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.

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