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Cablegate: Us - Mexico Review Seismic; Discuss Gom Proposal To

VZCZCXRO2576
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3098/01 3011611
ZNR UUUUU ZZH
P 281611Z OCT 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8799
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 003098

SENSITIVE, SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE FOR EEB/ESC, OES/OPA, L/OES
DOE FOR INTERNATIONAL AFFAIRS
NSC FOR ALDY AND WALSH

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

A) Mexico 2445
B) Mexico 1076 and previous

1. (SBU) Summary: US and Mexican officials held the fourth in a
series of formal consultations under Articles 4 and 5 of the Western
Gap Treaty October 19 in Villahermosa, Mexico. In reviewing Mexican
seismic data, USDEL found promising structures on the Mexican side
of the boundary as well as potential for trans-boundary reservoirs.
Mexican delegation welcomed news that the USG is working to extend
the ten-year moratorium on oil and gas drilling and exploitation
within the buffer zone inside the Western Gap. Mexican delegation
presented a general outline of a potential treaty on the development
of trans-boundary oil and gas reserves and will present a draft text
to the USG soon. The tone of the meeting was the most positive yet
in our series of discussions and demonstrated a growing level of
confidence between the delegations. End Summary.

2. (SBU) US (State and MMS/Interior) and Mexican (SRE SENER,
CNH,and PEMEX) officials met at Pemex facilities in Villahermosa,
Tabasco October 19 for the fourth in a series of formal
consultations under the Western Gap Treaty. The first part of the
meeting focused on viewing Mexican seismic data and discussing the
possibility of trans-boundary reservoirs. Leading the discussion,
Alfredo Guzman of the Mexican National Hydrocarbons Commission (CNH)
asserted that there is potential for trans-boundary reservoirs -
especially in the Perdido Fold area of the Gulf of Mexico. David
Cooke, MMS Geologist, found that the data showed some promising
geological structures on the Mexican side of the boundary and the
potential for trans-boundary reservoirs.

3. (SBU) Both sides expressed concerns that once the Shell
Oil-operated Great White field on the US side of the boundary goes
into production late 2009 or early 2010, the Mexican media may again
raise the "popote effect" - an erroneous claim that wells on the US
side will siphon off Mexican oil. The data indicates faulting
within the Great White field, and demonstrates a structural "low"
which separates Great White from the prospective structure and other
prospects on Mexico's side of the boundary. In addition, once
production begins, engineers will probably further reduce the size
of individual reservoirs based on their performance. Guzman
suggested the possibility of working together using the seismic data
to refute possible media reports to the contrary. The USG will
raise this again with the appropriate Mexican interlocutors as
needed.

Update on Deepwater Drilling
----------------------------

4. (SBU) GOM officials confirmed that Pemex has contracted a
deepwater rig for the Perdido Fold Belt area and will begin drilling
by the end of 2010. The first Mexican exploratory wells will be
drilled in the Maximino area November 2010, approximately 45
kilometers from Great White.

5. (SBU) Kevin Karl, MMS, updated Mexican delegation on US leases
and activities on blocks close to the US-Mexico maritime boundary.
He explained that, based on statistics to date, the average
reservoir size is 500-1000 acres with individual wells draining
100-400 acres. Currently the closest wells are being drilled 5.5
miles from the boundary, which makes drainage from the Mexican side
highly improbable. Karl explained that the reservoirs in this area
of the Gulf can be challenging and have a low recovery factor -
18-36% depending on which reservoir is being produced and based on
Shell data. Flow assurance is a major issue. He added that we will
have much more specific information once Great White begins
production. Other fields - including Silver Tip and Tobago - will
commence production at roughly the same time and will be tied back
to the Perdido Hub facility.

ELEMENTS OF AN AGREEMENT
------------------------

6. (SBU) Mexican Legal Advisor Joel Hernandez outlined the Mexican
concept for a bilateral agreement to govern the development of
trans-boundary oil and gas reservoirs. He confirmed that Mexico is
no longer proposing that the agreement cover both the maritime and
land boundary, but would instead focus only on the maritime border.
He explained that, by negotiating now, Mexico hopes to take a
preventive approach, which could provide legal certainty to would-be
investors while assuaging unfounded Mexican fears that US drilling
could drain Mexican resources. The agreement would authorize
licensees on both sides of the border (Pemex on the Mexican side and
commercial entities on the US side) to negotiate unitization
agreements and joint operating agreements for the purpose of

MEXICO 00003098 002 OF 003


developing trans-boundary reservoirs. He added that, by doing so,
the framework would promote energy security for North America by
allowing both sides to take advantage of the resources found on
their side of the boundary.

7. (SBU) Mexico is working on a proposed text for such an
agreement, Hernandez continued, and will provide it to us shortly.
Sam McDonald (State - L/OES) said the US looked forward to seeing
the Mexican draft, though he explained that the USG did not yet have
authority to negotiate. In the text, Hernandez continued, Mexico
will propose the following process for the development of a
trans-boundary reservoir:
a. Notification of possible existence of a trans-boundary
reservoir[, or of commencement of exploratory activities within a
certain range of the border];
b. Consultation and exchange of information in order to jointly
determine existence of trans-boundary reservoir;
c. Negotiation by licensees of a unitization contract;
d. Negotiation by licensees of an operating agreement for the
development of trans-boundary reservoir as a unit.

8. (SBU) Hernandez said that the GOM would borrow ideas for the
proposed text from a variety of existing bilateral agreements as
well as the US-Mexico bilateral experience in other areas.
Hernandez provided a general outline of elements that they planned
to include in their proposed text - including elements of a
unitization agreement; guidelines on apportionment and
reapportionment; guidelines for operating agreements; regulations
for the use of facilities near the delimitation line; creation of a
joint commission to examine issues referred by either government,
and provisions for dispute settlement. For the Joint Commission,
Hernandez pointed out that the US and Mexico have some good examples
to draw on. The US-Mexico Boundary and Water Commission, for
example, could be the model of a technical body that advises the
governments.

9. (SBU) Hernandez added that Mexico believes negotiating a treaty
would facilitate cooperation and enhance the profitability of small
fields by using existing infrastructure on the US side of the
boundary. Although the agreement would only apply to reservoirs
that physically straddle the boundary, Hernandez explained that it
would facilitate the development of broader trans-boundary fields.
Operators on both sides of the boundary could develop these fields
using collection facilities constructed on either or both sides of
the border.

10. (SBU) Turning to the Western Gap Treaty, Hernandez proposed
that the US and Mexico extend the moratorium on oil and gas drilling
and exploitation in the 2.8 nautical mile buffer zone (Article IV,
paragraph 1) until a bilateral agreement on trans-boundary
reservoirs enters into force. He added that Mexico is concerned
also about exploitation activities outside the Western Gap area. He
proposed that the buffer zone be extended beyond the Western Gap to
cover the entire maritime boundary. He noted that such an interim
agreement would preserve both countries' rights until a
trans-boundary agreement is negotiated.

11. (SBU) McDonald responded that it is the intention of the
Executive Branch to extend the moratorium in the Western Gap, and
that State is already consulting with the Senate on this. Brian
Duggan (State - EEB/ESC) offered a proposed visit by State
Department Energy Coordinator David Goldwyn as an opportunity to
rollout the extension of the moratorium. Both sides agreed to work
together to coordinate the timing and potential deliverables for
that visit. Duggan also noted that State and MMS had developed a
mechanism to review applications for petroleum pipelines that cross
our international border, resolving regulatory ambiguity that should
enhance the GOM's ability to auction service contracts near the
border. MMS Renee Orr offered to make staff available to train
officers from SENER and the Hydrocarbons Commission on all aspects
regulating industry in a transparent manner. In response to the
GOM's request to expand the moratorium to apply to the entire
maritime boundary, McDonald explained that the legal and policy
considerations were more complicated, in part because the USG has
already leased blocks along the border in other areas of the Gulf of
Mexico.

12. (SBU) McDonald requested that as the USG and GOM continue their
technical discussions, both sides refrain from making any public
comments about possible negotiations. Hernandez agreed. He added
that the GOM has told the Mexican Congress that Mexico has proposed
negotiations to the USG, but has not and would not share any details
of bilateral discussions.


MEXICO 00003098 003 OF 003


13. (U) Participants:

US:
-Sam McDonald, L/OES, State
-Brian Duggan, Energy Producer Country Affairs, EEB, State
-Andrew Dowdy, Deputy Director, WHA/EPSC, State
-Renee Orr, Chief, Leasing Division, Offshore Energy and Minerals
Management, MMS
-Kevin Karl, Regional Supervisor, Office of Production and
Development GOMR, MMS
-Dave Cooke, Deputy Regional Supervisor, Resource Evaluation, GOMR,
MMS
-Sigrid Emrich, Deputy Economic Counselor, US Embassy Mexico

Mexico:
-Ambassador Joel Hernandez, Legal Advisor, SRE
-Nicolas Guerrero Peniche, Legal Affairs, SRE
-Alfredo Guzman, National Hydrocarbons Commission
-David Madero, Director General for Exploration, SENER
-Leonardo Beltran, International Negotiations, SENER
-Enrique Puchet Canepa, Legal Affairs, SENER
-Guillermo Zuniga, SENER
-Juan Julian Ramirez, SENER
Jose Antonio Escalera, Deputy Director for Exploration, PEMEX
-Fernando Lopez Arriaga, PEMEX
-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
-Trinidad Martinez Vazquez, PEMEX
-Carlos Quesnel, Embassy of Mexico, Washington DC

14. (SBU) Embassy Comment: The Mexicans see an agreement on
trans-boundary reservoirs as an important opportunity for PEMEX to
work with IOCs and gain expertise in deepwater drilling. For the
first time in decades, the door has opened a crack to the USG
engaging constructively with Mexico on oil. Since the Mexicans
first made the proposal to engage in negotiations August 2008, both
sides have developed a better understanding of each other's policies
and practices and a level of confidence that could spill over into
other areas of cooperation. If bilateral discussions later promote
a further opening of Mexico's oil sector, it could benefit both
governments and commercial interests. Given Mexico's political
calendar, we should make a decision on whether to negotiate the
proposed agreement before the focus on the 2012 Presidential
elections and energy topics become taboo once more.

15. (U) USDEL cleared this cable.

Feeley

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