MESOAMERICAN ENERGY INITIATIVE MOVES AHEAD DESPITE

UNCLAS SECTION 01 OF 03 MEXICO 004494

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON ENRG EPET MX
SUBJECT: MESOAMERICAN ENERGY INITIATIVE MOVES AHEAD DESPITE
DOUBTS

REF: MEXICO 374 AND PREVIOUS

Sensitive but unclassified, entire text.

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Summary
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1. (SBU) Under the Mesoamerican Energy Integration Plan
(PIEM),the GOM is continues to vigorously promote
construction a refinery in either Panama or Guatemala to
serve as an outlet for heavy Mexican crude, as well as
provide development opportunities and reasonably priced
energy supplies for the region. Mexican Undersecretary for
Hydrocarbons, Hector Moreira, the project leader, met with
energy companies in Houston July 12 to encourage
participation in the effort. Participating countries and
organizations met August 10 in Guatemala to develop
methodology and a timetable for (1) identifying a private
firm to construct the facility, or (2) selecting a firm to
partner with Pemex to build the refinery. Meanwhile, Pemex
CEO Luis Ramirez Corso has been quoted in the Mexican press
expressing his doubts about the project's viability and
necessity at the same time our GOM interlocutors dismiss his
comments. While GOM officials involved understand the
difficulty of attracting an international oil company to
build the facility, they remain optimistic. PIEM
participants will also announce a contractor to conduct a USD
600 thousand Interamerican Development Bank feasibility study
for construction of a natural gas pipeline from Colombia
through the region to Guatemala.

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Refinery
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2. (SBU) On July 12, 2006 Mexican Hydrocarbon Undersecretary
Hector Moreira, responsible for the PIEM refinery project,
briefed IOCs including ExxonMobil, Chevron, Valero, Shell and
Saudi Aramco in Houston on Mexican plans for the project.
Moreira sought to build interest in the construction of a
refinery in Panama, Guatemala, or any other Central American
country that would want the project. The basis of the
briefing was the information contained in the IDB/GOM
documents on the project we previously provided to WHA/EPSC.
Moreira explained that Mexico had abandoned its earlier
idea of an "empresa integradora" that would contract the
crude and sell the products allowing the refinery to process
crude on a fee for service basis. The GOM does appear
convinced that inputs and output from the facility be
provided at market prices.


3. (SBU) As previously reported (reftels),Mexico would
provide Mayan crude as a feedstock through a long term
contract. Econoff met with both the Chevron representative
who attended the presentation, and the ExxonMobil's Country
President familiar with the project. Both reported that
their engineers were studying the proposal, but without some
government subsidy, the rate of return for the refinery did
not seem to be close to the internal thresholds necessary to
consider it.


4. (SBU) The company representatives added U.S. firms were
already supplying the region effectively from Gulf Coast
refineries. Any production from the proposed PIEM project
would result in lost sales from existing facilities. The
ExxonMobil President wondered aloud, with the steep decline
from Cantarell, where Mexico would get the heavy crude to
load the facility, and whether Mexico would end up purchasing
crude just to load the PIEM refinery.


5. (SBU) According to Luis Landa, Director General for
Bilateral Economic Relations at the Secretariat of Foreign
Affairs (SRE),Mexican officials met with their Central

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American partners, the IDB, and representatives of KBC, the
firm that conducted the PIEM refinery feasibility study,
August 10 in Guatemala to develop a final plan to engage
interested companies in the project. KBC was also to present
the outcome of its study to the group. While Landa said
that a plan to move ahead would come out of the August 10
meeting, he told us the GOM would suggest that Pemex's
marketing arm (PMI) issue an invitation, likely before the
end of August, to foreign firms inviting them to build
refinery. PMI would also steward the selection process.


6. (SBU) The firms invited to consider partnering in the
refinery would likely be asked to pay USD 10 to 20,000 as an
"information fee" giving them access to the feasibility
studies done by KBC, as well as the right to interview
"anyone in Central America" about the project. Once the
firms paid the information fee, they would likely have a
relatively short time -- about a month -- to state
unequivocally whether they would want to pursue the bid.


7. (SBU) Mexico, represented by Pemex, along with Panama,
and Guatemala would decide between the firms, if more than
one firm wanted to move forward following the due diligence
phase, though Landa admitted that it was much more likely
that no company would show interest in the project. In that
case, he described a "Plan B" in which Pemex, partnering with
a private firm, would seek build the Central American
facility.


8. (SBU) After all participants agreed on a path forward at
the August 10 meeting, Landa foresaw Energy Ministers from
the participating countries meeting in Panama August 25 to
"bless" the agreed on process. At the August 25 meeting,
Pemex would also introduce the idea that Pemex, through PMI,
represent the interest of all the parties when dealing with
the IOCs.


9. (SBU) Landa noted that as the companies decide whether or
not to participate in the refinery project, they will be free
to negotiate terms with Guatemala or Panama -- the countries
selected by the KBC study -- or any other location in Central
America they wish. According to Landa, under current GOM
thinking, Pemex would supply crude for the project under a
long term contract at market based prices and product from
the refinery would be available to the region at market
prices. The host country, whether Guatemala, Panama, or any
other Central American state, would offer incentives to the
refinery owner such as free land, water, or electricity; tax
abatements; or housing and education for refinery employees.
KBC would provide all parties with a "checklist" of
"appropriate" incentives for the refinery owner.



10. (SBU) Despite Landa's assessment of Pemex participation,
Pemex officials do not all seem to support the effort. The
Mexican Daily Reforma published an interview with Pemex CEO
Luis Ramirez Corso in which he said supplying the PIEM
refinery would interfere with Pemex's own plans to build a
new train at their Salina Cruz refinery. The PIEM project,
Ramirez Corso added, would need 230 thousand barrels per day
or more of Mexican crude that Pemex would rather refine
itself. After the article appeared, we spoke with a Pemex
representative who confided that, while the company would
comply with the Fox Administration's wishes, it did not see
the Central American project as an attractive option.


11. (SBU) In response to Ramirez Corso's statements, Energy
Secretary Canales said that Mexico needed to diversify its

SIPDIS
own outlets for crude. The article went on to quote an
unnamed Energy Secretariat (SENER) source who said the
opposing views between the government and Pemex were simply a
difference in strategy, a position we also heard from SENER
officials directly. We were also told that Hacienda would
not approve funds for Pemex's planned expansion of the Salina

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Cruz refinery.


12. (SBU) In closing, Landa was realistic about the
refinery's chances for success calling it "a long shot." The
IOCs had told Mexico they would need refining margins "as
wide as they are right now" guaranteed for the life of the
project. No country could guarantee that, but Mexico would
provide potential investors with guaranteed crude supply, a
local market, and the country that would host the project
would provide incentives. He added that KBC had suggested
that a Guatemala refinery could be used as a mechanism to use
Mexican crude to supply gasoline to California -- an
attractive bonus. While most companies remained
skeptical, Landa suggested that Valero was the most
interested of the refiners.

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Other PIEM Projects
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13. (SBU) Landa added that the IDB was preparing to announce
at the August 10 meeting, the consulting firm that would
complete the study of the proposed Central American gas
pipeline. The winning firm will receive USD 600 thousand to
develop a feasibility study for the pipeline that the
participating countries propose will run from Columbia,
through Central America to Guatemala to supply Colombian gas
to the region. Officials expect the consulting firm will
have the initial feasibility study completed by October 31.
The study will address pipeline routing as well as assess the
likelihood that the countries could create natural gas demand
through construction of distribution systems and gas fired
power plants. The GOM continues to work with Central
American governments on the renewable and energy efficiency
agendas that are also part of the PIEM plan.




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