SENIOR MEXICAN ENERGY OFFICIAL SEES CRISIS COMING

C O N F I D E N T I A L SECTION 01 OF 02 MEXICO 001256 SIPDIS SIPDIS STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD USDOC FOR ITS/TD/ENERGY DIVISION TREASURY FOR IA (ALICE FAIBISHENKO) DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD, DOE FOR DAS PUMPHREY AND A/S HARBERT DOL FOR ILAB E.O. 12958: DECL: 03/11/2017 TAGS: ENRG EPET ECON MX SUBJECT: SENIOR MEXICAN ENERGY OFFICIAL SEES CRISIS COMING REF: MEXICO 589 Classified By: MINISTER COUNSELOR FOR ECONOMIC AFFAIRS VLAD SAMBAIEW FOR REASONS 1.4(B) AND (D) Summary -------------- ¶1. (C) The Mexican Undersecretary for Energy Planning, Jordy Herrera, told a Department of Energy (DOE)-led USG delegation that Mexico's oil production could decline from 3 MBD to 2.5 MBD before stabilizing within two years. We were told President Calderon is planning a March 18 public address in which he would lay out in stark terms the production and resulting budgetary challenges that Mexico could face in the coming year. Herrera estimated that declining oil production could cause a budgetary shortfall of as much as 2.5 % of GDP within one year. End Summary. ¶2. (C) Newly appointed Undersecretary for Energy Planning, Jordy Herrera told a Department of Energy delegation led by Deputy Assistant Secretary for International Energy Cooperation David Pumphrey that he was "very worried about Pemex." He "didn't know what happened" during the Fox term, but Mexico's oil production situation had gone "very wrong." The Calderon administration had two options: maintain oil production at the current rate (or as close to the current rate as possible) or address tax reform. Calderon was coordinating fiscal reform efforts while mindful of the expected decrease in production. ¶3. (C) Herrera believed from Pemex data he had seen that Mexico could stabilize declining crude production at approximately 2.5 MBD, seventeen percent below current levels. The production crisis would result in a worst case 2.5% of GDP gap in the federal budget. It would take about a year to for the Administration to establish a strategy, and that President Calderon himself was leading the process. ¶4. (C) Herrera said that while not confirmed, current thinking was that as a first step, on March 18, "Pemex Day," the anniversary of the nationalization of the Mexican oil industry, Calderon would speak out in public about the magnitude of the impending crisis, something the government had never done before. Pemex needed money it did not have. With a large debt load, Pemex's ability to raise additional debt is limited. The only option remaining was to look at new contracting methods with private firms. Nevertheless, given Constitutional restrictions on private involvement in the energy sector, any move in this direction will be politically difficult. ¶5. (C) Herrera was not certain how the Mexican people would react to such a blunt message from the President. Nevertheless, commenting on efforts already underway led by Senate Energy Committee Chairman Francisco Labastida of the PRI (reftel) to introduce an initial set of Pemex corporate governance reforms, Herrera said that he and others in the Calderon Administration had "started to speak with the Senate, beginning March 6 with the National Action Party (PAN)" on prospects for reform. ¶6. (C) Herrera noted that the administration was willing to work with Labastida, though given the recent election of Beatriz Paredes as the new President of the PRI; the administration had to first make certain that Labastida continued to speak for the PRI leadership. ¶7. (C) Herrera also noted that Labastida had been working privately to promote his reform package, agreeing that public debate, at this stage, would be counterproductive. At the same time, Herrera argued that energy reform was too sensitive for the Administration to introduce its own legislation; thus, given the current situation, Labastida would probably continue to be a major player. ¶8. This message has been cleared by DOE DAS David Pumphrey. Visit Mexico City's Classified Web Site at MEXICO 00001256 002 OF 002 http://www.state.sgov.gov/p/wha/mexicocity GARZA