VZCZCXYZ0000
RR RUEHWEB

DE RUEHME #0635/01 0622248
ZNR UUUUU ZZH
R 032248Z MAR 09
FM AMEMBASSY MEXICO
TO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 000635 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE FOR L/OES KIM 
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 AND KARL 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET PGOV MX
SUBJECT: TRANSBOUNDARY RESERVOIRS -- WHAT IS MOTIVATING 
MEXICO? 
 
REF: A. A. 2008 MEXICO 2657 
     ¶B. B. 2008 MEXICO 3014 
 
MEXICO 00000635  001.8 OF 003 
 
 
¶1.  (SBU) Summary:  For political, economic and strategic 
reasons, Mexico is ratcheting up efforts to engage the USG on 
a possible treaty governing transboundary reservoirs.  We 
expect that this topic will be raised by the GOM to senior 
levels of the administration in an effort to create momentum. 
 Politically, the GOM is under pressure to preserve Mexico's 
oil reserves.  Leading Mexican papers routinely print 
articles erroneously claiming that drilling on the US side of 
the Gulf of Mexico is siphoning off huge quantities of 
Mexican oil.  The GOM is also under pressure from the Mexican 
Congress which has asked the GOM to take quick action. 
Economically, rapidly falling oil production is pushing the 
GOM to demonstrate what Mexico is doing to address the 
situation.  Strategically, the GOM may try to slow 
exploration on the US side of the boundary while negotiations 
proceed.  If a treaty is concluded, PEMEX may see engagement 
with international oil companies in the deep waters of the 
Gulf of Mexico as an opportunity to gain hands on experience 
quickly.  Private sector representatives question why the GOM 
is putting such emphasis on the transboundary fields which 
they feel will likely be small in number and size.  They 
acknowledge, however, that collaboration between the 
international oil companies and Pemex on transboundary fields 
could ease the way for future Mexican energy reforms.  End 
Summary. 
 
---------------------------------------- 
From the Backburner to the Priority List 
---------------------------------------- 
 
¶2.  (SBU) During bilateral consultations under the Western 
Gap Treaty and the Treaty on Maritime limits, the GOM 
formally proposed on August 20 opening negotiations with the 
USG on an agreement to regulate the exploitation of 
transboundary - both maritime and land - reservoirs.  (REF. 
A)  Mexico provided a diplomatic note containing a formal 
proposal to the State Department on September 10, 2008. 
 
¶3.  (SBU) The issue remained quiet until January 2009 while 
GOM officials were busy securing congressional ratification 
for the Calderon Administration's energy reform package. 
There was also a general agreement amongst our interlocutors 
that the issue would not get much traction within the USG 
until the new Administration came into office.  GOM officials 
are now eager to meet with us to discuss their proposal and 
options for moving the discussion forward. 
 
¶4.  (SBU) Econoff has met with government officials, oil 
industry representatives and other experts 
to discuss the motivation and objectives behind the Mexican 
proposal.  Although there is a strong political dimension to 
the GOM request, Mexico appears to also have a strong 
economic and strategic interest in engaging the US on 
transboundary reservoirs sooner rather than later. 
 
--------------------------------------------- --- 
The Political Dimension - Responding to Congress 
--------------------------------------------- --- 
 
¶5.  (SBU) On a political dimension, the GOM created concerns 
and expectations with the Mexican Congress about 
transboundary reservoirs that it must now address.  During 
2008, the GOM actively used the "popote" or straw-effect - an 
erroneous argument that claims wells drilled by 
international companies on the US side of the boundary could 
siphon off significant oil reserves from the Mexican side of 
the border - to highlight the urgent need for deep energy 
reforms in Mexico.  Maps comparing heavy drilling activity on 
the US side of the boundary to the lack of any developments 
on the Mexican side were used to shock the Mexican public and 
congress into action.  The campaign resonated with the 
Mexican public and created an almost hysterical reaction. 
Alarmist articles routinely appear in the Mexican press 
making false claims that international oil companies use 
directional drilling to siphon off reservoirs on the Mexican 
side of the boundary.  One IOC representative told ECONOFF a 
 
MEXICO 00000635  002.5 OF 003 
 
 
respected Mexican contact made the absurd claim that 
companies on the US side of the boundary had engaged in 
directional drilling up to 30 miles into Mexican territory. 
 
¶6.  (SBU) The "popote" argument caught the attention of 
several influential Mexican legislators including former 
Foreign Minister and now Senator Rosario Green and former PRI 
presidential candidate and Senator Francisco Labastida.  The 
Mexican Congress directed the GOM to approach the USG 
expeditiously with a formal proposal to negotiate a 
transboundary treaty.  The Congress also included a provision 
in the energy reform bill which provides that transboundary 
fields could be exploited in accordance with the provisions 
of a bilateral treaty that had been ratified by the Mexican 
Senate. 
 
¶7.  (SBU) Interest from the Mexican Congress continues to be 
a factor in the discussions.  By early January 2009, Energy 
Secretary Kessel and Pemex Director General Reyes Heroles 
were asked to update the Mexican Congress on the status of 
the negotiations with the USG.  At that time, Kessel stated 
publicly that the GOM had submitted a formal proposal to the 
USG in September 2008 and was waiting since that time for a 
USG response.  Kessel assured Congress that the GOM expected 
more momentum on the issue now that a new USG Administration 
has entered office. Privately, GOM officials tell us that 
Kessel and Foreign Minister Espinosa may raise this issue 
with their new USG counterparts to try to move discussions 
forward. 
 
-------------------------------------- 
Falling Production and Energy Security 
-------------------------------------- 
 
¶8.  (SBU) There are also strong economic and strategic 
motivations behind the Mexican position on the transboundary 
debate.   With production falling rapidly, Pemex is under 
pressure to find and exploit new reserves.  Earnings from oil 
exports are the largest source of Foreign Exchange and oil 
revenues account for over one third of the federal budget. 
Entering into a bilateral agreement could allow Pemex to work 
collaboratively with international oil companies on 
exploiting transboundary oil fields, thus gaining experience 
and sharing risk while addressing declining Mexican 
production.  Mexican officials claim that the best prospects 
- up to 50% of possible reserves - lie in the deep waters of 
the Gulf of Mexico.  Pemex has conducted some initial seismic 
studies in the area, and has drilled some exploratory wells 
at depths slightly more than 1,000 meters but with little 
success.  (On the US side of the boundary, international oil 
companies are planning to drill at depth of over 4,000 meters 
by the end of the decade.) 
 
¶9.  (SBU) Pemex does not have the technology, experience nor 
money to explore and exploit the deep waters of the Gulf of 
Mexico alone.  Some service companies could provide the 
needed technology, but risk-sharing for expensive deep water 
exploration would not be part of the equation, i.e. taking 
the risk of drilling in return for a piece of the action.  In 
the long term, collaboration with IOCs on the transboundary 
fields could also promote a deeper reform of the Mexican 
energy sector by demonstrating the benefits of joint 
ventures. 
 
-------------------- 
Private Sector Views 
-------------------- 
 
¶10.  (SBU) During separate and informal conversations with 
Econoff , representatives of several IOCs with a presence in 
Mexico opined that the negotiation of a transboundary treaty 
would be a positive development.  A treaty would provide them 
with legal certainty for their operations on the border and 
could provide greater commercial opportunities. 
 
¶11.  (SBU) The IOCs we spoke to are positioning themselves to 
take advantage of long-term commercial prospects in Mexico 
and are convinced that sooner or later the GOM will have to 
open its energy sector to foreign investments.  Several of 
 
MEXICO 00000635  003.4 OF 003 
 
 
these companies have leased blocks in the Gulf of Mexico 
along the boundary with Mexico and are actively exploring in 
this area.  These companies made it clear, however, that they 
would not jeopardize their long term interest in Mexico by 
unilaterally exploiting a reservoir they confirm is 
transboundary.  (Note:  Our contacts acknowledge that other 
oil companies that do not have the same long term interest in 
the Mexican oil sector may take a more aggressive stance.) 
Our interlocutors added that if they discover a commercially 
viable transboundary field 
they would want to work collaboratively with Mexico. 
However, if formal negotiations a bilateral agreement do not 
begin until that time, the IOC stands to lose significant 
time and money before the field can be exploited. 
 
¶12.  (SBU) Our interlocutors pointed out that given the 
geology of the transboundary area - they expect both the 
number and size of transboundary fields to be small.  From a 
commercial perspective, they are surprised that the GOM has 
put emphasis on concluding an agreement with the US on 
transboundary treaties.  The IOCs want to ensure that Mexico 
is not using the pretext of negotiating a treaty 
simply as a tactic to delay oil exploration on the US side of 
the boundary.  Any Mexican effort to use negotiations as a 
pretext for extending the moratorium on drilling in the 
Western Gap buffer zone to other parts of the boundary would 
be a non starter for the IOCs. 
 
¶13.  (SBU) One IOC representative was surprised that Mexico 
had proposed negotiating an agreement that would cover both 
potential maritime and land reservoirs.  He concluded that it 
is too late and too complicated to address land reservoirs 
given the amount of gas production activity on the US side of 
the boundary.  He agreed when Econoff suggested that 
including land reservoirs could just be part 
of Mexico's negotiating strategy and not reflect any genuine 
interest on the GOM's side. 
 
¶14.  (SBU) Comment:  Since the inauguration of the Obama 
Administration, Mexican officials have clearly signaled their 
interest in following up on the August 2008 proposal to 
engage the USG in a negotiation on transboundary reservoirs. 
The Mexican motivations are varied and complex.  The GOM 
initially used fears of the "popote" effect to secure a deep 
energy reform and must now address the consequences of having 
raised it - both to the public and to congress.  On a 
separate level, however, GOM officials see transboundary 
reservoirs as an vital opportunity to address declining 
Mexican oil production and provide Pemex an opportunity to 
gain valuable experience from partnering with IOCs.  At best, 
over the long term, Mexico could use successful bilateral 
engagement on transboundary reservoirs as an 
argument to pry open the Mexican energy sector to foreign 
investment.   Whatever the Mexican motivations, it would be 
in the USG interests to engage at least in preliminary 
discussions.  Refusing to discuss the GOM proposal would fuel 
arguments that foreign companies are already siphoning off 
Mexican production.  Engaging with Mexico would allow us to 
establish closer ties with Mexican counterparts in the 
hydrocarbons area and could add to a deeper understanding of 
positions and policies on both sides.  If these discussions 
promote a future opening of the Mexican oil sector to foreign 
participation, it would be a positive development for all 
involved. 
 
 
 
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 / 
BASSETT