VZCZCXRO2578
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0042/01 0081946
ZNR UUUUU ZZH
R 081946Z JAN 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 4569
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 03 MEXICO 000042 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE FOR EB/ESC MCMANUS AND DUGGAN 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTL AFFAIRS ALOCKWOOD, GWARD AND RDAVIS 
DOI FOR MMS ORR, TEXTORIS AND KARL 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON PGOV MX
SUBJECT: MEXICAN OIL PRODUCTION DECLINING - IMPLICATIONS FOR MEXICO, 
THE U.S. AND BILATERAL COOPERATION 
 
REF:  A. 08 Mexico 3491   B. 08 Mexico 3210 
 
¶1.  (SBU) Summary:  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. 
 The Calderon Administration's October 2008 modest energy reform 
will internally strengthen Pemex, Mexico's state owned oil company, 
but will not address the key issue of opening the sector to foreign 
investment.  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 will lead to our relying more heavily on countries 
outside North America for crude oil imports.  Implementation of 
Mexico's energy reform offers some opportunities for increased 
bilateral collaboration which could allow for closer cooperation on 
hydrocarbons and other energy issues as these production changes 
take effect. 
 
----------------- 
CURRENT SITUATION 
----------------- 
 
¶2.  (SBU) Until recently, Mexico was the second largest supplier of 
crude oil and petroleum products to the U.S., providing over 1.7 
million barrels per day of crude oil to the United States in 2006. 
Declining production and increased domestic demand have since caused 
Mexico to slip to third and occasionally fourth place behind Canada, 
Saudi Arabia and Venezuela.  From January to October 2008, average 
Mexico crude oil exports slipped to less than 1.2 million barrels a 
day.  Although some of the decline can be attributed to Gulf of 
Mexico hurricanes which disrupted production, Mexican oil exports to 
the U.S. clearly are on a downward trajectory.  Declining imports 
from Mexico will require the U.S. to relying more heavily on 
countries outside North America for crude oil imports. 
 
¶3.  (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 since 2004 and there 
are no signs that this decline can be arrested in the short to 
medium term.  From January to September 2008, Mexican petroleum 
production declined by 9.5% over the same period of 2007 and reached 
its lowest production level since 1995.  Mexico has relied heavily 
on the Cantarell oil field, one of the largest fields 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 50% from its peak of 
over 2 million barrels a day in 2004 to less than 900,000 barrels a 
day in December 2008.  Pemex projects that the decline is likely to 
continue at a rate of 14% a year. 
 
¶4.  (SBU) The Mexican government's reliance on oil revenue to 
finance over one third of the federal budget has deprived Pemex, 
Mexico's state owned oil company, of capital needed 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 has 
accelerated the development of the giant Chicontepec oil basin with 
contracts for 500 new wells expected to be awarded in early 2009. 
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 - Ku Maoob Zaap, Crudo Ligero Marino and other 
smaller fields in the south - are largely  enhanced oil recovery 
projects which will do little to reverse Mexico's production 
decline. 
 
¶5.  (SBU) Mexican officials acknowledge that the best prospects for 
possible reserves are in the deep waters of the Gulf of Mexico.  The 
GOM has conducted some seismic studies in this area, but has only 
drilled some exploratory wells at depths of slightly over 1,000 
meters with little success.  (In the Perdido Spar on the U.S. side 
 
MEXICO 00000042  002 OF 003 
 
 
of the Gulf of Mexico boundary, international oil companies plan to 
drill at depths of over 4,000 meters by the end of the decade.) 
Even if Mexico were to discover a significant oil field in the 
deepwaters of the Gulf, experts predict that it would take at least 
7-10 years to move from discovery to production. 
 
------------------ 
2008 Energy Reform 
------------------ 
 
¶6.  The energy reform package approved by the Mexican Congress in 
late October 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. 
 
¶7.  (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 fields 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 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.  The Calderon Administration in August formally 
requested that the USG and GOM consider bilateral negotiations on a 
treaty to govern transboundary reservoirs. 
 
-------------------------- 
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 reform will take over a year to implement.  Pemex and 
the Ministry of Energy continue to put forward unrealistic 
production forecasts taking off some pressure - at least in the 
short term - for additional reforms.  Moreover, politicial 
pressures, particularly in an election year, will make it difficult 
for the administration to move aggressively on this front in the 
short term future. 
----------------------------------- 
Potential for Bilateral Cooperation 
----------------------------------- 
 
¶9.  (SBU) Mexico officials remain extremely sensitive about any 
foreign - especially U.S. - comments regarding energy reform and 
production.  Quietly, Mexico is reaching out to other countries - 
especially those with state owned oil companies - for assistance 
with 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.  Most importantly, the GOM is interested in learning how 
the USG organizes grants for energy research and development 
programs.  The Calderon Administration would also be interested in 
discussing how to jointly address the global shortage of petroleum 
engineers, geologists and other technical experts. 
 
¶10.  (SBU) Engaging the Calderon Administration's on preliminary 
discussions regarding transboundary reservoirs also provides an 
opportunity for fostering bilateral cooperation.  Mexican officials 
 
MEXICO 00000042  003 OF 003 
 
 
have told us that the GOM would allow joint ventures with Pemex to 
exploit transboundary fields.  This opening could allow Pemex to 
engage more closely with U.S. and other international oil companies, 
potentially opening the door to deeper reforms in the future. 
(Note:  Collaboration on other energy topics such as renewable 
energy and energy efficiency will be discussed septel.  End note.) 
 
-------- 
Comment: 
-------- 
 
¶11.  (SBU) Declining Mexican oil production creates policy 
challenges for both Mexico and the U.S.  Even if Mexico introduced 
reforms allowing foreign investment in oil exploration and 
development now (which is not politically possible), it takes seven 
or more years from discovery to oil production in the areas of 
Mexico which show the most promise.  As revenues from petroleum 
decline, the GOM will have to look for alternate budget income - 
probably through higher rates of tax collection in a country with 
one of the weakest tax collection structures in Latin America. 
Declining oil imports from Mexico will require the U.S. to depend 
more heavily on other oil exporting countries. 
 
¶12.  (SBU) At the same time, the USG should look for opportunities 
to enhance bilateral cooperation on energy topics with Mexico as we 
confront these challenges.  While the USG should maintain its 
longstanding policy of not commenting publicly on Mexican energy 
reform or production prospects, the U.S. could offer to enhance 
bilateral cooperation on Mexican energy reform implementation, 
research and development, potential transboundary reservoirs as well 
as renewable energy and energy efficiency. 
GARZA