LATIN AMERICA-CARIBBEAN BIOFUEL INITIATIVE

UNCLAS PANAMA 002105

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR WHA/EPSC CORNEILLE
DEPARTMENT FOR EB/ESC/IEC IZZO
DEPARTMENT FOR S/P MANUEL
DEPARTMENT FOR OES/STC PAMELA BATES
DEPARTMENT FOR OES/OGC G.THOMPSON

E.O. 12958: N/A
TAGS: ECON ENRG PREL PGOV SENV PM
SUBJECT: LATIN AMERICA-CARIBBEAN BIOFUEL INITIATIVE

REF: A. STATE 164558


B. PANAMA 2005

C. PANAMA 651


1. (U) SUMMARY. Below is post's response to Reftel A. END
SUMMARY.

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ENERGY SECTOR - HYDROCARBONS
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2. (U) Panama's energy sector consists of the hydrocarbons
industry and the electricity sector. Panama's hydrocarbons
industry was 100% private until July 2006 when the GOP passed
legislation authorizing the creation of a state-run
hydrocarbons entity. GOP vision for this entity remains
divided between utilizing a state-run entity to negotiate and
participate in regional energy initiatives and recognition of
the inherent conflict between regulating an industry in which
they are an active participant. To date, the state-run
entity, Empresa de Generacion (EGESA) is in its inception
phase with a pending finance request to the GOP of $300
million . The private sector hydrocarbons industry consists
of Chevron-Texaco, Exxon-Mobil, Shell-BP and two national
companies Accel and Delta.


3. (SBU) At this time, fuel importers are required to onsell
wholesale product based on an "import parity price" (IPP).
This is a formula determined by the Ministry of Industry and
Commerce (MICI) based on international transportation and
commodity prices. MICI recalculates the IPP every two weeks.
MICI also publishes a "suggested retail price" weekly.
Distributors are not legally required to adhere to this price
but exceeding this price can be perceived as "price gouging"
by the Panamanian consumer. During the 2006 spike in oil
prices, MICI leaned heavily on the petroleum companies to
minimize the pass-through of along price increases to
consumers.

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ENERGY SECTOR - ELECTRICITY
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4. (U) Panama's electricity sector is divided into
generation, transmission and distribution companies. This
sector was privatized in the late 1990's when the GOP sold
49% of its holdings to the private sector. The GOP remains
an active participant in the electricity market through its
partial ownership in each of the three areas and because the
Panama Canal Authority (ACP) is also allowed to sell excess
hydro electricity generated by the operation of the Canal to
the distribution companies. The GOP heavily subsidizes
electricity for low income residents.


5. (SBU) About 64% of Panama's electricity is hydro
generated. The GOP is actively pursuing additional
hydroelectricity capacity to reduce the country's dependency
on thermal electricity, as Panama imports 100% of its fossil
fuel consumption. Generation capacity has not kept pace with
demand. By law, the distribution companies are required to
contract for 100% of the electricity demand. In the years
following privatization, spot market prices were lower than
contract prices and these companies began contracting for
only about 70% of the demand with short term contracts. The
absence of long term supply contracts discouraged investment
in new capacity by the industry. MICI reversed this trend in
2005 and several new hydroelectric plants as well as the
conversion of an existing marine diesel plant to coal are
underway. However, Panama can be expected to remain
dependent on expensive thermal electricity from the spot
market to meet demand through 2008 when new (and cheaper)
capacity is expected to come on-line. Panama is actively
pursuing the completion of the Central American electricity
grid under the MesoAmerican Energy Initiative.

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HOST COUNTRY FUEL DISTRIBUTION
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6. (U) Panama currently uses bunker C and marine diesel for
thermoelectricity generation and gasoline and diesel for
transportation. Passenger vehicles use motor gasoline
(MOGAS) and buses and some passenger vehicles use diesel
(Gasoil). According to the GOP, Panama's 2005 hydrocarbon
consumption was 14.8 million barrels. The transport sector
consumes 7.8 million, industry consumes 5.3 million and
residential use consumes .945 million. Within the transport
sector, taxis and buses consume 3.6 million gallons of gas
and 2.8 million gallons of diesel per year. Further
information is available at
www.mici.gob.pa/hidrocarburos/consumonacional 2006.html.


7. (U) The GOP is also actively exploring the importation
liquid natural gas from Colombia. Media reports state that
Panama uses 100 million cubic meters of natural gas a day.


8. (U) At this time, there is no reliable measure of the use
or availability of flex fuel cars in Panama. In the last six
months, two companies have begun selling kits to run existing
vehicles on LP gas. Although there is no legal impediment to
the use of ethanol/gasoline blends, none of the current fuel
suppliers/distributors offer the product. Further, many
automobile manufacturers do not guarantee performance when
using alternative blends and it may negate the warranty on a
vehicle.

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SUGAR INDUSTRY
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9.(U) In recent years, the Panamanian sugar industry reported
lower production and profits claiming excess world supply and
the decreased U.S. Tariff Rate Quota (TRQ). During 2006, the
U.S. increased the TRQ and the industry is reporting profits
and planning to increase production. Increased profit and
high oil prices spurred interest in ethanol by the industry.
The industry proposed to the GOP the doubling of the current
sugar cultivation area through tax breaks and other
protectionist measures against foreign competitors, primarily
Brazil. This legislation is under review by the governing
committee in the Panamanian legislature. In its current
form, it may contain provisions in violation of Panama's WTO
obligations.


10. (U) All of Panama's sugar producers burn the fields
before harvesting to increase efficiency and improve labor
conditions. One foreign company (an alcohol producer)
expressed concern about the environmental damage and stated
its intention to try alternative practices, including
mechanized harvest. However, as low cost labor is plentiful
in Panama, the industry is not incented to invest in
expensive mechanization for environmental reasons. Post's
Foreign Agricultural Section (FAS) staff could not find an
instance of citizen action against sugar cane field burning.


11. (U) The total area under sugar cultivation in Panama is
19,200 hectares. Some 12,400 hectares are owned among
Panama's four sugar producers and 6,400 hectares are
subcontracted from private farmers. Production is
concentrated in Panama's central provinces. One hectare of
sugar cane can consume up to 60,000 liters of water per day
with usage diminishing as the plants mature. The most common
fertilizer in use is UREA. Also prevalent is Potassium
Molibdate (MOP) and Diamine Phosphate (DAP). The four
privately owned and operated refineries produce 143,000
metric tons of sugar each year. The industry employs 3,800
people during the low season and up to 8,500 during the high
season. All four mills burn bagasse as an energy source.
One of the four mill owners told FAS staff that the sugar
cultivation area could be tripled but would require
additional land purchases and/or subcontracts to farmers.

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INVESTMENT CLIMATE - LAND OWNERSHIP
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12. (U) Panamanian law allows the private ownership of land
by foreigners. However, at this time only 30% of Panama's
sovereign territory is properly surveyed and titled.
Panama's land management bureau (CATASTRO) is currently
receiving Inter-American Development Bank (IADB) funding to
complete the land surveying and titling process. Law 2
passed in February of 2006 asserted the GOP's authority over
Panama's coastal and island areas as concessionary property
(similar to land lease in Hawaii). Development of these
areas requires the negotiation of a concession agreement with
the GOP.


13. (U) Significant portions of Panama are classified as
Rights of Possession (ROP) land. ROP property technically
belongs to the government but occupants who can demonstrate
they reside on the property, derive their primary subsistence
and perform regular maintenance on the property for 15 years
or more, can be awarded prescriptive rights (legal
recognition that the property "belongs" to them.) However,
ROP, even with a certificate issued by the Department of
Agriculture's Agrarian Reform (MIDA - Reforma Agraria) is
susceptible to legal challenge. The majority of Panama's
indigenous population lives on ROP property, often within
specially designated tribal lands (comarcas).

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INVESTMENT CLIMATE - ENERGY
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14. (U) At this time, Panama has little to no environmental
regulation specific to the production or refining of
bio-fuels.


15. (SBU) Panama is a global transportation and logistics
center with highly sophisticated port facilities. The
availability of fuel storage tanks, however, is limited.
Until recently, all fuel storage was owned or leased by the
existing petroleum industry. The GOP is negotiating an
agreement with Chevron Texaco to take back several tanks on
the Pacific coast near the entrance to the Panama Canal.


16. (U) Panama has world class engineering and construction
firms. The market for these services as well as the related
skilled and construction labor is extremely tight due to
Panama's housing and construction boom, upcoming Canal
expansion and a proposed $5 billion petroleum refinery in
Puerto Armuelles (Refs B & C).


17. (U) In the period after privatization (1999),electricity
generation companies building new power plants could import
material and equipment duty free and several did. However,
one U.S. company had several million dollars of duty
incorrectly assessed. Despite receiving a favorable ruling,
they have yet to receive these funds back from the GOP.

18.(U) In October 2006, the GOP proposed a new law which
would introduce ethanol to Panama as of March 15, 2008. The
law provides the guidelines for the promotion and development
of the use and production of ethanol. The law establishes a
minimum 5% ethanol blending requirement and allows the
transport fleet and power generation sector to use up to 10%
ethanol/gasoline blend. The GOP contracted a private
consulting firm to determine whether the proposed production
of 16 million gallons of ethanol per year is beneficial.
Media reports state it is estimated this would require an
investment of $50 million and an additional 16,000 hectares
of sugar cultivation. The draft legislation considers the
use of maize, banana, soya, manioc and/or sorghum for the
production of bio-diesel as well.


19. (U) Panama has an Association of Renewable Energy
Producers (APPER). On October 12 and 13, this association
reportedly hosted the First Conference of Central American
and Caribbean Renewable Energy Investors in Panama's City of
Knowledge. Renewable energy experts from the European Union
are scheduled to visit Panama November 13 to 30 to assist
this group in defining strategies to promote the use of
renewable energy in Panama, establish a foundation for Panama
to work with the EU in the transfer of technology, and
potentially establish the City of Knowledge as a pilot site
for the exploration of alternative energies.


20. (U) Panama will host an OAS General Assembly meeting in
June 2007. The GOP has proposed the meeting's theme as
"Energy for Development". This, together with the UN
Commission on Sustainable Development's two year cycle
focused on energy issues could offer a useful platform to
promote biofuels in the region.

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COMMENT
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21. (U) The GOP has a clear interest in exploring alternative
energy sources and reducing its dependence on foreign oil.
The transportation, financial and construction industries in
Panama are highly developed and sophisticated. Panama also
has available agriculture capacity and inexpensive labor.
These factors create a positive environment for investment in
alternative energy sources if bio-fuels can be shown to be
viable and profitable. The challenge for the GOP is to
enable market-driven solutions without undue government
intervention. It would be helpful if the OAS and UN CSD
processes could show clear examples where private sector
driven solutions have achieved real results.
ARREAGA