NICARAGUA: RESPONSE TO LATIN AMERICA-CARIBBEAN

UNCLAS MANAGUA 002384

SIPDIS

SIPDIS

STATE FOR: WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL,
AND OES/STC PAMELA BATES

E.O. 12958: N/A
TAGS: ENRG SENV ECON PREL PGOV NU
SUBJECT: NICARAGUA: RESPONSE TO LATIN AMERICA-CARIBBEAN
BIOFUELS INITIATIVE

REF: A. STATE 164558

B. MANAGUA 02051


1. (U) Summary: Nicaragua,s energy sector is heavily
dependent upon imported oil for electricity production. High
oil prices and poor regulation of the energy sector have left
electricity producers and distributors with empty pockets and
consumers without electricity. Nicaragua's climate and soil
are well suited to sugar cane production and experts predict
that within five years production will increase by 90% to a
total of 100,000 hectares. The country's first ethanol plant
will begin operation in November 2006, producing 18 million
liters of ethanol for export to Europe. An African
palm-based biodiesel will hit the local market within a year
and a second biodiesel from oleaginous plants will be
commercially available in 2008. Experts worry, nonetheless,
that market pressures will drive investors away from biofuels
and into more profitable markets. Without incentives from
the GON to pursue alternative fuel sources and a regulatory
framework to support the long-term growth and success of
biofuels, the fledgling biofuels sector may never take hold.
End Summary.

Energy Production, Distribution, and Use
--------------

2. (U) Nicaragua is heavily dependent upon imported petroleum
for electricity production. The country generates almost 70%
of its electricity from heavy fuel oil or diesel. Despite
huge potential, hydro-power accounts for only 15% of
electricity installed capacity, but production this year has
fallen to 10% as a result of drought. Other "green" energy
sources such as geothermic and burning of bagasse (biowaste
from sugar cane harvest) generate 15% of electricity
production. Most industrial enterprises and the heavy
transportation sector are fueled by diesel. Cars and light
trucks use gasoline; ethanol is not available on the local
market.


3. (U) Nicaragua partially privatized its energy sector in
2001 and privately-owned companies now account for 60% of
production and almost 100% of distribution. The regulator,
INE (the National Energy Institute),a creature of the
National Assembly and headed by a politician, has not managed
the sector well, creating an inhospitable environment for
growth. INE administers electricity prices and issues
tenders for power production, but has failed to adequately
deal with rising oil prices, aging infrastructure, and
growing local demand. In addition, two-thirds of all
customers qualify for free electricity through a subsidy that
must be borne either by paying customers or the government.
The National Assembly has not appropriated sufficient funds
to subsidize the sector, putting great financial strain on
the industry. Compounding the problem this year has been
unexpected maintenance on one power plant and low rainfall
along the river basin behind the country's largest
hydroelectric dam. The result has been chronic blackouts and
power rationing throughout the country.

Sugar Production Booming with Great Potential to Expand
-------------- --------------


4. (U) Nicaragua is the third largest sugar producer in
Central America. Its soil and climate are well suited to the
task. Annual rain falls provide most of the water needed for
growing. Production yields are among the highest in Central
America at more than 119 metric tons of sugar cane per
hectare with an average of 225 pounds of sugar per metric ton
of sugar cane (compared to an average of 269 pounds per
metric ton in the United States). According to the Ministry
of Labor, the sugar sector employs 35,000 people in the
fields and supports an additional 100,000 jobs nationwide.
Many consider Nicaragua's sugar industry to be the
best-organized in the country.


5. (U) Nicaragua,s four large scale sugar plantations and
four sugar mills are concentrated along the Pacific Coast.
San Antonio (of the Pellas Group) is the largest producer of
sugar cane, with more than 28,800 hectares under production.
The second largest producer, Monte Rosa, has 21,000 hectares
under production. The two remaining significant producers,
Montelimar and Benjamin Zeledon, cultivate 5,000 and 3,000
hectares, respectively. The Ministry of Agriculture and
Forestry (MAGFOR) estimates that an additional 42,000
hectares of fallow land could potentially produce sugar cane.
Experts predict that within five years, a total of 100,000
hectares will be utilized for sugar production, resulting in
an almost 90% increase over current production levels.


6. (U) The vast majority of sugar cane in Nicaragua is
harvested by hand, using a method that involves the burning
of sugar cane fields before harvest. New MAGFOR technical
norms, however, set burn limits to control pollution. As a
result, mechanized harvesting is becoming more prevelant.
Industry insiders expect that within three years, 70% of
sugar cane will be harvested mechanically and that this will
increase the average yield per metric ton. All four sugar
mills burn bagasse to generate electricity. Together, they
sell 60 megawatts to a local, independent power producer.

Technical Skills
--------------


7. (U) Nicaragua,s total labor force, estimated at 2 million
workers in July 2005, is largely rural and unskilled.
Critical shortages of skilled technicians and managerial
personnel present significant challenges to industry. An
estimated 30% of the employed population works in the
agricultural sector, 52% in services, and 18% in
manufacturing. A senior engineer for a Spanish construction
company working in Nicaragua told Econoff that his company
delayed the start of a major project by three months to
search for mid-level mechanical and industrial engineers, as
well as project managers. Eventually, the company filled
half of the available jobs with workers from Spain. A dearth
of qualified individuals to work on biofuels development and
ethanol plants could pose a problem for the advancement of
alternative energy.

Bio-Refineries and the Environment
--------------


8. (U) A 1994 environmental standards law requires that
certain industries (i.e., leather, dairy, sugar, forestry,
and meat processors) submit for approval environmental impact
statements to the Ministry of Environment and Natural
Resources (MARENA). The list of industries is not
comprehensive and many sectors, including bio-refineries,
currently operate without environmental oversight. A revised
version of the 1994 law, which would require all industries
to submit environmental impact statements, will go to the
President in November for approval. A MARENA insider doubts,
however, that the President will ratify the proposed changes
because they do not sufficiently centralize authority over
the regulatory process.

Infrastructure: Ports, Roads, and Transportation
-------------- --------------


9. (U) Nicaragua has no major port on the Atlantic coast, so
most shippers use Puerto Cortes in Honduras. Ground
shipments to and from Puerto Cortes, however, are
increasingly at risk of being hijacked. On the Pacific
Coast, the small Nicaraguan Port of Corinto is capable of
handling liquid cargo. Ground transportation from east to
west is extremely difficult. There are few paved roads
linking the Pacific and the Atlantic coasts and, those that
exist are in poor condition. Generally, ground
transportation for heavy cargo to and from ports is readily
available.

Nicaragua to Produce Ethanol for Export
--------------


10. (U) In November 2006, Nicaragua,s first ethanol plant
will begin operation. The Pellas Group, owner of Nicaragua's
largest sugar plantation and the country's only sugar
refinery, invested more than $4 million in the development of
a Pacific coast ethanol plant. The company holds a one-year
contract with a single buyer in Europe, who will purchase all
18 million liters produced. A Pellas Group spokesperson
suggested that Pellas is poised to expand production if the
ethanol plant was successful in its first year. To date, the
company has no plans to distribute ethanol domestically.


11. (U) Existing infrastructure could support the transport,
storage, and export of up to three times the Pellas Group's
estimated annual production of 18 million liters. The
ethanol plant is 18 miles from the Port of Corinto, which has
a 7 million liter storage capacity dedicated to ethanol. At
current production levels, Pellas will need less than half of
this storage capacity at any given time. Pellas plans to
transport ethanol from the plant to the Port of Corinto in
28,000 liter tanker trucks, which it has no difficulties
procuring.

Biodiesels: Coming Soon
--------------


12. (U) Another private enterprise, Agroindustrias de
Occidente (AGRINOSA),is venturing into the biofuels market
with an African Palm-based biodiesel. AGRINOSA has yet to
commercialize its product and is months away from completing
the paperwork needed to enter the local market. AGRINOSA
will sell the biodiesel to factories and heavy transportation
vehicles (two industries that are almost 100% dependent on
diesel consumption). A 2005 AGRINOSA study of the energy
market estimated current domestic demand for biodiesel at 5.6
million liters per month. AGRINOSA is capable of producing
1.4 million liters per month, or 25% of current demand.


13. (U) Grupo Cohen, a prominent Nicaraguan investment group,
has visions of joining AGRINOSA in the biodiesel market.
They are launching a pilot project to produce biodiesel from
oleaginous plants (i.e. soybean, sunflower, and peanuts).
Estimated production capacity is 1.8 million liters per year
and pilot production should begin within the coming months.
Grupo Cohen is not commited to a definite timeline, but hope
to make its product available commercially by mid 2008.
Neither AGRINOSA nor Grupo Cohen plan to export biodiesel.


Challenges to Biofuel Development
--------------


14. (U) While the biofuel industry has attracted some private
investment, a 2005 study by the Instituto Interamericano de
Cooperacion para la Agricultura (IICA) and MAGFOR suggests
that the GON will need to take a leading role in alternative
energy production to sustain long-term production. The study
criticized the GON for its "lack of political will" to move
ethanol or biodiesels forward, pointing to an absence of
incentives for biofuel production or use.


15. (U) Experts fear that investors will abandon biofuels for
more profitable markets if the GON does not provide
incentives for alternative fuel production. In 2005, for
example, the Pellas Group invested in a new distillery and
alcohol dehydrator to produce ethanol on a trial basis and
earmarked 8,000 metric tons of sugar cane for the project.
When international sugar prices skyrocketed, the company
stopped ethanol production and processed the cane for sugar
export. Without stable prices and incentives to stay in the
ethanol market, the industry may never develop.


16. (U) Pedro Silva de la Maza, project director for San
Antonio, echoed these concerns. He believes that cooperation
among GON institutions is weak and that the biofuels industry
needs "collaboration and joint planning between the forestry,
agricultural, and energy sectors" if it is to materialize.
The problem, he points out, is that "these ministries are
challenged with immediate problems and have few resources to
deal with advancing ethanol production."


17. (U) Comment: Nicaragua is heavily dependent on imported
oil and suffers when oil prices rise. In July 2006, violent
demonstrations erupted throughout the capital when rising
fuel prices forced bus companies to increase fares. Frequent
and prolonged blackouts spurred protests throughout the
country in August and September. Ethanol production could go
a long way toward alleviating the country's dependency upon
foreign oil and reducing imports. Nicaragua has a
well-developed sugar industry, available fallow land, and
existing private investment in ethanol and biofuels
production. Without incentives from the GON to pursue
alternative fuel sources and a regulatory framework to
support the long-term growth and success of biofuels, the
fledgling biofuels sector may never take hold. End Comment.
TRIVELLI