MEXICO: BIOFUELS UPDATE

UNCLAS SECTION 01 OF 02 MEXICO 005463

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DOE FOR INTERNATIONAL AFFAIRS RDAVIS AND ALOCKWOOD

E.O. 12958: N/A
TAGS: EAGR ECON ENRG EPET MX
SUBJECT: MEXICO: BIOFUELS UPDATE

Summary
--------------


1. (SBU) The Agriculture Committee in the lower house of the
Mexican Congress is preparing to issue a second draft of a
biofuels bill to replace an earlier version vetoed by
President Calderon September 1. The newer version should
provide a legal framework for ethanol production from palm,
sorghum and other crops while not specifically mentioning
agriculturally sensitive corn and sugar. Nevertheless,
despite optimism from our government contacts, there is no
firm indication that the framework will include
implementation funds. End Summary.

Current Biofuels State of Play
--------------


2. (SBU) According to the Director General responsible for
Renewable Energy and Technology at the Energy Secretariat
(SENER),as well as sources inside the committee, the
Agriculture Committee of the Chamber of Deputies will hold a
committee vote as soon as October 16 on a second version of
the Mexican Biofuels law. Legislators took into
consideration President Calderon's observations in his veto
last month of an initial proposal and came up with what they
say it is "a great law." According to Congressional sources,
all political parties, with the exception of the Green Party,
will support the bill. Once approved by the Chamber of
Deputies, the proposal would move to the Senate for its
approval. According to Senate staffers, Deputies have
already lobbied the bill with Senate members so it "should be
approved quickly."


3. (U) While our sources would not disclose details of the
new proposal, in a September press conference, Secretary of
Agriculture Alberto Cardenas called for a Mexican strategy
"different than Brazil's and the U.S.'s where biofuels
production is based on one product." Under the new proposal,
Mexico would likely seek to produce ethanol from a variety of
stocks including palm and sorghum to be planted in underused
land. The Agriculture Secretariat (SAGARPA) is also seeking
to avoid political pressure by not specifically mentioning
basic food products, such as corn and sugar cane in the bill
given the complicated economic structures already in place in
those markets.


4. (U) According to Cardenas, the state of Sinaloa has the
greatest potential for ethanol production. Cardenas also
said the bill would not include subsidies, but "financial
schemes" to stimulate production. According to one senior
Energy Secretariat source to whom we spoke, "we would like
it." Cardenas said he would ask for budget funds to
encourage palm, sorghum, and other feedstock crops and
develop the necessary infrastructure and R and D in the
states of Campeche, Veracruz, and Chiapas. Cardenas said the
government would "take gradual and well-planned steps toward
biofuels production."


5. (SBU) Nevertheless, our sources are quick to point out
that while the bill will provide a "good framework" for
biofuels production, it is not clear that any funding at all
will be provided in the budget for supporting these
alternative crops.

Background
--------------


6. (U) This current legislation replaces an earlier version
of a biofuels bill vetoed by President Calderon on September
1 (his first veto of any legislative proposal). In a
document sent to Congress explaining the veto, the Calderon
Administration argued that the earlier bill focused only on
ethanol production from corn and sugar cane, rather than
promoting the use of other more sustainable sources. The
Administration also objected to the earlier law's empowering
SAGARPA to fix prices, approve projects, promote and develop
biofuels, and create indicators and quality systems arguing
that those issues should fall directly under SENER. The
Administration argued SAGARPA should be responsible for
promotion and development of inputs, while the SENER should
control the production, transportation, and commercialization
of ethanol.


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7. (U) Calderon Administration officials had also objected
to the earlier bill's mandating replacement of the Methyl
Tertiary-Butyl Ether (MBTE) as an oxygenating agent in
gasoline sold in Mexico City, Monterrey and Guadalajara,
which would require importing ethanol. According to
Undersecretary for Energy Planning Jordy Herrera, The vetoed
law would have obliged Pemex to incorporate 2.6 million
liters of ethanol to gasoline while Mexico remains an ethanol
importer. The Calderon Administration seeks a more gradual
introduction and the development of new technologies since
the conversion capacity would not have been sufficient to
satisfy the demand for many years.

Biofuels a Political Issue
--------------


8. (SBU) The vetoed biofuels law had been drafted by
Institutional Revolutionary Party (PRI) legislators and
sugarcane producers. Some observers had suggested that
Calderon's vetoed the proposal to shield biofuels from
political pressures by agricultural organizations and the
PRI. Party of the Democratic Revolution (PRD) legislators
responded favorably to Calderon's veto as the party had voted
against the law. The National Agricultural Confederation
(CNC) accused Calderon and his National Action Party (PAN) of
betraying their agreement with the PRI. The CNC alleges that
Calderon sought to give SENER and multinationals control of
Mexican biofuels. Farmers responded to the veto by saying
that Mexico will now have to import ethanol and pay more for
it.


9. (U) In reality, Mexico's production of yellow corn is
insufficient for ethanol-production. Mexico currently
imports yellow corn for animal feed and the fructose
industry. While sugar cane could be used to produce
ethanol, benefiting the 12 million Mexicans that work in or
depend on that industry, Mexican sugar mills' low
productivity and profitability and the current contract
between sugar mills and producers make sugar production for
ethanol uneconomic.

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

10. (SBU) While Embassy sources were almost unanimous in
their approval of the replacement biofuels draft now being
prepared in the lower chamber's Agriculture Committee, all
note that the law only provides a framework for how biofuels
development will be handled. Without mandating specific
targets or providing funds for subsidies or infrastructure
development, biofuel production remains an optimistic goal.
Additionally, agriculture special interests were able to lard
Mexico's previous biofuels bill with enough pork to sink it.
There is only anecdotal evidence to show that this will not
happen a second time around.


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