US - MEXICO DISCUSS GOM PROPOSAL TO NEGOTIATE

UNCLAS SECTION 01 OF 04 MEXICO 001076

SENSITIVE, SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE FOR EEB/ESC, OES/OPA, L/OES
DOE FOR INTERNATIONAL AFFAIRS

E.O. 12958: N/A
TAGS: ECON ENRG EINV PGOV SENV MX
SUBJECT: US - MEXICO DISCUSS GOM PROPOSAL TO NEGOTIATE
TRANSBOUNDARY RESERVOIRS

A) Mexico 635
B) 08 Mexico 2657
C) 08 Mexico 3014


1. (SBU) Summary: US and Mexican officials held the
third in a series of formal consultations under Articles
4 and 5 of the Western Gap treaty and regarding
transboundary oil and gas reservoirs more generally March
31 in New Orleans. For the US side, the primary
objective of the discussion was to gather more
information regarding the GOM's September 2008 diplomatic
note proposing to negotiate a bilateral treaty on
transboundary reservoirs along the land and maritime
boundary, to exchange views on the legal and policy
issues involved, and the internal process that would have
to be completed before the USG could enter into treaty
negotiations. The Mexican side was disappointed that the
United States could neither agree to begin formal
negotiations nor to establish a formal working group at
this time. During the time that a treaty would be
negotiated, Mexico proposed, as interim measures,
extending the moratorium on drilling along the buffer
zone in the western gap of the Gulf of Mexico. The US
side made no substantive commitments but expressed
willingness to meet again after, among other things, it
held consultations with industry and other stakeholders.
End Summary.


2. (SBU) US (State, Interior and Energy) and Mexican
officials held consultations under Articles 4 and 5 of
the Western Gap treaty on March 31 in New Orleans. The
USG delegation was led by John Kim, Assistant Legal
Adviser for Oceans, International Environmental and
Scientific Affairs, Department of State. The Mexican
side fielded a large and relatively senior delegation led
by Ambassador Joel Hernandez, Judicial Advisor, SRE.
(The complete list of participants is in paragraph 15.)

Updates on Operation, Information and Data
-------------- --------------


3. (SBU) Kim opened the meeting by welcoming the
Mexicans to New Orleans and acknowledging the importance
of the bilateral relationship, as reflected in recently-
completed and upcoming high-level visits by USG officials
to Mexico. He referenced the September 2008 diplomatic
note proposing to negotiate a bilateral treaty on
transboundary reservoirs along the land and maritime
boundary. He noted that since the last bilateral
consultations in August 2008, the USG side had studied
and considered certain legal issues raised by the Mexican
proposal, reviewed international precedents, and had
brought other relevant USG agencies such as the
Department of Energy into the discussion. Kim emphasized
that the USG was serious about discussing the legal,
technical and policy aspects of the Mexican proposal, but
still had many questions for the Mexican side.


4. (SBU) MMS provided an overview of its regulatory
authorities and management activities in the Outer
Continental Shelf, and an update on recent activities in
the Gulf of Mexico. GOM officials were particularly
interested in the domestic regulatory authorities
governing federal/state and federal/federal unitization.
Mike Prendergast (MMS GOMR),noted that Great White in
the Perdido Fold Belt would begin operations in 2010.
The project is a phased development and will eventually
involve 19-35 wells. Although Great White will be the
closest production facility to Mexico yet, the wells are
over 5 miles from the boundary with average drainage of
100 to 400 acres per well. Kevin Karl, MMS GOMR,
emphasized that no transboundary reservoirs have been
confirmed to date. Given the high degree of faulting in
the area, he anticipated that any potential transboundary
reservoirs likely would be relatively small.


5. (SBU) Pemex New Business Manager Luis Macias briefed
on two seismic campaigns the Mexican parastatal had
conducted in the Perdido Fold Belt area and the Eastern
Gap. Due to a misunderstanding about the USG permitting
process, Pemex elected to stop shooting seismic data 6
miles from the boundary in both areas. The GOM is
currently evaluating the data and offered to share the
data with the USG once this process is complete. Macias
noted that Mexico would be interested in having the USG

MEXICO 00001076 002 OF 004


share similar data from the US side.


6. (SBU) On the Eastern Gap, Hernandez mentioned that
GOM officials would travel to Havana within two weeks to
learn about the content of the Cuban presentation to the
Commission on the Limits of the Continental Shelf. He
reiterated his offer that Mexico would be willing to
serve as a bridge between the USG and Cuba and that in
the long term the three countries could perhaps discuss
the possibility of a maritime boundary delimination
treaty. Kim thanked the Mexican side and agreed to take
the offer back to Washington. He also thanked the
Mexican delegation for keeping the USG informed about
their travel to Cuba and their presentation before the
Commission. Renee Orr, MMS Washington DC, added that
current USG policy is to not to auction blocks within 2
blocks or six miles of the Eastern gap.

Mexican Proposal
--------------


7. (SBU) Turning to the GOMs September 2008 diplomatic
note proposing to negotiate a treaty concerning potential
transboundary reservoirs, Hernandez explained the reasons
behind the Mexican proposal and the timing. He noted
that there are concerns in Mexico about the potential
"straw effect" - that international oil companies on the
US side of the boundary will 'suck' up oil from the
Mexican side of the boundary. Once production begins at
the Great White facility, he expected these concerns to
be voiced again. He added that transboundary reservoirs
had come up during the energy reform debate in Mexico,
that the Mexican Congress had taken an interest, and that
this resulted in provisions in the energy reform bill
which allow the GOM to negotiate a treaty regulating
transboundary reservoirs. Hernandez pointed out that the
moratorium in the buffer zone in the Western Gap treaty
will expire in January 2011 and that this gave both sides
an interest to discuss transboundary issues.


8. (SBU) Hernandez suggested both sides take what he
called a preventative approach by negotiating a framework
agreement which would stipulate what each country would
do in the event that a transboundary reservoir was
discovered. Pointing to the growing international
practice of cooperative exploration and exploitation of
transboundary resources, Hernandez cited the Norway -
Iceland agreement (recently signed but not yet in force)
and the UK-Norway Framework Agreement as possible models
for a framework agreement on unitization. According to
Hernandez, a framework agreement could include the
following elements:
--Guiding principles which could be used to lead to
identification of a transboundary reservoir;
--Specific criteria for operation of a deposit as a unit;
--Prohibition of the exploitation of any reservoir that
may extend to the continental shelf of the other party;
--A process for notification, exchange of information,
and consultations on the identification and scope of any
transboundary reservoir and the potential for exploiting
it;
--Recognition of apportionment of revenues;
On regulatory issues, Hernandez foresees each operator
following the regulatory framework in effect on the side
of the boundary on which the operator is operating.


9. (SBU) Hernandez emphasized that the GOM was eager to
begin serious discussions and would like to establish a
formal bilateral working group as soon as possible. He
offered to have the GOM prepare a draft text of an
agreement as the basis for discussion. In response to
Kim's questions, Hernandez made clear that Mexico wants a
free-standing framework agreement, as opposed to
amendments to the current boundary treaties. He also
agreed that there was no need to negotiate a separate MOU
on information exchange (as Mexico had proposed in August
2008) since this would be covered in the framework
agreement. Moreover, he thought discussion of an MOU
could detract from and delay the start of negotiations on
the framework agreement.


10. (SBU) At the outset, Kim pointed out that any
negotiations on a treaty covering transboundary land
reservoirs seemed particularly inappropriate at this
time, since we were not aware of any data or information

MEXICO 00001076 003 OF 004


regarding transboundary reservoirs on the land boundary,
and if there were any, negotiations over them likely
would involve agencies not represented in New Orleans, as
well as private landowners and state authorities. He
suggested focusing any bilateral discussions on a
unitization agreement on the maritime boundary in the
Gulf of Mexico which, in any case, seemed to be of most
interest to both sides. Hernandez did not object to this
suggestion.


11. (SBU) At Kim's request, Hernandez and other members
of the Mexican delegation also detailed the domestic
legal parameters under which Mexico was operating. He
noted that the Mexican president was empowered to sign
and the Congress to ratify a treaty on transboundary
reservoirs. SENER Chief Legal Advisor Alejandro Fleming
added that there were no legal limitations to Pemex
entering into a joint venture with an international oil
company and exploiting a transboundary reservoir on both
sides of the boundary. He added that 'transboundary
reservoirs' are not defined in Mexican law, and that the
GOM could seek a broader definition that goes beyond
individual reservoirs and includes transboundary fields.
In short, Hernandez confirmed that any unitization
agreement would not run afoul of Mexico's constitutional
prohibitions.


12. (SBU) Kim thanked the GOM for their useful
clarifications of its proposal, especially as to the
nature or elements of the unitization agreement the GOM
had in mind. He highlighted the constraints posed by
current U.S. domestic law and practice. For example, he
noted that the Secretary of Interior would need to obtain
statutory authority to enter into a joint cooperative
agreement with the GOM regarding unitization
arrangements. Also, he noted that current MMS leases
along the boundary do not contain any limitation on the
ability of lessees to extract resources from their lease
block, in accordance with the rule of capture. When
Renee Orr, MMS Leasing Division Chief referenced the
'rule of capture', it was clear that GOM officials were
not comfortable with the application of this rule.
Hernandez and Aldo Flores both argued that the
international practice did not support adherence to a
rule of capture, but rather cooperative development and
exploitation of straddling oil and gas reservoirs.


13. (SBU) Also, Kim explained that the USG would have to
go through its Circular 175 procedure in order to obtain
authority to negotiate this treaty, and that this
authority could require several weeks or possibly months
to complete. The USG could not agree to a formal working
group to work on a draft treaty until the C-175 authority
was granted. Kim noted that, among other things, the USG
would need to consult with stakeholders, including
industry, about the Mexican proposal.


14. (SBU) Hernandez noted that the GOM would like to
have a framework agreement in force before the drilling
moratorium in the buffer zone authorized under the
Western Gap Treaty expires in January 2011, but
recognized that this would be unlikely. As an interim
measure, he suggested extending the moratorium, within
the Western Gap region, beyond 2011, and asked the USG
when would be an appropriate time for the GOM to make a
formal request to such effect. Hernandez further asked
whether MMS could bar our lessees with lease blocks along
the maritime boundary from exploiting any reservoirs
within 1.4 nautical miles of the boundary unless and
until an agreement with Mexico was in place. Kim said
that the US delegation would further consider these
questions back in Washington.


15. (U) Participants:

US:
John Kim, Assistant Legal Advisor, L/OES, State
Matthew McManus, Division Chief, Energy Producer Country
Affairs, EEB, State
Sigrid Emrich, Deputy Economic Counselor, US Embassy
Mexico
Renee Orr, Chief, Leasing Division, Offshore Energy and
Minerals Management, MMS
Brad Blythe, Physical Scientist, Leasing Division, MMS
Kevin Karl, Regional Supervisor, Office of Production and

MEXICO 00001076 004 OF 004


Development GOMR, MMS
Mike Prendergast, GOMR Chief of Staff, MMS
Dave Cooke, Deputy Regional Supervisor, Resource
Evaluation, GOMR, MMS
Timothy H. Baker, Office of the Solicitor, DOI
Rhiannon Davis, Office of American Affairs, DOE

Mexico:
Ambassador Joel Hernandez, Legal Advisor, SRE
Alejandro Estivill, Director General for North America,
SRE
Carlos Quesnel, Embassy of Mexico, Washington DC
Alejandro Fleming, Legal Advisor, SENER
Juan Carlos Zepeda, Director General for Exploration,
SENER
Mr. Dante San Pedro, Advisor to the Undersecretary for
Hydrocarbons
Aldo Flores, Director General International Affairs,
SENER
Luis Macias, PEMEX
Fernando Lopez Arriaga, PEMEX
Xavier Antonio, Advisor to the Legal Counsel, PEMEX
Jos Luis Herrera, Head of the International Legal
Affairs Unit, PEMEX


16. (SBU) Comment: Since the Obama Administration was
inaugurated in January, GOM officials have been eager to
return to the most recent iteration of a Mexican proposal
to negotiate a treaty on potential transboundary
reservoirs. Mexico historically has sought an agreement
concerning transboundary reservoirs along the maritime
boundary. After highlighting the 'popote' effect --
which warns of International oil companies sucking up
Mexican oil from the US side of the boundary - to secure
a deep energy reform, the GOM must now deal with the
public fallout. GOM officials realize that once the
Great White production facility near the border goes into
operation in 2010, public concerns in Mexico will be
rekindled and would like bilateral negotiations to be
well underway before this occurs.


17. (SBU) The tone of the discussion was frank and
positive, and useful information was exchanged. GOM
officials were clearly disappointed that the USG could
not commit to formal negotiations, but likely will push
for a follow on meeting. This topic will not go away,
and we should expect the Mexican side to raise it to
senior USG officials regularly. Although the USG has
further work to do before making any decision on whether
or not to pursue negotiations, it would be in our
interests to keep the dialogue with Mexico open. Cutting
off discussions might fuel Mexican concerns that
international oil companies are already stealing Mexican
oil. Engaging with Mexico will allow us to build closer
ties and gain a deeper understanding of Mexico's
sensitive hydrocarbons policy. Eventually this may lead
to a further opening of Mexico's energy sector, an
outcome which would be a welcome development for US
energy security and commercial interests.


18. USDEL cleared this cable.

BASSETT