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Cablegate: Chicontepec - Who Is in Charge of Mexican Hydrocarbons

VZCZCXRO2458
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2995/01 2892206
ZNR UUUUU ZZH
P 162206Z OCT 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8639
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC

UNCLAS SECTION 01 OF 02 MEXICO 002995

SENSITIVE, SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE FOR EEB/ESC (MCMANUS AND DUGGAN)
STATE FOR L/OES (MCDONALD) and OES/OPA
D FOR LOURDES CUE
DOE FOR A/S SANDALOW, G.WARD AND A.LOCKWOOD
MMS FOR RENEE ORR

E.O. 12958: N/A
TAGS: ECON ENRG EINV PGOV SENV MX
SUBJECT: CHICONTEPEC - WHO IS IN CHARGE OF MEXICAN HYDROCARBONS
POLICY?

1. (SBU) SUMMARY: Juan Carlos Zepeda, head of Mexico's newly
created National Hydrocarbons Commission (CNH), said that the press
misquoted him last week as ordering PEMEX to stop drilling in
Chicontepec. However, Zepeda is clearly unhappy with Pemex's
current production policy in Chicontepec and will recommend to
Secretary Kessel that the parastatal change its strategy
dramatically given dismal results to date. Zepeda is outspoken and
intent on influencing Pemex's exploration and production strategies.
We expect to see more tension between Pemex and the CNH as Zepeda
asserts himself over the coming months. END SUMMARY.

2. (SBU) ECONOFF met with Juan Carlos Zepeda October 15 to discuss
recent press reports that he was ordering Pemex to halt production
in Chicontepec given that production fell well below the
parastatal's projections. The CNH was created under the energy
reform legislation passed by the Mexican Congress in November 2008
to regulate the hydrocarbons sector and is responsible for
conducting technical analysis and assessment of the country's
hydrocarbons policy (including rates of extraction and rates of
accruing reserves) and issuing regulations. CNH is tasked with
submitting recommendations based on its studies to the Secretariat
of Energy (SENER)who makes binding decisions on hydrocarbons policy
for the government. Zepeda stressed that SENER, not PEMEX has legal
responsibility for Mexico's hydrocarbons policy. He added that the
Pemex is still digesting the fact that CNH has a role in production
strategies, and some Pemex Exploration and Production (PEP) staff
are still in shock that they no longer control these decisions.


3. (SBU) Zepeda said the press misquoted him on Chicontepec.
However, he will make a recommendation to Secretary Kessel on
Chicontepec before December 15. Zepeda noted that Pemex had not
done sufficient geological advance work on the complex Chicontepec
field. Chicontepec was discovered in the 1920s and is estimated to
hold 40% of Mexican reserves. Pemex started exploiting the field in
a limited manner in the 1970s, but held back due the complex geology
of the reservoir (faulting, ground pressure) and the high costs of
production. According to Zepeda, Pemex panicked when production at
Cantarell started to fall dramatically and the parastatal had no
promising alternative source of production. Pemex estimated that
Chicontepec could produce 90,000 barrels of oil equivalent (BOE) per
day in 2009 and 600,000-700,000 BOE per day at its peak. Over the
past 18 months, the parastatal made a significant investment and
issued contracts worth approximately $2 billion to service companies
to exploit the field. Zepeda noted that in 2006, with 250 wells
Chicontepec, production stood at 29,000 barrels a day. Today, with
1,000 wells the field's production is still around 29,000 barrels
per day. The productivity of each individual well has fallen
dramatically.

4. (SBU) Zepeda stressed that Pemex needs to take time to further
study the geology of the field and develop a better production plan.
He agreed that Mexico could not walk away from 40% of known
reserves, but emphasized that the current policy is not workable.
The CNH is responsible for making recommendations about the rate of
extraction based on economic, technical and environmental standards,
he added, and the current production plan does not meet CNH
standards.

5. (SBU) Zepeda noted that the share prices of several service
companies (he cited Weatherford) that operate in Chicontepec fell
significantly in response to the comments he made last week. He
implied that PEMEX' response to his comments were in part an effort
by the parastatal to shore up the share prices of these firms.

6. (SBU) Zepeda currently has a skeleton staff of 20 employees, but
needs near 100 qualified personnel to fulfill the CNH mandate.
Zepeda blames the Finance Secretariat for not submitting a
sufficient budget proposal for CNH to Congress and has been lobbying
Diputados for more money. He will approach the World Bank and other
organizations about a grant to build the Commission's database and
is looking at other best practice models for the CNH. Embassy
Mexico is working with SENER and CNH on a potential Voluntary
Visitors Program which would provide CNH officials an opportunity to
look at the US model.

7. (SBU) Comment: Zepeda is clearly pushing the envelope to test
the CNH's authority over Pemex production strategies. The CNH has a
mandate to advise the Secretary of Energy on hydrocarbons policy but
has not been given the necessary budget to fully staff its
operations. Some energy experts question whether Pemex and the
Finance Ministry support CNH's efforts or are trying to undermine
the CNH. Zepeda is outspoken and committed to making his mark. He

MEXICO 00002995 002 OF 002


served as Assistant Secretary for Exploration and Production in
SENER before being named head of the CNH. With him at the helm, we
expect to see more sparks fly between the CNH and PEMEX in coming
months.

PASCUAL

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