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Viewing cable 07MEXICO1550, CALDERON WARNS OF PEMEX CRISIS

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Reference ID Created Released Classification Origin
07MEXICO1550 2007-03-27 19:57 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Mexico
VZCZCXRO6933
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1550/01 0861957
ZNR UUUUU ZZH
R 271957Z MAR 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 6115
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 MEXICO 001550 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON MX
SUBJECT: CALDERON WARNS OF PEMEX CRISIS 
 
REF: A. 06 MEXICO 5810 
 
     B. 06 MEXICO 6783 
     C. MEXICO 1256 
 
 
Introduction and Summary 
------------------------ 
 
1.  (U) President Calderon spoke frankly about the challenges 
facing Mexico in the petroleum sector on "Pemex Day," March 
18, the 69th anniversary of the expropriation of foreign oil 
company assets in Mexico.  He announced that Mexico has less 
than ten years of reserves remaining at current production 
rates, that in past years Pemex has operated well below the 
industry standard of replacing 100 percent or more of 
reserves, and that Pemex has more than USD 50 billion in 
pension liabilities alone.  Calderon noted that oil income 
will be essential for funding future government spending on 
poverty and infrastructure and concluded that if Mexico "did 
not act soon to reverse the situation, the country would face 
severe problems."  While pundits and industry participants 
have described this situation at length, this is the first 
time a Mexican President has described the situation in such 
stark terms. 
 
Speech 
------ 
 
2.  (U) In the speech, Calderon noted that by Pemex's own 
calculations, the company had 9.3 years of proven reserves 
remaining at the current production rate.  Pemex debt totaled 
more than USD 100 billion, half of which was pension 
liabilities.  Furthermore, Pemex has not been ale to replace 
the reserves it has produced for decades.  Calderon added 
that if Mexicans did not act quickly to replace reserves, 
Pemex would be unable to reverse the drop in daily production 
seen recently (ref A, B) with severe consequences.  Not only 
would Mexico be unable to finance development, but the 
country would become a net petroleum importer. 
 
3.  (U) Calderon implied that previous administrations had 
neglected Pemex, keeping the company from developing 
necessary new technologies and finding new fields fast 
enough.  He added that politicians had used Pemex income to 
finance a variety of projects without considering the health 
of the business.  To do nothing to fix Pemex would have 
irreversible costs for the nation, especially in terms of 
Mexico's competitiveness. 
 
4.  (U) Calderon then described six challenges that Mexico 
faces in the effort to strengthen the company.  The first was 
to invest sufficiently in exploration to ensure Mexican 
energy security for the longer term.  Second was to obtain 
the necessary financing and technology to exploit the 
nation's reserves, particularly in deep water or in difficult 
to develop onshore areas.  Calderon also called for making 
Pemex more efficient and transparent.  He called for Mexico 
to become competitive in refining and petrochemical 
production.  Finally, Pemex had to fight internal corruption, 
and to promote sustainable development and protect the 
environment. 
 
Reaction Mixed 
-------------- 
 
5.  (SBU) While none of the facts in the speech was new, what 
was unique was that President Calderon said them publicly. 
According to one source within the Pemex corporate finance 
office, the company's debt has reached USD 107 billion of 
which USD 16 billion was short-term.  In past years the 
gravity of this situation not reached the average Mexican 
with the immediacy that Calderon provided. 
 
6.  (SBU) Cesar Hernandez, a researcher in Energy Policy at 
Mexico's Research Center for Development (CIDAC) (strictly 
protect) noted that at the speech, Calderon recognized and 
was friendly with Pemex's union (STPRM) chief, Romero 
Deschamps.  In marked contrast with President Fox who "never 
really felt comfortable with Deschamps," Calderon, by his 
actions and statements from the podium seemed to signal a 
 
MEXICO 00001550  002 OF 002 
 
 
willingness to work with the union leader.  Coming off the 
President's recent progress pushing reform of the public 
sector union's pensions , Calderon currently enjoys 
reasonable acceptance from union leaders, and seems to be 
willing to use it.  According to Hernandez, if the public 
pension reform passes, Calderon will gain more respect from 
the unions and political capital that could be used on fiscal 
and ultimately energy reforms.  He added that Calderon's 
behavior was especially noteworthy given the very close ties 
between the STPRM and the opposition Institutional 
Revolutionary Party (PRI), though Calderon will still have 
substantial ground to cover when dealing with Party of the 
Democratic Revolution (PRD) unions on the issue. 
 
7.  (SBU) Pemex officials we spoke with also believed that it 
would be important for the President to begin to lay the 
groundwork for financial reform of Pemex.  They note that the 
legislature is far from consensus.  Pemex's current financial 
position is not sustainable.  The company has delayed 
maintenance to the point where some installations are in 
significant danger.  Additionally, Pemex debt is in danger of 
being downgraded 
 
8.  (SBU) Energy Secretariat Director General for Research, 
Technology and Energy Planning, Diego Arjona (strictly 
protect) who participated in drafting the speech, called the 
response it has received, important, thought he added that 
the effects would be slow in coming.  He believed that the 
biggest effect would be in the budget process in the Chamber 
of Deputies where he noted that members had already contacted 
him to discuss carving out a larger budget for the oil 
company.  He suggested that even after the speech, the 
average Mexican did not fully grasp the financial challenges 
Mexico would face. 
 
9.  (SBU) Miriam Grunstein, (strictly protect) a local 
attorney representing Petrobras in Mexico saw the response as 
more muted.  More than speeches on the same occasion in years 
past from President's Fox, Zedillo, and Salinas, she noted 
Calderon's nationalistic tone, surmising that this would help 
to co-opt the union leadership and those who continue to view 
the sector through a "uniquely Mexican lens, as an essential 
symbol of national sovereignty," though she believed the 
speech was not strident enough to capture the attention of 
most Mexicans. 
 
Comment 
------- 
 
10.  (SBU) We see Calderon's speech as a first step in a long 
public campaign for energy reform.  Whether his political 
savvy and the respect he has won from some unions will allow 
the President to change the sector before Mexico reaches a 
financial impasse is less clear. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
GARZA