Identifier
Created
Classification
Origin
03TEGUCIGALPA1645
2003-07-11 22:08:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tegucigalpa
Cable title:  

AES Attempts to Salvage 200MW Energy Contract and

Tags:  ENRG EPET EINV ECON HO 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 TEGUCIGALPA 001645 

SIPDIS

SENSITIVE

GUATEMALA FOR COMATT
STATE FOR WHA/CEN

E.O. 12958: N/A
TAGS: ENRG EPET EINV ECON HO
SUBJECT: AES Attempts to Salvage 200MW Energy Contract and
El Faro Project

REF: a) 01 TEGUCIGALPA 2872, b) 02 TEGUCIGALPA 02207, c) 02

TEGUCIGALPA 02857, d) 02 TEGUCIGALPA 03184, e) 02
TEGUCIGALPA 03273, f) 02 TEGUCIGALPA 03416, g) 02
TEGUCIGALPA 03479

THIS CABLE CONTAINS PROPRIETARY BUSINESS INFORMATION THAT
SHOULD BE KEPT CLOSE HOLD.

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 001645

SIPDIS

SENSITIVE

GUATEMALA FOR COMATT
STATE FOR WHA/CEN

E.O. 12958: N/A
TAGS: ENRG EPET EINV ECON HO
SUBJECT: AES Attempts to Salvage 200MW Energy Contract and
El Faro Project

REF: a) 01 TEGUCIGALPA 2872, b) 02 TEGUCIGALPA 02207, c) 02

TEGUCIGALPA 02857, d) 02 TEGUCIGALPA 03184, e) 02
TEGUCIGALPA 03273, f) 02 TEGUCIGALPA 03416, g) 02
TEGUCIGALPA 03479

THIS CABLE CONTAINS PROPRIETARY BUSINESS INFORMATION THAT
SHOULD BE KEPT CLOSE HOLD.


1. (SBU) AES Honduras' efforts to salvage its 200MW energy
contract, awarded and signed Christmas day, 2002 (ref g)
despite having overcome an unfair government procurement
process and political influence, may be reaching the end of
the road this month. Apparently, due to financial and
management restructuring, the company leadership have
directed staff to cease any spending on the El Faro project
in Honduras and instead find partners willing and able to
meet conditions of the contract. Although a U.S. oil and
gas company with substantial interest in the Central
American region is currently studying potential partnership
in the LNG-powered project, any final decisions are months
away. Closing of an interim deal and payment of the
required performance bond by a potential local partner, the
Larach Group, has been delayed by Larach's concerns over the
liability of committing to a project of this size. On July
3, AES requested authorization for a contingency plan that
allows the project to be scaled down and use bunker fuel if
financing for the LNG plant is not forthcoming in the next
six months. On July 9, the GOH refused to grant this
authorization. The GOH is threatening to cancel the
contract and begin legal proceedings by mid July if AES does
not pay the five million dollar performance bond. End
summary.

--------------
AES' Battle to Build Project and Win Contract
--------------


2. (SBU) For more than three years, AES has sought to build
a regional 540 MW gas-turbine electric power project fueled
with liquefied natural gas in Puerto Cortes. The El Faro
project was designed to provide power not only to Honduras
but also El Salvador and other Central American countries.
Throughout the process, AES requested and received extensive
advocacy from the Embassy and US agencies in Washington.
Post has treated this advocacy case as a priority because of

the U.S. commercial interest, the important contribution of
the project to lowering electricity costs in Honduras, and
the potential for spurring investment and regional
integration. The Embassy has been in constant contact with
decision-makers in the Honduran government at the highest
level. A contract to supply 200 MW of electricity by 2006,
using natural gas, to the Honduran electric power utility
ENEE was finally awarded in late 2002 and ratified in
February.


3. (SBU) To win this contract, AES had to overcome several
obstacles including political influence stalling the
processing of the project's environmental permit, several
modifications to the bid specifications favoring local
companies, six delays in the bid opening date (from January
until July, 2002) and indications of an unfair evaluation
process after the bid opening. The "winning" local company,
Lufussa was not disqualified despite the incompleteness in
its offer related to transmission capacity. The Ambassador
and Embassy staff supported the company in insisting that
the government acknowledge the flaws in the award process.
This advocacy contributed to the government's eventual
decision in early December 2002 to invalidate the tender and
subsequently provide awards to both Lufussa (210 MW contract
deliverable within two years) and AES (200 MW contract
deliverable within four years) (Ref f, g). Once the
decision was made, the GOH rushed AES Honduras into a take-
it-or-leave-it deal, insisting that the contract presented
on December 24 be signed by December 27, without changes or
time to send it in for corporate review, which AES Honduras
President Carlos Pineda did. Subsequently, the AES
contract became a political football in the Honduran
Congress, but eventually was approved, signed by the
President in February and published in March.


4. (SBU) In the meantime, AES Corporation in the US was
undergoing financial and management restructuring. A
December settlement with creditors did not include any
capital financing for the Honduras project. Gas prices
spiked in the run-up to the war in Iraq and have stayed
relatively high since, complicating financing arrangements.
AES' newly appointed chief of the Central American region
visited Honduras to explore the possibilities of switching
to a coal-fired plant. He concluded it was unfeasible both
legally and politically (especially since the company had
spent three years pushing the benefits of bringing gas to
Central America). The company then directed the manager of
AES Honduras to find partners to assume the development
costs of the project. AES has emphasized in conversations
with Econoffs that the company had lost confidence in
Honduras and its investment climate.

--------------
AES Strategy for Next Steps
--------------


5. (SBU) Thus, since February, AES Honduras has sought to
find both a local partner and an international energy
company to buy into the project. These deals have not
closed as quickly as hoped, and the company appears to be
running out of time.


6. (SBU) One US oil and gas company, active in Central
America, is seriously studying a major investment (with
majority control) in the El Faro project, and has begun its
own internal studies of the project. The company would
bring to the table sufficient funding for the project
(avoiding the need for a financing package) and its own gas
reserves. Investment by this multinational, or one like it,
would allow the El Faro project to proceed in its original
form using LNG and meeting all specifications of the
original emergency contract. A final decision will not be
forthcoming, however, until at least November 2003.


7. (SBU) To meet the immediate needs of providing a
performance bond and final paperwork for an operating
permit, AES is negotiating to sell a large majority of its
shares now (up to 90 percent) to the Honduran Larach Group.
Larach has been interested in participation in El Faro for
quite some time, but realization of the difficult financing
prospects for the LNG terminal has delayed the completion of
the deal. Recent news of high gas prices and a violent
kidnapping attempt in June of Luis Larach, one of the
principal negotiators, also affected the timing.


8. (SBU) To square the circle, on July 3, AES proposed to
ENEE and the GOH that the government agree that the
investors would have the flexibility to build a thermal
plant based on bunker fuel, if financing for the entire LNG
project could not be found in the next six months. The
proposal would give the comfort level to the Larach group to
sign its deal with AES and put down the five million dollar
performance bond immediately.

--------------
GOH Reactions
--------------


9. (SBU) Since March, President Ricardo Maduro, Minister of
the Presidency Luis Cosenza and a number of presidential
advisors have approached the Ambassador and other Emboffs
with strong concerns about the delays in payment of the
performance bond and news that AES was not planning on
maintaining a significant interest in the project. The GOH
perceives, probably correctly, a big political risk that
AES' exit strategy will be seized upon by political
opponents who have criticized Maduro for months for bowing
to pressure (read interference) from the USG in ultimately
supporting the AES project. Note: GOH authorities are deaf
to any suggestion that they brought these problems on
themselves by badly mishandling the 2002 tender process,
forcing an unfinanceable contract down AES' throats over
Christmas, or refusing to provide the flexibility that would
allow the company time to bring in a multinational energy
partner into the equation. End Note.


10. (SBU) By June, the government began sending letters to
AES insisting on compliance with the contract and laying the
groundwork for legal proceedings against AES for breach of
contract. In early July, AES received some encouragement
to provide the details of the contingency plan for bunker
fuel. However, on July 9, a negative reply was received
from the General Manager of ENEE.


11. (SBU) Upon receipt of the letter, AES requested Embassy
advocacy with President Maduro and his top advisors to
reconsider the decision. Without taking a formal position,
Econcouns participated in a conference call with AES
officials in Honduras and the U.S. late on July 9 to explain
our understanding of the GOH's view of the picture and
Embassy limitations in defending the company's decision on
an exit strategy immediately after contract signature.

--------------
Embassy Comment
--------------

12. (SBU) This is not necessarily the end of the project,
but the July 9 decision bodes badly. The GOH apparently
decided that if AES is exiting the project and proposing
that a conventional thermal project be substituted for the
gas version, there is no need for the GOH to respect its
side of the contract, especially with other well connected
domestic electricity producers willing to pick up the
contract. Time will tell over the next few weeks if the
Larach Group investors can convince the GOH otherwise. If
the contract is lost and the GOH does sue AES Honduras, that
will also complicate (if not doom) the efforts to continue
attracting a sizable investor for the gas project itself.
While the Embassy believes the July 3 AES proposal was
probably the best possible given the exit-strategy decision,
we do not recommend any formal advocacy for AES at this
time.

PALMER