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)

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Summary
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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.

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Background
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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

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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),

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ENERGY WORKING GROUP
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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