EL SALVADOR VIEWS ON MESOAMERICAN ENERGY INITIATIVE

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000235

SIPDIS

INFO WHA CENTRAL AMERICAN COLLECTIVE IMMEDIATE
AMEMBASSY BELIZE IMMEDIATE
AMEMBASSY BOGOTA IMMEDIATE
AMEMBASSY CARACAS IMMEDIATE
AMEMBASSY MEXICO IMMEDIATE
AMEMBASSY PANAMA IMMEDIATE
AMEMBASSY SANTO DOMINGO IMMEDIATE

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET ECON ES
SUBJECT: EL SALVADOR VIEWS ON MESOAMERICAN ENERGY INITIATIVE

REF: A. SECSTATE 11181


B. 2004 SAN SALVADOR 2376


1. (SBU) The Government of El Salvador (GOES) has expressed
interest in the Mesoamerican Energy Initiative (PIEM) and
will participate in related working groups, but the GOES
appears to be not yet convinced of the feasibility of the
proposal or its benefits for Central America. After the
Mexican government formally unveiled the initiative,
Salvadoran Vice President Ana Vilma de Escobar remarked to
emboffs that the proposal seemed to offer little for Central
America. Since then, the GOES has engaged with other
countries in the region on the project, but has identified
several shortcomings. How these are addressed will shape
GOES support for the PIEM.


2. (SBU) A first issue is economic viability. GOES Director
of Hydrocarbons Gina Hernandez told Econcouns in December
that the GOES could not make a judgment on the proposal - in
particular, the refinery proposal - without some analysis of
its economic feasibility. Hernandez did not believe that the
project would work if limited only to the use of Mayan crude
(comment: her use of the term),with its characteristics; she
also questioned how the financing mechanism would work. On
January 26, Hernandez said that a working group of countries
from the region had just approved the terms of reference for
an IDB-funded feasibility study on this project; the group
had also approved preliminary terms of reference for a study
on natural gas and she said final approval would probably be
forthcoming in end-February. She indicated that the GOES
would try to gain agreement that other sources of fuel could
be considered for a refinery project. On the issue of Pemex
investment in the region, she doubted the company's interest
in investing in the absence of incentives or its willingness
to construct new fuel storage facilities to supply a network
of gasoline stations.


3. (SBU) El Salvador is interested in the possibilities for
natural gas but acknowledges that a pipeline from Mexico, an
idea which has been under discussion for some time, may not
be feasible. However, Cutuco Energy Central America, CECA, a
consortium led by U.S. company Crystal Energy, has proposed
the construction of a natural gas terminal, natural gas
storage facility and natural gas-fired electricity plant at
the Port of La Union, now under construction on the Gulf of
Fonseca. CECA's broad vision contemplates an interconnection
to the SIEPAC transmission grid and a pipeline to deliver
natural gas to users as far away as Guatemala (comment: the
supply source for the gas is to be determined, but Spain's
Repsol is known to be involved in the project with Crystal.)
Ministry of Economy energy officials said that El Salvador
wants to ensure that any discussion of a natural gas plant in
the region allows for the possibility of siting it in El
Salvador.


4. (SBU) On the other hand, El Salvador is seeking to define
a role for renewable sources of energy in its own energy
policy. The Ministry of Economy believes that additional
electricity generation using biomass, solar, wind and
biofuels should be promoted as an alternative to importing
fossil fuel and has been looking for international assistance
in this effort. The GOES has also established the planning
and management of energy efficiency programs as a priority.
To promote its interest with the PIEM, the GOES will
participate in three working groups among Central America
countries, including Panama and Belize: hydrocarbons,
technical aspects of electricity interconnection, and
renewable energy and energy efficiency.

San Jose Accord
--------------


5. (SBU) Post believes that benefits of the San Jose Accord
accruing to El Salvador are minimal. The hydrocarbons market
in El Salvador is private; petroleum products are imported on
a commercial basis, and petroleum importers have expressed
doubt in the past that a system of government purchases in
order to access benefits of the Accord is viable. The
Minister of Economy has stated publicly, in addition, that El
Salvador does not need extended financing terms; what the
country wants is lower petroleum prices. Still, both Mexico
and Venezuela are important suppliers to El Salvador.
According to Central Bank figures, importers brought in over
half of El Salvador's supply of crude oil in 2004 and a third
in 2005 from Venezuela; in 2005, over a third of crude
imports originated in Mexico. In 2004 and 2005, crude oil
represented 34% of total fuels imports (which also included
gasoline, kerosene and jet fuel, diesel, propane, etc.).
Crude oil imports to El Salvador by country of origin (by
weight, as percent of total)
(Based on Import Data from Central Reserve Bank)

2004 2005
Mexico 8.0 36.7
Netherlands Antilles 1.9 2.5
Ecuador 31.9 25.2
Venezuela 56.5 35.1

Comment
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6. (SBU) The fuels market in El Salvador is market-based and
operated by private companies. Programs which limit the
flexibility of suppliers in where they source oil and oil
derivatives is unlikely to win support in El Salvador. El
Salvador is also cautious about signing on too early to a
refinery project that promises to be a white elephant. Like
other countries in the region, however, El Salvador is
tackling the need to mitigate the impact of higher global oil
prices on electricity prices (over 40 percent of electricity
is generated in thermal plants). The electricity components
of the PIEM which expand generation capacity and diversify
fuel sources - i.e., the LNG component project; development
of renewables - are likely to be of interest, especially if
they would consider siting a plant in El Salvador. Given the
production potential of the gas plant (expectations are on
the order of 500 MW or more),and/or the possible
construction of a coal-fired plant which has also been
proposed for the new port at La Union, El Salvador has an
interest in the development of the SIEPAC electricity grid,
but it is not clear if interconnection with Mexico is a
priority. El Salvador will proceed with analysis of the
proposed gas plant at La Union but believes that it must
build the structure to regulate the use of liquified natural
gas. The perceived need to establish a regulatory structure
for gas can be expected to hold if the impetus for
development of natural gas came through the PIEM.
Barclay