SURVEY OF ETHANOL POTENTIAL IN GUYANA

UNCLAS SECTION 01 OF 04 GEORGETOWN 001069 SIPDIS WHA/EPSC - CORNEILLE EB/ESC/IEC - IZZO S/P - MANUEL OES/STC - PAMELA BATES SIPDIS E.O. 12958: N/A TAGS: ECON ENRG EAGR PREL PGOV GY SUBJECT: SURVEY OF ETHANOL POTENTIAL IN GUYANA REFS: A) STATE 164558, B) 05 GEORGETOWN 906 ¶1. SUMMARY: Though a small-scale sugar producer, Guyana could be a lucrative destination for investment in ethanol production. Guyana's efforts to streamline its sugar industry and lower the cost of production--which will enable it to remain competitive--have limited excess cane capacity and investment in ethanol to date. Nevertheless, Guyana has ample land, relatively favorable investment and regulatory incentives for the energy sector, and duty-free access to the U.S. market through the Caribbean Basin Initiative. Obstacles include government-ownership and control of the sugar industry, poor infrastructure and a shrinking labor force. END SUMMARY. -------------- STATE OF THE SUGAR INDUSTRY -------------- ¶2. Guyana's sugar industry is struggling to remain profitable and is still surviving despite a 36% reduction in European Union price supports. The EU price reduction is expected to cost the Guyana Sugar Corporation (Guysuco) around US$40 million in revenue/year. Nevertheless, the firm has embarked on a modernization program that will improve cane yield and eventually lower the unit cost of production from US 17 cents/pound to about US 12 cents/pound of sugar, enabling it to remain competitive on the world market. Guysuco is also undertaking value-added initiatives such as improving the packaging of sugar, developing a stronger branding strategy, and building a refinery (Guyana currently exports raw cane sugar). ¶3. The crux of this effort is the Skeldon Sugar Modernization Project (SSMP),which will see the construction of a new 110,000 ton capacity sugar factory. The GOG and the People's Republic of China signed a concessional loan agreement paving the way for the US$110 million project in the eastern region of Berbice. The new factory is expected to begin operations in October 2007. ¶4. Guysuco is a state-owned company. Since 1990 the GOG has contracted out the management operation of the company to the British firm Booker Tate Limited. Production averages around 3.67 million tons of cane/year with a yield of approximately 80 tons of cane per hectare. The corporation is located along the narrow fertile coastal strip between the Atlantic Ocean and the rain forest and savannah of the interior. This area is low lying and is protected from the ocean by a sea wall, stretching across two counties, namely Demerara and Berbice. These five sugar estates (West Demerara Estates, East Demerara Estates, Blairmont Estate, East Berbice Estates and Skeldon Estate) include eight factories, four in the county of Demerara, with two on each bank of the Demerara River in the area surrounding Georgetown, and four in the county of Berbice in the east of the country, with three on the banks of the Berbice River and one on the bank of the Corentyne River. ¶5. Guysuco's five sugar estates comprise approximately 60,000 hectares about 41,000 of which are under cultivation. The industry has the potential to increase the amount of land at its disposal. The GOG has identified approximately 1 million acres in the Canje River Basin (Berbice Region) for potential cultivation. However, this will require prepping virgin land, which Guysuco estimates would require an investment of around US$100 million. ¶6. Guysuco employs around 17,500 people directly plus 5,000 private cane farmers and 4,000 temporary workers. In addition, the industry employs 20,000 people indirectly through the provision of goods and services. Guysuco directly accounts for 10 percent of Guyana's labor force and is the largest single employer in the country. The industry's union, the Guyana Agricultural Workers Union, is a primary support base for the ruling People's Progressive Party. Accordingly, the GOG is loathe to take economically rational steps, such as closing or consolidating less productive estates West of the Demerara River, that would reduce employment in the sector (REF B). ¶7. In terms of environmental impact, sugar cane harvesting methods in Guyana do include burning the fields prior to harvest. However, there is no level of local concern among citizens over environmental effects, given that the fields and factory are not in close proximity to citizens. The Environmental Protection Agency of Guyana ensures that Guysuco's environmental controls and mitigation measures keep pace with the introduction of new regulations and policies for the control of emissions from its factories and the burning of its fields. According to Guysuco, sugar cane is a net producer of carbon dioxide, replacing as much as 30 tons/hectare of carbon even when taking burning into account. Traditional fertilizers include sulphate of ammonia (SOP),urea, muriate of potas (MOP),and diammonium phospahate (DAP). Sulphosate and GEORGETOWN 00001069 002 OF 004 fluazifop-butyl are used for chemical ripening. ¶8. Guysuco uses bagasse (biomass from sugarcane) for power generation. Approximately 67% of the corporation's estimated 62.2 GWH in electrical power generation is produced from bagasse, with the remaining 33% produced from gas-oil (diesel). -------------- INVESTMENT CLIMATE -------------- ¶9. Guyana has seen little investment in the energy sector. A number of international investors have conducted feasibility studies in the areas of hydro-power generation and wind-power generation. The GOG has also been approached by a number of companies seeking to conduct both onshore and offshore oil exploration in Guyana. To date, none of these high-profile, speculative ventures have materialized. As far as ethanol is concerned, Guysuco is presently seeking funding to undertake a feasibility study to consider the capital, operating cost and economic viability of a 130 million liter/year ethanol plant. The company reports receiving inquiries from three potential investors interested in ethanol, but nothing has materialized to date. ¶10. The GOG does not offer subsidies for private electricity producers in country. However, the GOG has developed a number of investment incentives through the Guyana Office for Investment (Go-Invest) encouraging investors (both local and foreign) to invest into the energy sector. These include duty-free waivers on customs tariffs and consumption tax for plant, machinery and equipment as well as unrestricted repatriation of profits and dividends. ¶11. Presently Guyana does not have any environmental regulations that specifically address bio-refining. The Environmental Protection Agency (EPA) noted that environmental regulations for a bio-refinery can be addressed under Environmental Management Regulations of the Environmental Protection Agency Act. ¶12. Infrastructure is a major constraint to investment. A transportation sector study concluded in 2005 found that only 35% of Guyana's estimated 330 miles of paved roads could be rated in "good condition". Defective maintenance is the primary constraint. In addition, ferry connections are a key feature of Guyana's limited road infrastructure. Sugar outputs in the most productive region of Berbice must travel 130 miles by barge, truck and ferry to port facilities on the Demerara River. ¶13. The primary port facility is Georgetown Harbor, located on the mouth of the Demerara River. The port has a river frontage of about two nautical miles and is equipped with six main wharves with depths ranging from 4.9 - 6.1 meters. Maximum draft accepted is 8.2 meters (approximately 7500 tons deadweight) on high tide with a maximum length over all of 175 meters. Limited water depth in the face of heavy silting is a major limiting condition. A mudflat with depth of less than 5 meters over it extends 10 miles northeast of the mouth of the Demerara River. A channel, dredged to a depth of 6.90 meters in 1990, leads through the mudflat into the harbor, but no systematic or regular dredging is carried out. There are presently five wharves with capability for liquid storage each owned by petroleum importers. ¶14. In addition to the political strength of the agricultural workers union noted above, which may place pressure on potential investors to carry excess labor capacity, migration of both skilled and unskilled labor is an additional constraint on productivity. Guyana exports roughly 2% of its population each year, and firms regularly report having to train as many as five workers to fill one position. -------------- ENERGY SECTOR -------------- ¶15. The government adheres to free market principles in the energy sector. The price of energy is determined by the world market price of oil rather than by local demand and supply of fuel. The GOG does from time to time intervene in the market to keep the domestic market price for fuel from escalating. The government will normally reduce the consumption tax on import fuel when there is an increase in the world market price. Nevertheless, energy costs remain among the highest in the region, with electricity retailing at U.S. 28 cents/KwH and gasoline at US$3.03/gallon. ¶16. The GOG has generally encouraged private investment into the energy sector over the years. Note that recently the GOG and Florida-based Synergy Holdings signed an agreement for the construction of a hydro-power station worth US$300M. The hydro-power station at Amaila Falls is expected to be completed by December GEORGETOWN 00001069 003 OF 004 2010, though it appears to be little more than a speculative venture at this stage. The GOG has also agreed to similar projects with private investors to assess and develop Guyana's potential for other renewable energy generation, including wind and biomass. The GOG signed a technology transfer agreement with Brazil for ethanol production in September 2005, but cooperation in the sector has yet to materialize. ¶17. The regulatory structure of the energy sector includes the following agencies with whom potential investors would have to interact: --Office of the Prime Minister: The Office of the Prime Minister (OPM) has principal policy-making and regulatory responsibility in the sector, including granting licenses to public utilities and independent power producers and approval of development and expansion plans. --The Public Utilities Commission: The Public Utilities Commission is responsible for monitoring and enforcing operators' compliance with commitments emanating from licenses and standard terms and conditions for operations, including operating standards and performance targets and development of expansion plans. --The Guyana Energy Agency: The Guyana Energy Agency (GEA) is responsible for developing and implementing national energy policy and for promoting energy efficiency and the development of new and renewable sources of energy. --The Environmental Protection Agency (EPA): The EPA is responsible for drafting environmental regulations, enforcing compliance of sector operations with environmental laws and regulations and advising OPM and Office of the President of the Republic on the public suppliers' environmental audits and management plans. ¶18. Presently the sector is dominated by the state-owned entity Guyana Power and Light. An effort at privatization ended in 2003 when the investor, American Caribbean Power, sold its shares back to the GOG. Several private manufacturers, including Guysuco, produce their own electricity to aid their production process. Private sector electricity producers are permitted to sell power back to the national grid. However, the Electricity Sector Reform Act of 1999 prohibits private sector electricity producers to distribute electricity directly to other consumers. On the fuel side, the government-owned Guyana Oil Company (Guyoil) competes with Esso, Shell, and Texaco. ¶19. Guyana currently spends roughly a third of GDP on oil imports. The following table, based on data provided by the Guyana Energy Agency, breaks down average annual petroleum use by sector from 2000 to 2005 ('000s of BBLs): Commercial/Services 36.0 Residential 231.4 Industry including sugar 425.6 Marine & Road Transportation 856.0 Air Transportation 53.8 Agriculture/Mining 449.4 Fishing 180.3 Electricity Generation 1657.2 -------------- Total 38732.4 ¶20. Guyana has no government mandated ethanol blending requirement. The GOG has no plans in the near future nor has there been any attempt to legislate a mandatory ethanol blending requirement. Detailed information on Guyana's vehicle fleet is unavailable. However, high tariffs on vehicle imports have led to a prevalence of older model Japanese automobiles. Flex fuel vehicles are nonexistent. Guysuco's technical assessment of ethanol potential suggests that an output of 11 million liters/year would satisfy a 10% substitution requirement for domestic consumption. -------------- COMMENT -------------- ¶21. At present, all available land, capital and labor at the sugar industry's disposal is geared toward sugar production. Several of the inputs necessary for ethanol to be viable--land, water, knowledge of cane cultivation, political will--are present. Access to capital is lacking. Guyana's relatively small production capacity, especially vis a vis Brazil, make it easy to overlook and limits interest among foreign investors. The Chinese-financed sugar modernization program, while ultimately keeping the sugar industry competitive, has also weakened Guyana's debt posture. Guyana's history as a Heavily Indebted Poor Country and commitments to the IMF limit state-owned Guysuco's ability to finance expansion into GEORGETOWN 00001069 004 OF 004 ethanol. However, this also raises an opportunity for strategic USG involvement, perhaps through funding of a thorough feasibility study of ethanol potential. ROBINSON