VZCZCXRO5686
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1492/01 0791635
ZNR UUUUU ZZH
P 201635Z MAR 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9733
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 001492 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
DOC FOR ITA/TD/ENERGY DIVISION 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET MX
SUBJECT: MEXICO ENERGY: PEMEX CFO ON CORPORATE GOVERNANCE 
REFORM 
 
REF: A. MEXICO 1174 
     ¶B. 05 MEXICO 7205 
 
Sensitive but unclassified, entire text.  Not for internet 
distribution. 
 
Summary 
------- 
 
¶1.  (SBU) The CFO of Pemex, the Mexican oil parastatal, Juan 
Jose Suarez Coppel painted a rosy picture of the chances for 
passage of a bill that will allow the firm to operate more 
autonomously from the government.  The proposal would replace 
most government secretaries and union bosses on the board 
with energy and finance experts; allow the firm to derogate 
from government procurement rules; and issue quasi shares to 
the public.  He called the move necessary to ensure that the 
oil company would be able to undertake the next generation of 
exploration and production projects, which he termed 
essential to ensure that Mexico replaces reserves.  Pemex 
executives have decided to work with the opposition Party for 
the Democratic Revolution (PRD) to pass the legislation, 
perhaps in expectation of a win by presidential front-runner 
Andres Manuel Lopez Obrador. 
 
Pemex Problems 
-------------- 
 
¶2.  (SBU) Econoff and Econ Mincouns met February 27 with Juan 
Jose Suarez Coppel, Chief Financial Officer of Pemex.  Never 
one to sugar coat, Suarez Coppel admitted that the real 
obstacles keeping Pemex's reserve replacement rate at only 18 
percent last year was its inability to retain significant 
earnings, as well as its crushing overhead.  Still, he added, 
"if Exxon had our prospects and our exploration budget, they 
would be able to replace all of the reserves we produced.  We 
lack the experience and the ability.  Unless we are allowed 
to behave as a company, we will never gain those skills." 
 
¶3.  (SBU) According to many of our sources (ref A), the 
company has been worried about its reserve picture.  Its 
flagship field, Cantarell, will likely begin its decline this 
year.  Suarez Coppel confirmed that the company had been 
worried about Cantarell since 2003; nonetheless, management 
was "comfortable" with the Pemex Exploration and Production 
prediction of a decline rate for the complex just below 10 
percent per year.  The current management team had committed 
to stabilize national production over the Fox's term, and 
Suarez Coppel believed they had succeeded.  Production from 
the Ku-Maloob-Zaap complex would allow Pemex to maintain 
crude production volumes through 2010, but beyond that, the 
forecast was murkier. 
 
¶4.  (SBU) Beyond 2010, Pemex would have to develop the 
Chicontepec field; gain increased profitable production from 
mature fields; and begin to produce from fields in the deep 
Gulf of Mexico.  Success from these three ventures was far 
from assured.  Pemex's new fiscal regime governing the way 
the firm returned revenues to the state (ref B) was a 
necessary step, but additional autonomy, especially in the 
way the firm contracted, would be essential to the success of 
the three projects.  This was the essential thrust of the 
corporate governance reforms currently under discussion in 
the Mexican Congress. 
 
Legislative Proposal 
-------------------- 
 
¶5.  (SBU) Institutional Revolutionary Party (PRI) Senator 
Genaro Borrego had proposed Pemex corporate governance reform 
for the first time in December 2002; the proposal eventually 
died.  A multiparty group is now trying to get the proposal 
restarted in Congress. 
 
¶6.  (SBU) Suarez Coppel, a National Action Party (PAN) 
supporter, admitted that he was talking to PRD members of 
Congress to try to get the proposal approved.  The PRD 
deputies feel that AMLO himself should present the plan to 
send the signal that he was pro-institutions (like Pemex), 
though this was unlikely. 
 
¶7.  (SBU) According to Suarez Coppel, the most recent 
proposal would have the Presidency select eight Pemex board 
members for Senate approval.  That board would then present 
 
MEXICO 00001492  002 OF 003 
 
 
to the President a proposal for a Chief Operating Officer. 
The President would either approve or not.  Every year, the 
board would go either to the Senate or to the Chamber of 
Deputies (probably to the Chamber of Deputies) to present 
Pemex results and plans.  According to other sources to whom 
we have spoken (septel) the board numbers are far from fixed. 
 
¶8.  (SBU) If the law passes, it would go into effect on 
December 1.  Suarez Coppel believed that this should be 
acceptable.  He reported that PRD officials close to AMLO 
supported the idea.  He claimed it had a "good chance" of 
passing.  In the past, Suarez Coppel noted it had been 
possible to work only with the PRI, but Pemex felt the 
reforms needed a broader base of support.  Bluntly, he noted 
that as Mexico moved closer to elections, the PAN's ability 
to affect change declined.  He did not want important Pemex 
reforms to hinge on a "lame duck" so he began talks with PRD 
Energy Committee Secretary Francisco Carrillo (the 
highest-ranking PRD member on the Committee).  Carrillo was 
also chair of the SME, the union of Mexico City power company 
Luz y Fuerza  (LyF).  (Our follow up discussion with Carrillo 
is reported septel.) 
 
¶9.  (SBU) The most problematic aspects of the new proposal 
are the introduction of independent board members and the 
quasi-shares Pemex proposes to issue.  The make-up of the 
Pemex board now includes six members chosen by the executive 
branch and five chosen by the union.  Under one of the 
current proposals, the government and the union would each 
choose two representatives with the remaining representatives 
to be selected by some combination of the Administration and 
Congress based on their qualifications in energy and finance 
rather than political affiliations. 
 
¶10.  (SBU) Suarez Coppel called the quasi share offering a 
carrot to offer workers to dilute the strength of Pemex 
unions.  The Government would grant Pemex employees a pension 
made up of the shares in exchange for union seats on the 
board, thus tying the workers more closely to the success of 
the enterprise while diluting the union's strength. 
 
¶11.  (SBU) Additionally, the reform would depoliticize the 
board.  The current board, stacked with union 
representatives, simply cannot pass the cost and 
staff-cutting measures required to make Pemex operate as a 
traditional oil company.  The stock offering for board seats 
quid pro quo would allow Pemex to move forward as a 
functional organization. 
 
Next Phase 
---------- 
 
¶12.  (SBU) If and when the current set of reforms passes, the 
GOM's next goal will be to create a regulatory body to govern 
energy development nationally, much as the Norway's Petroleum 
Directorate and Brazil's National Petroleum Agency do.  The 
creation of such an independent regulator would separate 
Pemex management from the political aims of the Energy 
Secretariat, and would create an apolitical body more able to 
 
SIPDIS 
withstand political pressure over Pemex.  Creating the 
independent oversight body, Suarez Coppel claimed, will also 
allow the government to create a greater source of "in-house" 
expertise devoted to the oversight of the oil company.  The 
oversight body would also provide their expertise to the 
congress to assist in the democratic oversight of the oil 
producer. 
 
¶13.  (SBU) Suarez Coppel confided that with a functioning 
independent overseer, the mechanisms would be in place to 
allow other entities to begin to develop hydrocarbon 
resources in Mexico.  The body would also serve as an 
independent authority that would enable Mexico to create the 
regulations to bring this about. 
 
Pessimistic About Fox's Central American Initiative 
--------------------------------------------- ------ 
 
¶14.  (SBU) We asked Suarez Coppel how Pemex felt about 
President Fox's Mesoamerican Energy Integration Initiative 
(PIEM).  He was dismissive of the project predicting that it 
would not survive long beyond the December 1 government 
change.  At Los Pinos' request, Pemex engineers had looked at 
the refinery project.  He noted that they estimated the cost 
of the Central American refinery at USD 4 billion and gave it 
 
MEXICO 00001492  003 OF 003 
 
 
a rate of return of slightly less than five percent, making 
the project, he claimed, extremely unattractive. 
 
Comment 
------- 
 
¶15.  (SBU) While Suarez Coppel was a real cheerleader for the 
corporate governance reform, pre election realities could 
easily overtake his plans.  Nonetheless, his optimism over 
the reform of the Pemex fiscal regime was justified, as it 
passed only a few weeks after he predicted it would.  Perhaps 
most telling was the decision by the largely PAN-affiliated 
management of Pemex to work through PRD deputies to introduce 
the corporate governance reforms -- an indication that Pemex 
managers can place practicality over politics. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA