HONDURAS: ALLEGED PETROCARIBE - ELECTRICITY FUEL

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 000897

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: 05/16/2016
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: HONDURAS: ALLEGED PETROCARIBE - ELECTRICITY FUEL
DEAL FIZZLES; NATIONAL BID "SET UP TO FAIL"?

REF: TEGUCIGALPA 809 AND PREVIOUS

TEGUCIGALP 00000897 001.2 OF 004


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

1.(C) Summary: A key advisor to Honduran President Jose
Manuel &Mel8 Zelaya has indicated that a potential
PetroCaribe deal with parastatal energy company ENEE is off,
but rumors persist that Venezuelan parastatal oil company
PDVSA remains interested in purchasing Honduran fuel
importer, distributor and retailer DIPPSA. A Honduran
businessman with close ties to President Zelaya will travel
to Caracas soon in an attempt to resurrect PetroCaribe,s
financing scheme, but under the aegis of a commercial deal
that could involve DIPPSA and Honduran Bank Banco Atlantida.
Meanwhile, President Zelaya met with Venezuelan President
Hugo Chavez and delivered a commitment to include PDVSA and
PetroCaribe in the upcoming national bid for fuel imports.
That bid may run into serious roadblocks however, if as some
believe, President Zelaya is &setting it up to fail.8 END
SUMMARY.

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IMF Sounds Warning; Zelaya Listens
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2.(C) In a phone conversation May 11 with EconOff,
Presidential Advisor Enrique Flores Lanza confirmed that a
rumored PetroCaribe ) ENEE deal is now off. Flores also
stated that prior to a planned IMF meeting &Mel was very
interested in using PetroCaribe financing to help save ENEE8
but changed his mind when the IMF questioned the financial
implications of the deal. (NOTE: EconOff had raised the
PetroCaribe issue with the IMF representative two weeks ago,
and EconChief talked extensively with the head of the IMF
delegation to express USG concerns on the issue a day before
they met with President Zelaya. END NOTE.)

3.(C) On May 12 the IMF country team ended its semi-annual
audit of Honduran financial performance without reaching a
final conclusion or agreement with the GOH. Talks continue,
but early results suggest the Honduran economic situation is
&better than expected.8 Of greatest concern to the team
was the condition of key parastatal institutions,
particularly ENEE. The electricity parastatal is well over
USD 100 million in debt and requires significant new
investment in transformers and other generation and
transmission assets. Losses continue to mount for the
company as electricity rates (even with a "fuel adjustment"
surcharge) remain below generating costs. If the GOH were to
pursue a PetroCaribe deal, financing derived from it could
potentially qualify as concessional (therefore not violating
any agreements with bilateral and multilateral donors
following Highly Indebted Poor Country (HIPC) debt relief in
2005). However, if used to bail out ENEE, such debt would
increase the existing fiscal deficit. Depending on the
magnitudes of other state expenditures, such additional debt
could breach the fiscal deficit ceiling agreed to with the
International Monetary Fund.


4. (C) Later on May 11 EconChief, PolChief, and EconOff met
with Honduran businessman and Christian Democratic Party
leader Arturo Corrales, who confirmed that a government to
government PetroCaribe program for ENEE had been abandoned by
President Zelaya. Corrales is a political dealmaker that
Zelaya (Liberal Party) and his National Party predecessor
have worked closely with, partly due to his small party,s
clout in deals, and party due to his skills as a political
pollster. He also owns SEMEH, the company that reads ENEE,s
power meters and bills and collects on payments. Corrales
claims to have repeatedly stressed to President Zelaya that
&you can have PetroCaribe or CAFTA, but not both.8 Zelaya
has since asked Corrales to visit PDVSA in Caracas and broker
a deal for a &commercial8 version of PetroCaribe that would
keep the GOH out of the plan. This proposed arrangement
could potentially involve Honduran Bank Banco Atlandida,

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which would hold the up to 40 percent of the fuel bill being
financed in a special interest bearing escrow account. These
"savings" could then be parceled out to fund a series of
to-be-defined benevolent projects for the Honduran people.
Corrales plans to leave for Venezuela as early as this week.
(NOTE: Corrales, SEMEH, like many other companies, is owed
millions of USD by ENEE. Banco Atlantida is also an equity
partner in SEMEH, and is the financial backer of the recent
USD 55 million purchase of Honduran fuel importer DIPPSA by
former minority partner Henry Arevalo. END NOTE.)

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DIPPSA Intrigue Continues; PDVSA Still in the Picture
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5.(C) In addition to the prospect of a PetroCaribe deal for
fuel imports, Post also continues to monitor reports of PDVSA
interest in buying access to the Honduran market by
purchasing local firm DIPPSA. On May 8 EconOff spoke with
DIPPSA,s general manager, Fernando Cevallos, about the
rumored PDVSA involvement in the recent sale of DIPPSA. Per
Cevallos, Henry Arevalo was the only buyer and there were no
other parties involved. According to Exxon's country
manager, consistent with contractual arrangements, Arevalo
had contacted Exxon weeks ago regarding his proposed purchase
of the outstanding DIPPSA stock.

6.(C) Cevallos admitted that DIPPSA had been approached a few
months ago by leftist El Salvadorian mayors and local
Nicaraguan politicians seeking to access PetroCaribe
directly. They inquired about the use of DIPPSA facilities
for the storage and distribution of PetroCaribe related fuel
purchases. Cevallos says he told them that &no deal is
possible without Exxon,s support.8 (COMMENT: Based on
other conversations between EconOff and Exxon, this reading
is somewhat at odds with Exxon's view of the situation.
Following a conference call with Ambassador and senior
U.S.-based Exxon officials, Exxon informed Post that while
they are 50 percent owners in DIPPSA,s San Lorenzo storage
facility, they have no operational control over the facility.
In principle, they oppose using that storage to facilitate
PetroCaribe imports to supply FMLN mayors in El Salvador or
FSLN mayors in Nicaragua, but in fact Exxon might not be in a
position to actually block the move. END COMMENT.)

7.(C) Corrales provided more details on the sale of DIPPSA.
According to Corrales, former 40 percent minority shareholder
Henry Arevalo purchased the outstanding 60 percent of stock
from former owner Jose Lamas. Several sources had previously
indicated that Venezuelan parastatal fuel company PDVSA might
be providing the funding behind the deal. According to
Corrales, however, 100 percent of the financing for Arevalo's
purchase came from Banco Atlantida. In a subsequent May 12
conversation, Ficohsa Bank CEO and former Minister of
Investment Camilo Atala told Ambassador and EconChief that
Arevalo had borrowed USD 18 million to purchase the
additional 60 percent stake in DIPPSA, while also borrowing
USD 34 million to repay existing debt to other creditors,
particularly Banco Mercantil (BAMER). Atala thought USD 18
million a low value for 60 percent of the company, since such
a price implies a total company value of only USD 30 million
for a firm with 25 market share of all gasoline sales in
Honduras.

8.(C) However, according to Corrales PDVSA remains interested
in purchasing the firm, or at least the storage facilities
portion of it. He said that former President (and former
DIPPSA partner through BAMER Bank) Rafael Leonardo Callejas
(National Party) was attempting to broker such a PDVSA-DIPPSA
deal (taking a cut of the deal),and that PDVSA &had already
offered 50 million USD for the company8 to Banco Atlantida.
It is not clear if this bid was rejected or has simply been
postponed. Interestingly, Atala speculated that former
majority partner Lamas had sold the firm precisely to avoid
having to accept such an offer. According to Atala, Lamas

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had been approached by President Zelaya with the idea of
collaborating in some form of PDVSA entry into the market.
In this version of events, Lamas -- who has numerous business
interests in the U.S. -- chose to sell out to his business
partner rather than face the choice between defying his
President or potentially alienating the U.S. by selling
directly to PDVSA.


9. (C) Further stoking speculation of PDVSA interest in the
region, Honduran newspaper La Tribuna on May 10 printed an
article that stated with certainty that PDVSA wanted to
acquire DIPPSA. The article detailed (accurately) a recent
visit by Honduran Labor Minister Ricci Moncada to Caracas
(reported in previous cables),and stated that PDVSA
President Rafael Ramirez was analyzing the potential purchase
of DIPPSA in the context of participating in the upcoming
national bid for all of Honduras, fuel needs. The article
went on to say (apparently incorrectly) that PDVSA is
currently providing ENEE with technical and logistical
support, and that the Venezuelan company had recently
delivered their first fuel shipment of 140 thousand barrels
of diesel fuel to private Honduran electricity generator
LUFUSSA. Chukry Kafie, head of LUFUSSA, categorically told
EconOff on May 10 that no such deal had been concluded or
even considered with PDVSA. In a separate conversation,
Exxon supported Kafie's denial, and doubted that PDVSA could
deliver a significant quantity of fuel through San Lorenzo
without Exxon or DIPPSA knowing about it. (COMMENT: La
Tribuna is owned by former President Carlos Flores (Liberal
Party),who was one of the first to privately warn Post about
such talks with PDVSA. Though many of the details of the
story appear to be inaccurate, Post assesses that Flores
could be using such press coverage to throw up a yellow flag
in an attempt to derail a potential deal involving his old
nemesis Callejas. END COMMENT).

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NATIONAL BID &SET UP TO FAIL8
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10. (C) At the recent Latin America ) European Union summit
held in Vienna May 12, President Zelaya met with Venezuelan
President Hugo Chavez and announced that PDVSA was invited to
join the up-coming national fuel bid. His announcement
mentioned PetroCaribe and the benefits of the generous
financing terms offered under the plan, but carefully
highlighted the fact that &we have also invited companies
from the U.S., Mexico, and the Middle East.8 He went on to
detail the many linkages Venezuela has with the U.S.,
including &eight refineries and 19,000 service stations8
and asked &why can,t they also sell to Central America?8
(NOTE: Venezuela already provides about 40 percent of
Honduras, refined petroleum products, mainly through
PDVSA,s Curacao refinery and third party traders. END NOTE).

11.(C) Per Corrales, President Zelaya also stated in the IMF
meeting that the GOH would not be involved in any financial
aspect of the proposed national fuel tender. This contrasts
with what the bid's architect Robert Meyeringh had told
EconChief and EconOff previously, when he said that he
envisioned the GOH &taking title to the fuel at the flange
(off-load point),then immediately reselling it to the
downstream distributors.8 On the subject of financial risk
and sourcing of the estimated 80 million USD required each
month, Meyeringh vaguely described a line of credit agreement
with the importer and favorable payment terms with the
distributors. (NOTE: To EconOff, the normally confident
Meyeringh appeared to struggle at this point. It is unclear
to us that either he or the GOH have adequately thought this
part through. END NOTE.) Without GOH financial support, the
funding would need to come directly from the distributors, a
group that has been reluctant to participate from the
beginning. Given all these potential obstacles, in
Corrales, opinion, Zelaya is &setting up the national bid
to fail.8 Ominously, however, he challenged the GOH's

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private assurances that such a failure would give them the
political room for maneuvering to liberalize the fuels
distribution market in Honduras. Instead, he believes the
intention of some Zelaya advisors is to allow the current
system to fail, thereby allowing Venezuelan President Chavez
to ride in as the white knight, hero and savior of the
beleaguered Honduran poor.


12. (C) COMMENT: While a potential ENEE-PetroCaribe deal has
apparently been avoided, PDVSA remains the most likely
candidate to bid on and win the national fuel bid. In
principle winning the bid would allow PDVSA to supply ENEE,
which constitutes about 35 percent of Honduras, fuel needs,
while still providing access to PetroCaribe,s generous
financing terms. Moreover, through a DIPPSA deal PDVSA would
have the opportunity to store and distribute fuel to other
Central American countries, most notably El Salvador and
Nicaragua. President Zelaya,s comments regarding the lack
of GOH financial involvement complicates the matter
considerably. If they don,t play the role of financial
intermediary, the GOH will not have access to PetroCaribe,
which requires a government-to-government sale to make it
work. Arturo Corrales, visit to Caracas will attempt to
make a private deal involving PetroCaribe, but that precedent
will be difficult to set. If, as Corrales indicates, the
intention is to make the national bid fail and create an
opening for Chavez in a crisis situation, Honduras may be in
for a difficult summer. End COMMENT.
Ford