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Cablegate: U/S Jeffery's Visit to Mexico: Thank You For

VZCZCXRO9180
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2184/01 1981645
ZNY CCCCC ZZH
P 161645Z JUL 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 2584
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 04 MEXICO 002184

SIPDIS

STATE FOR E UNDER SECRETARY JEFFERY
STATE FOR WHA/FO FOR TOM SHANNON
STATE FOR WHA/MEX FOR LIZ WOLFSON
STATE FOR WHA/EPSC
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (RACHEL JARPE AND LUYEN TRAN)
DOE FOR INTL AFFAIRS ALOCKWOOD, AND GWARD
STATE PASS USTR FOR EISSENSTAT/MELLE/SHIGETOMI
STATE PASS FEDERAL RESERVE (ANDREA RAFFO)
NSC FOR RICHARD MILES, DAN FISK

E.O. 12958: DECL: 07/15/2018
TAGS: ECON ENRG PREL MX
SUBJECT: U/S JEFFERY'S VISIT TO MEXICO: THANK YOU FOR
SILENCE ON ENERGY DEBATE; BIOFUEL QUESTIONS

Classified By: A/DCM ISIAH PARNELL FOR REASONS 1.4(b) and (d)

1. (SBU) SUMMARY: U/S Jeffery visited Mexico City on July
10-11 where he met with officials from the Mexican
Secretariats of Finance (Hacienda), Agriculture (SAGARPA),
and Energy (SENER), as well as the head of Petroleos
Mexicanos (PEMEX), the state oil company. Energy and
biofuels were the key topics during the visit. Mexican
interlocutors expressed their gratitude that the USG has
refrained from commenting on Mexico's energy reform proposal.
They were also candid in their evaluation of Pemex's
challenges and oil production. They conveyed their
displeasure with current USG biofuel policy and the diverting
of corn for energy while food prices are so high, though
conceded that the high prices encourage rural investment. U/S
Jeffery also had an opportunity to meet with business
leaders, Bank of Mexico officials, and analysts to discuss
the current global economic situation and the effect on the
Mexican economy. END SUMMARY

Mexicans: Thank You For Not Commenting on Energy Reform
--------------------------------------------- ----------

2. (C) Jesus Reyes Heroles, Director General for Pemex, was
one of several officials to express his gratitude that the
USG has kept out of the current energy debate. He explained
that energy discussions are extremely political given
historic sensitivities and the "sovereignty chip" that many
Mexicans have regarding oil and Pemex. He said that the lack
of public comments from both the USG and the Mexican private
sector have made it easier to negotiate with the opposition.
SENER U/S for Energy Planning and Technological Development,
Jordy Herrera, commented that "the best way to help in energy
reform is to leave (Mexican) Congressmen alone". Herrera said
that the PRI party will be having their national assembly on
August 23rd, which will give the Calderon Administration a
better idea of whether/how its energy reform proposal will
prosper. Herrera remained optimistic that the reform would
ultimately pass, though uncertain of its final form.

Pemex, Energy Reform, and Oil Production
----------------------------------------

3. (C) Reyes Heroles said that Pemex officials see the
ongoing debate on energy reform as positive, since it makes
the public more aware of Pemex's vulnerable situation. He
said that he would be satisfied with the modest reform that
changes corporate governance (through the addition of
independent members to the board of directors) and grants the
freedom to budget and contract debt without having to jump
through the bureaucratic hoops mandated by the current Public
Works Law and without Hacienda's approval. In addition to
the reform, he said that he is also making an effort to
change the company's image as well as train and improve its
human capital. He noted that the previous administration did
not leave any projects in the works, and due to lack of
pipelines, gasoline is being moved increasingly by costly and
inefficient trucks. He noted that no new refineries have
been built in 16 years and expressed his frustration at the
slow pace of Pemex development and likened it to "watching
good opportunities pass by". He said that with such
second-rate performance it is very difficult for Pemex to
compete in the global market.

4. (C) With regard to oil production, Reyes Heroles
explained that technical problems and terrorist attacks have
had a negative impact on production in the past year. He said
that although the problems have been resolved, it is unlikely
that Pemex will achieve its goal of 3 million barrels per day
(bpd) for 2008. He stressed, however, that the goal will
remain 3 million bpd to encourage increased production for
the remainder of the year. SENER's Herrera also commented on
oil production, saying it will likely reach only 2.7 million
bpd because Cantarell is declining faster than expected and
new sources have not been found as quickly. He said that
Cantarell production is expected to decline by 50% in the
next 4-5 years and then stabilize.

5. (C) Herrera also commented on the issue of Mexican
subsidies. He admitted that they were untenable because the
high cost of shipping fuel around the country is making it
hard for the GOM to meet demand at current prices and
consumption levels. Despite this, he felt that in the short
term the GOM will not eliminate the subsidies due to
inflationary concerns.

6. (C) Both Reyes Heroles and Herrera admitted that pipeline
security is a problem. Reyes Heroles said that it would take
approximately 3 years to have a system that is less
vulnerable to attacks whereas Herrera said "There is no way
we can protect facilities. We don't have the money or the
capabilities." Herrera explained that the GOM is not
accustomed to attacks like those of last summer and while the
Interior Ministry had a plan, it involved the use of military
assets and would have been too expensive. Also, the lack of
coordination between federal, state, and local authorities
compounds the problem. He said that they are developing
technology that by next year will hopefully provide
assistance and that Mexicans have been working with DHS and
DOE on critical infrastructure protection. They are waiting
until the end of the energy reform debate to move on to the
next stage of cooperation involving a visit by Mexican Energy
Secretary Georgina Kessel to the U.S. to discuss technology
sharing.

Biofuels a Hot Topic
--------------------

7. (C) Biofuels, specifically USG support for production of
corn-based ethanol, was raised at every meeting attended by
U/S Jeffery. SAGAPRA U/S for Agriculture, Francisco Lopez
Tostado, expressed his concern that current U.S. biofuel
policy will contribute to a further rise in food prices
through its effect on supply. He also worried that Mexico's
supply of grain, which relies heavily on imports from the
U.S., is being determined in part by a policy that the GOM
has no ability to influence. Reyes Heroles questioned the
environmental benefits of ethanol. He referenced studies
that showed that ethanol did not provide as much of an
environmental gain as previously thought.

8. (C) The officials also noted that Mexico has its own
biofuels law, passed in October 2007. Tostado noted that the
law restricts corn-based ethanol production. He said that
Mexico is looking into sugar-based or 2nd and 3rd generation
production methods. He added that Mexico's biofuel system is
geared toward managing surpluses, not competing with market
demand. Hacienda Secretary Agustin Carstens noted the
challenges associated with biofuel development in Mexico
caused by the lack of agricultural productivity and the
politicization of agriculture policy. SENER's Herrera
explained that Mexico is looking for biofuels that will not
use corn or imports and that sugar is problematic because
prices are set by law. He said that they are looking into
using algae or jatropha for biofuels, including diesel. They
will start with a target of 2% ethanol content in gasoline in
the major metropolitan markets of Guadalajara, Monterrey, and
Mexico City by 2010 and then evaluate their progress.
Herrera noted that Mexico will host the 2nd annual
international conference on biofuels next year.

High Food Prices Can Be Positive
--------------------------------

9. (C) In meetings with both Hacienda and SAGARPA, Carstens
and Lopez Tostado noted that, while high food prices pose a
problem, they also provide a production incentive and
encourage greater investment in rural agriculture, something
that has been missing in Mexico. Tostado said that the GOM
is trying to take advantage of current prices for the benefit
of the producer, while at the same time providing some
protection to the consumer. He said that Mexico is expanding
production but is not currently able to meet its own demand.
He feels that technology will be important in increasing
production and solving the current food price problems. He
discussed a proposal by regional Agriculture Ministers that
would call for technology sharing via the FAO.

BOM Officials, Analyst Discuss Mexican Economic Outlook
--------------------------------------------- ----------

10. (C) U/S Jeffery met with officials from the Bank of
Mexico (BOM), including Deputy Governor Guillermo Guemez.
Guemez said that Mexico's economic outlook is similar to the
rest of the world except that the rise in food prices affects
Mexico more acutely due to high poverty levels here. He
further said that, while inflation is currently around 5%, it
would be closer to 8% but for the subsidies on gas and
diesel. Guemez noted that recent exchange rate fluctuations
have benefited Mexico in U.S. markets because Mexican goods
generally compete with imported goods from countries whose
currencies have appreciated more quickly versus the dollar.
He also commented that while growth in remittances has
declined, the decline is false in that the recent increases
were due to better data capturing. Guemez said that Mexico
has a good opportunity now that high oil prices are cutting
into China's competitive edge, but Mexico could miss the
opportunity unless it deals with issues such as
infrastructure and border wait
times.

10. (C) Analysts echoed the sentiments of BOM officials and
provided a lively discussion on the prospects of energy
reform, inflation and growth, and the overall success of the
Calderon Administration thus far. They felt that the energy
reform proposal, like other Calderon economic initiatives,
was weak. Rogelio Ramirez de la O, a former economic advisor
to failed leftist presidential candidate Andres Manuel Lopez
Obrador, felt that parts of the reform, specifically the
additional independent advisor, would make Pemex less, not
more, effective. The analysts agreed that Calderon did not
fully utilize his political capital and his plurality in the
Senate to pass stronger reforms and thereby wasted an
important opportunity to improve competitiveness during his
presidency. The analysts believed that the BOM will raise
interest rates in the near future to counter inflation,
though Sergio Luna Martinez, an economist at Banamex,
predicted that the BOM will wait another month before doing
so. The analysts agreed with Rogelio Ramirez's assertion
that the economic situation is currently very volatile and it
will be difficult for the next 12-18 months.

AmCham Raises Energy and Competitiveness Issues
--------------------------------------------- --

11. (SBU) Members of the AmCham stated that their main issue
is energy costs. They also asked about alternative energy
sources and USG plans to cope with high oil prices.
Competitiveness was an important topic for the group, and the
U/S, along with Embassy officials present, spoke about the
current steps being taken to facilitate border trade in light
of the need for heightened security at the border.

Comment
-------

12 (C) U/S Jeffery's visit touched on two politically
sensitive issues in Mexico, energy and corn. As repeatedly
noted by the top Mexican officials during the visit, the
biggest contribution the USG can make to the Calderon
government's energy reform proposal is to stay out of the
picture for the next few months as the congressional debates
and mark-ups move toward a possible final vote. Seven
decades after the big foreign companies were kicked out and
the oil industry nationalized, this subject still evokes a
highly emotional nationalistic response across a large swath
of the Mexican public and polity. We cannot over-emphasize
the probable negative reaction of any USG interventions - no
matter how well-reasoned or intentioned - on this subject
during this period. Officials also clearly expressed their
worry over USG subsidies for corn-based ethanol and the
effect on corn exports to Mexico. Somewhat surprisingly, the
salmonella threat did not come up in meetings except when
Tostado commented that our bilateral relationship is strong
enough to overcome such health issues.
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

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