FMLN MAYORS MOVE FORWARD ON OIL IMPORT AGREEMENT

C O N F I D E N T I A L SAN SALVADOR 000853 SIPDIS SIPDIS E.O. 12958: DECL: 03/28/2016 TAGS: ENRG PREL ES VE SUBJECT: FMLN MAYORS MOVE FORWARD ON OIL IMPORT AGREEMENT WITH CHAVEZ Classified By: Deputy Chief of Mission Michael A. Butler. Reasons: 1.4 (b) and (d) ¶1. (C) Summary: On March 20, an association of FMLN mayors formalized an arrangement with Venezuela's PDVSA to import Venezuelan fuel on preferential terms. Allegedly a proposal of now-deceased FMLN leader Schafik Handal, the government-mayor deal has been accepted by the economic and political establishment in El Salvador as purely political and economically unsustainable. Information is beginning to emerge that there may be more to the FMLN deal than just rhetoric, or at least as much as money might buy. End Summary. ¶2. (U) On March 20, a subsidiary of Venezuela's state-owned oil company PDVSA and an association of 20 FMLN mayors from El Salvador called ENEPASA (for "Intermunicipal Energy Association for El Salvador") agreed to establish a joint venture in El Salvador to import petroleum products from Venezuela to El Salvador. PDV Caribe president Alejandro Granados and the ENEPASA president (Soyapango mayor Carlos Garcia Ruiz) signed the agreement in Caracas with President Hugo Chavez, Minister of Energy/PDVSA president Rafael Ramirez, ENEPASA (including San Salvador Mayor-elect Violeta Menjivar) and representatives of Salvadoran bus owners, transport companies, and fuel distributors (ASDPP) present to witness the event. ¶3. (U) In comments at the signing, Chavez credited now-deceased FLMN party leader Schafik Handal with proposing a government-to-mayor deal, a departure from Venezuela's practice of agreements with central governments. Participants announced that the company would be established within 15 days to import fuel and seek to build an alternative distribution channel for fuel destined for "the Salvadoran people." ENEPASA, which was itself formally established in January 2006, would import 80,000 to 100,000 barrels of fuel monthly, which could grow as storage and distribution infrastructure - and possibly refining capacity - were put in place. Sixty percent of the value of imports would be payable within 90 days but payment of the remaining 40% could be made over 25 years, including a 2 year grace period, at a 1% rate of interest. PDVSA also committed to help create a seed capital fund, to provide transport subsidies, and to allow payment over the long term and in kind, with Salvadoran products such as sugar, coffee, or industrial goods. (An FMLN deputy told poloff in San Salvador that Chavez would get around OPEC restrictions on price cutting by picking up all transportation costs (an estimated at $6.00-7.00/barrel) and with these special payment terms.) In an interview published in the March 21 Salvadoran press, Venezuelan Assembly President Nicolas Maduro said the agreement included provisions on infrastructure financing, that there were important private Salvadoran businessmen involved in the arrangement, and that the GOES was free to join the initiative. Ramirez told the press that eliminating an intermediary would bring the price of fuel down by 8 to 10 dollars a barrel. Background ¶4. (SBU) In El Salvador, the agreement has been regarded until now as eminently political. Speculation about an oil deal from Venezuela circulated last spring and summer in response to the steady rise in oil prices and development of the Petrocaribe proposal. The Ministry of Economy appeared to make a pro forma attempt to approach the Venezuelan Government, but mostly to fend off attacks from the domestic political left by showing it was attempting to find a solution to higher oil prices (comment: prices that, by end 2005, added $180 million to El Salvador's annual fuel import bill). Publicly, the Minister of Economy has discounted the benefits to El Salvador of such a deal on the grounds that El Salvador does not need extended financing terms but, rather, lower prices; she and President Saca have repeatedly expressed their commitment to a competitive, free market model for oil and fuel imports. Reaction ¶5. (C) Most Embassy contacts have characterized the FMLN project as an eminently political attempt to show the superiority of Chavez' model to the free-market philosophy of the Salvadoran government. Technical Secretary Eduardo Zablah told econcouns on March 22 that the GOES objected to this blatant interventionism by Chavez in El Salvador's internal affairs but recognized that what ENEPASA wanted for its political purposes was for the GOES to say "no." As a result, the GOES strategy appears to be to welcome the initiative and hope that it proves untenable. In a public statement, President Saca bade ENEPASA luck and said the government would facilitate the process ("dar facilidades") so that the firm could operate, but warned against creating false expectations. Zablah told econcouns that ENEPASA had applied in late February for permission to import fuel, but that the government could not approve this request because Salvadoran law did not allows associations to import oil products (comment: probably one of a number of other legal and financial stumbling blocks.) Likewise, representatives of oil companies operating in El Salvador (which are Exxon-Mobil/Esso; Texaco-Chevron; Shell; and Puma) have publicly welcomed new competition in the marketplace. Privately, they have questioned the FMLN's ability to meet the logistical challenges while remarking that Chavez appears willing to throw a lot of money to overcome them. ¶6. (C) Zablah said he could only speculate about how the FMLN might realize this plan. He recounted a rumor that the FMLN was looking for facilities at the port of Acajutla and reasoned that with the cooperation of the gasoline distributors' association, the new joint company could secure local storage, and that it might be able to line up independent truckers to bring the fuel from the port. In fact, ENEPESA met with truckers on March 10 to discuss the import of fuel from Venezuela, and the Salvadoran press reported that in early March various transport sector groups created a new transport chamber including buses and microbuses, taxis and cargo transport providers interested in such a deal. A prominent local businessman involved in the liquor business told Ambassador on March 28 that FMLN representatives had approached him to lease his company's unused tanks at Acajutla; the businessman refused, but he was surprised at how organized the FMLN was, to the point of having letters of credit at the ready. This businessman believed that the FMLN had secured alternative storage facilities. Please Visit San Salvador's Classified Web Site at http://www.state.sgov/gov/p/wha/sansalvador/i ndex.cfm Barclay