We make reference to the Decree (the “Decree”) which amends, supplements and derogates several provisions of the Federal Budget and Fiscal Responsibility Law (the “Budget Law”) published on November 13, 2008 in the Official Federal Gazette (Diario Oficial de la Federación, “DOF”), which suppresses the Deferred Impact Status Projects or PIDIREGAS Projects (Proyectos de Impacto Diferido en el Registro del Gasto or "PIDIREGAS projects" for their initials in Spanish) in the legal and financial regime of Petroleos Mexicanos (“PEMEX”). It is important to mention that such amendments to the Federal Budget and Fiscal Responsibility Law were unanimously approved by the Mexican Congress in October 2008. Please note that, except as otherwise specifically provided, the information provided herein is prepared for informational purposes only and does not represent a legal opinion or business advice.

I. Background.

A. Types of PIDIREGAS projects.

B. Use of Revenues.

C. Effect on Public Finances.

D. Projects set forth in the Presupuesto de Egresos de la Federación (the “Federal Budget”).

II. Importance of the Decree.

A. PEMEX Investment Expenditure and Balanced Budget.

B. Budgetary nature of the PEMEX Investment Expenditure.

C. Acknoledgement of PIDIREGAS projects liabilities by PEMEX.

III. Other Issues deriving from the Decree.

A. Procurement.

B. Stabilization Fund for Infrastructure Investment.

I. Background.

On December 21, 1995, Article 18 of the Public Debt Law ("Public Debt Law”) and Article 30 of the abrogated Federal Public Budgetary, Accounting and Expenditures Law ("FPBAEL") were amended to create a category of long-term contingent public debt to support priority infrastructure projects which generate revenues for their own funding creating the Deferred Impact Status Projects or PIDIREGAS projects.1 In 2006, the Budget Law was enacted and abrogated the FPBAEL and regulated the PIDIREGAS projects in its Article 32.2 In addition to the above-mentioned laws, specific rules for obtaining a PIDIREGAS projects authorization were included in the Regulations of the FPBAEL (the “Regulations of the FPBAEL”)3 and in the Manual of Federal Budgetary Rules for the Federal Public Administration (the “Budgetary Manual”).4 However, the Regulations of the FPBAEL and the Budgetary Manual were abrogated by the Regulations of the Budget Law (the “Regulations of the Budget Law”) published in the DOF on June 28, 2006.

Article 18 of the Public Debt Law does not provide a definition of PIDIREGAS projects; however, such article provides the parameters for such projects as follows: "Obligations derived from fundings of long-term productive infrastructure projects related to priority activities and, as a result of which the relevant federal public entities acquire goods or services in any form which generate sufficient cash flow to re-pay such obligations shall, with the prior approval of the Ministry of Finance and Public Credit (the “Ministry of Finance”) under the terms of Article 30 of the FPBAEL [now Article 32 of the Budget Law], only be counted for purposes of this Law, as direct liabilities to be paid during the current or the next fiscal year. Any remaining amounts shall be considered contingent liabilities, until the funding has been fully paid to the extent such amounts are.”

Based on the legal framework applicable to PIDIREGAS projects, the expenditures of federal funds necessary to comply with payment obligations of the federal public sector are carried out after the satisfactory acceptance of the works performed by companies and such works generate revenues for their own payment. Given that such projects generate their own funds for repayment, the PIDIREGAS projects qualify as Productive Infrastructure Projects.

A. Types of PIDIREGAS projects. In accordance with Article 32 of the Budget Law, PIDIREGAS projects can be classified as follows:

I. Direct Investments. Projects in respect of which the relevant federal public entities assume an obligation to purchase productive assets built to their satisfaction;

II. Contingent Investments. Long-term productive infrastructure projects considered conditional investments because: (i) the main purpose of the agreement is not the purchase of the infrastructure assets and (ii) the purchase obligations of the federal public entity are contingent upon noncompliance of the agreement by such federal public entity or the occurrence of a force majeure event under the specific circumstances provided in the corresponding agreement. The acquisition of productive assets may only be made if they are in a condition that will allow the generation of the revenues necessary to pay the agreed obligations and the expenses related thereto.

B. Use of Revenues. The revenues generated by each project may only be used to pay the: (i) tax obligations; (ii) material investments; (iii) financial costs and (iv) operation and maintenance and related expenses of the project.5 In the case of a Direct Investment, once the foregoing amounts have been paid, the federal public entities may use the funds corresponding to the equivalent of one year of the present value of the net cash flow during the rest of the useful life of the project, using the same discount rate that was used in the financial evaluation for the authorization process, for other projects and programs. If there are additional amounts, such amounts are transferred to a liquid reserve that guarantees the payment of available financial obligations associated with the project in subsequent years, which amounts may only be used to pay the corresponding amortizations, including prepayments. If the balance of this reserve exceeds the amounts to be paid under the financing, such surplus may be used to fund other programs or investment projects different than PIDIREGAS projects.

C. Effect on Public Finances. Entities have the obligation to, in coordination with the Ministry of Finance, implement mechanisms to lessen the effect on public finances derived from the foreseen increases in payments of principal and interest of the corresponding financings in subsequent tax years.

D. Projects set forth in the Presupuesto de Egresos de la Federación (the “Federal Budget”). The Federal Budget includes the financial resources authorized to comply with the federal financing commitments on a yearly basis. The Federal Budget shall have a special chapter in respect to the multiannual commitments of expenditures related to contracts of public works, acquisitions, leases and services. Such commitments must be duly justified. The uncovered and exceeding commitments have a preference in respect to other items of expenditures, being subject to yearly budgetary availability. However, since the Federal Budget is subject to annual approval by the Chamber of Representatives, concerns arose as to whether federal public entities would, from year to year, have the necessary financial resources to fulfill their long-term agreements and financing commitments. In this regard, federal public entities may only undertake PIDIREGAS projects that are authorized in the special section of the Federal Budget.

II. Importance of the Decree.

The Decree, among other measures, suppresses the PIDIREGAS projects in the legal and financial regime of PEMEX. Such Decree is structured into three main parts:

A. PEMEX Investment Expenditure and Balanced Budget. The Budget Law provides that the total net expenditures included in the draft of the Federal Budget prepared by the Ministry of Finance must result in a balanced budget.6 Due to the current economic and social conditions in Mexico, the draft of the Federal Budget may contemplate a budgetary deficit.7 If a budgetary deficit is contemplated in the drafts, the Ministry of Finance has to justify its necessity, and provide information with respect to the projected duration of the deficit and the actions necessary to balance the budget. In this regard, the Decree added sixth and seventh paragraphs to Article 17 of the Budget Law, in order to establish that the PEMEX Investment Expenditure shall not be counted for the purposes of the balanced budget, which aims to release the investment amount of PEMEX and evaluate such entity on its own merits, regardless of other uses of budgetary resources.

B. Budgetary nature of the PEMEX Investment Expenditure. The Decree also amended the sixth paragraph of Article 32 of the Budget Law, in order to establish that PEMEX can no longer undertake PIDIREGAS projects. As a result, the entire amount of an investment will be considered a direct liability regardless of whether payment is due in the future.

Also, the Decree establishes in its Fourth Transitory Article that the Strategy and Investment Committee of PEMEX shall issue guidelines for the evaluation of investment projects. Such guidelines shall provide, among other aspects, that those projects funded with resources resulting from obligations which constitute public debt shall generate sufficient cash flow to cover such obligations and the public debt cost.

C. Acknoledgement of PIDIREGAS projects liabilities by PEMEX. The Fourth Transitory Article of the Decree provides that, no later than January 31, 2009, PEMEX shall acknowledge as direct public debt, for accounting and budgetory purposes, all financial commitments made by third parties and by financial vehicles in order to fund Long-Term Productive Infrastructure Projects established in Article 18, third paragraph, of the Public Debt Law and Article 32 of the Budget Law and corresponding to those projects authorized before the entry into force of the Decree and those projects which are in operation or under construction. In the latter case, PEMEX will recognize as direct public debt only the corresponding investment actually made.

The Fourth Transitory Article of the Decree also establishes that PEMEX must formalize such acknowledgment within the tax year 2009, in order to execute the necessary legal acts with the relevant third parties and financial vehicles in order to obtain the above-mentioned acknowledgment and the public debt cost under the modality determined by such public entity. PEMEX may opt for subrogation, assignment of debt or other legal mechanism through which the corresponding obligations are fully paid. Finally, PEMEX may conduct transactions or use the goods, if any, that are required for the funding of such acknowledgment.

In order to harmonize the above-mentioned amendments to the Budget Law, the Budgetary Manual shall be eventually modified.

III. Other Issues deriving from the Decree.

A. Procurement.

i) The Decree amended Article 48 of the Budget Law. Such amendment introduced an important change in the legal framework of public procurement with regard to infrastructure and services. Companies that have performed preliminary works or that have prepared studies containing technical specifications for projects to be procured by federal public entities can participate in the bidding process for the construction or implementation of such projects. This measure aims to encourage greater participation in the planning stages of projects and to ensure that those companies which have the required expertise participate in the relevant bidding processes.

ii) The Decree also amended Article 48 of the Budget Law in order to provide that in cases where the participants in bidding processes under the Law of Acquisitions, Leases and Services of the Public Sector (Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público) and Mexican Public Works and Services Law (Ley de Obras Públicas y Servicios Relacionados con las mismas) appeal the final award, the suspension will only be granted at the request of an interested party.

B. Stabilization Fund for Infrastructure Investment. Finally, the Decree amended Article 19 of the Budget Law to establish that PEMEX may use 50 percent of the accumulated resources in the Stabilization Fund for Infrastructure Investment at the close of the previous tax year for the expansion of the refining infrastructure in Mexico. Additionally, the Second Transitory Article of the Decree provides that, between 2009 and 2011, 30 percent of “the general purse” surplus must be utilized for investment projects of the Federal Budget.