CALDERON WARNS OF PEMEX CRISIS

UNCLAS SECTION 01 OF 02 MEXICO 001550

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/GWORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD
DOL FOR ILAB

E.O. 12958: N/A
TAGS: ENRG EPET ECON MX
SUBJECT: CALDERON WARNS OF PEMEX CRISIS

REF: A. 06 MEXICO 5810


B. 06 MEXICO 6783

C. MEXICO 1256


Introduction and Summary
--------------


1. (U) President Calderon spoke frankly about the challenges
facing Mexico in the petroleum sector on "Pemex Day," March
18, the 69th anniversary of the expropriation of foreign oil
company assets in Mexico. He announced that Mexico has less
than ten years of reserves remaining at current production
rates, that in past years Pemex has operated well below the
industry standard of replacing 100 percent or more of
reserves, and that Pemex has more than USD 50 billion in
pension liabilities alone. Calderon noted that oil income
will be essential for funding future government spending on
poverty and infrastructure and concluded that if Mexico "did
not act soon to reverse the situation, the country would face
severe problems." While pundits and industry participants
have described this situation at length, this is the first
time a Mexican President has described the situation in such
stark terms.

Speech
--------------


2. (U) In the speech, Calderon noted that by Pemex's own
calculations, the company had 9.3 years of proven reserves
remaining at the current production rate. Pemex debt totaled
more than USD 100 billion, half of which was pension
liabilities. Furthermore, Pemex has not been ale to replace
the reserves it has produced for decades. Calderon added
that if Mexicans did not act quickly to replace reserves,
Pemex would be unable to reverse the drop in daily production
seen recently (ref A, B) with severe consequences. Not only
would Mexico be unable to finance development, but the
country would become a net petroleum importer.


3. (U) Calderon implied that previous administrations had
neglected Pemex, keeping the company from developing
necessary new technologies and finding new fields fast
enough. He added that politicians had used Pemex income to
finance a variety of projects without considering the health
of the business. To do nothing to fix Pemex would have
irreversible costs for the nation, especially in terms of
Mexico's competitiveness.


4. (U) Calderon then described six challenges that Mexico
faces in the effort to strengthen the company. The first was
to invest sufficiently in exploration to ensure Mexican
energy security for the longer term. Second was to obtain
the necessary financing and technology to exploit the
nation's reserves, particularly in deep water or in difficult
to develop onshore areas. Calderon also called for making
Pemex more efficient and transparent. He called for Mexico
to become competitive in refining and petrochemical
production. Finally, Pemex had to fight internal corruption,
and to promote sustainable development and protect the
environment.

Reaction Mixed
--------------


5. (SBU) While none of the facts in the speech was new, what
was unique was that President Calderon said them publicly.
According to one source within the Pemex corporate finance
office, the company's debt has reached USD 107 billion of
which USD 16 billion was short-term. In past years the
gravity of this situation not reached the average Mexican
with the immediacy that Calderon provided.


6. (SBU) Cesar Hernandez, a researcher in Energy Policy at
Mexico's Research Center for Development (CIDAC) (strictly
protect) noted that at the speech, Calderon recognized and
was friendly with Pemex's union (STPRM) chief, Romero
Deschamps. In marked contrast with President Fox who "never
really felt comfortable with Deschamps," Calderon, by his
actions and statements from the podium seemed to signal a

MEXICO 00001550 002 OF 002


willingness to work with the union leader. Coming off the
President's recent progress pushing reform of the public
sector union's pensions , Calderon currently enjoys
reasonable acceptance from union leaders, and seems to be
willing to use it. According to Hernandez, if the public
pension reform passes, Calderon will gain more respect from
the unions and political capital that could be used on fiscal
and ultimately energy reforms. He added that Calderon's
behavior was especially noteworthy given the very close ties
between the STPRM and the opposition Institutional
Revolutionary Party (PRI),though Calderon will still have
substantial ground to cover when dealing with Party of the
Democratic Revolution (PRD) unions on the issue.


7. (SBU) Pemex officials we spoke with also believed that it
would be important for the President to begin to lay the
groundwork for financial reform of Pemex. They note that the
legislature is far from consensus. Pemex's current financial
position is not sustainable. The company has delayed
maintenance to the point where some installations are in
significant danger. Additionally, Pemex debt is in danger of
being downgraded


8. (SBU) Energy Secretariat Director General for Research,
Technology and Energy Planning, Diego Arjona (strictly
protect) who participated in drafting the speech, called the
response it has received, important, thought he added that
the effects would be slow in coming. He believed that the
biggest effect would be in the budget process in the Chamber
of Deputies where he noted that members had already contacted
him to discuss carving out a larger budget for the oil
company. He suggested that even after the speech, the
average Mexican did not fully grasp the financial challenges
Mexico would face.


9. (SBU) Miriam Grunstein, (strictly protect) a local
attorney representing Petrobras in Mexico saw the response as
more muted. More than speeches on the same occasion in years
past from President's Fox, Zedillo, and Salinas, she noted
Calderon's nationalistic tone, surmising that this would help
to co-opt the union leadership and those who continue to view
the sector through a "uniquely Mexican lens, as an essential
symbol of national sovereignty," though she believed the
speech was not strident enough to capture the attention of
most Mexicans.

Comment
--------------


10. (SBU) We see Calderon's speech as a first step in a long
public campaign for energy reform. Whether his political
savvy and the respect he has won from some unions will allow
the President to change the sector before Mexico reaches a
financial impasse is less clear.


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