,683,832  Ps.188,683,832  Ps.125,724,053  Ps.125,724,053  Ps.170,997,240  Ps.170,997,240  Ps.195,776,457  Ps.195,776,457 
Accounts receivable, notes and other  132,193,937   132,193,937   122,658,384   122,658,384   151,510,543   151,510,543   137,163,105   137,163,105 
Derivative financial instruments  4,230,800   4,230,800   3,614,378   3,614,378   12,909,868   12,909,868   4,389,836   4,389,836 
Liabilities:                                
Suppliers  35,758,809   35,758,809   32,215,474   32,215,474   35,138,344   35,138,344   37,102,983   37,102,983 
Accounts and accumulated expenses payable  14,063,436   14,063,436   10,803,337   10,803,337   18,097,530   18,097,530   14,592,081   14,592,081 
Taxes payable  43,376,135   43,376,135   70,761,756   70,761,756   146,593,355   146,593,355   45,006,644   45,006,644 
Derivative financial instruments  12,887,695   12,887,695   19,804,143   19,804,143   13,584,495   13,584,495   13,372,143   13,372,143 
Current portion of long-term debt  63,840,513   63,840,513   37,558,056   37,558,056   76,050,128   76,050,128   66,240,278   66,240,278 
Long-term debt  505,474,457   536,004,859   521,923,673   579,070,401   424,828,472   442,731,344   524,475,242   556,153,282 
                  
 
The fair value of the financial instruments presented in the previous table appears for informative purposes.
 
The nominal value of financial instruments such as cash equivalents, accounts receivable and payable, taxes payable and current portion of long-term debt approximate their fair value because of their short maturities.
 
The fair value of long-term debt is determined by reference to market quotes, and, where quotes are not available, is based on discounted cash flow analyses. Because assumptions significantly affect the derived fair value and they are inherently subjective in nature, the estimated fair values may not necessarily be realized in a sale or settlement of the instrument.
 
NOTE 11—12 —LABOR OBLIGATIONS:
 
PEMEX has established employee non-contributory retirement plans in accordance with theLey Federal del Trabajo(“Federal Labor Law”) and under collective bargaining agreements. Benefits are determined based on years of service and final salary at retirement. Liabilities and costs of such plans, including those related to the seniority premium benefit, to which every employee is entitled upon termination of employment, are recorded in accordance with an actuarial valuationvaluations performed by independent actuaries.
PEMEX partially funds its labor obligations through a Mexican trust structure, the resources of which come from the seniority premium item of the Governmental Budget, or any other item that substitutes or could be connected to this item, or that is associated to the same item and the interests, dividends and capital gains obtained from the investments of the trusts.
 
PEMEX has also established plans for other post retirementpost-retirement benefit obligations whose actuarial amounts are determined by independent actuaries. Such plans include the following benefits: cash provided to the retired personnel and their dependents for gas consumption, gasoline and other basic necessities, as well as, medical services which are provided using PEMEX’s infrastructure.


F-33F-30

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

For the years ended December 31, 2006
Cash Flow:
Plan contributions and 2005, PEMEX contributedbenefit paid were as follows:
                 
  Retirement remunerations, seniority premiums, pension and indemnity  Other post-retirement Benefits 
  2007  2006  2007  2006 
 
Contribution to the pension plan assets Ps.19,357,177  Ps.13,221,734  Ps.5,750,386  Ps.5,207,690 
Payments charged to the plan assets  13,449,831   11,839,880   5,750,386   5,207,690 
                 
Payments related to medical services provided to retired personnel were Ps. 17,795,5192,609,707 and Ps. 14,523,226, respectively, to2,574,209, during 2007 and 2006, respectively.
The cost, obligations and other elements of the pension plan, seniority premium plan and other post-retirement benefits plans.plans different from restructuring, mentioned in Note 3l of these financial statements, were determined, based on calculations prepared by independent actuaries as of December 31, 2007, 2006 and 2005.
 
The components of net periodic cost for the years ended December 31, 2007, 2006 2005 and 2004 pension plan and seniority premium liabilities2005 are as follows:
 
                 
  December 31, 2006 
     Seniority
       
  Pension  premium  Indemnity  Total 
 
Vested benefit obligation Ps.166,701,824  Ps.16,549,668  Ps.1,366,265  Ps.184,617,757 
Nonvested benefit obligation  133,942,007   63,051   16,092   134,021,150 
                 
Current benefit obligation  300,643,831   16,612,719   1,382,357   318,638,907 
Less: Plan assets  (2,014,900)  (26,756)  —   (2,041,656)
                 
Net current liability  298,628,931   16,585,963   1,382,357   316,597,251 
Net projected liability  (178,583,541)  (17,980,061)  (1,718,639)  (198,282,241)
Additional liability Ps.120,045,390  Ps.227,932  Ps.26,488  Ps.120,299,810 
                 
Projected benefit obligation Ps.306,064,555  Ps.17,083,760  Ps.1,410,413  Ps.324,558,728 
                 
Less: Plan assets  (2,014,900)  (26,756)  —   (2,041,656)
                 
Items to be amortized over the next 13 and 14 years:                
Transition obligations  (66,906,164)  (3,245,399)  (18,599)  (70,170,162)
Prior service costs and plan amendments  (6,579,494)  (244,189)  —   (6,823,683)
Variations in assumptions and adjustments for experience  (51,980,437)  4,412,645   326,825   (47,240,967)
                 
Total of unamortized items  (125,466,095)  923,057   308,226   (124,234,812)
                 
Net projected liability Ps.178,583,560  Ps.17,980,061  Ps.1,718,639  Ps.198,282,260 
                 
                         
  Retirement remunerations, seniority
          
  premiums, pension and indemnity  Other post-retirement benefits 
  2007  2006  2005  2007  2006  2005 
 
Net periodic cost:                        
Service cost Ps.9,167,594  Ps.7,507,356  Ps.6,513,609  Ps.6,405,902  Ps.5,881,745  Ps.4,163,849 
Financial cost  27,246,555   24,571,208   20,983,951   21,795,906   18,562,492   15,479,140 
Return on plan assets  (26,007)  (51,860)  (185,989)  —   —     
Amortization of prior services cost and plan amendments  677,353   663,036   364,519   4,483,931   4,447,357   4,478,314 
Variances in assumptions and experience adjustments  1,319,028   671,355   (168,555)  (1,352,970)  (3,131,317)  (3,811,680)
Amortization of transition liability  6,133,654   6,114,252   6,157,546   6,407,047   6,357,929   6,402,163 
Inflation adjustment  1,650,858   1,598,629   1,118,730   1,398,004   1,301,166   889,879 
                         
Total periodic cost  46,169,035   41,073,976   34,783,811   39,137,820   33,419,372   27,601,665 
Recognition of severance payments  —   —   1,402,142   —   —   — 
                         
Net periodic cost Ps.46,169,035  Ps.41,073,976  Ps.36,185,953  Ps.39,137,820  Ps.33,419,372  Ps.27,601,665 
                         


F-34F-31

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

                 
  December 31, 2006 
     Seniority
       
  Pension  premium  Indemnity  Total 
 
Net cost for the period for seniority premium, pension plan and indemnities:                
Service cost Ps.6,419,521  Ps.756,732  Ps.59,125  Ps.7,235,378 
Financial cost  22,425,238   1,157,043   98,757   23,681,038 
Return on plan assets  (49,330)  (651)  —   (49,981)
Transition obligation  5,512,852   378,615   1,277   5,892,744 
Prior services and plan amendments  603,243   35,772   —   639,015 
Variations in assumptions and adjustments for experience  1,048,353   (382,309)  (19,011)  647,033 
Inflation adjustment  1,456,797   78,370   5,547   1,540,714 
                 
Total net cost for the year  37,416,674   2,023,572   145,695   39,585,941 
                 

The actuarial present value of benefit obligations is as follows:
                 
  Retirement remunerations, seniority
       
  premiums, pension and indemnity  Other post-retirement benefits 
  2007  2006  2007  2006 
 
Vested benefit obligation value:                
Vested benefit obligation Ps.206,364,293  Ps.191,557,538  Ps.—  Ps.— 
                 
Accumulated benefit obligation (ABO)/ obligation Ps.357,768,687  Ps.330,616,544  Ps.—  Ps.— 
                 
Projected benefit obligation (PBO)/ Ps.367,485,744  Ps.336,758,891  Ps.300,396,198   266,481,493 
Plan assets at fair value  (7,664,407)  (2,118,402)  —   — 
                 
Projected benefit obligation over plan assets  359,821,337   334,640,489   300,396,198   266,481,493 
Items to be amortized:                
Prior services cost and plan amendments  (6,449,919)  (7,080,185)  (58,102,534)  (62,590,753)
Variances in assumptions and experience adjustments  (54,196,339)  (49,016,755)  743,034   14,811,311 
Unamortized transition liability  (66,631,947)  (72,807,858)  (71,146,932)  (77,594,439)
                 
Project liability net  232,543,132   205,735,691   171,889,766   141,107,612 
Additional liability  123,768,374   124,821,880   —   — 
                 
Total liability Ps.356,311,506  Ps.330,557,571  Ps.171,889,766  Ps.141,107,612 
                 
 
                 
  December 31, 2005 
     Seniority
       
  Pension  premium  Indemnity  Total 
 
Vested benefit obligation Ps.150,965,715  Ps.13,633,077  Ps.1,250,554  Ps.165,849,346 
Nonvested benefit obligation  111,884,903   56,234   18,539   111,959,676 
                 
Current benefit obligation  262,850,618   13,689,311   1,269,093   277,809,022 
Less: Plan assets  (1,454,463)  (16,925)      (1,471,388)
                 
Net current liability  261,396,155   13,672,386   1,269,093   276,337,634 
Net projected liability  (153,327,324)  (16,665,097)  (1,579,869)  (171,572,290)
                 
Additional liability Ps.108,068,831  Ps.70,691  Ps.18,539  Ps.108,158,061 
                 
Projected benefit obligation Ps.266,933,684  Ps.14,101,817  Ps.1,285,675  Ps.282,321,176 
                 
Less: Plan assets  (1,454,463)  (16,925)  —   (1,471,388)
                 
Items to be amortized over the next 13 and 14 years:                
Transition obligations  (72,642,563)  (3,639,367)  (18,540)  (76,300,470)
Prior service costs and plan amendments  (7,174,827)  (281,414)  —   (7,456,241)
Variations in assumptions and adjustments for experience  (32,334,507)  6,500,996   312,734   (25,520,777)
                 
Total of unamortized items  (112,151,897)  2,580,215   294,194   (109,277,488)
                 
Net projected liability Ps.153,327,324  Ps.16,665,107  Ps.1,579,869  Ps.171,572,300 
                 
Significant assumptions used in determining the net periodic cost of plans are as follows:
         
  Retirement remunerations, seniority premiums,
  
  pension and indemnity Other post-retirement benefits
  2007 2006 2007 2006
 
Discount rate 4.25% 4.25% 4.25% 4.25%
Rate of compensation increase 0.50% 0.50% 0.50% 0.50%
Expected long term rate of the return on plan assets 4.25% 4.25% — —
Employees’ average remaining labor life over which pending amortization items are amortized 11 years 12 years 11 years 12 years
 

Plan assets
The Plan assets are included into two trusts,Fondo Laboral Pemex (“FOLAPE”) andFideicomiso de Cobertura Laboral y de Vivienda(“FICOLAVI”), which are managed by BBVA Bancomer, S. A. and a Technical Committee, which is composed of personnel from Petróleos Mexicanos and the trusts.

F-35
F-32

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

                     
  December 31, 2005  December 31, 2004 
     Seniority
          
  Pension  premium  Indemnity  Total  Total 
 
Net cost for the period for seniority premium, pension plan and indemnities:                    
Service cost Ps.5,394,079  Ps.775,543  Ps.108,011  Ps.6,277,633  Ps.6,841,234 
Financial cost  19,006,178   1,104,064   113,499   20,223,741   19,252,703 
Return on plan assets  (178,574)  (677)  —   (179,251)  (671,943)
Transition obligation  5,551,783   381,357   1,329   5,934,469   5,822,638 
Prior services and plan amendments  315,278   36,035   —   351,313   289,605 
Variations in assumptions and adjustments for experience  182,181   (344,630)  —   (162,449)  142,532 
Inflation adjustment  1,006,216   64,669   7,315   1,078,200   1,638,886 
                     
Total net cost for the year  31,277,141   2,016,361   230,154   33,523,656   33,315,655 
Recognition of severance payments  —   —   1,351,345   1,351,345   — 
                     
Net cost of the period and recognition of severance payments Ps.31,277,141  Ps.2,016,361  Ps.1,581,499  Ps.34,875,001  Ps.33,315,655 
                     

 
Rates used in calculating benefit obligationsThe weighted-average asset allocation of retirement benefits, for seniority premiums, pensions and planother benefits are as follows:
 
             
  December 31, 
  2006  2005  2004 
 
Discount rate  4.25%  4.50%  4.59%
Rate of increase in compensation levels  0.50%  0.50%  0.92%
Rate of increase in costs of other post-retirement benefits  0.50%  0.50%  0.92%
Expected long term rate of the return on plan assets  4.25%  5.00%  5.50%
                 
  Retirement remunerations,
    
  seniority premiums,
    
  pension and indemnity  Other post-retirement benefits 
Type of Investment
 2007  2006  2007  2006 
 
Governmental securities  84.2%  71.0%  84.2%  71.0%
Fixed rate securities  15.8%  29.0%  15.8%  29.0%
                 
Total
  100.0%  100.0%  100.0%  100.0%
                 
 

NOTE 13 —COMPREHENSIVE (LOSS) INCOME:
Comprehensive (loss) income for the years ended December 31, 2007, 2006 and 2005 was as follows:
             
  2007  2006  2005 
 
Net (loss) income (Ps.18,307,569) Ps.46,953,205  (Ps.82,357,982)
Surplus in restatement of equity  18,638,402   4,064,648   8,184,288 
Derivative financial instruments  656,699   5,274,109   (7,036,437)
Effect on equity from labor obligations  (3,432,792)  (18,871,922)  (21,672,659)
Other  —   710,094   — 
             
Comprehensive (loss) income for the year (Ps.2,445,260) Ps.38,130,134  (Ps.102,882,790)
             
NOTE 14 —EQUITY:
On December 31, 1990, certain debt owed by Petróleos Mexicanos to the Mexican Government was capitalized as equity. This capitalization amounted to Ps. 22,334,195 in nominal terms (U.S.$7,577,000) and was authorized by the Board of Directors. The capitalization agreement between Petróleos Mexicanos and the Mexican Government states that the Certificates of Contribution “A” constitute permanent capital. As a result, the Certificates of Contribution “A” are as follows:
Amount
Certificates of Contribution “A” (nominal value)Ps.10,222,463
Inflation restatement increase86,735,530
Certificates of Contribution “A” in Mexican pesos of December 31, 2007 purchasing powerPs.96,957,993
As a condition of this capitalization, Petróleos Mexicanos agreed to pay a minimum guaranteed dividend to the Mexican Government equal to the debt service for the capitalized debt in December 1990. The minimum guaranteed dividend consisted of the payment of principal and interest on the same terms and conditions as those originally agreed upon with international creditors through 2006, at the exchange rates on the date that such payments are made. Such payments must be approved annually by the Board of Directors. This minimum guaranteed dividend was extended until 2007, by the CA-164/2007 agreement.

F-36
F-33

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

         
  2006  2005 
 
Other post-retirement benefit plans:
        
Obligations for other post-retirement benefits  Ps. 256,827,353  Ps.209,119,818 
Less:        
Pending items of amortization relative to those benefits  (120,831,812)  (97,959,987)
         
Net liability for other post-retirement benefits  Ps. 135,995,541  Ps.111,159,831 
         

 
             
  December 31, 
  2006  2005  2004 
 
Net cost for other post-retirement benefits:
            
Service cost  Ps. 5,668,660  Ps.4,013,000  Ps.3,789,973 
Financial cost  17,890,007   14,918,359   12,604,365 
Transition obligation  6,127,593   6,170,224   6,056,519 
Prior services and plan amendments cost  4,286,237   4,316,073   218,153 
Variations in assumptions and adjustments for experience  (3,017,875)  (3,673,590)  (112,953)
Inflation adjustment  1,254,027   857,640   1,170,850 
             
Total net cost for the year  Ps. 32,208,649  Ps.26,601,706  Ps.23,726,907 
             
During 2007 and 2006, Petróleos Mexicanos paid Ps. 4,270,225 and Ps. 268,990, (Ps. 263,329 nominal value) respectively, to the Mexican Government in advance for the minimum guaranteed dividend. These payments will be applied to final amount that the Board of Directors approves as the total annual dividend, which usually occurs in the following fiscal year.
 
         
  December 31, 
  2006  2005 
 
Expected obligations for other post-retirement benefits related to retired employees and active employees that have become vested  Ps. 130,293,808  Ps.125,024,449 
Portion of the post-retirement benefits for other employees based on years of service  126,533,545   84,095,369 
         
Total accumulated obligation for other post-retirement benefits  Ps. 256,827,353  Ps.209,119,818 
         
The effect of increasing by one percent the rate used in estimating the increase in the cost of other post-retirement benefits, with no change in other assumptions, is a follows:        
Total labor cost and financial cost  Ps.32,447,423  Ps.28,998,655 
         
Accumulated post-retirement benefit obligation Ps.295,356,873  Ps.253,662,141 
         
In 2006, Board of Directors of Petróleos Mexicanos approved the capitalization (i.e., transfer to equity) of Ps. 621,009 (Ps. 594,987 nominal value) for infrastructure works, corresponding to resources from the Mexican Government in accordance with the Federal Revenue Law for 2004.
During 2006, in compliance with the agreement CA399/2004, the Board of Directors of Petróleos Mexicanos approved the capitalization of Ps. 652,310 (Ps. 608,068 nominal terms) of revenues at December 31, 2005, from the Mexican Government for infrastructure works in accordance with the Federal Income Law for 2004.
In December 2006, the Mexican Government made a payment in the amount of Ps. 47,454,593 (Ps. 45,735,400 nominal value) to Petróleos Mexicanos derived from excess revenues that were paid in accordance with the Federal Expenditure Budget for the 2006 fiscal year. This payment increased the equity of Petróleos Mexicanos and the Subsidiary Entities.
In December 2007, the Mexican Government made payments in the amount of Ps. 11,160,824, to Petróleos Mexicanos, which was capitalized in equity. This total includes two payments in the amount of Ps. 11,131,800 and Ps. 19,700, which were additionally received from theFondo sobre Ingresos Excedentes (“FIEX”). PEMEX also capitalized interest in the amount of Ps. 9,324 which was related to these payments. This payment derived from excess revenues that were paid in accordance with theLey de Presupuesto y Responsabilidad Hacendaria, (“Federal Budget and Fiscal Responsibility Law”) article 19, fraction IV, clauses b) and c). Additionally, in February 2008, the Mexican Government made another payment in the amount of Ps. 2,806,200, to Petróleos Mexicanos.
In 2004, Petróleos Mexicanos signed an agency agreement (Funds for Specific Purposes — Trade Commission) with Banco Santader Serfin, S.A. as an agent in order to manage the funds transferred by the Mexican Government to Petróleos Mexicanos and Subsidiary Entities. According to theLey de Ingresos de la Federación(“Federal Revenue Law”), these funds are to be utilized only for infrastructure works related to exploration, refining, gas and petrochemicals. Payments made by the Mexican Government that increase the equity of Petróleos Mexicanos and the Subsidiary Entities are deposited into the Fund for Specific Purposes — Trade Commission. As of December 31, 2007 and 2006, the balance of this account was Ps. 11,858,575 and Ps. 35,589,790, respectively (see Note 6).
 
NOTE 12—15 —COMMITMENTS:
a. During 2007, PEMEX purchased a Floating Production Storage and Offloading (“FPSO”) vessel. The basic function of this new vessel is the reception and processing of crude oil from marine wells. The tanker treats and separates oil and gas, in order to meet international API guidelines for exports. Upon completion of this process, the tanker stores the product and distributes it to foreign clients’ shiPs. The tanker has a storage capacity of 2 million barrels and a distribution capacity of 1.2 million barrels per day.
Total investment in the vessel was U.S.$723,575, of which U.S.$352,996 was paid in 2007 and the balance will be due over a period of 15 years.


F-34

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
Future estimated payments are as follows:
     
2008 U.S. $25,267 
2009  25,267 
2010  25,267 
2011  25,267 
2012  25,267 
2013 and thereafter  244,244 
     
Total U.S. $370,579 
     
 
 a.b. PEMEX has entered into a nitrogen supply contract for the pressure maintenance program at the Cantarell field. During 2007, an additional contract was incorporated, also with the purpose of supplying nitrogen to the Ku-Maloob-Zap field, that expires in 2015.extending the original contract until 2027. At December 31, 20062007 and 2005,2006, the value of the nitrogen to be supplied during the term of the contract iswas approximately Ps. 12,892,85518,314,382 and Ps. 15,755,573,

F-37

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

13,377,497, respectively. In the event of the annulment of the contract and depending on the circumstances, PEMEX would be requiredhas the right and obligation to purchaseacquiring the vendor’s nitrogen production plant, in accordance withunder the terms of the contract.

 
The futureFuture estimated payments in connection with this contract are estimated as follows:
 
        
2007 Ps.2,332,301 
2008  1,608,217  Ps.1,969,805 
2009  1,254,243   1,695,836 
2010  1,254,243   1,717,418 
2011  1,254,242   1,721,866 
2012 and thereafter  5,189,609 
2012  1,742,658 
More than 5 years  9,466,799 
      
Total Ps.12,892,855  Ps.18,314,382 
      
b.  In 2005, PEMEX entered into a contract for the construction of a tanker, the Floating Production Storage and Offloading (“FPSO”) vessel with Bergensen. The basic function of this new vessel is to provide for the receipt and processing of crude oil from marine wells. The tanker separates oil and gas in order to meet international API guidelines for exportation. Upon completion of this process, the tanker stores the product and distributes it to foreign clients’ ships. The tanker has a storage capacity of 2 million barrels.
The contract represents an investment of U.S. $758,000. Under the terms of the contract, Pemex Exploration and Production will receive the FPSO vessel in April 2007.
In June 2007, an acceptance payment of U.S. $379,000 will be made, representing 50% of the purchase price of the vessel.
 
 c. During 2003, 2004 and 2005, PEMEX entered into Financed Public Work Contracts (“FPWC”FPWCs”) (formerly known as Multiple Services Contracts or “MSCs”). In connection with these contracts, the contractor, at its own cost, has to administer and support the execution of the works in connection with the FPWC,FPWCs, which are classified in theinto categories of development, infrastructure and maintenance. The estimated value of the FPWCFPWCs as of December 31, is as follows:
 
                    
Date of contracting
 Block 2006 2005 
Date of Contract
 
Block
 2007 2006 
February 9, 2004 Olmos U.S.$343,574  U.S.$343,574  Olmos U.S. $343,574  U.S. $343,574 
November 21, 2003 Cuervito  260,072   260,072  Cuervito  260,072   260,072 
November 28, 2003 Misión  1,035,580   1,035,580  Misión  1,035,580   1,035,580 
November 14, 2003 Reynosa-Monterrey  2,437,196   2,437,196  Reynosa-Monterrey  2,437,196   2,437,196 
December 8, 2003 Fronterizo  264,977   264,977  Fronterizo  264,977   264,977 
December 9, 2004 Pandura-Anáhuac  900,392   900,392  Pandura-Anáhuac  900,392   900,392 
March 23, 2005 Pirineo  645,295   645,295  Pirineo  645,295   645,295 
April 3, 2007 Nejo  911,509   — 
April 20, 2007 Monclava  433,501   — 
          
Total   U.S.$5,887,086  U.S.$5,887,086    U.S. $7,232,096  U.S. $5,887,086 
          


F-38F-35

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 d. PEMEX, through PMI, enters into sale contracts for crude oil with foreign companies in international markets. The terms and conditions of these contracts are specific to each customer, and the contract durations vary, including evergreen contracts and long term contracts.
 
e.  At December 31, 2006 and 2005, PEMEX had entered into contracts with various contractors for an approximate amount of Ps. 90,929,079 and Ps. 235,984,923. These contracts are for the development of PIDIREGAS.
NOTE 13—16 —CONTINGENCIES:
In the ordinary course of business, PEMEX is named in a number of lawsuits of various types. PEMEX evaluates the merit of each claim and assesses the likely outcome, accruing a contingent liability when an unfavorable decision is probable and the amount is reasonably estimable. Such contingent liabilities are discussed below.
 
 a.  In the ordinary course of business, PEMEX is named in a number of lawsuits of various types. PEMEX evaluates the merit of each claim and assesses the likely outcome, accruing a contingent liability when an unfavorable decision is probable and the amount is reasonably estimable. Unless specifically disclosed in this note, we do not believe a materially unfavorable outcome is probable for any known or pending lawsuits or threatened litigation for which we have not made any accruals.
b.(a) PEMEX is subject to the provisions of theLey General del Equilibrio Ecológico y la Protección al Ambiente(“General Law on Ecological Equilibrium and Environmental Protection”). To comply with this law, environmental audits of PEMEX’s larger operating, storage and transportation facilities are have been or are being conducted. Following the completion of such audits, PEMEX has signed various agreements with theProcuraduría Federal de Protección al Ambiente(Federal (Federal Attorney of Environmental Protection, or “PROFEPA”) to implement environmental remediation and improve environmental plans. Such plans contemplate remediation for environmental damages, as well as related investments for the improvement of equipment, maintenance, labor and materials.
 
As of December 31, 20062007 and 2005,2006, the reserve for environmental remediation expenses totaled Ps. 3,441,2942,093,440 and Ps. 1,476,218,2,398,258, respectively. This reserve is included in long-term liabilities in the balance sheet.
 
While the audits of Petróleos Mexicanos’ four subsidiaries’ main facilities are complete, there are a number of facilities yet to be audited, and some completed audits are pending evaluations. Pemex-Refining expects 18 pipeline systems to be audited, and nine audits should be completed by 2008. Pemex-Gas and Basic Petrochemicals foresees the auditing of six pipelines transferred by Pemex-Petrochemical during June 2007. Pemex-Exploration and Production is evaluating a new program for regional audits primarily covering its pipelines system. We cannot predict the outcome of these audits, the outcome of the pending evaluations of audits nor the outcome of the new regional program.
 c.(b) As of December 31, 2006,2007, PEMEX iswas involved in various civil, commercial, tax, criminal, administrative, labor and arbitration and administrativelawsuits. Based on the information available, the amount claimed in connection with these lawsuits the final resolution of which is pending as of the date of these financial statements.totaled approximately Ps. 39,209,855. At December 31, 2006 and 2005,2007, PEMEX had accrued a reserve of Ps. 9,716,756 and Ps. 1,642,647, respectively,10,453,830 for these contingent liabilities. Among these lawsuits, are the following:


F-39

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Based on the information available, the amount claimed in connection with these lawsuits totaled approximately Ps. 37,503,000 at December 31, 2006. Among these lawsuits, are the following:
 
 i. PEMEXPemex-Refining is a party to an arbitration proceeding (No. 11760/KGA) between Pemex-Refining andfiled by CONPROCA, S.A. de C.V. (“CONPROCA”) before the International Chamber of Commerce, in which CONPROCA is seeking payment of U.S. $633,100$633,100 related to construction and maintenance services in the Cadereyta refinery. PEMEXPemex-Refining filed a counterclaim against CONPROCA in the amount of U.S. $907,700.$907,000 (which includes the value added tax).
The arbitration panel notified the parties that it will issue an award on this matter on March 31, 2008. As of the date of these financial statements, such award has not been issued. Once it is issued, a hearing on damages will be held.
On October 13, 2006, the parties filed briefs and submitted evidence for the second liability hearing, which was held in January 2007. On January 20 and 21, 2006, the Cadereyta Refinery, El Tejar pumping station and a cross-section valve located on the border of La Antigua River were inspected by the arbitration panel and its experts. On April 4, 2007, the parties submitted their pleadings in connection with the second hearing. The arbitration panel will issue a partial or provisional award on this matter and once the award is issued, a hearing on damages will be held.
 ii. In April 2004, Construcciones Industriales del Golfo, S.A. de C.V. filed a civil claim against Pemex-Exploration and Production, (exp. 40/2004-VII), for a total amount of Ps. 15,237 plus U.S. $219,584$219,584 for the removal of deposits in the Salamanca refinery. Both partiesOn September 28, 2007, a judgment was issued in favor of Pemex-Exploration and Production. The plaintiff filed their documentary evidence andan appeal against this judgment, which was denied on January 21, 2008. The plaintiff then filed a final judgmentconstitutional relief known asamparo, which is still pending.


F-36

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 iii. In December 2003, Unión de Sistemas Industriales, S. A. filed a civil claim against Pemex-Refining (exp. 202/2003), forseeking Ps. 393,095. The trial is in the evidentiary stages.stages; expert evidence is still pending.
 
 iv. In December 2004, Corporación Mexicana de Mantenimiento Integral S. de R. L. de C. V. (“COMMISA”) filed an arbitration claim before the International Court of Arbitration of the International Chamber of Commerce (the “ICA”) against Pemex-Exploration and Production (IPC-01) for breach of a construction agreement in connection with two platforms in the Cantarell complex. Pemex-Exploration and Production has filed a counterclaim against COMMISA.
On January 26, 2007, COMMISA filed a claim seeking U.S.$292,043 and Ps. 37,537; and Pemex-Exploration and Production filed a counterclaim seeking U.S.$125,897 and Ps. 41,513. On August 10, 2007, each party filed their responses to the claim and counterclaim, respectively. On September 10, 2007, both parties filed their replies, in which COMMISA modified its claim and is, as of the date of these financial statements, seeking U.S.$319,900 and Ps. 37,200 in damages. On October 10, 2007, the parties filed their rejoinders. A hearing was held during which each party presented its case to the panel and filed its evidence. On February 15, 2008, the parties filed their pleadings.
The final award is expected to be issued before May 31, 2008 in accordance with a resolution issued by the ICA on February 14, 2008.
On November 28, 2006, the ICA issued a preliminary award declaring its jurisdiction. On January 26, 2007, Pemex-Exploration and Production filed a detailed counterclaim seeking U.S. $125,897 and Ps. 41,513. Pemex-Exploration and Production is required to file a response to the detailed claim filed by COMMISA before June 11, 2007. Based on the detailed claim, COMMISA is seeking U.S. $292,043 and Ps. 37,537.
 v. An arbitration proceeding before the ICA was filed by COMBISA, S. de R. L. de C. V. (“COMBISA”) against Pemex-Exploration and Production (IPC-22) seeking U.S. $235,770$235,770 for the alleged breach of a construction agreement in connection with three platforms in the Cantarell complex. Pemex-Exploration and Production responded to the claim and filed a counterclaim seeking approximatelyagainst COMBISA. On July 23, 2007, a final award was granted, pursuant to which COMBISA was ordered to pay U.S. $12,294.$4,600 and Pemex-Exploration and Production was ordered to pay U.S.$61,300 as well as financial expenses and the corresponding value added tax. Both parties requested an additional decision to clarify this final award on November 16, 2007. The FCA modified the award such that total amount owed to COMBISA was corrected and Pemex-Exploration and Production was ordered to pay U.S.$61,600 as well as financial expenses and the corresponding value added tax. The total amount owed to Pemex-Exploration and Production was ratified.
 
The arbitral hearing ended December 1, 2006. On January 31, 2007,30, 2008, Pemex-Exploration and Production and COMBISA executed a settlement agreement under which Pemex-Exploration and Production agreed to pay U.S.$84,579 (plus the parties filed their concluding briefs. A final decision is still pending.value added tax) and COMBISA agreed to pay U.S.$4,594 plus the value added tax). This claim, which was initially for a total amount of U.S.$235,770, concluded with a payment of U.S.$91,983 to COMBISA.
 
 vi. COMMISA filed an arbitrationa claim before the ICA against Pemex-Exploration and Production (IPC-28), seeking approximately U.S.$142,400 and Ps. 40,199 and U.S. $142,400 for, among other things, the alleged breach of a contract (PEP-O-IT-136/08) related to two vessels, the Bar Protector and Castoro 10, both of which are located in the Cantarell complex. Pemex-Exploration and Production filed a counterclaim. On February 11, 2008, Pemex-Exploration and Production was notified of an award pursuant which Pemex-Exploration and Production was ordered to pay Ps. 10,928 and U.S.$75,075, plus the value added tax and U.S.$200 related to arbitration expenses.


F-40F-37

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

agreement (PEP-O-IT-136/98 IPC-28) in connection with two vessels in the Cantarell complex. Pemex-Exploration and Production filed a counterclaim seeking approximately Ps. 488 and U.S. $2,057.

COMMISA filed a request to execute this award, which was notified to Pemex-Exploration and Production on March 24, 2008. As of the date of these financial statements, an answer to this request will be filed by Pemex-Exploration and Production.
 
 On March 12, 2007, the proceedings to furnish additional evidence concluded. The final decision is still pending.
vii.On March 31, 2006, Petroquímica Cangrejera, S. A. de C. V., Petroquímica Pajaritos, S. A. de C. V. and Petroquímica Morelos, S. A. de C. V. (each of which has since been merged into Pemex-Petrochemicals) were notified by the Council of Coatzacoalcos, Veracruz of an alleged underpayment of certain real estate taxes in the amount of approximately Ps. 1,846,691. The companies objected to the assessment before theTribunal de lo Contencioso Administrativo del Poder Judicial de Veracruz(Contentious Administrative Court of the Judicial Power of the State of Veracruz).
On December 22, 2006, a settlement agreement for the real estate taxes was executed between the parties. The agreement was filed with the court to conclude the administrative proceedings. Pemex-Petrochemicals paid Ps. 76,040 to the Council of Coatzacoalcos, Veracruz.
viii. A civil claim was filed by Asociación de Transportistas al Servicio de Petróleos Mexicanos Clientes o Empresas Sustitutos, A. C. against Pemex-Refining (exp. 262/2005-II) seeking approximately Ps. 1,647,629 for damages in connection with the suspensionalleged breach of a tank truck transportation agreement datedagreement. On March 26, 1993. The trial7, 2008 a final hearing was held in which both parites filed their allegations. A final judgement is in the evidentiary stages. The trial has been suspended due to an appeal filed by Pemex-Refining from a ruling excluding certain documentary evidence filed by Pemex-Refining.still pending.
 ix.viii. A civil claim was filed by Asociación de Transportistas al Servicio de Petróleos Mexicanos, Clientes o Empresas Sustitutos, A. C. against Pemex-Refining (exp. 271/2005-I) asserting that Pemex-Refining should authorize the plaintiff to replace tank trucks older than ten years in accordance with the tank truck transportation agreement mentioned in paragraph viii. Evidencevii above. On January 23, 2008, a final hearing was held in which both parites filed their allegations. A final judgement is still pending.
ix. A civil claim was filed by Asociación de Transportistas al Servicio de Petróleos Mexicanos, Clientes o Empresas Sustitutos, A. C. against Pemex-Refining, (295/2007), seeking a judicial judgment declaring the parties,breach of a services agreement dated March 26, 1993 and a final hearing is pending.damages, among other expenses.
On October 31, 2007, Pemex-Refining was summoned and a precautionary measure was granted to the plaintiff requesting Pemex-Refining to replace tank trucks and grant the appropiate authorizations. On November 5, 2007, Pemex-Refining filed a motion stating that the judge lacked jurisdiction, which was granted and the trial suspended. The resolution of this motion is still pending. A request for constitutional relief known as anamparowas filed by Pemex-Refining against the precautionary measure, which was accepted by theJuzgado Quinto de Distrito en Materia Civil (“Fifth Civil District Court”).
 x. A request for Constitutional relief known as anamparowas filed by Minera Carbonífera Río Escondido, S.A. de C.V. and Minerales Monclova, S.A. de C.V. against several officersfor alleged violation of PEMEXits mining concesions and Pemex-Explorationfor the excecution of development, infrastructure and Production, claiming thatmanteinance works in non-associated gas fields under a public works contract (No. 414105826) and a modification of the construction contract 414105826 is unconstitutional because the officers who executed the agreement did not have the appropriate authority.
Reports and expert opinions were filed as evidence.  AsLey Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo(“Regulatory Law to Article 27 of the datePolitical Constitution Concerning Petroleum Affairs”). The purpose of this filing, a third expert’s opinion is still pending, as well ascontract was to explore non-associated gas in the constitutional hearing.same fields where the plaintiffs have their mining concessions.
The plaintiffs argue they have a right to exploit gas found in the fields located under their mining concessions. As of the date of these financial statements, a final judgment is still pending. A third arbitrator expert’s opinion on Geology and a constitutional hearing are still pending.
 xi. There is anAn arbitration proceeding before the ICA was filed by TEJAS GAS DE TOLUCA,Tejas Gas de Toluca, S. de R. L.R.L. de C. V.C.V. against Gas Natural México S. A.S.A. de C. V.C.V. (“GNM”) and Pemex-Gas and Basic Petrochemicals seeking, among other things, compliance with a Memorandumtransportation agreement and its amendments as agreed in February, 2001 and November, 2001. This agreement was executed for the operation of the Palmillas-Toluca pipeline.


F-41F-38

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Understanding and its annexes (which was executed for the construction and operation of the Palmillas-Toluca pipeline, as well as for the execution of a transportation agreement).

In February 2008, several hearings were held with the arbitration panel and the part involved, during which a summary of claims and counterclaims were presented. On February 26, 2008, the initial arbitration report was executed and a provisional arbitration calendar was agreed.
 
 As of this date, the arbitration panel has not been formed. The provisional arbitration schedule is being set and the initial arbitration report is being prepared to state the claim and counterclaim.
xii. As ofIn connection with the date of this report, two claims filed by a group of Congressmen from the LIXth Legislature against Pemex-Exploration and Production related to the Financed Public Works Contracts program remain pending.(“FPWC”), as of the date of these financial statemets only one claim remains open since Pemex-Exploration and Production obtained a favorable judgement in the other similar claims filed by these plaintiffs.
 
In the first case, the civilThe remaining claim seeks to void the FPWC entered into between Pemex-Exploration and Production and Repsol Exploración México, S.A. de C.V. for the Reynosa-Monterrey natural gas production block. Pemex-Exploration and Production also filed a motion arguing that the plaintiffs lacked standing, which was granted on June 10, 2005. This decision was appealed by the plaintiffs, and the appeal was subsequently denied. TheSegundo Tribunal Unitario en Materias Civil y Administrativa(Second Unitary Civil and Administrative Court) granted jurisdiction to theJuzgado Décimo Primero de Distrito en Materia Civil(Eleventh Civil District Court). Pemex-Exploration and Production requested that this court determine that all previous judicial decisions be declared void. Because the court did not declare void all previous judicial decisions, Pemex-Exploration and Production filed anamparobefore theTribunal Unitario en Materia Civil y Administrativa(Unitary Civil and Administrative Court) in Mexico City. On October 11, 2006, the constitutional hearing was held and theamparowas granted.
The second case is relatedrelates to the FPWC entered into between Pemex-Exploration and Production and PTD Servicios Múltiples, S. de R.L. de C.V. (“PTD”) for the Cuervito natural gas production block. Theblock before theJuzgado Noveno de Distrito en Materia Civil del Distrito Federal(“Ninth Civil District Court)Court”) in Mexico City issued a decision that the plaintiffs did not have standing. AnCity. On December 12, 2007, Pemex-Exploration and Production was summoned after an appeal was filed by the plaintiffs, whichPTD was denied on April 3, 2006. The plaintiffsdenied. Pemex-Exploration and Production filed an amparo before theSexto Tribunal Colegiado en Materia Civil del Primer Circuito(Sixth Civil Joint Court of the First Circuit) against the decision that denied their appeal. On November 24, 2006, the Sixth Civil Joint Court of the First Circuit granted anamparoto the plaintiffs and determined that the decision of thePrimer Tribunal Unitario (First Unitary Court) exceeded the scope of the appeal because it analyzeda motion arguing the lack of capacity and standing of the plaintiffs when only the lack of capacity was at issue. The First Unitary Court ordered a new decision to be issued. In responsedue to the decisiontermination of their positions as Congressmen. the trial is in the evidenciary stage.
xiii. In August 2007, a civil claim (12/2007) was filed by Leoba Rueda Nava against Petróleos Mexicanos and Pemex-Refining. This claim was presented to theJuzgado Decimocuarto de Distrito del Décimo Circuito(“Fourteenth District Court of the Tenth Circuit”) in Coatzacoalcos, Veracruz. Plainiffs seek, among other things, civil liability and damages resulting from the pollution of land used to store oil waste in accordance with an agreement entered into by and among Leoba Rueda Nava, Petróleos Mexicanos and Pemex-Refining. The trial is in the evidenciary stage. Judicial inspection, confesional and testimonial evidences have been filed. As of the date of these financial statemets expert opinions are still pending.
xiv. Administrative proceedings were initiated by the Federal Competition Commission (the “Commission”). On December 7, 2007, the Commission issued a resolution prohibiting Pemex-Refining from engaging in anti-competitive practices in trading and distributing greases and lubricants in service stations, without specifically requesting a modification or termination of a license agreement. Pemex-Refining filed anamparoagainst this resolution, which is still pending.
In January 2008, the Commission requested Pemex-Refining to provide evidence related to the compliance of a resolution issued by the Commission in 2003 in connection with this same subject. Pemex-Refining informed the Commission that a suspension was granted to Bardahl de México, S. A. de C. V. (“Bardahl”) in severalamparosto maintain the exclusivity right of the Sixth Civil Joint Court of the First Circuit, PTD Servicios Múltiples,Mexlub trademark until a final resolution was issued.
xv. Several claims have been filed by Impulsora Jalisciense, S. A. de C. V. and Mexicana de Lubricantes, S. A. de C. V.
Anamparo(1519/2005) was filed by Impulsora Jalisciense, S.A. de R.L. de C.V. and Petróleo Brasileiro México, S. de R.L. de C.V. filed an appeal before the Supreme Court of Justice. The First Unitary Court decided that the lack of standing motion was groundless. In response, Pemex-Exploration and Production filed anamparoas a third injured party, before theSegundo Tribunal UnitarioJuzgado Quinto de Distrito en Materia Civil y Administrativa del Primer Circuito(Second Unitary Civil and“Fifth Administrative CourtDistrict Court”) in the State of the First Circuit). On February 21, 2007, theJalisco. This proceeding has been joined with a pending proceeding


F-42F-39

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

judge decided that the plaintiffs have standing. As of the date of this report, Pemex-Exploration and Production has not been summoned.
 
Claims included in this note filed by Bardahl against the execution of any resolutions lubricants manufactured by Bardahl.
Theseamparosare suspended due to several objections filed by Bardahl. A constitutional hearing is still pending.
xvi. A civil claim (28/2007) was filed by Mexicana de Lubricantes, S. A. de C. V. against Pemex-Refining seeking, among other things, a judicial judgment declaring null and void any advance termination or cancellation of the following agreements executed between Mexicana de Lubricantes, S. A. de C. V. and Pemex-Refining: 1) License and Trademark contract; 2) Basic greases supply contract; and 3) Manufacture contract of lubricants and greases for Petróleos Mexicanos and the Subsidiary Entities. The claim was summoned and Pemex-Refining was required to file its response in April.
The result of these proceedings is uncertain in outcome assince their final resolution will be issued by the final resolutions are pending.appropriate authorities.
 
NOTE 14—EQUITY:
On December 31, 1990, certain debt owed by Petróleos Mexicanos to the Mexican Government was capitalized as equity. This capitalization amounted to Ps. 22,334,195 in nominal terms (U.S. $7,577,000) and was authorized by the Board of Directors. The capitalization agreement between Petróleos Mexicanos and the Mexican Government stipulates that the Certificates of Contribution “A” constitute permanent capital. Prior to 1990, the Mexican Government made several equity contributions in the form of Certificates of Contribution “A” in the amount of Ps. 6,318 (nominal value).
In December 1997, the Board of Directors and the Mexican Government agreed to an equity reduction of the Certificates of Contribution “A” in exchange for a cash payment to the Mexican Government of Ps. 12,118,050 in nominal terms (U.S. $1,500,000). Petróleos Mexicanos and the Ministry of Finance and Public Credit agreed upon a corresponding reduction in the future payments of the minimum guaranteed dividend.
As a result, the Certificates of Contribution “A” are as follows:
Amount
Certificates of Contribution “A” (nominal value)Ps.10,222,463
Inflation restatement increase83,222,919
Certificates of Contribution “A” in Mexican pesos of December 31, 2006 purchasing powerPs.93,445,382
As a condition of this capitalization, Petróleos Mexicanos agreed to pay a minimum guaranteed dividend to the Mexican Government equal to the debt service for the capitalized debt in December 1990. The minimum guaranteed dividend consists of the payment of principal and interest on the same terms and conditions as those originally agreed upon with international creditors through 2006, at the exchange rates in effect as of the date such payments are made. Such payments must be approved annually by the Board of Directors.
The Board of Directors at its May 18, 2006, May 18, 2005 and May 12, 2004 meetings approved total annual dividends for Ps. 15,798,732 (Ps. 15,283,418 nominal value), Ps. 11,066,866 (Ps. 10,387,839 nominal value), and Ps. 11,169,118 (Ps. 10,175,004 nominal value), respectively.
During 2006 and 2005, Petróleos Mexicanos paid Ps. 259,245 and Ps. 15,902,900, respectively to the Mexican Government in advance for the minimum guaranteed dividend. These payments will be applied to the final amount that the Board of Directors approves as the total annual dividend, which usually occurs in the following fiscal year.
In 2004, Petróleos Mexicanos signed an agency agreement (Specific Funds – Trade Commission) with Banco Santader Serfin, S.A. as agent in order to manage the funds transferred by the Mexican Government to Petróleos Mexicanos and Subsidiary Entities. According to theLey de Ingresos de la Federación (Federal Revenue Law), these funds are to be utilized only for infrastructure works in exploration,


F-43

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS17 — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

refining, gas and petrochemicals. Payments made by the Mexican Government that increase the equity of Subsidiary Entities are deposited in the Specific Funds – Trade Commission account. As of December 31, 2006 and 2005 the balance of this account was Ps. 34,300,437 and Ps. 27,939,631, respectively (see Note 5).
In 2006, Board of Directors of Petróleos Mexicanos approved the capitalization (i.e., transfer to equity) of Ps. 598,511 (Ps. 594,987 nominal value) for infrastructure works, corresponding to resources from the Mexican Government in accordance with the Federal Revenue Law for 2004.
During 2006, the Board of Directors of Petróleos Mexicanos approved the capitalization of Ps. 628,678 (Ps. 608,068 nominal value) of revenues from the Mexican Government for infrastructure works in accordance with the Federal Income Law for 2004.
In December 2006, the Mexican Government made a payment in the amount of Ps. 45,735, 400 (nominal value) to Petróleos Mexicanos derived from excess revenues that were paid in accordance with the Federal Expenditure Budget for the 2006 fiscal year. This payment increased the equity of Petróleos Mexicanos by Ps. 13,211,400 (nominal value) and the Subsidiary Entities by Ps. 32,524,000 (nominal value). The amount relating to the Subsidiary Entities is managed through the agency agreement referred to above in this note, pursuant to the provisions of the Federal Revenue Law.
NOTE 15—COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) for the years ended December 31, 2006, 2005 and 2004 was as follows:
             
  2006  2005  2004 
 
Net income (loss) for the year  Ps. 45,252,176   (Ps. 79,374,302)  (Ps. 27,413,156)
Surplus in restatement of equity  3,917,392   7,887,786   (5,028,681)
Derivative financial instruments  5,083,038   (6,781,520)  — 
Effect on equity from labor obligations  (18,188,227)  (20,887,498)  (7,500,232)
Other(1)
  684,369   —   — 
             
Comprehensive income (loss) for the year  Ps. 36,748,748   (Ps. 99,155,534)  (Ps. 39,942,069)
             
(1)Other includes the translation effect of foreign subsidiaries
NOTE 16—SEGMENT FINANCIAL INFORMATION:
 
PEMEX’s primary business is the exploration for and production of crude oil and natural gas and the refining and marketing of petroleum products, conducted through four business segments: Pemex-Exploration and Production, Pemex-Refining, Pemex-Gas and Basic Petrochemicals and Pemex-Petrochemicals. Management makes decisions related to the operations of the consolidated business along these four strategic lines.
 
The primary sources of revenue for the segments are as described below:
 
 • Pemex-Exploration and Production earns revenues from domestic crude oil sales, as well as from the export of crude oil, through PMI Group, to international markets. Export sales are made through PMI Group to approximately 25 major customers in various foreign markets. Less than


F-44

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

half of PEMEX crude oil is sold domestically; however, these amounts are in large part sufficient to satisfy Mexican domestic demand.

 • Pemex-Refining earns revenues from sales of refined petroleum products and derivatives. Most of Pemex-Refining’s sales are to third parties and occur within the domestic market. The entity supplies theComisión Federal de Electricidad(“CFE”) with a significant portion of its fuel oil production. Pemex-Refining’s most profitableimportant products are the different types of gasoline.
 
 • Pemex-Gas and Basic Petrochemicals earns revenues primarily from domestic sources. Pemex-Gas and Basic Petrochemicals also consumes high levels of its own natural gas production. Most revenues of this entity are obtained throughfrom the sale of ethane and butane gas.
 
 • Pemex-Petrochemicals engagesPemex-Petrochemical is engaged in the sale of petrochemical products to the domestic market. Pemex-Petrochemicals offers a wide range of products withthat generate large revenues, the higher revenue generating products beingmajority of which come from methane derivatives, ethane derivatives and aromatics and derivatives.
 
In making performance analyses for the entities, PEMEX’s management focuses on sales volumes and gross revenues as primary indicators.indicators of the performance analyses.
 
Income (loss) and identifiable assets for each segment have been determined before intersegment adjustments. Sales between segments are made at internal transfer prices established by PEMEX, which reflect international market prices.


F-45F-40

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 
Following is the condensed financial information of these segments:
 
                                                        
         Corporate and
              Corporate and
     
 Exploration and
   Gas and Basic
   Subsidiary
 Intersegment
    Exploration and
   Gas and Basic
   Subsidiary
 Intersegment
   
 Production Refining Petrochemicals Petrochemicals Companies Eliminations Total  Production Refining Petrochemicals Petrochemicals Companies Eliminations Total 
Year ended December 31, 2006:
                            
Sales -                            
Year ended December 31, 2007
                            
Sales —                            
Trade Ps.—  Ps.392,219,698  Ps.133,663,453  Ps.20,854,842  Ps.515,756,751  Ps.—  Ps.1,062,494,744  Ps.-  Ps.430,382,930  Ps.139,963,302  Ps.21,701,729  Ps.542,926,858  Ps.-  Ps.1,134,974,819 
Intersegment  857,768,619   44,567,150   80,049,164   9,304,633   165,750,492   (1,157,440,058)  —   912,295,482   42,229,528   82,940,711   35,942,074   247,993,773   (1,321,401,568)  — 
Services income  —   —   —   —   1,880,032   (819,423)  1,060,609 
Total net sales  857,768,619   436,786,848   213,712,617   30,159,475   681,507,243   (1,157,440,058)  1,062,494,744   912,295,482   472,612,458   222,904,013   57,643,803   792,800,663   (1,322,220,991)  1,136,035,428 
Operating income (loss)(1)
  665,587,886   (79,906,737)  10,332,374   (11,425,073)  (3,303,282)  63,228   581,348,396 
Gross income  740,811,644   (81,024,508)  15,816,747   (6,559,693)  41,180,144   (34,854,648)  675,369,686 
Operating income (loss)  707,401,828   (114,306,785)  7,335,910   (14,115,424)  5,850,043   (1,734,890)  590,430,682 
Comprehensive financing cost  (23,298,237)  (8,699,215)  1,093,499   (4,022,138)  12,200,387   (257,000)  (22,982,704)  (25,561,647)  (5,764,552)  1,071,281   (1,181,167)  10,097,224   1,292,274   (20,046,587)
Net income (loss)  73,139,088   (34,045,615)  6,083,001   (17,376,521)  52,675,998   (35,223,775)  45,252,176   19,966,387   (45,653,619)  4,958,173   (16,085,945)  (11,473,248)  29,980,683   (18,307,569)
Depreciation and amortization  49,942,292   8,407,360   3,401,850   870,137   671,366   —   63,293,005   57,262,960   10,159,674   3,437,370   1,091,848   639,866   —   72,591,718 
Labor cost reserve  29,124,816   28,579,131   6,491,464   8,215,002   12,896,453   —   85,306,866 
Taxes and duties  663,549,438   3,846,738   5,537,391   257,203   4,064,958   —   677,255,728 
Acquisition of fixed assets  59,663,876   12,751,757   4,946,587   1,650,554   15,100,283   —   94,113,057   99,252,970   22,912,301   5,871,320   998,725   324,582   —   129,359,898 
Total assets  1,056,630,895   343,979,223   128,907,567   69,661,160   1,964,854,463   (2,359,298,852)  1,204,734,456   1,237,968,403   417,393,498   133,970,702   79,872,062   2,331,376,672   (2,870,300,731)  1,330,280,606 
Current assets  630,760,334   229,536,695   85,311,492   58,650,943   495,164,854   (1,070,863,531)  428,560,787 
Investments in shares  342,538   157,094   1,095,666   —   612,696,004   (581,227,948)  33,063,354 
Fixed assets  565,433,958   162,585,821   42,005,574   15,569,956   8,250,144   —   793,845,453 
Current liabilities  191,867,210   148,709,748   33,463,623   8,896,698   929,478,616   (1,022,952,043)  289,463,852 
Labor reserve  180,931,471   178,386,606   40,791,915   49,058,100   79,033,180   —   528,201,272 
Total liability  998,713,758   377,308,387   85,452,634   59,275,500   2,262,119,197   (2,502,496,731)  1,280,372,745 
Equity  239,254,644   40,085,112   48,518,068   20,596,562   69,257,475   (367,804,000)  49,907,861 
                                           
Year ended December 31, 2005:
                            
Sales -                            
Year ended December 31, 2006
                            
Sales —                            
Trade Ps.—  Ps.367,539,570  Ps.139,734,701  Ps.21,036,151  Ps.437,973,240  Ps.—  Ps.966,283,662  Ps.-  Ps.406,963,236  Ps.138,687,862  Ps.21,638,776  Ps.535,144,047  Ps.-  Ps.1,102,433,921 
Intersegment  745,320,118   39,811,173   85,939,922   9,173,602   127,215,062   (1,007,459,877)  —   890,012,141   46,242,429   83,058,212   9,654,394   171,981,054   (1,200,948,230)  — 
Services income  —   —   —   —   1,707,386   (631,439)  1,075,947 
Total net sales  745,320,118   407,350,743   225,674,623   30,209,753   565,188,302   (1,007,459,877)  966,283,662   890,012,141   453,205,665   221,746,074   31,293,170   708,832,487   (1,201,579,669)  1,103,509,868 
Operating income (loss)(1)
  546,995,348   (27,855,170)  10,291,780   (9,427,235)  (21,242,770)  20,208,519   518,970,472 
Gross income  718,463,139   (52,193,884)  18,030,329   (4,925,440)  31,717,998   (25,840,484)  685,251,658 
Operating income (loss)  690,607,335   (82,910,431)  10,720,768   (11,854,541)  (1,720,065)  (565,837)  604,277,229 
Comprehensive financing cost  8,368,601   (3,719,602)  2,504,563   (3,421,738)  (12,669,405)  4,276,693   (4,660,888)  (24,174,018)  (9,026,219)  1,134,603   (4,173,330)  12,659,001   (266,662)  (23,846,625)
Net income (loss)  (18,988,037)  (55,425,471)  6,952,552   (17,204,921)  (73,760,858)  79,052,433   (79,374,302)  75,888,386   (35,325,390)  6,311,661   (18,029,704)  54,656,089   (36,547,837)  46,953,205 
Depreciation and amortization  41,103,624   8,349,076   3,718,199   1,036,097   723,523   —   54,930,519   51,819,623   8,723,393   3,529,726   902,845   696,602   —   65,672,189 
Labor cost reserve  25,562,500   24,775,200   5,637,100   6,972,400   11,546,149   —   74,493,349 
Taxes and duties  591,866,238   3,165,413   4,703,707   394,529   4,634,622   —   604,764,509 
Acquisition of fixed assets  28,429,932   6,300,960   1,866,583   2,420,712   42,241,816   —   81,260,003   61,906,641   13,231,096   5,132,529   1,712,598   15,667,903   —   97,650,767 
Total assets  877,767,205   308,810,976   100,927,807   53,819,901   1,565,875,219   (1,822,383,153)  1,084,817,955   1,096,349,650   356,909,402   133,753,202   72,279,723   2,038,713,342   (2,447,984,895)  1,250,020,424 
Current assets  533,417,998   173,292,736   84,553,543   50,300,628   457,242,716   (899,414,425)  399,393,196 
Investments in shares  330,752   157,094   1,967,913   —   491,078,954   (460,773,767)  32,760,946 
Fixed assets  514,467,528   156,937,920   41,253,162   15,908,016   8,628,831   —   737,195,457 
Current liabilities  84,578,731   113,869,248   38,595,497   11,677,253   787,977,256   (860,383,856)  176,314,129 
Labor reserve  162,516,165   160,501,772   36,305,067   43,602,148   68,740,031   —   471,665,183 
Total liability  805,563,141   322,204,631   84,445,277   55,768,854   1,984,483,183   (2,043,900,288)  1,208,564,798 
Equity  290,786,509   34,704,770   49,307,958   16,510,869   54,230,161   (404,084,641)  41,455,626 
                                           
Year ended December 31, 2004:
                            
Sales -                            
Year ended December 31, 2005
                            
Sales —                            
Trade Ps.—  Ps.339,916,711  Ps.124,777,471  Ps.18,089,185  Ps.348,985,898  Ps.—  Ps.831,769,265  Ps.-  Ps.381,355,382  Ps.144,987,328  Ps.21,826,900  Ps.454,436,655  Ps.-  Ps.1,002,606,265 
Intersegment  603,190,202   29,053,601   72,240,565   7,919,976   100,070,610   (812,474,954)  —   773,336,701   41,307,675   89,170,404   9,518,438   131,997,076   (1,045,330,294)  — 
Services income  —   —   —   —   1,875,001   (650,193)  1,224,808 
Total net sales  603,190,202   368,970,312   197,018,036   26,009,161   449,056,508   (812,474,954)  831,769,265   773,336,701   422,663,057   234,157,732   31,345,338   588,308,732   (1,045,980,487)  1,003,831,073 
Operating income (loss)(1)
  443,440,998   42,877,046   14,298,320   (8,499,972)  (675,910)  (2,003,114)  489,437,368 
Gross income  594,226,368   3,088,433   20,740,515   (5,601,679)  7,885,280   (6,451,743)  613,887,174 
Operating income (loss)  567,556,903   (28,902,246)  10,678,648   (9,781,605)  (20,166,208)  20,317,888   539,703,380 
Comprehensive financing cost  8,160,712   5,695,144   (168,651)  1,449,534   3,479,901   (11,038,390)  7,578,250   8,683,177  ��(3,859,422)  2,598,710   (3,550,361)  (13,145,650)  4,437,455   (4,836,091)
Net income (loss)  (14,698,056)  (23,719,649)  12,528,648   (13,241,329)  (23,676,569)  35,393,799   (27,413,156)  (19,701,797)  (57,508,914)  7,213,898   (17,851,654)  (76,533,529)  82,024,014   (82,357,982)
Depreciation and amortization  31,076,550   8,064,878   3,656,581   1,386,070   867,338   —   45,051,417   42,648,709   8,662,918   3,857,966   1,075,044   750,720   —   56,995,357 
Labor cost reserve  22,739,043   21,067,212   4,782,355   5,742,055   9,336,373   —   63,667,038 
Taxes and duties  595,838,203   24,443,717   2,412,419   262,157   3,917,966   —   626,874,462 
Acquisition of fixed assets  71,877,107   5,003,123   1,759,422   1,712,463   355,863   —   80,707,978   29,498,613   6,537,813   1,936,748   2,511,707   43,829,686   —   84,314,567 
Total assets  781,745,009   295,354,322   112,017,741   92,931,362   1,107,230,745   (1,370,487,511)  1,018,791,668   910,762,474   320,419,181   104,721,683   55,842,991   1,624,736,468   (1,890,886,536)  1,125,596,261 
               
Current assets  379,304,272   138,951,636   56,041,394   33,282,845   429,691,461   (721,191,173)  316,080,435 
Investments in shares  227,313   157,094   1,276,801   —   231,359,791   (204,339,923)  28,681,076 
Fixed assets  475,493,308   152,858,631   40,924,037   15,850,726   9,340,494   —   694,467,196 
Current liabilities  123,657,961   114,490,526   21,971,433   53,748,694   554,475,788   (690,761,619)  177,582,783 
Labor reserve  142,000,010   137,607,036   30,508,286   36,672,374   58,796,102   —   405,583,808 
Total liability  747,717,710   303,672,915   59,003,711   90,957,975   1,639,794,045   (1,686,540,129)  1,154,606,227 
Equity  163,044,885   16,746,308   45,717,987   (35,114,975)  (15,057,361)  (204,346,661)  (29,009,817)


F-41

 
(1)Represents the measure of segment performance. Amounts reconcile to the consolidated statements of operations by deducting operating costs and expenses from net sales.
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
NOTE 17—18 —FISCAL REGIME:
 
On December 21, 2005, the Mexican Congress approved a new fiscal regime for PEMEX, which was published in the Federal Official Gazette of the Federation, effective January 1, 2006.


F-46

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 
Under this new fiscal regime, PEMEX’s contributions remain established by theLey Federal de Derechos(“Federal Duties Law)Law”), except for the Excess Gain Duties (Crude Oil Gain Tax), which is established by the Federal Income Law. The new fiscal regime for PEMEX contemplatesapplicable for 2006 and 2007 contemplated the following duties:
 
a. The Ordinary Hydrocarbons Duty -From — In 2006 to 2009,and 2007, this duty will applyapplied a variable rate that dependsdepended on the price of Mexican crude oil for export. In 2006 and 2007, the rate will change in a rangeranged from 78.68% to 87.8 1%87.81% (depending on the price of the Mexican crude oil) and will turn into a fixed rate of 79% from 2010 forward..
 
The method of calculating this duty is the value of the extracted total production of crude oil and natural gas during the year minus certain permitted deductions (including investments, plus some costs, expenses and duties). During 2007, PEMEX made daily and weekly advance payments to the account of this duty, in the amount of Ps. 464,837,848 (Ps. 231,326,765 daily and Ps. 233,511,083 weekly). During 2006, PEMEX made daily and weekly advance payments to the account of this duty, in the amount of Ps. 522,283541,916,001 (Ps. 259,829269,596,338 daily and Ps. 262,454272,319,663 weekly). PEMEX decreased its accrued expenses by Ps. 49,880 to leave a total outstanding balance of Ps. 472,403. During 2005, PEMEX made daily and weekly advance payments to the account of the Crude Oil Extraction Duty totaling Ps. 211,494.
Special Tax on Production and Services –In accordance with the regulations in effect, PEMEX is subject to the Special Tax on Production and Services (“IEPS”), which it carries on the import and sale of gasoline and diesel. The IEPS is paid to Ministry of Finance monthly, after deducting the daily advance payments. The rates applicable to this tax depend on such factors as the type of product, price of reference, the region where one sells additional freight and applicable commissions.
In 2005, rising international prices of the hydrocarbons and petroleum products caused a negative effect in the rate of the IEPS tax, which was absorbed by PEMEX. On January 1, 2006, the Federal Revenue Law was amended, allowing PEMEX to credit the negative IEPS against other taxes and payments to which PEMEX is also subject. This allowed PEMEX to recognize in 2006 revenue of approximately Ps. 56,769,000 (Ps. 55,256,000 nominal value), presented in the consolidated statement of operations within “Other revenues”. As of December 31, 2006, there is a negative balance of IEPS tax credit of Ps. 12,888,490 (see Note 5).
 
b. Hydrocarbon Duty for the Oil Revenues to Stabilization Fund – — This duty will bewas applied at a rate between 1% and 10% of the value of the extracted crude oil production where the yearly weighted average crude oil export price for a certain year exceeds between U.S. $22.00$22.00 and U.S. $31.00$30.00 per barrel.
 
c. Extraordinary Duty on Crude Oil Exports – — This duty will applywas applied at a rate of 13.1% on the difference between the value realized for crude oil exports and the value budgeted for crude oil exports.price of U.S.$42.80, times the annual export volume. This duty is to be credited against the Hydrocarbon Duty to Fund Stabilization.for the Oil Revenues Stabilization Fund. The income offrom this duty is designated to the states of Mexico via the Fund of Stabilization of the Income of the Federative Entities.Entities Stabilization Fund.
 
d. Excess Gains RevenueRenevue Duty – — This duty will bewas derogated in 2007, however during 2006, applied a rate of 6.5% onto the difference between the realized value and the budgeted value of crude oil exports.exports of U.S.$36.50. This duty is to be credited against the Hydrocarbon Duty to Fund Stabilization and, where necessary, against the Ordinary HydrocarbonsHydrocarbon Duty.
 
e. Duty for the Fund for Scientific and Technological Research on Energy – — This duty will bewas applied at a rate of 0.05% onto the value of the extracted production of crude oil and natural gas for the year. The collection isrevenues from this tax are designated for theInstituto Mexicano del Petróleo(Oil “Mexican Institute)Petroleum Institute”) in accordance with thePresupuesto de Egresos de laFederación( (“Federal Budget of Expenditures)Expenditure Budget”).


F-47

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

f. Duty for the Fiscal Monitoring of Oil Activities – — This duty will bewas applied at a rate of 0.003% to the value of extracted total production of crude oil and natural gas for the year. The collection isrevenues from this tax are designated for theAuditoria Superior de la Federación(“Supreme Federal Top Audit)Audit”) in accordance with the Federal Budget of Expenditures.Expenditure Budget.
 
g. Additional Duty – — This duty will beis applied whenif the realactual production of crude oil in the yearyears 2006, 2007 and 2008 is less than the target production, but only when the shortfall is not by reason of force majeure, act of god or energy policy.
 
h. Special Tax on Production and Services — In accordance with the regulations in effect, PEMEX is subject to the Special Tax on Production and Services (“IEPS”), which applies to the import and sale of


F-42

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
gasoline and diesel. The IEPS is paid to SHCP monthly, after deducting the daily advance payments. The rates applicable to this tax depend on factors such as the type of product, price of reference, the region where one sells, additional freight and applicable commissions.
In 2005, increase in international prices of hydrocarbons and petroleum products caused the rate of the IEPS tax to be negative, which was absorbed by PEMEX. On January 1, 2006, the Federal Revenue Law was amended, allowing to PEMEX to credit the negative IEPS against other taxes and payments to which PEMEX is also subject. As a result of this PEMEX recognized in 2007 and 2006 revenue of approximately Ps. 72,137,000 and Ps. 57,330,998 (Ps. 55,256,000 nominal value), respectively, presented in the consolidated statement of operations within “Other revenues”. As of December 31, 2007, there was a negative balance of IEPS tax credit of Ps.��32,943,613 (see Note 6).
i. Hydrocarbon Income Tax (“IRP”) –— This tax is calculated by applying a 30% rate on the excess of the total incomerevenues minus the authorized deductions pursuant to the specific rules expressed by the Ministry of Finance.SHCP.
 
For the years ended December 31, 20062007 and 20052006 PEMEX generated an IRP as follows:
 
                
 2006 2005  2007 2006 
Current IRP  Ps.3,705,184   —  Ps. 4,070,364  Ps. 3,705,184 
Deferred IRP  1,031,619   2,057,889   1,867,292   1,031,619 
          
  Ps.4,736,803  Ps.2,057,889   5,937,656   4,736,803 
Inflation effect  92,711   178,056 
          
Total IRP Ps.6,030,367  Ps.4,914,859 
     
 
In accordance with Article 7 of the Federal Revenue Law corresponding to the fiscal year 2006 from January l, 2006,2007, Petróleos Mexicanos and itsthe Subsidiary Entities, except Pemex-Exploration and Production, arewere required to make daily payments (including non-working days) of U.S. $6,628Ps. 3,314 to the account of the IRP during the fiscal year. On the first working day of every week of the fiscal year, PEMEX willwould have to pay U.S. $46,524. As ofPs. 23,262. Through December 31, 2006,2007, the daily and weekly payments made to the Federal Treasury was U.S. $2,409,292.totaled Ps. 2,442,496. As of December 31, 2007, Pemex has caused Ps. 3,431,142 of IRP.
 
Since July 2006,The principal concepts that cause the daily and weekly payments ofdeferred IRP were suspended in accordance withare the official written communications numbers102-K-129,102-K-150,102-K-173,102-K-185,102-K-194 and102-K-219 on June 10, July 28, August 31, September 28, October 31 and November 30, 2006, respectively, issued by the Department of Income of the Ministry of Finance, pursuant to paragraph VIII of article 7 of the Federal Income Law of 2006.following:
 
Income and Assets Taxes - Some Subsidiary Companies are subject to the income tax law and the assets tax law.
For the years ended December 31, 2006 and 2005 the Subsidiary Companies incurred the following income tax:
             
  2006  2005  2004 
 
Current income tax Ps. 4,598,426  Ps.3,360,935  Ps.1,456,518 
Deferred income tax  (160,214)  476,494   544,940 
             
  Ps.4,438,212  Ps.3,837,429  Ps.2,001,458 
             
         
  2007  2006 
 
Deferred asset IRP:        
Advance from customers Ps.491,424  Ps.518,388 
Provision for insurance  94,892   115,176 
Provision for contingencies  19,918   11,831 
Environmental reserve  63,508   85,255 
Allowance for uncollectible  8,899   9,870 
         
   678,641   740,520 
Deferred liability IRP:        
Advance insurance  (2,692)  (7,314)
Properties, plants and properties  (5,552,588)  (3,855,675)
         
   (5,555,280)  (3,862,989)
         
Long term liability (Ps.4,876,639) (Ps.3,122,469)
         


F-48F-43

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

j. Value Added Tax — For purposes of determining the Value Added Tax (“VAT”), PEMEX follows the criterion for excluding only the interests paid for institutions of credit and credit unions in accordance with the fraction V of the article 15 of the Regulation of Value Added Tax.
k. Income and Assets Taxes — Certain Subsidiary Companies are subject to the income tax law and the assets tax law.
For the years ended December 31, 2007, 2006 and 2005, the Subsidiary Companies incurred the following income tax:
             
  2007  2006  2005 
 
Current income tax Ps. 3,253,655  Ps. 4,771,281  Ps. 3,487,273 
Deferred income tax  (27,414)  (166,237)  494,405 
             
  Ps.3,226,241  Ps.4,605,044  Ps.3,981,678 
             
The principal concepts that cause the Deferred Income Taxes are the following:
         
  2007  2006 
 
Deferred asset income taxes:        
Losses of prior years Ps.653  Ps.8,359 
         
Deferred liability income taxes:        
Properties, plants and equipment  (1,535,911)  (1,483,062)
         
Long term liability (Ps.1,535,258) (Ps.1,474,703)
         
On October 1, 2007, a modification to the Federal Duties Law was published in the Official Gazette of the Federation. Effective January 1, 2008, the fiscal regime applicable to Pemex-Exploration and Production was modified.
NOTE 18—19 —NEW ACCOUNTING PRONOUNCEMENTS
 
On January 1, 2007,The CINIF has issued the following NIF issued by the CINIF becameFRS, effective for years beginning after December 31, 2007, and PEMEX is currently evaluating the effect of the adoption of these new pronouncements:
NIF B-3 “Income statement” – Incorporates, among other things, a new approach to classify income costs and expenses as ordinary and extraordinary. It eliminates special and extraordinary items and establishes that employees’ profit sharing should be presented as an ordinary expense rather than as an item within taxes.
NIF B-13 “Subsequent events” – Requires, among other things, the recognition of assets and liabilities restructuring in the period in which they actually take place and the recognition of creditors’ waivers to enforce their right to demand debts in the event of lack of compliance of the entity with debt agreement commitments. Such issues, if applicable, will be disclosed in the notes to the financial statements.
NIF C-13 “Related parties” – Extends to the definition and scope of the related parties and increases the disclosure requirements in the notes to the financial statements.
NIF D-6 “Capitalization of the Comprehensive Financing Result”—Establishes, among other obligations, the obligation of capitalizing the comprehensive financing result and the rulesdo not provide for its capitalization.earlier application:
 
NOTE 19 -(a) FRS B-10 “Effects of inflation” — FRS B-10 supersedesSUBSEQUENT EVENTSBulletin B-10 and its five amendments, as well as the related circulars and INIF. The principal guidelines established by this FRS are: (i) The use ofunidades de inversión(“UDIs”) to determine the inflation for a given period; (ii) the elimination of inventory replacement costs as well as specific indexation for fixed assets, (iii) the requirement to recognize the effects of inflation only when operating in an inflationary economic environment (accumulated inflation equal to or higher than 26% in the most recent three-year period); and (iv) reclassification of the accounts of gain or loss from holding non-monetary assets (“RETANM”), monetary position gains or losses (“REPOMO”), and deficit/excess in equity restatement, to retained earnings, when the unrealized portion is not identified.
 
On January 2, 2007, PEMEX made its last advance paymentManagement estimates that the initial effects of minimum guaranteed dividendsthis new FRS will be a charge to retained earnings and a credit to surplus in the restatement of equity in the amount of U.S. $392,300.Ps. 178,171,999, and will have no effect on assets, liabilities, equity or net income.
 
As of June 29, 2007, the average price of crude oil exports is U.S. $61.60 per barrel; this price increased approximately 16.1% compared to the same average price as of December 31, 2006, which was U.S. $53.04 per barrel.
As of June 29, 2007, the exchange rate for U.S. dollars is Ps. 10.790.
On March 5, 2007, the contracts for the Nejo and Monclova blocks were awarded, corresponding to the third round of FPWC bidding for non-associated gas production works and services, in the Burgos basin. These contracts will be up to 15 years, with an estimated value for the first three years of U.S. $177,000 and a maximum amount for the duration of the contracts of U.S. $345,000.

(b) FRS D-3 “Employee benefits” — FRS supersedesBulletin D-3, the portion applicable to Employee Statutory Profit Sharing (“ESPS”) ofBulletin D-4 and INIF The principal guidelines


F-49F-44

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

established by this FRS are: (i) a maximum of five years for amortizing unrecognized/unamortized items, with the option to recognize immediately actuarial gains or losses in results of operations; (ii) the elimination of the recognition of an additional liability and related intangible asset and any related item as a separate element of equity; (iii) the inclusion severance benefits in results of operations; and (iv) the presentation of ESPS, including deferred ESPS, in the statement of income as ordinary operations. Additionally, FRS D-3 establishes that the asset and liability method required by FRS D-4 should be used for determining deferred ESPS, and that any effects arising from the change are to be recognized in retained earnings, with no restatement of prior years’ financial statements.
As of date of these financial statements, management is still in the process of determining the initial effects of this new FRS.
(c) FRS D-4 “Tax on earnings” — FRS supersedesBulletin D-4 and Circulars 53 and 54. The principal guidelines established by this FRS are: (i) the reclassification of the cumulative income taxes effects resulting from the initial adoption ofBulletin D-4 in 2000 to retained earnings; (ii) the recognition of theImpuesto al Activo(“IMPAC”) as a tax credit (benefit), rather than as a tax prepayment; and (iii) the transfer of accounting treatment of ESPS incurred and deferred to FRS D-3, as discussed in paragraph (b) above.
Management estimates that the initial effects of this new FRS will not be material.
(d) FRS B-2 “Statement of cash flows” — FRS supersedesBulletin B-12 and paragraph 33 ofBulletin B-16. The principal guidelines established by this FRS are: (i) the replacement of the statement of changes in financial position with the statement of cash flows; (ii) the reporting of cash inflows and cash outflows in nominal currency unitsi.e.the effects of inflation are not included; (iii) the establishment of two alternative preparation methods (direct and indirect), without stating preference for either method. In addition, cash flows from operating activities are to be reported first, followed by cash flows from investing activities and finally, cash flows from financing activities; (iv) the reporting of captions of principal items as gross; and (v) the requirement of disclosure of the composition of those items considered cash equivalents.
(e) FRS B-15 “Translation of foreign currencies” — FRS B-15 supersedesBulletin B-15. The principal guidelines established by this FRS are: (i) the substitution of the integrated foreign operation and foreign entity concepts for determining recording currency, functional currency and reporting currency, requiring that translation be made based on the economic environment in which the entity operates, regardless of its dependency on the holding company; and (ii) the inclusion of translation procedures for those instances where the reporting currency is different from the functional currency.
NOTE 20 — — DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAPSUBSEQUENT EVENTS:
On April 11, 2008, the average price of the crude oil for exportation was of U.S.$91.84 per barrel; this price increased by approximately 11.4% as compared to the average price as of December 28, 2007 which was U.S.$82.44 per barrel.
On April 11, 2008, the exchange rate was Ps. 10.5503 per dollar, which is 2.1% less than the exchange rate as of December 31, 2007, which was Ps.10.8662.
On April 8, 2008, the Mexican President sent to the Mexican Congress an Energy Reform Initiative.


F-45

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
The Energy Reform includes five fundamental initiatives:
• A new Organic Law for Petróleos Mexicanos.
• Modifications to the Organic Law of the Public Federal Administration.
• Creation of an oil commission, which would be decentralized entity under theSecretaría de Energía(Energy Ministry or “SENER”), with technical and operative autonomy.
• Extensive modifications to theLey Reglamentaria, (“Regulatory Law”).
• Extensive modifications to theLey de la Comisión Reguladora de Energía(“Law of the Regulatory Commission of Energy”).
NOTE 21—DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP
 
PEMEX’s consolidated financial statements are prepared in accordance with Mexican FRS, which differs in certain significant respects from accounting principles generally accepted in the United States (“U.S. GAAP”). In accordance withBulletin B-10, as discussed in Note 2b.3a. to the financial statements, all of the related U.S. GAAP adjustments have also been restated to reflect the effects of inflation. The application ofBulletin B-10 represents a comprehensive measure of the effects of price level changes and is considered to result in a more meaningful presentation than historical cost-based financial reporting in an environment such as Mexico. None of the adjustments to the financial statements for the effects of inflation required under Mexican FRS have been eliminated in the U.S. GAAP reconciliation.


F-46

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
The differences between Mexican FRS and U.S. GAAP, as they relate to PEMEX, are presented below together with explanations of certain adjustments that affect net income and shareholders’ equity as of and for the years ended December 31, 2007, 2006 2005 and 2004:2005:
 
             
  2006  2005  2004 
 
Net income (loss) for the year under Mexican FRS Ps.45,252,176   (Ps. 79,374,302)  (Ps. 27,413,156)
             
U.S. GAAP adjustments:            
Exploration and drilling costs, net (a)  (1,444,502)  (1,493,672)  (1,526,217)
Pensions and seniority premiums (b)  1,869,452   975,778   804,406 
Post-retirement benefits (c)  4,859,871   3,252,942   (2,858,334)
Accrued vacation (d)  (19,805)  (16,107)  136,426 
Fixed asset adjustments:            
Capitalized gains (losses) of derivative financial instruments, net (e)  3,786,109   (8,140,013)  890,056 
Capitalization of interest, net (f)  2,693,158   1,858,414   2,096,517 
Impairment, net (g)  3,834,430   6,020,670   9,846,385 
Depreciation convention (h)  754,772   754,772   754,772 
Derivative financial instruments (i)  71,968   993,526   6,220,077 
Sales of shares of Repsol (j)  —   —   727,159 
Profit in inventory (k)  (4,006,026)  (2,675,545)  1,117,526 
Available-for-sale investment securities (m)  (2,886,826)  (800,103)  (5,407,389)
Effects of inflation accounting on U.S. GAAP adjustments (o)  27,590   199,385   622,007 
Deferred income taxes (p)  (72,068)  426,631   — 
Reclassification of Pemex Finance net income to minority interest (q)  (52,804)  1,117,236   — 
             
Total U.S. GAAP adjustments, net  9,415,319   2,473,914   13,423,391 
             
Net income (loss) for the year under U.S. GAAP Ps.54,667,495   (Ps. 76,900,388)  (Ps. 13,989,765)
             

             
  2007  2006  2005 
 
Net (loss) income for the year under Mexican FRS (Ps.18,307,569)  Ps. 46,953,205   (Ps. 82,357,982)
             
U.S. GAAP adjustments:            
Exploration and drilling costs, net (a)  (1,370,873)  (1,498,801)  (1,549,819)
Pensions and seniority premiums (b)  2,328,436   1,939,725   1,012,457 
Post-retirement benefits (c)  4,025,557   5,042,554   3,375,220 
Accrued vacation (d)  (45,809)  (20,549)  (16,712)
Fixed asset adjustments:            
Capitalized gains (losses) of derivative financial instruments, net (e)  (177,334)  3,928,429   (8,445,996)
Capitalization of interest, net (f)  3,509,960   2,794,394   1,928,272 
Impairment, net (g)  3,344,517   3,978,566   6,246,987 
Depreciation convention (h)  783,144   783,144   783,144 
Derivative financial instruments (i)  (8,149,706)  74,673   1,030,873 
Profit in inventory (j)  (18,919,219)  (4,156,613)  (2,776,119)
Available-for-sale investment securities (l)  246,258   (2,995,342)  (830,179)
Effects of inflation accounting on U.S. GAAP adjustments (m)�� 159,139   28,627   206,880 
Deferred income taxes (n)  (62,488)  (74,777)  442,668 
Reclassification of Pemex Finance net income to minority interest (o)  (6,089)  (54,789)  1,159,233 
             
Total U.S. GAAP adjustments, net  (14,334,507)  9,769,241   2,566,909 
             
Net (loss) income for the year under U.S. GAAP (Ps.32,642,076)  Ps. 56,722,446   (Ps. 79,791,073)
             
Comprehensive (loss) income under U.S. GAAP:            
Net (loss) income for the year under U.S. GAAP (Ps.32,642,076)  Ps. 56,722,446   (Ps. 79,791,073)
Other comprehensive income (loss):            
Additional minimum pension liability (b)  (168,399,229)  (20,311,938)  (19,692,549)
Derivative financial instruments (i)  656,699   5,274,109   (4,930,806)
Unrealized gains on available-for-sale investment securities (l)  (246,258)  2,995,342   830,179 
Surplus in restatement of equity  18,539,917   4,108,268   5,571,542 
Other  —   710,094   — 
             
Comprehensive (loss) income (Ps.182,090,947)  Ps. 49,498,321   (Ps. 98,012,707)
             


F-50F-47

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

             
  2006  2005  2004 
 
Comprehensive income (loss) under U.S. GAAP:            
Net income (loss) for the year under U.S. GAAP Ps.54,667,495  (Ps.76,900,388) (Ps.13,989,765)
Other comprehensive income (loss):            
Additional minimum pension liability (b)  (19,576,073)  (18,979,124)  (2,790,733)
Derivative financial instruments (i)  5,083,038   (4,752,172)  (8,143,833)
Unrealized gains on available-for-sale investment securities (m)  2,886,826   800,103   3,985,329 
Surplus (deficit) in restatement of equity  3,959,433   5,369,696   (5,028,682)
Other  684,369   —   — 
             
Comprehensive income (loss) Ps.47,705,088  (Ps.94,461,885) (Ps.25,967,684)
             

         
  2007  2006 
 
Components of accumulated other comprehensive income at December 31:        
Derivative financial instruments (i)  (Ps. 1,105,629)  (Ps. 1,762,328)
Additional minimum pension liability (b)  (211,299,353)  (42,900,124)
Unrealized gains on available-for-sale investment securities (l)  12,716,759   12,963,017 
Surplus in restatement of equity  175,864,184   157,324,267 
Other  710,094   710,094 
         
Accumulated other comprehensive income  (Ps. 23,113,945)  Ps. 126,334,926 
         
 
         
  2006  2005 
 
Components of accumulated other comprehensive income at
December 31:		        
Derivative financial instruments (i) (Ps.1,698,482) (Ps.6,781,520)
Additional minimum pension liability (b)  (41,345,930)  (21,769,857)
Unrealized gains on available-for-sale investment securities (m)  12,493,390   9,606,564 
Surplus in restatement of equity  151,624,695   147,665,262 
Other  684,369   — 
         
Accumulated other comprehensive income Ps.121,758,042  Ps.128,720,449 
         
         
  2007  2006 
 
Equity is reconciled as follows:        
Equity under Mexican FRS  Ps. 49,907,861   Ps. 41,455,626 
         
U.S. GAAP adjustments:        
Exploration and drilling costs (a)  12,518,420   13,889,293 
Pensions and seniority premiums:        
Pensions and seniority premiums (b)  (5,546,942)  (7,875,378)
Additional minimum pension liability (b)  (67,715,653)  5,426,624 
Post-retirement benefits:        
Post-retirement benefits (c)  (34,187,352)  (38,212,908)
Effect in equity of labor obligation (c)  (91,824,161)  — 
Accrued vacation (d)  (636,092)  (590,283)
Fixed asset adjustments:        
Capitalized gains of hedging financial instruments, net (e)  2,883,974   3,061,308 
Capitalization of interest, net (f)  (4,782,607)  (8,292,567)
Impairment, net (g)  (26,564,246)  (29,908,763)
Depreciation convention (h)  —   (783,144)
Derivative financial instruments (i)  —   8,149,706 
Profit in inventory (j)  (26,755,771)  (7,836,552)
Advanced payments on minimum guaranteed dividend (k)  (4,270,225)  (268,990)
Deferred income taxes (n)  305,403   367,891 
Reclassification of Pemex Finance equity to minority interest (o)  (1,415,775)  (1,464,681)
         
Total U.S. GAAP adjustments, net  (247,991,027)  (64,338,444)
         
Deficit under U.S. GAAP  (Ps. 198,083,166)  (Ps. 22,882,818)
         
 
         
  2006  2005 
 
Equity is reconciled as follows:        
Equity (deficit) under Mexican FRS  Ps. 39,953,764   (Ps. 27,958,841)
         
U.S. GAAP adjustments:        
Exploration and drilling costs (a)  13,386,109   14,830,611 
Pensions and seniority premiums:        
Pensions and seniority premiums (b)  (7,590,067)  (9,459,518)
Additional minimum pension liability (b)  5,230,027   6,617,873 
Post-retirement benefits (c)  (36,828,525)  (41,688,395)
Accrued vacation (d)  (568,898)  (571,350)

F-51F-48

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

         
  2006  2005 
 
Fixed asset adjustments:        
Capitalized gains (losses) of derivative financial instruments,
net (e)		  2,950,403   (835,705)
Capitalization of interest, net (f)  (7,992,143)  (10,685,303)
Impairment, net (g)  (28,825,223)  (32,659,653)
Depreciation convention (h)  (754,770)  (1,509,542)
Derivative financial instruments (i)  7,854,457   7,782,489 
Profit in inventory (k)  (7,552,647)  (3,546,621)
Advanced payments on minimum guaranteed dividend (l)  (259,245)  (15,902,901)
Deferred income taxes (p)  354,563   426,631 
Reclassification of Pemex Finance equity to minority interest (q)  (1,411,618)  (1,400,855)
         
Total U.S. GAAP adjustments, net  (62,007,577)  (88,602,239)
         
Deficit under U.S. GAAP  (Ps.22,053,813)  (Ps.116,561,080)
         

         
  2007  2006 
 
Changes in U.S. GAAP equity for the year ended December 31:        
Deficit at January 1  (Ps. 22,882,818)  (Ps. 120,942,611)
Net (loss) income for the period  (32,642,076)  56,722,446 
Mexican Government increase in equity of Subsidiary Entities  11,160,824   48,727,913 
Minimum guaranteed dividends  (4,270,225)  (166,440)
Other comprehensive income:        
Additional minimum pension liability (b)  (168,399,229)  (20,311,936)
Derivative financial instruments (i)  656,699   5,274,109 
Unrealized gains on available-for-sale investment securities (l)  (246,258)  2,995,342 
Surplus in restatement of equity  18,539,917   4,108,265 
Other  —   710,094 
         
Deficit at December 31  (Ps. 198,083,166)  (Ps. 22,882,818)
         
 
         
  2006  2005 
 
Changes in U.S. GAAP equity for the year ended December 31:        
Deficit at January 1  (Ps.116,561,080)  (Ps. 52,530,556)
Net income (loss) for the period  54,667,495   (76,900,388)
Mexican Government increase in equity of Subsidiary Entities  46,962,589   46,412,892 
Minimum guaranteed dividends  (160,410)  (15,981,529)
Other comprehensive income:        
Additional minimum pension liability (b)  (19,576,073)  (18,979,124)
Derivative financial instruments (i)  5,083,038   (4,752,172)
Unrealized gains on available-for-sale investment securities (m)  2,886,826   800,103 
Surplus in restatement of equity  3,959,433   5,369,694 
Other  684,369   — 
         
Deficit at December 31  (Ps. 22,053,813)  (Ps.116,561,080)
         
I. Explanation of reconciling items:
I.  Explanation of reconciling items:
 
(a)  Exploration and drilling costs
 
As discussed in Note 2e., effectiveEffective January 1, 2004, for Mexican FRS purposes, PEMEX approved a change in thechanged its accounting policy for the recognition of well exploration and drilling costs to the successful-efforts method of accounting. The change in accounting policy for recording well exploration and drilling expenses had no effect on our consolidated financial statements.
 
Under U.S. GAAP, PEMEX follows the successful-efforts method of accounting by which costs of drilling exploratory wells and exploratory-type stratigraphic test wells are initially capitalized and are later

F-52

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

charged to expenses if proved reserves are not discovered. Development costs, including the costs of drilling development wells and development-type stratigraphic test wells, are capitalized. The capitalized costs of wells and related equipment are amortized on a UOP basis over proved developed reserves, as the related oil and gas reserves are extracted.
 
Consequently, at December 31, 20062007 and 2005,2006, the U.S. GAAP equity adjustment represented the cumulative costs of capitalized unsuccessful wells in proven areas under U.S. GAAP, not capitalized under Mexican FRS through December 31, 2003, net of the amortization of such capitalized amounts. The 2007, 2006 2005 and 20042005 U.S. GAAP net income adjustment reflects the amortization of such capitalized costs on a UOP basis.
 
In April 2005, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff PositionNo. FASSFAS 19-1 “Accounting for Suspended Well Costs”(“FSP 19-1”).FSP 19-1 addresses the circumstances that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and drilling of those wells is under way or firmly planned for the near future. Under the provisions ofFSP 19-1, exploration costs would continue to be capitalized after the completion of drilling when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value,

F-49

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
would be charged to expenses.FSP 19-1 provides a number of indicators that need to be present to demonstrate that sufficient progress has been made in assessing the reserves and the economic viability of the project.
 
PEMEX’s policy is to determine whether or not exploratory well costs are capitalized or expensed shortly after completion of drilling. As such, PEMEX does not have significant suspended well costs for the three years ended December 31, 2006.2007. No capitalized exploratory well costs have been charged to expenses since the adoption ofFSP 19-1.
 
(b)  Pensions and seniority premiums
 
Under Mexican FRS, PEMEX followsBulletin D-3, which establishes the procedures for measuring the expenses and liabilities for pension plans, seniority premiums and severance payments. The primarymain differences between PEMEX’s application ofBulletin D-3 and the U.S. GAAP guidance provided in Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”), are the implementation dates.dates (including the measurement date for benefit obligations, amortization of past liabilities and recognition of gain and losses).
 
In accordance withOn September 30, 2006, the FASB approved substantial amendments to SFAS 87, 88, 106 and 132, through the issuance of SFAS 158—“Employers’ Accounting for Defined Benefit Pension and other Post-retirement Plans and Amendment of FASB Statements 87, 88, 106 and 132(R),” which proposed a new methodology for the recognition of labor liabilities in companies’ financial statements.
The principal changes included in SFAS 158 do not affect the methodology for determining the charge to income during the year (net periodic pension cost), but only their recognition in the balance sheet. Changes in SFAS 158 include: (i) a shift in the minimum amount to be recognized as a liability in the balance sheet, from Accumulated Benefit Obligation (ABO) to Projected Benefit Obligation (PBO); (ii) recognition of the total outstanding items to write off as a direct impact on the affected property (Accumulated Other Comprehensive Income Loss or “AOCI”); (iii) recognition of asset effect; and (iv) disclosure in the balance sheet of noncurrent assets, current liabilities and noncurrent liabilities.
PEMEX recognized SFAS No. 158, effective January 1, 2007, and included its effects in the results of the actuarial valuation of its labor obligations.


F-50

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
The differences betweenBulletin D-3 and SFAS No. 87, PEMEX recognizes an additional minimum pension liability, which, under SFAS No. 87 is equal to the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liabilities (see Note 1 and Note 20 IIe.)158 are summarized as follows:
ItemBulletin D-3SFAS 158
Net Periodic CostNo differenceNo difference
Minimum liability to be recognizedAccumulated Benefit Obligations (ABO)Projected Benefit Obligations (PBO)
Items not amortized unrecognized (actuarial gains/losses, prior service, plan amendments and transition obligation).Recognized as components of net periodic cost based on the employees’ average working lifetime.Recognize the total outstanding items as a component of the Accumulated other comprehensive loss/income (AOCI); for retirement and post-retirement benefits, as an adjustment to equity
Unfunded ABODifference between ABO and plan assetsN/A
Recognition of additional minimum liabilityDifference between unfunded ABO and net projected liabilityN/A
Recognition of intangible asset and other comprehensive incomeOffsetting account of additional liabilityIn the year of recognition of actuarial gain/losses and past service costs/credits, there is also a write off of an equivalent amount in other comprehensive income (OCI) SFAS 158, paragraph 4(d)
Disclosure in the balance sheet of noncurrent assets, current liabilities and noncurrent liabilitiesN/ARequired (for retirement and post-retirement benefits)
 
(c)  Post-retirement benefits
 
As described in Note 2l., effective January 1, 2004 for Mexican FRS purposes, PEMEX adopted the amendments toBulletin D-3 that set forth additional valuation and disclosure requirements for the recognition of post-retirement obligations.


F-53

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Under U.S. GAAP, PEMEX follows the guidelines of SFAS No. 106, “Employers’ Accounting for Post-RetirementPost-retirement Benefits Other Thanthan Pensions” (“SFAS No. 106”) in accounting for health service and other supplemental payments provided to retirees and other eligible family members. SFAS No. 106 requires the accrual of the expected cost of providing such benefits during retirement.
 
After giving effectEffective January 1, 2007, PEMEX recognized SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Post-retirement Plans.” This statement requires an employer to recognize the amendmentsfunded status of a defined benefit post-retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.
The recognition of SFAS 158 for post-retirement benefit plans results in the same differences betweenBulletin D-3 and SFAS 158 as those related to pensions and seniority premiums (see Note 21I.(b)).


F-51

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in PEMEX’sthousands of Mexican FRS financial statementspesos as of December 31, 2007 purchasing power and in 2004, thethousands of U.S. GAAP adjustment represents the difference between the unrecognized prior service costsdollars or other currency units, except exchange rates and transition obligation amounts under Mexican FRS and these amounts U.S. GAAP as a result of the different adoption dates of the applicable Mexican and U.S. GAAP standards.oil prices per barrel)
 
(d)  Accrued vacation
 
Under Mexican FRS, vacation expense is recognized when the vacation is utilized by the employee. Under U.S. GAAP, vacation expense is accrued based on when it is earned by the employee.
 
(e)  Fixed assets—Capitalized gains and losses of derivative financial instruments
 
Under Mexican FRS, certain realizedfinance costs related to loans allocated to construction projects are capitalized as part of capitalized interest, and are included net of gains and losses arising from derivative financial instruments designated as cash flow hedges and from derivative financial instruments not designated as hedges are capitalized as part of capitalized interest. In addition, as further discussed in Note 20Ii., certain embedded foreign currency contracts are not bifurcated for Mexican FRS purposes, whereas such contracts are bifurcated for U.S. GAAP purposes, thereby creating a basis difference in fixed assets. hedges.
Under U.S. GAAP, realized gains and losses arising from financial instruments designated as cash flow hedges and not designated as hedges cannot be capitalized as part of the qualifying assets, butassets. These amounts are recognizedaccumulated in other comprehensive income and are reclassified into earnings immediately.over the life of the assets the hedged transaction relates to. For the years ended December 31, 2007, 2006 and 2005, and 2004, under Mexican FRS, PEMEXthe capitalized a(loss) gain (loss) ofadjustments in the reconciliation were Ps. 3,786,812,(19,439), Ps. (7,826,572)3,929,158 and Ps. 1,156,146,(8,120,773), respectively, arising from hedging instruments.
 
The 2007, 2006 2005 and 2004,2005 net income adjustments also include a reversal of depreciation of Ps. (703)(157,895), Ps. (313,441)(729) and Ps. (266,090)(325,223), respectively, related to amounts previously capitalized.
 
(f)  Fixed assets—Capitalization of interest
 
Under MexicanEffective January 1, 2007, Pemex adopted FRS D-6 “Capitalization of Comprehensive Financing Result,” which establishes the rules that must be observed in the capitalization of the Comprehensive Financing Result attributable to certain assets whose acquisition required a substantial period (prolonged) before their intended use.
The capitalized comprehensive financing result is composed of the cost of interest, is capitalized to property, plantthe foreign exchange effect, the result in monetary position and equipment based upon total interestother costs associated with obtaining financing identified with qualifying assets, which directly affect the investment cost incurred on loans allocated to construction projects, regardless of whether or notduring the amounts borrowed have been spent on such projects.acquisition period.
 
Under U.S. GAAP, interest is capitalized by applying an average interest rate to theconstruction-in-progress balance without exceeding total interest expense and also contemplate borrowings which are not project specific. Under Mexican FRS and U.S. GAAP to average amount of accumulated expenditures for the extent that interest income is earned on restricted funds, such amounts are considered as part ofqualifying asset during the net amount capitalized.period. PEMEX has accordingly adjusted its results of operations and equity to reflect the U.S. GAAP requirements for capitalizing interest.

Interest costs for the years ended December 31, 2007, 2006 and 2005, for Mexican FRS and U.S. GAAP purposes were allocated as follows:
             
  2007  2006  2005 
 
Under Mexican FRS:            
Interest capitalized Ps.5,350,849  Ps.6,996,305   Ps. 5,540,983 
Interest expense  57,847,569   46,099,472   57,146,232 
             
Total interest cost Ps.63,198,418  Ps.53,095,777   Ps. 62,687,215 
             
Under U.S. GAAP:            
Interest capitalized Ps.7,797,815  Ps.8,659,013   Ps. 6,321,963 
Interest expense  55,400,603   44,436,764   56,365,252 
             
Total interest cost Ps.63,198,418  Ps.53,095,777   Ps. 62,687,215 
             


F-54F-52

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Interest costs for the years ended December 31, 2006, 2005 and 2004, for Mexican FRS and U.S. GAAP purposes were allocated as follows:
             
  2006  2005  2004 
 
Under Mexican FRS:            
Interest capitalized Ps.6,742,842  Ps.5,340,243  Ps.4,666,343 
Interest expense  44,429,372   55,075,928   34,153,620 
             
Total interest cost Ps.51,172,214  Ps.60,416,171  Ps.38,819,963 
             
Under U.S. GAAP:            
Interest capitalized Ps.8,345,313  Ps.6,092,930  Ps.5,621,456 
Interest expense  42,826,901   54,323,241   33,198,507 
             
Total interest cost Ps.51,172,214  Ps.60,416,171  Ps.38,819,963 
             
 
In addition, the net income adjustment for capitalized interest presented herein also includes the reversal of depreciation of Ps. 1,090,687,1,062,994, Ps. 1,105,727,1,131,686, and Ps. 1,141,4041,147,292 for the years ended December 31, 2007, 2006 2005 and 2004,2005, respectively, related to the cumulative difference in amounts previously capitalized for such assets because the cumulative amounts capitalized under Mexican FRS have exceeded those amounts under U.S. GAAP.
 
(g)  Fixed assets—Impairment
 
For Mexican FRS purposes, as described in Note 2i., effective January 1, 2004,3j. PEMEX adoptedBulletin C-15, under which it evaluates the impairment of long-lived assets whenever there are events or circumstances indicating that the book value of a given asset may not be recoverable.recoverable underBulletin C-15.
 
For each of the cash-generating units, if the book value of the long-lived assets exceeds the estimated future value (discounted) of cash flows recoverable by such long-lived assets, a charge is made to income for the period for an impairment loss. PEMEX performs this calculation at least annually. In accordance withBulletin C-15, the impairment recorded can be reversed in subsequent periods if the subsequent impairment analysis does not indicate a loss in such future periods.
 
For U.S. GAAP purposes, an evaluation of impairment is undertaken whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, as is the case under Mexican FRS. However, under U.S. GAAP, the impairment criteria are met when the carrying value of assets exceeds the sum of expected future cash flows (undiscounted and without financing charges) of the related assets. The asset is written down to fair value as determined by using the present value of expected future cash flows. U.S. GAAP does not allow for reversal of losses; PEMEX measures impairment of its oil and gas producing assets based on the undiscounted estimated future cash flows associated with estimated proved reserves on afield-by-field basis.
 
In determining the estimated future cash flows for impairment purposes for all periods presented, hydrocarbon duties based on sales to third parties have not been included in the net cash flow calculation for both Mexican FRS and U.S. GAAP. Management believes that the hydrocarbon duties paid are similar in nature to income taxes or dividend distributions payable to its parent, and therefore are properly excluded from the net cash flow calculation.


F-55

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31,In 2007, 2006 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

In 2006, 2005, and 2004 under U.S. GAAP, PEMEX did not record an impairment charge. However,During 2007, there was no impairment for the year under Mexican FRS; however, during 2006 and 2005, PEMEX recognized an impairment charge under Mexican FRS of Ps. 677,771, Ps. 3,584,426703,247 and Ps. 3,953,229,3,719,165, respectively, relating to Pemex-Petrochemicals and Pemex-Exploration and Production assets. AsBecause these assets had already been impaired under U.S. GAAP, these charges have been reversed for U.S. GAAP purposes. The 2007, 2006 2005 and 20042005 U.S. GAAP net income reconciliation also includes a credit of Ps. 3,156,659,3,344,517, Ps. 3,984,3933,275,319 and Ps. 5,893,156,4,134,166, respectively, for depreciation due to the difference in carrying values of long-lived assets between Mexican FRS and U.S. GAAP.
 
In addition, the 2005 U.S. GAAP net income reconciliation includes a debit of Ps. 1,548,1491,606,344 to adjust for the impairment reversal accounted for under Mexican FRS during 2005.
 
(h)  Fixed assets—Depreciation convention
 
Until 2002, under Mexican FRS, PEMEXPEMEX’s accounting policies, assets would begin to depreciate assetsin the year after which they were placed in service. Under U.S. GAAP, however, assets are depreciated from the date they were placed in service. Beginning in 2003, PEMEX prospectively changed its accounting underpolicies requiring


F-53

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican FRS to require pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
depreciation from the month after the asset was placed into service, therefore eliminating any new differences between Mexican FRS and U.S. GAAP for assets placed in service in 2003 and later years. The 2007, 2006 2005 and 20042005 U.S. GAAP adjustments reflect a credit to income of Ps. 754,772783,144 for the reversal of the depreciation expense previously recorded under U.S. GAAP for assets placed in service before 2003.
 
(i)  Accounting for derivative financial instruments
 
For U.S. GAAP purposes, PEMEX applies SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (as amended, “SFAS No. 133”), which requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet as assets or liabilities at their fair values and that changes to fair values be recognized immediately asin earnings, unless the derivative qualifies as a “hedge” (as defined in SFAS No. 133), for which certain special accounting treatment is permitted.
 
In accordance with U.S. GAAP, hedge effectiveness is assessed consistently with the method and risk management strategy documented for each hedging relationship. PEMEX assesses the effectiveness of each hedging relationship retrospectively and prospectively to ensure that hedge accounting was appropriate for the prior period and continues to be appropriate for future periods. PEMEX considers hedge accounting to be appropriate if the assessment of hedge effectiveness indicates that the change in fair value of the designated hedging instrument is highly effective at offsetting the change in fair value or cash flow variability due to the hedged risk of the hedged item or transaction.
 
If a derivative instrument qualifies as a fair value hedge, the change in the fair value of the derivative and the change in the fair value of the hedged item that is due to the hedged risks is recorded asin earnings based on the income classification of the item being hedged. These hedges also adjust the book values of the derivatives and hedged item. If a derivative instrument qualifies as a cash flow hedge, the effective portion of the hedging instrument’s gain or loss is reported as stockholders’ equity (as a component of accumulated other comprehensive income) and is reclassified into earnings in the period during which the transaction being hedged affects earnings. Gains or losses reclassified from stockholders’ equity to earnings are classified in accordance with the earnings treatment of the hedged transaction. The ineffective portion of a hedging derivative’s fair value change, where that derivative is used in a cash flow hedge, is recorded as current


F-56

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated earnings in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

earnings.the comprehensive financing result. Classification in the statement of operations of the ineffective portion of the hedging instrument’s gain or loss is based on the income statement classification of the transaction being hedged. If a derivative instrument does not qualify as a hedge under the applicable guidance, the change in the fair value of the derivative is immediately recognized in the statement of operations.operations in the comprehensive financing result.
 
PEMEX also evaluates contracts for “embedded” derivatives, and considers whether any embedded derivatives have to be bifurcated, or separated, from the host contracts in accordance with SFAS No. 133 requirements. Embedded derivatives may have terms that are not clearly and closely related to the terms of the host contract in which they are included. If embedded derivatives exist andthat are not clearly and closely related to the host contract or either include leverage features or exposure to the substantial loss of the principal in the case of structured products, they are accounted for separately from the host contract as freestanding derivatives, with changes in their fair value recorded in current earnings in the comprehensive financing result to the extent that the hybrid instrument is not already accountedrecorded at fair value.value with changes in fair value recorded in earnings.
 
When hedge accounting is discontinued due to PEMEX’s determination that the derivative no longer qualifies as an effective fair value hedge, PEMEX will continue to carry the derivative on the balance sheet at


F-54

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
its fair value.value with changes in fair value recorded in earnings under the comprehensive financing result. The related hedged asset, liability or liabilityfirm commitment will cease to be adjusted for changes in fair value that are due to the previously hedged risk.risk and subsequent interests accrual will be recognized based on the new effective interest yield or funding cost, taking into account the fair value hedge adjustment amount as of the termination date of the hedge. When PEMEX discontinues hedge accounting in a cash flow hedge relationship because it is no longer probable that the forecasted transaction will occur in the originally expected period or within two months, the effective gain or loss on the derivative remainsremaining in accumulated other comprehensive income and is reclassified immediately into earnings when the forecasted transaction affects earnings. However,earnings; if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income are recognized in current earnings. If a derivative instrument ceases to meet the criteria for hedge accounting, any subsequent gains andor losses are recognized in current earnings and the effective portion, as of the date the cash flow hedge relationship ceased to exist, is recorded in earnings based on where the hedged item had an effect, in the amount needed to achieve the effective yield or funding cost provided by the derivative while the hedged item still impacts earnings.
 
AnThe remaining adjustment of the carrying amount of a fair value hedged asset, held for saleliability or firm commitment will remain part of the carrying amount of that asset or liability or firm commitment until the asset is sold at which pointor written off, the entire carrying amount ofliability expires, is paid or transferred or the hedged asset would be recognized as the cost of the item sold in determining earnings. Anfirm commitment ceases to exist. In fair value hedges, an adjustment of the carrying amount of a hedged interest-bearing financial instrument will be amortized to earnings;earnings as part of the new effective yield; amortization will begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.
The principal differences between derivative accounting under Mexican FRS and U.S. GAAP through December 31, 2004 relate to the following:
i)   PEMEX has entered into cross currency swaps under which it swaps principal and interest payments onnon-U.S. dollar-denominated obligations for U.S. dollar amounts. This limits PEMEX’s exposure to fluctuations in these currencies as they relate to the U.S. dollar. Under U.S. GAAP, foreign currency hedges can be designated as such only when hedging the risk to the entity’s functional currency, and therefore, contracts entered into by PEMEX entities whose functional currency is not the U.S. dollar do not qualify for hedge accounting under U.S. GAAP despite qualifying under Mexican FRSBulletin C-2, which had no similar


F-57

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

requirement that foreign currency hedge transactions be carried out in the entity’s functional currency.

ii)  Given the need for specialized technology, PEMEX enters into infrastructure and supply contracts whose settlement terms are denominated in U.S. dollars. Such contracts are generally entered into by entities whose functional currency is not the U.S. dollar, thus creating a foreign currency embedded derivative that is bifurcated and evaluated separately under U.S. GAAP. Such embedded derivatives are not required to be bifurcated under Mexican FRSBulletin C-2, since they were considered normal contractual provisions in Mexico.
 
For Mexican FRS purposes, effective January 1, 2005, PEMEX adopted the provisions ofBulletin C-10, “Derivative Financial Instruments and Hedging Operations,” issued by the MIPA, which contains provisions similar to those of SFAS 133, and provides an expanded guidance for the recognition, valuation, accounting treatment and disclosuresdisclosure applicable to derivative financial instruments including hedges and embedded derivatives, included hedge documentation and effectiveness testing therein.testing.
 
Similar to the requirements under U.S. GAAP, contracts need to be evaluated for embedded derivatives with such derivatives needing to be bifurcated from the host contracts under certain conditions. However, unlikeconditions and recognized at fair value with fluctuations recognized in earnings. For Mexican FRS purposes and U.S. GAAP, under which foreign currency embedded derivatives in either recognized financial instruments or in non-recognized contractual agreements, are bifurcated from host contracts when such contracts are not denominated in one of the functional currencies of either one of the counterparties.
As of December 31, 2007, PEMEX did recognize an impact in earnings in the comprehensive financing result, due to the foreign currency embedded derivatives effects. The foreign currency embedded derivatives were bifurcated from host contracts when such contracts were not denominated in the functional currency of either one of the counterparties, Mexican FRS does not require that such embedded derivatives be bifurcated. Therefore, atcontractual counterparties; therefore as of December 31, 2006 and 2005,2007 there are no differences continue to exist between Mexican FRS and U.S. GAAP as they relaterelated to certain foreign currencyaccounting for derivative instruments and hedging activities (including embedded derivatives which forattributable to the embedded non-functional currency component), except that U.S. GAAP purposes are recognized at fair valueallows for non-effectiveness testing associated with fluctuations recognizedthe use of interest rate swaps, when they meet certain general and particular conditions in earnings.designated hedging relationships (known as the “short-cut method criteria”).
 
As a result of the above, PEMEX has recognized a U.S. GAAP adjustment for the years ended December 31, 2007, 2006 2005 and 20042005, representing a net (loss) gain (loss) of Ps. 71,968,(8,149,706) Ps. 993,52674,673 and Ps. 6,220,077,1,030,873, respectively, reported as a component of “interest, net”in the comprehensive financing result in the consolidated statements of operations.


F-55

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
For the years ended December 31, 2007, 2006 2005 and 2004,2005, PEMEX recognized a net gain (loss) of Ps. 5,083,038,656,699, Ps. (4,752,172)5,274,109 and Ps. (8,143,833)(4,930,806), respectively, reported as “derivative financial instruments” in the consolidated other comprehensive lossincome (loss) statement under U.S. GAAP. All
As to permissible exclusions under both Mexican FRS and U.S. GAAP, for hedge effectiveness testing on formalized hedge relationships, PEMEX uses all components of each derivative’s gain or loss that were included in the assessment and measurement of hedge effectiveness, except for the time value (extrinsic value changes) of option contracts. The time value exclusion on options based hedges is reflected in the comprehensive financing result within earnings.
 
For cash flow hedges, effective gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current-period earnings are included in the line item in which the hedged item is recorded in the period during which the forecasted transaction (including recognized assets or liabilities where applicable as hedged items) affects earnings. In 2006,2007, a net loss of Ps. 701,3431,479,284 was reclassified from other comprehensive income (loss) into earnings and as of December 31, 2006,2007, a net loss of Ps. 576,792812,620 of the balance related to derivative instruments accumulated in other comprehensive income (loss) is expected to be reclassified during the next twelve months to the consolidated statement of operations.


F-58

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, In 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(j)  Sale of shares of Repsol

Under Mexican FRS, PEMEX recorded gains in years prior to 2002 related to the transfer of its Repsol shares to a third party. For U.S. GAAP purposes, the transfer of the shares did not meet the criteria for sale recognition as the transaction included a repurchase feature at the option of PEMEX, and, accordingly, all gains were reversed and the transfer of the shares were treated as a financing transaction. Under U.S. GAAP, the Repsol shares would be evaluated pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) (adjustment (m)), and a liability resulting from these transactions would also be reflected on the balance sheet.
During 2004, PEMEX exercised the option to repurchase the Repsol shares, terminated the equity swap arrangements relating thereto and subsequently transferred the repurchased shares to RepCon Lux, a consolidated entity. Therefore, the cumulative equity adjustmentnet loss of Ps. 727,159 as of December 31, 2003727,706 was reversed as of December 31, 2004.reclassified from other comprehensive income (loss) into earnings.
 
(k)(j)  Profit in inventory
 
Under Mexican FRS, PEMEX values crude oil and derivatives for export at net realizable value with the difference between the net realizable value and cost recorded in earnings. In contrast, U.S. GAAP requires that inventories be recorded at net realizable value, but not to exceed cost.the lower of cost or market value. For U.S. GAAP equity reconciliation purposes, PEMEX has eliminated the effect of recognizing a profit within its ending inventory balance at each period end. For net income reconciliation purposes, the adjustment reflects the reversal of the prior year’s equity adjustment as inventory is sold, as well as profit in inventory at the balance sheet date.
 
(l)(k)  Advance payments on minimum guaranteed dividend
 
Under Mexican FRS, advance payments on the minimum guaranteed dividend owed to the Mexican Government derived from the capitalization of debt as described in Note 14 are recorded as an account receivable prior to approval of the total annual dividend amount by the Board of Directors, which is usually takes place in the following fiscal year.
 
Under U.S. GAAP, such receivable balances are reflected as a reduction in equity. PEMEX has accordingly adjusted equity to reflect the advance minimum guaranteed dividend payment as a reduction in equity.
 
The effective rate used to calculate the minimum guaranteed dividend is LIBOR plus 0.8125% (which ranged6.175% (in 2007, was 6.3165% and from 4.5206% to 6.4530% for 2006, and from 3.3625% to 4.8125% 2005)in 2006).
 
The outstanding principal amountfinal payment of the capitalized debt ofamounted to U.S. $392,310, maturedand was made in January 2007.
 
(m)(l)  Accounting for available-for-sale securities (Repsol)
 
Pursuant to SFAS No. 115, PEMEX classifies its investment securities as “available-for-sale” and, accordingly, they are recorded at fair value with unrealized gains and losses excluded from the statement of operations and reported in other comprehensive income (loss). income. The fair value of the securities is determined by quoted market prices at December 31, 2007, 2006 2005 and 2004.2005. An impairment loss is recognized when the loss is considered other than temporary.


F-56

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
Under Mexican FRS, available for salethese investment securities are also recorded at fair value but the unrealized gains and losses are reflected in earnings. The income adjustments for the years ended


F-59

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2005, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

December 31, 2004, 2005 and 20062007 reflect the reversal of the fair value adjustment to earnings as reflected under Mexican FRS whereas U.S. GAAP would require such adjustment to be reflected in other comprehensive income (loss). income.
 
The U.S. GAAP cost and fair value of PEMEX’s investments at December 31, 2007, 2006 2005 and 2004,2005, are as follows:
 
                        
     Unrealized Gain
  Cost Fair Value Unrealized Gain 
 Cost Fair Value (Loss) 
2007
 Ps.10,429,499  Ps.23,146,258  Ps.12,716,759 
2006
 Ps.9,859,196  Ps.22,352,586  Ps.12,493,390  Ps.10,229,803  Ps.23,192,820  Ps.12,963,017 
2005 Ps.9,713,505  Ps.19,320,069  Ps.9,606,564  Ps.10,078,636  Ps.20,046,310  Ps.9,967,675 
2004 Ps.9,713,505  Ps.18,519,965  Ps.8,806,461 
 
(n)  Asset retirement obligations
PEMEX’s liability provisions recognized in the balance sheet represent present obligations whose settlement will probably require the future use of estimated economic resources. These provisions have been recorded based on the present value of management’s best estimate of future payments necessary to settle the liability. However, actual results could differ from the provisions recognized. No assets or trust funds have been established to satisfy these obligations.
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—An Interpretation of FASB Statement No. 143,” (“FIN 47”), which was adopted by PEMEX on December 31, 2005. FIN 47 clarifies that the phrase “conditional asset retirement obligation,” as used in FAS 143, refers to a legal obligation to perform an asset retirement activity for which the timingand/or method of settlement are conditioned on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists as to the timingand/or method of settlement. Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FAS 143 acknowledges that, in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 has not had a material impact on PEMEX’s financial position and results of operations.


F-60

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The following table indicates the changes to PEMEX’s pre-tax asset retirement obligations in 2006 and 2005:
         
  2006  2005 
 
Balance at January 1 Ps.14,251,420  Ps.14,674,446 
Liabilities incurred  1,724,190   1,797,000 
Liabilities settled  —   — 
Accretion expense  (35,574)  641,829 
Inflation  (291,758)  (473,287)
Currency exchange gain  (69,914)  (614,071)
Revisions in estimated cash flows  (131,696)  (1,774,497)
         
Balance at December 31 Ps.15,446,668  Ps.14,251,420 
         
(o)(m)  Effects of inflation on the U.S. GAAP adjustments
 
Various U.S. GAAP adjustments included herein are adjustments to monetary assets and liabilities recorded under Mexican FRS pursuant toBulletin B-10 as described in Note 2b.3a. and, therefore, the adjustments to the respective balance would also result in an adjustment to the monetary gain or loss as reported under Mexican FRS for each of the three years presented.
 
(p)(n)  Deferred income taxes
 
As described in Note 17,18, during 2005, a new fiscal regime was enacted that was applicable to Petróleos Mexicanos and its subsidiary entities effective January 1, 2006. Due to the change in tax regime, Petróleos Mexicanos and its subsidiary entities began recognizing deferred income taxes during 2005. The U.S. GAAP equity adjustment represents the cumulative impact of deferred income taxes relating to the other U.S. GAAP adjustments applicable to Petróleos Mexicanos and its subsidiary entities.
 
(q)(o)  Reclassification of Pemex Finance equity to minority interest
 
As described in Note 2c., effectiveEffective July 1, 2005, PEMEX entered into an option agreement with BNP Paribas Private Bank and Trust Cayman Limited to acquire 100% of the shareshares of Pemex Finance. As a result, insince 2005, the financial results of Pemex Finance have been consolidated into the financial statements of PEMEX for Mexican FRS purposes. Historically, Pemex Finance has been consolidated in the accompanying condensed consolidated U.S. GAAP information included herein for all periods presented. However, under U.S. GAAP, net income and retained earnings from Pemex Finance are reclassified as minority interest.interest due to the fact that PEMEX is not currently owner of any of the shares of Pemex Finance. The U.S. GAAP adjustment related to Pemex Finance represents the reclassification of net income and equity recognized under Mexican FRS to minority interest.
 
II.  Additional disclosure requirements:
 
(a)  Consolidation of Pemex Finance
 
PEMEX and certain subsidiaries have entered into several agreements with Pemex Finance under which Pemex Finance purchases existing accounts receivable and rights to future receivables from certain customers.


F-61

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Pemex Finance obtains resources for such purchases through the placement of debt instruments in the international markets as well as the recurring returns on its investments. Through December 31, 2004, Pemex Finance was not consolidated into PEMEX’s condensed consolidated financial statements for Mexican FRS purposes. Beginning in 2005, Pemex Finance is consolidated under Mexican FRSFRS.


F-57

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as describedof December 31, 2007 purchasing power and in Note 2c.thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
Under U.S. GAAP SFAS No. 140, “Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”), PEMEX has evaluated the Pemex Finance structure in light of the permitted and non-permitted activities of a Qualified Special Purpose Entity (“QSPE”) and has determined that Pemex Finance diddoes not qualify as a QSPE and should therefore be consolidated for U.S. GAAP purposes. Consequently, Pemex Finance has been consolidated in the accompanying condensed consolidated U.S. GAAP information included herein for all periods presented.presented; subsequently is reclassified as minority interest as described in note 21 Ip.
 
(b)  Special Tax on Production and Services (“IEPS Tax”)
 
Under Mexican FRS, the IEPS Tax is reflected as part of “Net domestic sales” when charged to customers and the amounts payable to the Mexican Government are then deducted from “Income before hydrocarbon extraction duties and other, special tax on production and services, and cumulative effect of adoption of new accounting standards.”
 
Under U.S. GAAP, this tax would have no net effect on revenues nor would it be deducted from “Income before hydrocarbon extraction duties and other, special tax on production and services, and cumulative effect of adoption of new accounting standards,” as both the amount charged to customers and the amount accrued as payable to the tax authorities would be excluded from revenues (i.e., there is nogross-up).
 
(c)  Environmental, dismantlement and abandonment liabilities
 
PEMEX estimates its environmental liabilities on asite-by-site basis based on the best available information. PEMEX establishes accruals for its environmental liabilities using estimates based on costs of similar remediation works most recently contracted and in progress at that time.
 
In 1999, PEMEX implemented newhas internal guidelines for estimating and recording environmental liabilities. The guidelines,liabilities, thePasivos Ambientales: DefinicióGuía para la Determinación de las Provisiones y Lineamientos para su Cuantificación y Registro ContableRevelaciones de Carácter Ambiental (Environmental Liabilities: Definition and (Guidelines for the Determination of Environmental Liabilities and their Quantification and Accounting Treatment), soughtDisclosure). The guidelines’ purpose is to standardize and improve PEMEX’s internal procedures for identifying necessary remediation works and estimating and monitoring environmental liabilities.
These guidelines codified existing policy with respect to estimating environmental liabilities, and establish that an environmental liability exists when:
 
 i)   As a result of the activities of PEMEX, an affected area is identified in a particular site, and PEMEX undertakes a formal commitment to correct the environmental deficiency, in accordance with the criteria, guidelines, standards and legal framework in force; and
 
 ii)  A reasonable estimate of the costs of remediation orclean-up of the identified affected area has been made, including the costs of the assessment studies.
 
As stated above, in accordance with past and present internal guidelines, PEMEX conductssite-by-site studies to identify environmental liabilities and develop a reasonable estimate of such liabilities. These guidelines consider many factors but are tailored to specific Mexican requirements. Each contaminated


F-62

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

site must be characterized, quantified and assessed through a specific study. The contamination of the affected sites may extend to the soil, subsoil and bodies of water, including water deposits, lagoons, swamps and others. These sites may be located inside PEMEX’s facilities, in surrounding areas, in abandoned areas where PEMEX had activity in the past or along the pipelines.
 
Once the corresponding contaminated site has been identified and evaluated, expenses for the cleanup of (i) hydrocarbon seepage and other spills that may cause pollution and that cannot be corrected in a short


F-58

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
timeframe, (ii) water deposits and (iii) the concentration of hazardous residuals, will be included in the remediation or restoration of affected areas. Estimates are kept current based on the best available information.
 
Based on reports from field managers and other available information, management prepares reports for identified affected areas on a periodic basis. When the contamination relates to a new incident, PEMEX informs theProcuraduría Federal de Protección al Ambiente(Federal Environmental Protection Agency, or “PROFEPA”) and responds immediately to eliminate the cause of the incident or to minimize its impact. Subsequently, PEMEX and PROFEPA jointly determine whether the contamination has been eliminated or if additional actions are necessary for the remediation of the site.
 
PEMEX believes its environmental liabilities are probable when its initial studies reveal the existence of contamination in the inspected areas at levels above those permitted by Mexican law, indicating that PEMEX will have to perform remediation works necessary to bring the site into compliance. PEMEX believes the liability is reasonably estimable when (i) an assessment of the size of the affected area has been made, (ii) it has compared the affected area to other affected areas identified and addressed in the past, and (iii) based on PEMEX’s experience with current or recent activities on similar sites, PEMEX can assess the estimated remediation costs in order to be able to calculate the corresponding environmental liability. Thus, PEMEX accrues for these environmental liabilities when it identifies affected areas with contamination levels above those permitted by Mexican law and PEMEX is able to make a reasonable estimate of the size of the affected area and the remediation cost. In addition, PEMEX periodically revises its estimates of environmental liabilities as it obtains new information during the course of the remediation works in order to ensure its estimates are based on the most accurate and updated information.
 
PROFEPA administers the Mexican environmental regulatory rubric and establishes acceptable standards of environmental remediation. Although PROFEPA has the authority to review and inspect remediation works performed by PEMEX and compliance with permitted contamination levels established by laws and regulations, it does not determine PEMEX’s environmental liabilities. PEMEX maintains proper records of all of the studies, estimations, performed works and any other information that PROFEPA may request from time to time.
 
While the audits of Petróleos Mexicanos’ four subsidiaries’ main facilities are complete, there are a number of facilities yet to be audited,During 2007, 2006 and some completed audits are pending evaluations. Pemex-Refining expects 18 pipeline systems to be audited, and nine audits should be completed by 2008. Pemex-Gas and Basic Petrochemicals foresees audits of six pipelines transferred by Pemex-Petrochemical in June 2007. Pemex-Exploration and Production is evaluating a new program for regional audits primarily covering its pipelines systems. We cannot predict the outcome of these audits, the outcome of pending evaluations of audits nor the outcome of the new regional program.


F-63

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

During 2006, 2005 and 2004, PEMEX spent Ps. 4,174,573,4,120,000, Ps. 3,018,5684,175,000 and Ps. 2,615,999,3,019,000, respectively, on various environmental projects and related expenditures. The most important of these projects have been directed toincluded the modernization of installations, the implementation of systems and control mechanisms to monitor atmospheric pollution, the acquisition of equipment to clean hydrocarbon spills, the expansion of aquatic effluent systems, the restoration and reforestation of affected areas, studies for environmental investigationinvestigative studies and the conducting of environmental audits. In addition, PEMEX has engaged in extensive research and development efforts to develop capacity for increased production of unleaded gasoline, diesel and fuel oil with lower sulfur content and alternative fuels, such as industrial oil gas and natural gas. Currently, PEMEX is developing a procedure,Procedimiento para la Determinación de Gastos Asociados a las Actividades de Seguridad Industrial y Protección Ambiental(Procedure (Procedure for the Determination of Costs Associated with Industrial Safety and Environmental Protection) to determine the costs and expenses related to the activities associated with industrial safety and environmental management.
 
PEMEX’s management believes that its operations are in stubstantialsubstantial compliance with theLey General del Equilibrio EcologicoEcológico y Protección al Ambiente(General Law of Ecological Equilibrium and Environmental Protection, or the “Environmental Law”) as such law has been historically interpreted and enforced.
 
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic


F-59

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded on an undiscounteda discounted basis when expenses include payments during periods longer than one year, when environmental assessmentand/or remediation is probable and the costs can be reasonably estimated.
 
As PEMEX has exclusive rights to production and processing of crude oil, natural gas, and refined products within Mexico, there are no instances of joint liability; PEMEX is the sole responsible party in the event of environmental damage. PEMEX has contractedobtains insurance policies to cover the cost of certain environmental contingencies. The liability accruals are not reflected net of any amounts forthcoming under such policies.
 
Environmental liabilities accrued in the consolidated financial statements, for both Mexican FRS and U.S. GAAP purposes, as of December 31, are divided among the operating units as follows:
 
                
 2006 2005  2007 2006 
Pemex—Exploration and Production Ps.690,612  Ps.784,100  Ps.371,639  Ps.716,572 
Pemex—Refining(1)
  1,292,919   692,119   1,507,709   1,341,520 
Pemex—Gas and Basic Petrochemicals  273,888   269,078   211,692   284,183 
Pemex—Petrochemicals  53,955   51,917   2,400   55,983 
          
Total Environmental Liability Accrual Ps.2,311,374  Ps.1,797,214  Ps.2,093,440  Ps.2,398,258 
          
­ ­
 
      (1)  The increase primarily resulted from revisions to estimates and new reserves established for additional remediation plans.
(1)The increase primarily resulted from revisions to estimates and new reserves established for additional remediation plans.
 
(d)  Dismantlement and abandonment costs
 
Under current Mexican law, PEMEX’s legal obligation related to dismantlement and abandonment activities is governed by the following two federal laws: the Petroleum Works Law and the Environmental Law described in this note. Although PEMEX is subject to other laws and regulations established at a local


F-64

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

level in areas where PEMEX undertakes petroleum extractiveextraction activities, these local laws and regulations do not contain any specific guidance on abandonment, restoration and removal of oil and gas facilities or otherwise impose a higher standard on PEMEX in this regard. Mexico is not a party to any international treaty or convention that would affect PEMEX’s understanding of its obligation with regard to dismantlement and abandonment activities. Thus, the only relevant law for PEMEX as to abandonment and removal of facilities related to oil- and gas-producing activities is Mexican federal law.
 
The Petroleum Works Law provides that wells must be plugged, or in certain cases, capped, to ensure the maintenance of sanitary and safe conditions and to prevent the seepage of hydrocarbons to the surface. The Petroleum Works Law requires that PEMEX plug a well when it turns out to be dry, invaded with salt water or abandoned due to a mechanical accident, or once a well’s production has been depleted such that abandonment is necessary due to economic unfeasibility of production. All activities required for plugging a well are undertaken with the purpose of isolating, in a definitive and convenient manner, the cross formations in the perforation that contains oil, gas or water in order to ensure that hydrocarbons do not seep to the surface.
 
PEMEX must obtain authorization from the Ministry of Energy before performing any plugging activities. The Petroleum Works Law also states that the Ministry of Energy may authorize temporary plugging of exploratory wells where production of hydrocarbons is commercially feasible but for which there are no adequate means for their exploitation.
 
PEMEX monitors and reviews its own internal estimates of costs to undertake dismantlement and abandonment at levels consistent with Mexican legal requirements and guidelines for oil and gas industry extractive


F-60

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
extraction activities. Estimates as to aggregate costs include PEMEX’s operational specifics such as the number of onshore and offshore wells, depth of wells, the varying nature of offshore platforms, expected production lives, current expectations as to when the costs will be incurred based on present production rates and other operational specifics. The actual costs incurred in the dismantlement and retirement of wells are considered where practicable, as described above. The average cost for plugging and dismantlement varies from producing region to producing region and from platform to platform. For the offshore regions, to the extent that actual costs are not available due to limited plugging and dismantlement activity historically, PEMEX usesrelives on estimates based on services costs. The estimated costs are both peso- and U.S. dollar-denominated.


F-65

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(e)  Pensions and seniority premiums

 
The components of seniority premiums and pension plan cost, calculated in accordance with SFAS No. 87 and 158, using December 31 as a measurement date, consist of the following:
 
                        
 2006 2005 2004  2007 2006 2005 
Service cost Ps.6,852,496  Ps.6,277,635  Ps.6,841,240  Ps.9,088,563  Ps.7,110,082  Ps.6,513,611 
Interest cost  23,086,816   20,223,743   19,449,166   27,204,694   23,954,649   20,983,953 
Return on plan assets  (31,632)  (179,251)  (861,702)  (11,149)  (32,821)  (185,989)
Net amortization and deferral  336,973   786,208   97,849 
Net amortization of gain and losses  431,153   349,640   815,762 
Amortization of net transition obligation  5,501,967   5,540,966   5,440,692   5,733,629   5,708,786   5,749,251 
Adjustment to net periodic pension cost due to inflation  1,466,536   1,058,898   1,599,180   866,361   1,521,663   1,098,702 
Plan amendments  503,333   191,024   (55,176)  527,348   522,253   198,205 
              
Net cost under U.S. GAAP  37,716,489   33,899,223   32,511,249   43,840,599   39,134,252   35,173,495 
Net cost under Mexican FRS  (39,585,941)  (34,875,001)  (33,315,655)  (46,169,035)  (41,073,977)  (36,185,952)
              
Additional (benefit) expense recognized under
U.S. GAAP		 (Ps.1,869,452) (Ps.975,778) (Ps.804,406) (Ps.2,328,436) (Ps.1,939,725) (Ps.1,012,457)
              
 
Actuarial assumptions (net of inflation) used in the calculation of benefit obligations, net seniority premiums and pension plan cost under U.S. GAAP as of December 31 are:
 
                        
 2006 2005 2004  2007 2006 2005 
Discount rate  4.25%   4.50%   4.59%   4.25%   4.25%   4.50% 
Rates of increase in compensation levels  0.50%   0.50%   0.92%   0.50%   0.50%   0.50% 
Expected long-term rate of return on assets  4.25%   5.00%   5.50%   4.25%   4.25%   5.00% 
 
The calculation of pension cost and benefit obligations under SFAS No. 87 and 158 requires considerable judgment with respect to choosing actuarial assumptions. Each significant assumption reflects PEMEX’s best estimate of the plan’s future performance solely with respect to that assumption. Assumed discount rates and compensation levels often have the greatest effect on pension cost and benefit obligations, and are related because both are affected by some of the same economic factors. The discount rate is based upon the current prices for settling the pension obligation, referred to as the “settlement rate.” Assumedrate” and the current yield on high quality corporate bonds (AA or better) of term and currency consistent with the benefit obligation as of the measurement date. According to the external actuary, assumed compensation levels reflect PEMEX’s estimate of actual future compensation levels for the individuals involved and is consistent with


F-61

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
assumed discount rates to the extent that both incorporate expectations of the same future economic conditions, such as inflation.

The combined seniority premium and pension plan liability as of December 31 under SFAS No. 87 and 158 is as follows:
         
  2007  2006 
 
Accumulated benefit obligation Ps.354,120,653  Ps.329,198,933 
         
Projected benefit obligation  364,687,896   336,758,893 
Plan assets at fair value  (7,122,630)  (2,118,402)
         
Projected benefit obligation in excess of plan assets  357,565,266   334,640,491 
Unrecognized net loss  —   (45,560,129)
Unrecognized transition obligation  —   (69,564,015)
Unrecognized prior service costs  —   (5,905,290)
         
Accrued liability under U.S. GAAP  357,565,266   213,611,057 
Accrued liability recognized under Mexican FRS  (232,543,132)  (205,735,690)
         
U.S. GAAP adjustment to seniority premium and pension plan liability after recognition of SFAS 158 Ps.125,022,134  Ps.7,875,367 
Accumulated other comprehensive income  119,475,192   — 
Net U.S. GAAP adjustment to seniority premium and pension plan liability  5,546,942   7,875,367 
         
Additional minimum liability Ps.—  Ps.115,122,678 
         


F-66F-62

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The combined seniority premiumchanges recognized in “accumulated other comprehensive income” before and pension plan liabilityafter the recognition of SFAS 158, as of December 31 under SFAS No. 87 is as follows:
 
         
  2006  2005 
 
Accumulated benefit obligation Ps.317,272,654  Ps.276,558,474 
         
Projected benefit obligation  324,558,730   282,321,176 
Plan assets at fair value  (2,041,656)  (1,471,390)
         
Projected benefit obligation in excess of plan assets  322,517,074   280,849,786 
Unrecognized net loss  (43,909,568)  (20,984,909)
Unrecognized transition obligation  (67,043,837)  (72,767,509)
Unrecognized prior service costs  (5,691,352)  (6,065,549)
         
Accrued liability under U.S. GAAP  205,872,317   181,031,819 
Accrued liability recognized under Mexican FRS  (198,282,260)  (171,572,300)
         
Net U.S. GAAP adjustment to seniority premium and pension plan liability  7,590,057   9,459,519 
         
Additional minimum liability Ps.110,951,993  Ps.96,338,271 
         
         
  2007  2006 
 
Before recognition of the funded status provisions of SFAS 158
        
Additional liability Ps.114,921,322  Ps.115,122,678 
Actual intangible assets  68,227,509   72,222,554 
         
Accumulated other comprehensive (Income)  46,693,813   42,900,124 
         
After recognition of the funded status provision of SFAS 158
        
Transition (assets) obligation Ps.63,402,660  Ps.— 
Prior service cost (income)  5,208,308   — 
Net (gain)/loss  50,864,224   — 
         
Accumulated other comprehensive (Income)  119,475,192   — 
         
Increase in accumulated other comprehensive loss (income) to reflect the recognition of SFAS 158 Ps.72,781,379  Ps.— 
         
Non current assets  (7,122,630)  — 
         
Current liabilities  10,719,970   — 
Non current liabilities  346,845,296   — 
         
Net amount recognized in statement of financial position as of December 31, 2007 Ps.357,565,266  Ps.328,733,735 
         
 
The scheduled maturities on the benefits expected to be paid according to the plans in each of the next ten years through 2016,2017, are as follows:
 
        
 Expected Benefit
  Expected Benefit
 
Year
 Payments  Payments 
2007 Ps.16,075,928 
2008  16,398,564  Ps.17,842,600 
2009  17,950,577   17,923,433 
2010  19,457,860   19,624,667 
2011  21,123,573   21,467,404 
2012  22,842,502   23,259,417 
2013  24,397,772   25,232,630 
2014  26,077,481   26,954,721 
2015  27,876,858   28,900,722 
2016  29,131,691   30,446,622 
2017  32,066,949 
      
Total Ps.221,332,806  Ps.243,719,165 
      
 
In accordance withThe 2007 and 2006 U.S. GAAP equity adjustments of Ps. 67,715,653 and Ps. 5,426,624 reflect the provisionsdifference in the amounts recognized in accumulated other comprehensive loss under Mexican FRS of Ps. 51,759,539 and Ps. 48,326,747, respectively, and the amounts recognized under U.S. GAAP of Ps. 119,475,192 and Ps. 42,900,124, respectively, and including the adoption of SFAS No. 87, PEMEX has reflected, for U.S. GAAP purposes, an additional minimum liability at the end of each year representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liabilities. The additional minimum liability is offset by recording an intangible asset provided that the asset recognized does not exceed the sum of the unrecognized prior service cost and the unrecognized transition obligation for the year. As of December 31, 2006 and 2005, for U.S. GAAP purposes, PEMEX recognized an intangible asset of Ps. 69,606,063 and158.


F-67F-63

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Ps. 74,568,415, respectively. In addition, in 2006 and 2005, PEMEX recognized in other comprehensive loss the excess of the additional minimum pension liability over the sum of the unrecognized prior service cost and the unrecognized transition obligation of Ps. 41,345,930 and Ps. 21,769,856, respectively. The 2006 and 2005 U.S. GAAP equity adjustments of Ps. 5,230,027 and Ps. 6,617,873 reflect the difference in the amounts recognized in other comprehensive loss under Mexican FRS of Ps. 46,575,957 and Ps. 28,387,730, respectively, and the amount unrecognized under U.S. GAAP of Ps. 41,345,930 and Ps. 21,769,857, respectively, related to additional minimum pension liabilities.
 
The objective of PEMEX’s investment guidelines with respect to theits plan assets is to grant the highest security together with an adequate rate of return, maintaining the purchasing power of the investments. The comparative benchmark used by PEMEX is the monthly average of primary interest rates of Mexican Government28-day T-billsTreasury-bills (“Cetes 28”).
 
The investment guidelines list certain prohibited investments, such as securities of companies that are subject to intervention by a regulatory authority, subordinated securities, convertible securities, certain foreign exchange securities, derivatives such as futures, forwards, swaps, options, exotic options, swaptions, etc., except structured notes in pesos with protected initial investment, securities having terms with certain characteristics such as liquidity, risk, return, or maturity that do not comply with certain requirements set by PEMEX’s Financial Resources Committee and securities not listed on the Mexican Stock Exchange.
 
The expected long-term rate of return is based on the guidelines of the Mexican Society of Consulting Actuaries, which annually issues recommendations for selecting financial assumptions based on a historical analysis conducted using economic variables such as inflation, risk-free interest rates and increases to the legal minimum wage and salaries in general.
 
At December 31, 20062007 and 2005,2006, all of PEMEX’s plan assets were invested in Mexican Government bonds and bonds issued by financial institutions listed on the Mexican Stock Exchange. The following table shows PEMEX’s actual investment allocation at December 31 of each year.
 
                
Securities
 2006 2005  2007 2006 
Mexican Government Bonds  71%   63%   84.%   71% 
Bonds issued by financial institutions listed on the Mexican Stock Exchange  29%   37%   16%   29% 
          
Total  100%   100%   100%   100% 
          
 
(f)  Other post-retirement benefits
 
PEMEX has implemented SFAS No. 106, effective January 1, 1995, using the transitional recognition method and December 31 as a measurement date.
 
PEMEX makes supplemental payments in respect of its obligationobligations for gas, gasoline and basic food supplies and provides health carehealthcare benefits, in each case to retired employees and immediate family members. PEMEX regularly determinesadjusts the level of its supplemental payments consideringbased on inflationary conditions. Health careHealthcare is provided through a regional network of PEMEX hospitals and medical centers, which also provide care to active PEMEX employees. No commitments have been made regarding the level of such contributions in the future.


F-68F-64

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Effective January 1, 2004, PEMEX adopted the amendments toBulletin D-3 which established an obligation to recognize a reserve for post-retirement medical benefits and to include the supplemental payments as a part of PEMEX’s other post-retirement benefits obligation. In prior years, the obligation for post-retirement medical benefits was recognized under U.S. GAAP, but not under Mexican FRS. In prior years, the obligation for supplemental payments under Mexican FRS was recognized as a part of PEMEX’s pensions and seniority premiums obligation and reclassified for U.S. GAAP purposes as a component of the SFAS No. 106 adjustment. In 2004, under Mexican FRS, these benefits were reclassified to form part of the liability for other post-retirement benefits, which is now consistent with their treatment under U.S. GAAP.
 
The scheduled maturities onamounts of the benefits expected to be paid according to the plans in each of the next ten years, through 2016,2017, are as follows:
 
        
 Expected Benefit
  Expected Benefit
 
Year
 Payments  Payments 
2007 Ps.11,372,864 
2008  12,287,017  Ps.13,257,829 
2009  13,195,664   14,117,305 
2010  14,216,817   15,172,410 
2011  15,328,624   16,350,695 
2012  16,506,788   17,605,214 
2013  17,722,437   18,965,386 
2014  18,739,037   20,307,814 
2015  19,683,719   21,715,469 
2016  20,663,003   22,562,957 
2017  23,634,012 
      
Total Ps.159,715,970  Ps.183,689,091 
      
In 2004, PEMEX reevaluated the estimated costs used in the calculation of its obligations for post-retirement benefits. As a result of the reevaluation, the estimated allocable cost per employee was reduced resulting in a reduction in PEMEX’s post-retirement benefits obligation. In accordance with SFAS No. 106, the gain resulting from this change in estimate has been recorded as an unrecognized actuarial gain and will be amortized over the related service period.


F-69F-65

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
The components of other post-retirement benefits expense consist of the following for the years ended December 31, 2007, 2006 2005 and 2004:2005:
 
                                                                        
 2006 2005 2004  2007 2006 2005 
 Supplemental
     Supplemental
     Supplemental
      Supplemental
     Supplemental
     Supplemental
     
 Payments Health Services Total Payments Health Services Total Payments Health Services Total  Payments Health Services Total Payments Health Services Total Payments Health Services Total 
Service cost Ps.4,518,036  Ps.1,166,690  Ps.5,684,726  Ps.2,617,140  Ps.1,395,858  Ps.4,012,998  Ps.2,548,794  Ps.2,065,434  Ps.4,614,228  Ps.4,103,096  Ps.2,298,180  Ps.6,401,276  Ps.4,687,869  Ps.1,210,546  Ps.5,898,415  Ps.2,715,518  Ps.1,448,328  Ps.4,163,846 
Interest cost  11,729,108   5,342,613   17,071,721   9,338,423   5,371,096   14,709,519   8,349,570   6,753,440   15,103,010   14,283,753   7,508,894   21,792,647   12,170,005   5,543,442   17,713,447   9,689,454   5,572,995   15,262,449 
Amortization of actuarial (gains) and losses  405,878   (2,599,773)  (2,193,895)  (170,968)  (1,628,913)  (1,799,881)  1,325   (21,032)  (19,707)  812,365   (562,453)  249,912   421,135   (2,697,498)  (2,276,363)  (177,395)  (1,690,144)  (1,867,539)
Amortization of prior service cost and plan amendments  20,595   56,667   77,262   (15,033)  —   (15,033)  (7,191)  —   (7,191)  21,545   55,841   77,386   21,369   58,797   80,166   (15,598)  —   (15,598)
Amortization of transition obligation  2,975,335   2,668,738   5,644,073   2,996,046   2,690,602   5,686,648   2,943,123   2,639,845   5,582,968   3,112,566   2,791,828   5,904,394   3,087,178   2,769,056   5,856,234   3,108,667   2,791,742   5,900,409 
Adjustment to net periodic post-retirement benefit cost due to inflation  796,407   268,484   1,064,891   493,846   260,667   754,513   718,223   593,711   1,311,934   444,765   241,883   686,648   826,344   278,575   1,104,919   512,410   270,467   782,877 
                                      
Net expense under U.S. GAAP  20,445,359   6,903,419   27,348,778   15,259,454   8,089,310   23,348,764   14,553,844   12,031,398   26,585,242   22,778,090   12,334,173   35,112,263   21,213,900   7,162,918   28,376,818   15,833,056   8,393,386   24,226,444 
Expense under Mexican FRS  (20,778,959)  (11,429,690)  (32,208,649)  (15,314,651)  (11,287,055)  (26,601,706)  (14,646,766)  (9,080,141)  (23,726,907)  (22,925,973)  (16,211,847)  (39,137,820)  (21,560,040)  (11,859,332)  (33,419,372)  (15,890,329)  (11,711,335)  (27,601,664)
                                      
Additional expense (benefit) under
U.S. GAAP		 (Ps.333,600) (Ps.4,526,271) (Ps.4,859,871) (Ps.55,197) (Ps.3,197,745) (Ps.3,252,942) (Ps.92,922) Ps.2,951,256  Ps.2,858,334  (Ps.147,883) (Ps.3,877,674) (Ps.4,025,557) (Ps.346,140) (Ps.4,696,414) (Ps.5,042,554) (Ps.57,273) (Ps.3,317,949) (Ps.3,375,220)
                                      


F-70F-66

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
Actuarial assumptions used in the calculation of other post-retirement benefits and costs under U.S. GAAP as of December 31 were:
 
                     
 2006 2005 2004  2007 2006 2005
Discount rate  4.25%  4.50%  4.59%  4.25%  4.25%  4.50%
Health care cost trend rate  1.50%  1.50%  0.92%  1.50%  1.50%  1.50%
 
Since the other post-retirement benefits are not based on levels of compensation, it is not necessary to use salary increase assumptions to determine expenses. The effect of a 1% increase in the health carehealthcare cost trend rate was to increase net expense for other post-retirement benefits by Ps. 1,685,5069,686,783 for 2007, Ps. 1,748,864 for 2006 and Ps. 2,205,1522,288,044 for 2005, and Ps. 538,238 for 2004, and to increase the accumulated post-retirement benefit obligation by Ps. 13,423,79614,698,361 for 2007, Ps. 13,928,396 for 2006 Ps. 20,598,780 for 2005 and Ps. 4,284,87321,373,088 for 2004.2005. The effect of a 1% decrease in the health care cost trend rate was to decrease net expense for other post-retirement benefits by Ps. 1,353,0236,386,544 for 2007, Ps. 1,403,883 for 2006 and Ps. 2,428,4512,519,736 for 2005, and Ps. 436,506 for 2004, and decrease the accumulated post-retirement benefit obligation by Ps. 10,971,27012,007,042 for 2007, Ps. 11,383,680 for 2006 Ps. 25,710,112 for 2005 and Ps. 3,485,30826,676,555 for 2004.2005.


F-71F-67

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power and
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
The other post-retirement benefits liability as of December 31, 2007 and 2006 and 2005 iswas as follows:
 
                                                
 2006 2005  2007 2006 
 Supplemental
     Supplemental
      Supplemental
     Supplemental
     
 Payments Health Services Total Payments Health Services Total  Payments Health Services Total Payments Health Services Total 
Accumulated unfunded post retirement benefit obligation:
                                                
Retirees Ps.80,080,245  Ps.50,292,131  Ps.130,372,376  Ps.67,583,668  Ps.45,019,053  Ps.112,602,721  Ps.97,348,838  Ps.53,911,935  Ps.151,260,773  Ps.83,090,461  Ps.52,182,612  Ps.135,273,073 
Fully eligible active participants  14,799,867   1,338,440   16,138,307   10,817,470   1,627,385   12,444,855   16,897,125   1,633,991   18,531,116   15,356,194   1,388,752   16,744,946 
Other active plan participants  72,294,954   38,021,717   110,316,671   64,720,990   19,351,252   84,072,242   84,421,650   43,687,740   128,109,390   75,012,521   39,450,953   114,463,474 
                          
Total  167,175,066   89,652,288   256,827,354   143,122,128   65,997,690   209,119,818   198,667,613   99,233,666   297,901,279   173,459,176   93,022,317   266,481,493 
Unrecognized actuarial gains (losses)  (25,857,950)  10,727,113   (15,130,837)  (14,063,409)  32,612,792   18,549,383   —   —   —   (26,829,950)  11,130,345   (15,699,605)
                        
Prior service cost and plan amendments  (456,519)  (485,130)  (941,649)  (477,949)  (540,674)  (1,018,623)  —   —   —   (473,680)  (503,366)  (977,046)
Unamortized transition obligation  (36,259,991)  (31,670,811)  (67,930,802)  (39,355,967)  (34,446,385)  (73,802,352)  —   —   —   (37,623,004)  (32,861,317)  (70,484,321)
                          
Net post-retirement benefit liability:                                                
U.S. GAAP  104,600,606   68,223,460   172,824,066   89,224,803   63,623,423   152,848,226   198,667,613   99,233,666   297,901,279   108,532,542   70,787,979   179,320,521 
Mexican FRS  (110,899,469)  (25,096,072)  (135,995,541)  (95,188,909)  (15,970,922)  (111,159,831)  (132,243,775)  (39,645,991)  (171,889,766)  (115,068,180)  (26,039,433)  (141,107,613)
                          
U.S. GAAP adjustment after recognition of SFAS 158  66,423,838   59,587,675   126,011,513   (6,535,638)  44,748,546   38,212,908 
Accumulated other comprehensive income  73,107,425   18,716,736   91,824,161   —   —   — 
             
Net U.S. GAAP adjustment (Ps.6,298,863) Ps.43,127,388  Ps.36,828,525  (Ps.5,964,106) Ps.47,652,501  Ps.41,688,395  (Ps.6,683,587) Ps.40,870,939  Ps.34,187,352  (Ps.6,535,638) Ps.44,748,546  Ps.38,212,908 
                          


F-72F-68

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
The changes recognized in “other comprehensive income” as of December 31, 2007 were as follows:
             
  2007 
  Supplemental
       
  Payments  Health Services  Total 
 
After recognition of the funded status provision of SFAS 158
            
Transition (assets) obligation Ps.34,490,623  Ps.29,986,702  Ps.64,477,325 
Prior service cost (income)  452,493   446,770   899,263 
Net (gain)/loss  38,164,309   (11,716,736)  26,447,573 
             
Accumulated other comprehensive (Income) Ps.73,107,425  Ps.18,716,736  Ps.91,824,161 
             
Increase in accumulated other comprehensive loss (income) to reflect the adoption of SFAS 158 Ps.73,107,425  Ps.18,716,736  Ps.91,824,161 
             
Current liabilities Ps.8,810,348  Ps.4,447,481  Ps.13,257,829 
Noncurrent liabilities  189,857,265   94,786,185   284,643,450 
             
Net amount recognized in statement of financial position as of December 31, 2007 Ps.198,667,613  Ps.99,233,666  Ps.297,901,279 
             


F-69

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
PEMEX recognized SFAS No. 158, and included its effects in the results of the actuarial valuation of its labor obligations effective January 1, 2007. Pursuant to the requirements of SFAS No. 132, the following tables present a reconciliation of the beginning and ending balances of plan assets’ fair value and the accumulated post-retirement benefit obligation:
 
                                                
 Seniority Premiums and
      Seniority Premiums and
         
 Pension Benefits Supplemental Payments Health Services  Pension Benefits Supplemental Payments Health Services 
 2006 2005 2006 2005 2006 2005  2007 2006 2007 2006 2007 2006 
Change in benefit obligation (PBO)
                        
Benefit obligation at beginning of year Ps.271,323,614  Ps.249,318,687  Ps.137,546,938  Ps.114,511,558  Ps.63,426,810  Ps.65,958,207 
Change in projected benefit obligation (PBO)
                        
Projected benefit obligation at beginning of year Ps.324,558,730  Ps.281,522,669  Ps.167,175,066  Ps.142,717,327  Ps.89,652,288  Ps.65,811,024 
Effect of inflation on beginning balance  10,997,563   909,111   5,575,190   400,039   2,570,879   219,252   12,200,163   11,410,961   6,284,111   5,784,761   3,370,030   2,667,518 
Service cost  6,852,493   6,277,635   4,518,036   2,617,140   1,166,690   1,395,858   9,088,563   7,110,078   4,103,096   4,687,869   2,298,180   1,210,546 
Interest cost  23,086,816   20,223,743   11,729,108   9,338,423   5,342,613   5,371,096   27,204,694   23,954,649   14,283,753   12,170,005   7,508,894   5,543,442 
Prior service costs and plan amendments  1,369,712   4,757,830   658,356   360,580   268,682   606,412   (3,817)  1,421,199   677,354   683,104   131,165   278,782 
Actuarial (gains)/losses  22,461,088   11,586,844   12,216,889   20,321,006   19,180,493   (5,316,169)  5,079,228   23,305,400   11,894,618   12,676,122   (1,121,669)  19,901,488 
Benefits paid  (11,532,556)  (10,752,673)  (5,069,451)  (4,426,618)  (2,303,879)  (2,236,966)  (13,439,665)  (11,966,065)  (5,750,385)  (5,260,012)  (2,605,222)  (2,390,482)
                          
Benefit obligation at end of year Ps.324,558,730  Ps.282,321,177  Ps.167,175,066  Ps.143,122,128  Ps.89,652,288  Ps.65,997,690 
             
Projected benefit obligation at end of year Ps.364,687,896  Ps.336,758,891  Ps.198,667,613  Ps.173,459,176  Ps.99,233,666  Ps.93,022,318 
                                     
Change in plan assets
                                                
Fair value of plan assets at beginning of year Ps.1,414,072  Ps.2,683,026  Ps.—  Ps.—  Ps.—  Ps.—  Ps.2,041,656  Ps.1,467,227   —  Ps.—  Ps.—  Ps.— 
Effect of inflation on beginning balance  57,317   (86,534)  —   —   —   —   76,746   59,472   —   —   —   — 
Actual return on plan assets  (775,686)  (954,975)  —   —   —   —   (758,787)  (804,844)  —   —   —   — 
Company contributions  17,640,993   14,607,290   —   4,304,060   —   —   24,953,065   18,304,118   —   —   —   — 
Transfer of funds  (5,019,025)  (4,304,060)  5,019,025   —   —   —   (5,750,385)  (5,207,690)  5,750,385   5,207,690   —   — 
Benefits paid  (11,276,015)  (10,473,358)  (5,019,025)  (4,304,060)  —   —   (13,439,665)  (11,699,880)  (5,750,385)  (5,207,690)  —   — 
                          
Fair value of plan assets at end of year Ps.2,041,656  Ps.1,471,389  Ps.—  Ps.—  Ps.—  Ps.—  Ps.7,122,630  Ps.2,118,403  Ps.—  Ps.—  Ps.—  Ps.— 
                          


F-73F-70

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(g)  Leases
 
During the three years endedAs of December 31, 2006,2007, PEMEX did not have any significant operating lease arrangements.
PEMEX enters into non-cancelable lease arrangements for equipment used in the ordinary course of business. PEMEX’s future minimum obligation under lease commitments in effect at December 31, 2006 is aor capital lease of Ps. 843,172 for 2007, which includes a total of Ps. 78,278 of imputed interest.
Assets acquired under capital leases, together with their related depreciation, are included in “Properties and equipment, net.”
The scheduled maturities of the principal amount on leases are as follows:
     
  Lease maturities as of
 
  December 31,
 
Year
 2006 
 
2007 Ps.143,161 
2008  121,944 
2009  121,944 
2010  121,944 
2011  121,944 
2012 and thereafter  133,957 
     
Total Ps.764,894 
     
leases.
 
(h)  Supplemental geographical information
 
The majority of PEMEX’s operations are in Mexico. The following shows PEMEX’s domestic and export sales for the years ended December 31 (on a Mexican FRS basis):
 
                        
 2006 2005 2004  2007 2006 2005 
Domestic sales Ps.546,737,992  Ps.525,582,776  Ps.482,783,367  Ps.592,047,961  Ps.567,289,873  Ps.545,339,433 
Export sales:                        
United States  433,886,747   363,034,328   290,154,951   441,431,866   450,196,550   376,680,788 
Canada, Central and South America  34,143,179   33,226,644   29,166,372   36,547,306   35,426,621   34,475,634 
Europe  39,777,811   38,204,717   24,982,143   52,691,863   41,273,059   39,640,832 
Far East  7,949,015   6,235,197   4,682,432   12,255,823   8,247,818   6,469,578 
              
Total export sales  515,756,752   440,700,886   348,985,898  Ps.542,926,858  Ps.535,144,048  Ps.457,266,832 
              
Total sales Ps.1,062,494,744  Ps.966,283,662  Ps.831,769,265  Ps.1,134,974,819  Ps.1,102,433,921  Ps.1,002,606,265 
              
 
PEMEX does not have significant long-lived assets outside of Mexico.
 
For the years ended December 31, 2006 2005 and 2004,2005, under Mexican FRS, PEMEX recognized non-cash fixed asset impairment charges and reversals per segment as discussed in Note 20Ig.


F-74

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 200421Ig.
 
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(i)  Valuation and qualifying accounts

 
The valuation and qualifying accounts for PEMEX are as follows:
 
                 
  Balance at
  Additions
       
  beginning of
  charged to costs
     Balance at
 
Description
 period  and expenses  Deductions  end of period 
 
For the year ended December 31, 2006:
                
Reserves deducted in the balance sheet from the assets to which they apply:
                
Allowance for uncollectible trade accounts
 Ps.2,611,300  Ps.147,632  Ps.(181,642) Ps.2,577,290 
Allowance for slow-moving inventory and obsolescence
  1,761,713   420,745   (538,691)  1,643,767 
For the year ended December 31, 2005:                
Reserves deducted in the balance sheet from the assets to which they apply:                
Allowance for uncollectible trade accounts Ps.2,064,350  Ps.1,610,164  (Ps.1,063,214) Ps.2,611,300 
Allowance for slow-moving inventory and obsolescence  1,782,550   350,209   (371,046)  1,761,713 
For the year ended December 31, 2004:                
Reserves deducted in the balance sheet from the assets to which they apply:                
Allowance for uncollectible trade accounts Ps.2,366,642  Ps.1,102,111  (Ps.1,404,403) Ps.2,064,350 
Allowance for slow-moving inventory and obsolescence  2,090,375   103,769   (411,594)  1,782,550 
                 
  Balance at
  Additions
       
  beginning of
  charged to costs
     Balance at
 
Description 
period
  and expenses  Deductions  end of period 
 
For the year ended December 31, 2007:
                
Reserves deducted in the balance sheet from the assets to which they apply:
                
Allowance for doubtful accounts
 Ps.2,674,170  Ps.12,242,359  (Ps.13,425,595) Ps.1,490,934 
For the year ended December 31, 2006:                
Reserves deducted in the balance sheet from the assets to which they apply:                
Allowance for doubtful accounts Ps.2,709,459  Ps.153,181  (Ps.188,470) Ps.2,674,170 
For the year ended December 31, 2005:                
Reserves deducted in the balance sheet from the assets to which they apply:                
Allowance for doubtful accounts Ps.2,141,949  Ps.1,670,690  (Ps.1,103,180) Ps.2,709,459 
 
 
 
Note:  The above valuation and qualifying accounts are presented in accordance with U.S. GAAP. The Mexican FRS accounts titled “reserve for dismantlement and abandonment activities, sundry creditors and others” and “reserve for retirement payments, pensions, and seniority premiums” are accrued liability accounts, and not valuation and qualifying accounts and have not been included in the table above.


F-71

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
(j)  Significant risks and uncertainties
 
Environmental
 
The ultimate costs to be incurred in relation to PEMEX’s environmental contingencies may exceed the total amounts reserved. Additional liabilities may be accrued as the assessment work is completed and formal remedialremediation plans are formulated. Numerous factors affect the reliability and precision ofclean-up cost estimates, including the individual characteristics of the site, the lack of specific guidance as to permissible levels of pollution and type of technology available for the remediation as well as general economic factors, such as inflation.
 
As discussed in this note, PEMEX accrues an environmental liability when a reasonable estimate of the costs for remediation orclean-up of the identified affected area has been made. In some cases, investigations are not yet at a stage where PEMEX is able to quantify the liability or estimate a range of possible exposure. In such cases, the amounts of PEMEX’s liabilities are indeterminate due to the unknown magnitude of possible contamination, the imprecise and conflicting engineering evaluations and estimates of proper cleanup methods and costs, the unknown timing and extent of the corrective actions that may be required, and the ambiguities in Mexican environmental laws and regulations.


F-75

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

PEMEX is not aware of any unasserted claims or assessments, which may give rise to an environmental liability, and therefore, no amounts related to such items have been reflected in the environmental accrual.
 
Mexican Government
 
The operations and earnings of PEMEX have been, and may in the future be, affected from time to time in varying degree by political developments and laws and regulations, such as forced divestiture of assets, budgetary adjustments, restrictions on production levels and capital expenditures, price controls, tax increases, cancellation of contract rights, refined product specifications, and environmental, health and safety regulations. Both the likelihood of such occurrences and their overall effect upon PEMEX are not estimable.
 
Labor
 
PEMEX employees belonging to the Petroleum Workers’ Union of the Mexican Republic represent approximately 80.1%80% of the workforce. They have a collective bargaining agreement which is renegotiated every two yearsyears. On July 17, 2007, Petróleos Mexicanos and the Union executed a new collective bargaining agreement that became effective on August 1, 2007. The terms of the new agreement provide for a 4.25% increase in wages and a 1.6% increase in other benefits. By its terms, the new collective bargaining agreement is duescheduled to expire on July 31, 2007.2009.
 
Product prices
 
Because PEMEX’s major products are energy-related commodities, significant changes in the international prices of crude oil, natural gas, refined products and petrochemical products could have a significant impact on PEMEX’s results of operations in any particular year. CrudeIn 2007, crude oil representsrepresented approximately 35%37% of PEMEX’s sales revenues net of the IEPS Tax, and prices of the products PEMEX produces can be influenced by changes in crude oil prices, which makes it reasonably possible that PEMEX is vulnerable to near-term severe impacts from fluctuations in prices.


F-72

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
(k)  Capitalized software costs
 
Direct internal and external costs related to the development of internal use software are deferred and included in other assets. Capitalized software costs, net of amortization, as of December 31, 20062007 and 20052006 amounted to Ps. 161,868162,404 and Ps. 306,093,167,953, respectively. Amortization expense for the years ended December 31, 2007, 2006 2005 and 20042005 amounted to Ps. 140,528,112,310, Ps. 268,275145,810 and Ps. 123,402,278,359, respectively.


F-76

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

(l)  Supplemental condensed information on a U.S. GAAP basis

 
The following condensed consolidating information reflects the U.S. GAAP adjustments disclosed in this note.
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 20062007 AND 20052006
 
                
 2006 2005  2007 2006 
ASSETS        
ASSETS
Total current assets Ps.385,461,379  Ps.293,382,034  Ps.397,534,791  Ps.399,950,872 
Properties and equipment, net  689,252,581   638,735,770   777,900,994   715,161,586 
Intangible asset derived from the actuarial computation of labor obligations and other assets  105,204,543   108,509,806   35,865,531   109,159,182 
          
Total assets Ps.1,179,918,503  Ps.1,040,627,610  Ps.1,211,301,316  Ps.1,224,271,640 
          
 
LIABILITIES        LIABILITIES
Other current liabilities Ps.290,099,944  Ps.176,904,411 
Reserve for retirement payments, pensions and seniority premiums  23,977,799   — 
Total current liabilities Ps.170,495,486  Ps.171,716,660   314,077,743   176,904,411 
Long-term debt  505,474,457   521,923,673   424,828,472   524,475,242 
Reserve for dismantlement and abandonment activities, sundry creditors and others  30,371,410   29,593,251   31,467,252   31,513,074 
Reserve for retirement payments, pensions and seniority premiums  489,648,376   430,218,308   631,488,746   508,054,258 
Non current deferred income tax liabilities  4,570,969   2,335,943   6,106,494   4,742,792 
          
Total liabilities  1,200,560,698   1,155,787,835   1,407,968,707   1,245,689,777 
     
Minority interest  1,411,618   1,400,855   1,415,775   1,464,681 
TOTAL EQUITY (DEFICIT)
  (22,053,813)  (116,561,080)  (198,083,166)  (22,882,818)
          
Total liabilities and equity Ps.1,179,918,503  Ps.1,040,627,610  Ps.1,211,301,316  Ps.1,224,271,640 
          


F-77F-73

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2007, 2006 2005 AND 20042005
 
             
  2006  2005  2004 
 
Total revenues, net of IEPS Tax Ps.1,129,349,393  Ps.957,564,002  Ps.780,301,891 
Total costs and operating expenses  (474,208,169)  (441,539,217)  (345,146,102)
Comprehensive financing (cost) income  (17,493,867)  (11,341,638)  2,239,699 
             
Income before deferred income taxes hydrocarbon extraction duties and other minority interest  637,647,357   504,683,147   437,395,488 
Hydrocarbon extraction duties and other taxes  (582,927,058)  (582,700,771)  (451,189,826)
Minority interest  (52,804)  1,117,236   (195,427)
             
Net income (loss) Ps.54,667,495  (Ps.76,900,388) (Ps.13,989,765)
             
             
  2007  2006  2005 
 
Total revenues, net of IEPS tax Ps.1,136,035,428  Ps.1,103,509,868  Ps.982,007,013 
Cost of sales  469,614,890   413,280,469   382,868,741 
             
Gross income  666,420,538   690,229,399   599,138,272 
General expenses  84,939,004   78,753,185   74,183,794 
             
Operating income  581,481,534   611,476,214   524,954,478 
Other revenues  83,019,010   61,213,533   2,896,394 
Comprehensive financing result (cost)  (25,609,627)  (18,151,461)  (10,116,062)
Profit sharing in non-consolidated subsidiaries and affiliates  5,791,312   7,078,236   7,828,486 
             
Income before taxes, duties and other and minority interest  644,682,229   661,616,522   525,563,296 
Taxes and duties, net of IEPS tax  (677,318,216)  (604,839,287)  (604,607,734)
Cumulative effect of adoption of new accounting standards  —   —   (1,905,868)
Minority interest  (6,089)  (54,789)  1,159,233 
             
Net income (loss) (Ps.32,642,076) Ps.56,722,446  (Ps.79,791,073)
             


F-78F-74

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
 
                        
 2006 2005 2004  2007 2006 2005 
Operating Activities
                        
Net income (loss) for the year Ps.54,667,495  (Ps.76,900,388) (Ps.13,989,765)
Net (loss) income for the year (Ps.32,642,076) Ps.56,722,446  (Ps.79,791,073)
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities:                        
Depreciation and amortization  59,736,091   50,893,067   38,767,205   68,929,829   61,981,571   52,806,137 
Reserve for retirement payments, pensions and seniority premiums  65,065,267   57,247,987   59,096,505   78,952,867   67,511,070   59,399,939 
Loss on disposal of fixed assets  3,122,635   5,187,312   3,890,381   10,051,439   3,240,015   5,382,303 
Allowance for uncollectible trade accounts  67,711   613,531   302,293   (1,086,357)  70,256   636,594 
Allowance for slow-moving inventory and obsolescence  (144,953)  (20,837)  307,824 
Minority interest  65,332   (1,117,236)  243,793   4,157   67,788   (1,159,233)
Foreign exchange loss (gain)  13,460,782   (29,125,882)  6,054,335   4,318,464   13,966,773   (30,220,724)
Accrued interest  4,607,397   —   — 
Profits sharing in subsidiaries  (4,007,188)  (1,599,919)  (2,279,883)  (5,533,058)  (4,157,818)  (1,660,060)
Deferred taxes  (1,793,835)  1,631,261     
Deferred income taxes  1,881,378   (1,861,265)  1,692,580 
Dismantlement and abandonment costs in fixed assets  (1,919,880)  (1,697,762)  (1,546,098)  —   (1,992,048)  (1,761,581)
Financial instruments  (71,967)  (706,939)  (5,932,890)
Unrealized gains on financial instruments  (8,149,706)  (74,672)  (733,513)
Gain from monetary position  (14,282,349)  (16,994,450)  (23,791,819)  (13,413,563)  (14,819,222)  (17,633,272)
              
  173,965,141   (12,590,255)  61,121,882   107,920,771   180,654,894   (13,041,903)
              
Changes in operating assets and liabilities:                        
Accounts and notes receivable  (19,126,371)  (53,948,289)  (63,602,558)  (10,237,517)  (19,845,331)  (55,976,205)
Inventories  (8,173,318)  (6,979,546)  (3,093,574)  3,643,578   (8,630,955)  (7,263,527)
Other assets  (3,131,969)  3,541,924   (16,725,750)  1,219,546   (3,249,700)  3,675,065 
Accounts payable and accrued liabilities  (29,628,629)  23,534,377   67,736,572   106,582,975   (30,742,369)  24,419,034 
              
Cash flow provided by (used in) operating activities
  113,904,854   (46,441,789)  45,436,572   209,129,353   118,186,539   (48,187,536)
       
Investing Activities
                        
Acquisition of fixed assets  (102,795,521)  (75,585,683)  (87,485,581)  (134,133,678)  (106,659,605)  (78,426,949)
Investments in Subsidiaries  1,508,668   —   — 
Specific funds accounts-trade commission  (6,360,806)  7,225,819   (35,165,450)  —   (6,599,909)  7,497,438 
              
Cash flows used in investing activities
  (109,156,327)  (68,359,864)  (122,651,031)  (132,625,010)  (113,259,514)  (70,929,511)
       
Financing Activities
                        
Proceeds from new long term financing  162,597,763   253,519,684   147,811,672   117,557,830   168,709,813   263,049,489 
Financing payments  (142,909,227)  (135,642,380)  (81,957,656)  (194,928,716)  (148,281,185)  (140,741,177)
Increase in Equity of Subsidiary Entities  46,938,456   46,398,426   35,092,226   11,160,824   48,702,873   48,142,543 
Retirement, seniority premiums and other post retirements benefits payments  (27,717,544)        
Dividends paid to the Mexican Government  (259,245)  (15,902,901)  (11,169,118)  (263,329)  (268,990)  (16,500,691)
              
Cash flows provided by financing activities
  66,367,747   148,372,829   89,777,124 
Cash flows (used in) provided by financing activities
  (94,190,935)  68,862,511   153,950,164 
       
Effects of inflation on cash and cash equivalents  (8,156,495)  (1,944,769)  (4,232,341)  (7,092,625)  (8,463,098)  (2,017,874)
Increase in cash and equivalents  62,959,779   31,626,407   8,330,324 
       
(Decrease) increase in cash and equivalents  (24,779,217)  65,326,438   32,815,244 
Cash and cash equivalents, beginning of period  125,724,053   94,097,646   85,767,324   195,776,457   130,450,019   97,634,776 
              
Cash and cash equivalents, end of period Ps.188,683,832  Ps.125,724,053  Ps.94,097,648  Ps.170,997,240  Ps.195,776,457  Ps.130,450,019 
                   
Supplemental cash disclosures:
                        
Interest paid (net of amounts capitalized) Ps.51,235,309  Ps.57,011,642  Ps.38,737,883  Ps.42,784,228  Ps.53,161,244  Ps.59,154,710 
Taxes paid  612,314,507   521,653,340   481,336,375   623,886,506   635,331,409   541,262,289 
       
Supplemental non-cash disclosures:
                        
Unrealized gains on available for sale securities Ps.2,886,826  Ps.800,103  Ps.5,407,389  (Ps.240,723) Ps.2,995,342  Ps.830,179 
Additional minimum pension liability  (19,576,073)  (18,979,124)  2,790,733   (168,399,229)  (20,311,938)  (19,692,549)
Derivative financial instruments  5,083,038   (4,752,172)  8,143,833   656,699   5,274,109   (4,930,806)
       


F-75

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
(m)  Recently issued accounting standards
 
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing thresholds and attributes for financial statement recognition and


F-79

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. PEMEX is currently evaluating the impact of adopting FIN 48 on its financial condition and results of operations.
In June 2006, the Emerging Issues Task Force (“EITF”) ratified the consensus on EITF IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),”(“EITF 06-03”).EITF 06-03 concluded that the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, such as sales, use, value-added and certain excise taxes is an accounting policy decision that should be disclosed in a company’s financial statements. In addition, companies that record such taxes on a gross basis should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant.EITF 06-03 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption ofEITF 06-03 is not expected to impact PEMEX’s financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“Measurement”. SFAS 157”). This statement157 defines fair value, establishes a framework for measuringthe measurement of fair value, in GAAP and expands disclosuresenhances disclosure about fair value measurements. SFAS does not require any new fair value measurements. SFAS 157 is effective for financial statements issuedfair value measurements already required or permitted by other standards for fiscal years beginning after November 15, 2007. PEMEX is required to adopt SFAS 157 beginning on January 1, 2008. SFAS 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of SFAS 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. PEMEX is currently evaluating the impact of adoptingits adoption of SFAS 157 on its financial condition and results of operations.operations and financial position.
 
In September 2006,December 2007, the FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities,”Statement No. 141R, “Business Combinations” (“FSP AUG AIR-1”SFAS 141R”) and FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51” (“SFAS 160”). This FSP eliminatesSFAS 141R and SFAS 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes theaccrue-in-advance method of accounting for planned major maintenance activities, because it causes the recognition of a liability in a period prior to the occurrence of the transactiontransactions with noncontrolling interest holders. Both statements are effective for periods beginning on or event obligating the entity. The effective date of this FSP is an entity’s first fiscal year beginning after December 15, 2006.2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. PEMEX is currently evaluating the impact of adopting FSP AUG AIR-1SFAS 141R and SFAS 160 on its financial condition and results of operations.
In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R),” (“SFAS 158”). Part of this statement requires companies without publicly traded equity securities that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on a prospective basis as of the end of the first fiscal year ending after June 15, 2007. In addition, SFAS 158 requires companies using a measurement date for those plans other than their fiscal year end change to a fiscal year end measurement date effective for years ending after December 15, 2008. PEMEX believes that the impact of the adoption of SFAS 158 in 2007 will be significant, given the unrecognized balance sheet amounts related to pension and seniority premiums and other post retirement benefits, which existed at December 31, 2006 (see Notes 20Ib. and c.). Nevertheless, the actual impact will not be known until such time as PEMEX completes its evaluation and adopts the standard.
In December 2006, the FASB issued FSPNo. EITF 00-19-2, “Accounting for Registration Payment Arrangements,”(“EITF 00-19-2”).EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be


F-80

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

separately recognized and measured in accordance with FASB Statement No. 5,Accounting for Contingencies.EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.EITF 00-19-2 shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance ofEITF 00-19-2. For registration payment arrangementsoperations and financial instruments subject to those arrangements that were entered into prior to the issuance ofEITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. PEMEX is currently evaluating the impact of adoptingEITF 00-19-2 on its financial condition and results of operations.position.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115,”115” (“SFAS 159”). This Statement permits entitiesSFAS 159 gives PEMEX the irrevocable option to choose to measure manycarry most financial instrumentsstatements assets and certain other itemsliabilities at fair value that are not currently required to be measured at specified election dates. SFAS 159 provides entities withfair value. If the opportunity to mitigate the volatilityfair value option is selected, changes in reportedfair value would be recorded in earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.at each subsequent reporting date. SFAS 159 is effective asfor PEMEX’s 2008 fiscal year. PEMEX is currently evaluating the impact that the adoption of this statement could have on its financial condition, results of operations and cash flows.
In March 2008, the beginningFASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB SFAS No. 133” (“SFAS 133”). SFAS 133 changes the disclosure requirements for derivative instruments and hedging activities by requiring the entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s firstfinancial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal yearyears and interim periods beginning after November 15, 2007.2008. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB 157.permitted. PEMEX is currently evaluating the impact of adopting SFAS 159161 on its financial condition and results of operations.
 
(n)  Accounting for Buy/Sell Contracts
 
In the first quarter of 2005, the United States Securities and Exchange Commission (“SEC”) issued comment letters to companies in the oil and gas industry requesting disclosure of information related to the accounting for buy/sell contracts. Under a buy/sell contract, a company agrees to buy a specific quantity and quality of a commodity to be delivered at a specific location while simultaneously agreeing to sell a specified quantity and quality of a commodity at a different location to the same counterparty. Physical delivery occurs


F-76

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
for each side of the transaction, and the risk and reward of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling, credit risk and risk of nonperformance by the counterparty. Both parties settle each side of the buy/sell contract through separate invoicing.
 
The SEC raised the issue as to whether the accounting for buy/sell contracts should be shown net on the income statement and accounted for under the provisions of Accounting Principles Board (“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”). PEMEX understands that others in the oil and gas industry may report buy/sell transactions on a net basis in the income statement rather than gross.
 
The EITF deliberatedconsidered this topic asin IssueNo. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”(“EITF 04-13”). At its September 2005 meeting, the EITF decided that two or more legally separate exchange transactions with the same counterparty, including buy/sell transactions, should be combined and considered as a single arrangement for purposes of applying APB 29 when the transactions were entered into “in contemplation” of one another.EITF 04-13 was ratified by the FASB in September 2005, and is effective for new arrangements, or modifications or renewals of existing arrangements, entered into as of April 1, 2006, which was the effective date for PEMEX’s adoption of this standard. During the


F-81

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

years ended in December 31, 2007, 2006 and 2005, PEMEX did not enter into any arrangement that would be considered a buy/sell contract underEITF 04-13.
 
(o)  Deferred income taxes
 
Effective January 1, 2000, PEMEX follows the provisions of the revisedStatement D-4, “Accounting Treatment of Income Tax, Asset Tax and Employee Profit Sharing,” for Mexican FRS purposes. Accounting for income taxes in accordance with this statement is similar to accounting for income taxtaxes in accordance with U.S. GAAP SFAS 109, “Accounting for Income Taxes” (“FASSFAS 109”).
 
As described in Note 17,18, during 2005, a new fiscal regime applicable to PEMEX and its subsidiaries was enacted. Beginning January 1, 2006, certain subsidiary companies of PEMEX will be subject to the tax regime applicable to all other Mexican corporations. In general, Mexican companies are taxed based on pre-tax income at a statutory rate. The statutory rate for Mexico beginning January 1,for 2006 iswas 29% and for 2007 was 28%. As a result of the change in fiscal regime in 2005, PEMEX began generating deferred income taxes.


F-82F-77

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

At December 31, 20062007 and 2005,2006, the primary components of the net deferred tax liability under U.S. GAAP consist of the following:
 
                
 2006 2005  2007 2006 
Current deferred tax asset:
                
Accounts and other receivables Ps.1,314,877  Ps.1,766,025  Ps.947,346  Ps.1,364,303 
Inventories  1,818,803   988,043   3,979,258   1,887,170 
Accrued liabilities  369,378   108,006   245,505   383,263 
Prepaids and other current assets  210,507   236,995   45,405   218,420 
          
Total current deferred tax asset
  3,713,565   3,099,069   5,217,514   3,853,156 
Less: current valuation allowance  (3,218,659)  (2,391,842)  (4,799,664)  (3,339,648)
          
Net current deferred tax asset
  494,906   707,227  Ps.417,850  Ps.513,508 
          
Current deferred tax liability:
                
Prepaids and other current assets  —   (2,543)  —   — 
          
Total current deferred tax liability
  —   (2,543) Ps.—  Ps.— 
          
Noncurrent deferred tax asset:
                
Contingencies  1,413,186   113,726  Ps.1,304,574  Ps.1,466,308 
Derivative financial instruments  —   23,996   —   — 
Reserve for environmental costs  485,150   1,144,544   516,493   503,387 
Property taxes  —   1,339,248   —   — 
Tax loss carryforwards  8,067   14,416,627   653   8,370 
Other assets  182,115   — 
Fixed assets  7,663,843   11,968,344   5,189,973   7,951,927 
          
Total noncurrent deferred tax asset
  9,570,246   29,006,485   7,193,808   9,929,992 
Less: noncurrent valuation allowance  (8,294,820)  (26,175,519)  (6,617,685)  (8,606,622)
          
Net noncurrent deferred tax asset
  1,275,426   2,830,966  Ps.576,123  Ps.1,323,370 
          
Noncurrent deferred tax liability:
                
Derivative financial instruments  (626,190)  (2,626,920)  —   (649,728)
Fixed assets  (5,220,204)  (2,539,989)  (7,100,465)  (5,416,431)
          
Net noncurrent deferred tax liability
  (5,846,394)  (5,166,909)  (7,100,465)  (6,066,159)
          
Total noncurrent deferred tax liability
  (4,570,968)  (2,335,943)  (6,524,342)  (4,742,789)
Net deferred tax liability
 (Ps.4,076,062) (Ps.1,631,259) (Ps.6,106,493) (Ps.4,229,281)
          
Net deferred tax liability under U.S. GAAP (Ps.4,076,062) (Ps.1,631,259) (Ps.6,106,493) (Ps.4,229,281)
Net deferred tax liability under Mexican FRS (Ps.4,430,625) (Ps.2,057,891)  6,411,896   4,597,172 
          
Net deferred U.S. GAAP adjustments to the net deferred tax liability
 (Ps.354,563) (Ps.426,632)
Net U.S. GAAP adjustments to the net deferred tax liability
 Ps.305,403  Ps.367,891 
          

(p)  Asset retirement obligations
PEMEX’s liability provisions recognized in the balance sheet represent obligations whose settlement will probably require the future use of estimated economic resources. These provisions have been recorded based on the present value of management’s best estimate of future payments necessary to settle the liability. However, actual results could differ from the provisions recognized. No assets or trust funds have been established to satisfy these obligations.


F-83F-78

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143,” (“FIN 47”), which was adopted by PEMEX on December 31, 2005. FIN 47 clarifies that the phrase “conditional asset retirement obligation,” as used in SFAS 143, refers to a legal obligation to perform an asset retirement activity for which the timingand/or method of settlement are conditioned on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists as to the timingand/or method of settlement. Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS 143 acknowledges that, in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 has not had a material impact on PEMEX’s financial position and results of operations.
The following table indicates the changes to PEMEX’s pre-tax asset retirement obligations in 2007 and 2006:
         
  2007  2006 
 
Balance at January 1 Ps.16,027,309  Ps.14,787,131 
Liabilities incurred  1,338,248   1,789,002 
Liabilities settled  —   — 
Accretion expense  118,204   (36,911)
Inflation  (580,643)  (302,725)
Currency exchange gain  245,272   (72,542)
Revisions in estimated cash flows  —   (136,646)
         
Balance at December 31 Ps.17,148,390  Ps.16,027,309 
         
Note 21 — Subsidiary guarantor information,NOTE 22—SUBSIDIARY GUARANTOR INFORMATION, PIDIREGAS liabilities and the Pemex Project Funding Master Trust (“Master Trust”LIABILITIES AND THE PEMEX PROJECT FUNDING MASTER TRUST (THE “MASTER TRUST”)
 
The following consolidating information presents condensed consolidating balance sheets at December 31, 20062007 and 20052006 and condensed consolidating statements of operations and cash flow for the years ended December 31, 2007, 2006 2005 and 20042005 of Petróleos Mexicanos, the Master Trust,Pemex-Exploration and Production,Pemex-Refining,Pemex-Gas and Basic Petrochemicals and the Non-Guarantor Subsidiaries (excluding the Master Trust).
 
These statements are prepared in conformity with accounting principles generally accepted in Mexico,Mexican FRS, including the recognition of inflation in accordance withBulletin B-10, with one exception: for the purposes of the presentation of the subsidiary guarantor information, the Subsidiary Entities and Subsidiary Companies have been accounted for as investments under the equity method by Petróleos Mexicanos. Earnings of subsidiaries are therefore reflected in Petróleos Mexicanos’ investment account and earnings. The principal elimination entries eliminate Petróleos Mexicanos’ investment in subsidiaries and intercompany balances and transactions.Pemex-Exploration and Production,Pemex-Refining andPemex-Gas and Basic Petrochemicals (collectively, the “Subsidiary Guarantors”) and Pemex-Petrochemicals are100%-owned subsidiaries of Petróleos Mexicanos. Pemex-Petrochemicals, Pemex Finance and the Subsidiary Companies collectively comprise the non-guarantor subsidiaries (“Non-Guarantor Subsidiaries”). Petróleos Mexicanos’ guaranty of the indebtedness of the Master Trust is full


F-79

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
and unconditional. The guaranties by the Subsidiary Guarantors of Petróleos Mexicanos’ guaranty of the Master Trust’s payment obligations are full and unconditional and joint and several.
 
The Master Trust, a consolidated entity which is a Delaware statutory trust, was organized under the laws of Delaware on November 10, 1998. On December 31, 1998, PEMEX transferred all assets and liabilities related to PIDIREGAS for an amount equaling Ps. 12,471,156 (in nominal terms) to the Master Trust. The main objective of the Master Trust is to administer financial resources related to PIDIREGAS, such financial resources being designated by PEMEX for that purpose, by assuming payment obligations under contracts relating to PIDIREGAS and acting as the borrower under financing arrangements for PIDIREGAS.
 
Under an Assignment and Indemnity Agreement dated November 10, 1998, among Petróleos Mexicanos, the Master Trust and the Subsidiary Guarantors, Petróleos Mexicanos and the Subsidiary Guarantors have certain obligations to the Master Trust with respect to the liabilities incurred by the Master Trust in connection with PIDIREGAS. These obligations include:
 
 (i)  the obligation of Petróleos Mexicanos to guarantee the repayment of the debt obligations undertaken by the Master Trust to finance PIDIREGAS;
 
 (ii) the obligation of Petróleos Mexicanos and the Subsidiary Guarantor which is sponsoring the relevant PIDIREGAS to make such payments to the Master Trust as may be necessary for the Master Trust to fulfill its payment obligations in respect of any financing the Master Trust has entered into in connection with such project; and
 
 (iii) the joint and several obligation of Petróleos Mexicanos and each of the aforementioned Subsidiary Guarantors to indemnify the Master Trust with respect to any liability incurred by the Master Trust in connection with PIDIREGAS.


F-84

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The Master Trust is consolidated in the financial statements of PEMEX for each of the periods presented in accordance with consolidation principles detailed in Mexican FRSBulletin B-8 “Consolidated and Combined Financial Statements and Valuation of Permanent Investments in Stocks.” In accordance with U.S. accounting principles, the Master Trust is a special purpose entity requiring consolidation in the financial statements as it does not meet non-consolidation criteria as specified in U.S. accounting literature.


F-80

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
The following table sets forth, as of the date of this report, the principal amount outstanding as of June 27, 2007, of the registered debt securities issued by Master Trust, for which Petróleos Mexicanos is the Guarantor and Pemex Pemex—Exploration and Production, Pemex Pemex—Refining and Pemex Pemex—Gas and Basic Petrochemicals are the Subsidiary Guarantors:
 
Table 1: Registered Debt Securities of the Master Trust
 
                 
        Principal Amount
    
Security Issuer  Guarantor  Outstanding    
 
5.75% Guaranteed Notes due 2015.2015  Master Trust   Petróleos Mexicanos  U.S.$1,720,947 234,372     
6.125% Notes due 2008  Master Trust   Petróleos Mexicanos   709,844281,400     
6.625% Guaranteed Bonds due 2035  Master Trust   Petróleos Mexicanos   1,249,000     
7.375% Notes due 2014  Master Trust   Petróleos Mexicanos   1,551,059362,995     
7.875% Notes due 2009  Master Trust   Petróleos Mexicanos   907,603797,727     
8.00% Notes due 2011  Master Trust   Petróleos Mexicanos   731,048
8.5% Notes due 2008Master TrustPetróleos Mexicanos930,079182,174     
8.625% Bonds due 2022  Master Trust   Petróleos Mexicanos   754,234160,245     
8.625% Bonds due 2023  Master Trust   Petróleos Mexicanos   225,395
8.85% Guaranteed Notes due 2007Master TrustPetróleos Mexicanos407,241106,507     
9.125% Notes due 2010  Master Trust   Petróleos Mexicanos   927,824552,855     
9.25% Guaranteed Bonds due 2018  Master Trust   Petróleos Mexicanos   334,915107,109     
9.375% Guaranteed Notes due 2008  Master Trust   Petróleos Mexicanos   468,601294,775     
9.50% Guaranteed Bonds due 2027  Master Trust   Petróleos Mexicanos   573,333219,217     


F-85

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The following table sets forth, as of the date of this report, the principal amount outstanding of the registered debt securities issued by Petróleos Mexicanos, and guaranteed by Pemex Exploration and Production, Pemex Refining and Pemex Gas and Basic Petrochemicals:
 
Table 2: Registered Debt Securities of Petróleos Mexicanos
 
         
      Principal Amount
 
Security Issuer Guarantor Outstanding 
 
8.85% Global Guaranteed Notes due 2007Petróleos
Mexicanos		Pemex Exploration and Production, Pemex Refining and Pemex Gas and Basic PetrochemicalsU.S.$162,526
9.25% Global Guaranteed Bonds due 2018 Petróleos
Mexicanos		 Pemex Exploration and Production, Pemex Refining and Pemex Gas and Basic Petrochemicals U.S.$9,296 
9.375% Guaranteed Notes due 2008 Petróleos
Mexicanos		 Pemex Exploration and Production, Pemex Refining and Pemex Gas and Basic Petrochemicals  99,859 
9.50% Global Guaranteed Bonds due 2027 Petróleos
Mexicanos		 Pemex Exploration and Production, Pemex Refining and Pemex Gas and Basic Petrochemicals  102,149 
 
The Master Trust does not guaranty debt securities issued by Petróleos Mexicanos.
 
The significant differences between Mexican FRS and U.S. GAAP as they affect PEMEX are described in Note 20.21. The following also presents the reconciliation of equity to U.S. GAAP as of December 31, 2007 and


F-81

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and 2005in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
2006 and the reconciliation of income to U.S. GAAP for the three years ended December 31, 20062007 for each of Petróleos Mexicanos, the Master Trust, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries. The following reconciliation to U.S. GAAP does not include the reversal of Mexican FRS inflation accounting adjustments, as these adjustments represent a comprehensive measure of the effects of price level changes in the inflationary Mexican economy, which is considered a more meaningful presentation than historical cost-based financial reporting for both Mexican and U.S. accounting purposes.
 
As of December 31, 2006,2007, Petróleos Mexicanos, the Master Trust, Fideicomiso F/163 and RepCon Lux are the only entities of PEMEX authorized to contract debt with debt outstanding as of that date, and thus all guaranteed debt is issued by these entities. The guarantees of the Subsidiary Guarantors are full and unconditional and joint and several. PEMEX’s management has not presented separate financial statements for the Subsidiary Guarantors because it has determined that such information is not material to investors.


F-86F-82

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
 
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power and
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
BALANCE SHEET
As of December 31, 2006
2007
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
ASSETS                        
Current assets:
                        
Cash and cash equivalents
 Ps.128,258,631   Ps.21,859,987   Ps. 2,869,471   Ps. 35,695,743   Ps. —   Ps. 188,683,832 
Accounts, notes receivable and other,
                        
net and derivative financial
                        
instruments
  40,062,263   5,198,537   49,874,082   41,289,855   —   136,424,737 
Accounts receivable-intercompany
  49,275,610   39,150,670   660,278,318   65,856,811   (814,561,409)  — 
Inventories, net
  421,988   7,654   49,576,339   9,809,358   —   59,815,339 
                         
Total current assets
  218,018,492   66,216,848   762,598,210   152,651,767   (814,561,409)  384,923,908 
Long-term receivables — intercompany
  592,783,252   390,505,450   20,558,387   96,809,582   (1,100,656,671)  — 
Investments in shares
  390,582,120   —   2,366,791   28,062,936   (389,437,771)  31,574,076 
Other investments
  54,643,000   —           (54,643,000)  — 
Properties and equipment, net
  8,118,291   —   686,840,284   15,529,630   —   710,488,205 
Intangible asset derived from the
actuarial computation of labor
obligations
  11,499,664   —   56,055,948   6,168,241   —   73,723,853 
Other assets
  1,236,029   —   1,098,063   1,690,322   —   4,024,414 
                         
Total assets
  Ps. 1,276,880,848   Ps. 456,722,298   Ps. 1,529,517,683   Ps.300,912,478   (Ps.2,359,298,851)  Ps. 1,204,734,456 
                         
                         
LIABILITIES                        
Current liabilities:
                        
Current portion of long-term debt
  Ps. 12,379,479   Ps.31,479,174   Ps. 1,316,284   Ps. 18,665,576   Ps. —   Ps. 63,840,513 
Accounts payable — intercompany
  611,549,382   4,400,039   173,659,318   24,945,084   (814,553,823)  — 
Other current liabilities
  4,230,464   12,350,210   53,480,220   36,025,181   —   106,086,075 
                         
Total current liabilities
  628,159,325   48,229,423   228,455,822   79,635,841   (814,553,823)  169,926,588 
Long-term debt
  15,232,850   359,630,696   1,157,636   129,453,275   —   505,474,457 
Long-term payables-intercompany
  525,715,789   48,862,179   561,493,040   19,228,662   (1,155,299,670)  — 
Reserve for retirement payments,
pensions, seniority premiums,
dismantlement and abandonment
activities, sundry creditors,
and others
  66,692,580   —   377,190,274   45,496,793   —   489,379,647 
                         
Total Liabilities
  1,235,800,544   456,722,298   1,168,296,772   273,814,571   (1,969,853,493)  1,164,780,692 
EQUITY
  41,080,304   —   361,220,911   27,097,907   (389,445,358)  39,953,764 
                         
Total liabilities and equity
  Ps. 1,276,880,848   Ps.456,722,298   Ps. 1,529,517,683   Ps. 300,912,478   (Ps. 2,359,298,851)  Ps. 1,204,734,456 
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-87

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF EQUITY
For the year ended December 31, 2006
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Equity under Mexican FRS
  Ps.41,080,304  Ps.          —   Ps.361,220,911   Ps.27,097,907   (Ps.389,445,358)  Ps.39,953,764 
U.S. GAAP adjustments:
                        
Exploration and drilling costs
      —   13,386,109   —   —   13,386,109 
Pensions and seniority premiums
  (507,499)  —   (6,282,808)  (799,760)  —   (7,590,067)
Additional Pension liability
  696,227   —   4,062,498   471,302   —   5,230,027 
Post-retirement benefits
  (5,196,100)  —   (27,952,516)  (3,679,909)  —   (36,828,525)
Accrued vacation
  (78,586)  —   (432,909)  (57,403)  —   (568,898)
Fixed asset adjustments:
                        
Capitalized gains (losses) of derivative financial instruments, net
  —   —   2,950,403   —   —   2,950,403 
Capitalization of interests, net
  26,041   —   (8,185,715)  167,531   —   (7,992,143)
Impairment, net
  —   —   (24,832,185)  (3,993,038)  —   (28,825,223)
Depreciation convention
  (17,051)  —   (710,009)  (27,710)  —   (754,770)
Derivative financial instruments
  591   —   7,851,325   2,541   —   7,854,457 
Profit in inventory
  —   —   (7,552,647)  —   —   (7,552,647)
Deferred income taxes
  —   —   354,563   —   —   354,563 
Advance payment of minimum guaranteed dividends (APMGD)
  (259,245)  —   —   —   —   (259,245)
Reclassification of Pemex Finance net income to minority interest
  —   —   —   (1,411,618)  —   (1,411,618)
Investments in subsidiaries(2)
  (56,671,954)              56,671,954   — 
                         
Total U.S. GAAP adjustments, net
  (62,007,576)  —   (47,343,891)  (9,328,064)  56,671,954   (62,007,577)
                         
Equity (Deficit) under U.S. GAAP
  Ps.(20,927,272)  Ps.       —   Ps.313,877,020   Ps.17,769,843   (Ps.332,773,404)  (Ps.22,053,813)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.
(2)Reflects adjustment to investment balances of subsidiaries as a result of applying U.S. GAAP adjustments of such subsidiaries.


F-88

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
BALANCE SHEET
As of December 31, 2005
                                                
 Petróleos
 Master
 Subsidiary
 Non-Guarantor
   PEMEX
  Petróleos
   Subsidiary
 Non-Guarantor
   PEMEX
 
 Mexicanos(1) Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated  Mexicanos(1) Master Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated 
ASSETS                                                
Current assets:                                                
Cash and cash equivalents Ps.39,442,854  Ps.56,286,972  Ps.2,558,776  Ps.27,435,451   Ps.—  Ps.125,724,053  Ps.121,386,348  Ps.19,201,904  Ps.3,672,809  Ps.26,736,179  Ps.—  Ps.170,997,240 
Accounts, notes receivable and other, net                        
and derivative financial instruments  55,566,722   —   22,964,464   47,741,576   —   126,272,762 
Accounts, notes receivable and other,
                        
net and derivative financial
                        
instruments
  18,262,729   3,883,155   86,304,727   55,969,800   —   164,420,411 
Accounts receivable-intercompany  142,538,283   34,696,429   481,516,202   86,857,936   (745,608,850)  —   123,671,752   73,310,725   778,048,681   95,832,373   (1,070,863,531)  — 
Inventories, net  385,329   —   45,891,574   6,355,658   —   52,632,561   313,283   —   77,582,304   15,247,549   —   93,143,136 
                          
Total current assets  237,933,188   90,983,401   552,931,016   168,390,621   (745,608,850)  304,629,376   263,634,112   96,395,784   945,608,521   193,785,901   (1,070,863,531)  428,560,787 
Long-term receivables - intercompany  370,348,067   324,968,107   26,048,186   109,352,649   (830,717,009)  — 
Long-term receivables — intercompany
  633,228,579   470,050,109   16,380,552   98,550,013   (1,218,209,253)  — 
Investments in shares  247,211,145   —   1,601,026   24,887,132   (246,057,294)  27,642,009   368,950,383   —   1,595,297   30,312,679   (367,795,005)  33,063,354 
Other investments
  213,432,941   —   —   —   (213,432,941)  — 
Properties and equipment, net  8,679,538   —   645,150,451   15,477,834   —   669,307,823   8,070,672   —   770,025,355   15,749,426   —   793,845,453 
Intangible asset derived from the actuarial computation of labor obligations  12,537,025   —   60,640,623   6,592,683   —   79,770,331   11,124,683   —   54,913,164   5,970,988   —   72,008,835 
Other assets  174,841   —   1,134,686   2,158,889   —   3,468,416   954,213   —   809,713   1,038,251   —   2,802,177 
                          
Total assets Ps.876,883,804  Ps.415,951,508  Ps.1,287,505,988  Ps.326,859,808  (Ps.1,822,383,153) Ps.1,084,817,955  Ps.1,499,395,583  Ps.566,445,893  Ps.1,789,332,602  Ps.345,407,258  (Ps.2,870,300,730) Ps.1,330,280,606 
                          
LIABILITIES                                                
Current liabilities:                                                
Current portion of long-term debt Ps.8,164,709  Ps.26,330,963  Ps.773,806  Ps.2,288,578   —  Ps.37,558,056  Ps.6,603,093  Ps.62,355,642  Ps.2,337,399  Ps.4,753,994  Ps.—  Ps.76,050,128 
Accounts payable - intercompany  494,335,186   5,527,296   172,677,593   73,068,776   (745,608,851)  — 
Accounts payable — intercompany
  728,424,666   6,605,943   219,812,679   68,108,752   (1,022,952,040)  — 
Other current liabilities  5,177,685   16,046,218   77,537,637   34,823,170   —   133,584,710   3,816,030   13,457,162   151,890,502   44,250,030   —   213,413,724 
                          
Total current liabilities  507,677,580   47,904,477   250,989,036   110,180,524   (745,608,851)  171,142,766   738,843,789   82,418,747   374,040,580   117,112,776   (1,022,952,040)  289,463,852 
Long-term debt  27,501,294   347,108,343   1,152,105   146,161,931   —   521,923,673   8,676,110   289,721,950   5,160,995   121,269,417   —   424,828,472 
Long-term payables-intercompany  313,803,322   20,938,688   492,919,798   3,048,708   (830,710,516)  —   623,510,449   194,105,101   648,882,879   13,046,260   (1,479,544,689)  — 
Reserve for retirement payments, pensions, seniority premiums, dismantlement and abandonment activities, sundry creditors, and others  56,340,130   —   325,958,972   37,411,255   —   419,710,357   79,229,875   200,095   433,390,324   53,260,127   —   566,080,421 
                          
Total Liabilities  905,322,326   415,951,508   1,071,019,911   296,802,418   (1,576,319,367)  1,112,776,796   1,450,260,223   566,445,893   1,461,474,778   304,688,580   (2,502,496,729)  1,280,372,745 
EQUITY  (28,438,522)  —   216,486,077   30,057,390   (246,063,786)  (27,958,841)  49,135,360   —   327,857,824   40,718,678   (367,804,001)  49,907,861 
                          
Total liabilities and equity Ps.876,883,804  Ps.415,951,508  Ps.1,287,505,988  Ps.326,859,808  (Ps.1,822,383,153) Ps.1,084,817,955  Ps.1,499,395,583  Ps.566,445,893  Ps.1,789,332,602  Ps.345,407,258  (Ps.2,870,300,730) Ps.1,330,280,606 
                          
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-89F-83

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power and
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF EQUITY
For the year ended December 31, 20052007
                                                
 Petróleos
   Subsidiary
 Non-Guarantor
   PEMEX
  Petróleos
   Subsidiary
 Non-Guarantor
   PEMEX
 
 Mexicanos(1) Master Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated  Mexicanos(1) Master Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated 
Equity under Mexican FRS
  (Ps. 28,438,522) Ps       —  Ps.216,486,077  Ps.30,057,390   (Ps. 246,063,786)  (Ps. 27,958,841) Ps.49,135,360  Ps.       —  Ps.327,857,824  Ps.40,718,678  (Ps.367,804,001) Ps.49,907,861 
U.S. GAAP adjustments:
                                                
Exploration and drilling costs  —   —   14,830,611   —   —   14,830,611   —   —   12,518,420   —   —   12,518,420 
Pensions and seafaring premiums                        
Pensions and seniority premiums  (756,362)  —   (7,734,931)  (968,225)  —   (9,459,518)  (215,898)  —   (4,721,584)  (609,460)  —   (5,546,942)
Additional Pension liability  953,482   —   5,065,535   598,856   —   6,617,873   (9,035,148)  —   (52,271,893)  (6,408,612)  —   (67,715,653)
Post-retirement benefits  (5,899,769)  —   (31,658,959)  (4,129,667)  —   (41,688,395)  (4,792,303)  —   (25,951,048)  (3,444,001)  —   (34,187,352)
Effect in equity of labor obligation
  (13,666,071)  —   (69,621,670)  (8,536,420)  —   (91,824,161)
Accrued vacation  (78,942)  —   (434,762)  (57,646)  —   (571,350)  (88,199)  —   (483,805)  (64,088)  —   (636,092)
Fixed asset adjustments:                                                
Capitalized gains (losses) of derivative financial instruments, net  —   —   (835,705)  —   —   (835,705)
Capitalization of interests, net  12,095   —   (10,536,909)  (160,489)  —   (10,685,303)
Capitalized gains (losses) of hedging financial instruments, net
      —   2,883,974   —   —   2,883,974 
Capitalization of interest, net
  39,891   —   (5,233,589)  411,091   —   (4,782,607)
Impairment, net  —   —   (28,250,179)  (4,409,474)  —   (32,659,653)  —   —   (22,615,830)  (3,948,416)  —   (26,564,246)
Depreciation convention  (34,102)  —   (1,420,020)  (55,420)  —   (1,509,542)
Derivative financial instruments  202,167   —   7,574,564   5,758   —   7,782,489 
Profit in inventory  —   —   (3,546,621)  —   —   (3,546,621)  —   —   (26,755,771)      —   (26,755,771)
Deferred income taxes  —   —   426,631   —   —   426,631   —   —   305,403   —   —   305,403 
Advance payment of minimum guaranteed dividends  (15,902,901)  —   —   —   —   (15,902,901)
Advance payment of minimum guaranteed dividends (APMGD)
  (4,270,225)  —   —   —   —   (4,270,225)
Reclassification of Pemex Finance net income to minority interest  —   —   —   (1,400,855)  —   (1,400,855)  —   —   —   (1,415,775)  —   (1,415,775)
Investments in subsidiaries(2)
  (67,097,907)              67,097,907   —   (215,963,074)  —   —   —   215,963,074   — 
                          
Total U.S. GAAP adjustments, net
  (88,602,239)  —   (56,520,745)  (10,577,162)  67,097,907   (88,602,239)  (247,991,027)  —   (191,947,393)  (24,015,681)  215,963,074   (247,991,027)
                          
Equity (Deficit) under U.S. GAAP
  (Ps. 117,040,761) Ps.—  Ps.159,965,332  Ps.19,480,228   (Ps. 178,965,879)  (Ps. 116,561,080) Ps.(198,855,667) Ps.—  Ps.135,910,431  Ps.16,702,997  (Ps.151,840,927) (Ps.198,083,166)
                          
 
 
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.
 
(2)Reflects adjustment to investment balances of subsidiaries as a result of applying USU.S. GAAP adjustments of such subsidiaries.


F-90F-84

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 20042005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power and
and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
BALANCE SHEET
As of December 31, 2006
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
ASSETS                        
Current assets:                        
Cash and cash equivalents Ps.133,079,873  Ps.22,681,704  Ps.2,977,334  Ps.37,037,546  Ps.—  Ps.195,776,457 
Accounts, notes receivable and other, net                        
and derivative financial instruments  41,568,203   5,393,950   51,748,849   42,841,939   —   141,552,941 
Accounts receivable-intercompany  51,127,882   40,622,344   685,098,180   68,332,370   (845,180,776)  — 
Inventories, net  437,851   7,942   51,439,914   10,178,091   —   62,063,798 
                         
Total current assets  226,213,809   68,705,940   791,264,277   158,389,946   (845,180,776)  399,393,196 
Long-term receivables — intercompany  615,065,974   405,184,550   21,331,177   100,448,654   (1,142,030,355)  — 
Investments in shares  405,264,102   —   2,455,759   29,117,822   (404,076,737)  32,760,946 
Other investments  56,697,030   —   —   —   (56,697,030)  — 
Properties and equipment, net  8,423,458   —   712,658,610   16,113,389   —   737,195,457 
Intangible asset derived from the actuarial computation of labor obligations  11,931,936   —   58,163,091   6,400,106   —   76,495,133 
Other assets  1,282,491   —   1,139,339   1,753,862   —   4,175,692 
                         
Total assets Ps.1,324,878,800  Ps.473,890,490  Ps.1,587,012,253  Ps.312,223,779  (Ps.2,447,984,898) Ps.1,250,020,424 
                         
LIABILITIES                        
Current liabilities:                        
Current portion of long-term debt Ps.12,844,824  Ps.32,662,476  Ps.1,365,763  Ps.19,367,215   —  Ps.66,240,278 
Accounts payable — intercompany  634,537,523   4,565,436   180,187,172   25,882,770   (845,172,901)  — 
Other current liabilities  4,389,487   12,814,454   55,490,541   37,379,369   —   110,073,851 
                         
Total current liabilities  651,771,834   50,042,366   237,043,476   82,629,354   (845,172,901)  176,314,129 
Long-term debt  15,805,453   373,149,214   1,201,152   134,319,423   —   524,475,242 
Long-term payables-intercompany  545,477,446   50,698,910   582,599,564   19,951,468   (1,198,727,388)  — 
Reserve for retirement payments, pensions, seniority premiums, dismantlement and abandonment activities, sundry creditors, and others  69,199,554   —   391,368,856   47,207,017   —   507,775,427 
                         
Total Liabilities  1,282,254,287   473,890,490   1,212,213,048   284,107,262   (2,043,900,289)  1,208,564,798 
EQUITY  42,624,513   —   374,799,205   28,116,517   (404,084,609)  41,455,626 
                         
Total liabilities and equity Ps.1,324,878,800  Ps.473,890,490  Ps.1,587,012,253  Ps.312,223,779  (Ps.2,447,984,898) Ps.1,250,020,424 
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-85

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF EQUITY
For the year ended December 31, 2006
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Equity under Mexican FRS Ps.42,624,513  Ps.       —  Ps.374,799,205  Ps.28,116,517  (Ps.404,084,609) Ps.41,455,626 
U.S. GAAP adjustments:                        
Exploration and drilling costs  —   —   13,889,293   —   —   13,889,293 
Pensions and seniority premiums  (526,576)  —   (6,518,979)  (829,823)  —   (7,875,378)
Additional Pension liability  722,398   —   4,215,207   489,019   —   5,426,624 
Post-retirement benefits  (5,391,421)  —   (29,003,251)  (3,818,236)  —   (38,212,908)
Accrued vacation  (81,540)  —   (449,182)  (59,561)  —   (590,283)
Fixed asset adjustments:                        
Capitalized gains (losses) or derivative financial instruments, net  —   —   3,061,308   —   —   3,061,308 
Capitalization of interests, net  27,020   —   (8,493,416)  173,829   —   (8,292,567)
Impairment, net  —   —   (25,765,627)  (4,143,136)  —   (29,908,763)
Depreciation convention  (17,692)  —   (736,698)  (28,754)  —   (783,144)
Derivative financial instruments  613   —   8,146,456   2,637   —   8,149,706 
Profit in inventory  —   —   (7,836,552)  —   —   (7,836,552)
Deferred income taxes  —   —   367,891   —   —   367,891 
Advance payment of minimum guaranteed dividends  (268,990)  —   —   —   —   (268,990)
Reclassification of Pemex Finance net income to minority interest  —   —   —   (1,464,681)  —   (1,464,681)
Investments in subsidiaries(2)
  (58,802,256)  —   —   —   58,802,256   — 
                         
Total U.S. GAAP adjustments, net  (64,338,444)  —   (49,123,550)  (9,678,706)  58,802,256   (64,338,444)
                         
Equity (Deficit) under U.S. GAAP (Ps.21,713,931) Ps.—  Ps.325,675,655  Ps.18,437,811  (Ps.345,282,353) (Ps.22,882,818)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above
(2)Reflects adjustment to investment balances of subsidiaries as a result of applying U.S. GAAP adjustments of such subsidiaries


F-86

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the year ended December 31, 2007
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales
 Ps.34,453,424  Ps.—  Ps.1,607,811,952  Ps.814,111,011  (Ps.1,321,401,568) Ps.1,134,974,819 
Services income
  27,491   —   —   1,852,541   (819,423)  1,060,609 
                         
Total sales revenues
  34,480,915   —   1,607,811,952   815,963,552   (1,322,220,991)  1,136,035,428 
Costs of sales
  235,627   —   932,208,069   815,588,389   (1,287,366,343)  460,665,742 
                         
Gross income
  34,245,288   —   675,603,883   375,163   (34,854,648)  675,369,686 
                         
General expenses:
                        
Transportation and distribution expenses
  —   —   23,561,036   1,237,503   —   24,798,539 
Administrative expenses
  32,982,205   25,934   51,611,895   8,684,722   (33,164,291)  60,140,465 
                         
Total general expenses
  32,982,205   25,934   75,172,931   9,922,225   (33,164,291)  84,939,004 
                         
Operating income
  1,263,083   (25,934)  600,430,952   (9,547,062)  (1,690,357)  590,430,682 
Other (expenses) revenues, net
  (321,083)  —   82,028,474   (6,439,786)  7,751,405   83,019,010 
Comprehensive financing result (cost) income
  10,119,811   (25,786,670)  (30,254,918)  (4,995,428)  30,870,618   (20,046,587)
Equity participation in subsidiaries
  (29,969,811)  —   —   12,842,972   22,671,893   5,545,054 
Capitalization of Master Trust operations and others
  —   25,812,604   —   3,810,272   (29,622,876)  — 
                         
(Loss) Income before taxes and duties
  (18,908,000)  —   652,204,508   (4,329,032)  29,980,683   658,948,159 
Taxes and duties
  662,486   —   672,933,568   3,659,674   —   677,255,728 
                         
Net (loss) income for the year
 (Ps.19,570,486) Ps.—  (Ps.20,729,060) (Ps.7,988,706) Ps.29,980,683  (Ps.18,307,569)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-87

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF INCOME
For the year ended December 31, 2007
                         
  Petróleos
  Master
  Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net (loss) income under Mexican FRS
  (Ps. 19,570,486) Ps.          —   (Ps. 20,729,060)  (Ps. 7,988,706) Ps.29,980,683  (Ps.18,307,569)
U.S. GAAP adjustments:
                        
Exploration and drilling costs
  —   —   (1,370,873)  —   —   (1,370,873)
Pension and seniority premiums
  310,678   —   1,797,395   220,363   —   2,328,436 
Post-retirement benefits
  599,118   —   3,052,203   374,236   —   4,025,557 
Accrued vacation
  (6,659)  —   (34,623)  (4,527)  —   (45,809)
Fixed asset adjustments:
                        
Capitalized gains of hedging financial instruments, net
  —   —   (177,334)  —   —   (177,334)
Capitalization of interest, net
  12,871   —   3,259,826   237,263   —   3,509,960 
Impairment, net
      —   3,149,798   194,719   —   3,344,517 
Depreciation convention
  17,692   —   736,700   28,752   —   783,144 
Derivative financial instruments
  (613)  —   (8,146,456)  (2,637)  —   (8,149,706)
Profit in inventory
      —   (18,919,219)  —   —   (18,919,219)
Available-for-sale securities
  246,258   —       —   —   246,258 
Deferred income taxes
  —   —   (62,488)  —   —   (62,488)
Effect of inflation accounting on U.S. GAAP adjustment
  140,863   —   16,163   2,113   —   159,139 
Reclassification of Pemex Finance net income to minority interest
  —   —   —   (6,089)  —   (6,089)
Investments in Subsidiaries
  (15,654,715)  —   —   —   15,654,715   — 
                         
Total U.S. GAAP adjustments
  (14,334,507)  —   (16,698,908)  1,044,193   15,654,715   (14,334,507)
                         
Net (loss) income for the year
  (Ps. 33,904,993) Ps.—   (Ps. 37,427,968)  (Ps. 6,944,513) Ps.45,635,398  (Ps.32,642,076)
                         
(1) Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-88

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the year ended December 31, 2006
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales Ps.25,478,992  Ps.—  Ps.1,508,268,084  Ps.686,187,726  (Ps.1,157,440,058) Ps.1,062,494,744 
Other (expenses) revenues, net  (616,006)  —   58,074,942   12,089,864   192,675   69,741,475 
                         
Total revenues  24,862,986   —   1,566,343,026   698,277,590   (1,157,247,383)  1,132,236,219 
                         
Costs and operating expenses:                        
Costs of sales  202,305   —   848,759,431   687,288,033   (1,133,144,294)  403,105,475 
Transportation and distribution expenses  —   —   22,923,857   1,094,933   —   24,018,790 
Administrative expenses  29,989,747   29,987   40,571,274   7,840,544   (24,409,469)  54,022,083 
                         
Total costs and operating expenses  30,192,052   29,987   912,254,562   696,223,510   (1,157,553,763)  481,146,348 
Comprehensive financing cost (income)  (16,983,531)  10,184,669   30,903,954   6,863,121   (7,985,509)  22,982,704 
Equity participation in subsidiaries  35,222,680   —   —   —   (35,222,680)  — 
Capitalization of Master Trust operations and others  —   10,214,656   —   (1,921,672)  (8,292,984)  — 
                         
Income (Loss) before hydrocarbon extraction duties and other  46,877,145   —   623,184,510   (6,730,713)  (35,223,775)  628,107,167 
Hydrocarbon extraction duties and other  347,389   —   578,008,036   4,499,566   —   582,854,991 
                         
Net income (loss) for the year Ps.46,529,756  Ps.—  Ps.45,176,474  (Ps.11,230,279) (Ps.35,223,775) Ps.45,252,176 
                         
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales Ps.26,436,747  Ps.—  Ps.1,564,963,881  Ps.711,981,523  Ps.(1,200,948,230) Ps.1,102,433,921 
Services income  —   —   —   1,707,386   (631,439)  1,075,947 
                         
Total revenues  26,436,747   —   1,564,963,881   713,688,909   (1,201,579,669)  1,103,509,868 
Costs of sales  209,910   —   880,664,298   713,123,190   (1,175,739,188)  418,258,210 
Gross income  26,226,837   —   684,299,583   565,719   (25,840,481)  685,251,658 
Transportation and distribution expenses  —   —   23,785,565   1,136,091   —   24,921,656 
Administrative expenses  31,117,062   31,114   42,096,348   8,135,270   (25,327,021)  56,052,773 
                         
Total costs and operating expenses  31,117,062   31,114   65,881,913   9,271,361   (25,327,021)  80,974,429 
Operating income  (4,890,225)  (31,114)  618,417,670   (8,705,642)  (513,460)  604,277,229 
Other (expenses) revenues net  (671,689)  —   60,257,979   795,886   831,357   61,213,533 
Comprehensive financing result (cost) income  17,621,942   (10,567,511)  (32,065,634)  (7,121,106)  8,285,684   (23,846,625)
Equity participation in subsidiaries  36,579,228   —   —   10,041,050   (36,546,701)  10,073,577 
Capitalization of Master Trust operations and others  —   10,598,625   —   (1,993,908)  (8,604,717)  — 
                         
Income (loss) before taxes and duties  48,639,256   —   646,610,015   (6,983,720)  (36,547,837)  651,717,714 
Taxes and duties  360,447   —   599,735,358   4,668,704   —   604,764,509 
                         
Net income (loss) for the year Ps.48,278,809  Ps.—  Ps.46,874,657  Ps.(11,652,424) Ps.(36,547,837) Ps.46,953,205 
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.

F-89

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF INCOME
For the year ended December 31, 2006
                         
  Petróleos
  Master
  Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net income (loss) under Mexican FRS Ps.48,278,809  Ps.          —  Ps.46,874,657   (Ps. 11,652,424)  (Ps. 36,547,837) Ps.46,953,205 
U.S. GAAP adjustments:                        
Exploration and drilling costs  —   —   (1,498,801)  —   —   (1,498,801)
Pension and seniority premiums  258,219   —   1,506,708   174,798   —   1,939,725 
Post-retirement benefits  730,119   —   3,845,768   466,667   —   5,042,554 
Accrued vacation  (2,987)  —   (15,532)  (2,030)  —   (20,549)
Fixed asset adjustments:                        
Capitalized gains of hedging financial instruments, net  —   —   3,928,429   —   —   3,928,429 
Capitalization of interest, net  14,470   —   2,439,576   340,348   —   2,794,394 
Impairment, net  —   —   3,546,475   432,091   —   3,978,566 
Depreciation convention  17,692   —   736,700   28,752   —   783,144 
Derivative financial instruments  (209,153)  —   287,164   —3,338   —   74,673 
Profit in inventory  ��   —   (4,156,613)  —   —   (4,156,613)
Available-for-sale securities  (2,995,342)  —   —   —   —   (2,995,342)
Deferred income taxes  —   —   (74,777)  —   —   (74,777)
Effect of inflation accounting on U.S. GAAP Adjustment  8,891   —   17,453   2,283   —   28,627 
Reclassification of Pemex Finance net income to minority interest  —   —   —   (54,789)  —   (54,789)
Investments in Subsidiaries  11,947,332   —   —   —   (11,947,332)  — 
                         
Total U.S. GAAP adjustments  9,769,241   —   10,562,550   1,384,782   (11,947,332)  9,769,241 
                         
Net income (loss) for the year Ps.58,048,050  Ps.—  Ps.57,437,207   (Ps. 10,267,642)  (Ps. 48,495,169) Ps.56,722,446 
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-90

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and
in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the year ended December 31, 2005
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales Ps.24,061,252  Ps.—  Ps.1,430,157,491  Ps.593,717,816  Ps.(1,045,330,294) Ps.1,002,606,265 
Services income      —       1,875,001   (650,193)  1,224,808 
                         
Total sales revenues  24,061,252   —   1,430,157,491   595,592,817   (1,045,980,487)  1,003,831,073 
Costs of sales  144,345   —   812,102,068   617,226,094   (1,039,528,608)  389,943,899 
Gross income  23,916,907       618,055,423   (21,633,277)  (6,451,879)  613,887,174 
General expenses:                        
Transportation and distribution expenses  —   —   22,490,759   1,165,151   —   23,655,910 
Administrative expenses  25,656,966   27,590   46,231,359   5,381,815   (26,769,846)  50,527,884 
                         
Total costs and operating expenses  25,656,966   27,590   68,722,118   6,546,966   (26,769,846)  74,183,794 
Operating income  (1,740,059)  (27,590)  549,333,305   (28,180,243)  20,317,967   539,703,380 
Other (expenses) revenues, net  (1,096,609)  —   (2,816,900)  21,144,400   (14,334,497)  2,896,394 
Comprehensive financing result (cost) income  141,280   (4,114,555)  7,422,464   (12,722,733)  4,437,453   (4,836,091)
Equity participation in subsidiaries  (79,370,808)  —   —   6,004,200   82,025,273   8,658,665 
Capitalization of Master Trust operations and others  —   4,142,145   —   6,280,036   (10,422,181)  — 
                         
(Loss) income before taxes and duties, special tax on production and services (IEPS tax) and cumulative effect of adoption of new accounting standards  (82,066,196)  —   553,938,869   (7,474,340)  82,024,015   546,422,348 
                         
Taxes and duties  —   —   622,694,255   4,180,207   —   626,874,462 
                         
Cumulative effect of adoption of new accounting standards  (481,068)  —   (1,241,427)  (183,373)  —   (1,905,868)
                         
Net (loss) income for the year Ps.(82,547,264) Ps.—  Ps.(69,996,813) Ps.(11,837,920) Ps.82,024,015  Ps.(82,357,982)
                         
 
 
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-91

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and
in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF INCOME
For the year ended December 31, 20062005
                                                
 Petróleos
 Master
 Subsidiary
 Non-Guarantor
   PEMEX
  Petróleos
   Subsidiary
 Non-Guarantor
   PEMEX
 
 Mexicanos(1) Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated  Mexicanos(1) Master Trust(1) Guarantors(1) Subsidiaries Eliminations Consolidated 
Net income (loss) under Mexican FRS Ps.46,529,756  Ps.       —  Ps.45,176,474  (Ps.11,230,279) (Ps.35,223,775) Ps.45,252,176 
Net (loss) income under Mexican FRS  (Ps.82,547,264) Ps.—   (Ps. 69,996,813)  (Ps. 11,837,920)  Ps. 82,024,015   (Ps. 82,357,982)
U.S. GAAP adjustments:                                                
Exploration and drilling costs  —   —   (1,444,502)  —   —   (1,444,502)  —   —   (1,549,819)  —   —   (1,549,819)
Pension and seniority premiums  248,864   —   1,452,123   168,465   —   1,869,452   161,589   —   757,723   93,145   —   1,012,457 
Post-retirement benefits  703,668   —   3,706,443   449,760   —   4,859,871   437,766   —   2,641,111   296,343   —   3,375,220 
Accrued vacation  (2,879)  —   (14,969)  (1,957)  —   (19,805)  (2,343)  —   (12,697)  (1,672)  —   (16,712)
Fixed asset adjustments:                                                
Capitalized gains (losses) of derivative financial instruments, net  —   —   3,786,109   —   —   3,786,109 
Capitalized gains (losses) of hedging financial instruments, net  —   —   (8,445,996)  —   —   (8,445,996)
Capitalization of interests, net  13,946   —   2,351,194   328,018   —   2,693,158   12,550   —   1,660,006   255,716   —   1,928,272 
Impairment, net  —   —   3,417,993   416,437   —   3,834,430   —   —   2,381,679   3,865,308   —   6,246,987 
Depreciation convention  17,051   —   710,011   27,710   —   754,772   9,848   —   758,517   14,779   —   783,144 
Derivative financial instruments  (201,576)  —   276,761   (3,217)  —   71,968   (833,939)  (4,214,796)  5,333,327   746,281   —   1,030,873 
Profit in inventory  —   —   (4,006,026)  —   —   (4,006,026)  —   —   (2,776,119)  —   —   (2,776,119)
Available-for-sale securities  (2,886,826)  —   —   —   —   (2,886,826)  (830,179)  —   —   —   —   (830,179)
Deferred Income Taxes  —   —   (72,068)  —   —   (72,068)
Effect of inflation accounting on U.S. GAAP Adjustment  8,569   —   16,821   2,200   —   27,590 
Deferred income taxes  —   —   442,668   —   —   442,668 
Effect of inflation accounting on                        
U.S. GAAP adjustment  190,371   —   14,586   1,923   —   206,880 
Reclassification of Pemex Finance net income to minority interest  —   —   —   (52,804)  —   (52,804)  —   —   —   1,159,233   —   1,159,233 
Investments in Subsidiaries  11,514,502   —   —   —   11,514,502   — 
Investments in subsidiaries  3,421,246   —   —   —   (3,421,246)  — 
                          
Total U.S. GAAP adjustments  9,415,319   —   10,179,890   1,334,612   (11,514,502)  9,415,319   2,566,909   (4,214,796)  1,204,986   6,431,056   (3,421,246)  2,566,909 
                          
Net income (loss) for the year Ps.55,945,075  Ps.—  Ps.55,356,364  (Ps.9,895,667) (Ps.46,738,277) Ps.54,667,495 
Net (loss) income for the year  (Ps.79,980,355) (Ps.4,214,796)  (Ps. 68,791,827) Ps.(5,406,864) Ps.78,602,769   (Ps. 79,791,073)
                          
 
 
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-92

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and
in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOMECASH FLOW(1)
For the year ended December 31, 20052007
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales Ps.23,189,557  Ps.—  Ps.1,378,345,484  Ps.572,208,498  (Ps.1,007,459,877) Ps.966,283,662 
Other (expenses) revenues, net  1,501,418       (2,714,849)  27,972,129   (14,441,822)  12,316,876 
                         
Total revenues  24,690,975   —   1,375,630,635   600,180,627   (1,021,901,699)  978,600,538 
Costs and operating expenses:                        
Costs of sales  139,116   —   782,681,086   594,865,114   (1,001,868,376)  375,816,940 
Transportation and distribution expenses  —   —   21,675,960   1,122,939   —   22,798,899 
Administrative expenses  24,727,461   26,590   44,556,481   5,186,842   (25,800,023)  48,697,351 
                         
Total costs and operating expenses  24,866,577   26,590   848,913,527   601,174,895   (1,027,668,399)  447,313,190 
Comprehensive financing cost (income)  (136,162)  3,965,493   (7,153,562)  12,261,811   (4,276,692)  4,660,888 
Equity participation in subsidiaries  (79,053,646)  —   —   —   79,053,646   — 
Capitalization of Master Trust operations and others  —   3,992,083   —   6,052,521   (10,044,604)  — 
                         
(Loss) income before hydrocarbon extraction duties and other, special tax on production and services and cumulative effect of adoption of new accounting standards  (79,093,086)  —   533,870,670   (7,203,558)  79,052,434   526,626,460 
Hydrocarbon extraction duties and other  —   —   579,101,760   4,028,766   —   583,130,526 
Special tax on production and services (IEPS Tax)  —   —   21,033,414   —   —   21,033,414 
Cumulative effect of adoption of new accounting standards  (463,640)  —   (1,196,452)  (176,730)  —   (1,836,822)
                         
Net (loss) income for the year (Ps.79,556,726) Ps.—  (Ps.67,460,956) (Ps.11,409,054) Ps.79,052,434  (Ps.79,374,302)
                         
 
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(2)  Master Trust(2)  Guarantors(2)  Subsidiaries  Eliminations  Consolidated 
 
Operating activities
                        
Net income (loss) for the year  (Ps. 19,570,485) Ps.—   (Ps.20,729,059)  (Ps. 7,988,708)  (Ps.29,980,683)  (Ps. 18,307,569)
Adjustments to reconcile net income (loss) to cash provided by operating activities                        
Depreciation and amortization  639,866   —   70,860,006   1,091,846   —   72,591,718 
Reserve for retirement payments, pensions and seniority premiums  12,742,593   —   64,195,411   8,368,862   —   85,306,866 
Loss on disposal of fixed assets  33,101   —   9,752,826   265,512   —   10,051,439 
Allowance for uncollectible trade accounts  (111)  —   (1,039,524)  (46,722)  —   (1,086,357)
Allowance for decline in the value of inventory  (46,625)  —   (94,928)  (45,151)  —   (186,704)
Conversion effect      —   —   —   —   — 
Foreign exchange loss (gain)  658,970   3,668,150   —   (8,656)  —   4,318,464 
Accrued interest  (338,113)  4,193,183   24,426   727,893   —   4,607,389 
Equity in earning in investees less dividend received and other  29,980,683   —       (5,533,058)  (29,980,683)  (5,533,058)
Gain from monetary position  (11,040,864)  —   (3,469,158)  1,643,735   —   (12,866,287)
Deferred income taxes      —   1,867,292   27,414   —   1,894,706 
Changes in operating assets and liabilities                        
Accounts and notes receivable  21,799,646   1,315,383   (35,391,122)  (13,975,332)  —   (26,251,425)
Inter-company changes and deductions  372,417,508   2,375,374   (230,977,862)  17,875,996   (161,691,016)  — 
Inventories  155,330   7,654   (10,154,825)  (4,659,156)  —   (14,650,997)
Other assets  281,816   —   288,350   649,381   —   1,219,547 
Accounts payable and accrued liabilities  (668,839)  1,307,046   96,944,710   8,870,377   —   106,453,294 
                         
Cash flows provided by (used in) operating activities
  407,044,476   12,866,790   (57,923,457)  7,264,233   (161,691,016)  207,561,026 
Investing activities:
                        
Increase in fixed assets, net  (331,786)  —   (131,384,646)  (986,862)  —   (132,703,294)
Inter-company (increase) decrease in investments  (187,467,741)  (113,704,714)  161,051,930   (5,397,631)  145,518,156   — 
Investments in Subsidiaries  (3,297,964)      771,494   3,283,315   889,766   1,646,611 
                         
Cash flows provided by (used in) investing activities
  (191,097,491)  (113,704,714)  30,438,778   (3,101,178)  146,407,922   (131,056,683)
Financing Activities
                        
Proceeds from long term financing  51,509,770   59,731,700   6,316,360   —   —   117,557,830 
Financing payments  (64,163,753)  (106,625,310)  (1,316,313)  (22,823,340)  —   (194,928,716)
Inter-company (decrease) increase in financing  (216,111,281)  145,073,451   44,700,132   10,163,426   16,174,272   — 
Increase in equity of subsidiary entities  11,160,824   —   —   —   —   11,160,824 
Retirement, seniority premiums and other post retirements benefits payments  (4,951,499)  —   (21,412,162)  (1,353,883)  —   (27,717,544)
Minimum guaranteed dividends paid to the Mexican Government  (263,329)  —   —   891,178   (891,178)  (263,329)
                         
Cash flows provided by (used in) financing activities
  (222,819,268)  98,179,841   28,288,017   (13,122,619)  15,283,094   (94,190,935)
                         
Effects of inflation on cash and cash equivalents
  (4,821,242)  (821,717)  (107,863)  (1,341,803)  —   (7,092,625)
                         
Increase (decrease) in cash and cash equivalents  (11,693,525)  (3,479,800)  695,475   (10,301,367)  —   (24,779,217)
Cash and cash equivalents, beginning of period  133,079,873   22,681,704   2,977,334   37,037,546   —   195,776,457 
                         
Cash and cash equivalents, end of period Ps.121,386,348  Ps.19,201,904   Ps. 3,672,809   Ps. 26,736,179  Ps.—  Ps.170,997,240 
                         
 
(1)The accompanying cash flow is prepared in accordance with Mexican FRS.
(2)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-93

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and
in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF INCOME
For the year ended December 31, 2005
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net income (loss) under Mexican FRS (Ps.79,556,726) Ps.—  (Ps.67,460,956) (Ps.11,409,054) Ps.79,052,434  (Ps.79,374,302)
U.S. GAAP adjustments:                        
Exploration and drilling costs  —   —   (1,493,672)  —   —   (1,493,672)
Pension and seniority premiums  155,735   —   730,272   89,771   —   975,778 
Post-retirement benefits  421,907   —   2,545,428   285,607   —   3,252,942 
Accrued vacation  (2,258)  —   (12,237)  (1,612)  —   (16,107)
Fixed asset adjustments:                        
Capitalized gains (losses) of derivative financial instruments, Net  —   —   (8,140,013)  —   —   (8,140,013)
Capitalization of interests, net  12,095   —   1,599,867   246,452   —   1,858,414 
Impairment, net  —   —   2,295,395   3,725,275   —   6,020,670 
Depreciation convention  9,491   —   731,037   14,244   —   754,772 
Derivative financial instruments  (803,727)  (4,062,102)  5,140,110   719,245   —   993,526 
Profit in inventory  —   —   (2,675,545)  —   —   (2,675,545)
Available-for-sale securities  (800,103)  —   —   —   —   (800,103)
Deferred Income Taxes  —   —   426,631   —   —   426,631 
Effect of inflation accounting on U.S. GAAP Adjustment  183,474   —   14,058   1,853   —   199,385 
Reclassification of Pemex Finance net income to minority interest  —   —   —   1,117,236   —   1,117,236 
Investments in Subsidiaries  3,297,300   —   —   —   (3,297,300)  — 
                         
Total U.S. GAAP adjustments  2,473,914   (4,062,102)  1,161,331   6,198,071   (3,297,300)  2,473,914 
                         
Net (loss) income for the year (Ps.77,082,812) (Ps.4,062,102) (Ps.66,299,625) (Ps.5,210,983) Ps.75,755,134  (Ps.76,900,388)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-94

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the year ended December 31, 2004
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Master Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net sales Ps.19,793,730  Ps.—  Ps.1,169,178,551  Ps.455,271,941  (Ps.812,474,957) Ps.831,769,265 
Other (expenses) revenues, net  451,720   —   2,535,925   10,426,939   (1,421,277)  11,993,307 
                         
Total revenues  20,245,450   —   1,171,714,476   465,698,880   (813,896,234)  843,762,572 
Costs and operating expenses:                        
Costs of sales  190,421   —   618,794,981   456,516,317   (791,532,635)  283,969,084 
Transportation and distribution expenses  —   —   18,564,266   528,950   (197,129)  18,896,087 
Administrative expenses  23,524,435   8,325   31,202,941   4,938,798   (20,207,773)  39,466,726 
                         
Total costs and operating expenses  23,714,856   8,325   668,562,188   461,984,065   (811,937,537)  342,331,897 
Comprehensive financing cost (income)  (9,595,766)  5,674,044   13,687,205   8,851,180   (11,038,413)  7,578,250 
Equity participation in subsidiaries  (32,367,176)  —   —   —   32,367,176   — 
Capitalization of Master Trust operations and others  —   5,682,369   —   3,381,919   (9,064,288)  — 
                         
(Loss) income before hydrocarbon extraction duties and other, special tax on production and services and cumulative effect of adoption of new accounting standards  (26,240,816)  —   489,465,083   (1,754,446)  32,382,604   493,852,425 
                         
Hydrocarbon extraction duties and other  —   —   449,486,748   1,687,650   15,427   451,189,825 
Special tax on production and Services (IEPS tax)  —   —   58,819,245   —   —   58,819,245 
                         
Cumulative effect of adoption of new accounting standards  (1,172,604)  —   (7,048,147)  (3,035,760)  —   (11,256,511)
                         
Net (loss) income for the year (Ps.27,413,420) Ps.—  (Ps.25,889,057) (Ps.6,477,856) Ps.32,367,177  (Ps.27,413,156)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-95

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
U.S. GAAP RECONCILIATION OF INCOME
For the year ended December 31, 2004
                         
  Petróleos
  Master
  Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(1)  Trust(1)  Guarantors(1)  Subsidiaries  Eliminations  Consolidated 
 
Net income (loss) under Mexican FRS
 (Ps.27,413,420) Ps.—  (Ps.25,889,057) (Ps.6,477,856) Ps. 32,367,177  (Ps.27,413,156)
U.S. GAAP adjustments:
                        
Exploration and drilling costs  —   —   (1,526,217)  —   —   (1,526,217)
Pension and seniority premiums  12,781   —   607,624   184,001   —   804,406 
Post-retirement benefits  (333,536)  —   (2,232,829)  (291,969)  —   (2,858,334)
Accrued vacation  18,850   —   103,812   13,764   —   136,426 
Fixed asset adjustments:                        
Capitalized gains (losses) of hedging financial instruments, net  —   —   890,056   —   —   890,056 
Capitalization of interests, net  —   —   2,053,170   43,347   —   2,096,517 
Impairment, net  —   —   7,492,900   2,353,485   —   9,846,385 
Depreciation convention  14,531   —   717,020   23,221   —   754,772 
Derivative financial instruments  2,663,154   3,991,117   1,146,393   (1,685,744)  105,157   6,220,077 
Sales of shares of Repsol  727,159   —   —   —   —   727,159 
Profit in inventory  —   —   1,117,526   —   —   1,117,526 
Available-for-sale securities  (5,407,389)  —   —   —   —   (5,407,389)
Effect of inflation accounting on U.S. GAAP adjustment  595,815   —   23,126   3,066   —   622,007 
Investments in Subsidiaries  15,026,869               (15,026,869)  — 
                         
Total U.S. GAAP adjustments
  13,318,234   3,991,117   10,392,581   643,171   (14,921,712)  13,423,391 
                         
Net (loss) income for the year
 (Ps.14,095,186) Ps.3,991,117  (Ps.15,496,476) (Ps.5,834,685) Ps.17,445,465  (Ps.13,989,765)
                         
(1)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-96

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
 
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF CASH FLOW(1)
For the year ended December 31, 2006
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(2)  Master Trust(2)  Guarantors(2)  Subsidiaries  Eliminations  Consolidated 
 
Operating activities
                        
Net income (loss) for the year Ps.46,529,755  Ps.—  Ps.45,176,474  (Ps.11,230,278) (Ps.35,223,775) Ps.45,252,176 
Adjustments to reconcile net income (loss) to cash provided by operating activities                        
Depreciation and amortization  671,365   —   61,751,502   870,138   —   63,293,005 
Reserve for retirement payments, pensions and seniority premiums  11,027,389   —   53,914,166   6,853,035   —   71,794,590 
Impairment of fixed assets  —   —   —   677,770   —   677,770 
Loss on disposal of fixed assets  24,640   —   2,841,924   256,071   —   3,122,635 
Allowance for uncollectible trade accounts  775   —   (51,808)  118,745   —   67,712 
Allowance for decline in the value of inventory  (18,355)      (71,196)  (55,402)  —   (144,953)
Foreign exchange loss (gain)  19,161   12,424,980   623,031   393,610   —   13,460,782 
Equity in earning in investees less dividend received and other  (29,504,163)  —   —   (9,677,281)  35,223,775   (3,957,669)
Gain from monetary position  (11,969,769)  —   (4,055,741)  1,743,161   —   (14,282,349)
Deferred income taxes  —   —   1,031,619   (160,214)  —   871,405 
Dismantlement and abandonment costs in fixed assets  —   —   (1,919,880)  —   —   (1,919,880)
Changes in operating assets and liabilities                        
Accounts and notes receivable  5,794,221   (5,218,119)  (24,530,225)  4,859,732   —   (19,094,391)
Inter-company changes and deductions  (95,910,710)  (989,961)  111,959,301   (77,657,471)  62,598,841   — 
Inventories  (33,315)  (8,640)  (8,033,613)  (2,326,201)  —   (10,401,769)
Other assets  (1,066,538)  —   (97,896)  405,047   —   (759,387)
Accounts payable and accrued liabilities  (756,665)  (3,167,889)  (31,573,950)  1,774,158   —   (33,724,346)
                         
Cash flows provided by operating activities
  (75,192,209)  3,040,371   208,963,708   (83,155,380)  62,598,841   114,255,331 
Investing activities:
                        
Increase in fixed assets, net  (255,195)  —   (96,785,134)  (1,844,354)  —   (98,884,683)
Specific funds account — trade commission  (6,360,806)                  (6,360,806)
Inter-company (increase) decrease in investments  (324,123,643)  (84,001,981)  (283,066,677)  57,078,448   634,113,853   — 
Investments in Subsidiaries  (2,791,641)  —   (828,125)  10,009,921   (10,601,946)  (4,211,791)
                         
Cash flows used in investing activities
  (333,531,285)  (84,001,981)  (380,679,936)  65,244,015   623,511,907   109,506,799)
Financing Activities
                        
Proceeds from long term financing  39,272,061   112,873,129   —   10,452,573   —   162,597,763 
Financing payments  (45,346,740)  (92,562,167)  —   (5,000,320)  —   (142,909,227)
Inter-company (decrease) increase in financing  499,292,811   28,815,829   137,931,823   31,978,772   (698,019,235)  — 
Increase in equity of subsidiary entities  13,211,400   —   33,478,562   248,493   —   46,938,455 
Minimum guaranteed dividends paid to the Mexican government  (259,245)  —   —   (11,958,006)  11,958,006   (259,245)
                         
Cash flows provided by financing activities
  506,170,287   49,126,791   171,410,385   25,721,512   (686,061,229)  66,367,746 
Effects of inflation on cash and cash equivalents
  (8,631,016)  (2,592,166)  2,616,538   450,145   —   (8,156,499)
                         
Increase (decrease) in cash and cash equivalents  88,815,777   (34,426,985)  310,695   8,260,292   —   62,959,779 
Cash and cash equivalents, beginning of period  39,442,854   56,286,972   2,558,776   27,435,451   —   125,724,053 
                         
Cash and cash equivalents, end of period Ps.128,258,631   Ps.21,859,987   Ps.2,869,471   Ps.35,695,743   Ps.—   Ps.188,683,832 
                         
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(2)  Master Trust(2)  Guarantors(2)  Subsidiaries  Eliminations  Consolidated 
 
Operating activities                        
Net income (loss) for the year Ps.48,278,809  Ps.—  Ps.46,874,657   (Ps. 11,652,424)  (Ps. 36,547,837) Ps.46,953,205 
Adjustments to reconcile net income (loss) to cash provided by operating activities                        
Depreciation and amortization  696,602   —   64,072,741   902,846   —   65,672,189 
Reserve for retirement payments, pensions and seniority premiums  11,441,909   —   55,940,799   7,110,641   —   74,493,349 
Impairment of fixed assets  0   —   —   703,247   —   703,247 
Loss on disposal of fixed assets  25,566   —   2,948,752   265,697   —   3,240,015 
Allowance for uncollectible trade accounts  803   —   (53,755)  123,209   —   70,257 
Allowance for decline in the value of inventory  (19,045)  —   (73,872)  (57,485)  —   (150,402)
Foreign exchange loss (gain)  19,881   12,892,035   646,451   408,406   —   13,966,773 
Equity in earning in investees less dividend received and other  (30,613,224)  —   0   (10,041,051)  36,547,837   (4,106,438)
Gain from monetary position  (12,419,713)  —   (4,208,196)  1,808,687   —   (14,819,222)
Deferred income taxes  —   —   1,070,397   (166,236)  —   904,161 
Dismantlement and abandonment costs in fixed assets  —   —   (1,992,048)  —   —   (1,992,048)
Changes in operating assets and liabilities                        
Accounts and notes receivable  6,012,026   (5,414,268)  (25,452,316)  5,042,409   —   (19,812,149)
Inter-company changes and deductions  (99,515,994)  (1,027,173)  116,167,851   (80,576,615)  64,951,931   — 
Inventories  (34,567)  (8,965)  (8,335,597)  (2,413,642)  —   (10,792,771)
Other assets  (1,106,629)  —   (101,576)  420,273   —   (787,932)
Accounts payable and accrued liabilities  (785,108)  (3,286,970)  (32,760,815)  1,840,849   —   (34,992,044)
                         
Cash flows provided by (used in) operating activities  (78,018,684)  3,154,659   214,743,473   (86,281,189)  64,951,931   118,550,190 
Investing activities                        
Increase in fixed assets, net  (264,788)  —   (100,423,287)  (1,913,683)  —   (102,601,758)
Specific funds account-trade commission  (6,599,909)  —   —   —   —   (6,599,909)
Inter-company (increase) decrease in investments  (336,307,451)  (87,159,615)  (293,707,153)  59,224,025   657,950,194   — 
Investments in Subsidiaries  (2,896,579)  —   (859,254)  10,386,194   (11,051,854)  (4,421,493)
                         
Cash flows provided by (used in) investing activities  (346,068,727)  (87,159,615)  (394,989,694)  67,696,536   646,898,340   (113,623,160)
Financing Activities                        
Proceeds from long term financing  40,748,298   117,116,030   —   10,845,485   —   168,709,813 
Financing payments  (47,051,324)  (96,041,579)  —   (5,188,282)  —   (148,281,185)
Inter-company (decrease) increase in financing  518,061,228   29,899,016   143,116,680   33,180,854   (724,257,778)  — 
Increase in equity of subsidiary entities  13,708,017   —   34,737,021   257,834   —   48,702,872 
Minimum guaranteed dividends paid to the Mexican Government  (268,990)  —   —   (12,407,507)  12,407,507   (268,990)
                         
Cash flows provided by financing activities  525,197,229   50,973,467   177,853,701   26,688,384   (711,850,271)  68,862,510 
Effects of inflation on cash and cash equivalents  (8,955,456)  (2,689,606)  2,714,894   467,066   —   (8,463,102)
                         
Increase (decrease) in cash and cash equivalents  92,154,362   (35,721,095)  322,374   8,570,797   —   65,326,438 
Cash and cash equivalents, beginning of period  40,925,511   58,402,799   2,654,960   28,466,749   —   130,450,019 
                         
Cash and cash equivalents, end of period Ps.133,079,873  Ps.22,681,704  Ps.2,977,334  Ps.37,037,546  Ps.—  Ps.195,776,457 
                         
 
(1)The accompanying cash flow is prepared in accordance with Mexican FRS.
(2)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.above


F-97F-94

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF CASH FLOW(1)
For the year ended December 31, 2005
                         
  Petróleos
     Subsidiary
  Non-Guarantor
     PEMEX
 
  Mexicanos(2)  Master Trust(2)  Guarantors(2)  Subsidiaries  Eliminations  Consolidated 
 
Operating activities
                        
Net income (loss) for the year  (Ps. 79,556,726) Ps.—   (Ps. 67,460,956)  (Ps. 11,409,054) Ps.79,052,434   (Ps. 79,374,302)
Adjustments to reconcile net income (loss) to cash provided by operating activities                        
Depreciation and amortization  690,311   —   53,170,898   1,069,310   —   54,930,519 
Reserve for retirement payments, pensions and seniority premiums  8,998,132   —   46,828,327   5,650,248   —   61,476,707 
Impairment of fixed assets  —   —   (2,203,639)  3,584,426   —   1,380,787 
Loss on disposal of fixed assets  291,482   —   4,148,148   747,681   —   5,187,311 
Allowance for uncollectible trade accounts  (3,801)  —   923,343   (306,011)  —   613,531 
Allowance for slow-moving inventory and obsolescence  —   —   (20,837)  —   —   (20,837)
Foreign exchange loss (gain)  (3,184,037)  (25,332,483)  —   (609,361)  —   (29,125,881)
Equity in earning in investees less dividend received and other  77,487,902   —   (449,924)  (1,403,028)  (79,052,434)  (3,417,484)
Gain from monetary position  (4,514,503)  —   (12,441,837)  (38,110)  —   (16,994,450)
Deferred income taxes  —   —   2,057,891   —   —   2,057,891 
Dismantlement and abandonment costs  —   —   (1,697,762)  —   —   (1,697,762)
Changes in operating assets and liabilities                        
Accounts and notes receivable  19,322,830   347,343   28,302,552   (39,694,728)  (14,808,242)  (6,530,245)
Inter-company changes and deductions  (11,359,858)  296,179,910   (367,242,561)  82,422,509   —   — 
Inventories  (47,335)  (153,678)  (6,529,291)  (2,952,882)  —   (9,683,186)
Other assets  1,619,029   (58,957)  760,843   1,014,538   —   3,335,453 
Accounts payable and accrued liabilities  (2,508,299)  2,502,337   5,101,221   17,958,646   —   23,053,905 
                         
Cash flows provided by operating activities
  7,235,129   273,484,472   (316,753,583)  56,034,184   (14,808,242)  5,191,961 
Investing activities:
                        
Increase in fixed assets, net  (694,361)  —   (81,777,637)  (2,445,395)  —   (84,917,393)
Specific fundsaccount-trade commission
  7,225,819   —   —   —   —   (7,225,819)
Inter-company (increase) decrease in investments  (399,495,765)  (301,112,606)  14,736,564   (114,074,446)  799,946,253   — 
Investments in Subsidiaries  —   —   —   2,527,079   —   2,527,079 
                         
Cash flows used in investing activities
  (392,964,307)  (301,112,606)  (67,041,073)  (113,992,762)  799,946,253   (75,164,495)
Financing Activities
                        
Proceeds from long term financing  49,640,624   127,490,222   934,966   75,453,871   —   253,519,683 
Financing payments  (58,286,870)  (62,873,914)  (11,229,645)  (3,251,949)  —   (135,642,378)
Sale of future accounts receivable  —   —   (51,485,288)  —   12,441,459   (39,043,829)
Inter-company (decrease) increase in financing  386,722,649   (3,970,250)  416,796,326   397,531   (799,946,256)  — 
Increase in equity of subsidiary entities  15,085,960   —   31,312,465   —   —   46,398,425 
Dividends paid  (15,902,902)  —   —   (2,366,786)  2,366,786   (15,902,902)
                         
Cash flows provided by financing activities
  377,259,461   60,646,058   386,328,824   70,232,667   (785,138,011)  109,328,999 
Effects of inflation on cash and cash equivalents
  2,277,495   (617,155)  (2,158,615)  (1,446,491)  —   (1,944,766)
                         
Increase (decrease) in cash and cash equivalents  (6,192,222)  32,400,769   375,553   10,827,598   —   37,411,698 
Cash and cash equivalents, beginning of period  45,635,076   23,886,203   2,183,223   16,607,853   —   88,312,355 
                         
Cash and cash equivalents, end of period  Ps. 39,442,854  Ps.56,286,972  Ps.2,558,776  Ps.27,435,451  Ps.—  Ps.125,724,053 
                         
(1)The accompanying cash flow is prepared in accordance with Mexican FRS.
(2)Petróleos Mexicanos is the issuer of the registered debt securities shown in Table 2 above and a full and unconditional guarantor of the registered debt securities shown in Table 1 above. The Master Trust is the issuer of the registered debt securities shown in Table 1 above, but is not an obligor on the registered debt securities shown in Table 2 above. The Subsidiary Guarantors are full and unconditional guarantors of the registered debt securities listed in both Table 1 and Table 2 above.


F-98

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

NOTE 2223 — Supplementary information on oil and gas exploration and production activities (unaudited)SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
 
The following tables provide supplementary information on the oil and gas exploration, development and producingproduction activities of Pemex-Exploration and Production in compliance with SFAS No. 69, “Disclosures about Oil and Gas Producing Activities” (“SFAS No. 69”). All exploration and production activities of Pemex-Exploration and Production are located in Mexico.
 
The supplemental data presented herein reflects information for all of Pemex-Exploration and Production’s oil and gas producing activities. Capitalized costs and results of operations presented herein have been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all information is presented in constant pesos as of December 31, 2006.2007.
 
Capitalized costs for oil and gas producing activities (unaudited):
 
                        
 As of December 31,  As of December 31, 
 2006 2005 2004  2007 2006 2005 
Proved properties Ps.814,251,220  Ps.712,540,925  Ps.614,919,061  Ps.954,798,041  Ps.844,858,923  Ps.739,325,338 
Construction in progress  54,659,956   54,680,906   65,375,434   50,804,000   56,714,624   56,736,361 
Accumulated depreciation and amortization  (369,896,470)  (318,215,448)  (274,218,779)  (405,777,786)  (383,800,878)  (330,177,167)
              
Net capitalized costs Ps.499,014,706  Ps.449,006,383  Ps.406,075,716  Ps.599,824,255  Ps.517,772,669  Ps.465,884,532 
              
 
Costs incurred for oil and gas property exploration and development activities (unaudited):
 
                        
 Year Ended December 31,  Year Ended December 31, 
 2006 2005 2004  2007 2006 2005 
Exploration Ps.12,117,260  Ps.15,171,804  Ps.22,567,890  Ps.15,133,406  Ps.12,572,748  Ps.15,742,112 
Development  85,001,222   77,992,553   72,487,582   100,790,721   88,196,418   80,924,293 
              
Total costs incurred Ps.97,118,482  Ps.93,164,357  Ps.95,055,472  Ps.115,924,127  Ps.100,769,166  Ps.96,666,405 
              
 
There are no property acquisition costs because PEMEX exploits oil reserves owned by the Mexican nation.
 
Exploration costs include costs of geological and geophysical studies of fields amounting to Ps. 5,058,454,4,975,089, Ps. 5,409,6445,248,601 and Ps. 5,649,2995,612,993 for 2007, 2006 2005 and 2004,2005, respectively that, in accordance with the successful efforts methods of accounting, are accounted for as geological and geophysical exploration expenses.
 
Development costs include those costs incurred to obtainin obtaining access to proved reserves and to provideproviding facilities for extracting, treating, gathering and storing the oil and gas.


F-99F-95

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Results of operations for oil and gas producing activities (unaudited):
 
                        
 Year Ended December 31,  Year Ended December 31, 
 2006 2005 2004  2007 2006 2005 
Revenues from sale of oil and gas  Ps.857,704,121  Ps.745,320,117  Ps.603,190,203  Ps.912,229,890  Ps.889,945,219  Ps.773,336,700 
              
Hydrocarbon duties  562,082,158   515,167,531   409,603,317   663,069,892   583,210,826   534,532,678 
Excess-gains taxes  7,925,886   58,664,538   36,980,005   —   8,223,820   60,869,738 
Production costs (excluding taxes)  72,924,057   74,071,052   68,717,859   82,715,955   75,665,272   76,855,383 
Other costs and expenses  36,687,531   50,642,117   38,161,917   24,200,433   38,066,615   52,545,754 
Exploration expenses  5,058,454   5,409,644   5,649,299   4,975,089   5,248,601   5,612,993 
Depreciation, depletion, amortization and accretion  47,640,143   38,994,451   26,457,628   56,843,298   49,430,936   40,460,252 
              
  732,318,229   742,949,333   585,570,025   831,804,667   759,846,070   770,876,798 
              
Results of operations for oil and gas producing activities  Ps.125,385,892  Ps.2,370,784  Ps.17,620,178  Ps.80,425,223  Ps.130,099,149  Ps.2,459,902 
              
 
Crude oil and natural gas reserves:
 
Sales prices and production costs (unaudited)
 
The following table summarizes average sales prices as of December 31 of each year presented (excluding production taxes) in U.S. dollars:
 
                        
 2006 2005 2004  2007 2006 2005 
Weighted average sales price per barrel of oil equivalent(1)
 U.S.$43.39  U.S.$43.75  U.S.$30.00  U.S.$69.49  U.S.$43.39  U.S.$43.75 
Crude oil, per barrel U.S.$47.97  U.S.$47.04  U.S.$29.52  U.S.$83.43  U.S.$47.97  U.S.$47.04 
Natural gas, per thousand cubic feet U.S.$6.04  U.S.$6.85  U.S.$6.64  U.S.$6.59  U.S.$6.04  U.S.$6.85 
 
 
(1)To convert dry gas to barrel of oil equivalent, a factor is used of 5.201 thousand cubic feet of dry gas per barrel of oil.
 
Crude oil and natural gas reserves (unaudited)
 
Under the Political Constitution of the United Mexican ConstitutionStates and Mexican statutory law, all oil and other hydrocarbon reserves within Mexico are owned by the Mexican nation and not by PEMEX. Under theits Organic Law, PEMEX has the exclusive right to produce these reserves and owns the extracted production, — not the reserves, — subject to a federal production tax. As more fully discussed in Note 20,18, during 2005, the Mexican Government enacted2007, a new fiscal regime, applicable to PEMEX and effective as of January 1, 20062008, by means of a decree, that added a new chapter tomodifying several provisions of the Federal Law of Duties Chapter XII, which concernsrelated to hydrocarbons. PEMEX’s activities are limited to reserves located in Mexico.

Taxes for 2006 and 2007 were calculated pursuant to the Federal Duties Law effective as of October 1, 2007, which includes the following duties:
Ordinary Hydrocarbon Duty—A variable rate of 74.0% in 2008, 73.5% in 2009, 73.0% in 2010, 72.5% in 2011 and 71.5% in2012-2032 is applied as a function of crude oil and gas prices considered as of December 31. The base for calculating this duty is the value of total crude oil and natural gas production during the year minus the allowed deductions (depreciated investments, costs, expenses and applicable rights). The deductions allowed may not exceed the value obtained by multiplying the produced volume for a


F-100F-96

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 2005 AND 2004
2005
(Figures stated in thousands of Mexican pesos as of December 31, 20062007 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

Taxes are calculated pursuant to the Federal Duties Law in force as of December 31, 2006, which sets forth the following duties:
 
• Ordinary Hydrocarbon Duty—A variable rate (which fluctuates between 78.68% and 87.81% depending on the year), was applied depending on the weighted average Mexican crude oil export price and natural gas prices as of December 31, 2006. This duty is applied to the annual value of extracted production of crude oil and natural gas minus certain permitted deductions (including specific depreciation investments, certain costs and expenses, and the other duties referred to below, subject to certain conditions). The allowed deductions may not exceed the value obtained of multiplying the produced volume for a particular year times the price of U.S. $6.5 per barrel of oil equivalent for crude oil and associated natural gas, and U.S. $2.7 per thousand of cubic feet of non-associated natural gas, respectively.
• Hydrocarbon Duty for the Oil Revenues Stabilization Fund—A rate of 10% was applied to the value of the extracted crude oil production because the weighted average crude oil export price as of December 31, 2006 exceeded U.S. $31.00 per barrel.
• Duty for the Fund for Scientific and Technological Research on Energy—A rate of 0.05% is applied to the value of extracted crude oil and natural gas production for the year.
• Duty for Fiscal Monitoring of Oil Activities—A rate of 0.003% was applied of extracted production of crude oil and natural gas for the year.
• Additional Duty—This duty is applied only if annual crude oil production is below target production for the years 2006 through 2008, pursuant to a formula that calculates the difference between target production and actual crude oil production. If target production is not reached by reason offorce majeure, an act of God or energy policy, this duty is not collected.
• Extraordinary Duty on Crude Oil Exports—A rate of 13.1% was applied to the value that resulted from multiplying the annual export volume by the difference between the annual weighted average price of one Mexican barrel of crude oil and the budgeted crude oil price of U.S. $42.80 per barrel.
particular year times the price of U.S. $6.5 per barrel of oil equivalent for crude oil and associated natural gas, and U.S. $2.7 per thousand of cubic feet of non-associated natural gas, respectively.
Duty on hydrocarbons for the stabilization fund of the petroleum incomes—A rate of 10 percent is applied, based on the price of crude oil for export over the value of crude oil production during the year, which always exceeds U.S.$ 31 per barrel.
Duty for the scientific and technological research fund on matter of energy—A rate of 0.15% in 2008, 0.30% in 2009, 0.40% in 2010, 0.50% in 2011 and 0.65% in2012-2032 is applied over the value of the crude oil and natural gas production during the year.
Duty for the petroleum fiscalization—A rate of 0.003% is applied over the value of the total crude oil and natural gas production during the year.
 
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 recoverable in future years from known reservoirs under existing economic and operating conditions —i.e.i.e., prices and costs at the date of estimation. Mexico’s proved reserves are estimated by Pemex-Exploration and Production’s technical staff. PEMEX usesstaff, using the year-end crude oil and natural gas prices to calculate its reserves estimates.estimates, and reviewed by an independent group inside Pemex-Exploration and Production to ensure consistency.
 
PEMEXPemex-Exploration and Production estimates Mexico’s reserves using standard geological and engineering methods generally accepted by the petroleum industry. The choice of method or combinations 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. The reserves
Reserves data setsets forth herein represent estimates only. Reserves valuation is a subjective process that involvesof estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserves


F-101

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

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 productionproducing subsequent to the date of an estimate may justifylead to the revision of an estimate.
 
Mexico’s total proved developed and undeveloped reserves of crude oil, condensates and liquefiable hydrocarbons recoverable from processing plants decreased by 6.0%5% in 2006,2007, from 13.7 billion12,849 million barrels of oil equivalent at December 31, 20052006 to 12.8 billion12,187 million barrels of oil equivalent at December 31, 2006. 2007.
Mexico’s proved developed reserves of crude oil, condensates and liquefiableliquid hydrocarbons recoverable from processing plants, decreased by 6.6%6% in 2006,2007, from 9.6 billion8,978 million barrels of oil at December 31, 2005,2006 to 9.0 billion8,436 million barrels of oil at December 31, 2006. 2007.
Mexico’s total proved ofdeveloped and undeveloped dry gas reserves decreased by 4.8%5% in 2006,2007, from 14.6 trillion13,856 billion cubic feet at December 31, 2005,2006 to 13.9 trillion13,162 billion cubic feet at December 31, 2006.2007. Mexico’s proved developed dry gas reserves decreased by 2.3%6% in 2006,2007, from 8.9 trillion8,688 billion cubic feet at December 31, 2005,2006 to 8.7 trillion8,163 billion cubic feet at December 31, 2006.2007.
 
The following two tables of crude oil and dry gas reserves set forth PEMEX’s estimates of Mexico’s proved reserves at December 31, 2006, 2005 and 2004determined in accordance with the definition of proved reserves underRule 4-10(a) ofRegulation S-X of the Securities ActAct.


F-97

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of 1933:Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
Crude oilOil and condensate reservesCondensate Reserves (including natural gas liquids)1(1)
 
                        
 (Millions of barrels)  (In millions of barrels) 
 2006 2005 2004  2007 2006 2005 
Proved developed and undeveloped reserves
                        
At January 1  13,671   14,803   16,041   12,849   13,671   14,803 
Revisions2
  433   197   (109)
Extensions and discoveries2
  79   25   245 
Revisions(2)
  455   425   165 
Extensions and discoveries  150   86   57 
Production  (1,332)  (1,354)  (1,374)  (1,268)  (1,332)  (1,354)
              
At December 31  12,849   13,671   14,803   12,187   12,849   13,671 
              
Proved developed reserves at December 31
  8,978   9,617   9,745   8,436   8,978   9,617 
       
 
 
Note:    Table amountsNumbers may not total due to rounding.
 
1.(1)Crude oil and condensate reserves include the fraction of liquefiable hydrocarbons recoverable in natural gas processing plants.
 
2.(2)Revisions and extensions include positive and negative changes due to new data gathered through drilling of extension wells.wells and reservoir performance
Source: Pemex-Exploration and ProductionProduction.


F-102

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 
Dry gas reservesGas Reserves(1)
 
                        
 (Billions of cubic feet)  (In billions of cubic feet) 
 2006 2005 2004  2007 2006 2005 
Proved developed and undeveloped reserves
                        
At January 1  14,557   14,807   14,850   13,856   14,557   14,807 
Revisions1
  280   661   547 
Extensions and discoveries1
  505   394   641 
Production2
  (1,487)  (1,305)  (1,231)
Revisions(2)
  879   280   640 
Extensions and discoveries  171   505   415 
Production(3)
  (1,744)  (1,487)  (1,305)
              
At December 31  13,856   14,557   14,807   13,162   13,856   14,557 
              
Proved developed reserves at December 31
  8,688   8,888   8,325   8,163   8,688   8,888 
       
 
 
Note:Table amountsNumbers may not total due to rounding.
 
1.(1)To convert dry gas to barrel of oil equivalent, a factor is used of 5.201 thousand cubic feet dry gas per barrel of oil
(2)Revisions and extensions include positive and negative changes due to new data gathered through drilling of extension wells.
wells and reservoir performance.
2.
(3)Production refers to dry gas, although natural gas production reported in other tables referrefers to sour wet sour 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.
 
Based on the reservoir performance, new information, and discoveries and production during 2007, proved reserves of crude oil, natural gas, condensates and liquid hydrocarbons for all regions as of December 31, 20062007, were estimated to be 15,514.214,717.2 million barrels of oil equivalent as compared to 16,496.915,514.2 million barrels of oil equivalent at December 31, 2005.2006.


F-98

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Figures stated in thousands of Mexican pesos as of December 31, 2007 purchasing power and in thousands of U.S. dollars or other currency units, except exchange rates and oil prices per barrel)
 
Standardized measure of discounted future net cash flows related to proved oil and gas reserves (unaudited)
 
The standardized measure tables presented below relate to proved oil and gas reserves excluding proved reserves scheduled to be produced after the year 2030.2032.
 
Estimated future cash inflows from production are computed by applying average prices of oil and gas as ofon December 31 to the year-end quantities. Future development and production costs are those estimated future expenditures needed to develop and produce the year-end estimated proved reserves, assuming constant year-end economic conditions.
 
Future tax expenses are computed by applying the appropriate year-end statutory tax rates—with consideration of the tax rates of the new fiscal regime for Pemex-Exploration and Production already legislated for 2006—2008—to the future pre-tax net cash flows related to Mexico’s proved oil and gas reserves.
 
The estimated future payment of taxes was made based on the new fiscal regime applicable to Pemex-ExplorationPemex Exploration and Production, effective January 1, 2006,2008 by means of a decree which reformed Chapter XII of the Federal Law of Hydrocarbon Duties.


F-103

 
PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

The standardized measure provided below represents a comparative benchmark value rather than an estimate of expected future cash flows or fair market value of PEMEX’s production rights. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. Accordingly, reserve estimates may be materially different from the quantities of crude oil and natural gas that are ultimately recovered.
 
Standardized measure of discounted net cash flows (unaudited, millions of U.S. dollars)
 
                        
 As of December 31,  As of December 31, 
 2006 2005 2004  2007 2006 2005 
Future cash inflows U.S.$615,337  U.S.$653,914  U.S.$493,971  U.S.$945,566  U.S.$615,337  U.S.$653,914 
Future production costs (excluding taxes)  (82,696)  (85,432)  (70,922)  (107,148)  (82,696)  (85,432)
Future development costs  (35,845)  (35,966)  (29,314)  (38,205)  (35,845)  (35,966)
       
Future cash flows before tax  496,797   532,516   393,735   800,213   496,797   532,516 
Futureproduction-and-excess-gains tax
  (410,021)  (448,162)  (311,918)
Future income taxes  —   —   — 
Futureproduction-and-excess-gains taxes
  (632,321)  (410,021)  (448,162)
Future net cash flows  86,775   84,354   81,817   167,892   86,775   84,354 
Effect of discounting net cash flows at 10%  (31,699)  (32,728)  (35,193)  (78,074)  (31,699)  (32,728)
              
Standardized measure of discounted future net cash flows U.S.$55,076  U.S.$51,626  U.S.$46,624  U.S.$89,818  U.S.$55,076  U.S.$51,626 
              
 
 
Note:Table amounts may not total due to rounding.


F-104F-99

PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Figures stated in thousands of Mexican pesos as of December 31, 2006 purchasing power
and in thousands of U.S. dollars or other currency units, except exchange rates
and oil prices per barrel)

 
To comply with SFAS No. 69, the nextfollowing table presents the aggregate standardized measure changechanges for each year and significant sources of variance:
 
Changes in standardized measure of discounted net cash flows (unaudited)
 
                        
 2006 2005 2004  2007 2006 2005 
Sales of oil and gas produced, net of production costs U.S.$(68,136) U.S.$(55,988) U.S.$(41,740) U.S.$(74,299) U.S.$(68,136) U.S.$(55,988)
Net changes in prices and production costs  2,908   122,257   46,463   173,861   2,908   122,257 
Extensions and discoveries  4,573   3,149   3,629   6,642   4,573   3,149 
Development cost incurred during the year  7,803   7,067   6,207   8,951   7,803   7,067 
Changes in estimated development costs  (6,796)  (11,453)  (5,212)  (14,634)  (6,796)  (11,453)
Reserves revisions and timing change  14,910   3,419   9,082 
Reserves revisions and timing changes  29,947   14,910   3,419 
Accretion of discount of pre-tax net cash flows  28,482   20,523   17,507   26,446   28,482   20,523 
Net changes in production-and excess-gains taxes  19,707   (83,972)  (26,962)
Net changes inproduction-and-excess-gains taxes
  (122,172)  19,707   (83,972)
              
Aggregate change in standardized measure U.S.$3,450  U.S.$5,002  U.S.$8,974  U.S.$34,742  U.S.$3,450  U.S.$5,002 
       
        
Standardized measure                        
As of January 1  51,626   46,624   37,650   55,076   51,626   46,624 
As of December 31  55,076   51,626   46,624   89,818   55,076   51,626 
              
Change U.S.$3,450  U.S.$5,002  U.S.$8,974  U.S.$34,742  U.S.$3,450  U.S.$5,002 
              
 
 
Note:Table amounts may not total due to rounding.
 
In computing the amounts under each factor of change, the effects of variances in prices and costs are computed before the effects of changes in quantities. Consequently, changes in reserves are calculated at December 31 prices and costs. The change in computed taxes includes taxes effectively incurred during the year and the change in future tax expense.


F-105F-100