HONDURAN-PETROCARIBE DEAL MAY BE SIGNED FOR POWER

C O N F I D E N T I A L SECTION 01 OF 05 TEGUCIGALPA 000809 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: 05/03/2016 TAGS: ENRG EPET HO PGOV PINR PREL SUBJECT: HONDURAN-PETROCARIBE DEAL MAY BE SIGNED FOR POWER COMPANY; NATIONAL FUEL BID TO PROCEED REF: TEGUCIGALPA 676 AND PREVIOUS Classified By: AMB Charles Ford for reasons 1.4 (b) and (d). ¶1. (C) Summary: Rumors continue to swirl that a deal for bunker fuel for electricity generation has been signed between Honduran parastatal energy company ENEE and PetroCaribe, the Venezuelan fuel sales scheme. The unconfirmed deal may involve Honduran gasoline distributor DIPPSA. Meanwhile, the planned national fuel bid (reftel) is set to begin within forty-five days, after the new head of the unit formally signed a contract that included significant savings guarantees. To offset the risk of oil price volatility, the GOH is also negotiating a futures hedging deal with U.S.-based Citibank. Despite its geopolitical costs to the GOH and addition of long-term debt, PetroCaribe's hard-to-beat financing terms could make it an irresistible short-term option for meeting the Zelaya administration's campaign promises of lower fuel prices. END SUMMARY. -------------- --- ENEE'S PETROCARIBE DEAL: THE CAMEL'S NOSE IN THE TENT? -------------- --- ¶2. (C) According to several sources, state energy company ENEE signed a deal on or about April 29 with the government of Venezuela to import up to a year,s supply of bunker oil, a low grade fuel used to power thermal electricity generating plants. The deal would be conducted through PetroCaribe, a GOV fuel import and financing scheme. Following favorable comments over the week-end by Honduran President Jose Manuel &Mel8 Zelaya, who termed a potential PetroCaribe-ENEE deal a &good idea,8 the Honduran representative for Exxon/Mobil contacted EconOff with information &from a friend of ex-president Carlos Flores8 that a PetroCaribe deal had been signed. Manuel Ivan Fiallos, a Liberal Party congressman and head of the Congressional Fuel Commission, confirmed that he also heard a deal had been signed. No official GOH confirmation has been released. ¶3. (C) State energy company ENEE, on the brink of financial disaster for several years, would appear to be in some respects an ideal candidate for PetroCaribe. The company relies on bunker oil and diesel as feedstocks for about 70 percent of its energy generating needs, has nearly exhausted its ability to borrow with a recent bond issue worth approximately 100 million USD, and suffers from considerable internal problems (high technical and non-technical losses -- that is, poor power lines and lots of theft -- poor collections, and insufficient out-year investments to meet projected demand, just to name a few). PetroCaribe could source bunker fuel from PDVSA refineries, with generous financing terms of 23 years at 1 percent interest, with a two year grace period. The funds freed up by such a transaction would allow ENEE to invest in badly need infrastructure investments. (Comment: Former ENEE head Juan Bendeck recently resigned in part after being criticized for trying to force delinquent energy users to pay their bills. Bendeck was replaced by 37 year-old Leo Starkman, who has no background in energy whatsoever, but is a Liberal Party activist and the son of a Liberal Party Congressman. We therefore remain skeptical that the political will exists to successfully force changes on the legendarily inefficient and corrupt institution. End Comment). ¶4. (C) In a potentially related development, Minister of the Presidency Yani Rosenthal told Ambassador April 29 that Honduran fuel importer DIPPSA was recently sold to Honduran Henry Arevalo, a current DIPPSA shareholder. Per Rosenthal, Transpetrol, a Belgium-based fuel trader that allegedly is owned 30 percent by PDVSA, is also among the buyers, though on unknown terms. (NOTE: No other confirmation has been received regarding Transpetrol, but other sources ) including Exxon - confirm DIPPSA has been sold to current shareholder Henry Arevalo. Limited information is available on Transpetrol ) www.transpetrol.com ) other than having a TEGUCIGALP 00000809 002 OF 005 sizable fleet of 14 tankers and a headquarters in Bermuda. END NOTE.) DIPPSA is a 50 percent owner (with Exxon) of a 420,000 barrel capacity fuel storage facility in the southern Honduran port of San Lorenzo. Rosenthal speculated that PDVSA access to this facility (through Transpetrol) would give PDVSA a storage depot from which to deliver fuel overland to the dozen or so El Salvadoran municipalities that have recently signed on to PetroCaribe. The port would also have easy access to the Nicaraguan border to the south, possibly allowing similar deals to be concluded with FSLN mayors as well. (Comment: It is Post's view that this purchase, if accurate, does far more than give PDVSA an opening into the Central American market -- it also gives the Chavez administration a potential beachhead for attempting to influence the outcome of local elections in favor of leftist (FMLN and FSLN) candidates. End Comment.) -------------- NATIONAL BID CONTRACT: SIGNED AND DELIVERED -------------- ¶5. (C) Meanwhile, U.S. citizen consultant Robert Meyeringh has finally signed, after weeks of negotiating, a contract to develop the new national fuel bid for the GOH. (NOTE: the national fuel bid is intended to be a competitive public tender by the GOH directly to find a supplier for all of Honduras, fuel needs for a full year, estimated at almost 15 million barrels of refined fuel per year. ENEE,s share is about 35 percent, or 5.25 million barrels of bunker fuel. END NOTE.). Per reftel, the GOH was committed to incorporating key savings guarantees into the final contract. These guarantees would allow the GOH to clearly demonstrate to domestic special interests that it is moving forward with a national bid -- a bid in which it privately professes to have little faith -- while ensuring that, should the bid fail, the GOH will be able to lay the blame squarely on Meyeringh. Meyeringh's as-yet unpublished contract gives him a base salary of USD 750,000, with a bonus of up to USD 1.2 million if performance targets are met, as well as undisclosed penalties if they are not. -------------- GOH SEEKS TO DAMPEN PRICE VOLATILITY AS WELL -------------- ¶6. (C) With this high profile initiative to lower imported gasoline prices underway, the GOH is now moving to limit the impact of spiraling international oil prices by negotiating a futures hedging deal with Citibank. The 400 to 700 million Lempira (USD 21 to 37 million) deal, approved sight-unseen by Congress even though the details have not yet been finalized with Citibank, would provide a collar on imported gasoline prices. Under the proposed terms, the arrangement would require Citibank to pay the difference if prices rise above a preset ceiling, while exposing the GOH to repayment penalties if prices fall below an agreed floor. Public sources report that the GOH's proposed terms included a ceiling of $2.16 per gallon for gasoline, and a floor of $1.60. At the time of Congressional approval, the ceiling strike-price was only barely above the going spot market price, making the deal very expensive for the GOH. Gasoline prices have eased somewhat since then, but the true cost of the deal cannot be known until the day it is signed. The deal would provide this collar through November 2006. (NOTE: How the GOH will pay for this hedge is unclear; one plan was to raise taxes by four lempiras (about USD 0.20) on a gallon of premium gasoline. The prospect of the Honduran populace reacting positively to a stiff price hike in order to save money in the future is probably very low. END NOTE). ¶7. (C) In a meeting April 26 with EconChief and EconOff, GOH Presidential adviser Enrique Flores Lanza, who helped negotiate both Meyeringh,s contract and the hedging deal, seemed to believe that the combination of the two deals would greatly reduce the GOH,s risk exposure. Oddly, he still considered market liberalization the best way to reduce pump prices in the long term. &The national bid is just a step on TEGUCIGALP 00000809 003 OF 005 the way towards a freer market,8 he stated. While he freely admitted that the national bid has a very low probability of producing the savings Meyeringh projects, he lacked any contingency plan to move the country from a potential point of failure towards a more liberalized market. Flores did react positively to a potential working group that would produce a market liberalization plan while the national bid is being developed. (NOTE: A World Bank fuel expert has already spoken to key GOH ministers about market liberalization and may be a good candidate to lead a series of workshops. END NOTE.). -------------- -------------- MISSION IMPOSSIBLE? HOW THE NATIONAL BID WOULD WORK -------------- -------------- ¶8. (C) In a meeting April 28 with EconChief and EconOff, national bid architect (and U.S. citizen) Meyeringh outlined how the bid would work and which companies might participate. Starting the clock when the contract was signed April 27, he has two weeks to hire his core team of five people and set-up his office, followed by thirty days to develop and receive approval for his bid proposal. During this period, he will send out a letter to all fuel distributors requesting their projected import requirements itemized by week, by cargo, and by type of fuel. &If they don,t respond, we,ll estimate it for them,8 Meyeringh stated. At the end of the first month and a half, a Request For Proposal would be sent out to a list of potential bidders identified by Meyeringh,s team, who would have approximately two weeks to respond. From the respondents, three proposals will be selected, ranked, and passed onto the GOH. The two finalists will be asked to appear in person to present final offers and negotiate last minute deals. The bid winner would then have 30 days to begin delivery. If all goes according to plan, per Meyeringh, the first national fuel delivery could arrive by the beginning of August. ¶9. (C) The bid winner would not be selected just on price, Meyeringh said, but on a combination of factors including service history, quality, financing, and other items. Given the different quantities and types of fuel, Meyeringh stated, the winner would most likely source the fuel from a variety of different suppliers. The selected company would be responsible for &DES8 (Delivery Ex-Ship, vice FOB or CIF delivery of the fuel, which means all measurements are taken and ownership formally changes hands at the receiving flange of the storage terminal.) At that point the GOH would accept delivery, pay per agreed terms (perhaps 30 day payment, Meyeringh speculated),and then sell the fuel onward to existing distributors, presumably through Texaco, Shell, and DIPPSA storage facilities. Meyeringh stated that he would offset the risk of the GOH taking title to the fuel by ensuring that GOH payment terms were twice as long as the distributors. -------------- --- &NEGOTIATE THE USE OF SUPPLY FACILITIES, OR SELL THEM AS RAZOR BLADES8 - MEYERINGH -------------- --- ¶10. (C) In order to make the national bid work, the current fuel importers would need to make two important concessions: break their existing fuel import contracts (which may extend from several months to years),and, in the case of several firms, allow GOH use of their supply facilities. Per the importers, which include U.S. companies Exxon/Mobil and Texaco, breaking fuel delivery contracts come with hefty penalties which would require compensation from the GOH. (Meyeringh rebutted that all contracts have a force majeure clause that protects the companies in such cases.) As for the supply facilities, the representative from Exxon/Mobil has stated repeatedly that his company is unwilling to be forced to allow usage of its facilities by other importers. &We can,t control the quality,8 was one oft-mentioned rationale. TEGUCIGALP 00000809 004 OF 005 ¶11. (C) Meyeringh provided a glimpse into his strategy of gaining the importers support by stating &the importers have never had a legal right to import fuel into this country.8 According to his legal analysis, an import license was illegally and improperly granted by the GOH to Honduran firm DIPPSA in 1992, and all subsequent licenses merely repeat this mistake and are therefore invalid. He is firm in his view that only the GOH itself has the right to import petroleum or any of its derivatives, including not only fuels, but even products such a paint solvents. With this argument, Meyeringh stated confidently that the importers delivery contracts could be broken without the requirement of compensation. Turning to the storage facility issue, he went on to say that he would sweeten the deal for facilities owners by offering a significantly improved throughput fee of USD 0.65 for the use of the existing supply facilities, versus an industry average of USD 0.15 ) USD 0.45. (NOTE: The Exxon representative was unimpressed with the USD 0.65 throughput fee. END NOTE.) If the importers still refused to allow access to their supply facilities, Meyeringh would continue with a plan to solicit bids for the construction of new supply facilities for the exclusive use of the national fuel, leaving the importers to sell their unused supply facilities &as razor blades.8 (NOTE: Meyeringh admitted that there is a glut of storage facilities now, and that he would not recommend building new facilities. That said, all evidence indicates that the GOH is nevertheless prepared to move forward with such a plan if pressed. Unconfirmed rumors of a potential refinery project, to be co-located with the proposed storage facilities in the port town of Trujillo, makes building the new tank farm a more plausible move. END NOTE.) -------------- PETROCARIBE: THE BID TO BEAT? -------------- ¶12. (C) EconChief and EconOff met April 27 with Juliette Handal, a Notables Commission member and head of the Patriotic Coalition, an umbrella organization that includes close to 47 groups. Per reftel, she has been the most outspoken proponent of the national bid strategy, threatening to send one of her groups, the taxi drivers, into the streets every time momentum for the national bid appeared to stall. While still strongly supporting the strategy, she accepted the possibility that the international bid solicitation could lead to a PetroCaribe "solution," but that that would ¬ be good for the country.8 In a phone conversation between EconOff and Adolfo Facusse, another Notables Commission member and a past proponent of using PetroCaribe for a limited fuel buy for ENEE, the move towards PetroCaribe for all of Honduras, fuel needs would be a &mistake8 and was not the original intention of the national bid. At an April 28 breakfast with visiting WHA DAS Madison, Facusse openly supported a PetroCaribe deal for ENEE. ¶13. (C) When asked if PetroCaribe was a possible outcome of the international bid solicitation, Meyeringh answered that PDVSA was on the list of companies to receive the Request For Proposal and that he felt they would &definitely be a bidder.8 While he mentioned his personal misgivings about the scheme (&It,s just a way to curry political favor8), he stated that it was his responsibility to pass on the best offers to the GOH &and let them decide.8 Meyeringh stated that Brazilian national fuel company Petrobras had recently tendered an attractive bid to Costa Rica,s national import company Recope and they should be a serious bidder. Interestingly, he noted that due to the change towards lower-sulfur fuel standards in the U.S., there is a large amount of &excess fuel, particularly in the European market, that will not meet U.S. standards and could be available as a low-priced tender from companies like France,s ELF.8 (NOTE: This is an interesting technical observation from a man with a lifetime's experience in fuels trading, but it misses one key factor: while there may be excess fuel available on the world market, no company could possibly beat the financing scheme proposed by PetroCaribe and make a TEGUCIGALP 00000809 005 OF 005 profit. END NOTE.) ¶14. (C) Comment: Whether it,s with ENEE now or via the national bid in three months, PetroCaribe has a good possibility of becoming a key fuel supplier to Honduras. If DIPPSA has been purchased in part by PDVSA, Venezuela and President Hugo Chavez could be positioning themselves to become a major supplier, storage provider, and distributor of fuel to three Central American countries. The IMF and the World Bank are &extremely concerned8 by the terms of the PetroCaribe deal, but they have not taken a strong and visible stand against the plan so far. With President Zelaya thinking overwhelmingly locally and short-term, PetroCaribe's hard-to-beat financing terms could make it an irresistible option for meeting his administration's campaign promises of lower fuel prices -- despite its geopolitical costs to the GOH. End Comment. Ford