Identifier
Created
Classification
Origin
06MEXICO1492
2006-03-20 16:35:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Mexico
Cable title:  

MEXICO ENERGY: PEMEX CFO ON CORPORATE GOVERNANCE

Tags:  ECON ENRG EPET MX 
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VZCZCXRO5686
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1492/01 0791635
ZNR UUUUU ZZH
P 201635Z MAR 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9733
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 MEXICO 001492 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/ESC
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
DOC FOR ITA/TD/ENERGY DIVISION

E.O. 12958: N/A
TAGS: ECON ENRG EPET MX
SUBJECT: MEXICO ENERGY: PEMEX CFO ON CORPORATE GOVERNANCE
REFORM

REF: A. MEXICO 1174

B. 05 MEXICO 7205

Sensitive but unclassified, entire text. Not for internet
distribution.

Summary
-------

UNCLAS SECTION 01 OF 03 MEXICO 001492

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/ESC
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
DOC FOR ITA/TD/ENERGY DIVISION

E.O. 12958: N/A
TAGS: ECON ENRG EPET MX
SUBJECT: MEXICO ENERGY: PEMEX CFO ON CORPORATE GOVERNANCE
REFORM

REF: A. MEXICO 1174

B. 05 MEXICO 7205

Sensitive but unclassified, entire text. Not for internet
distribution.

Summary
--------------


1. (SBU) The CFO of Pemex, the Mexican oil parastatal, Juan
Jose Suarez Coppel painted a rosy picture of the chances for
passage of a bill that will allow the firm to operate more
autonomously from the government. The proposal would replace
most government secretaries and union bosses on the board
with energy and finance experts; allow the firm to derogate
from government procurement rules; and issue quasi shares to
the public. He called the move necessary to ensure that the
oil company would be able to undertake the next generation of
exploration and production projects, which he termed
essential to ensure that Mexico replaces reserves. Pemex
executives have decided to work with the opposition Party for
the Democratic Revolution (PRD) to pass the legislation,
perhaps in expectation of a win by presidential front-runner
Andres Manuel Lopez Obrador.

Pemex Problems
--------------


2. (SBU) Econoff and Econ Mincouns met February 27 with Juan
Jose Suarez Coppel, Chief Financial Officer of Pemex. Never
one to sugar coat, Suarez Coppel admitted that the real
obstacles keeping Pemex's reserve replacement rate at only 18
percent last year was its inability to retain significant
earnings, as well as its crushing overhead. Still, he added,
"if Exxon had our prospects and our exploration budget, they
would be able to replace all of the reserves we produced. We
lack the experience and the ability. Unless we are allowed
to behave as a company, we will never gain those skills."


3. (SBU) According to many of our sources (ref A),the
company has been worried about its reserve picture. Its
flagship field, Cantarell, will likely begin its decline this
year. Suarez Coppel confirmed that the company had been
worried about Cantarell since 2003; nonetheless, management
was "comfortable" with the Pemex Exploration and Production
prediction of a decline rate for the complex just below 10
percent per year. The current management team had committed

to stabilize national production over the Fox's term, and
Suarez Coppel believed they had succeeded. Production from
the Ku-Maloob-Zaap complex would allow Pemex to maintain
crude production volumes through 2010, but beyond that, the
forecast was murkier.


4. (SBU) Beyond 2010, Pemex would have to develop the
Chicontepec field; gain increased profitable production from
mature fields; and begin to produce from fields in the deep
Gulf of Mexico. Success from these three ventures was far
from assured. Pemex's new fiscal regime governing the way
the firm returned revenues to the state (ref B) was a
necessary step, but additional autonomy, especially in the
way the firm contracted, would be essential to the success of
the three projects. This was the essential thrust of the
corporate governance reforms currently under discussion in
the Mexican Congress.

Legislative Proposal
--------------


5. (SBU) Institutional Revolutionary Party (PRI) Senator
Genaro Borrego had proposed Pemex corporate governance reform
for the first time in December 2002; the proposal eventually
died. A multiparty group is now trying to get the proposal
restarted in Congress.


6. (SBU) Suarez Coppel, a National Action Party (PAN)
supporter, admitted that he was talking to PRD members of
Congress to try to get the proposal approved. The PRD
deputies feel that AMLO himself should present the plan to
send the signal that he was pro-institutions (like Pemex),
though this was unlikely.


7. (SBU) According to Suarez Coppel, the most recent
proposal would have the Presidency select eight Pemex board
members for Senate approval. That board would then present

MEXICO 00001492 002 OF 003


to the President a proposal for a Chief Operating Officer.
The President would either approve or not. Every year, the
board would go either to the Senate or to the Chamber of
Deputies (probably to the Chamber of Deputies) to present
Pemex results and plans. According to other sources to whom
we have spoken (septel) the board numbers are far from fixed.


8. (SBU) If the law passes, it would go into effect on
December 1. Suarez Coppel believed that this should be
acceptable. He reported that PRD officials close to AMLO
supported the idea. He claimed it had a "good chance" of
passing. In the past, Suarez Coppel noted it had been
possible to work only with the PRI, but Pemex felt the
reforms needed a broader base of support. Bluntly, he noted
that as Mexico moved closer to elections, the PAN's ability
to affect change declined. He did not want important Pemex
reforms to hinge on a "lame duck" so he began talks with PRD
Energy Committee Secretary Francisco Carrillo (the
highest-ranking PRD member on the Committee). Carrillo was
also chair of the SME, the union of Mexico City power company
Luz y Fuerza (LyF). (Our follow up discussion with Carrillo
is reported septel.)


9. (SBU) The most problematic aspects of the new proposal
are the introduction of independent board members and the
quasi-shares Pemex proposes to issue. The make-up of the
Pemex board now includes six members chosen by the executive
branch and five chosen by the union. Under one of the
current proposals, the government and the union would each
choose two representatives with the remaining representatives
to be selected by some combination of the Administration and
Congress based on their qualifications in energy and finance
rather than political affiliations.


10. (SBU) Suarez Coppel called the quasi share offering a
carrot to offer workers to dilute the strength of Pemex
unions. The Government would grant Pemex employees a pension
made up of the shares in exchange for union seats on the
board, thus tying the workers more closely to the success of
the enterprise while diluting the union's strength.


11. (SBU) Additionally, the reform would depoliticize the
board. The current board, stacked with union
representatives, simply cannot pass the cost and
staff-cutting measures required to make Pemex operate as a
traditional oil company. The stock offering for board seats
quid pro quo would allow Pemex to move forward as a
functional organization.

Next Phase
--------------


12. (SBU) If and when the current set of reforms passes, the
GOM's next goal will be to create a regulatory body to govern
energy development nationally, much as the Norway's Petroleum
Directorate and Brazil's National Petroleum Agency do. The
creation of such an independent regulator would separate
Pemex management from the political aims of the Energy
Secretariat, and would create an apolitical body more able to

SIPDIS
withstand political pressure over Pemex. Creating the
independent oversight body, Suarez Coppel claimed, will also
allow the government to create a greater source of "in-house"
expertise devoted to the oversight of the oil company. The
oversight body would also provide their expertise to the
congress to assist in the democratic oversight of the oil
producer.


13. (SBU) Suarez Coppel confided that with a functioning
independent overseer, the mechanisms would be in place to
allow other entities to begin to develop hydrocarbon
resources in Mexico. The body would also serve as an
independent authority that would enable Mexico to create the
regulations to bring this about.

Pessimistic About Fox's Central American Initiative
-------------- --------------


14. (SBU) We asked Suarez Coppel how Pemex felt about
President Fox's Mesoamerican Energy Integration Initiative
(PIEM). He was dismissive of the project predicting that it
would not survive long beyond the December 1 government
change. At Los Pinos' request, Pemex engineers had looked at
the refinery project. He noted that they estimated the cost
of the Central American refinery at USD 4 billion and gave it

MEXICO 00001492 003 OF 003


a rate of return of slightly less than five percent, making
the project, he claimed, extremely unattractive.

Comment
--------------


15. (SBU) While Suarez Coppel was a real cheerleader for the
corporate governance reform, pre election realities could
easily overtake his plans. Nonetheless, his optimism over
the reform of the Pemex fiscal regime was justified, as it
passed only a few weeks after he predicted it would. Perhaps
most telling was the decision by the largely PAN-affiliated
management of Pemex to work through PRD deputies to introduce
the corporate governance reforms -- an indication that Pemex
managers can place practicality over politics.


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