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DE RUEHME #0514/01 0432333
ZNR UUUUU ZZH
O R 122330Z FEB 10
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0459
INFO RUEHME/AMEMBASSY MEXICO

UNCLAS MEXICO 000514 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG MX ECON
SUBJECT: Scenesetter for February 15-18, 2010 Visit of David Goldwyn 
to Mexico City 
 
¶1.  (SBU) Summary.  Your visit comes at a time when we have a 
unique opportunity to deepen our bilateral energy relationship with 
Mexico, our third largest source of oil imports.  As the largest 
source of export earnings and contributor of over one third of 
budget revenues, the oil sector is a critical component of the 
Mexican economy.  Due to the decline of Mexico's largest oil field 
and underinvestment in new exploration and exploitation, Mexican 
crude oil production is declining rapidly and the country could 
become a net oil importer within five years.   The Calderon 
Administration broke a taboo early in its term by addressing the 
need for energy reform and engaging the public in a discussion of 
necessary changes.  However, the modest October 2008 reform package 
that Mexico's Congress passed does not address the constitutional 
prohibition on private investment in the oil sector.  For Mexico, 
declining oil income will require the GOM to search for alternative 
sources of revenue - perhaps through increased tax collection.  For 
the United States, declining imports from Mexico have implications 
for North America energy security - especially in the short and 
medium term.  The Calderon Administration's August 2008 proposal to 
negotiate a US-Mexico agreement on trans-boundary reservoirs 
demonstrates a new willingness by Mexico to engage bilaterally on 
oil and gas topics.  Our preliminary discussions on the Mexican 
proposal have opened the door to other opportunities for 
collaboration.  End Summary. 
 
 
 
Political Context 
 
-------------------- 
 
 
 
¶2.  (SBU) Present Calderon enters the last three years of his 
six-year term facing a complicated political and economic 
environment.  His PAN party emerged seriously weakened from a 
dramatic 2009 mid-term election in which the opposition (PRI) 
gained control of the Mexican Congress.  His popularity numbers 
have dropped 10-points since the beginning of last year, yet they 
still hover solidly over 50 percent.  He is by no means a lame 
duck.  Still, the opposition PRI party is in the ascendancy, 
cautiously managing its illusory unity in an effort to dominate the 
ten gubernatorial contests that are up in the coming year, and to 
avoid any missteps that could jeopardize its front-runner status in 
the run-up to the 2012 presidential elections.  In addition, the 
public's deepening economic worries have begun to counterbalance 
their concern about security. 
 
 
 
Economic Context 
 
---------------------- 
 
 
 
¶3.  (SBU) Following the 2009 electoral setback, Calderon made 
promoting jobs and eradicating poverty his top two priorities for 
2010, sharing the agenda with security issues that have become 
acutely sensitive in the past weeks due to the persisting violence 
in Ciudad Juarez.  It is important that Calderon succeed in making 
real progress on the economy and security in the last three years 
of his term.  The economic and security agendas are time-sensitive 
and volatile, and the more momentum that can be achieved now, the 
greater the prospect for continuity into a new administration. 
However, the complexities of pushing viable economic reforms 
through an opposition Congress complicate advancing such an agenda. 
If Calderon is unable to strengthen Mexico's competitiveness in 
order to promote jobs and eradicate poverty, the United States will 
also feel the impact through immigration pressures and greater 
volatility in high-violence cities that have been the battleground 
for narco-traffickers.  A stable and growing Mexico is in both our 
security and economic interests. 
 
 
 
 
 
Mexico's Energy Challenge 
 
------------------------------------ 
 
 
 
¶4.  (SBU)    The oil sector is a crucial component of Mexico's 
economy and is the largest source of export earnings for the 
country, accounting for 10 percent of all export earnings. 
However, Mexico's oil production has declined rapidly from a peak 
of 3.4 million barrels per day in 2004 to a projected 2.5 million 
 
 
barrels per day in 2010.  Despite some optimistic GOM forecasts, 
there are no realistic options for reversing this decline in the 
short to medium term.  Mexico has relied heavily on the Cantarell 
oil field, one of the largest in the world.  Despite nitrogen 
injection and other enhanced oil recovery techniques, the Cantarell 
field has entered a stage of long-term decline with production 
falling by more than 70% from its peak of over 2 million barrels a 
day in 2004 to less than 650,000 barrels per day in 2009. 
 
 
 
¶5.  (SBU) The Mexican government's reliance on oil revenue to 
finance over one third of the federal budget has deprived Mexico's 
state owned oil company, Pemex, of much needed capital for 
exploration, production, and infrastructure projects.  As a result 
of decades of underinvestment, Pemex today finds itself without 
alternative oil fields which could compensate for Cantarell's 
decline.  Pemex accelerated the development of the giant 
Chicontepec oil basin in 2009, investing $2 billion with the goal 
of increasing production from 29,000 to 90,000 barrels in 2009. 
With 750 new wells drilled over the past year, overall production 
remains stagnant and production per well has fallen dramatically. 
Although the Chicontepec fields are estimated to contain almost 9 
billion barrels of reserves, Chicontepec is a complex reservoir 
which involves technical challenges and significant operational 
costs.  Exploiting Chicontepec will require high-risk investments 
and the drilling of a large number of wells for relatively small 
returns.  Many experts believe that even with substantial 
investments, Pemex will have a difficult time reaching its 600,000 
barrel a day production goal by 2021.  Other fields Mexico is 
currently exploiting include Ku Maloob Zaap, which has reached peak 
production levels; Crudo Ligero Marino and other smaller fields in 
the south which are largely enhanced oil recovery projects which 
will do little to reverse Mexico's production decline. 
 
 
 
¶6.  (SBU) Mexican officials acknowledge that the greatest 
opportunities for reversing declining production lie in the deep 
waters of the Gulf of Mexico, with Pemex estimating that 56 percent 
of prospective resources are in that area.  To date, Pemex's 
deepwater results have been disappointing.  The parastatal has 
contracted service companies to drill twelve deep water wells for a 
total investment of approximately $750 million, but none of these 
have proven commercially viable.  Two new deepwater rigs will start 
working for Pemex in 2010, boosting exploration efforts.  Some 
energy experts opine that Pemex is under such pressure to reverse 
production declines that it has not conducted sufficient seismic 
analysis to begin these exploration efforts.  Even if Mexico were 
to discover a significant oil field in the deep waters of the Gulf, 
these experts predict that it would take at least 7-10 years to 
move from discovery to production. 
 
 
 
2008 Energy Reform 
 
-------------------------- 
 
 
 
¶7.  (SBU) The energy reform package approved by the Mexican 
Congress in late October 2008 was a significant political victory 
for the Calderon administration.  The fact that the three principal 
political parties in Congress acknowledged the need to reform this 
sensitive sector - long a taboo subject on the Mexican political 
scene - was in itself historic.  Substantively, the reform will 
give greater financial autonomy and more decision making power to 
Pemex.   However, the Calderon Administration made a political 
decision not to tackle the sacrosanct Constitutional prohibition on 
private sector investment.  As a result, the reform does not 
address the most pressing issue facing Pemex - declining 
production.  To explore and develop Mexico's more costly, difficult 
but promising fields - especially deepwater - Pemex needs to 
diversify risk, attract private investment (possibly through joint 
ventures) and access the technological capabilities and expertise 
of the international oil companies.   The reform allows only  for 
performance-based contracts.  Pemex and SENER, in consultation with 
the international oil companies and other interested parties, are 
developing the draft contracts now.  We understand that a draft 
text will be sent to stakeholders February 15 for comments. 
Tenders will likely begin with projects in Chicontepec  this 
spring.   GOM officials claim that a constitutional challenge 
against the implementing regulations for the new contracts will not 
delay this process, but companies may be less inclined to bid given 
legal uncertainties. 
 
 
¶8.  (SBU) The energy reform will allow more flexibility on 
exploiting potential transboundary reserves.  According to Mexican 
government officials, since not all the oil resources in a 
transboundary field belong to Mexico, the constitution would not 
prohibit PEMEX from entering into a joint venture with an IOC.  The 
reform provides that transboundary reservoirs would be exploited in 
accordance with the provisions of a bilateral treaty that has been 
ratified by the Mexican Senate.  The Chamber of Deputies, which 
would be more critical of such provisions, would not have 
jurisdiction.  PEMEX added that their intention on exploiting 
potential U.S.-Mexico transboundary fields would be to collaborate 
closely with the companies and use the infrastructure on the U.S. 
side of the boundary as a way of making cooperation with IOCs more 
palatable. 
 
 
 
Outlook for Future Reforms 
 
------------------------------------ 
 
¶8.  (SBU) Energy experts and the private sector are in general 
agreement that declining production will eventually force Mexico to 
introduce energy reforms which will open the oil and gas sector to 
private investment.  This could take some time, however, as the 
October 2008 reforms are still being implemented.  Moreover, 
political pressures as Mexico approaches important gubernatorial 
elections in 2010, 2011 and a presidential election in 2012, make 
it difficult for the administration to move aggressively on this 
front in the short term future. 
 
¶9.  (SBU) Mexico officials remain extremely sensitive about any 
public  - especially US - comments regarding energy reform and 
production.  Quietly, Mexico is reaching out to other countries - 
especially those with state owned oil companies - for advice on 
implementation of the reforms.  We should retain the USG's 
long-standing policy of not commenting publicly on these issues 
while quietly offering to provide assistance in areas of interest 
to the GOM.  Mexican officials have asked for USG assistance in 
recent months on select topics involving implementation of the 
October 2008 reforms.  The GOM has expressed interest in learning 
more about the US Minerals Management Service, US gas flaring 
regulations, how US grants for energy research and development 
programs are organized,  gas and oil leasing procedures and other 
topics.  The Calderon Administration may also be interested in 
discussing how to address jointly the global shortage of petroleum 
engineers, geologists and other technical experts.  You may want to 
emphasize our interest in working with Mexico on these topics. 
 
 
 
Electricity 
 
 ----------- 
 
¶10.  (U) Under Mexico's constitution, the generation, transmission, 
distribution and marketing of electric power  is reserved for the 
federal government,  specifically the Federal Commission of 
Electricity (CFE), with few exceptions.   Since 1992, the 
government has encouraged private sector participation in the power 
sector in the following areas:  independent power production (IPP) 
or private power generation facilities which sell production to 
CFE;  self-supply; co-generation; small scale (less than 30 MW); 
export;  and import for self supply.  The total installed capacity 
in the country in 2008 was 51,000 MW, of which fourteen percent was 
cogeneration or self supply.   Mexican power production comes  from 
the following resources:  40 percent natural gas; 27 percent fuel 
oil; 22 percent hydro; 6 percent coal; 3 percent nuclear and 2 
percent wind and geothermal. 
 
 
 
¶11.  (U) The government encourages IPPs to construct combined cycle 
gas fired power plants. 
 
The key issues facing IPPs, however, include the lack of 
infrastructure to supply natural gas to power plants under 
development and the increasing cost and scarcity of natural gas in 
Mexico.  As a result, liquefied natural gas (LNG) has become more 
important for Mexico as CFE develops its own long-term 
arrangements with LNG suppliers.  There are two LNG terminals in 
operation in Mexico:  Ensenada - Sempra; Altamira - Shell, Mitsui 
and Total; and one under construction in Manzanillo. 
 
 
 
¶12.  You can use this opportunity to ask the GOM about their long 
term natural gas production and supply plans.  You may want to ask 
what plans Mexico has to improve its natural gas infrastructure, 
 
 
especially along the Caribbean coast. 
 
 
 
Renewable Energy 
 
---------------------- 
 
 
 
¶13.  (SBU) Advancing bilateral cooperation on renewable energy, 
energy efficiency and the environmental agenda has been a top 
priority for both President Obama and President Calderon since 
their first meeting January 2009.  This agenda was formalized when 
the Bilateral Clean Energy and Climate Change Framework was 
announced during President Obama's April 2009 visit to Mexico.  On 
January 25-26 a senior level working group met in Washington to 
discuss pragmatic steps to advance this collaboration.  The working 
group agreed to establish a bilateral task force which will work to 
create a renewable energy market between Baja California and 
California.  The task force will consider standards, transmission 
capacity, regulatory issues and financing.  This pilot project 
could be applied  more broadly across the border, creating 
significant opportunities for US companies to export green 
technology to Mexico.  The January 25-26 meeting also helped 
advance cooperation on the Framework Convention on Climate Change 
16th Conference of the Parties (COP-16) which Mexico is hosting in 
late 2010. 
 
 
 
¶14.  (SBU) You may wish to stress President Obama's personal 
commitment to advancing a joint agenda on climate change and 
renewable energy.  You could stress the administration's commitment 
to use all available policy and financial tools, drawing on DOE, 
EPA, State, TDA, USAID, OPIC and EXIM to create a viable renewable 
energy market between the countries.  This wider context will also 
help reinforce USTR's Trade Climate Initiative, which seeks to fast 
track tariff cuts for climate friendly technologies.  Ambassador 
Kirk raised this point during his February 8-9, 2010 visit to 
Mexico. 
PASCUAL