HONDURAS: DIPPSA SALE A PDVSA FRONT? ALSO: FUEL

S E C R E T SECTION 01 OF 04 TEGUCIGALPA 001331

SIPDIS

SIPDIS

STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN
STATE FOR D, E, P, AND WHA
TREASURY FOR DDOUGLASS
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK

E.O. 12958: DECL: 07/24/2031
TAGS: EPET ENRG PGOV PREL PINR HO
SUBJECT: HONDURAS: DIPPSA SALE A PDVSA FRONT? ALSO: FUEL
BID TERMS OF REFERENCE FINALLY TO BE RELEASED

REF: TEGUCIGALPA 1238 AND PREVIOUS

Classified By: AMB Charles Ford for reasons 1.4 (b) and (d)


1. (S) Summary: The Terms of Reference for the international
fuel bid solicitation are due to be released on July 25. The
TOR are expected to be "ex-tank," meaning bidders will be
responsible for both importing and storing the fuel. This
gives an apparent bidding advantage to companies that already
own or can access such storage, including U.S. firms Esso and
Texaco. Post fears, however, that the intent of this TOR
might be to incline the process in favor of Honduran company
DIPPSA, which also owns significant storage capacity. DIPPSA
was reportedly purchased for over USD 65 million on July 21
by a Florida-based company (Caribbean Petrochemical Company)
which was incorporated only one month ago with a
capitalization of only USD 100. GOH Minister of Foreign
Relations Milton Jimenez alleged to Ambassador that the
company is a front for Venezuelan interests. The contract
apparently has significant out-clauses, and the possibility
remains that Post could help steer the GOH away from a
Venezuelan solution. In a worse case scenario, PDVSA could
become the key supplier to Honduras, while certain special
interests receive lucrative payouts and the GOV uses DIPPSA's
Gulf of Fonseca storage facilities to supply FSLN and FMLN
municipalities in Nicaragua and El Salvador, likely with a
view towards influencing Nicaraguan elections. End Summary.


2. (C) In a July 23 meeting with Ambassador (detailed
septel),President Jose Manuel "Mel" Zelaya Rosales said the
terms of reference (TOR) for the long-awaited international
fuel solicitation will be released on July 25. Zelaya
discounted any talk of nationalizing storage facilities
(owned primarily by U.S. firms Esso and Texaco). According
to Zelaya, the TOR will specify delivery "ex-tank," meaning
the individual bidders will be responsible not only for
delivery but also storage of the fuel. The GOH would take
delivery on the distribution side ("at the rack") of the
storage tanks -- hence "ex-tank." The TOR will be published
to the Presidency website (www.presidencia.gob.hn),he said,
and a public comment period of 10 days will be honored.


3. (S) On the surface this appears a major step forward,
away from a PetroCaribe (government to government) solution
and towards a market-driven and transparent outcome.
Further, it appears to de-escalate the rhetoric of
nationalization of the existing storage facilities and, given
the "ex-tank" provision, would even seem to favor current
U.S. investors Esso and Texaco in the process. However, Post
fears this TOR alternatively might be the endgame of an
elaborate ruse intended to ensure that certain personal and
political interests win the upcoming bid solicitation.

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"DIPPSA Will Be the Key."
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4. (S) As reported previously, many behind-the-scenes
participants in the bid process (such as former President
Rafael Leonardo Callejas (National Party) and
French-Argentinean dealmaker Adrian Recca) have always
considered Honduran gasoline retailer DIPPSA to be the key to
a winning bid strategy. Despite the GOH decision to
nationalize imports and launch a bid solicitation, it has
long been clear that the obstacle to executing that plan
would be storage. Facing the capricious removal of their
import licenses, neither Esso nor Texaco were likely to reach
agreement with the GOH on use of their storage facilities.
This left the GOH with only three options: build new
GOH-owned facilities; nationalize the existing facilities; or
use DIPPSA's facilities. Regarding the first: the GOH might
still build its own facilities, but that could take up to a
year. On the second: Post has fought unflaggingly to
dissuade the GOH from a strategy of confiscation of the

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existing assets. Despite Post's strong message, both
President Zelaya and his consultant on the bid project had
until recently continued to threaten such confiscation if
necessary. Suddenly, on July 23, both the GOH message and
tone appeared to shift dramatically.


5. (S) The cause of this shift in tone from casual menace to
magnanimity towards the oil companies is, in Post's view, the
result of the recent sale of DIPPSA, thereby making the third
option viable. In a stunning confirmation of what Post had
already suspected, Minister of Foreign Affairs Milton Jimenez
told Ambassador that the company that purchased DIPPSA --
Caribbean Petrochemical Company -- "is a front for the
Venezuelans." Assuming this is true (Post assesses that it
is),and taking into account the decision to base the TOR on
"ex-tank" delivery terms, the company that owns DIPPSA is now
perhaps the best-positioned to win the upcoming international
fuel solicitation.


6. Post has up to now managed to discourage a potential PDVSA
bid, pointing out that PetroCaribe-inspired financing plans
cannot be used to lower the pump price. Moreover, the GOH
has agreed (per Post urging) to a ten day public comment
period after the TOR are released. However, in the worst
case scenario, the GOH might have attained precisely what was
intended all along: PDVSA could become the key supplier to
Honduras; certain special interests (including Recca and
Callejas, who appears to be continuing his questionable role
of dealmaker, but possibly members of the Zelaya
administration as well) could receive lucrative payouts; and
the GOV could be able to use DIPPSA's Gulf of Fonseca storage
facilities to supply FSLN and FMLN municipalities in
Nicaragua and El Salvador, likely with a view towards
influencing Nicaraguan elections.

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Who is Caribbean Petrochemical Company?
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7. (S) Post has suspected from first contact that Caribbean
Petrochemical Company (CPC) was a front company for other
interests, the most likely being Venezuela. The company
approached DIPPSA owner Henry Arevalo unsolicited, and within
two days had tabled an offer to purchase the firm -- despite
the fact they had done no due diligence and that they have no
experience in the downstream petroleum sector. In
EconChief's talks with company representatives it soon became
clear that the company also lacked even the most rudimentary
understanding of political or economic conditions in
Honduras, including recent GOH decisions to nationalize fuel
imports. Such flagrant disregard for country risk could only
be explained if an unseen local partner were actually
directing CPC actions. It now appears that local partner
could be Adrian Recca, finally successful in his long quest
(reported extensively reftels) to structure a deal that would
give PDVSA access to the Honduran market.


8. (S) It is unclear to Post whether CPC's actions in this
regard would violate any U.S. or Honduran laws. CPC was
incorporated in Florida on June 13, 2006, with a
capitalization of 10,000 shares with a par value of USD 0.01
each (implying a total capitalization of USD 100). Yet
somehow this firm, only one month later, was able to offer
over USD 65 million for DIPPSA. (A note on the sales price:
CPC told Post the sale price was USD 65 million. DIPPSA
owner Arevalo told EconChief the price was USD 75 million;
while President Zelaya told Ambassador the price was USD 90
million.) In a move that may have been intended to imply GOH
innocence to Ambassador, Zelaya ordered FM Jimenez to
investigate CPC, and made a phone call in front of Ambassador
to tax authority (DEI) Director Armando Sarmiento, exhorting
him to likewise investigate the firm. Esso, a 50 percent
partner with DIPPSA in the Gulf of Fonseca storage facilities
at Port Henecan, previously known as PetroSur, knew nothing

TEGUCIGALP 00001331 003 OF 004


about the sale beyond a local press report, and told Post
that when questioned on July 22, Henry Arevalo denied to Esso
that the sale had happened. On that same day Arevalo
confirmed the sale to EconChief.


9. While the existence of a contract between CPC and DIPPSA
was confirmed by both companies, there appear to be
significant caveats attached. On July 21 the President of
CPC confirmed the contract to EconOff, but indicated that
three provisions need to be met: 1) that CPC can continue to
import their own fuel (Comment: Not allowable under proposed
TOR. End Comment); 2) that there will be no revision in the
GOH,s price setting formula (Comment: The inefficient
formula gives DIPPSA solid margins on downstream operations,
and will most likely be the next target of revision. End
Comment); and 3) the current GOH subsidy situation will end
soon (Comment: This has been threatened, but would result in
a politically explosive USD 1.28 dollar per gallon increase
in the pump price of gasoline. End Comment). Per the CPC
President, Arevalo was in the process of obtaining a letter
agreeing to these terms and conditions from President of the
Congress Roberto Micheletti. Similarly, on July 25 Arevalo
confirmed to EconChief that a contract has been signed, but
stressed that the contract was subject to due diligence
investigations and verification of the buyer's bona fides.


10. (S) It seems credible to Post that CPC is representing
the interests of other parties, possibly PDVSA, as alleged by
FM Jimenez. Post has requested (via email) that
Washington-based agencies undertake basic fact-finding in an
effort to establish the company's bona fides, and to
determine whether any U.S. regulations or laws (for example,
money laundering) have been broken in this transaction.

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Comment
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11. (S) Comment: In principle the current bid structure
opens the way for a transparent bid process and a winner
based on merit (which winner will then be responsible for
supplying or entering into a commercial agreement for storage
facilities). That is the rosiest scenario, but seems
unlikely to Post. The worst case scenario, as noted above,
is that the terms, by requiring ex-tank delivery, discourage
a number of bidders from participating while rendering other
bids less competitive, thus clearing the way for the GOH to
award the contract to PDVSA (via its alleged front CPC, via
its front DIPPSA).


12. (S) Comment continued: Should both of those
possibilities fail, Zelaya has said he would vacate the bid
until new storage facilities could be constructed. This
would certainly infuriate certain civic groups, who would be
faced with the prospect of waiting at least 8 months for the
bid process they are convinced (probably incorrectly) will
lower pump prices significantly. Focusing on storage as the
obstacle, these groups are likely to vilify the storage
owners (Texaco and Esso) and might call increasingly shrilly
for expropriation of those assets to allow the bid to go
forward. It is worth recalling that, during the one-day taxi
strike last spring, protesters blocked key highways from dawn
until being broken up by police at 1400 hours local. Asked
why he waited so long to act, Zelaya told Ambassador that by
waiting he allowed the wrath of the public to build, and
their frustrations to turn them against the taxi drivers,
such that the police action, when it finally came, was seen
as a relief rather than an act of state oppression. Post
could foresee Zelaya using similar tactics to justify an
expropriation of the storage tanks, should that prove
necessary in his view. End Comment.

Ford


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FORD