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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