HONDURAS: FUEL BID FAILURE AN INCREASINGLY LIKELY

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001935

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: 10/11/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: FUEL BID FAILURE AN INCREASINGLY LIKELY
SCENARIO

REF: TEGUCIGALPA 1784 AND PREVIOUS

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

1.(C) Summary: The GOH formally offered to accept bids to
supply all the country,s fuel requirements October 11,
despite a USTR request to delay the bid until a CAFTA-
compliance review could be completed. Industry observers,
however, question whether the bid will succeed, and even key
presidential advisors have stated that the bid makes no
economic sense. Meanwhile, Honduran fuel retailer DIPPSA
appears to have forestalled a rumored take-over bid by
instead signing a co-share deal with London-based trader
Trafigura Beheer. Venezuelan fuel company PDVSA still
retains an interest in supplying the region and, with
PetroCaribe shipments to Nicaragua beginning, may need to
soon acquire Honduran storage facilities. End Summary.

--------------
Bids to Be Accepted Without USTR Opinion
--------------


2. (U) The GOH formally offered to accept bids to supply
Honduras with approximately 15 million barrels of refined
fuel October 11, and the expectation is that the GOH will
receive all the responses by October 27. At that point the
GOH will take approximately a week to review and evaluate the
bids, leaving the final decision in the hands of a select
five person commission yet to be named. While conceivably up
to fourteen different companies could win in the bid (eight
types of fuel, the majority required on both coasts),in
reality only two to three companies would be likely to win.


3. (C) To support the bid, and to manage the import process
once the winner(s) is identified, the GOH has moved to
replace the existing unit that sets fuel prices (UTP) with a
new organization (CAP) headed by Honduran Lucy Bu. This unit
will be in charge of managing the contract process, ensuring
compliance, and potentially engineering the financial aspects
of the deal. (Note: How payment will flow from the fuel
distributors to the bid winner has yet to be fully explained.
End Note.) Per the former Deputy Director of the UTP,
Wilberto Pinot, the CAP will initially be run with the same
12 people formerly employed at the UTP, with additional
training in key areas like procurement, contracts, and
insurance. (Comment: The additional courses may constitute a
complete retraining of their job function, since previously
the UTP only worked a computer model to determine how prices
and margins are set. Pinot also expects that additional
subject experts, specifically from the company that
recommended and established the bid, SurOil, will be hired.
Pinot went so far as to call the future CAP &little
SurOil.8 End Comment).


4. (C) The bid was sent out despite a request by the USTR
that the GOH hold the tender until a CAFTA compliance review
had been initiated. To date, USTR has issued no formal
opinion concerning the CAFTA-compliance of the proposed bid
procedure, but Post is aware of several private companies
that are preparing complaints. Those complaints are likely
to raise not only the legitimacy of the bid process itself,
but also the implied threat to abrogate existing market
access rights and to strand current U.S. investment. The GOH
is well aware of these concerns and has repeatedly said the
process will not result in expropriation of rights or assets,
but the GOH has yet to explain to anyone's satisfaction how
the bid award process will avoid such an outcome.

--------------
A Bid Destined for Failure?
--------------


5. (C) The most perplexing element of the bid is that

TEGUCIGALP 00001935 002 OF 003


virtually none of the main players, excluding perhaps
presidential advisor Enrique Flores Lanza and activist Juliet
Handal, appears to believe the bid will succeed. Honduran
business group COHEP has outlined at least 15 legal
challenges to the bid from domestic laws, while fuel industry
representatives remain convinced that, if the USTR cannot
identify significant violations with CAFTA, they will be able
to identify issues with the Bi-Lateral Investment Treaty or
WTO agreements. Supreme Court President Vilma Morales has
mentioned to Ambassador and PolCouns that she considers the
bid illegal. Opposition party congressmen, who originally
allowed the bid to pass through Congress with a weak
endorsement, appear ready to unite against any potential
winner when the tender contract is again presented for
legislative approval.


6. (C) Some advisors to President Jose Manuel &Mel8 Zelaya
appear to agree. In an October 4 meeting with EconOffs,
Minister to the President Yani Rosenthal stated bluntly that
the bid &makes no economic sense,8 and he would prefer
another way out of the situation. EconOff has spoken earlier
in the year with Treasury Minister Rebecca Santos and Social
Development Minister Marlon Lara, who expressed skepticism
that a bid tender would work. Vice President of Congress and
liberal party member Elizabeth &Lizzy8 Flores pointedly
described the bid to EconOff as &unworkable.8 More than
one minister has described President Zelaya as in an
impossible situation that he would love to see go away.


7. (C) The bid momentum has largely been sustained by
interest groups with a stake in the fuel price setting
process, led by the Patriotic Coalition activist Juliet
Handal. Dealerships, truckers and other intermediaries that
have enjoyed high margins from the inefficient fuel price
setting formula have maintained pressure on the GOH to finish
the bid process. With their message of bringing lower prices
to the consumer, an attack on the transnational importers has
resonated strongly with the Honduran consumer. While the
margins of the dealers and truckers may be just as high or
higher than the transnationals, the companies remain, as one
well informed businessman stated, &the easiest target to
start off with.8 The transnationals strong initial counter
attack, stating emphatically that they will not join the bid
or allow use of their facilities, only worsened their
relations with working class Hondurans.

--------------
DIPPSA Signs Deal; PDVSA Looking for Storage
--------------


8. (C) Honduran fuel retailer DIPPSA has reportedly signed a
limited deal with London-based Trafigura Beheer, B.V. Per
DIPPSA owner Henry Arevalo, DIPPSA will assume administrative
control over Trafigura,s twenty-seven PUMA gasoline stations
in Honduras while Trafigura would source all of the combined
company,s fuel requirements in country (Note: DIPPSA
currently sources their fuel from Exxon/Mobil traders. End
Note.) Arevalo indicated that a previously proposed deal to
buy 50 percent of DIPPSA was scuttled due to uncertainty over
the bid. By becoming the primary source of fuel for DIPPSA,
which controls about 25 percent of the retail market,
Trafigura has effectively set itself up to be a strong
contender to win the upcoming fuel bid. (Comment: Texaco
facilities would likely still be required to import more than
just DIPPSA,s share. Trafigura has considerable storage
capacity in Guatemala through its Copensa subsidiary, but
transportation and delivery to points in Honduras and
neighboring countries would be difficult and expensive. With
limited investment obligations in Honduras, however,
Trafigura could conceivably come in with a price low enough
to win the bid. End Comment).


9. (C) Venezuelan national fuel company PDVSA, initially

TEGUCIGALP 00001935 003 OF 003


attracted to DIPPSA for the Honduran company,s strategically
placed storage facilities within easy reach of El Salvador
and Nicaragua, seems to have lost out on a purchase in the
short term. While there may be a connection with Trafigura
(reftels),the current arrangement as defined by Arevalo
would limit the company,s use of the key southern tank farm,
which is 50 percent owned by Exxon/Mobil. Recent news
reports that PDVSA expects to deliver up to 350 thousand
gallons of fuel oil to Nicaragua next month puts increased
pressure on the company to secure sufficient storage
facilities to distribute the fuel. A recent shipment of only
80 thousand gallons now sits in eleven tanker trucks
somewhere in Managua awaiting sale. (Comment: Arevalo was
interviewed in an October 12 article pointedly stating that
PDVSA would not be a reliable supplier, given their recent
delivery difficulties in the Dominican Republic. He also
clearly outlined PDVSA,s regional supply strategy, ending by
stating &I have explained the situation to the
ambassador. I don,t believe PDVSA will be an option for
Honduras.8 End Comment).


10. (C) COMMENT. Unless an unlikely scenario occurs, such as
one of the transnationals breaking ranks and participating in
the bid, the process is likely to end in failure. Texaco is
the key player; without their 800 thousand barrel storage
capacity, modern terminal facility and distribution &rack8
for tanker trucks, the bid will be more difficult, and
therefore more expensive, to implement. With the most to
lose, Texaco has been perhaps the most outspoken of the
transnationals against the bid. The industry,s anti-bid
stance has placed them at odds with the Honduran consumer,
who has equated a vote against the bid with a vote for higher
prices. How the industry can transition from a failed bid to
business as usual remains unclear, and without a proactive
plan President Zelaya may resort to forceful action that
could put Trafigura, and perhaps PDVSA, in charge of fuel
imports to Honduras. END COMMENT.
WILLIARD