HONDURAS: CONOCOPHILLIPS FUEL BID MAY BE IN

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002309

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 12/13/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: CONOCOPHILLIPS FUEL BID MAY BE IN
JEOPARDY

REF: TEGUCIGALPA 2265 AND PREVIOUS

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

1.(C) Summary: While only two weeks have passed since U.S.
fuel company ConocoPhillips was selected to supply all of
Honduras, requirements for premium gasoline, regular
gasoline, and diesel fuel, doubts on how to proceed are
beginning to surface. The math does not support the
potential savings announced by the GOH, and aspects of the
winning bid may not even be workable. With ConocoPhillips
representatives arrival on December 11 and the GOH continuing
to negotiate with existing importers, it now appears at least
possible that the GOH could abandon its fuel importation
scheme altogether, in favor of a more measured approach. End
Summary.

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A CHANGE IN STRATEGY MAY BE IN THE WORKS
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2. (C) On November 29, Honduran 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 (reftels). In the course of the
announcement, Zelaya justified the winning bid by identifying
over USD 50 million per year in total savings. Not
coincidentally, the contract of the U.S. consultant managing
the bid stipulated that he would receive a bonus of USD 1.25
million if savings of over USD 46 million were found. The
U.S. consultant,s firm, SurOil, developed the terms of
reference and provided the final analysis of all the bids to
the GOH reviewing committee.


3. (C) Immediately following the announcement, the existing
importers of fuel began to question how the savings of USD 50
million were calculated. While ConocoPhillips took advantage
of a surplus of high sulfur fuel to come in 6 U.S. cents per
gallon less then the current reference price, the reported
savings of 25 U.S. cents per gallon was impossible to derive.
Several importers told EconOff that the books were cooked by
eliminating at least seven cost items from the calculation to
inflate the savings figure. Moreover, certain aspects of the
ConocoPhillips offer appear not to work at all: several
sources confirm that the size of the tanker specified in the
winning bid would be too large to off-load in Honduras, key
northern port of Puerto Cortes.


4. (C) Despite awarding the bid to ConocoPhillips, President
Zelaya reportedly is now considering declaring the entire
process void and instead modifying the existing import
pricing formula and putting Honduras on the path towards a
more liberalized fuels market. Zelaya recently dispatched
confidant Arturo Corrales to negotiate with the existing
importers on adjusting the reference price, or import price
specified in the formula used to set margins throughout the
fuel supply chain. EconOff spoke with Corrales on December
11, and he confirmed that he was attempting to get the
current importers (who would be replaced by ConocoPhillips if
the current process continues to a conclusion) to match the
real cost savings he indicated that ConocoPhillips brought to
the table ) about 6 U.S. cents. When asked where that put
ConocoPhillips, Corrales replied that their offer contained
many conditions, and that &the contract wasn,t signed
yet.8 In a brief telcon with EconOff on December 12,
however, Corrales appeared more hesitant, apparently in light
of the recent arrival of ConocoPhillips representatives and
ensuing press coverage. He indicated that he &needed to
talk with the President8 about whether he should precede to
negotiate with the importers.

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CONOCOPHILLIPS: WE UNDERSTAND THE RISKS
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TEGUCIGALP 00002309 002 OF 004




5. (C) EconOffs invited the ConocoPhillips representatives to
Post December 12, and laid out the history of the fuel bid
during a two hour discussion. Stating repeatedly that they
fully understood the risks and that any contract would be
signed only after a thorough due diligence, the team made it
clear that their responsibility would be to deliver the fuel
only to the off-load flange (just before the storage tanks)
and the ensuing down-stream details and negotiations were
purely up to the GOH. On the subject of storage, the reps
indicated that the GOH has a concession agreement with
Honduran retailer DIPPSA that allows them to use their
facilities at cost. (Comment: EconOff spoke the same day
with DIPPSA President Henry Arevalo who indicated that his
offered price for storage is 5 U.S. cents per gallon, versus
the GOH offered price of 3 cents. Per Arevalo, several other
&cost8 items must be included in the price. End Comment).


6. (C) The reps also seemed convinced that between DIPPSA and
Honduran fuel company HonduPetrol the GOH could store the
estimated 10 days worth of premium, regular and diesel fuel
that ConocoPhillips was required to deliver, though just
barely. The team indicated that business magnate Freddy
Nasser,s HonduPetrol, principally a tank farm in the
northern port of Puerto Cortes and designed more for storage
and distribution of fuel oil to thermal plants, could be
modified to store more diesel, and DIPPSA expanded to include
more premium and regular fuel storage. (Comment: While Post
agrees that the planned supply and potential storage figures
may conceivably work ) with little headroom ) the plan
would hit serious bottlenecks in off-loading capacity and
limited space for &rack8 loading to tanker trucks.
Additionally, DIPPSA,s terminal location is off a poorly
constructed road that is subject to washouts, traffic
blockages, and has been an area of increased truck assaults
and robberies. Bottom line: Post doubts that the GOH could
make this scenario work without Texaco,s modern, 800
thousand barrel storage and terminal facilities. End
Comment). EconOffs strongly recommended that the reps visit
the facilities themselves during the course of their due
diligence. They undertook to have a technical team do so.


7. (C) As EconOffs briefed the ConocoPhillips reps on the
fuel situation, it became apparent that they knew little
about the year-long process that developed the bid. Safe in
the assumption that their liability ended with the
off-loading of fuel, the reps had paid little attention to
the plight of the current importers that includes canceling
long term supply contracts, stranding investment, and
potential expropriation. While admitting that they had been
contacted by Exxon (Note: Exxon owns 50 percent of a southern
tank farm with DIPPSA. End Note),they had made no
initiative to contact Texaco or learn more about their point
of view. Per the reps, that was the responsibility of the
GOH.


8. (C) When asked about how the GOH planned to finance the
transaction, they vaguely responded that favorable downstream
credit terms would free enough money up on an on-going basis,
and the GOH would have to put up as little as USD 20 million
to get the process going. (Comment: Treasury Secretary
Rebecca Santos has stated that no money is available to front
the bid process. End Comment). Disturbingly, when asked
what would happen if the GOH tried to renegotiate prices in
the face of potential fuel price spikes, the rep in charge of
credit stated emphatically &we just won,t deliver the
shipment.8 (Comment: The GOH has previously resorted to
freezing fuel prices after a few hundred taxis demonstrated
against justifiable price hikes. In that case, the current
importers ) with significant investment in-country )
acquiesced, and are still owed approximately USD 10 million.
As the GOH puts all of their strategic fuel imports into one
company,s hands ) a U.S. company that has little investment
in Honduras ) they may lose what little control they have

TEGUCIGALP 00002309 003 OF 004


over fuel prices, and may set the U.S. up as a scapegoat if
ConocoPhillips pulls out under pressure. End Comment.)

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KEY BID PROPONENTS ISOLATED
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9. (C) While the GOH appears to be seriously considering
backtracking on the bid results, two of the major proponents
of the bid are preoccupied by their own futures. The U.S.
citizen consultant is under intensified attack regarding a 16
year-old derelict fuel barge abandoned in the northern port
of Trujillo still loaded with its cargo of asphalt. The
consultant apparently negotiated the shipment into Honduras
years ago; how and why it was abandoned remains unclear. The
topic had been in and out of the news ever since the
consultant,s contract was announced in late 2005, but in the
days following the November 2006 bid award the ship
mysteriously began to sink, spilling toxic asphalt into the
bay. The prosecutor in charge of environmental issues has
started to mention legal proceedings against the consultant.
(Comment: The consultant,s contract included a USD 750
thousand base pay with the USD 1.2 million bonus if the
savings target were met. If the GOH changes their position
on the savings, his bonus may be lost and it would not
surprise us if fines for environmental damages ended up in
the neighborhood of USD 750 thousand. End Comment).


10. (C) While the consultant may end up as the fall-guy,
social activist Juliette Handal seems to be off in a
different direction. Handal is generally considered one of
the key forces behind the bid process; as a member of the
original commission of notables, she managed to get the U.S.
consultant (and personal friend) hired. Many are talking
about Handal as a leading candidate for Minister of Commerce,
replacing Lizzy Azcona when she (along with the rest of the
Cabinet) ritually submits her resignation on December 29.
(Comment: Handal served previously as a SIC minister, under
former President Maduro, but only for about 60 days. Despite
the short tenure, she has many contacts at SIC and would most
likely be ecstatic over the appointment. Given Post's deeply
unsatisfactory interactions with Handal in the oil bid
solicitation process, Post considers that her appointment as
Minister of Trade and Commerce would be a disaster for
Honduras as it tries to take advantage of CAFTA and to learn
to compete in the global marketplace. End Comment).


11. (C) Finally, in the midst of a potential crumbling of the
ConocoPhillips part of the tender, the bid from the only
other winner, Gas Del Caribe, may also be in jeopardy. While
their offer beat the nearest competitor by just over 60 U.S.
cents per 25 pound cylinder of LPG natural gas, the offer
apparently relied on their controversial tank farm recently
installed in the port city of Omoa for their storage. The
never-used tank farm has come under fire as a potential
environmental hazard, and a Congressional committee has
recommended that the storage tanks be moved to another
location. Without this million-barrel equivalent storage
capacity already installed, Gas Del Caribe would not be able
to meet their published prices. (Comment: If Gas Del Caribe
is eliminated, the GOH would be forced to move to the second
place firm, GeoGas from Switzerland. More importantly,
another USD 10 million in announced savings would evaporate,
almost certainly leaving the U.S. consultant below the
required savings for his bonus even with a ConocoPhillips
win. End Comment).


12. (C) COMMENT. Corrales, pitch to the importers is very
similar to what he proposed in Miami just before the bid was
awarded. There he had outlined a free market plan in
exchange for reduced import prices, and gained agreement on
almost all points. Why Zelaya then went ahead and awarded
the bid to ConocoPhillips is still unclear. Perhaps he
received assurances from the U.S. consultant that the savings

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added up, and felt the selection of a U.S. company would
neutralize Post,s influence, reduce prices significantly at
the pump, and show the people he could take on the
multinationals and win. As the savings evaporate under
scrutiny and he potentially backtracks on the bid, he may now
be moving to identify the U.S. consultant as the fall guy
while moving Handal up and out as a troublemaker. Post will
continue discussions with representatives of the
ConocoPhillips team as they undertake their due diligence.
END SUMMARY.
FORD