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Viewing cable 08MEXICO1072, CALDERON INTRODUCES ENERGY REFORM

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Reference ID Created Released Classification Origin
08MEXICO1072 2008-04-10 14:14 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Mexico
VZCZCXRO8770
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1072/01 1011414
ZNR UUUUU ZZH
P 101414Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1339
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 05 MEXICO 001072 
 
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 ALOCKWOOD, AND GWARD 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON MX
SUBJECT: CALDERON INTRODUCES ENERGY REFORM 
 
REF: A. MEXICO 209 
     B. MEXICO 531 
 
Introduction and Summary 
------------------------ 
 
1. (U) Secretary Kessel delivered in the evening of April 8th 
 the Administration's energy proposal, signed by President 
Calderon, to the "secretario tecnico" of the Senate, Victor 
Orduna Munoz.  The proposal will be presented to the full 
Senate on April 10 and will be sent to the Energy, Finance, 
and Legislative Studies Committees for analysis and approval. 
 After being approved by the Senate, the bill would have to 
be sent to the Chamber of Deputies.  PAN coordinator in the 
Chamber of Deputies, Hector Larios, said that there wasn't a 
100% consensus on the reform, but that approval was feasible. 
 According to him, Calderon will submit changes to Pemex 
fiscal regime on April 10 to the Chamber of Deputies.  The 
proposal includes five main changes to secondary laws.  These 
changes are discussed in detail beginning in para 12. and 
track relatively closely with the proposed changes suggested 
by our sources in refs A and B: 
 
A. The "Organic Law" of Pemex (Pemex founding statutes) (see 
paras 9-14 below). 
 
B. The "Organic Law" of the Federal Public Administration 
defining government operations (defining the role of the 
Energy Secretariat)(see para 15 below). 
 
C. Reforms to the Energy Regulatory Commission (CRE) law on 
pricing (see para 16 below). 
 
D. Reforms to regulations of Article 27 of the Constitution 
reserving oil production and refining for the state. (see 
para 17-18 below). 
 
E. Creation of an "Oil Comission," which will support the 
Energy Secretariat in developing policies. The commission 
will have five commissioners appointed by the President (see 
para 19 below). 
 
At 9:30 p.m. April 8 Mexican President Felipe Calderon gave a 
political speech on national television to explain the 
proposal.  He stressed several times that Pemex will not be 
privatized and that Mexican oil will continue to be owned by 
Mexicans.  He said that his energy proposal was only aimed at 
strengthening Pemex.  Calderon used information included in 
the government's diagnostic several times during his message. 
 End Introduction and Summary. 
 
Summary of President Calderon's Message 
--------------------------------------- 
 
2. (U) Calderon started his speech noting that the government 
will act with patriotism to take advantage of oil resources. 
"Pemex will continue to be the property of all Mexicans and 
will not be privatized. Pemex is a national symbol."  Pemex 
is losing competitiveness.  He said that a few years ago 
Pemex was the sixth most important oil company in the world 
and currently it is the eleventh.  This is the result not 
only of its financial problems, but also of its lack of 
technology and operational capability.  Reserves are 
declining.  Mexico's remaining proven reserves would last a 
little over nine years at current production rates.  Output 
has declined and Mexico has stop receiving the equivalent of 
USD 9.4 billion annually.  With these resources, Calderon 
argued,the government could have dramatically increased the 
budget for the popular social program "Oportunidades."  The 
lack of refineries has meant that Mexico has had to increase 
gasoline and fuel imports.  Currently, he reported, 4 out of 
10 liters of gasoline are imported.  Calderon praised Pemex 
employees work.  He reminded the audience that that more than 
half of Mexican reserves are located in deep water.  The 
proposal seeks to guarantee that Mexico has oil for future 
generations.  The proposal will strengthen Pemex.  He 
repeated that Pemex will continue to be a state-run 
company,and the initiative does not propose changing the 
Constitution. 
 
3. (U) He listed the six pillars of his proposal: 
 
 
MEXICO 00001072  002 OF 005 
 
 
1. Provide Pemex with more management and financial autonomy 
over ten years.  Pemex will have more freedom to manage its 
budget and debt to invest its resources in new projects.  In 
particular allow it to reinvest profits to strengthen the 
business. 
 
2. Create a special regime for Pemex that will allow it to 
award contracts without following traditional government 
procurement rules, giving the firm greater access to 
technology and improving its ability to operate. 
 
3. Reduce gasoline imports.  Private companies will be 
allowed to build and operate refineries on behalf of Pemex. 
Payment will be on a fee-for-service basis.  The construction 
of refineries will generate more jobs, will trigger economic 
development in the states where they are built, as well as 
strengthen the petrochemical industry, and produce clean 
gasoline and cheaper fertilizers for farmers.  Pemex will 
continue to own the oil and its products. 
 
4. Improve Pemex administration. Improve its accountability 
and transparency to eliminate corruption. 
 
5.  Pemex will issue "bonos ciudadanos" (citizen's bonds) 
which are debt instruments which will be available to all 
Mexicans.  The return paid by these instruments will be 
similar to the rate of return obtained by Pemex.  The value 
of these individual bonds will be about 10 dollars. 
Individuals, pension and investment funds will be able to 
acquire the bonds. There will be restrictions to prevent a 
single entity from holding large volumes of the bonds. The 
bonds would not confer an equity stake. 
 
6. Calderon also said that regulatory authorities will be 
strengthened. He will also implement measures to protect the 
environment when producing and replacing oil reserves. 
 
4. (U) He added that the government considered the concerns 
and ideas of other actors while developing the proposal. 
Calderon also believed that the decision should not be 
unilateral and that the proposal should be broadly discussed 
and analyzed, but he urged legislators to move quickly.  He 
also raised the fact that Cuba and the U.S. were already 
exploring fields that cross into Mexican waters while Mexico 
has been unable to explore for and produce oil in deep water. 
 Calderon finished his message by repeating that the oil is 
and will be owned by Mexicans and that Pemex will not be 
privatized, but strengthened. 
 
Responses 
--------- 
 
5. (U) Both former Economy Secretary Luis de la Calle and 
Economist Ernesto Cervera speaking on television said after 
the debate that the proposed reform was "what was  feasible 
and possible" and not "what the country needed." De la Calle 
said that it was a good step forward, particularly the fact 
that Calderon tabled the reform and that he understood the 
country needed a broad debate.  De la Calle said he expected 
many of the issues, if passed would be challenged before the 
Supreme Court of Justice, though Administration officials 
told Emboffs last year that they would worked with the court 
to study the constitutionality of reform measures before 
introducing them. De La Calle thought though that a challenge 
was positive because it helped the democratic process. He 
also commented that more than an energy reform, Calderon's 
reform was a political reform, because of all the 
negotiations it required. 
 
6. (U) AMLO Economic Advisor Mario di Constanzza complained 
about the possibility of Pemex directly entering into service 
contracts and the private sector's participation in 
refineries. He said the PRD has always been afraid of the 
creation of more monopolies as it has happened before with 
the financial and telecommunication sectors. He also said 
that the Frente Amplio Progresista had drafted and 
distributed and alternate proposal, which didn't include 
private participation but steps to correct and modernize 
Pemex. When asked why they had not sent it as a formal 
proposal to Congress rather than complaining, he said that 
their experience is that nobody cares about their proposals 
and the other parties do not even think of discussing them. 
 
MEXICO 00001072  003 OF 005 
 
 
 
7. (U) About "removing" Pemex from public finances, all 
comentators were disappointed that Pemex' fiscal regime would 
be modified in a ten-year period. This seemed too long to 
continue with the status quo before Pemex could use its own 
resources for projects. However, they all agreed that since 
there has not yet been a broad tax reform, public finances 
would still have to depend on oil revenues through the medium 
term. They mentioned the importance of implementing taxes on 
consumption. 
 
Political Parties' Reaction 
--------------------------- 
 
8. (U) PRI leader Beatriz Paredes said her party had 
committed to carefully review and analyze the proposal. AMLO 
said that the proposal intended to privatize the sector by 
allowing private capital in refineries, but said that 
protests would not begin immediately.  April 10 Senate PRI 
leader Manilo Fabio Beltrones called for a series of open 
fora between experts and political leaders to debate the 
proposals.  Beltrones also suggested that PRI would make some 
changes to the proposal. 
 
Summary of Energy Reform 
------------------------ 
 
Pemex Organic Law 
----------------- 
 
9.  (U) To improve corporate governance and strengthen the 
Pemex board of directors, legislation proposes adding 4 
professional (independent) counselors.  The number of union 
members (5) and government officials (6) will remain 
unchanged.   The board of directors will be independent. 
Professional board members will be appointed by the President 
of Mexico to staggered eight-year terms beginning on January 
1, 2009.  The appointment could be extended for an additional 
period.  These board members must be Mexican and must have 
experience in the sector.  Two of them would be considered 
representatives of the State and will be full-time.  The 
other two will be part-time members.  Any decision made by 
the board would have to have at least two votes from the 
professional counselors.  If not, the decision would be 
approved by simple majority in a following session.  The 
quorum required to vote any decision will be eight members of 
the board (Comment: thus, under this proposal the government 
plus two of the professional counselors could outvote the 
union, and perhaps unsurprisingly, the PRI opposes having the 
President nominate the professional members).  To make the 
Board's decision even more transparent, Calderon proposed the 
creation of an Auditing and Transparency Committee, the 
Strategy and Investment Committee, and Salaries Committee. 
The board has the power to create more committees as 
necessary.  The President will also designate a commissioner, 
who will be responsible for reporting information on Pemex 
activities, and for protecting the interest of the owners of 
the citizens' bonds.  The law also includes mechanisms to 
sanction the members of the board, regardless if they are 
independent or government officials or members of the union. 
 
10.  (U) The legislation seeks to provide Pemex with 
financial autonomy from the government.  Pemex will be 
allowed to propose its debt schemes to the Finance 
Secretariat (Hacienda), which will have to approve them. 
 
SIPDIS 
However, Pemex will be able to determine its own foreign 
currency or foreign capital market financing without having 
to obtain Hacienda's authorization.  Hacienda will; however, 
have the authority to prohibit any of Pemex' financial 
decisions if they threaten the country's macroeconomic 
stability. 
 
11.  (U) Pemex will be able to sell bonds directly to 
Mexicans.   The bonds could be obtained by any Mexican 
citizen either directly or through financial intermediaries. 
These bonds will not grant holders any equity, and their 
return would be tied to the firm's performance. 
 
12.  (U) Pemex will be able to use additional revenues it 
generates without Hacienda's authorization as long as the 
decisions do not interfere with the government's 
balanced-budget target. 
 
MEXICO 00001072  004 OF 005 
 
 
 
13.  (U) To improve Pemex's ability to enter into contracts 
and procure supplies, Calderon proposes a mixed scheme that 
will distinguish substantive operations (exploration and 
production) from other less-substantive activities.  The 
first will be exempted from the requirements established in 
the Acquisition, Leasing and Public Services Law which had 
made Pemex's contracting extremely unweildy.  The Board of 
Directors and the Auditing Committee would decide to grant 
contracts (for operations including exploration and 
production activities) either through public bidding, direct 
award or limited invitation.  For exploration and production 
work there would be a clause in the contract that allows the 
amount to be paid to be determined after the contract is 
signed, giving Pemex a flexibility it did not previously 
have, as many operations such as drilling can involve a 
significant change of scope during the execution of a 
contract.  Pemex will also be able to pay companies based on 
their performance. 
 
14.  (U) The proposed financing changes changes will be 
implemented over a ten-year period because the government 
acknowledges that the recent tax reform was not sufficient 
and public finances still rely on oil revenues.  The gradual 
implementation will also prevent states and municipalities 
from significant short term revenue swings.  Most of the 
states' resources -in some cases more than 95%- come from 
federal transfers and not from local taxes.  Changes to 
Pemex' contract requirements will be implemented immediately. 
 Pemex will be able to channel from 10% to 90% its own 
revenues to investment projects gradually.  Pemex' 
subsidiaries will continue to operate as usual until the 
Executive issues a decree. 
 
Federal Public Administration Organic Law 
----------------------------------------- 
 
15.  (U) With these modifications Calderon seeks to 
strengthen the Energy Secretariat (SENER) as the agency 
responsible for establishing, conducting and supervising the 
energy policy; for fostering the participation of the private 
sector where applicable, for creating regulations to protect 
the sector's security, for regulations to exploit oil 
resources, for the elaboration of medium and long term plans 
to exploit oil resources, for fostering the use of alternate 
energy resources, and for issuing an opinion on the 
feasibility of Pemex investment proposals. 
 
Energy Regulatory Commission (CRE) Law 
-------------------------------------- 
 
16.   (U) The government will continue to control the 
first-hand sale of oil related products.  The existing Energy 
Regulatory Commission (CRE), which now only regulates 
electricity and natural gas prices, as well as aspects of 
natural gas and gas liquids (LPG) transport and storage, 
would be given additional authorities.  The newly empowered 
CRE would work to foster investment to complement the 
government's investment in the distribution, transportation, 
and storage of petroleum products.  This reform will help 
Pemex to expand and maintain its pipeline and distribution 
network with private investment so that Pemex can channel 
more resources to oil and natural gas exploration and 
production.  Following the  reform the CRE and not Hacienda 
would determine the price of refined products until effective 
competition conditions existed or as determined by the 
Executive.  This would permit development of a petrochemical 
industry, now impossible because of the Finance Ministry's 
control of hydrocarbon pricing.  The CRE would also create 
the contract models for private participation in the 
petrochemical industry and be able to propose changes to 
energy laws.  Five commissioners will be appointed to 
staggered five-year terms as opposed to the concurrent terms 
they now serve. 
 
Reform of Constitution Article 27 Implementing Regulations 
--------------------------------------------- ------------- 
 
17.  (U)  The Administration's reform also proposes several 
changes to implementing laws of Article 27 of the Mexican 
Constitution.  On the downstream side, third parties will be 
allowed to provide transportation, distribution, and storage 
 
MEXICO 00001072  005 OF 005 
 
 
services to Pemex.  Oil products will continue to be owned by 
the government.  Private capital would be permitted in oil 
refining activities, but through a processing fee scheme in 
which ownership of the hydrocarbon would remain in government 
hands.  The private sector would be allowed to build and 
operate refineries, and own the pipelines, facilities and 
equipment. 
 
18.  (U)  On the upstream side, the reform would allow the 
government to sign international agreements to develop 
transboundary wells.   SENER would be able to direct Pemex to 
specific areas to explore and develop.   Article 6 of the 
regulation gives Pemex the authorization to hire the services 
of individuals or companies to explore and develop resources 
(these services could include maintenance of facilities, 
technical analysis, drilling of wells, and three dimensional 
seismic).  The payment for the services would be in cash but 
not through a percentage or share of production.  SENER would 
have to grant a permit for the areas to be explored and 
developed.  (Note: Calderon acknowledges that for many years 
Pemex has been using contracts with private companies, but he 
wanted to make article 6 more specific to prevent legal 
challenges and provide companies with more legal certainty: 
one is that Pemex keeps control over exploration and 
production, and second that risk contracts would remain 
illegal.)  The Administration, by decree, would establish 
blocks which could be developed to guarantee future oil 
supply.  Additional regulations would help to guarantee that 
private companies provide good service in oil transportation, 
storage and distribution, measures to prevent the creation of 
monopolies, and mechanisms to guarantee energy supply and 
national energy security. 
 
Oil Commission Law 
------------------ 
 
19.  (U) Following the lead of Norway, the UK, and Brazil, 
Calderon proposes the creation of a technical and specialized 
Commission to support SENER in overseeing energy regulation, 
exploration and production activities, and technical 
analysis, determining oil reserves and production volume, and 
in the evaluation of areas to be developed.   The Commission 
would evaluate the exploration and production projects 
submitted by Pemex.  The Commission would also grant the 
permits to perform the projects or works.  The commission 
would depend on SENER, but would have administrative and 
operational autonomy.  The president would appoint five 
commissioners proposed by SENER (the PRI specifically opposes 
this provision). 
 
Comment 
------- 
 
20. (SBU) Though the proposal is barely 24 hours old, we 
believe that this very token resistance is a sign that much 
of the package was negotiated before hand, nevertheless, 
initial comments by PRI leaders indicate that some additional 
negotiation remains.  Beltrones fora, however, (see para 8) 
are likely designed as a sop to placate the PRD before a vote 
is held. 
 
 
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