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.



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