(C) HONDURAS: RECENT HONDURAS ENERGY DISCUSSIONS

S E C R E T SECTION 01 OF 08 TEGUCIGALPA 001393 SIPDIS NOFORN SIPDIS STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN STATE FOR D, E, P, AND WHA STATE FOR INR/I JGIBNEY TREASURY FOR JHOEK STATE PASS AID FOR LAC/CAM NSC FOR DAN FISK E.O. 12958: DECL: 08/04/2031 TAGS: PINR EPET PGOV HO VE SUBJECT: (C) HONDURAS: RECENT HONDURAS ENERGY DISCUSSIONS WITH VENEZUELA (C-AL6-01066) REF: A. A. TEGU 000482 ¶B. B. TEGU 000521 ¶C. C. TEGU 000534 ¶D. D. TEGU 000505 ¶E. E. TEGU 001008 ¶F. F. TEGU 001131 ¶G. G. TEGU 001238 ¶H. H. TEGU 000809 ¶I. I. TEGU 000897 ¶J. J. 05 TEGU 001851 ¶K. K. 05 TEGU 001970 ¶L. L. 05 TEGU 002577 ¶M. M. STATE 124888 Classified By: AMB Charles Ford for reasons 1.4 (b) and (d) ¶1. (S/NF) The following responds to tasker C-AL6-01066 transmitted ref M. All responses are keyed to questions contained in reftel and repeated below. ¶A. (U) PRESIDENT ZELAYA. 1) (C) WHERE DOES ZELAYA STAND WITH RESPECT TO THE VENEZUELA OIL TALKS? WHAT ARE HIS MOTIVATIONS FOR INVOLVEMENT ON THE ISSUE -- E.G., POLITICAL, FINANCIAL (PERSONALLY OR OTHERWISE)? President Zelaya strikes us as a well-meaning populist, but susceptible to leftist influences as political pressures mount in a chaotic atmosphere of high public expectations. Six months into his presidency, Zelaya retains a high (60 percent) approval rating, but his support appears soft as he careens through crises involving demands from teachers, health workers, national registry personnel, environmentalists, and others, and growing public concern over high energy costs, corruption, and violent crime. In his stubborn style, Zelaya has alienated much of the political establishment, including his Vice President, the former Liberal Party President, much of the press hierarchy, and many business leaders. Averse to making tough decisions, Zelaya prefers to push issues down the road, hoping to buy time. Overly self-assured and a selective listener, Zelaya will need to decide in coming months whether to continue relying on a handful of pro-Sandinista and pro-Chavez inner circle advisors, or to appoint competent technocrats who can run his government. Zelaya credits his election to his campaign promise to lower gas pump prices. Inexperienced in governing and not academically prepared, Zelaya has reached for what he considers to be the quickest fix to the oil price problem: a deal with Venezuela. We believe his motivation rests primarily with a benign desire to reduce poverty through lower gas prices, but his position lacks sound economic analysis and has been strongly influenced by his pro-Chavez advisors. A second school of thought that we have been unable to confirm is that Chavez was a contributor to the Zelaya campaign which accounted for Zelaya,s campaign promise to lower gas prices and his rush to meetings with Chavez early in his tenure. A traditional &Caudillo8 from the rural heartland, Zelaya resents opposition to his decisions and remains sensitive to historical Honduran dependency on the United States ) a relationship that he nevertheless genuinely wants to nurture. Given his apparent willingness to confer with corrupt former President Cajellas regarding the oil deal, we do not discount Zelaya,s interest in personal financial gains from a Venezuelan deal, but this is probably not his prime motivation. We also think Zelaya may have been overwhelmed by the sensational attention showered on Chavez, whom he met in Vienna and Santiago. Lacking a personal agenda and a TEGUCIGALP 00001393 002 OF 008 rather shallow and non-strategic thinker, Zelaya does not appear to grasp the larger geo-political threat posed by Chavez. Zelaya,s chaotic management style reflects his life-style. His father spent seven years in prison; one brother was murdered in a getaway car; another brother may currently be hiding from narco-associates; his wife lives apart from him; his chief advisor, Sandinista sympathizer Patty Rodas, is rumored to have an amorous, but tumultuous relationship with him. Despite Zelaya,s peculiar character, we believe we can work with him and with others who can help shape his policies. We have engaged Zelaya directly on many occasions and he has reciprocated by speaking eloquently at our Independence Day celebration, personally welcoming a U.S. warship, and visiting the Residence on several occasions for candid discussions on immigration, drugs, the White House visit, etc. At the same time, we have worked intensely with pressure groups ) the press hierarchy, religious groups, business leaders, labor leaders, congressional and political party operatives, human rights activists and others - who might contain and help manage Zelaya. We continue to enjoy considerable cooperation on military, drug, and immigration issues and we are pressing for judicial reform and greater business competitiveness to attract foreign investment, create jobs, and reduce poverty. With careful and frequent counsel and pressure from like-minded Hondurans, we hope to encourage Zelaya to respond more fully to U.S. interests. But, our success will depend on whether Zelaya continues to manage by crisis ) much of which may be deliberately fomented by his closest confidants who have little faith in building democratic institutions and would prefer an ill defined government by popular will. If he continues to govern in this manner, various alienated groups both within and outside his party could increase pressure on Zelaya to replace much of his current government with less ideological, more competent technocrats. In any event, reliance on remittances from Hondurans residing in the U.S., trade ties based on CAFTA, dependence on U.S. military support to ensure national sovereignty, and historic bilateral relations will ensure our continued close bilateral ties ) polls show current approval of the U.S. standing at over 70 percent. The road, however, will likely be uneven and there is a strong possibility that he will make poor decisions on oil and fiscal issues while striving to maintain good relations with the U.S. 2) (C) HOW DOES ZELAYA MANAGE HIS TEAM ON THIS ISSUE? ARE THERE MULTIPLE HONDURAN FACTIONS INVOLVED IN NEGOTIATIONS? DOES ZELAYA PROVIDE CLEAR AND CONCISE DIRECTIONS? IS HE INTERESTED IN SEEING THE BID SOLICITATION TAKE PLACE AND DO SO IN A TRANSPARENT, FAIR PROCESS? There appear to be at least three factions involved in the fuel import bid solicitation issue. One, led by Presidential Advisors Patricia Rodas and Enrique Flores Lanza, appear intent on a more left-leaning policy, including closer relations with Venezuela. They likely also hope to use soft financing from a fuel deal to increase GOH subsidies and other social spending in the hopes of creating a legacy for the Liberal Party, enabling it to win the next several elections. A second faction, led by Juliette Handal, seeks to break the backs of the International Oil Companies (IOCs) in Honduras in an attempt to lower fuel prices at the gas pumps. Handal appears motivated by political opportunism and is widely thought to be seeking the Presidency. Others, such as independent gasoline retailers association ADHIPPE, support the effort as a means to gain additional contract flexibility TEGUCIGALP 00001393 003 OF 008 and possibly lower prices from their suppliers, all while safeguarding their bloated (but guaranteed) profit margins. Yet others in this strange-bedfellows coalition support lower prices as a social justice concern -- Catholic Cardinal Andres Rodriguez and several Evangelical pastors fall into this group. Their support seems predicated on the incorrect belief that either the GOH or the IOCs can control oil prices, and that therefore high pump prices must be indicative of exploitation of the Honduran poor. A third faction, represented by Adrien Reca but likely including former President Rafael Leonardo Callejas and others, are in it for the money. They see a USD 1 billion contract in the offing, and are desperately maneuvering to get a commission of some kind from that deal. Henry Arevalo, owner and President of Honduran gasoline distributor DIPPSA, appears to be an outlier. He has been forced by circumstance to seek a buyer for his company. While he clearly wants the best possible price, he wants to avoid aligning himself with any of the three factions listed above. His resultant acrobatics have on several occasions left both participants and observers convinced there was a deal when in fact no deal had yet been concluded. 3) (C) ARE ZELAYA AND HIS TEAM CONCERNED ABOUT THE GOVERNMENT'S RELATIONSHIP WITH THE INTERNATIONAL FINANCIAL INSTITUTIONS? WHAT IS HE DOING TO MAINTAIN THAT RELATIONSHIP? WHERE DOES THE ADMINISTRATION STAND WITH REGARD TO MAINTAINING DEBT RELIEF SCHEDULES? WHAT ADDITIONAL INSIGHTS DOES POST HAVE ON THE MOVE OF HUGO NOE PINO TO BE THE REPRESENTATIVE TO THE INTER-AMERICAN DEVELOPMENT BANK (IDB)? Zelaya and his team profess to care deeply about the GOH relationship with the IFIs, but lack the political courage to make the difficult domestic decisions necessary to comply with the GOH/IMF agreement. A plethora of subsidies and other handouts, possibly including a significant upcoming pay hike for teachers, lead international observers to question the Zelaya team's dedication to fiscal discipline in general, and to meeting its Fund requirements in particular. Zelaya is clearly anxious, however, to acquire up to USD 1 billion in additional debt relief from the Interamerican Development Bank (IDB). Post urges that any such future debt relief should be predicated upon continued strong fiscal performance, not prior HIPC debt relief. Under these criteria, there is reason to doubt whether the GOH would qualify for additional debt relief. Zelaya's Minister of Finance, Rebecca Santos, is a staunch believer in fiscal discipline, and has reportedly warned the administration repeatedly of the risks it runs with uncontrolled spending. However, despite (or perhaps because of) being a close personal friend of President Zelaya, Santos has thus far been unable to curb his reflexive tendency to restore social order by increasing government subsidies. This has had the lamentable consequence of teaching Honduran interest groups that if they take to the streets, the GOH will pay them off. (Biographical Note: To Post's knowledge, Minister of Finance Rebecca Santos is unrelated to wife of the Vice President Rebecca Santos. End Note.) Please see Teguc 1131 for Post's best assessment of the condition surrounding former Minister of Finance Hugo Noe Pino's departure. While Noe Pino's diplomatic and economic experience could indeed prove crucial in future talks over IDB debt relief (Noe Pino's nominal reason for leaving the Ministry),Post suspects the public rift between Zelaya and Noe Pino over teachers' wages was also a contributing factor. Noe Pino flatly refused the teacher's exorbitant demands, TEGUCIGALP 00001393 004 OF 008 citing fiscal inability to pay. Zelaya sought instead to placate the teachers, and has subsequently promised to meet all benefits obligations and give them substantial wage hikes as well. One consequence (in addition to Noe Pino's departure) has been an emboldened and intransigent teachers' union, which has recently launched a series of disruptive strikes and threatened to "paralyze" the country. ¶B. (C) OTHER ACTORS: IT APPEARS THAT NUMEROUS CHARACTERS FROM BOTH INSIDE AND OUTSIDE THE GOVERNMENT ARE INVOLVED IN THE DEAL, BUT THEIR MOTIVES, INTERRELATIONSHIPS, AND SOMETIMES EVEN THEIR IDENTITIES REMAIN UNCLEAR. 1) (C) WHO ARE OTHER KEY PLAYERS AND WHAT ROLE/INTERESTS DO THEY HAVE IN THE ISSUE? DO THESE FIGURES COORDINATE THEIR EFFORTS, OR ARE THEY REPRESENTING DIFFERENT INTERESTS? WITH WHOM DO THEY ALIGN THEMSELVES (ZELAYA, THE BUSINESS SECTOR, PARTY FIGURES?) See reftels for Post's best assessment of the players and their motivations. A brief summary follows: President Manuel Zelaya Rosales: originally sought to reduce prices as an election gimmick; later likely enamored of possible easy money from PetroCaribe soft financing. Dubiously claims to seek long-term market liberalization. In the mean time, he's gone too far with the fuel solicitation to turn back now without severe political repercussions. Vice President Elvin Santos: Publicly and privately opposes any deal with Venezuela; has increasing doubts about the fuel solicitation. Vocally favors market-driven solutions, but carries little weight on this issue within the GOH. Patricia Rodas: Liberal Party President, Zelaya's closest advisor. Leftist by orientation, likely supports deal with PDVSA as mechanism for closer relations between GOH and GOV; likely also welcomes Chavez support for Sandinistas in upcoming Nicaraguan elections. Suspected of abiding (or even fomenting) social chaos and bureaucratic stagnation as means of spurring crises to support her claims that the current socio-political system is broken and must be overturned, not tweaked. Milton Jimenez: Minister of Foreign Relations; also leftist, appears to support closer relations with Chavez; was visibly distressed when leftist candidate Lopez Obrador lost the Mexican Presidential election. A close advisor to President Zelaya, but not a leading actor in the fuel solicitation. Enrique Flores Lanza: Legal Counsel to the Presidency; third of four left-leaning advisors closest to President Zelaya, lead official on fuel solicitation. Clearly sought to steer early energy policy toward Venezuela, deeply resents USG efforts to prevent this non-transparent outcome. Unreliable and untrustworthy as an interlocutor. Perhaps the biggest threat to U.S. investments in the Honduran fuel sector. Aristides Mejia: Minister of Defense; fourth of the left-leaning inner circle. More moderate in outlook; generally pro-U.S.; not known to be deeply involved in the fuel solicitation process. Juliette Handal: former Minister of Trade, leader of the "Patriotic Coalition" -- a group that has pressed for years for structural reform to the fuel sector, in the belief that "transnational" companies are exploiting Honduras. Seems genuinely to believe that the state taking control of the sector through nationalization is the best solution; opposes sector liberalization because one likely result would be that uncompetitive gas stations would go out of business. Post assesses she is less a socialist than just deeply confused TEGUCIGALP 00001393 005 OF 008 about market economics. Widely assumed she wants to be President of Honduras. Prone to populist rhetoric largely divorced from the facts; as a result, she is one of the most popular figures in Honduras today. Empowered by Zelaya's weak policies, Handal has become a threat to his administration, mobilizing street protests and raising fears of further social unrest. The Notables Commission: A group of eight high-profile civilians (including Juliette Handal) named by Congress in October 2005 to investigate reform of the fuel import and distribution pricing formula. (Note: All fuel prices are set by the GOH. End note.) Several members dropped out when the project became politicized; only 2 signed the final report recommending nationalization of imports. None of the members have any experience or expertise in the petroleum sector. Commission hearings were private, and the final report was never publicly released. The commission also failed in its mandate to look for reforms to the pricing formula that could lower pump prices, focusing early and almost exclusively on nationalizing imports and blaming the IOCs. Adrien Reca: an extremely aggressive entrepreneur (some would say con-man),possibly fronting for GOV interests. Has sought for several months to broker a deal with PDVSA, and more recently has sought to engineer the purchase of DIPPSA (again, possibly on behalf of GOV interests). Believed also to be representing the interests of corrupt former President of Honduras Rafael Leonardo Callejas. Post assesses Reca and Callejas are interested primarily in the profits and commissions such a deal could generate. Henry Arevalo: Founder and President of DIPPSA; increased his 40 percent share in DIPPSA to 100 percent in early 2006 when partner Jose Lamas sold out. Some observers suggest this purchase (approximately USD 60 million in total) overextended him financially, explaining his urgency to sell all or part of the firm. Post assesses that Arevalo is not involved in either the political or financial plots involving fuel imports. However, he has in the past misrepresented certain facts, which Post assesses was an attempt to keep as many options open as possible while seeking to sell his company at the highest price without incurring the wrath or either the USG or GOH. Yani Rosenthal: Minister of the Presidency; Privately claims he opposes any deal with Venezuela, but publicly has been an active participant in presenting and supporting the fuel bid solicitation. Often refers inquiries on this issue to Flores Lanza. Post assesses he is carrying out his President's instructions, but trying not to be standing too close in case all of this explodes. ¶C. (U) DEAL-SPECIFIC QUESTIONS. 1) (C) HOW IS THE STATE ELECTRICITY COMPANY, ENEE, INVOLVED IN THE TALKS WITH VENEZUELA'S PDVSA AND WITH HONDURAN FUEL DISTRIBUTOR DIPPSA? ENEE is primarily a purchaser of electricity from privately-run electricity generators, overwhelmingly thermo-electric (diesel or bunker fuel fired). ENEE is thus not a major direct buyer of fuel imports (though fuel prices are passed through to ENEE and thence to consumers). However, rumors persist that ENEE Director Leon Starkman has been trying to arrange a direct-purchase deal for ENEE with PDVSA. It is known that Starkman was in attendance at the July 8 secret meetings with PDVSA. How ENEE could use such a deal to its advantage remains unclear. One suggestion is that ENEE could sell fuel at a discount to generators, in TEGUCIGALP 00001393 006 OF 008 exchange for writing down over USD 100 million in payments arrears ENEE still owes them. In effect, ENEE would, under this scheme, be using Petrocaribe financing as a long-term, low-interest loan to consolidate and restructure its debt to the private sector. Two major power generators (Freddy Nasser and Schucry Kafie) told Post separately that they would not accept such a deal, noting both that they have existing long-term supply contracts and that they fear the quality of the fuel that would be delivered could be off-spec (as has happened in other countries using PDVSA or Petrocaribe). Post is unaware of any special relationship between DIPPSA and ENEE. Many have speculated that were ENEE to arrange for a direct deal with PDVSA, DIPPSA's import terminal in San Lorenzo would be used for the shipments. However, former DIPPSA owner Jose Lamas reports that the offloading collars and pipes at that terminal are too narrow to offload bunker fuel. Lufusa's storage facility, co-located in San Lorenzo, is equipped for handling bunker fuel, but it is unclear that Lufusa would have an interest in allowing GOH use of those facilities. Lufusa has reportedly approached or was approached by PDVSA to arrange a direct import deal on preferential financing terms similar to those offered to FSLN mayors in El Salvador. It is Post's understanding that this approach was rebuffed (press reports indicate PDVSA spurned Lufusa; Lufusa claims it was they that rejected the offer). 2) (C) WHAT ROLE DOES THE BUSINESS COMMUNITY HAVE IN THE ISSUE? WHAT IS THE POTENTIAL IMPACT OF A PDVSA OIL DEAL ON US AND MULTINATIONAL OIL COMPANIES? Companies that are major consumers of energy generally favor any GOH measure to reduce the cost of energy or fuel to the final consumer. That said, private-sector umbrella group COHEP has vocally opposed nationalization or expropriation of existing energy sector investments, citing the strong negative impact such actions would likely have on future investment flows. U.S. firms Esso (ExxonMobil) and Texaco (ChevronTexaco) currently have rights to import fuel into Honduras and market it. (Note: As part of this bid solicitation process, the GOH has raised a legal technicality to question the firms' rights to import fuel. End Note.) Both firms are owners of substantial infrastructure, including service stations and import/storage facilities. Esso, for example, reports over USD 30 million in direct investment in service stations and other infrastructure in the last five years alone. The current GOH plan could strip these firms of their rights to import, and the GOH stated intent to build a DBOT (Design, Built, Operate, Transfer) storage facility of over 2 million barrel capacity threatens to leave these firms' storage investments stranded. (The American citizen consultant to the bid tender, when asked about this outcome, replied that as far as he was concerned the companies could "sell their tanks for razor blades.") Loss of the ability to import freely also jeopardizes these firms' profit margins, and could force them to abrogate existing contracts with both suppliers and consumers. 3) (C) HOW MANY GAS STATIONS DOES DIPPSA HAVE IN HONDURAS? HOW DOES THAT NUMBER COMPARE WITH THE MAJOR OIL COMPANIES? (NOTE: PREVIOUS INFORMATION HAS SHOWN 98 FOR TEXACO AND 68 FOR ESSO.) According to DIPPSA's website (www.dippsa.net),DIPPSA has "more than 100" service stations, making it the largest single operator of gasoline stations in Honduras. DIPPSA's share of the market is approximately one quarter. According to the 2005 Notables Commission on Fuels Report TEGUCIGALP 00001393 007 OF 008 number 1, there are 420 service stations in Honduras. According to report number 3, there are 413 stations, broken down as follows: DIPPSA 106 ESSO 68 SHELL 74 Texaco 100 Hondupetrol 20 Puma 28 "white flag" 55 Post notes that this list totals 451 stations. Post is unable to explain this discrepancy in the reports. According to a Texaco source, Texaco owns, operates, or licenses 98 service stations, and Esso 68. According to this source, there are 432 service stations in Honduras. He estimated that an additional 17 percent of the market is composed of "white flag" (independent) gasoline stations. ¶D. (U) GENERAL ENERGY QUESTIONS. 1) (C) PLEASE PROVIDE INFORMATION ON ENERGY CONSUMPTION IN HONDURAS, INCLUDING THE FOLLOWING, TO HELP ANALYSTS UNDERSTAND THE POTENTIAL IMPACT OF ANY DEAL WITH VENEZUELA. A) (U) HOW MUCH GASOLINE, DIESEL, BUNKER, COAL, AND NATURAL GAS DOES HONDURAS CONSUME? Honduras produces no petroleum products. Total consumption is equal to total imports for these products. According to figures supplied by industry sources, in 2005 Honduras imported approximately 15.7 million barrels of petroleum-derived products, as follows (in thousands of bbl): Avgas 1.5 0.01 percent Turbo 196.4 1.25 ROM 95 2599.9 16.56 ROM 87 195.1 1.24 Diesel 5446.4 34.69 Kero 218.2 1.39 Bunker C 6313.8 40.21 Asphalt 107.8 0.69 LPG 451.8 2.88 Oils 163.1 1.04 Grease 7.1 0.05 Total 15700.9 100.00 Post has no figures on coal consumption. To Post's knowledge, no significant electricity is coal-generated; all coal imports would therefore supply industry, notably including steel and cement. B) (U) HOW IS ELECTRICITY GENERATED? According to information provided by state-run electric company ENEE to the Honduran Investment and Trade Development Foundation (FIDE),in 2004 Honduras generated 4842 GWh of electricity, from the following sources: Hydro 1430 GWh 29.5 percent Diesel/Bunker 3118 64.4 Gas Turbines 267 5.5 Cogeneration 27 0.6 Total 4842 Of which: State-owned 1384 28.6 Privately-owned 3458 71.4 TEGUCIGALP 00001393 008 OF 008 C) (U) WHERE DO THE CURRENT SUPPLIES OF REFINED PRODUCTS COME FROM? Honduras has no domestic refining capacity and therefore imports no crude oil, only refined products such as diesel and gasoline. According to GOH Ministry of Trade figures, Honduras imported just over 600,000 barrels of refined petroleum products from Venezuela in 2003, or roughly 1,650 barrels per day. As such, Venezuela is the direct source of just 4.2 percent of Honduras, petroleum imports, but Venezuelan fuel refined in Curacao would add another 19 percent of total imports, to about 23 percent. It,s unclear how much (if any) of the 44.8 percent supplied by the United States may be sourced from PDVSA,s Citgo subsidiary. The other major supplier is Trinidad and Tobago (13 percent). Honduran importers are currently all private-sector firms, though the GOH in early 2006 took steps to nationalize all imports and form a GOH entity to procure and import all fuel needs. D) (U) WHO OWNS THE STORAGE FACILITIES IN COUNTRY, WHERE ARE THEY LOCATED, AND WHAT ARE THE CAPACITIES? On the Atlantic Coast there are 91 tanks, as follows: Texaco: 34 tanks 824,336 bbl Puerto Cortes Gas del Caribe: 32 tanks 42,131 bbl(LPG) Omoa Honduperol: 11 tanks 313,000 bbl Puerto Cortes DIPPSA: 14 tanks 417,500 bbl Tela Atlantic Total: 91 tanks 1,596,967 bbl On the Pacific Coast there are 18 tanks, as follows: DIPPSA: 10 tanks 420,000 bbl San Lorenzo LUFUSA Power Co: 8 tanks 501,318 bbl San Lorenzo Pacific Total: 18 tanks 921,318 bbl A more specific breakdown of the tanks by type of fuel stored is available in the Terms of Reference document, Annex VII, which can be downloaded at www.presidencia.gob.hn/casapresidencialweb.ht m under the Boletines de Prensa section for the month of July. Below the heading "Licitacion DBOT para Terminal de Almacenamiento" click on "ver noticia completa" and scroll to the bottom of the page. The document is available in both English and Spanish. Note that document also contains rudimetary information on ports, including maximum vessel size and draft. Ford FORD