BIOFUELS FORUM IN EL SALVADOR

UNCLAS SAN SALVADOR 002040

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC FAITH CORNEILLE, EEB/ESC/IEC/EPC MATT
MCMANUS, EEB/ESC/IEC BRENDA HAENDLER, IIP/SEG RICHARD TAYLOR

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET ETRD ES
SUBJECT: BIOFUELS FORUM IN EL SALVADOR


1. SUMMARY: At a biofuels forum on September 25, diverse Salvadoran
stakeholders heard presentations on biofuels, the U.S.-Brazil
biofuels partnership and ongoing feasibility studies in El Salvador.
A visiting biofuels researcher sponsored by EB and IIP, Dr. George
Philippidis, drew on U.S. and Brazilian experience to discuss
benefits and challenges of promoting biofuels. U.S. and Brazilian
speakers jointly presented information about the U.S.-Brazil
partnership and feasibility studies in El Salvador.
A panel discussion aired stakeholders' concerns over food security
and environmental issues. A press breakfast after the forum helped
to distribute information about the U.S.-Brazil initiative.
Subsequent meetings with Ministers of Economy and Agriculture
highlighted keen GOES interest in biofuels and the importance of a
pending ethanol law which has been delayed by pricing issues. END
SUMMARY.


2. The forum's featured speaker, Dr. George Philippidis, provided an
overview of U.S. and Brazilian biofuels industries and discussed the
multiple benefits and challenges involved in promoting biofuels.
Noting the competitiveness of El Salvador's sugar industry and
investment climate, he discussed industry options and variables that
will affect ethanol and biofuel industries in El Salvador. Dr.
Philippidis emphasized the important GOES role in establishing
biofuels mandates, temporary incentives and a favorable business
climate to allow the private sector to invest in biofuels projects.
Stakeholders who attended the conference included sugar growers and
refiners, GOES, NGO, petroleum and other political party
representatives; though, the FMLN representatives were a no show,
despite saying they would attend.


3. In a similar presentation on September 26 at the Biofuels Seminar
for Latin America and the Caribbean sponsored by the Latin American
Energy Organization (known by it's Spanish acronym - OLADE),Dr.
Philippidis described new technologies being developed to produce
cellulosic ethanol. The three-day OLADE seminar, sponsored in part
by the GOES, Government of Brazil and the Food and Agriculture
Association of the United Nations, attracted 200 participants from
17 different countries. For more information on the presentations
at the seminar see
http://www.olade.org/biocombustibles/ponencia s.html.

U.S.-BRAZIL INITIATIVE PRESENTED
--------------


4. Faith Corneille of WHA/EPSC joined Mauricio Borjes of Brazil's
Export Promotion Agency (APEX) to explain the U.S.-Brazil biofuels
partnership. Providing context of U.S. energy policy, Corneille
underscored the joint U.S. and Brazilian objectives of diversifying
energy matrices while providing environmental and economic benefits
through biofuels production. Borjes discussed Brazil's long
experience and success in developing a highly efficient biofuels
industry. Teresa Cendrowska, Vice President of ASTM International,
discussed ASTM's role in developing technical standards for
biofuels, underscoring an important area of collaboration under the
U.S.-Brazil partnership


5. Consulting teams from Winrock International and a Brazilian NGO,
the Getulio Vargas Foundation (FGV) delivered a joint presentation
emphasizing their close collaboration and complementary roles in
studying the feasibility of biofuels projects in El Salvador.
Winrock explained their USTDA-funded definitional mission to
identify specific investment or technical assistance projects to
support biofuels development. FGV described their broader and
lengthier mission to analyze technical issues and factors affecting
the competitiveness and feasibility of biofuels projects in El
Salvador. Sybille Nuenninghoff, energy officer at the
Inter-American Development Bank (IADB),also discussed IADB's
technical assistance and support for biofuels in El Salvador.


6. Following the presentations, another visiting biofuels
specialist, Dr. Johanna Mendelson Forman, joined Dr. Philippidis to
facilitate a panel discussion. Several stakeholders raised concerns
over potential negative effects on food Security and the environment
from ethanol production. Dr. Philippidis explained that Biofuels
projects are unlikely to affect food prices in El Salvador since
initial ethanol production would probably use molasses and existing
sugar production. (COMMENT: El Salvador sells roughly half of its
500,000 metric tons of annual sugar production at higher prices to
the U.S. and internal market, while the remainder is exported at
lower world prices. Initial ethanol projects could use molasses and
possibly sugar that would otherwise be exported at lower world
prices. END COMMENT.) Dr. Philippidis also clarified that the
implementation of Biofuels projects are more likely to have a
positive rather than a negative impact on the environment.


7. At a media breakfast on September 26, forum speakers fielded
questions from 10 Salvadoran print journalists on the U.S.-Brazil
initiative and implications of potential biofuels projects in El
Salvador. One local paper, La Prensa Grafica, exaggerated a
conflict between speakers' comments supporting investment incentives
and GOES opposition to incentives. The GOES does not expect
investment incentives to be necessary if the ethanol law includes a
10% mixing mandate and pricing mechanisms to reduce investment
risks.

PRICING ISSUES DELAY ETHANOL LAW
--------------


8. Econoff and Faith Corneille joined Winrock consultants in
meetings with Minister of Economy Yolanda de Gavidia on September 25
and Minister of Agriculture Mario Salaverria with his Vice Minister
Emilio Suadi and Presidential Agricultural Advisor Carmen Elena Diaz
de Sol on September 26. Both Ministers emphasized strong private
sector interest in biofuels projects and underscored the importance
of an ethanol law being drafted to establish a 10% mixing mandate
and encourage private investment in biofuels. Both described in
detail the outstanding issues and political pressures over pricing
mechanisms and profit-sharing arrangements that the GOES is working
to resolve.


9. In order to limit investment risk, the GOES has proposed a price
floor of $1.95 per gallon and a pricing band linked to world fuel
prices but influential sugar producers are pushing for a higher
price floor and more favorable terms to further reduce investment
risks. Minister de Gavidia emphasized the GOES goal of encouraging
private sector investment without raising fuel prices. A consultant
from Colombia will visit in October to discuss Colombia's success in
promoting biofuels including their legislative framework. As sugar
producers have expressed frustration over delays in preparing
ethanol legislation since 2004, the GOES has repeatedly promised to
finalize the ethanol law by the end of 2007. Minister de Gavidia
noted that numerous consultants have provided sufficient analysis
and proposals, but the GOES needs to make careful political
decisions to resolve the pricing issues.

COMMENT
--------------


10. The biofuels forum provided an opportunity to roll out U.S. and
Brazilian consulting missions under the U.S.-Brazil Initiative and
address important stakeholders in EL Salvador. The forum also
highlighted stakeholders' concerns over potential negative impact of
biofuels projects on food security and the environment. While
visiting speakers may have helped to allay these concerns, the forum
highlighted the need for further public education on the benefits
and risks of biofuels. The GOES meetings underscored the keen
interest of Ministers de Gavidia and Salaverria in biofuels and the
importance of pending ethanol legislation. In addition to ethanol,
the GOES is very interested in biodiesel projects, since El Salvador
consumes more diesel than gasoline and diesel may offer greater
income and employment opportunities for small farmers.
Presentations from the biofuels forum will be posted on Embassy-San
Salvador's internet website (http://sansalvador.usembassy.gov/).
END COMMENT.


Glazer