CAPTURING THE FUNDAMENTALS OF A DEREGULATING …

C A P T U R I N G T H E F U N D A M E N T A L S O F AD E R E G U L A T I N G M A R K E T

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NGI’s Mexico Gas Price Index - About ..............................................................................1

NGI’s Mexico Natural Gas Prices (Cost Plus Transport Prices) ..........................................1

U.S. Spot Market Prices Impactf ul to Mexico ..................................................................4

NGI’s Mexico Border NatGas Flow Tracker ......................................................................7

Summary of SISTRANGAS Receipts & Deliveries ..............................................................8

Forward Curves at U.S. Locati ons Key to Mexico Exports ............................................... 10

Esti mated PEMEX VPM (First Hand Sales) Prices ........................................................... 11

Average Mexico Day-Ahead Power Prices at Selected Distributed Nodes ...................... 11

South Central Storage Chart.......................................................................................... 12

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NGI's Mexico Gas Price Index – About

Natural Gas Intelligence has expanded its more than 35-year commitment to covering the North American market by delivering the first daily news and pricing service dedicated to the newly opened Mexican natural gas industry. With the July 2017 launch of NGI's Mexico Gas Price Index, we have been working alongside active participants to provide transparency in the Mexican market since its historic opening.

In our daily Mexico Gas Price Index service, we provide regional price related data for the Mexican natural gas market, as well as news and insight into the evolving open market. Our daily product, developed in collaboration with the market players in Mexico, assesses natural gas as a cost-plus transportation equation, as we work with both sides of the trades to incorporate market data and establish fundamental-driven benchmarks for the Mexican natural gas market as it matures.

A subscription to NGI’s Mexico Gas Price Index includes daily updates to pricing, fundamentals and midstream movements, as well as forward-looking pricing and market insights. The following is a more in-depth explanation of how NGI is working to add transparency to the maturing natural gas market in Mexico – and why it matters to you.

NGI’s Mexico Natural Gas Prices (Cost Plus Transport Prices)

What Does the Chart Represent?

We believe the best method to determine spot market prices at any trading point is to conduct a volumetric weighted average calculation of actual trades done at each site, which is the method we use to calculate spot market prices in the United States and Canada. Such an approach automatically captures the supply and demand factors that prevail at each individual location. However, because the Mexico market is still in its very early stages, liquidity is not yet strong enough for us to employ this methodology.

NGI certainly plans to publish volumetric weighted averages of actual spot market trades when the Mexico natural gas market is sufficiently liquid, and those prices will appear in our U.S./Mexico Spot Market Prices chart, which we detail in the next section. In the meantime, we offer this Mexico Price table showing estimated U.S.-to-Mexico natural gas cost plus transport prices. It shows what the cost of gas would be at the U.S./Mexico border, and at various points within Mexico, by simply adding relevant pipeline transportation charges to U.S. spot market indexes that are located close to the U.S./Mexico border. While this approach does not capture all fundamental drivers in the market, it does provide what we believe to be the best proxy available.

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How Did NGI Select the Various Border Points & Feeder Pipelines that Appear in the Table?

The border locations in our table represent some of the highest volume export locations from the United States into Mexico, according to data from the U.S. Energy Information Administration (EIA). Each individual border point tends to be served primarily by only one U.S. pipeline, hence our decision to use North Baja for Ogilby, CA; El Paso Natural Gas (EPNG) for Clint, TX; Sierrita Pipeline for Sasabe, AZ; Trans-Pecos Pipeline for Presidio, TX; Tennessee Gas Pipeline for Alamo, TX/Rio Bravo, MX; NET Mexico for Rio Grande, TX; and Kinder Morgan Texas for Roma, TX.

Why Does NGI Use Ehrenberg, Houston Ship Channel, and Waha as Its Starting Point Indexes?

Our goal is to use spot market indexes that are as close to the actual U.S./Mexico border points we list in our table as possible. The farther away from these border points we go, the more likely we would introduce regional pricing factors that may not be reflective of those at the border. In addition, starting farther away from the border means we must add more transportation charges, which increases the chances that the calculated border price may not be as representative of actual trades conducted at or near the border. Finally, our selected starting point indexes must be liquid and highly likely to be published each trading day.

Ehrenberg, AZ, is the actual point of reference along North Baja pipeline to Ogilby, CA, and the Waha Hub serves as the main supply conduit for our listed border locations at Clint, TX, and Sasabe, AZ. When we first published NGI’s Mexico Gas Price Index on July 1, 2017, we used our regional South Texas average as the starting point for Alamo, TX; Rio Bravo, MX; Rio Grande, TX; and Roma, TX, because this represents the average price for several different interstate pipelines that are relatively close to the U.S./Mexico border. We also believe this is more reflective of the price of production in South Texas. However, many natural gas buyers and sellers in Mexico are using the Houston Ship Channel (HSC) as the starting point to deliver gas into Mexico, particularly since that is a key component of PEMEX’s First Hand Sales (VPM) pricing mechanism. As a result, we have been using the HSC as the reference point for our Alamo/Rio Bravo, Rio Grande, and Roma prices since Oct. 20, 2017.

Does NGI Include Both Commodity & Demand Charges in Its Calculations?

For U.S. intrastate pipelines and all Mexico pipelines, including both SISTRANGAS and privately developed systems, we include both variable/commodity and fixed/demand charges. However, for U.S. interstate pipelines, we only include variable/commodity charges.

There are several reasons for this. First, we want our Mexico Price chart to represent the incremental cost a shipper faces in moving gas to the border and into Mexico. We assume transporters on interstate pipelines, such as Tennessee Gas Pipeline or El Paso Natural Gas, already have capacity on those lines, and are therefore already paying firm demand charges. The true incremental charge in this case is the various commodity charges to ship gas to the border. However, to move gas to Rio Grande, TX, for example, a shipper would have to sign up for transportation on NET Mexico. In this case, both the commodity and the demand charge would be incremental. The same logic applies for then moving gas along SISTRANGAS in Mexico.

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Another reason we include both commodity and demand charges along the various U.S. intrastate pipelines is that these pipelines work differently from interstate pipelines. Unlike U.S. interstate pipelines, which are regulated by the U.S. Federal Energy Regulatory Commission (FERC) and are highly competitive, 100% open access, transportation-only facilities, most U.S. intrastate facilities are not entirely open access carriers. Intrastate facilities still maintain a merchant function, whereby the pipeline buys and sells gas along the system. It is therefore more difficult to procure third-party transportation only services on these pipelines, which means they are not as competitive as interstate pipelines. As a result, we believe the price of gas downstream on an intrastate pipeline tends to be higher than that on an interstate line, everything else being equal. Including demand charges on intrastate lines in our calculation reflects these higher delivered prices, in our view.

You can see this in our daily Alamo/Rio Bravo and Rio Grande prices, which are only a few miles apart, and both of which reflect transportation charges from the HSC. Our Rio Grande via NET Pipeline (intrastate) includes both commodity and demand charges, whereas our Alamo/Rio Bravo via Tennessee Gas Pipeline (interstate) only reflects commodity charges.

NGI expanded this table in October 2018 in response to changes in the SISTRANGAS tariff; specifically, the switch from six to nine tariff rate zones. In addition to adding new points, NGI updated the transportation rates at existing points to account for the new arrangement.

Daily News Coverage

Additionally, NGI has a network of experienced energy reporters focused on the Mexico natural gas market, delivering insightful and unique content daily. From fundamental-driving market movements to insights into the evolving reform, NGI is committed to providing a more transparent market perspective to our clients.

U.S. Spot Market Prices Impactful to Mexico

As noted, eventually we will begin calculating natural gas spot market prices within Mexico based on actual transactions, and those prices will appear in an additional Mexico section of this chart. The main

advantage of this approach is that instead of being an estimate of what a price may be at a given location, based on adding transport to a U.S. index, these prices will automatically include supply and demand factors that prevail at each individual pricing location. For now, however, we list the Ehrenberg, HSC and Waha prices we use as the starting points in our Mexico Natural Gas Prices table, as well as spot market prices at El Paso Permian, El Paso San Juan, NGPL S. Tx, Tennessee S. Tx, Texas Eastern S Tx., and the Henry Hub. In addition, we provide a

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mathematical average of the three South Texas points, to facilitate a comparison to our Forward Price table, explained later in another section.

For each individual pipeline index, we show the daily traded range, the volumetric weighted average, the change from the prior day, the total number of transactions we used to calculate the daily average, and the total volume those transactions represent.

We source all our U.S. spot market prices from our Daily Gas Price Index publication. For more information on how we calculate these prices, please refer to our NGI Price Methodology.

When Will NGI Publish Spot Market Prices in Mexico Based on Actual Transactions?

In order to assess the natural gas market based on actual transactions, daily spot market trading in Mexico must become liquid enough to support nodal indexes, and active companies must report transactional data for us to incorporate into our calculations.

Although the deregulated wholesale natural gas market in Mexico began operating on July 1, 2017, the market is still evolving, and it remains a work in progress. It may take some time for all the pieces to be in place to promote a liquid daily marketplace, such as the evolution of daily electronic bulletin boards (EBBs); the ability to release unused pipeline capacity to the marketplace; access to storage in Mexico, and the presence of many third party (non-Pemex) producers in the country, to name a few.

Even still, we believe certain trading points at the U.S./Mexico border, and within Mexico, will develop faster than others. Our plan is to roll out indexes individually, as soon as they meet the above criteria.

Not Ready to Contribute Price Data to Our Survey? Get to Know Us First!

We fully encourage all natural gas buyers and sellers in Mexico to contribute transactional data to NGI, which will enable us to aggregate spot market prices at key locations in Mexico as soon as possible for publication in NGI’s Mexico Gas Price Index. Establishing transparency will benefit all who trade in the market.

However, we realize that at this early stage of the deregulated market reform, many Mexico focused market participants may not yet be ready to report trades to Price Reporting Agencies, such as NGI, until the market becomes more liquid, or until some companies become more familiar with the price reporting process.

That makes now a great time to expedite things by learning more about us, and about the price submission process, so you’ll be prepared to price report when you are ready to price report. As has been our practice in collecting and publishing spot prices in the U.S. and Canada for more than 30 years, we follow a strict code of confidentiality which we detail in full in our price methodology.

We would be happy to speak with any member of your organization to walk you through the process, and to answer any questions you may have. If you would like to do so, please contact Dexter Steis at [email protected], or (703) 318-8848.

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How Will NGI’s Mexico Spot Market Prices Compare to the IPGN Published by CRE?

In August 2017, The Comisión Reguladora de Energía (CRE) began publishing its Índice de Referencia Nacional de Precios de Gas Natural al Mayoreo (IPGN) to help provide initial wholesale market pricing liquidity to the emerging de-regulated Mexico natural gas marketplace.

Our understanding is that while CRE eliminates transactions that are more than three standard deviations from the calculated weighted average, the IPGN represents the amount and volume of gas that is billed to customers for the month in question, and therefore includes transactions that may have been conducted at any point in the past. It also may include deals with special charges, such as premiums for counterparty credit risk. NGI’s U.S. and Canada wholesale indexes only include trades that were transacted within a specific time period just before the gas is scheduled to flow and exclude charges that we consider to be over and above the intrinsic value of the gas.

For more information on how we calculate our U.S. and Canada spot market prices, please refer to our methodology.

It is also our understanding that CRE only intends to publish IPGN prices temporarily, perhaps for up to two years, with a goal for Price Reporting Agencies such as NGI to take on a more prominent role once the Mexico natural gas spot market has developed more fully.

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The Sooner Spot Market Trade Data Are Submitted to NGI, the Sooner Nodal Spot Market Prices Can be Published

Of course, it is our intention to begin publishing nodal spot market prices in Mexico as soon as possible, and we encourage companies that participate in the Mexico natural gas spot market to contribute their trade data to NGI as well, especially since they are already required to furnish this information to CRE. This process is as simple as sending us a spreadsheet of completed transactions each day. NGI pledges to keep all trade data submitted to us confidential. We will not reveal any sensitive trade information to other market participants.

Our plan is to apply the same procedures and standards on how we calculate spot market prices in the United States and Canada to Mexico as well. Once again, for more on the type of trading information companies report to us, how to submit volume and price data to us, how we calculate prices, and to see our Pledge of Confidentiality, please refer to our NGI Price Methodology found on the NGI website. You may also contact [email protected], or call Dexter Steis at (703) 318-8848.

NGI’s Mexico Border NatGas Flow Tracker

NGI’s Mexico Border NatGas Flow Tracker measures the flow of natural gas from the United States into Mexico at key pipeline interconnects along the international border. For each listed point, we show nominated gas, total operating capacity, and operating capacity utilization for the flow date listed in the chart.

We obtain these data from the EBBs of U.S. interstate pipelines, as well as from the emerging EBBs in Mexico. U.S. intrastate pipelines in Texas are the major source of export capacity into Mexico. U.S. intrastate pipes are not required to have standardized EBBs, and therefore typically do not make their daily flow data available to the public. In these cases, we get flow data from the connecting Mexico pipeline, when available.

NGI plans to add more border point flow data as it becomes available, particularly as more EBBs emerge for the various Mexico pipelines.

How Did NGI Select the Points Listed?

In addition to having publicly available flow data, all the locations NGI lists in its Mexico Border NatGas Flow Tracker either currently have or are expected to have meaningful flows in the near future. The following chart shows U.S. border interconnects at all locations monitored by the U.S. Department of Energy, and it includes historical data to give you an idea of how volume flows have progressed in recent years.

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Annual Gross U.S. Natural Gas Exports to Mexico, by Location Average Volume (MMcf/d) Location Included

by NGI in Table?

Interconnecting Pipelines 2013 2014 2015 2016 2017

Arizona Douglas (Cochise County)

Yes El Paso Natural Gas/SISTRANGAS, Aguaprieta, Mexicana de Cobre

147 176 184 224 234

Nogales No El Paso Natural Gas/Ductos de Nogales

1 1 1 1 1

Sasabe Yes Sierrita Pipeline/Sonora Pipeline

0 1 77 111 113

California Calexico No SoCalGas/TGN Pipeline 21 21 22 26 52 Ogilby Mesa Yes North Baja/Rosarito Pipeline 273 307 317 315 329 Otay Mesa No SDG&E-SoCal Gas/TGN 0 1 1 2 2 Texas Alamo Yes SNG 209 216 190 320 310 Clint Yes El Paso/Samalayuca Pipeline 297 339 345 349 180 Del Rio No West Texas Gas/SISTRANGAS 1 1 1 1 1 Eagle Pass No WTG

Transmission/SISTRANGAS 7 10 12 17 22

El Paso No Norteno Pipeline, El Paso Natural Gas, & Roadrunner/SISTRANGAS & Tarahumara

15 11 9 58 99

Hidalgo No Texas Eastern/SISTRANGAS 25 41 24 5 22 McAllen No Kinder Morgan Border &

Energy Transfer/SISTRANGAS 214 218 168 111 142

Presidio Coming Soon

Trans-Pecos Pipeline/Ojinaga-El Encino Pipeline

0 0 0 0 0

Rio Bravo Yes Tennessee/Gasoducto Del Rio 214 209 224 225 241 Rio Grande Yes NET Mexico/Los Ramones I 0 22 852 1567 1896 Roma Yes Kinder Morgan Texas/Kinder

Morgan Mexico (Mier-Monterrey)

379 423 460 432 535

San Elizario Yes Comanche Trail/San Isidro-Samalayuca Pipeline

0 0 0 0 48

Source: U.S. Department of Energy (as listed on the Energy Information Administration website), NGI’s Mexico Gas Price Index calculations

Summary of SISTRANGAS Receipts & Deliveries

Our SISTRANGAS flow chart represents the daily summary of all natural gas that is nominated at the various receipt and delivery points along the SISTRANGAS pipeline system, as reported on its electronic bulletin board. These flows reflect nominations made as of the evening cycle for each gas flow day.

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We delineate total deliveries by both the type of end-user, and by the nine current SISTRANGAS zones. We also break down total system receipts by source (imports vs. nationally sourced flows), by type (LNG, U.S. pipelines, Mexico pipelines, and domestic production), and by the various SISTRANGAS zones.

Please note that the flow data represent activity on the SISTRANGAS system only, and do not incorporate the entire Mexico natural gas pipeline grid. As a result, this table is not a one-for-one representation of total activity within the country. For example, LNG flow into SISTRANGAS likely understates total LNG deliveries into all of Mexico, because some LNG that is re-gasified at Manzanillo is typically consumed before it enters the SISTRANGAS system. Furthermore, some domestic production may serve the various refineries in Mexico directly, so simply looking at the SISTRANGAS total Mexico production figure will likely understate total national production. However, given that SISTRANGAS is easily the largest pipeline system in Mexico, we believe tracking our SISTRANGAS Receipts & Deliveries Table over time provides a good representative picture of activity and emerging trends within the country.

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Forward Curves at U.S. Locations Key to Mexico Exports

To provide a more comprehensive view of the U.S. to Mexico market, and to give insight as to how spot market prices may change in the future, we publish relevant forward prices for the next 12 months. These prices, which also appear in our broader NGI’s Forward Look publication, represent fixed and basis (difference to the Henry Hub) prices at various key trading points in Texas and California.

The prices in this table match those we publish in our U.S./Mexico Spot Market Prices table. They enable our readers to monitor price movement at these locations not only in the day ahead market, but also for the next 12 calendar months.

We also monitor the difference between forward prices in West Texas and South Texas via our Waha-to-South Texas Average Spread calculation. The Permian Basin in West Texas is emerging as a key source of supply to compete with South Texas for exports into Mexico, but prices in either region are determined by different supply and demand factors. For example, West Texas prices are heavily influenced by electricity demand in Mexico, while those in South Texas are determined by a combination of Gulf Coast industrial and electricity demand, as well as by liquefied natural gas (LNG) exports.

Ideally, we would prefer to use Agua Dulce/Nueces as the index on record for the South Texas piece, especially

since Agua Dulce is the header point for the NET Mexico pipeline that exports the most gas to Mexico, and Nueces is home of the header system that CFE is building. However, that index remains somewhat illiquid. Instead, we use the average of NGPL S. Tx, Tennessee Zn 0 South, and Texas Eastern S. Tx as a proxy for pricing activity in South Texas.

For forward looking prices beyond the next 12 months and all the 78 locations that NGI publishes, please visit www.natgasintel.com/forwardlook_locations.

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Estimated PEMEX VPM (First Hand Sales) Prices

VPM represents the price at which PEMEX will sell gas for each region, at a specific point in time. PEMEX derives these prices using a stated formula.* Our estimated PEMEX VPM prices represent what we believe the published VPM prices** for each region will be for a particular day, based on the daily U.S. spot market prices for Houston Ship Channel, El Paso Permian, and El Paso San Juan that we publish in our NGI’s Daily Gas Price Index newsletter (and re-publish in the Day Ahead Prices section of Mexico Gas Price Index).

*Since the official VPM formula references one of our competitor’s daily indexes, our estimate of the daily VPM prices may be slightly different from those that are actually published, but overall, our estimated VPM prices tend to be either exactly the same or only marginally different from those published by PEMEX.

**Please note that our estimated VPM prices are preliminary, and do not include any adjustments for gas quality that may ultimately impact the final actual published prices for the Sur and Istmo regions.

Average Mexico Day-Ahead Power Prices at Selected Distributed Nodes

The electricity prices that appear in this chart represent the high, low and simple average of the 24 hourly prices published by the Centro Nacional de Control de Energia (CENACE) for distributed nodes in the table, and are listed in Mexican pesos/megawatt hour (MWh). All prices include energy, congestion, and line-loss components. We also convert prices to U.S. dollar/MWh, based on the exchange rate stated at the top of the table.

This provides a representative distribution of power prices within the various regions in Mexico. Many are served (or will be served) by gas fired generation.

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South Central Storage Chart

The U.S. EIA updates weekly storage data each Thursday at 10:30 a.m. Eastern time, and we publish our U.S. South Central Storage chart soon after. As of September 2017, roughly 85% of all natural gas exported to Mexico from the United States came via pipeline from Texas, or via LNG from Louisiana. Both Texas and Louisiana are part of the U.S. South Central region (see below). Furthermore, several companies have proposed pipelines to ship gas from Oklahoma to Texas, which we believe makes Oklahoma another viable source of storage gas to Mexico.

All the figures in our South Central Storage chart are updated weekly, except total working gas capacity, which is updated annually.

Contact Natural Gas Intelligence

NGI is committed to working within the market to provide transparency in pricing natural gas throughout Mexico. To contribute your perspective or trade data, with questions or to connect with our pricing analysts, or to start a free trial of the Natural Gas Intelligence Mexico Gas Price Index, contact us at [email protected] or 1 (800) 427-5747.