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Cablegate: Energy Reform - Waiting to Read the Fine Print

VZCZCXRO9634
RR RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3491/01 3302036
ZNR UUUUU ZZH
R 252036Z NOV 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 4116
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 02 MEXICO 003491

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE FOR EB/ESC MCMANUS AND DUGGAN
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTL AFFAIRS ALOCKWOOD, GWARD AND RDAVIS
DOI FOR MMS ORR, TEXTORIS AND KARL

E.O. 12958: N/A
TAGS: ENRG EPET ECON PGOV MX
SUBJECT: ENERGY REFORM - WAITING TO READ THE FINE PRINT

REF: A. Mexico 3210
B. Mexico 2335
C. Mexico 1339
D. Mexico 531

1. (SBU) Summary: The energy reform package approved by the
Mexican Congress in late October is complex - and in some areas
vague. Many experts are waiting to see the bylaws and new contract
templates before making a final judgment on what impact the
legislation will have. In the meantime, the Ministry of Energy
(SENER) and the state owned oil company, PEMEX, not surprisingly,
are spinning a positive picture. The GOM highlights the political
significance of a reform on this sensitive topic while claiming that
the changes in the law will allow Mexico to attract more private
sector interest and increase production of hydrocarbons. Many
companies and analysts are still evaluating the results, but do not
have high hopes about increased business opportunities. Publicly
international oil companies (IOCs) are careful not to seem overly
negative. They conclude that eventually Mexican will have no choice
but to introduce deeper reforms, and they want to be in a good
position to take advantage of the opportunities that arise. End
Summary
2. (U) In a series of meetings over the past month, Econoff
discussed the potential impact of the energy reform legislation
approved by the Mexican Congress October 26 with SENER, PEMEX,
representatives of international oil companies (IOCs), energy
consultants, attorneys and journalists.
A HISTORIC ACHIEVEMENT - BUT DETAILS NEED TO BE DEVELOPED
3. (SBU) Officials from SENER and PEMEX are pleased with the result
of the energy reform, and especially stress the political
significance of this achievement. The fact that the three principal
political parties in Congress acknowledged the need to reform this
sensitive sector - long a taboo on the Mexican political scene - was
in itself historic. GOM officials praise the ruling PAN and
opposition PRI and PRD parties for working quietly together to forge
an agreement. The final round of negotiations between the parties
was conducted behind closed doors and away from media scrutiny.
4. (SBU) While acknowledging that the legislation sets limitations,
both SENER and PEMEX officials believe the legal framework gives
them enough flexibility to offer incentives that will attract IOCS
-- especially to deepwater exploration and production. SENER and
PEMEX are in the process of drafting the necessary bylaws and
contract template. Some officials claim that these documents will
be ready by September 2009, but most agree that the first tenders
will not appear until late 2009 or early 2010. PEMEX has reached
out to other international and state owned oil companies -
especially Petrobras and Statoil - for advice on drafting the
contracts and running the bidding process.
5. (SBU) Officials stress that the reform gives PEMEX greater
operational flexibility in contracting goods and services. In
particular, PEMEX plans to auction off blocks for both exploration
and production. This will allow the firm that wins the bid to
manage the full project. The law stipulates that PEMEX will make
decisions about where drilling will take place, but PEMEX officials
argue that such decisions would be made in collaboration with the
company that holds the lease for a particular location. PEMEX
officials note that the leases will be significantly larger than
those offered in the U.S. by the Minerals Management Service of the
Department of the Interior (MMS). The GOM is in the process of
establishing the rules and procedure for an auction. (Note: The
GOM has an open invitation from the MMS to view how the U.S. manages
this process. End Note)
6. (SBU) PEMEX officials note that the GOM will begin with a small
offering of blocks in areas near existing infrastructure. One
official noted that PEMEX will start with a few leases to test how
attractive the new contracts will be to the private sector, adding
"We'll know pretty soon." GOM officials stressed that the new
contracts should improve operational efficiency by including
incentives for firms to use cutting edge technology. Variable
compensation schemes under the new contracts will encourage faster
and better results. Under the current system, several officials
have complained that service companies use obsolete technology in
Mexico and complete projects even if they know halfway through the
contract that wells have little production promise.
7. (SBU) Both SENER and PEMEX officials stress the structural
changes in the reform will make both organizations more effective
and more efficient. According to SENER the legislation will
strengthen the Energy Ministry and allow it to act as a buffer
between the Finance Ministry and PEMEX. The newly created
Hydrocarbons Council under SENER will give the Energy Ministry

MEXICO 00003491 002 OF 002


authority to set the oil production and reserves policy - a function
currently under the Finance Ministry. PEMEX also stresses that
changes to its organizational structure will allow the parastatal to
operate more transparently and efficiently. Most experts agree,
however, that the impact of these organizational changes will depend
largely on finding individuals with the required technical skills to
mange the Hidrocarbons Council and to fill the four new seats on the
PEMEX board. Mexico has a shortage of qualified experts who could
be brought into these key positions.
FLEXIBITY ON TRANSBOUNDARY
8. (SBU) Both PEMEX and SENER officials told Econoff that the
energy reform will allow more flexibility on exploiting potential
transboundary reserves. According to the GOM interpretation, since
not all the oil resources in a transboundary field belong to Mexico,
the constitution would not prohibit PEMEX from entering into a joint
venture with an IOC. The reform provides that transboundary fields
would be exploited in accordance with the provisions of a bilateral
treaty that has been ratified by the Mexican Senate. The Chamber of
Deputies, which would be more critical of such provisions, would not
have jurisdiction. PEMEX added that their intention on potential
U.S.-Mexico transboundary fields would be to collaborate closely
with the companies and use the infrastructure on the U.S. side of
the boundary. (Note: This is a sensitive issue in Mexico, and
would almost certainly be challenged in court by opponents of a more
open energy regime. End Note.)
PRIVATE SECTOR - TOO EARLY TO SAY
9. (SBU) The IOCs do not share the GOMs effusive praise for the
energy reform legislation. However, they are also cautious not to
criticize the energy reform package publicly. The IOCs recognize
that the Calderon Administration, Mexican Senate and Chamber of
Deputies have put a significant effort into the reform process.
They are also aware that, by working with SENER and PEMEX during the
drafting stages, they may be able to shape somewhat the terms of the
new contracts. For now, the private sector is waiting to see the
bylaws and contracts to determine if they will provide for any
additional business opportunities.
10. (SBU) More IOCs may decide to pursue service contracts even if
the terms are not significantly better than the current model.
Petrobras and Repsol already work with PEMEX under existing
contracts. Other IOCs may decide that it is better to develop a
close cooperative relationship with PEMEX now which could prove
useful when Mexico opens its energy sector. These firms may also be
interested in selling technology even if they cannot share
production. Still, IOCs have limited resources and the new service
contracts may not be lucrative enough to make doing business in
Mexico a priority.
11. (SBU) GOM officials and industry experts expect the
constitutionality of the reform will be challenged through the first
round of contracts. While government officials and industry experts
agree that such a challenge will create legal certainty, the
downside is that no company will want to be the one embroiled in the
legal battle. The IOCs will take into account that firms which take
advantage of the new service contracts may find themselves under a
political spotlight and could be subject to negative public
backlash.
COMMENT:
12. (SBU) Although many companies and analysts are waiting to see
the bylaws and new contract model before deciding on the value of
the GOM's energy reform package, most are privately cynical about
how much the reform will do to expand business opportunities. The
IOCs have been mindful of the political significance of the reform
and cautious not to seem too critical of the results. In
particular, the IOCs with a presence in Mexico are here for the long
haul and calculate if (and when) this reform fails to turn around
production, the Mexican Congress will have no choice but to
introduce deeper reforms. International oil companies want to make
sure that they are well positioned when that happens.

GARZA

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