NEW MEXICAN ENERGY UNDERSECRETARY DISCUSSES PLANS

UNCLAS SECTION 01 OF 03 MEXICO 007037 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN USDOC FOR ITS/TD/ENERGY DIVISION TREASURY FOR IA (ALICE FAIBISHENKO) DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW DOL FOR ILAB E.O. 12958: N/A TAGS: ENRG EPET ECON ELAB MX SUBJECT: NEW MEXICAN ENERGY UNDERSECRETARY DISCUSSES PLANS REF: A. MEXICO 3638 ¶B. MEXICO 6483 ¶C. MEXICO 6898 Sensitive but unclassified, entire text. -------------- Summary -------------- ¶1. (SBU) Constitutional reform in the energy sector is at least three years away according to the newly appointed Undersecretary for Energy Planning at the Mexican Secretariat of Energy (SENER),Jordy Herrera. In the meantime, the Calderon Administration will introduce legislation to "strengthen the sector" including separating the Federal Electricity Commission (CFE),the Mexican Electricity Monopoly, into separate companies and developing new contracting methods to allow private firms to participate in deepwater oil development. Introduction of this "strengthening" legislation will follow an analysis by the Mexican Supreme Court to determine which areas of energy production can be opened to competition without constitutional change. Herrera felt Mexico could triple output from alternative energy sources, but it is unlikely that the Administration will challenge union hardliners to spur development of ethanol from sugarcane. Energy Secretary Georgina Kessel will seek a greater role overseeing the Mexican energy monopolies Petroleos Mexicanos (Pemex) and CFE and will reorganize SENER under functional areas that could affect the international office that coordinates with the DOE, though such final decisions could be several months away. End Summary. ¶2. (SBU) Emboffs paid a courtesy call on newly appointed Undersecretary for Energy Planning Jordy Herrera December 19. One of three Undersecretaries to Energy Secretary Georgina Kessel, the Calderon team announced his appointment December ¶11. Previously Herrera had been a campaign advisor after working as Calderon's private secretary during his stint as Energy Secretary under Fox. -------------- Constitutional Energy Reform Three Years Away -------------- ¶3. (SBU) SENER was limited in its room to act given the constitutional restrictions on private participation in the energy sector, though Herrera added that the President was very much aware of the threat to the nation's finances posed by the decline in Mexican production. ¶4. (SBU) Pointing to the only picture hanging in his undecorated, new office, one of Calderon surrounded by Party of the Democratic Revolution (PRD) protestors and Presidential security taking the Presidential oath, Herrera said that given the current make up of the Congress, the Administration believed that it was at least 12-13 percentage points short of the 2/3 majority it would need in congress to amend the Constitution to allow foreign participation in the energy sector. Mexico was at a "cultural disadvantage, with a large majority of citizens holding a 'leftist view' of the economy." ¶5. (SBU) Therefore, given other Administration priorities Calderon would not introduce the amendment for at least three years and not during the current Deputies' term. Herrera believed that in the end, it would be "congress leading the people" towards reform, thus the ideas that would be seeds of energy reform needed to be planted in the Congress. He was confident that the President would eventually get energy reform passed. ¶6. (SBU) In the meantime, the Administration felt private investment was crucial to the sector so it would "do what it could" absent reform. SENER would propose a series of measures to "strengthen both Pemex and CFE" and provide additional opportunities within constitutional limits. Herrera said development of oil production in deepwater needed special focus. SENER and Pemex were working on MEXICO 00007037 002 OF 003 modified contracts to offer deepwater service providers that would provide more attractive terms. ¶7. (SBU) The Mexican Supreme Court was also analyzing the reach of Articles 27 and 28 of the constitution to determine precisely which types of private participation in the petroleum industry would and would not be permitted. Herrera expected an answer from the court in March or April 2007. -------------- More Natural Gas -------------- ¶8. (SBU) The natural gas sector also needed regulatory changes. On one side with its lower rate of return versus oil, Pemex was reluctant to spend its limited capital on natural gas projects; conversely, CFE needed supplies of natural gas to run combined cycle plants. Herrera believed CFE operated liquefied natural gas (LNG) projects, specifically the terminal currently being bid in Manzanillo (ref A) started under the Fox administration, were good ideas and should go forward. He suggested that Mexico would consider projects in other regions. Herrera said Mexico did have enough electrical generating capacity on-line or planned to see it through the next 15-20 years. -------------- -------------- More Renewable Energy, but Dim Outlook for Biofuels/Ethanol -------------- -------------- ¶9. (SBU) On alternative energy, Herrera felt that Mexico needed an achievable goal of 6-7000 MW total from renewable sources to be developed over the next six years. Currently, renewables provided approximately 2000 MW, mostly through wind farms in the State of Oaxaca. Herrera expected the biggest renewable developments would come from mini-hydroelectric projects in southern Mexico. ¶10. (SBU) On biofuels and ethanol, he was much less sanguine. While confident the Congress would quickly pass a biofuel/ethanol law providing a regulatory framework for the sector (ref B),he did not see corn as an appropriate feedstock, and as long as sugarcane prices remained fixed, it too would not be an economic choice. He added that, as an accident of geography, those areas where Pemex is strong and could provide ethanol infrastructure (the State of Veracruz), the sugarcane workers union which aggressively protected fixed sugar prices, was also strong. This conflict would prevent development of the sector for the foreseeable future. Despite the Administration's interest in promoting ethanol and biofuels, given their other challenges, taking on the union would not be a priority. Nevertheless, the regulatory framework for ethanol and biofuel production would be in place, so ethanol production could move forward once the cane workers backed away from their obstructionist stand on sugar pricing. -------------- SENER Reorganization and More Power? -------------- ¶11. (SBU) While Herrera, with only nine days on the job, felt it was too early to say where Energy Secretary Georgina Kessel would take SENER, he added that one of Kessel's first tasks would be to break up CFE into separate companies based on function (generation, transmission, distribution, etc.) and develop a legislative framework to govern the sector. Currently, CFE is controlled by presidential decree. As for SENER itself, Herrera expected that the Secretariat would be reorganized from the current three directorates based on energy type: hydrocarbons, electricity, and planning to a functional structure, with directorates for planning, regulatory framework, and industry coordination. He also suggested that the current international office (which leads on SPP energy discussions with DOE) be combined with the investment promotion function; though a final decision had not yet been taken. Finally, he said that President Calderon wanted a "stronger Energy Secretariat." To that end, he said that Secretary Kessel wanted to hear directly from foreign companies wanting to do business with Mexico, and Kessel then MEXICO 00007037 003 OF 003 would ensure new opportunities are presented to Pemex and CFE. Kessel would be especially interested to hear from companies with new technologies, especially in deepwater technology. -------------- Comment -------------- ¶12. (SBU) Herrera spoke with complete confidence in our initial meeting. But, as new Administration appointees sort out the relationship between Pemex with its 140,000 employees, powerful union, and well-respected new CEO (ref C) and SENER with its modest staff of 800, priorities may shift. Nevertheless, unlike previous Mexican Undersecretaries for Energy Planning, Herrera does enjoy a close relationship to the President. End comment. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity BASSETT