LATIN AMERICA-CARIBBEAN BIOFUELS INITIATIVE RESPONSE

UNCLAS SECTION 01 OF 03 SAN SALVADOR 002513 SIPDIS DEPT FOR WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL, OES/STC PAMELA BATES SIPDIS E.O. 12958: N/A TAGS: ECON PREL PGOV ES SUBJECT: LATIN AMERICA-CARIBBEAN BIOFUELS INITIATIVE RESPONSE REF: STATE 164558 SUMMARY -------------- ¶1. This cable responds to reftel. There is significant interest in El Salvador to promote biofuels, but to date concrete actions have not been taken. The GOES is working on legislation to promote ethanol production, storage, and sales. The law would mandate a 90/10 gasoline/ethanol mix, a mixture that normal gasoline engines can use without modification. Interest in ethanol production has grown with the increase in global petroleum prices. The GOES views ethanol use as a way to decrease dependence on petroleum imports (over $900 million in 2005) and to stimulate the agricultural sector. Brazilian companies are exploring investment opportunities in El Salvador in the renewable energy sector. End summary. ETHANOL EXPORTS AND DOMESTIC USE -------------- ¶2. The GOES, led by the Ministry of Economy and the Ministry of Agriculture, in conjunction with the Salvadoran Sugar Association, has been working on legislation that would promote ethanol production, storage, and sales. The legislation would create an incentive to produce ethanol to supply the U.S. market; CAFTA reserves for El Salvador an export quota of 5.2 million gallons of ethanol in the first year, and the quota will increase by 1.3 million gallons every year. CAFTA requires that this ethanol be distilled in El Salvador but not necessarily from locally grown raw inputs. For local use, the law would mandate a 90/10 gasoline ethanol mix, a mixture that normal gasoline engines can use without modification. ¶3. Interest in ethanol production has grown with the increase in global petroleum prices. The GOES views ethanol use as a way to decrease dependence on petroleum imports (over $900 million in 2005) and to stimulate the agricultural sector. According to Julio Arroyo, Executive Director of the Salvadoran Sugar Association, gasoline mixed with ethanol produced from sugarcane in El Salvador can be competitive when oil prices are higher than $40 - $50 per barrel. He also said that when using locally grown sugar cane, 80 percent of the revenues generated from ethanol production would go directly to farmers, with 20 percent going to the refiners. FACTS AND FIGURES -------------- ¶4. In 2005, El Salvador imported $900 million of petroleum products, including approximately $455 million in direct gasoline imports or petroleum to be refined into gasoline. Assuming ethanol could be produced at the price of gasoline, a 10 percent ethanol mix would mean $45.5 million generated in the local market, with $36 million of that in the rural agricultural sector. The current breakdown of the fuel market in El Salvador is estimated to be 57 percent diesel, 26 percent regular gasoline, and 17 percent premium gasoline--a total of 343.1 million gallons per year. THE SUGAR INDUSTRY -------------- ¶5. Although El Salvador lacks environmental regulations for bio-refinery, two local companies produce ethanol, Las Cabaas Refinery and The Salvadoran Sugarcane Company (CASSA): --Las Cabaas Refinery: In 1987, Las Cabaas sugarcane mill installed machinery to produce ethanol and ran it for 4 years. (Note: This was to supply ethanol to mix with gasoline, a voluntary pilot project which some gasoline stations participated in between 1987 and 1991. End note) In 2005, with an investment of $800,000, they refurbished the existing equipment, giving them the ability to produce 31,700 gallons per day from raw sugarcane or 15,850 gallons per day using molasses, a byproduct of sugar refining. To date they have only tested small batches and have not run at capacity. Ana Mariella Rivas, the General Manager at Las Cabaas, told emboffs they worry about competition from Brazil but believe they can find a market for their product in the United States. (Note: Rivas also said they are looking for ways to dispose of the vinasse, a byproduct of the distillation process high in potassium but extremely acidic, of which 20 gallons is created for each gallon of ethanol. She suggested they it may be used as fertilizer, with careful Ph monitoring. End note.) --The Salvadoran Sugarcane Company (CASSA): A joint venture between CASSA, Cargill, and the American Renewable Fuel Suppliers resulted in the construction of a $10.5 million alcohol dehydration plant in Acajutla. The plant has the capacity to produce 60 million gallons of ethanol a year but hasn't yet been tested to this level. The plant began operations in September 2005 and is now dehydrating Brazilian alcohol to re-export to the United States under CAFTA-DR. ¶6. The GOES is also experimenting with an ethanol and biodiesel pilot project to determine their economic and technical feasibility. SAN SALVAD 00002513 002 OF 003 El Salvador does not have flex-fuel vehicles, but the decision to move forward with ethanol/gasoline mix could represent an opportunity for flex-fuel (running up to 85 percent ethanol) car manufacturers, such as Toyota and Volkswagen. ¶7. According to Julio Arroyo, Executive Director of the Salvadoran Sugar Association, to produce 15 million gallons of ethanol per year, which is the estimated need for a 10 percent ethanol mix, El Salvador would need 4 ethanol plants producing 31,700 gallons per day running for 120-150 days per year. Arroyo estimates an additional 7,000 hectares of sugar would need to be planted, creating 4,000 new jobs. Currently, 72,000 hectares are under sugar cultivation and 7,000 farmers grow sugarcane. The construction of an ethanol plant that could produce 31,700 gallons per day would require an initial investment of $10 to $12 million. ¶8. The Salvadoran Sugar Association, Las Cabaas, and CASSA are anxious to see the passage of legislation to promote ethanol use through tax incentives for production and local usage. They are concerned about competition from Brazil, which has a well-developed industry and lower operating costs. One local fuel producer, Esso, which owns a share of the RASA refinery at Acajutla, is not worried about increased competition from ethanol, but is concerned that its production will be subsidized by the sugar industry and the true costs of production will be hidden. The petroleum companies in the Salvadoran market have also cautioned that the use of a gasoline-ethanol mix not be mandatory unless adequate supply were guaranteed. Neither industry representatives nor Director of Hydrocarbons and Mines at the Ministry of Economy Gina Hernandez could provide a timetable for passage of the legislation. Julio Noltenius, Executive Director of CASSA, believes that high fuel prices will drive other sugar mills to invest in ethanol production plants, even if there is no government legislation in place. ¶9. Note: With few exceptions, foreign citizens and private companies can freely establish businesses in El Salvador. Foreign firms can also own essential national infrastructure. End note. PORT FACILITIES -------------- ¶10. Currently, El Salvador's only cargo seaport is located in Acajutla. However, the Japan Bank for International Cooperation provided a $129 million loan to finance development of port facilities, including a terminal, peripheral equipment, and access roads at La Union Port (formerly Cutuco Port) located southwest of Fonseca Bay, at the eastern end of El Salvador. Puerto de La Union will offer excellent infrastructure by 2009. Its 117 hectares will have one terminal for containers, two for receiving and distributing grains, and one for passenger traffic. Thus, El Salvador will soon have additional facilities to accommodate vessels to transport ethanol to the United States. The port is 185km by highway and 252km by rail from San Salvador. BRAZIL LOOKING FOR OPPORTUNITIES -------------- ¶11. In May of this year, Plinio Nastari of Datargo, a Brazilian Consulting Company, met with the Salvadoran Sugar Association, the Salvadoran Private Sector Association (ANEP),the Salvadoran Chamber of Commerce, and the Ministry of Economy to describe the Brazilian history with ethanol production and offer advice on investment in renewable energy. On June 2, a Brazilian trade delegation visited El Salvador seeking new investment opportunities with the local industry, including renewable energy. ENERGY SECTOR -------------- ¶12. In 1998, the government privatized electricity distribution and established an electricity market separated among generation, transmission, and distribution. The law established an electricity market in which generators bid power into the market based on the price of their generation. However, the GOES is seriously considering shifting to a cost based pricing mechanism. ¶13. Distribution is controlled by two U.S. companies with a combined investment of $699 million. In 1999, CEL sold its shares of a 265 MW thermal generation facility to an American company at a cost of $210 million and its shares of Nejapa Power to another American company at an estimated cost of $212 million. During the dry season, both companies provide more than 50 percent of the total energy produced in the country. The government owns all hydroelectric resources and 85 percent of a geothermal company. ¶14. SIGET (the electricity and telecommunications regulator),sets end-user tariffs every six months. Energy cost is calculated as the average cost of the last 6 months that was negotiated in the spot market. There is no government mandated ethanol blending requirement. SAN SALVAD 00002513 003 OF 003 COMMENT -------------- ¶15. At current gasoline prices (approximately $3.10/gallon for regular unleaded gasoline) using a 10 percent ethanol mix makes economic sense. Both Julio Arroyo and GOES officials admit it will not lower fuel costs, but rather offers an opportunity to keep more of that $3.10/gallon in El Salvador. The sugar industry's support for the ethanol legislation--especially the support of CASSA and the wealthy Regalado family--make it likely that ethanol legislation will be passed sooner rather than later. End comment. Barclay