VZCZCXRO2957
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0209/01 0281434
ZNR UUUUU ZZH
R 281434Z JAN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0248
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 07 MEXICO 000209 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
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 A/S HARBERT, ALOCKWOOD, AND GWARD 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON MX
SUBJECT: MEXICAN CONGRESS TO DEBATE ENERGY REFORM 
 
REF: A. 06 MEXICO 5810 
     ¶B. 06 MEXICO 6783 
     ¶C. 07 MEXICO 1256 
 
Sensitive but unclassified, entire text. 
 
------- 
Summary 
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¶1.  (SBU) With Mexican oil exports at the lowest point in a 
decade, 1.5 million barrels per day, the Mexican congress 
will debate energy reform during its spring session.  The 
most significant debate will begin in the Senate led by 
Francisco Labastida of the Institutional Revolutionary Party 
(PRI).  It is likely that the PRI and the governing National 
Action Party (PAN) will unite to develop a single proposal 
for reform that will concentrate on 'what is achievable' 
rather than 'what is necessary' to reverse Mexico's 
production declines.  No draft reform proposals have yet been 
announced as party leaders are reluctant to draw attacks from 
the opposition.  The three parties will meet January 30 to 
attempt to hash out positions.  According to one 
knowledgeable insider, the initial proposal will not include 
a constitutional change to permit outside upstream 
investment, though it may include laws to permit outside 
investment in refining, transport, and storage.  It will seek 
to separate Pemex from national financial accounts and create 
a separate petroleum regulator.  While most expect the debate 
to conclude by April, one well-placed Embassy source believes 
the process could slip into the summer.  Regardless of the 
outcome it is unlikely that the reform will significantly 
improve Mexico's energy or financial security.  End Summary. 
 
 
------------ 
Introduction 
------------ 
 
¶2.  (SBU) This cable will set the stage for the upcoming 
congressional debate on energy reform in Mexico.  Our 
experience from the passage of pension and fiscal reform 
suggests that the Calderon team will work to achieve the 
possible rather than strive for an ideal hydrocarbons law. 
It is less clear whether an achievable compromise can stave 
off fiscal crisis.  Supporting a Mexican energy reform, the 
International Monetary Fund notes that within "the medium 
term" Mexico will cease to be a crude oil exporter.  Post has 
provided Washington agencies similar assessments (refs.  A, 
B)   Furthermore, in its 2007 economic outlook for Mexico, 
the IMF warned that beginning in 2012, oil production 
declines would become even more pronounced. 
 
¶3.  (SBU) On the reform agenda, the lead PRI Energy Committee 
staffer in the Senate (upper house), Francisco Diaz Palafox 
(protect throughout) explained that the Mexican  people have 
unrealistically high expectations of what they think is going 
to be a comprehensive reform of the sector, but what would 
eventually pass would be a "light" reform.  Nevertheless, 
after years of not doing anything with the energy sector, 
even this would be a step in the right direction. 
 
¶4.  (SBU) As to the current status of the negotiations 
between and among the political groups, the senior Party of 
the Democratic Revolution (PRD) staffer to the Chamber of 
Deputies Energy Committee, Fluvio Ruiz Alarcon (protect 
throughout), noted, contrary to almost constant press 
reporting, there is not yet a broad inter-party consensus on 
reform.  Ruiz believed some package could be approved by 
April 2008, but it too would be a patchwork, only what was 
"politically possible and not what the country really needed." 
 
¶5.  (SBU) Ruiz suggested that the reform would pass easily in 
the Senate, but debate in the Chamber of Deputies would be 
more difficult since there were "too many legislators that 
respond to special interests, such as their own state 
governors."  He admitted that March PRD leadership elections 
could also complicate progress as in order for the PRD to 
play a constructive role in the energy debate, the wing of 
the party supporting radicalized former presidential 
candidate Andres Manuel Lopez Obrador (AMLO)  would have to 
 
MEXICO 00000209  002 OF 007 
 
 
be soundly defeated. 
 
¶6.  (SBU) Diaz Palafox cautioned that unlike other reforms, 
energy reform was a uniquely sensitive issue, because for 
Mexicans, oil represents their national identity.  Ordinary 
citizens would have difficulty understanding that the sector 
needs private investment; even if it were made clear that the 
government would still own the oil.  Regardless of strict 
definitions "allowing private investment in the sector" is 
equivalent in most Mexicans' eyes -- including Diaz Palafox's 
-- to "privatizing" the sector. 
 
--------------- 
Party Positions 
--------------- 
 
 
PAN 
--- 
 
¶7.  (SBU) PAN legislators have remained relatively quiet 
waiting for the Calderon Administration to issue its reform 
proposal.  Despite their "lead" position, the PAN divides 
into two groups on the reform question:  those who want 
private investment in the sector and those who have a more 
nationalistic view, such as former Deputies Energy Committee 
chair and the current head of Mexico's Energy Regulatory 
Commission (CRE) Francisco Diaz Salazar, and want some 
investment restrictions to remain. 
 
Both Energy Secretary Georgina Kessel and Undersecretary 
Jordy Herrera, who are both close to President Calderon (ref. 
C), have said that they favor private investment in the 
sector.  Kessel, who has added few details to this statement, 
told the press in December that the Secretariat of Energy and 
Congress were working very closely in order to achieve a 
consensus on the reform.  Despite these comments, PRI 
staffers with whom we spoke noted that the Administration had 
not begun any formal talks with their seemingly natural PRI 
allies. 
 
Despite their low profile, the Energy Secretariat has 
published energy outlooks emphasizing for the need for more 
investment in exploration and production, in particular in 
deep water. 
 
In a press interview, the PAN Secretary of the Senate Energy 
Committee Ruben Camarillo stated unequivocally that his party 
was against privatizing Pemex because that would mean 
transferring the parastatal's assets to private industry. 
However, he said he was in favor of allowing private 
investment in other activities including refining, 
transportation, and storage through the amendment of 
secondary laws.  He explained that PRI and PAN seek to allow 
the co-existence of private investment with Pemex investment. 
 This, despite more forward leaning positions from some less 
highly placed PAN members, probably most accurately expresses 
the party's current thinking; though, any more specific 
position will have to await a formal Government proposal, 
which has yet to appear. 
 
Finally, some observers expect that academically inclined 
Secretary Kessel will be replaced in favor of a more 
 
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operational politician, though recent news points to the new 
Secretary of the Interior (Gobernacion), Juan Camilo Mourino 
 
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as taking charge of the energy debate on behalf of the 
Calderon Administration. 
 
PRI 
--- 
 
¶8.  (SBU) PRI Senator and former Secretary of the Interior 
(Gobernacion) and Energy, Francisco Labastida Ochoa 
informally leads the PRI faction negotiating energy reform. 
Jesus Reyes Heroles, current Pemex CEO, is also working very 
closely with Labastida.  The two previously drafted a 
proposal to reform Pemex's fiscal regime included in the 
Finance Secretariat's (Hacienda's) fiscal reform.  PRI 
national leader Beatriz Paredes, who has said several times 
that PRI will not agree to change the Constitution, also 
wields power within the party in the debate. 
 
MEXICO 00000209  003 OF 007 
 
 
 
According to Diaz Palafox, the PRI is internally divided. 
There are several groups ("corrientes") inside the party, and 
those groups each have a separate position on reform. 
Paredes has instructed party members not to give an 
individual opinion to the public on energy reform until the 
PRI as a whole has a unified position. 
 
Labastida stated recently that the approval of energy reform 
during the first congressional session from February to April 
2008, was feasible.  According to him, legislators are 
working carefully to achieve good and qualitative legislative 
changes and therefore, "there was no need to rush things. 
PRI legislators were committed to pass an energy reform 
package during the upcoming session."  Though our contacts 
were less sanguine about quick passage in the lower house. 
 
The Senate's Energy Committee held several forums from June 
through September 2007.  At the forums, Senator Labastida 
reported on the Senate Committee's travel to Brazil and 
Norway and vigorously praised the success that the oil 
parastatals, Petrobras and Statoil, have had despite being 
partially state-owned.  He said that these companies have 
proved how successful state-controlled companies can be.  He 
also noted that in Brazil, about 1% of the sales revenue is 
channeled to R and D, while Mexico only channels 0.05%. 
Labastida highlighted that most of the projects in Brazil and 
Norway have 70% national investment thanks to legislative 
changes and a warmer attitude towards private capital. 
Legislators also highlighted investments that both countries 
made in research and technology and the integration of 
domestic supply chains into the energy sector. 
 
While Diaz Palafox told us he was unable to review the 
positions of the various PRI factions, he seemed confident 
that both the PRI and PAN would develop a joint reform 
proposal.  However, even though Labastida, a strong leader, 
has been pushing for energy reform since early 2007 and seems 
more open to allowing some private investment, Diaz Palafox 
was quick to point out that he doesn't represent the whole 
PRI, and even Labastida must still comply with the party's 
platform, which opposes any constitutional change. 
 
PRD 
--- 
 
¶9.    (SBU) According to staffer Fluvio Ruiz, on energy 
reform the PRD will field a negotiating team, which includes 
Senator Graco Ramirez from the Senate Energy Committee, 
Senator Carlos Navarrete, and Congressman Javier Gonzalez 
Garza.  Ruiz reported that Ramirez met with his PRD 
colleagues the weekend of January 15 to present PRD's 
proposal and position. 
 
Ruiz, who works closely with Ramirez, represents the more 
moderate wing of the PRD on energy reform.  Statements from 
the three PRD leaders bear this out. 
 
Ruiz admitted that the PRD has been discussing the reform 
with a similar "low profile," because his moderate faction is 
convinced that Mexico needs an energy reform without losing 
sovereignty or the government's control over oil.  However, 
this moderate faction continues to fear a confrontation with 
AMLO and his supporters because his divisive rhetoric would 
endanger realistic negotiations. 
 
In a December 13 Senate press conference Carlos Navarrete 
said his party's priorities for the February to April 
congressional session would be the State, Judicial, and the 
Supreme Court of Justice reforms.  He said rhetorically that 
PRD will also commit to "defend Mexican oil and Pemex as 
national patrimonies and as a State's property." 
 
Navarrete has also said that the government was deliberately 
using Pemex as a tax-cash cow to take into bankruptcy and 
justify the need to privatize it.  PRD estimates that the oil 
export price during 2008 will be higher than the USD 49 per 
barrel approved by Congress (Note the current price of the 
Mexican Basket is USD 74 per barrel), giving additional 
resources to Pemex including 13 billion dollars that could be 
used for investment in the construction of a refinery, 
 
MEXICO 00000209  004 OF 007 
 
 
without resorting to national or foreign investment, to 
reduce gasoline imports.  Navarrete said that one of the 
proposals tabled by his party was to amend the Budget and 
Fiscal Responsibility Law and sell the idea to PRI to allow 
Pemex to keep these additional resources. 
 
During the same forum, Senator Ramirez said that PRD's 
priority would be to have an adequate tax regime for Pemex so 
that it "stops being Hacienda's cash cow; the second issue 
would be to modify Pemex' board of directors, not with 
members of the private sector, but with specialized 
technicians; and third, achieving Pemex' independence from 
the Finance Secretariat and the federal government."  More 
than investments in exploration and production, Ramirez said 
that the government should focus on revamping Mexican 
refineries.  Again, he insisted that there would not be a 
consensus regarding changing Article 27 of the Constitution. 
He pledged that he would not be tempted to support 
privatization and called for working for a "different Pemex 
in Mexican hands." 
 
States 
------ 
 
¶10.  (SBU) While not formally separate actors in the reform 
process, Mexican States, personified by their governors, 
acting in may cases regardless of party, will play an 
important role limiting the degree of autonomy granted to 
Pemex and the energy sector as a result of the reforms.  Most 
governors strongly oppose any changes in Pemex's taxation 
scheme since generous surpluses resulting from the high oil 
price accrue directly to the states.  Most of the states have 
never developed effective ways to collect local taxes, so 
about 95% of the money they receive is transfers from the 
federal government financed largely from oil revenues. 
 
¶11.  (SBU) Going even further, according to Ruiz, the 
governors of Tabasco, Campeche, and Veracruz believe that 
because the oil is found in their states, they should get an 
even bigger share of state transfers from energy sales. 
Hacienda establishes energy prices, collects taxes from 
Pemex, and makes transfers to the states.  They remain a 
natural counterweight within the government to the Energy 
Secretariat on reducing the interdependence between Pemex and 
 
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the government.  Nevertheless, Hacienda has agreed that there 
is a need for more transparency on how states spend oil 
revenue transfers. 
 
Aspects of the Energy Reform Proposal 
------------------------------------- 
 
¶12.  (SBU) Neither the government nor any party has made a 
formal reform proposal.  While the party representatives have 
discussed the need to pass some form of energy reform and 
make the sector more competitive, there is no consensus on 
the steps necessary to achieve those changes. 
 
¶13.  (SBU) In the weeks leading up to the start of the 
congressional session in February, Deputies and Senators from 
the different parties are meeting to discuss their agenda for 
the upcoming session including the position each party will 
have on the energy reform. 
 
¶14.  (SBU) While no party has released a specific package of 
proposals that would be included in a reform proposal, from 
our discussions, we have pieced together a broad outline of 
the issues that could be addressed: 
 
¶15.  (SBU) Budgetary Independence:  At the very broadest 
level, the reform will attempt to give Pemex budgetary 
independence, removing it from national accounts.  Hacienda 
is reluctant to separate the parastatal from the budget 
because of the difficulty of maintaining the fiscal balance 
required by the budget and fiscal accountability law without 
Pemex coffers to 'raid.'  One senior Pemex Finance official 
closely linked with Hacienda, told us more bluntly.  "Pemex 
is one of the worst performing oil companies in the world, 
would you trust us to invest your money the most wisely? 
Until we can better manage our own business, why give Pemex 
more autonomy or more Mexican government money?" 
 
 
MEXICO 00000209  005 OF 007 
 
 
However, PRD staffer Ruiz claimed that by his calculations, 
separating the Pemex balance sheet from national accounts 
would only represent a reduction of 1.5% of GDP.  According 
to the PRD, Hacienda has approximately USD 41 billion 
obtained from Pemex' revenues "frozen" or invested in 
financial instruments that could be invested in 
infrastructure. 
 
¶16.  (SBU) Constitutional Changes:  While Pemex has worked to 
provide contracts that allow private participation in 
production of gas fields on a fee for service basis, and they 
continue to search for new mechanisms to develop Mexican 
resources, article 27 of the Mexican Constitution forbids 
Pemex from entering into any risk based contract for the 
development of hydrocarbon resources.  Without such 
contracts, no outside firm would invest in the oil sector in 
Mexico,  especially in the very risky and technically 
complicated deep-water fields where Mexico's greatest 
potential lies. 
 
The PRD and PRI remain strongly opposed to any constitutional 
change, but Ruiz explained that there could be some space for 
private investment in the sector.  While outside analysts 
have written that the main issue being discussed by political 
parties is whether or not to pass constitutional changes, 
both the PRD and PRI representatives with whom we spoke 
reiterated that given sensitivities in Mexico, such a 
constitutional amendment could never pass, and thus was moot 
anyway. 
 
¶17.  (SBU) Private Participation:  While private 
participation in the upstream is almost certainly off the 
table without a constitutional change, simpler legal changes 
may permit private investment in other areas including 
refining, transportation, and storage, as well as the special 
case of transboundary fields (developing those reservoirs 
that lie on the border with the U.S.), though this latter 
case may be difficult.  The PAN seems to be in favor of 
private investment; the PRI is somewhat on board, but the PRD 
remains strongly opposed. 
 
According to Ruiz, the PRI and PAN would make amendments to 
regulations allowing private investment in transportation, 
storage, and refining.  The PRD still does not have a 
position on transboundary wells, except that they strongly 
oppose private investment. 
 
On refining, in 2006 Mexican gasoline demand exceeded 
national refining capacity by 268,000 barrels per day.  Pemex 
estimates this gap will grow to over a half million barrels 
per day by the end of Calderon's term.  The gasoline pipeline 
from Mexico's Gulf Coast terminal to Mexico City is currently 
loaded to capacity.  Much of the surplus Mexico earns through 
crude sales it uses to purchase gasoline.  President Calderon 
has included construction of a seventh national refinery in 
his national infrastructure plan.   Nevertheless, the USD 3-5 
billion cost of such a refinery would represent a third or 
more of Pemex's annual capital budget.  Private investment 
could resolve the problem.  No specific constitutional 
restriction on refining exists.  Some have suggested allowing 
only Mexican private investors to participate any new Mexican 
refinery project, but Hacienda would like to open the 
opportunity to foreign investors as well. 
 
However, Ruiz noted that without changes to legal framework, 
investors would be reluctant to invest large amounts of money 
in a new Mexican refinery.  Because the prices of gasoline, 
as well as all inputs are now fixed by Hacienda, private 
investors would be unlikely to find an appropriate rate of 
return in such an investment.  In transportation, Ruiz saw a 
problem of creating monopolies, which could represent a risk 
in fuel distribution.  Private investment in storage, 
according to Ruiz is not as risky as the other two. 
 
Diaz suggested the PRI also had a proposal to open refining, 
transportation and storage services to private investment, 
and shared concerns that given the current Mexican legal 
framework, it would be difficult to attract potential 
investors without special incentives.  Diaz also said that 
some PRI members proposed establishing restrictions on 
foreign investment as an incentive for national investors in 
 
MEXICO 00000209  006 OF 007 
 
 
these areas. 
 
¶18.  (SBU) Board of Directors: Currently the Pemex board of 
directors is made up of six government representatives and 
five representatives of the Pemex union.  According to Ruiz, 
one PRD proposal with, reportedly some PAN support would be 
to include seven members from the government, four members 
from the union, and three independent members.  Unlike the 
PAN, the PRD would called the independent members "social 
members" since the PRD would like them to be academics, 
technicians, or experts in energy, and not businessmen or 
financiers as the PAN has suggested.  The PAN also suggests 
having more independent members than government ones. 
 
¶19.  (SBU) Oversight: Ruiz noted there was support across 
parties for creation of an independent agency or organization 
such as Brazil's National Petroleum Agency (ANP) or the 
Norwegian Petroleum Directorate (NPD), which would define oil 
and gas policy separately from government financial demands 
and Pemex operational needs.   The relationship, funding, and 
power of this organization relative to Pemex, the Secretariat 
of Energy, and Hacienda will generate significant discussion. 
 Existing actors are likely to oppose the concept because of 
the loss of control it implies.   Ruiz suggested one 
alternative to the independent oil and gas regulator would be 
creation of a separate "contract-plan" between the government 
and the parastatals to establish goals and commitments. 
 
¶20.  (SBU) Mexican Petroleum Institute (IMP):  The PRD has 
proposed strengthening the largely ineffective IMP, the R and 
D arm of Pemex, by increasing its budget. 
 
¶21.  (SBU) Other changes:  Ruiz and the PRD also suggest 
combining Pemex's four separate business units (Exploration 
and Production, Refining, Gas and Basic Petrochemicals, and 
Petrochemicals) to save on overhead.  The change would also 
give the company more flexibility on transfer pricing; 
currently all product transfers between the four companies 
must now be at Hacienda dictated prices.  Finally the change 
would simplify management.  The Presidents of the four 
sub-companies are all appointed by the Mexican President 
making it difficult for Pemex's CEO to lead the companies. 
 
---------------------------- 
Timetable: After You Alfonso 
---------------------------- 
 
¶22.  (SBU) Although the PRI, PAN, PRD and government have 
been discussing energy reform since the fall of 2007, neither 
party nor the government have been willing to present a 
reform proposal because of the political cost of being the 
first to move.  Nevertheless, legislators from different 
political parties will meet for two consecutive days in 
late-January outside Mexico City to move forward what 
Labastida called an integral reform.  Diaz Palafox told us he 
believed that eventually the PRI, PAN, and the government 
could reach an agreement to present a reform package within 
the month. 
 
¶23.  (SBU) If either PAN or PRI individually announced an 
energy proposal the other parties would be obligated to 
attack it, stifling the process.  Diaz Palafox also felt the 
Congress and Calderon would have to "sell" the reform as a 
patriotic gesture rather than an economic issue.  He noted 
that President Fox's electricity reform failed because he 
sold it as a business issue. 
 
¶24.  (SBU) Most sector analysts believe that the February to 
April Congressional session is the last opportunity to pass 
reform because after the spring session, the 2009 mid-term 
congressional elections would make the political environment 
too difficult to pass any reform.  Diaz Palafox told us his 
boss, Labastida, also wants to pass an energy reform before 
April, but Diaz Palafox believes the time is too short given 
the complexity of the issue.  He suggested discussions could 
be extended to a special session during the summer. 
 
¶25.  (SBU) Ruiz suggested there would be two potential 
outcomes to the initial debate.  In either case the PRI and 
PAN would agree on some reform.  The PRD would either oppose 
any change in the sector or it would agree on some aspects of 
 
MEXICO 00000209  007 OF 007 
 
 
the reform.   Even as the lead PRD staffer, it was difficult 
for Ruiz to predict the outcome because any agreement would 
involve more "political" considerations than an analysis of 
what was best for the sector or the country. 
 
¶26.  (SBU) Ruiz said in his estimation, the PRD would have 
nothing to lose if it voted against a reform.  Conversely, if 
the whole PRD supported the PRI and PAN they would likely 
lose political capital with their key constituents. 
 
------- 
Comment 
------- 
 
¶27.  (SBU) Petroleum Intelligence Weekly reported that 
Mexican oil exports fell to a decade-low monthly average of 
1.496 million barrels per day in December and average 2007 
output was 3.082 million barrels per day down 174,000 barrels 
per day from a depressed 2006.   Senior representatives of 
Halliburton and Chevron in Mexico suggested to the Ambassador 
this week they expected the 10% drop in production from 
Cantarell to continue.  Initial indications show that the 
energy reforms likely to pass the Mexican congress in 2008 
are unlikely to stanch this decline.   Worse yet, individual 
Senators continue to suggest reform proposals that would 
ensure that international oil companies remain barred from 
the Mexican upstream sector. 
 
¶28.  (SBU) To help inform the debate on the Mexican Energy 
sector, we have proposed that the Mexican Senate Energy 
Committee visit the U.S. Gulf Coast to learn more about what 
U.S.-based industry would have to offer Mexico and as a 
counterweight to the committee's visits to Brazil and Norway. 
 We are hopeful that such a visit might help to squelch some 
of the more nationalistic proposals that have arisen in the 
debate. 
 
 
 
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