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