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.

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Summary
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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.

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Constitutional Energy Reform Three Years Away
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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.

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More Natural Gas
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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.

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More Renewable Energy, but Dim Outlook for Biofuels/Ethanol
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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.

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SENER Reorganization and More Power?
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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.

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Comment
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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.





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