UNCLAS SECTION 01 OF 02 PANAMA 002342

SIPDIS

DEPT FOR WHA/CEN
AND EB/ESC
DEPT PASS USTR AMALITO

E.O. 12958: N/A
TAGS: ENRG EIND EPET ETRD PM ENIV ECONOMIC AFFAIRS
SUBJECT: GOP AT ODDS WITH PETROLEUM INDUSTRY

This cable is the first in a two part series on the Energy
Sector in Panama

1.SUMMARY (SBU) The sharp increase in global oil prices
prompted demonstrations and transportation strikes during
September and October. In a country where 40% of the
population already live in poverty, the price of a basic
commodity has more than doubled this year. The GOP responded
by abruptly changing existing fuel price regulations and
giving itself a legal avenue to potentially assume control of
privately owned storage facilities. The GOP also exempted
the transport sector from diesel fuel tax, losing revenue at
a time of budget deficit. The petroleum industry maintains
these short term solutions have caused them economic harm,
jeopardized the investment climate, and damaged the
relationship between the industry and the GOP. In the
absence of a cohesive energy plan designed to reduce
dependence on foreign oil, the GOP is scrambling to deflect
responsibility and appear proactive through the hasty
announcement of energy development projects of undetermined
viability, benefit or length. No plans to participate in
Venezuela's Petrocaribe have been announced. END SUMMARY.

--------------
GOP CHANGES OIL PRICE RULES
--------------


2. (U) Panama imports 100 percent of its fossil fuel and
despite excellent use of hydro electricity, almost half of
Panama's energy consumption depends on oil. Three global
petroleum companies currently service the Panamanian market,
Chevron-Texaco, Exxon-Mobil and Shell-BP. Exxon-Mobil and
Chevron-Texaco representatives told Emboffs that regulatory
and market reforms in Panama from 1992 to 2002 successfully
created a highly competitive market and some of the lowest
prices in Central America.


3. (SBU) Since September 2003, the rack price of imported
fuel in Panama has been published every 14 days by the GOP
using international costs of supply, transport and storage.
In September 2005, the GOP began lowering the effective
period to 7 days whenever global oil prices fell and held to
the 14 days whenever global oil prices rose, making

it
impossible for an importer to calculate costs or project
revenue. Exxon-Mobil President of the Inter-Americas, Jesse
Owens told Emboffs he did not expect to profit on every
shipment to Panama, but that the actions undertaken by the
GOP had made the market unprofitable for the foreseeable
future.


4. (SBU) In April 2005 the GOP changed existing regulations
to allow the occupation and utilization of the country's only
fuel storage infrastructure (currently owned and operated by
Chevron-Texaco) "for any situation which might affect the
supply of refined products." Chevron-Texaco country manager
believes this undermines the integrity of their substantial
in-country fuel storage assets.


5. (SBU) The GOP has also foregone diesel fuel tax revenue
to reduce prices for the transport industry, through a
designated list of retail outlets who may sell diesel tax
free. Industry representatives maintain that this list of
distributors does not correspond to the purchasing patterns
of the transport industry and the allocated volumes far
exceed those used by the transport industry. In conjunction
with the American Chamber of Commerce, the industry has
protested their forced compliance with this program,
asserting it could result in a black market in diesel.


6. (U) An Amcham board member and retired oil executive told
Econoff that the GOP's politically expedient attempts to
shelter the populace and the economy from the impact of
rising global oil prices were potentially more destabilizing
than the prices themselves because they threatened the
stability of the supply and reduced revenue at a time of
deficit hindering the GOP's ability to invest in alternate
fuels.

--------------
GOP RESPONSE TO INDUSTRY CONCERNS
--------------


7. (SBU) Vice-Minister of Industry Manuel Paredes told
Emboffs the GOP feels squeezed between domestic
constituencies expecting to be shielded from the global rise
in fuel prices and the fuel companies expecting to make a
profit. Paredes questioned the financial damages claimed by
the petroleum companies, suggesting they write off their
losses against their global profits. However, he conceded
the GOP had erred by destabilizing existing regulation.
Emboffs emphasized the importance of a stable investment
climate to Panama's development strategy. Paredes said the
GOP is structurally incapable of administering a secure and
transparent diesel fuel subsidy program for the transport
sector such as checks, ATM cards, or coupons directly to the
transport fuel purchasers.


8. (SBU) In August 2005, the GOP announced its first policy
on hydrocarbons and alternate energy sources. This "policy"
is a hastily cobbled together set of desired infrastructure
and capacity with minor efforts at conservation. (To
conserve energy, new government working hours are 7:30 am to
3:30 pm.) To diversify its energy sources, the GOP proposes
recouping its refining capacity through a joint venture with
Mexico, a natural gas pipeline with Columbia, and the
development of alternate fuel sources such as wind, solar and
peat. However, neither the financial viability nor the
projected length of any project has been established.


9. (SBU) Comment: As Panama is not in a position to
meaningfully affect the global price of oil, avoiding further
degradation of living standards requires the GOP to tackle
the long-term challenges of high unemployment, disparate
income distribution, corruption, and completing Social
Security and Judicial reforms. Industry representatives told
Emboffs that the rack price and effective period had
stabilized at an acceptable level but made it clear they did
not want to subsidize GOP short term political solutions
again. End Comment.
ARREAGA