GARCIA TOUTS MAPLE GAS ETHANOL PROJECT

UNCLAS LIMA 000087 SIPDIS SIPDIS DEPT FOR WHA/AND,/EPSC (FCorneille),EB/ESC/IEC(Izzo) DEPT FOR OES/STC (PBates),S/P (GManuel),E TREASURY FOR J. LEVINE STATE PASS TO EXIM, OPIC, TDA STATE PASS TO EPA/OIA DEPT OF ENERGY FOR S. LADISLAW ENERGY INFORMATION ADMIN. FOR CHARLES ESSER USDA for FAS/CMP USDOC FOR M. CAMERON E.O. 12958: N/A TAGS: ENRG ECON ETRD SENV SNAR PE SUBJECT: GARCIA TOUTS MAPLE GAS ETHANOL PROJECT REF: A)Lima 4221 (B)Lima 4404 ¶1. (U) SUMMARY: On January 5, U.S. oil firm Maple Gas signed a $650 million contract with the Piura Regional Government for a sugar cane-based ethanol plant. President Garcia spoke at the signing ceremony, calling the biofuel project the start of an "agrarian revolution" that showcased foreign private investment. Sited on the northern desert coast, the plant should produce 30 million gallons/year by 2010. Garcia announced other biofuel projects in the works. The Maple project is a model for U.S investors on how to coordinate land and water rights acquisition with the national and a regional government. END SUMMARY. PRESIDENT GARCIA AT SIGNING CEREMONY -------------- ¶2. On 5 January, Maple Gas Peru (MGP) consummated the purchase of 10,600 undeveloped hectares in the northern desert from the regional government of Piura. MGP's ethanol project is officially launching the bio-energy industry in Peru. President Alan Garcia spoke at the signing ceremony to an enthusiastic crowd; glowing speeches were also made by the Regional President, the Ministers of Production and Agriculture, and parent company Maple Gas president Rex Cannon. Econoffs and Ag Counselor witnessed a love fest of optimism over the chance to bring prosperity to impoverished but once wealthy Piura. Garcia touted an "agrarian revolution" whereby now agriculture would produce energy. He labeled the investment a hallmark for decentralization, and described the need for and benefits of private foreign investment in Piura. ETHANOL PROJECT DESCRIPTION -------------- ¶3. MGP is a subsidiary of Texas-based Maple Gas Corporation. With the signing of the land purchase agreement, MGP will produce sugar cane, and build and operate a mill, ethanol processing plant, co-generation power plant, and a marine terminal at Piata for export. Operations will require 400 direct and 2000-3000 indirect jobs, most local, and around 1000 for construction. Ground breaking is expected in October, with ethanol production to start in 2010. Staggered production lands, coupled with the coast's ideal cane climate (no rain) will make for low-cost, year-round production. ¶4. Water rights from the nearby Chira River were secured from the national government by Supreme Decree last year. MGP's next step is to complete environmental impact assessments (EIA) underway and secure construction permits. (Note: this desert is not considered environmentally sensitive; impacts from diverting water from the river will have to be addressed. Neither MGP nor government proponents expect problems, but on 1/10 an opposition Congress person announced an inquiry into MGP's proposed water diversion. End note.) ¶5. MGP is investing $120 million, with $80 million of debt. Lima investment firm AC Capitales is an equity partner with $10 million. (AC invests Peruvian pension funds.) MGP projects annual revenues at $35 million. (Note: MGP also operates the Aguayta natural gas projet and an oil refinery in the Peruvian jungle. End Note.) Estimated cost of production is $0.50 per gallon, compared to $0.65 per gallon in Brazil. The U.S. is the target market, with Peru a possible market if the GOP improves ethanol incentives. CORPORATE SOCIAL RESPONSIBILITY HELPS -------------- ¶6. Maple Gas Per will contribute $500,000/year to Piura's regional government for 20 years; the GOP has agreed to treat these payments as tax-deductible donations (although tax agency SUNAT has not given its final approval). Piura's reelected APRA party Regional President, Csar Trelles (as enthusiastic as Garcia at the ceremony) said that he will invest the funds in health and education. To encourage local farmers on surrounding lands to switch from low-tech but water-hungry/low value rice cultivation (begun after the 70's military government's expropriations destroyed the lucrative cotton industry),MGP will provide technical training for cane production, plus pay up to one-half the value of the first harvest upfront. LAND, WATER, POWER: MODEL FOR U.S. INVESTORS -------------- ¶7. Key hurdles were acquiring sufficient land, securing clear titles and ensuring water rights for irrigation. Water rights in Peru have suffered from conflicting local/national regulation; MGP convinced President Toledo to set a precedent with a Supreme Decree that guaranteed water. The power plant will produce 37MW, with excess capacity of 12MW which MGP will sell to the local power grid. A careful land purchase process, coupled with constant patrolling, good police cooperation and local security officers have managed to minimize squatter issues that frequently plague large projects. ETHANOL AND CELLULOSE PROJECTS IN THE WORKS -------------- ¶8. MGP's investment is part of an accelerating investment climate for biofuels. Overall investment could reach $280 million as Grupo Romero (Peru) and Manuelita (Colombia, the second-largest ethanol producer in Brazil) are negotiating with Piura to develop ethanol production facilities. Andean Trade Promotion and Drug Eradication Act (ATPDEA) preferences, plus U.S. mandatory ethanol use in many states are the prime incentive, per MGP. If as predicted the GOP legislates mandatory ethanol use to combat serious urban air pollution, Peru will become a market. Garcia also announced that a bio-oil project in the jungle is well along (Ref B). COMMENT -------------- ¶9. While not surprising that Garcia would show up to support his fellow APRA party Regional President, it is a welcome sign that he made a long trip to plug U.S. investment in the politically sensitive agricultural and energy sectors. This project, the first major deal with a regional government since Regional Presidents took office in 2003, shows U.S. firms that it is possible to acquire some of the millions of hectares that the GOP ceded to the regions. MGP's deal shows how a firm can navigate Peru's vague water law regime to secure desert water rights from the national government. It also shows less investment-friendly regional presidents - such as mine-rich Arequipa's, that working with foreign investors is a key to prosperity. MGP's careful attention to local needs is also a model for future investors. Peru is further along the road to becoming a net energy exporter. POWERS