BIOFUELS PARTNERSHIP LAUNCHED BUT CHALLENGES REMAIN

UNCLAS SANTO DOMINGO 002343 SIPDIS SENSITIVE SIPDIS DEPT FOR MATT MCMANUS AND FAITH CORNELIUS IN EEB/ESC/IEC/EPC E.O. 12958: N/A TAGS: ENRG EAID ECON DR SUBJECT: BIOFUELS PARTNERSHIP LAUNCHED BUT CHALLENGES REMAIN ¶1. (U) Summary: The U.S. and Brazilian Embassies launched the U.S.-Brazil Biofuels Partnership in the Dominican Republic at the Brazilian Embassy on September 28. Consultants from both countries introduced their programs for identifying opportunities to assist the Dominican Republic to develop its biofuels industry and spent the following week meeting with relevant stakeholders to develop recommendations for support. As a result of a confluence of circumstances, including high global energy prices, an approaching presidential election, and the country,s complete reliance on imported fuel, there appears to be broad political support for the U.S.-Brazil Biofuels Partnership,s goals. Despite this political support there are a number of challenges remaining to successful implementation, including a lack of clearly articulated government decision-making procedures and structures, land title conflicts, uncertainty about the fiscal impact and tax implications of biofuels blending or production, and the continuing debate over biofuels, impact on food prices for the poor. End Summary. U.S.-Brazil Biofuels Partnership Launched -------------- ¶2. (U) On September 28, the U.S. and Brazilian governments sponsored an event to officially launch the U.S.-Brazil Biofuels Partnership in the Dominican Republic. The event, which was widely covered by local print and television journalists, was positively received by Dominican government representatives in attendance. At the event, the Charge d,Affaires introduced the USTDA-sponsored consultants from Winrock International and the Brazilian Ambassador introduced the APEX-sponsored consultants from the Fundacao Getulio Vargas (FGV). The launch event was preceded the week before by the timely visit of a Public Affairs and Econ Section sponsored independent speaker series on biofuels development in the region. This independent speaker successfully raised awareness among university students, with the media, and among key government stakeholders about the potential for biofuels production to meet the Dominican Republic,s energy diversification needs, and in the process paved the way for the successful launch of the biofuels partnership. Winrock Comes to the DR -------------- ¶3. (U) Winrock International visited the Dominican Republic from September 27 to October 6 to conduct a scoping mission to identify opportunities for feasibility studies and technical assistance to support development of a local biofuels industry. Winrock will draft a report with recommendations for USTDA assistance by the end of October with assistance likely to commence early next year. While in town, Winrock met with private sector and non-governmental groups in the process of developing specific project proposals to exploit bioenergy resources as well as established energy companies such as Shell and Chevron. With the assistance of the Embassy, Winrock also met with government ministries engaged in renewable energy, including the Ministry of Industry and Commerce (SEIC),National Energy Commission (CNE),Ministry of Foreign Affairs (MFA),Ministry of Economy, Planning and Development (SEEPD),Ministry of Environment (SEMARANA),the Dominican Agrarian Institute (IAD),the Dominican Petroleum Refinery (Refidomsa),and the Ministry of Agriculture. These meetings were important to assess the technical assistance needs and to gauge interest in biofuels development. Consultants from FGV attended most of the government meetings organized by Post for Winrock. FGV was particularly interested in data related to agriculture, environment, mapping, and other information necessary to put together a national study for long-term biofuels planning. Potential Areas for Assistance -------------- ¶4. (U) Winrock has identified a range of potential areas where technical assistance and feasibility studies could catalyze biofuels. Most importantly, Winrock is likely to recommend a small feasibility study to be conducted for the country,s sole oil refinery (Refidomsa) to construct the storage and blending infrastructure for mixing ethanol with gasoline. As the country,s sole import point for oil and gasoline, blending infrastructure at Refidomsa would be ideal to get the process started. The blend could begin with the replacement of MTBE, which is currently blended with gasoline at about two percent and has been phased out in the U.S. Discussions with government officials indicate there is a possibility that implementing regulations from recently passed renewable energy legislation, which are due to be published by the CNE on November 6, will articulate a clear mandate for blending ethanol with an initial target of 5 percent. However, the draft regulations are still under consideration and no final decisions have been made. While the SEIC has elaborated a draft plan to begin blending based on older legislation, the new regulations would be essential to secure the buy-in of other actors in the energy sector. ¶5. (U) Asked why the refinery, which is a 50-50 joint venture between Shell Oil and the Dominican government, has not already initiated a plan to blend ethanol and build the necessary storage tanks, the president of the government,s administrative council of Refidomsa, Ruben Montas, informed Winrock and EconOff that they were waiting for the sale of Shell,s shares in the refinery to be finalized before initiating any new projects. However, Montas expressed interest in the concept. Shell,s local representative merely stated that they had not pursued blending because they were currently divesting from the country, selling not only their share of the refinery but also their numerous gas stations. The announcement of the sale was expected in August but has been postponed on several occasions. Shell stated that they would be providing their nominated candidate for the sale on or about the 5th of October, but the government will have 60 days to consider the selection and respond to Shell, meaning a decision is not likely before early December. ¶6. (U) In addition to a small feasibility study on blending, Winrock has identified the reform of the fuel tax structure for possible technical assistance, possibly through the OAS. The potential of this initiative was bolstered on October 5 when the new Minister of Industry and Commerce announced plans to revisit the hydrocarbons law and its regulations to look for opportunities to diversify and reform the tax structure to reduce energy costs. Post intends to schedule a meeting with the new Minister to raise the issue of blending ethanol as well as the potential for technical assistance on regulatory reform once Winrock's recommendations are finalized. ¶7. (U) Over the course of the week Winrock conducted site visits with several private sector groups currently in the process of developing projects and found several potentially worthwhile initiatives. Among the ideas that might require feasibility studies are jatropa and sweet sorghum projects in the border region, a small scale ethanol project in the eastern sugar plantations and a large scale project being developed by one of the traditional sugar family companies, the Vicini Group, which envisions a facility to produce 50,000 to 75,000 liters per day. This project is targeted at both local consumption and potential export. Broad Political Support for the Initiative -------------- ¶8. (U) President Leonel Fernandez, who has consistently cited the threat posed by rising energy prices to the stability of the Dominican economy, declared at a press conference on October 6 that the development of alternative energies, and specifically biofuels, will be essential for both domestic consumption and possible export. Fernandez has cited biofuels and renewable energy repeatedly as important for the Dominican Republic given its nearly complete reliance on imported sources of energy, including at the recent summit of PetroCaribe. Political support for biofuels development stretches across political party boundaries. At the official launching of the U.S.-Brazil Biofuels Initiative at the Brazilian Embassy on September 28, the chairman of the Chamber of Deputies, Energy and Mines Committee, Pelligrin Castillo, said, &We are all in agreement that more needs to be done to secure greater energy security in the Dominican Republic.8 He went on to describe multiple ongoing projects that have potential and discussed the need to encourage similar development in Haiti. In addition, members of the Dominican Senate and Chamber of Deputies, from both the ruling PLD and the main opposition PRD, attended the public affairs speaker series on biofuels on September 18 organized by the CNE and expressed support for the initiative. The confluence of high energy prices, a looming presidential election in May, and the Dominican Republic,s absolute reliance on imported fuel, have all combined to generate a tremendous amount of political support for biofuels production and the U.S.-Brazil Biofuels Partnership. Challenges Remain -------------- ¶9. (SBU) Despite the broad political support for the initiative, the Dominican government lacks a clear coordinating authority to help push and implement the outcome of Winrock,s and FGV,s findings. The structure of the energy sector is such that there are multiple, and often competing government agencies -- all with a role to play and no clearly identified focal point for decision-making. During Winrock,s visit, no less than four separate government ministries appeared to claim responsibility for coordinating events. Post made sure to include all parties in the discussions and provide opportunities for each ministry to have input into Winrock,s work. However, the lack of clear organization is a major challenge to implementation of initiatives. ¶10. (SBU) As an example of the lack of coordination and in-fighting between ministries, someone from the CNE complained that the SEIC is still collecting gasoline tax money, which should now be going to the CNE, and spending it on &solar panels to buy political support,8 rather than on coordinated development of renewable energies. CNE and SEIC are also quibbling over what proposals should take priority and appear to be unaware of what each other is doing to promote biofuels and renewable energies. CNE,s director of renewable energy, Doroteo Rodriguez, even predicted that the Non-Conventional Energy Office at SEIC could be rolled into the CNE following more consultation meetings between the parties. However, since the last coordination meeting held on September 28, there have been no changes in the government structures. ¶11. (U) Land rights are also a hurdle to successful implementation. With the large sugar producers unlikely to convert currently active sugar plantations to ethanol production as a result of the highly beneficial U.S. sugar quota, the bulk of the land available for large scale ethanol production is fallow sugar fields that are predominately owned by the government,s State Sugar Council (CEA). Although there is land available, it is extremely difficult to get clear answers about who holds the rights to develop certain fields. In some instances competing sugar companies have laid claim to the same fields and CEA has been publicly implicated in property disputes. ¶12. (U) In addition, there are a range of questions about what has happened to fallow government owned sugar fields over the course of the past 25 years, including indications that large squatter populations or alternative unsanctioned development may have risen up. According to the executive director of CEA, Enrique Martinez, there are an estimated 20,000 people living on the land that private groups have identified for sugar production for ethanol that would need to be resettled. Asked if alternative land has already been identified, Martinez told EconOff that CEA has plenty of available land and that resettlement would provide these people with access to better housing, clean water, electricity and other basic services. Martinez also said the resettlement would be done at government expense, although construction of new facilities and other details have not yet commenced. The prospect of such a large scale resettlement, which could also raise issues related to undocumented workers of Haitian descent, could pose a huge political stumbling block. These issues would need to be dealt with by the government prior to the initiation of any new planting or harvesting and would be sensitive politically in the lead up to elections. Without clear land rights or land use decisions, it is difficult to imagine the kind of investments necessary to develop large scale biofuels production. ¶13. (U) With the Dominican government reliant on high gasoline taxes, there is some concern about what the fiscal impact of blending ethanol will be and how it will be taxed. Although identified by Winrock as an area for technical assistance as mentioned above, uncertainty about the fiscal consequences of ethanol production or blending is widespread. A respected economic journalist and former Dominican Ambassador to the U.S., Bernando Vega, wrote an article several months ago expressing skepticism about ethanol precisely because of the tax structures in place in the country. In follow-up statement on Dominican television on October 11, Vega recommended that ethanol not be taxed in order to reduce fuel costs. ¶14. (U) Finally, there is the debate about the impact of biofuels production on global food prices. The DR is sensitive to global prices given its dependence on imports. President Fernandez raises concerns about the impact of global biofuels production on food prices in his public remarks and the issue was raised, although only in passing, at nearly all of the public speaker series events in mid-September. However, there appears to be widespread consensus that there will be virtually no impact on food production in the DR from local biofuels production because most of the land to be used for biofuels is either fallow sugar cane fields or underutilized land along the border. There are no projects that currently entail crop switching from food producing land. ¶15. (U) While President Fernandez and other government officials appear to view biofuels as a viable option for the country,s energy future, the Dominican government continues to pursue other options for reducing the burden of rising energy costs. For example, the Minister of Finance just returned from a trip to Venezuela seeking an increase in their oil quota from 30,000 barrels/day to 50,000 barrels/day. Last week the Ministry of Industry and Commerce introduced an energy contingency plan, which includes a heavy emphasis on energy conservation, and announced its decision to reconsider the hydrocarbons law to look at the tax implications of various policy alternatives. This review could conceivably include the introduction of ethanol into the fuel mix for gasoline. ¶16. (U) Comment: The recent run-up in imported fuel prices has created hardship locally, creating an opening for opposition parties to demand reductions in fuel costs. The main opposition presidential candidate also proposed a 20 percent reduction in electricity rates in a speech last week. The introduction of biofuels in the Dominican Republic is one response to the broader problem of increasing energy prices. For this reason, the feasibility study and technical assistance envisioned under the U.S.-Brazil Biofuels Partnership is well timed here, but will likely see results only in the medium to long-term given near-term challenges to implementation. End Comment. BULLEN