MEXICO ENERGY REFORM

C O N F I D E N T I A L SECTION 01 OF 03 MEXICO 000213 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA STATE FOR EB/ESC MCMANUS AND IZZO USAID FOR AA/LAC AND AA/EGAT 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 ALOCKWOOD DOL FOR ILAB E.O. 12958: DECL: 02/28/2015 TAGS: EAID EPET ECON MX SUBJECT: MEXICO ENERGY REFORM REF: A. 06 MEXICO 6783 ¶B. 06 MEXICO 5810 Classified By: AMBASSADOR ANTONIO O. GARZA FOR REASONS 1.4(B) AND (D) -------------- Summary -------------- ¶1. (C) Embassy Mexico is supporting the establishment of a Mexican private sector working group to promote serious, in-depth discussion of the future of energy in Mexico. Energy is at the core of debates affecting the Government of Mexico's fiscal future. President Calderon and other leaders have called for energy reform to modernize the sector and bring it into line with global best practices. However, there are deep political divisions concerning the direction of reform and what exactly should be done. Most anti-reform arguments are couched in highly politicized language, and the Mexican public lacks access to well-informed, factual, objective analyses of the energy situation. The Embassy will use an effective strategy developed by AID for the creation of expert working groups and networks in support of these types of policy reforms, such as the creation of the federal civil service. Other efforts supported ongoing dialogue on key issues such as re-election and anti-trafficking legislation efforts. End Summary. -------------- Background -------------- ¶2. (C) Mexico's energy sector is seen by national and international experts as facing significant production and revenue challenges over the next few years (refs A, B). The country's electricity system has lacked investment and cannot keep pace with growing demand. Electricity is also expensive, costing the government billions of pesos in subsidies for households, and eroding the competitiveness of producers who have no alternative supplies for this critical input. The Government of Mexico is financially dependent on the state oil monopoly, Petroleos Mexicanos (Pemex) which provides nearly 40% of GOM revenues and transfers almost two thirds of its profits to the federal treasury. Over two thirds of Mexican oil production comes from the giant offshore Cantarell field. Pemex has announced that it expects Cantarell production could decline by an average of 14 percent a year between 2007 and 2015 (ref B). Absent new production and/or fundamental tax reform, this dramatic reduction in oil production could easily translate into a fiscal crisis. Finally, Mexico is highly dependent on petro-chemical, gasoline and liquefied natural gas imports because neither Pemex nor the private sector has invested enough in domestic production. ¶3. (C) An examination of the mainstream press over the past year clearly demonstrates that public discourse about energy issues is focused on preserving economic nationalism, rather than undertaking major reforms that would actually improve Mexico's competitiveness and economic sovereignty over time. Because of the enduring political importance of Mexico's 1938 oil nationalization, any efforts to change the status quo are easily caricatured by opponents as efforts to privatize the sector and hand it over to foreign firms. Public sector unions and privatization-wary citizens also oppose increasing private sector participation in Mexico's electrical market. ¶4. (C) Failed presidential candidate Andres Manuel Lopez Obrador and his allies have vowed to oppose any energy reform package proposed by the Calderon administration. They allege that any reforms will be contrary to national interests and will have a negative impact on the public and particularly on the poor. Most anti-reform arguments are couched in highly politicized language designed to curtail reasonable examination of alternatives, to the extent that some elected officials have publicly stated that "competitiveness" is in fact a code term for "privatization." ¶5. (C) Accordingly, energy sector advocates are mindful that a first step toward reform is to change the terms of public MEXICO 00000213 002 OF 003 debate. In practical terms, this means avoiding support of "reform." Instead, advocates will focus on raising public awareness and understanding about existing problems, and explaining the likely consequences of continuing the status quo. If these issues are properly and extensively discussed in public and political dialogue, serious debate on needed reforms will inevitably follow. ¶6. (C) AID, ECON, and FCS working together have reached out to persons from the private sector and academia to identify potential working group members. Individuals were proposed based on their knowledge and interest in the issue, with the goal being a set of experts that would gain broad respect from the public. Each person was approached individually and told about our proposal to support this energy working group to promote responsible discussion and debate by Mexicans. However, our proposal was that while AID would provide logistical support, the content and direction of debate would be determined by the group members, all Mexican citizens. ¶7. (C) Comment: Private oil companies present in Mexico that are identified as potential investors in the Mexican energy sector were also consulted; corporate representatives noted the extreme political sensitivity of this issue and some suggested that it was important to be transparent regarding USG support for the group. Others suggested that other countries may wish to become involved (the UK, Canada, Norway, Brazil among others have expressed interest to us in participating in support of the group and its efforts), -------------- ENERGY WORKING GROUP -------------- ¶8. (C) The initial working group meeting was held the second week in December, 2006. Invitees came from diverse institutions,: the Mexican Energy Association (AME); the Mexican Wind Energy Association (Asociacion Mexicana de Energia Eolica); The Center for Development Research (CIDAC); Fundacion IDEA, a recently-established public policy think tank; a private Mexican law firm specializing in energy matters; and from two of Mexico's leading private universities, the Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM) and the Instituto Tecnologico Autonomo de Mexico (ITAM). ¶9. (C) The group expressed consensus about the need for a coordinated effort to promote dialogue and raise public awareness about the energy sector in Mexico. They cited the likely negative consequences of continuing the status quo, such as fiscal crisis, increased dependence on imports of energy products, and uncompetitive prices of key production inputs. ¶10. (C) Participants acknowledged that private sector participation is likely to emerge as part of a proposal to help make the sector more sustainable and efficient. They suggested that the dialogue should focus on how to improve the efficiency and sustainability of state-owned oil, gas and electricity enterprises, which will remain a fixture of Mexico's political environment for the foreseeable future. It was agreed that a useful approach is to spread an understanding of successful parastatals in other countries. Examples cited included Brazil (Petrobras) and the U.S. (Tennessee Valley Authority). Note: We expect the group will also look at Norway and Canada. ¶11. (C) The meeting ended with a discussion about next steps and how the network would function. The participants agreed that AID should act as the technical secretariat and provide support research, information dissemination (establishing a web portal, news bulletins) and organizing forums (conferences, seminars). At the same time, participants unanimously agreed that content, opinions and proposals would come only from network members, who are all Mexican, and who will speak or write as individuals rather than representatives of their respective organizations, institutions, or political parties. MEXICO 00000213 003 OF 003 ¶12. (C) Rafael Fernandez de Castro, Director of the International Relations program at ITAM noted that his university is planning to hold an event in late January to launch a book he has co-written with Sidney Weintraub (Center for Strategic and International Studies, CSIS) on hemispheric energy cooperation. He invited each member to participate and suggested that it would be a good opportunity to convene a second network meeting. ¶13. (C) Participants agreed to attend the proposed January meeting, and identified several goals, including: defining membership, institutionalizing the group, and identifying specific activities as well as the members responsible for carrying them out. The group also agreed that it was important to bring in members from one or two of Mexico's public universities so that the group reflects the country's diverse political tendencies. The January meeting will likely include a few new members that bring important skills and additional technical knowledge that the group identified as important, such as, for example, renewable energy. ¶14. (C) Comment: AID will continue to report as the membership of the core working group evolves and a network is developed. All information generated by members will be public and will be shared with the Embassy working group. ECON and AID will continue assisting the working group organizers to develop, with the groups concurrence, both printed and electronic material for dissemination on the group's website, as well as introduce suggestions to the group leaders for possible programs. ECON will also continue meeting with policy makers in the administration, Congress and in the parastatals (Pemex and CFE) to independently gauge the progress of the debate for the working group. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA