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Cablegate: Mexico: Latin America-Caribbean Biofuels Initiative

VZCZCXYZ0007
RR RUEHWEB

DE RUEHME #6483/01 3191901
ZNR UUUUU ZZH
R 151901Z NOV 06
FM AMEMBASSY MEXICO
TO SECSTATE WASHDC 4216

UNCLAS MEXICO 006483

SIPDIS

SIPDIS

FOR WHA/EPSC CORNEILLE,
EB/ESC/IEC IZZO,
E MANUEL,
AND OES/STC PAMELA BATES

E.O. 12958: N/A
TAGS: ENRG EPET ECON MX
SUBJECT: MEXICO: LATIN AMERICA-CARIBBEAN BIOFUELS INITIATIVE

REF: SECSTATE 164558

1. Summary. Mexican officials, private organizations and
energy research centers believe that the country's
agricultural production is appropriate for ethanol and
bio-fuel manufacturing, but with output of only 45 million
liters per year, significant investment and infrastructure
development will be necessary before Mexico can count on
ethanol for a significant share of its fuel demand.
Nevertheless, Pemex officials report the company is looking
at options to produce a 10% ethanol fuel. The Mexican
Congress is considering two measures to promote ethanol and
biofuels, and investors have begun building some ethanol
facilities. End summary.

2. Mexico produces 45 million liters/year of ethanol and
imports an additional 119 million liters/year to supply its
chemical and pharmaceutical sectors. In a recent speech to
energy industry representatives, Energy Secretary Fernando
Canales noted that the Mexican oil and gas monopoly, Pemex,
would develop an integrated program to blend ethanol with
gasoline sold throughout the country. Pemex recently
invested USD 4 million in a first step to add the necessary
equipment to the company's 6 refineries and 17 gasoline
distribution centers.

3. Nonetheless, Mexico is limited in how far it can take the
program due to its limited ethanol production capacity.
Currently Mexican ethanol production is all slated for
non-fuel uses. According to the Mexican press, two private
investment projects supported by the national development
bank are moving ahead in Sinaloa state to produce ethanol
from corn, one project in Tamaulipas state will produce
ethanol from sorghum, and two projects in Veracruz state will
produce ethanol from sugar cane.

4. Along the same lines, the Mexican Economy Secretariat
announced a public-private program in January 2006 for the
domestic sugar industry to examine construction of ethanol
plants. Press reports indicate that Mexican sugar industry
representatives, concerned about competition from high
fructose corn syrup, are looking to ethanol production as a
potential savior for the industry.

------------------
Investment Climate
------------------

5. There is no specific bio-fuel legislation in place in
Mexico, but the Mexican Congress has entered the debate, and
there are now two proposed pieces of legislation to establish
the necessary legal framework for the Mexican Energy
Secretariat (SENER) to move ahead on bio-fuels.

SIPDIS

(A) Proposed Law for the Use of Renewable Sources of Energy
-- The proposal includes the creation of a trust fund that
will allow "renewable energy sources" to provide 8 percent of
national electricity generation by 2012. This proposed law
defines bio-fuels as "liquid or gas fuels, such as ethanol,
methanol, bio-diesel and methane gas, as long as they are
produced from biomass, or non-toxic and safe organic
residues." Within this generic trust fund, a specific
support would be created to cover any differentials between
the cost of production and market prices for bio-fuel.

(B) Proposed Law for the Development and Promotion of
Bio-fuels -- In this proposal, bio-fuels are defined as
"ethanol and biodiesel fuels that are produced from
commodities or agricultural products." The law calls for
phasing in a specific target for percentage biofuel or
ethanol for all Mexican gasoline.

6. Both proposals are under debate in the current session of
Congress. As a result of the greater attention given to
ethanol in recent months, the GOM has decided to analyze for
itself the true potential of bio-fuels. With support of the
Interamerican Development Bank and the German government (GTZ
- German Technical Cooperation), SENER is carrying out
feasibility studies for ethanol and bio-diesel. Those
studies were to have been completed in the last several
weeks, though the Embassy has not yet been able to obtain
copies.

-------------
Energy Sector
-------------

7. Despite these first steps, Article 27 of the Mexican
Constitution, reserves production of crude oil to Pemex.

While initial reading of the constitution does not indicate
that ethanol production would be similarly restricted, the
lack of legal framework and Pemex's de facto position as the
only gasoline distributor and retailer in Mexico suggests
that some regulatory and legislative work will be required to
allow legal clarity for large-scale ethanol blending to move
forward, a position confirmed by industry experts.

--------------------
Agriculture Industry
--------------------

8. Many private organizations and energy research centers in
Mexico believe that the country's agricultural production is
particularly appropriate for ethanol and bio-diesel.
However, none of the 8 percent of the nation's energy
consumption generated from biomass is related to fuel for
transportation. The main sources of bio-energy used are
sugar cane bagasse (92 Petajoules -- used for the generation
of electricity and heat in the sugar cane industry) and wood
(250 Petajoules -- used for heating and cooking).

9. The transformation of the sugar industry will be another
factor that the new government has to consider in its overall
bio-fuel policies. Mexican industry and government officials
recognize the need to diversify the sugar industry.
Currently, almost all sugar cane production goes into the
production of sugar. The sugar industry is pushing the
government to develop a bio-ethanol industry as a key part of
diversification, and the current Sugar Law already has some
provisions towards such diversification. However, many have
pointed out that successful development requires substantial
investment in plants and infrastructure as well as the
participation of Mexico's energy sector. Some local
governments are also indicating that they will provide some
"supports" to produce ethanol based on sugarcane. However,
since the Sugar Law is still an uncertain legal framework,
there is no clarity about the policy and pricing of sugar
cane for ethanol production purposes.

10. Mexico currently does not produce enough corn to meet
domestic demand, although some regions do produce a surplus.
That being the case, it is unlikely that Mexico could
effectively use corn as an ethanol feedstock.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity
BASSETT

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