MEXICO/CENTAM ENERGY - MEXICANS MOVE ON ENERGY

UNCLAS SECTION 01 OF 05 MEXICO 000620 SIPDIS SENSITIVE SIPDIS FOR EB/ESC, WHA/EPSC, AND WHA/MEX USDOC FOR ITA/MAC/NAFTA ARUDMAN AND ITA/ENERGY DIVISION TREASURY FOR IA MEXICO DESK ENERGY FOR KDEUTSCH AND SLADISLAW E.O. 12958: N/A TAGS: ENRG MX PGOV PREL SUBJECT: MEXICO/CENTAM ENERGY - MEXICANS MOVE ON ENERGY INITIATIVE REF: A. MEXICO 374 ¶B. SECSTATE 11181 ¶C. 05 MEXICO 6895 ¶D. 05 MEXICO 7368 ¶E. 05 MEXICO 7466 ¶F. 05 MEXICO 7533 Sensitive but Unclassified, entire text. Summary -------------- ¶1. (SBU) To avoid the appearance that the U.S. is pulling the strings behind the Mesoamerican Energy Integration Plan (PIEM),Mexican Energy Undersecretary Hector Moreira will not send a team to brief U.S. officials until he has the cover of the proposed Binational Commission (BNC) in Washington. Nonetheless, Foreign Secretary Derbez will send his Assistant Secretary for Economic Affairs, Irma Gomez to Washington next SIPDIS week to provide a more general political-level briefing. Meanwhile, the Central American PIEM participants have approved a "Terms of Reference" document for initial studies on the planned refinery. The IDB has provided Mexico with a first draft of a similar document for a proposed gas pipeline linking Colombia and Mexico (copies e-mailed to Washington agencies). PIEM participants have also agreed on a first list of projects on energy efficiency and have discussed ways to cooperate on renewables. While the GOM is interested in our help with the PIEM, they suggest we channel specific offers of cooperation through the IDB. End Summary. Mexican Team Won't Come to Washington in February... -------------- -------------- ¶2. (SBU) Emincouns and Econoff met Mexican Undersecretary for Hydrocarbons Hector Moreira Wednesday, January 25 to discuss the state of play in the PIEM and to follow-up questions outlined in ref B. Joining Moreira were Secretariat of Energy (SENER) Director General for SIPDIS International Affairs Salvador Beltran Del Rio and SRE Director General for Economic Bilateral Relations, Luis Landa. Moreira opened by reiterating the message we received from SRE Unit Head Gomez (ref A) that Energy Secretary Canales would attend the upcoming Binational Commission and meet with Secretary Bodman, though he wondered whether the new Canadian minister would be able to attend to allow coverage of SPP goals. Nonetheless, he would not travel to the U.S during February to brief on the Central American energy plan. He explained that the PIEM initiative remained in a nascent state and that press coverage that might arise over meetings with U.S. officials on the details of the project before it was more thoroughly defined could kill it before it got off the ground. He added that the PIEM needed to be seen as a Mexican project. He dismissed even an expert level visit during February for the same reason. As alternatives, Landa noted that SRE Unit Head (Assistant Secretary equivalent) Irma Gomez would be traveling to SIPDIS Washington the week of February 6 and her diplomatic role would enable her to raise the topic without raising undue press concerns. Moreira added that he could foresee leading a team that would accompany or advance a Canales BNC delegation by a few days to meet with Washington agencies on the PIEM. He believed that the BNC would provide appropriate "justification" for a visit. ...But, SRE Official Will Visit Washington Next Week -------------- -------------- ¶3. (SBU) To preview her visit to the U.S., econoff met separately February 3 with Luis Landa who reviewed Gomez's MEXICO 00000620 002 OF 005 talking points for Washington officials. While Gomez would not be able to discuss technical aspects of the proposal, she could review the project's rationale. Despite earlier comments from SENER officials (ref C) that the primary purpose of the PIEM was to assure an outlet for Mexican crude, Landa countered that impetus for the plan came from Mexican opposition to Chavez, who he described in very un-diplomatic terms. Central America's dependence on Venezuelan oil had to be reduced. Moreira too had called Petrocaribe "unsustainable." Chavez was making too many promises he could not keep, and sooner or later countries would see he could not be relied on. The Central American market was small enough that a single refinery could supply it. When President Fox raised the issue at Mar de Plata, the primary purpose for the project had morphed to that of reducing the regions dependence on refined product imports. ¶4. (SBU) While building a refinery had been the initial response to the regions energy woes, questions remained. What were the supply security implications of a single source of fuel for the entire region? The market within the region was balkanized with "important people" controlling importation of refined products in many of the Central American states. Could the countries be made to create a regional gasoline market despite those vested interests? Harmonized standards, Landa argued, would be essential for the region to take advantage of the refinery's economies of scale. Without agreement to modify regulatory frameworks, the project would die. Refinery Project Status -------------- ¶5. (SBU) Landa quickly reviewed the January 13, 2006 draft of the IDB's terms of reference (copies e-mailed to Washington agencies). The terms of reference are instructions from the IDB to the firm that will eventually be selected to conduct the initial studies of the project (reftels). According to this draft, the first phase of work will include: -- market studies for refined product in the region -- studies to determine the necessity of additional capacity in the region. -- a recommendation on a site for the proposed refinery. -- an outline the process flow including determination of inputs and outputs, as well as technology to be employed, and -- a simplified business model. ¶6. (SBU) According to Landa, the consulting firm, to be chosen in February, is scheduled to begin work March 1. Central American countries would hold at least one interim meeting April 24 to receive a progress report on the consulting firm's findings. Experts would meet again to review final results of the first phase of the consulting firm's work May 21 and to develop a presentation to leaders who will meet May 31 in Santo Domingo. If the May meeting results in a decision to go ahead with the project, leaders would sign a second document that would bind them to continue with it. While Landa did not outline all of the details of this proposed document, he noted that it would include a commitment to undertake the necessary political reforms that would create a harmonized market. ¶7. (SBU) Moreira reported that the technical committee of PIEM participants met January 23 and quickly approved the draft Terms of Reference document described in para 5. Despite earlier reports from Moreira's staff as on dissent among the participants vying for the project, he said the document was approved almost without debate. MEXICO 00000620 003 OF 005 DOE Refinery Questions -------------- ¶8. (SBU) We also reviewed the questions from reftel paper with Moreira. While, many of the ultimate responses to the questions will depend on the outcome of the consultant's work outlined in para 4, Moreira, a former UNAM Petroleum Engineering Professor, is the conceptual father of the refinery project. His responses follow each of the questions: -- Will the refinery operator contract be a build-operate-own (BOO) or build-operate-transfer (BOT) contract? It is unclear if the public, multi-country-owned energy company will own the refinery or if the private entity will own the refinery. It is premature to define the nature of the refinery operator contract (BOO versus BOT). As outlined in the original Mexican presentation, the initial plan called for the refinery to be built, owned and managed by an experienced multinational energy company. -- How will the brokering company for the refinery be funded and managed? The brokering company would be funded through capital contributions from each of the participating countries. While management of the company had not been outlined in detail, staff would come from the participating countries, as well. -- Why does there need to be a public company created, adding debt to the countries involved when a private company could take on this project and generate revenue for the nations involved? The initial paid in capital for the brokering company would be relatively small, approximately USD 100 million. Divided among all of the participating countries, the capital required for the brokering enterprise would not be significant expenditure. Moreira added that the refinery would only be viable if it could take advantage of economies of scale at production levels of 250 thousand barrels per year. An investment in the brokering company would keep participating states tied to product from the refinery. It would also ensure that windfalls from high refining margins or high crude prices would accrue to the participating governments to be used to meet development goals, rather than to leave the region. -- What is the nature and purpose of the tax on imported petroleum products produced outside this plan? The tax on imported petroleum products would help to maintain gasoline quality standards in the region. Moreira explained that there is now no standard for sulfur content for gasolines sold in Central America. Furthermore, consumers in the region are not sophisticated enough to discern the difference. As an environmental measure, the proposed refinery would produce low sulfur fuels that could easily be undercut by cheaper higher sulfur product imported into the region. The proposed tax would apply to fuels that do not meet a specified sulfur content imported into the region. -- How will product from the refinery be distributed given the lack of existing infrastructure? This will be determined from the IBD study described in the "Terms of Reference". -- Will there be restrictions on other companies importing MEXICO 00000620 004 OF 005 gasoline or other finished products into the region? As currently envisioned, there will be no restrictions, though the participating nations or entities within the nations will have to execute long term purchase contracts for fuels produced by the refinery. -- How will the plan allow for competition? Except as noted above, the refinery will operate in an open market. -- Can Mexico afford to supply the refinery in light of their declining oil production concerns? Moreira, and others to whom we have spoken at SENER and Pemex have been unequivocal in their statements that current plans call for Mexican crude production stay near constant given new production coming on line from fields including Ku-Maloob-Zaap and the Light Marine Crude project. Despite acknowledging conflicting reports from outside sources on Mexico's reserve picture, Moreira predicted that Mexican crude exports would increase three percent in 2006. He sees no inherent conflict between supplying the refinery and Mexico's production capacity. -- If the refinery will accept alternative sources of supply, where could they come from? Moreira noted that Mexico sought a very long-term contract to supply the refinery with its crude as a principal condition for the project. This contract would, he believed; fully load the facility, obviating the need for additional crude supply. At the conclusion of the initial purchase contract, the brokering company could choose other sources if it wished. Gas Pipeline Project -------------- ¶9. (SBU) Landa and Moreira both noted that while the Natural Gas project was on a slower timetable, leaders could possibly decide to approve a Colombia-Mexico gas interconnection at the May 31 meeting, though this was less clear. On January 27, the IDB issued a draft "Terms of Reference" document for a study of the pipeline project (copy e-mailed to Washington Agencies). According to the draft document, the selected consulting firm should consider supply to the region from Mexico or Colombia or from NGL regassification. The first phase of analysis should include: an updated regional gas demand forecast; definition of a possible supply scenarios; and recommendations of the best way to supply the region. A second phase would add: a proposal for a regulatory framework for the region; possible pipeline alignments and an first environmental impact analysis; and development of a financing and development plan. The Central American representatives are due to review this draft proposal in February. Renewables and Energy Efficiency -------------- ¶10. (SBU) At the meeting of Central American experts on renewables, January 30-31 (ref F) on the margins of the World Bank Renewable Energy Policy Forum, the representatives agreed on eight conclusions geared mostly towards increased cooperation and exchange among the participants. According to Landa, they defined no specific project. (Conclusions e-mailed to Washington Agencies) On energy efficiency, Mexico has proposed specific cooperation programs that include: modifying street lighting to use more energy efficient bulbs; promotion of alternative fuels for electricity generation; and assisting participants with MEXICO 00000620 005 OF 005 development of regulatory frameworks to allow consumers to replace old appliances with more energy efficient models. Mexico will pay for Central American experts to meet February 17 in El Salvador to approve these projects and develop funding schemes for the projects. Funding sources could include the GOM, the UN Economic Commission for Latin America (CEPAL),and the IDB. Landa noted that the Mexican Foreign Affairs Secretariat would foot the bill for the initial work in this area to ensure follow-up. Comment: Working With Mexico -------------- ¶11. (SBU) Senior officials from SENER and SRE have been willing to provide us with information on the progress of the PIEM. To gain our acceptance of the project they have not shied away from sharing their anti-Chavez views--SRE directly and SENER, by outlining for us why Venezuela was not serving the region well. They are; however, very sensitive about the PIEM remaining a Mexican regional project, fulfilling what he considers his committment to Deputy Secretary Zoellick to send a briefing team to Washington. While Moriera made it clear at our meeting that "news of his presence in the halls of the State Department" would kill the PIEM, he was happy to talk with U.S. officials. He only needed the cover the BNC would provide. Landa noted that after Moreira made his decision not to send a team in February known, Derbez ordered Gomez to brief Washington on the project. All involved believe that Gomez is far enough away from the details of the project that she can show her face in Foggy Bottom. She will be well briefed, and should be able to answer questions about Mexico's work with the IDB, though she will be less successful with technical details. On cooperation, Landa strongly suggested that the USG remain in close contact with IDB Regional Operations Division Chief Marcelo Antinori about specific tie-ins with U.S. efforts and IDB Vice President Ciro De Falco about our support for the project(s). End Comment. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity KELLY