HONDURAS: CONOCOPHILLIPS WINS CONTROVERSIAL FUEL

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002265

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: 12/01/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: CONOCOPHILLIPS WINS CONTROVERSIAL FUEL
BID

REF: TEGUCIGALPA 2247 AND PREVIOUS

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

1.(C) Summary: The Honduran national bid for all of the
country,s fuel needs, recommended just over a year ago by a
GOH-appointed review panel, finally came to a conclusion
November 29. U.S. fuel company ConocoPhillips was selected
to supply premium, regular and diesel fuel, while Mexican
company Gas Del Caribe won the bid for LPG Gas. The bids for
fuel oil (Bunker) were declared technically insufficient,
while the bids for Kerosene and Aviation Fuel were declared
non-competitive. Controversy continues to swirl, however,
with fuel trader Trafigura Beheer maintaining their bids were
the best, industry analysts questioning the GOH,s savings
estimates, and everyone wondering how the current Bunker
importers skirted the bid process. How informed
ConocoPhillips is regarding the highly charged storage and
import situation is unclear, and whether they can come to
terms with Texaco and Honduran retailer DIPPSA will soon be
known. End Summary.


2. (U) The winners of the Honduran national bid for all the
country,s fuel requirements was formally announced November

29. A gleeful President Jose Manuel &Mel8 Zelaya
identified U.S. fuel company ConocoPhillips as the winner to
supply an estimated 8 million barrels of premium, regular and
diesel fuel, identifying over USD 40 million per year in
savings. Mexican-based natural gas retailer Gas Del Caribe
won the bid for an estimated 1 million barrel equivalents of
LPG Gas, an estimated savings of over USD 10 million.
(Comment: The total savings of just over USD 50 million per
year was questioned by every importer contacted by EconOff.
How they arrived at that figure remains a mystery. End
Comment). The bids for 7 million barrels of bunker fuel were
declared technically insufficient, and the prices for the
relatively small quantities of Kerosene and Aviation Fuel
were declared non-competitive.

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CONOCOPHILLIPS LEVERAGES HIGH-SULPHUR FUEL
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3. (C) In a November 30 phonecon with EconOff, the
ConocoPhillips representative organizing the bid indicated
that he had been notified unofficially that he had won, and
that he should be receiving an official letter November 31.
He also stated that his regional representative, an Argentine
national named Andrew Shashan (phonetic interpretation of
name),was &close to people running the bid8 and had been
providing an on-going status. Shashan also stated that the
storage situation on both the north and south coasts had been
solved. (Comment: Other industry sources confirm that
Shashan is close to the U.S. citizen consultant organizing
the bid. It is difficult to believe that the deadlocked
position on the use of Texaco, DIPPSA and Exxon facilities
has been solved, and a potential confrontation between at
least two U.S. companies may be a possibility. EconOff
advised the ConocoPhillips rep to verify independently that
terminal and storage usage has been arranged. End Comment).


4. (C) The ConocoPhillips rep also detailed how they were
able to provide such a low price point for the bids (reftel).
As Post had suspected, ConocoPhillips refineries have an
excess capacity of high-sulfur fuel that would require a
considerable investment to &blend-off8 with lower sulfur
fuels to meet increasingly stringent U.S. standards. Winning
the Honduran fuel bid, per the rep, would allow the company
to place their off-spec fuel while developing a regional
market. The strong economics allowed them to beat the next
closest competitor by almost six U.S. cents per gallon
(Comment: The six cents does not come close to the GOH,s
estimate of 25 U.S. cents savings per gallon. End Comment).

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TEGUCIGALP 00002265 002 OF 004


TRAFIGURA MAY CHALLENGE RESULT
--------------


5. (C) Meanwhile, the company many thought would win the bid
was left shaking their heads in amazement. Trafigura Beheer,
which submitted 19 comprehensive bids that included all fuel
types, both coasts, and storage and terminal agreements with
Honduran fuel retailer DIPPSA, lost on every count. In a
November 30 meeting with EconOff, Honduran Trafigura
representative Roberto Alvarado remained convinced that they
had rendered the best bids, and showed EconOff a spreadsheet
detailing what he believed were impossible savings identified
by the GOH. (Comment: Reliable Embassy sources state that
Alvarado had several sets of numbers and showed EconOff the
one that would cast the most doubt on the process. He did,
however, qualify the numbers as rough, and the questionable
figures were highlighted independently by other importers.
Alvarado,s effort, though, seemed designed to win EconOff,s
confidence and potential Post support if Trafigura attempted
to challenge the bid result, which they seem intent on doing.
End Comment).


6. (C) It is unclear if Trafigura,s 50 percent purchase of
DIPPSA, widely reported in the press, will continue to go
through in light of the bid result. Alvarado indicated that
Trafigura was &frustrated8 with DIPPSA owner Henry
Arevalo,s machinations and conflicting statements, and that
the deal had not been formally concluded. He also indicated
that Banco Atlantida head Guillermo Bueso was holding the
shares and stubbornly refusing to close the deal. (Comment:
In response to concerns about the role DIPPSA was playing in
the bid process, Bueso indicated to Ambassador and EconOff
that any deal for DIPPSA, particularly involving Trafigura,
would require &at least a couple of months of due
diligence,8 effectively separately a potential deal for the
Honduran fuel retailer from the bid process. End Comment).
Alvarado denied the rumor that Arevalo would get a premium
for the purchase if Trafigura won the bid, stating that the
DIPPSA deal &just made good business sense8 and would go
through with or without the bid. Given Arevalo,s history
with potential suitors for his company, the prospects of the
50 percent deal actually going through may be waning.

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CONTROVERSY SURROUNDS THE OTHER PARTICIPANTS
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7. (SBU) The winner of the only other successful bid, Gas Del
Caribe, has had its own share of problems. The company
recently constructed several storage tanks in the coastal
town of Omoa that have been declared a potential
environmental hazard and have yet to be used. Apparently
questions still remain regarding the structural integrity of
the storage units, fire control systems, and potential
contamination of a nearby lagoon. It is not clear if use of
these storage units was included in the winning bid.


8. (C) The failed bid for bunker fuel, which constitutes the
largest single fuel item in the tender, is also wrapped in
controversy. Per the GOH, the five bids for the fuel used to
power electricity generators contained 3 percent sulfur,
while the four private generators that produce the energy
require 2 percent. Per the written bid proposal, only 2 of
the 4 generators require less than 3 percent sulfur, the
lowest being Luffusa at 1.8 percent. Documents obtained from
the fuel bid analysis commission, however, indicate that at
least one bid, from PetroPeru, was specifically for bunker
fuel in Luffusa. (Comment: Many speculate that the owners of
the plants, business magnate Freddy Nasser and Central
American Business Man of the Year Schukry Kaffie, came to a
quiet agreement with the GOH over the plants in undefined
terms. End Comment).


9. (C) Just before the winners were announced,
representatives from the importers were called to a meeting

TEGUCIGALP 00002265 003 OF 004


in Miami with Presidential confidant Arturo Corrales. In the
first meeting, held the day before the announcement, Corrales
raised the hopes of the importers by describing how President
Zelaya was looking for a way out of the bid, and talked of a
potential free market alternative in the likely event the
entire process was terminated because sufficient savings
could not be found. The importers left that meeting feeling
that an agreement could be reached on virtually all points.
The next day, however, Corrales, tone changed, this time
demanding 30 percent access to Texaco storage facilities for
the bid winner at a rate negotiated by the GOH. The
importers, principally Texaco, responded that the rate could
only be negotiated between private parties and would not
guarantee a rate to the GOH. The importers left
disillusioned and doubtful that any agreement could be
reached. (Comment: It is unclear why Corrales changed his
tone overnight, but it is most likely tied to the surprise
decision to award the tender to ConocoPhillips. End Comment).


10. (C) In a November 30 meeting with President Zelaya and
Ambassador, Finance Minister Rebecca Santos for the first
time expressed concern over the GOH,s role in the financing
process. In order to make the bid work, the GOH would need
to play the intermediary, assuming responsibility of the
product from ConocoPhillips or Gas Del Caribe and passing
that on to the downstream distributors. At a minimum, the
GOH would need to provide some type of guarantee, and maybe
the initial deposit on the first shipment to begin the
process. When confronted with this reality Santos balked,
saying that no money was available to front a potentially
million dollar deal. (Comment: Post has questioned how this
transaction would proceed from the very beginning of the
process. The fact that the GOH could effectively put
themselves in the middle of the process opened the initial
potential for PetroCaribe, which would have allowed the GOH
to finance 40 percent of the import costs while turning
around and collecting on 100 percent from the distributors.
It also could allow the GOH to play the float, or differences
in credit terms between what ConocoPhillips requires and what
the GOH demands from distributors. End Comment).



11. (C) COMMENT. While the bid has by no means gone smoothly,
and the end results are just as confusing and wrapped in
controversy as the over year long process needed to get to
this point, one thing seems clear: the regional designs of
Venezuelan President Hugo Chavez using Honduras as a
springboard appears to have been stalled. The threat of a
soft financing deal through PetroCaribe is diminished, a plan
which may have allowed President Zelaya,s Liberal party to
finance projects and public works, win the people,s hearts,
and set up his party for the next elections while needlessly
growing the country,s debt burden. Also diminished is the
potential use of DIPPSA,s strategic southern storage farm
for distribution of fuel to PetroCaribe-financed
municipalities in Nicaragua and El Salvador. And Zelaya,s
potentially strategic role in the spreading of left leaning
populism in Latin American through Chavez, petro-diplomacy
is reduced.


12. (C) COMMENT CONTINUED: What apparently remains is good
old fashioned corruption, what many observers believe may be
an attempt by the U.S. citizen consultant or potentially
Presidential advisor Yani Rosenthal or even President Zelaya
himself to place themselves at the center of a potential USD
1 billion business; a business where one or two U.S. cents
per gallon could easily fall off the table into someone,s
pocket without notice. In the full scheme of things, a
ConocoPhillips victory may actually work, if the company can
come to terms with Texaco and Exxon on terminal use, storage
and distribution. Big issues still remain, however,
including the breaking of current supply contracts, the role
of the GOH in financing the transaction, and how
ConocoPhillips will live up to the big (and unsupported)
savings announced by the GOH. Post will monitor developments

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closely. END SUMMARY
FORD