Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Memorandum From the President’s Assistant for National
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- Zbigniew Brzezinski
- 168. Summary of Conclusions and Minutes of Policy Review Committee Meeting
- 169. Letter From Secretary of Energy Schlesinger to Director of Central Intelligence Turner
- James R. Schlesinger
167. Memorandum From the President’s Assistant for National
Security Affairs (Brzezinski) to Secretary of Energy
Washington, November 8, 1978.
U.S.-Mexican Energy Relations
With the passage of the President’s energy legislation,
need to develop some options for the President on strategies for negoti-
ating with Mexico on supplies of oil and natural gas. We will not only
want to be clear on our objectives, but also on our tactics both with re-
gard to U.S. companies and regulatory agencies and Mexico.
As you know, the President places high priority on good relations
with Mexico, and he has directed a Presidential Review Memorandum
to look comprehensively at all of the issues in our relation-
ship with the purpose of suggesting a coherent strategy for dealing
with them. Since U.S.-Mexican energy relations are such an important
element in our overall relations with Mexico, and since energy is inter-
connected with other important issues in our relationship, a strategy on
energy should be developed in the context of PRM–41 rather than sepa-
rately. This is the purpose of the PRM exercise.
Therefore, the President would like you to present your views on
an appropriate energy strategy in PRM–41, and delay taking any steps
towards opening negotiations with the Mexicans until he has had an
opportunity to review PRM–41 and decide an energy strategy for
Source: National Archives, RG 59, Central Foreign Policy Files, P780176–1194.
Confidential. Copies were sent to Vance and McIntyre.
See Document 164.
PRM 41, “Review of U.S. Policies Toward Mexico,” August 14. (Carter Library,
National Security Affairs, Staff Material, North/South File, Box 32, Pastor Country Files,
Mexico: PRM 41 (Policy), 10/77–11/78)
February 1977–January 1979 537
168. Summary of Conclusions and Minutes of Policy Review
Washington, November 9, 1978, 3–4:23 p.m.
Secretary Blumenthal’s Trip to the Middle East
Deputy Secretary Warren Christopher
Mr. Randy Jayne, Associate Direc-
Mr. Richard Cooper, Under Secretary
tor for National Security and
for Economic Affairs
Mr. Harold Saunders, Assistant
Secretary for Near East and South
Lt. Gen. William Smith
Admiral Stansfield Turner
Secretary W. Michael Blumenthal
Mr. Robert Bowie, Dir., Ntl For-
Mr. Anthony Solomon, Under Secretary
eign Ass. Cntr.
for Monetary Affairs
Mr. Maurice Ernst, Dir., Economic
Mr. C. Fred Bergsten, Assistant Secretary
for International Affairs
Mr. Stuart Eizenstat
Deputy Secretary Charles Duncan
Amb. Henry Owen
Ms. Ellen Frost, Deputy Assistant
Secretary for International
Ms. Kitty Schirmer
Capt. Gary Sick (Notetaker)
Mr. Stanley Marcuss, Deputy Assistant
Mr. Rutherford Poats
Secretary for Domestic Commerce
Mr. Walter MacDonald, Deputy Assistant
Secretary for Intl Affairs
SUMMARY OF CONCLUSIONS
1. The group discussed the possible danger of a high-level visit to
Iran at this moment. It was agreed that it was difficult to predict what
the situation would be in ten days, and it was decided to maintain the
Source: Carter Library, National Security Affairs, Staff Material, Special Projects
File, Box 8, Henry Owen, Chron, 11/1–13/78. Secret. The meeting was held in the White
House Situation Room.
Blumenthal visited Saudi Arabia, the United Arab Emirates, Iran, and Kuwait No-
vember 16–22. Detailed reports of Blumenthal’s meetings are in telegrams 8212 from
Jidda, November 19; 6258 from Kuwait, November 22; 8352 from Jidda, November 26;
and 3162 from Abu Dhabi, November 30. (All in National Archives, RG 59, Central For-
eign Policy Files, P850040–2681, P850070–1906, P850040–2687, D780495–0142)
538 Foreign Relations, 1969–1976, Volume XXXVII
closest possible watch on the security situation, with this information
to be passed to the Secretary’s party prior to arrival in Tehran.
2. Prior to Secretary Blumenthal’s departure, an interagency group
will examine possible areas of economic cooperation and technical
assistance where the United States might be helpful to Iran.
3. The possibility of offering U.S. technical assistance to Iran to
open up the oil fields once again and get production started was exam-
ined. It was decided that this point would be checked with Ambas-
sador Sullivan; if he approved, Secretary Blumenthal could make a
low-key offer of U.S. assistance when he saw the Shah.
4. On oil prices, all agreed that an increase in oil prices of some size
was probably inevitable in December at the OPEC pricing meeting.
Discussion focused on what U.S. strategy should be to minimize that
price increase. Specifically, should the U.S. continue to argue for a zero
price increase, or should we direct our efforts toward minimizing and
spreading out the price increase that we anticipated? It was agreed that
Secretary Blumenthal in his meetings with Middle East leaders would
make all of the arguments against a price increase and counsel extreme
moderation. Mr. Eizenstat added that any indication that the United
States was supporting a price increase by OPEC would undercut
anti-inflation efforts in this country. He therefore suggested that “ex-
treme moderation” should publicly be interpreted to mean no increase
5. If asked about the President’s pledge at Bonn to bring domestic
oil prices in line with world levels by 1980,
Secretary Blumenthal will
take the line that the President has not changed his commitment, but
has not decided when and how it would be implemented.
6. The oil situation would be monitored very closely in the coming
days. If it appears that the Iranian strike is going to be prolonged, Secre-
tary Blumenthal should press Kuwait, the UAE and the Saudis to in-
crease their production as much as possible.
Mr. Christopher opened the meeting with a general overview of
the situation in the four countries to be visited by Secretary Blumenthal.
He proposed that rather than going country-by-country, the group
focus on Iran first, then the oil pricing question, thirdly, a review of the
current status of the peace process by Assistant Secretary Saunders,
and finally, Mr. Cooper would give his impressions based on his own
recent trip to many of these countries.
[Omitted here is discussion unrelated to oil prices.]
See footnote 3, Document 157.
February 1977–January 1979 539
He [Mr. Christopher] then turned to the oil price question, noting
that he expected a very strong pitch in December to increase prices. The
improved status of the dollar will help minimize the increase, but the
Iranian shortfall will soon be felt in the oil market. He wondered how
much could be done to minimize this.
Mr. Cooper said that we were in a condition of typical pre-OPEC
jockeying for position and that in fact the calls for a price increase were
more moderate than they had been in past years.
Secretary Blumenthal disagreed, recalling that a year ago we esti-
mated that there was a 50–50 chance of no increase at all. Today no one
is estimating that no increase is impossible. However, he agreed that
OPEC members are being moderate, considering the provocation in-
volved. He wondered if it still made sense for us to call for no increase
in prices and whether this was the best tactical position we could take
to in fact get no increase or a minimum increase in prices.
Mr. Cooper said that during his recent trip they had not dismissed
his arguments about no price increase. The UAE had been not unsym-
pathetic to the arguments. Iran recognized the importance of a price in-
crease on the world economy; but, of course, oil price policy itself has
become the subject of political demonstrations. Kuwait favors at least a
10% increase; however, the improved position of the dollar has taken
some of the wind out of their sails on this argument.
Secretary Blumenthal noted that he had talked recently to Aba
al-Khayl, the Finance Minister of Saudi Arabia, who had said that a
price increase was inevitable. He wondered about our credibility in
continuing to maintain the position of no price increase.
Mr. MacDonald noted that we had anticipated a five to seven per-
cent increase even before the Iranian events. Now it’s going to be at
least that high.
Mr. Eizenstat said one reason for the painful steps that we took on
the dollar was to give ourselves more leverage with regard to oil prices.
Our position calling for no price increase was not unreasonable.
Mr. Bowie said that we have to try to bring on additional supply
and that in order to gain leverage to convince the oil-producing states
to increase their production, we will need to recognize the problem and
thereby recognize that some increase in price is probably essential.
Mr. Cooper noted that the Government of Kuwait is concerned
about taxes, not about prices. They have refused to raise production if
they can’t be sure of their earnings on investments in this country.
Ambassador Owen said the question is not whether or not there
will be an increase—he felt that everyone agreed that there would be—
or admit that there will be some. It was a tactical decision.
540 Foreign Relations, 1969–1976, Volume XXXVII
Secretary Blumenthal thought that it might be better to acquiesce
reluctantly on some price increase and tie that to an increase in produc-
tion, knowing that the price increase is probably unavoidable, and the
other is critical.
Mr. Eizenstat suggested that we take the line of outlining the
reasons why there should be no price increase, recognizing that we
cannot determine OPEC policy, and if they insist on having a price in-
crease they should keep it as small as possible.
Secretary Blumenthal wondered in that line whether he could let
himself be drawn into a discussion of the nature of the increase; i.e.,
whether it should be split and spread out over an entire year rather
than all at once, and so forth.
Mr. Christopher said that as soon as there is any public mention of
an increase, that will become the working floor for OPEC and they will
simply negotiate on from there.
Secretary Blumenthal said that as far as public position is con-
cerned, he would intend to explain all the reasons why there should be
no increase. If the question was posed to him that an increase appeared
to be inevitable, he would say that if that in fact comes, he would prefer
to see as little as late as possible. He felt the real issue is what gives us
the best leverage to get the lowest price and that should be our strategy
even if it doesn’t play well in the United States. Last year we knew the
Saudis were prepared to support a zero price increase, and the Shah
was leaning in that direction. This year we know the Saudis feel that
some increase is inevitable.
Mr. Cooper wondered if we could counsel “extreme moderation.”
Secretary Blumenthal noted that that is different from calling for
no price increase.
Mr. Christopher said that a possible line would be to use all argu-
ments against any price increase and counsel extreme moderation.
There were no objections to that formulation.
Mr. Eizenstat said that with regard to public opinion in this
country, “extreme moderation” should be interpreted to mean a zero
price increase. We should not be seen as favoring an increase, however
small. On another issue, Mr. Eizenstat noted that the President had
pledged in Bonn to reduce imports by 2.5 million bpd by 1985. That we
can say is all right in view of the Energy Bill. Secondly, he had pledged
to bring domestic oil prices up to world levels by 1980. A decision on
this will be required in May of 1979. It is going to be extremely difficult
in view of the inflationary nature of the decision. If asked about the U.S.
pledge, what would Secretary Blumenthal say?
Secretary Blumenthal said that he would say that the President
had not decided to change his commitment he made in Bonn, but when
February 1977–January 1979 541
and how to implement that decision had not yet been decided, in-
cluding actions in 1979.
Mr. Cooper said that within the next week we will have to decide
how much Secretary Blumenthal should push the Governments of Ku-
wait and the UAE and potentially the Saudis to increase production. If
the situation in Iran is bleak, we should push hard.
Admiral Turner wondered whether it would be better to get the
Saudis to put the pressure on these countries, or whether we should do
so. If the Saudis take the position that a price rise is acceptable, then Ku-
wait might be prepared to cooperate on production.
Mr. Poats observed that a technical meeting that day had reviewed
the supply situation and concluded that Kuwait and the UAE together
had only 600,000 bpd of excess production capacity and in the entire
world there was only 1.7 million bpd in excess capacity, which meant
that even under the best of circumstances we could not hope to over-
come the entire Iranian shortfall.
[Omitted here is discussion unrelated to oil prices.]
In a November 24 memorandum to the President, Blumenthal reported on his trip
and commented, among other things, on the oil price issue: “Each country’s position on
this complicated matter differs somewhat. In each case, attitudes are shaped by a com-
plex interplay of individual perceptions as to political interests (vis-a`-vis the U.S., other
OPEC members, LDCs, domestic pressures) and economic considerations (budget re-
quirements, cash flow, external asset position, amount of reserves, etc.). Saudi Arabia and
the UAE will be the most moderate. Iran will be passive (but probably wouldn’t mind a
pretty good increase). Kuwait will support those arguing for at least 10–15%. The final
outcome is uncertain.” (Carter Library, National Security Affairs, Staff Material, Special
Projects File, Box 8, Henry Owen, Chron, 11/1–13/78)
Telegram 304969 to the Embassies in OPEC countries, December 2, instructed
them to “approach key officials on forthcoming OPEC price decision, using as point of
departure report on Secretary Blumenthal’s trip to the Middle East and the presentation
he made in regard to the upcoming OPEC oil price decision.” (National Archives, RG 59,
Central Foreign Policy Files, D780497–0160)
542 Foreign Relations, 1969–1976, Volume XXXVII
169. Letter From Secretary of Energy Schlesinger to Director of
Central Intelligence Turner
Washington, November 11, 1978.
I recently wrote you
to express my concern over the impact of pro-
posed reductions in FY 1980 funding for certain National Security
Agency collection activities which support, among others, Department
of Energy requirements. Review of the National Intelligence Topics at-
tached to your 28 August letter
has prompted me to express additional
concerns regarding the collection, analysis and production of intelli-
gence on foreign energy intentions, research and technology develop-
ment and the priorities assigned to Community efforts in these areas.
It is important that the U.S. not be surprised by future foreign po-
litical or technological developments in energy or energy-related fields.
Community reporting on the political and economic aspects of oil
supply and pricing is generally adequate. However, it appears that in-
sufficient information is being collected to allow comprehensive
analysis and evaluation—in DOE or elsewhere—of potential develop-
ments in foreign energy technologies and energy resources, especially
in the Soviet Union. The National Intelligence Topics reflect this situa-
tion in mentioning energy only with respect to nuclear proliferation
and oil production policies and capacities. Although these are impor-
tant topics, there are many other important areas of interest, for exam-
ple: resource development, especially in the Soviet Union, and foreign
energy technology, such as secondary oil recovery, coal conversion,
and breeder reactors. My staff will work closely with the DCID 1/2
Committee this Fall in order to more clearly define requirements and
align priorities for collection of this essential information.
Despite the increasing importance of energy from a political, eco-
nomic, and security standpoint, it appears that Community efforts in
this area continue to be fragmented and lack overall coordination. Spe-
cifically, the Community lacks a suitable focal point for interaction with
policy-level users of energy intelligence, for coordination and moni-
toring of efforts throughout the Community, and for timely dissemina-
tion of information and analyses. For instance, energy intelligence pro-
duction responsibilities are spread among the Economic Intelligence
Source: Library of Congress, Manuscript Division, Schlesinger Papers, Box 4,
Chron: Oct.–Dec. 1978. Secret. Drafted by J.B.K. LaBarre on September 12.
Neither the letter nor its attachment was found.
DCID 1/2, February 17, 1977, is entitled “U.S. Foreign Intelligence Requirements
Categories and Priorities.”
February 1977–January 1979 543
Committee, the Scientific and Technical Intelligence Committee, and
the Joint Atomic Energy Intelligence Committee rather than in a single
committee or working group concerned with providing a broad per-
spective of all factors relating to energy. Even within CIA, energy intel-
ligence production efforts are shared by several offices, including OSI,
OER, and ORPA, with no one office having overall coordination
I believe that existing Community assets are capable of satisfying
the requirements of this Department and other users for timely
warning of significant foreign energy developments and for subse-
quent assessment of the implications of such developments. However, I
feel this will require that higher priorities be given to the collection of
energy intelligence and a more central focusing and coordinating of
Community analysis and production efforts. I understand that the Re-
source Management Staff currently is conducting a study of Commu-
nity energy intelligence activities which will serve as a basis for review
and subsequent revision of Community priorities, efforts, and organi-
zations. I look forward to discussing these matters with you following
conclusion of the RMS study.
James R. Schlesinger
Printed from a copy with Schlesinger’s typed signature and an indication that he
signed the original.
170. Paper Prepared by the National Security Council Staff
Washington, November 22, 1978.
U.S. Interests and Key Issues
The discovery of sizeable oil and gas deposits in Mexico is a major
development which can make a significant contribution to world oil
supply and exert a restraining force on oil prices. Within a decade,
Mexico will be at the forefront of the world’s oil nations, producing at a
Source: Carter Library, National Security Affairs, Staff Material, North/South
File, Box 32, Pastor Country Files, Mexico: PRM 41 (Policy), 10/77–11/78. Secret. This pa-
per is part of a larger study on the central issues affecting U.S.-Mexican relations, pro-
duced in response to PRM 41 (see footnote 3, Document 167).
544 Foreign Relations, 1969–1976, Volume XXXVII
level double the projected production of Nigeria, Kuwait and Libya
and probably on a par with Iran. Mexico’s announced “potential re-
serves”—160 billion barrels of oil plus gas equivalent to an additional
60 billion barrels—far exceed those of other nations except Saudi
These new discoveries substantially alter opportunities for Mex-
ican development and offer the United States an important new source
of oil with reduced vulnerability to political and military developments
beyond the hemisphere.
Mexican oil will impact significantly on the United States. Our
major interest is to see Mexican oil production increase rapidly—at a
rate consistent with Mexico’s own hydrocarbon development program,
its economic and social objectives, and world oil market requirements.
In view of the Mexican policy to promote rapid oil development and
production, some question whether U.S. actions to accelerate Mexican
production prior to 1982 (the end of Lopez Portillo’s term) will be
needed. Others believe we can and should move vigorously to stimu-
late Mexican output.
Our interests in Mexican gas raise complex issues. The potential
availability of 2 billion cu. feet per day of Mexican gas (rising to a level
of 5 bcf by 1985 or just under 4 percent of total U.S. gas consumption)
would be highly attractive under certain conditions. Whether such im-
ports would exert a positive economic impact on the U.S. would de-
pend largely on price and displacement factors.
From a strict supply standpoint, because National Energy Act in-
centives have spurred new domestic production, we do not now
“need” Mexican gas, and are unlikely to need it until the mid 1980’s—
assuming (a) we continue to pursue a strategy of stimulating increased
domestic gas production by allowing higher prices and (b) we do not
wish to import Mexican gas as an alternative to imported oil.
In negotiations last year the Mexicans held tenaciously to a price of
$2.60 per thousand cu. feet, with an OPEC-tied escalator, or 20% above
the comparable price for imported Canadian gas. President Lopez Por-
tillo is strongly and publicly committed to that price and PEMEX Direc-
tor Diaz Serrano has reiterated recently that Mexico now does not want
to talk gas for two years. Nevertheless, whether the Mexicans will be
prepared to adjust downward in view of the larger domestic U.S. avail-
abilities has not been tested.
If Mexican gas were available below U.S. domestic gas prices, that
could exert a positive impact on the cost of living in those areas serv-
iced, although it would run counter to the production incentive provi-
sions of the National Energy Act and might jeopardize the Alaskan gas
pipeline deal. If Mexican gas were available at prices above those pre-
vailing domestically, there would be no domestic displacement but it
February 1977–January 1979 545
could spur increased Canadian prices on the 3 bcf exported to us, at a
cost of $900 million.
While it might have some impact on domestic and Canadian pro-
duction and prices, Mexican gas could represent a net addition to U.S.
gas consumption, possibly replacing imported oil from the Middle
East. One impact would be that $5–6 billion per year in U.S. payments
for energy imports would go to Mexico’s economy rather than Middle
Eastern oil countries. With 62 percent of Mexico’s imports coming tra-
ditionally to the U.S., a significant part of U.S. gas payments are likely
to return in the form of Mexican payments for imports from the U.S.
The key issues in energy therefore are both long term and imme-
diate, e.g., (1) what policies, if any, the U.S. can or should pursue to en-
courage the development of Mexico’s petroleum resources and in-
crease U.S. and world access to Mexican production; (2) what our
position should be on the proposed Mexican-U.S. gas deal.
Between 1978 and 1990, U.S. consumption is projected
to increase from 21.8 to 24.2 million barrels per day. During this period
U.S. domestic production probably will decline slightly, from 10.2 to
9.8 million b/d and imports rise from 11 to 13.8 million b/d.
Current U.S. consumption of natural gas is approximately 20
trillion cubic feet (tcf) annually. Domestic production accounts for
about 19 tcf, or 95% of this amount. Imports of natural gas from Canada
and high cost LNG from Algeria make up the balance. DOE anticipates
1985 domestic production still will be approximately 19 tcf feet and
consumption 21 tcf.
U.S. Sources of Supply
Most oil imports come from the Middle East, which has grown
rapidly as the prime source of supply for the U.S., from 21 percent in
1975 to 40 percent today. Future production by other established sup-
pliers like Indonesia and Nigeria is expected to stagnate or decline
during the 1980’s. Absent Mexico or other major new sources, U.S. de-
pendence on Middle East suppliers will continue to grow. Exports of
Mexican oil could modify this trend somewhat and provide the U.S.
The PRC discussed this paper on December 6. At the meeting, Schlesinger recom-
mended that the United States try to reach a natural gas agreement with Mexico and that
an approach on the issue be proposed for the President to discuss with Mexican President
Jose´ Lo´pez Portillo. Everyone “recognized the importance of resolving this issue to se-
cure energy and ensure good relations with Mexico.” (Carter Library, National Security
Affairs, Staff Material, North/South File, Box 32, Pastor Country Files, Mexico: PRM 41
Source: Energy Information Administration, “Annual Report to the Congress,”
1977. The data comes from the “Base Case,” (or Case C). [Footnote in the original.]
546 Foreign Relations, 1969–1976, Volume XXXVII
and its allies with a more diversified and balanced oil import pattern.
The Middle East will continue to play the dominant role in the supply
of oil to the U.S. and world markets. But Mexican production will help
and could have a positive impact on world oil prices as well.
U.S. Security Interests
The strategic, political and security ramifications of even further
dependence on the Middle East in the mid-80’s are obvious. Recent
events in Iran underline U.S. vulnerability. The summary judgement of
the Department of Defense on the national security implications of
Mexican petroleum is:
“Mexico provides a relatively close source of supply to meet
present and future U.S. energy needs during periods of war or interna-
tional crisis. We believe that much of the oil produced in Mexico will
naturally flow to the U.S. because of the U.S.’ geographic proximity to
Mexico and its large market. However, the U.S. should offer positive
encouragement to Mexico to develop its energy sources and to build in-
frastructure projects such as pipelines which will connect Mexico with
the U.S. petroleum (liquids and gas) distribution system. Such coopera-
tive arrangements enhance U.S. security by providing overland routes
not subject to ocean interdiction.”
Mexico’s Oil and Gas Reserves
The full scope of Mexico’s petroleum reserves is not yet deter-
mined. On the basis of exploration to date, they would seem clearly to
exceed those of any country outside the Middle East. Official estimates
—“Proved reserves” of 20 billion barrels (both oil and gas in oil
—“Proved and probable reserves” of 57 billion barrels (40 oil and 17 gas
in oil equivalents);
—“Potential reserves” of 220 billion barrels (160 oil and 60 gas in oil
By comparison, using the conservative 40 billion barrels “proved and
probable” oil reserves,
Mexico has more oil than almost all major pro-
ducers, including: the U.S. (39 billion), Iraq (36), Libya (25), Nigeria
(19), Venezuela (14) and Canada (8) and is exceeded only by the USSR
(41), Iran (60) and Saudi Arabia (150). If its “potential reserves” prove
out, Mexico (160) will exceed Iran and could move into a class with
Saudi Arabia (150).
These are staggering estimates. The finds are so recent, however,
(most of Mexico’s resources are located in fields discovered since 1972
in the Reforma area of southern Mexico), experts still disagree strongly
on their full extent. Because of this, some experts recommend using 100
billion barrels (more than Iran, less than Saudi Arabia) as the best rule
of thumb for now. Whatever its ultimate reserves, Mexico is clearly
February 1977–January 1979 547
destined to move into the front rank of major world producers within
the next 5 to 10 years—a factor which will greatly benefit the U.S. and
other consuming nations.
Mexico’s total crude oil production is slated to reach 1.6 million
b/d by year’s end, with nearly 600,000 b/d exports, a tripling of its
output since the initial Reforma discoveries in 1972. Reforma output,
from 17 fields, will account for over half the total this year, or about
Until Lopez Portillo came into power, PEMEX had a very conserv-
ative approach to oil matters and developed resources slowly. After the
1976 elections, Lopez Portillo opted for a strategy of massive and rapid
development to provide funds for Mexico’s pressing social problems.
He reorganized PEMEX, and appointed Jorge Diaz Serrano as Director
With the new orientation production and export guidelines have
been revised steadily upward. PEMEX had previously indicated that it
would produce 2.2 million b/d in 1982 and export roughly 1.1 million
b/d. Plans now call for reaching these targets in 1980. PEMEX now ex-
pects to produce 2.7 to 3.0 million b/d by 1982, and exports of about 1.5
Rapid increases in output have been accomplished in the face of
severe problems. Although fields are productive, initial development
has been slow because the Reforma reservoirs are extremely deep, geo-
logic conditions and terrain are difficult and infrastructure has been
lacking. PEMEX now has about 150 producing wells in the area, up
from about 100 a year ago.
There seem few technical constraints to higher output. PEMEX, es-
tablished with the nationalization of foreign oil companies in Mexico in
1938, is an experienced oil company with impressive expertise in all
aspects of the petroleum industry. It is credited with the huge
Chiapas-Tabasco discoveries and development. Financially sound,
PEMEX enjoys an excellent credit rating and there are no company fi-
nancial obstacles to constrain rapid oil development.
Despite the very real Mexican sensitivity to foreign interference in
oil matters, PEMEX uses U.S. contractors and consultants, asking only
that PEMEX be clearly in control and the foreign presence be relatively
Few political obstacles exist to rapid expansion of Mexican petro-
leum production through 1982 and Mexico is expected to continue its
rapid development efforts. The President of Mexico remains the key to
major petroleum decisions but the environment in which he operates is
also important. Outside of PEMEX, some of the government and busi-
548 Foreign Relations, 1969–1976, Volume XXXVII
ness elite question the wisdom of a rapid pace of oil production and be-
lieve the substantial new oil earnings will disrupt the economy, as hap-
pened in Venezuela, Nigeria and Iran. Some fear the oil bonanza,
combined with other dynamics such as the rapid demographic changes
and continued high levels of unemployment could disrupt the balance
in Mexican politics and society. In the years ahead, Mexican policy
makers must weigh these factors carefully as they set oil policy.
By 1985, production is likely to reach from 3.5 to 5 million b/d. The
more conservative estimate assumes that Mexico tries to increase pro-
duction at the same rate as in 1978–82 but faces increasingly real ab-
sorption problems. The higher estimate assumes the new Administra-
tion that takes office in 1982 at least continues, and perhaps steps up,
the current fast pace development effort, that there are few serious
technical constraints and that Mexico is able to absorb the revenues
This year, Mexican production of natural gas will be 2.1 billion cfd,
1.1 billion cfd of Reforma gas (associated with oil) and 1.0 billion cfd of
Mexico’s domestic demand for gas amounts to 1.6 billion cfd with
another 0.5 billion cfd flared. Consumption has been stagnant for the
past few years because of supply and distribution problems, but expan-
sion of domestic pipeline capacity now underway will enable Mexico
to increase future usage. Mexican gas production could grow to 8.3 bcf
by 1985. With strong Mexican Government stimulation, domestic de-
mand could grow to 2.5–3.0 billion cubic feet by 1985.
PEMEX signed a Memorandum of Intention in August 1977 with a
consortium of six U.S. pipeline companies to sell 2 bcf daily of natural
gas. The proposal called for a 6-year renewable contract with a border
price equivalent to the price of #2 fuel oil in New York Harbor (then
$2.60 per thousand cu. feet, now $2.87) and an escalator clause also tied
to the price of #2 fuel oil. U.S. officials were concerned by its impact on
energy legislation and the price of the larger quantities of natural gas
imports from Canada, priced at $2.16 per mcf at the border and had
strong reservations concerning the proposed price escalator because of
its tight link to OPEC-determined oil prices. The U.S. and Mexico could
not reach agreement and the Memorandum expired. Lopez Portillo,
who had staked personal prestige on the gas deal as a sign of the ad-
vantages of close cooperation with the U.S., was bitterly disappointed
at our failure to reach agreement. We had indicated, however, will-
ingness to resume negotiations whenever Mexico requested after pas-
sage of U.S. energy legislation.
February 1977–January 1979 549
Without exports to the U.S. Mexico will be forced to adopt several
measures to maximize domestic use and avoid flaring and could con-
ceivably attempt to look elsewhere for exports. With the gas deal still in
suspense, Lopez Portillo committed Mexico to expanded domestic
usage. Construction of the gas pipeline from the Reforma area to Mon-
terrey has begun and should be completed by the end of 1979. A pos-
sible second pipeline would increase through-put to over 4 billion cfd.
The building of the pipeline to high energy consumption areas
gives Mexico two options: to use the gas domestically (including the
shutting in of non-associated gas), or to add a spur to the U.S. border
should an export agreement be reached. Increased domestic use would
involve substantial conversion costs, however, and force Mexico to use
such energy for lower priority requirements. The use of cheap gas to
subsidize the power costs of domestic industry—and make exports
more competitive—provides an attractive option for Mexican planners.
Privately, Mexican officials have made clear that at some point
they expect substantial quantities of gas surplus to Mexico’s needs to be
available for export. It is difficult to tell whether Mexico would agree at
present to the 2 billion cfd gas deal on terms acceptable to us. Given
Lopez Portillo’s desire for foreign exchange to finance Mexico’s devel-
opment before 1982, such a gas agreement still may be negotiable, if we
judge it to be in our interests. But we have seen strong evidence that we
may be too late—that Mexico may have decided to go ahead on its own
without a U.S. linkage on gas.
Importance of Oil and Gas to Mexican Development
Mexico’s new oil and gas discoveries represent a dramatic oppor-
tunity to deal with the problems of underdevelopment. The gov-
ernment now seeks to develop its large-scale reserves as rapidly as pos-
sible consistent with sound oil management. Although well aware of
the problems that rapid oil development could entail, the Lopez Por-
tillo Administration is determined to achieve full benefit of its new pe-
troleum resources to attack serious socio-economic problems.
We judge that Mexico could produce enough crude, 5 million b/d,
to support oil exports of about 3.4 million b/d in 1985 and gas exports
of nearly 5 billion cfd. Earnings from oil would approach $30 billion by
1985 (assuming oil prices increase 3 percent annually in real terms) and
gas sales another $7 billion (assuming sales priced at $2.60 per thou-
sand cubic feet plus an escalator tied to the U.S. rate of inflation)
bringing total oil and gas revenues to $37 billion annually by 1985 (or
about $20 billion in constant 1978 dollars). Taking a more conservative
projection (oil exports limited to 2.5 million b/d, and gas to 3 bcf) oil
and gas revenues in 1985 will be $25 billion. This compares with export
earnings from all sources of $5 billion in 1978.
550 Foreign Relations, 1969–1976, Volume XXXVII
Mexico determines its own pricing and production policies. Like
all exporters, Mexico follows OPEC price leadership on oil. It is un-
likely that Mexico would join OPEC, however, because of its stubborn
resistance to any outside influence on its oil policies. It already gets the
benefits of high OPEC prices on oil, without paying the dues of mem-
bership, much as it benefits from GATT tariff reductions without join-
ing GATT and gets GSP which OPEC members do not. Mexico is deter-
mined to maintain the independence of its petroleum industry and
resists adamantly any outside influence, or the appearance of yielding
to foreign pressure, on its oil and gas policy.
The PRM–41 review has revealed disagreement among the agen-
cies on whether the U.S. will be able to influence the pace of Mexico’s
petroleum development. Deep-seated political sensitivities in Mexico
seriously constrain our ability to influence the evolution of Mexican en-
ergy policies. These sensitivities are based on the long-standing fear of
domination by the United States. Thus, the level of Mexican production
will be determined basically by Mexico’s perception of its national in-
terests. Mexican internal political factors, especially the need for reve-
nue to finance labor-intensive development and other programs, could
push the Mexicans to expand production. Nevertheless, prospects for
direct U.S. influence do not appear to be great, unless we are prepared
to play some heavy chips.
Although Diaz Serrano has stated categorically that Mexico does
not wish to discuss the export of gas for two years, Mexico will have
more gas than it can consume domestically at some point. Essentially,
time is on our side since the price which Mexico seeks for its gas will
converge with the U.S. market price after deregulation in 1985, and the
current surplus of gas will come to an end.
We are, however, the only feasible external market for Mexican gas
(unless the Japanese are prepared to invest heavily in liquification facil-
ities) and the natural market for Mexican oil and this close symbiosis
plus the need for upfront gas and oil revenues to finance Mexico’s de-
velopment in the 1980–82 period suggest a degree of common interest.
forming them that the President approved the conclusions of the December 6 PRC meet-
ing, including reaching an agreement on natural gas with Mexico. Brzezinski asked,
among other things, that the Departments of State and Energy coordinate with each other
to “prepare a short paper which suggests a strategy for concluding an agreement with
Mexico on the importation of natural gas.” He added: “This should also include talking
points which the President could use with President Lopez Portillo and recommenda-
tions for how to relate the President’s trip to the conclusion of such an agreement.” (Car-
ter Library, National Security Affairs, Staff Material, North/South File, Box 32, Pastor
Country Files, Mexico: PRM 41 (Policy), 10/77–11/78) The President made a State visit to
Mexico February 14–16, 1979. See Document 190.
February 1977–January 1979 551
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