MEXICO: BIOFUELS UPDATE

UNCLAS SECTION 01 OF 02 MEXICO 005463 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, AND WHA/EPSC STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD USDOC FOR ITS/TD/ENERGY DIVISION 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. MEXICO 00005463 002 OF 002 ¶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. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity and the North American Partnership Blog at http://www.intelink.gov/communities/state/nap / GARZA