VZCZCXRO3133
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4867/01 2531919
ZNR UUUUU ZZH
R 101919Z SEP 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8809
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MEXICO 004867 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON MX
SUBJECT: MEXICAN FINANCE UNDERSECRETARY OPTIMITIC ON ENERGY 
REFORM 
 
Introduction and Summary 
------------------------ 
 
¶1.  (SBU) In an August 21 meeting with Congressman Roy Blunt 
(R-Missouri) Mexican Finance Undersecretary Alejandro Werner 
(strictly protect throughout) predicted that if fiscal reform 
goes well, the Calderon Administration would next turn to 
reform in the energy sector.  He explained that Pemex needs 
to retain more revenue in order to make the investments 
needed to reverse the current decline in oil production, and 
described the need to overhaul Pemex's corporate governance. 
In order to develop new technology and get technology 
transfer needed to explore new deep water fields, Pemex must 
be allowed some form of association with other companies. 
Nevertheless, despite his substantial authority as a senior 
member of the Administration, Werner's optimism does not jive 
with our other energy sector sources.  End Introduction and 
Summary. 
 
Mexico Needs Private Sector Involvement 
-------------------------------- 
 
¶2.  (SBU) Werner explained that of all the countries in the 
world, Mexico was the most closed to foreign investment in 
the energy sector.  Even Cuba allows Spanish refineries. 
Mexico imports growing volumes of gasoline from the U.S. 
rather than allow private investment in refineries.  Werner 
noted that Pemex shares ownership with foreign firms -- 
specifically Shell -- for its U.S.-based operations, but not 
for operations based in Mexico.  Werner noted that many 
state-owned energy companies in other countries allowed 
public-private partnerships, in order to modernize their 
operations.  He said that currently Pemex accounts for about 
8 percent of GDP, five percent of which goes directly to the 
government, and only three percent of which is left for 
Pemex. He said that in order to develop new technology and 
get technology transfer to explore new deep water fields, 
Pemex must be allowed some form of association with other 
companies. 
 
Better Business Practices 
------------------------- 
 
¶3.  (SBU) Werner described the need to overhaul Pemex's 
financial and management structure, perhaps floating capital 
in stock markets and allowing significant representation of 
Pemex's board for minority shareholders.  Pemex also needs 
corporate accounting practices so that Pemex would be 
governed by market rather than government controls.  He added 
that Pemex should look at market incentives like the 
Brazilian and Norwegian state oil companies.  The goal would 
be to provide market oversight of Pemex. 
 
Reform in 2008 
-------------- 
 
¶4.  (SBU) Werner predicted that if the Calderon 
Administration succeeds in its current attempt to get the 
Congress to pass fiscal reform, the government should have a 
signficant package on energy reform approved by the middle of 
¶2008.   He said Mexico was stuck in an ideological discussion 
on whether to "privatize" Pemex.  The Mexican Government 
would not privatize Pemex; rather, it needed to undertake a 
"process of reforms."  The Administration and Congress were 
not holding "all or nothing" discussions.  Werner said the 
current discussions with the PRI on energy reform were 
"driven by the PRI," rather than by "taboos" over whether to 
allow private sector participation that have long blocked 
reasoned debate.  During Congressional debate on fiscal 
reform, the PRI had called on the government to address 
Pemex's declining revenues, which in turn Werner said was 
leading to discussion on improving Pemex's corporate 
governance. Werner said this discussion would also include 
consideration of allowing Pemex to make some form some of 
association with private companies.  Between energy and 
fiscal reform, Werner said he thought the PRI was ready to 
support a program that would give the government 80% of what 
was needed to fix the challenge Mexico faces from low tax 
revenues and declining oilproduciton.  Werner chose his words 
carefully, stressing that there was no discussion of 
privatization.  Nor did he specifically mention foreign 
 
MEXICO 00004867  002 OF 002 
 
 
investment.  He noted that in considering energy reform, all 
sides were haunted by the narrow election results in July 
2006, so that nobody wanted to give the PRD issues it could 
use to raise "nationalistic fervor." 
 
¶5. (SBU) Werner was optimistic the Congress would support 
reform of the energy sector, because Congress already 
supported reform on the financial sector to address the 
problem of overly conservative rules for lending by banks to 
small and medium enterprises (SME's) that result in rules 
impossible for SME's to comply with.  (Werner noted the need 
to work to push lending to SME's over the next few years. 
He said that in Mexico private sector lending was 16% of GDP, 
while in Chile it was 60 to 70 %.) 
 
Comment 
------- 
¶6.  (SBU) Werner's optimistic outlook on the future of energy 
reform mirrors what we heard from the Calderon team early in 
the term: (1) energy reform was synonymous with making Pemex 
more efficient; (2) no Mexican party wants to "privatize" 
Pemex, but rather the word "privatization" was only a word 
used by the PRD to over politicize the debate, and; (3) the 
market could do a better job of overseeing Pemex than 
government regulators.  Nine months into the Administration 
the picture has become more obscure, and few observers, 
besides Werner, now share the Undersecretary's optimism. 
Energy Secretariat officials who had previously described 
aggressive plans to win over Congress are silent.  Outside 
observers who had been enthusiastic about the chances for 
reform under Calderon have become much more cautious, and 
relatively minor changes in distribution of Pemex tax revenue 
are now being touted as energy reform by the PRD and the PRI. 
  End Comment. 
 
 
 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA