MEXICO ENERGY: PRD DEPUTY ON PEMEX CORPORATE

UNCLAS SECTION 01 OF 02 MEXICO 001526 SIPDIS SENSITIVE SIPDIS FOR WHA/MEX, WHA/EPSC, AND EB/ESC ENERGY FOR SLADISLAW AND KDEUTSCH USDOC FOR ITA/MAC/NAFTA/ARUDMAN AND ITA/ENERGY DIVISION TREASURY FOR IA - JASPER HOEK E.O. 12958: N/A TAGS: ECON EFIN ENRG MX SUBJECT: MEXICO ENERGY: PRD DEPUTY ON PEMEX CORPORATE GOVERNANCE BILL REF: (A) MEXICO 1492; (B) MEXICO 1476 -------------- SUMMARY -------------- ¶1. (SBU) Francisco Carillo, the senior member of the Party of the Democratic Revolution (PRD),on the Chamber of Deputies' energy committee, told us March 16 that a Pemex corporate governance bill would likely pass before the end of April. The three political parties have already agreed informally on changes to Pemex's budgeting process and management and procurement procedures, while gaps among the parties remain on composition of Pemex's board of directors and a proposed scheme to issue securities that entitle the bearer to a share of Pemex profits without title to underlying assets. Carillo predicted that Congress would pass those measures on which all sides agreed and leave controversial topics for the next legislature. Meanwhile, PRD legislators, with expert help, are trying to enrich presidential hopeful Andres Manuel Lopez Obrador's (AMLO) energy proposal, which has been somewhat difficult to pin down. -------------- CONGRESS MAY PASS A LIMITED REFORM -------------- ¶2. (SBU) Econoff and Econ FSN met March 16 with Francisco Carrillo, Secretary of the Energy Committee of the Chamber of Deputies. Carrillo noted a general consensus among the main political parties on the need to pass Pemex's corporate governance bill (ref A). He hoped both houses would approve the bill before the end of April, at least on those issues were there is sufficient consensus: budget, technical operations, and management independence as well as an adjusted acquisition and purchases system. Lawmakers would postpone more controversial issues, such as the issuance of quasi shares until the next legislature takes over. Carrillo said that there was a general perception in Congress that Pemex's fiscal reform was a very "timid" effort that will prevent the state-run company from guaranteeing sufficient investment. Legislators will continue working to improve the way Pemex remits proceeds to the Mexican Government. -------------- NO CONSENSUS ON PEMEX'S BOARD -------------- ¶3. (SBU) Carrillo told us that there was no consensus yet on the composition of the board. Carillo backed a proposal to modify the current eleven board members (six government and five union representatives) by adding "independent" members. Carrillo said he preferred using the word "experts" rather than "independent" to prevent misinterpretations (for example, that Pemex was becoming more like a private company). He and other legislators suggest that the new board includes only five "experts" and only four government representatives along with the five union members. For Carrillo, Pemex requires a balanced board that would add to the expertise technical opinion of the independent members, the long-term vision of the government. -------------- AGREEMENT ON PROCUREMENT -------------- ¶4. (SBU) There is consensus among legislators on the need to modify the Government's Works and Acquisitions Regulations or at least the chapters pertaining to Pemex and the Federal Electricity Commission. The amendment would define a new competitive bidding process; encourage technology transfer; improve transparency; and allow Pemex to be more flexible in the way it awards bids. Legislators will also seek to modify the current auditing process to base it on economic results rather than on procedures as it is currently done. -------------- NEXT STEPS -------------- MEXICO 00001526 002 OF 002 ¶5. (SBU) As a next phase, Mexico would seek to create a technical oil regulator similar to Norway's Petroleum Directorate and Brazil's National Petroleum Agency. Carillo believed the regulator would be overseen by the Energy Secretary who would be responsible for defining long-term SIPDIS goals. The other members of the board, which could be "independent," would have the flexibility to develop the strategies to achieve such objectives. Carillo's position differs from Pemex which seeks a more independent regulator separate from the Energy Secretariat. -------------- PRD'S FUTURE ENERGY PLANS -------------- ¶6. (SBU) Carrillo contradicted AMLO's earlier pronouncement that it would not be necessary to develop deep water reserves, but rather concentrate on developing shallow and onshore fields. Drilling in deep water would be very important, he said, but experts did say that there were about 20 billion barrels of onshore and shallow-water reserves much easier to exploit. For Carillo, Mexico did have a reserve crisis and he acknowledged that AMLO's current energy plan was still a "thesis," but that he planned to summon experts and businessmen in an energy forum to enrich AMLO's energy proposals. The objective would be to have the Advisory Council - created to elaborate further on AMLO's platform by taking into consideration proposals from civil society (ref B) - take into consideration the energy forum's suggestions and include them in the overall strategy. On natural gas supply, Carrillo believed that LNG re-gasification plants such as the Manzanillo facility currently under development were a "necessary illness," and thus AMLO would continue with these projects, despite his objective to reduce dependence on energy inputs. He explained that Mexico needed to work on alternative energy sources, such as nuclear power, to cover growing demand. -------------- COMMENT -------------- ¶7. (SBU) There is broad support in Congress from all three major parties to pass a new corporate governance bill for Pemex this session that helps to improve its productivity. A draft prepared by a group of Senators and Deputies will be presented to the energy committee of the Chamber of Deputies this week. Its reception will indicate how close the parties are. Congress' and the Executive's new strategy of elaborating the bill in coordination with Senators, Deputies and Pemex should yield benefits for the state-run company, leaving a good legacy for the coming administration. Despite this optimism, we continue to receive reports that considerable daylight remains between Pemex and Congress' positions on the board and on issuing quasi shares. At least one source told us that Pemex insists on an all-or- nothing deal, and would force the government to scuttle the proposal this session if they do not get it. End comment. KELLY