Identifier
Created
Classification
Origin
06TEGUCIGALPA2372
2006-12-27 20:08:00
CONFIDENTIAL//NOFORN
Embassy Tegucigalpa
Cable title:  

HONDURAS: FUEL BID MISSES KEY DEADLINE; FREE

Tags:  ENRG EPET HO PGOV PINR PREL 
pdf how-to read a cable
VZCZCXRO4891
OO RUEHLMC
DE RUEHTG #2372/01 3612008
ZNY CCCCC ZZH
O 272008Z DEC 06
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4436
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHBS/AMEMBASSY BRUSSELS PRIORITY 0152
RUEHCV/AMEMBASSY CARACAS PRIORITY 0499
RUEHME/AMEMBASSY MEXICO PRIORITY 7122
RUEHUNV/USMISSION UNVIE VIENNA PRIORITY 0079
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0544
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 002372 

SIPDIS

NOFORN
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: 12/27/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: FUEL BID MISSES KEY DEADLINE; FREE
MARKET PATH APPEARS MORE LIKELY

REF: TEGUCIGALPA 2265 AND PREVIOUS

Classified By: AMB Charles Ford for reasons 1.4 (b) and (d).
C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 002372

SIPDIS

NOFORN
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: 12/27/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: FUEL BID MISSES KEY DEADLINE; FREE
MARKET PATH APPEARS MORE LIKELY

REF: TEGUCIGALPA 2265 AND PREVIOUS

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

1.(C) Summary: The key deadline of ten working days to sign
the contract to supply all of Honduras, Premium, Regular and
Diesel fuel has passed, but bid winner U.S. fuel company
ConocoPhillips said it won't likely sign any contract until
sometime in January. Meanwhile, losing bidder Trafigura has
launched a legal complaint against the bid results while it
completes its 50 percent purchase of Honduran fuel company
DIPPSA. Savings from the process, once predicted to be as
high as USD 0.25 per gallon, are likely to be less than USD
0.05, seriously eroding political support for the process.
Following calls by Post and others for full disclosure of the
process and its results, former supporters of the bid process
have begun publicly questioning the results. This sparked a
mudslinging match in the press that further amplified Post's
message and strengthened the case for market liberalization.
As the fuel tender stalls, the GOH appears more and more to
be leaning towards canceling the process and moving towards a
free market in fuels. End Summary.

--------------
KEY DEADLINE PASSES
--------------


2. (C) Despite having announced U.S. fuel company
ConocoPhillips as the winner in the Honduran national tender
to supply the country,s fuel needs (reftels),the GOH missed
a key deadline December 27 to sign a formal contract to
finalize the deal. Per the official bid documents, &the
total time from (official notification) to Contract signature
cannot exceed ten working days. If the parties cannot come
to an agreement, the GOH will initiate the same process with
the Bidder ranked in second place.8 Per Post contacts on

the commission overseeing the bid (CAP),ConocoPhillips was
officially notified December 12 that they had won; the
company,s reps left Honduras December 14 after 2 days of
negotiations without a signed contract. (Comment: Post
strongly recommended to the reps to do a thorough due
diligence of the proposed process before signing.
Afterwards, despite pressure from the GOH to sign, the reps
left stating only that a contract was possible in
mid-January. End Comment).


3. (C) EconOff met with the representative of the bidder
ranked in second place, Trafigura Beheer, on December 19.
The rep detailed the legal action the company is taking
against the GOH, questioning how the bid was awarded to
ConocoPhillips and requesting full publication of the bid
results. Per Trafigura, the winning bid failed to include
key cost items, but did include the fuel additive MTBE, which
Trafigura claims is contrary to bid instructions. Not
coincidentally, recent Honduran newspaper reports have
declared MTBE unsafe and urged the GOH to avoid any fuel that
contains the fuel additive. (Comment: MTBE, a fuel additive
designed to reduce air pollution and increase octane, is now
being phased out in the U.S. in favor of ethanol. The bid
instructions clearly state that MTBE can be bid up to 15
percent, which would most likely accommodate a ConocoPhillips
proposed blend of perhaps 10 percent. Just who is behind the
recent media controversy is unclear. End Comment).

--------------
CORRALES CONTINUES TO PROMOTE ALTERNATIVE PLAN
-------------- -


4. (C) Presidential confidant Arturo Corrales continues to
meet with fuel industry representatives, with the full
(though quiet) support of Honduran President Jose Manual
&Mel8 Zelaya. In a brief meeting December 21 with EconOff,
Corrales indicated that he had met with the President the day

TEGUCIGALP 00002372 002 OF 003


before and had been encouraged to continue to seek a revised
import price with the current fuel importers. He was only
waiting on Presidential advisor Yani Rosenthal,s savings
cost breakdown from the ConocoPhillips proposal before he
scheduled the meeting. (Comment: Corrales had already
cancelled two meetings with the importers because Rosenthal
had not produced the figures. Corrales, plan was to make
the importers meet the anticipated savings from the bid,
which would allow President Zelaya to cancel the bid process
while still delivering lower prices. Post suspects that the
savings figures are false, and Rosenthal is stalling. Why
Rosenthal continues to back the process is unclear, but
corruption remains a distinct possibility. End Comment).


5. (C) Post has managed to sell Corrales on a free market
plan that will eventually eliminate the fuel price setting
formula and liberalize the market for fuels. Business
magnate Freddy Nasser, a major player in the fuel oil
(bunker) and diesel business, is also involved in the pitch
to the importers. In a Dec 21 conversation with EconOff,
Nasser appeared very interested in the free market plan and
requested a fuller briefing in the new year. (Comment: Post
has no illusions about Nasser, a legendarily ruthless
businessman who plays by his own rules. He is widely
believed to be a grey marketer in diesel fuel, which he
imports duty-free as feedstock for his thermo-electric
generating plants. Tax authority director Armando Sarmiento
has told Post previously that he suspects more fuel is
imported than is used in electricity generation, implying
significant tax fraud is taking place. Others allege Nasser
also profits from transfer pricing, as he buys all his fuel
from an offshore company he owns, which reportedly
over-invoices him for fuel imports. Nasser is therefore very
interested in avoiding the award of a bid in bunker fuel and
would look to virtually any solution that would cancel the
bid process. Post expects that this solution will help put
an end to Nasser,s process. End Comment).


6. (C) The deal making by Corrales -- a former member of the
Notables Commission that instigated the bid process --went
public December 22 when activist and Notables Commission
President Juliette Handal accused him of distorting the
savings figures and casting doubt over the bid process. The
attack came days after an article questioning the purported
savings was published in La Tribuna, the newspaper owned by
former president and Liberal party godfather Carlos Flores.
The article quoted an unnamed technical representative of one
of the importers, who questioned key elements of the cost
savings. More importantly, a table of figures was attached
detailing changes in the price setting formula, and a note
(presumably the text of an email) from Rosenthal to Corrales
describing the changes.


7. (C) The changes included using a different octane mix, new
delivery parameters, and identified several lines that had
been deleted and &no longer formed a part of the formula.8
Corrales publically responded by calling Handal a &liar,8
and said &all the Honduran people hope that the Government
will explain how these savings were achieved.8 (Comment:
The appearance of stories in La Tribuna attacking the bid
process and dissecting its claims suggests Flores is actively
working to discredit the bid process and its supporters.
Flores is the leader of the moderate wing of the Liberal
Party, and is openly distrustful of the more leftist elements
that surround President Zelaya. Flores is also clearly
working to build the profile and prestige of his daughter
Lizzie, who as a freshman Congresswoman is nevertheless Vice
president of Congress and a likely Presidential candidate
someday. End Comment).

--------------
IMPORTERS RESPONDING WARILY
--------------

TEGUCIGALP 00002372 003 OF 003




8. (C) Meanwhile, the importers (including U.S. companies
ExxonMobil and Chevron/Texaco) have responded to the advances
of Corrales and Nasser with caution. On one hand, several
reps have maintained that it is virtually impossible to
reduce their margins any more in the formula to meet
Corrales, expectations on the reference price; on the other
hand, each rep on separate occasions has indicated that the
current import reference price is &beatable.8 Given the
GOH,s history of asking for concessions then not delivering
on its part, the skepticism on the importers part is
understandable. (Comment: The importers have still not been
paid an estimated USD $10 million for the GOH instigated fuel
price freeze. End Comment). Corrales, insistence on
combining any reference price reduction with a free market
plan, however, has kept the importers interested. Post has
received little response from ConocoPhillips.


9. (C) On December 23, Corrales met with President Zelaya and
Foreign Minister Milton Jimenez. According to a readout
supplied by Jimenez to Ambassador, Zelaya was "furious" to
learn that the majority of over USD $50 million in claimed
savings would come from changes to the pricing formula and
not from reduced import costs, as had been promised. He was
grateful to Corrales for providing political cover for the
administration by refusing to implicate Zelaya publicly in
the ongoing talks over how to escape this morass. Zelaya
reportedly instructed his ministers to again contact the
importers seeking their participation in some kind of revised
system that could deliver lower pump prices.


10. (C) EconOff talked to one importer December 27, and he
indicated that Corrales asked for a meeting that day, and
that there was a genuine interest amongst the importers to
further dialogue. It has long been the position of the
importers that the only substantial cost savings would come
from tweaking the pricing formula and GOH fuel tax policy,
not from reduced import prices. It now looks like the GOH
might be grudgingly coming to the same conclusion. Post is
working closely with the World Bank, members of Congress, and
others to ensure that any discussion of revising the pricing
formula take place within the context of a broader market
liberalization. Such a move is in the long-term interest of
both investors and consumers, and gives Zelaya a face-saving
exit strategy that builds on earlier pledges to move towards
a more open market.


11. (C) SUMMARY. With the deadline for signing the contract
passing quietly, the GOH is now in a precarious position.
Because the actual notification to ConocoPhillips was never
published, the GOH could conceivably argue that the winner
was never &officially8 notified, or notified only recently,
to buy more time, but that may only extend the deadline to
December 29 (it would be hard to explain how the bid winner
came and went in a flurry of press conferences without being
officially notified). Without a deal with ConocoPhillips,
the GOH would legally have to move to the second place
winner: Trafigura. Post has made it clear to the Trafigura
rep that we will strongly oppose awarding the contract to
them, and have armed key opposition (Nationalist) party
legislators with derogatory information on Trafigura,s
actions around the world and the benefits to a free market
approach. DIPPSA President Henry Arevalo on December 27
publicly called for publication of all data from the bids and
the awards process, adding his voice to the growing chorus
demanding transparency. Post assesses that Trafigura/DIPPSA
would be well placed to compete in a liberalized market and,
if they cannot win the bid outright, might become a strong
ally in the effort to open the market. Post will monitor
developments closely. END SUMMARY.
FORD