WHO WILL BREAK FIRST? HONDURAS MAY SOON FACE FUEL

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 001192

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: 07/11/2017
TAGS: ENRG EPET HO PGOV PINR PREL
SUBJECT: WHO WILL BREAK FIRST? HONDURAS MAY SOON FACE FUEL
SHORTAGES

REF: TEGUCIGALPA 892

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

1.(C) Summary: Since a January change in the Honduran price
setting formula, the four major importers of refined fuel
continue to deliver premium gasoline at a loss. Now, a
recent change in a regional reference price for diesel fuel
threatens to increase their losses. While U.S.
transnationals Exxon and Texaco attempt to negotiate with the
GOH with little success, Dutch/English transnational Shell
may begin to reduce supply. Of most concern is Honduran fuel
company DIPPSA, which has the least resources to withstand
sustained losses and has recently caused isolated fuel
shortages when they could not meet supply agreements. With
GOH implemented price freezes only adding to the final
burden, the question remains: who will break first? End
Summary.

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FUEL IMPORTERS: 12 CENT LOSS ON EACH GALLON
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2. (C) As reported in reftel, a change in the fuel price
setting formula effected last January 15 (reftel) has forced
the companies that import refined fuel to operate at a loss,
by their estimates up to 12 U.S. cents per gallon.
In late May, the Exxon executive for the Americans in a
teleconference with President Jose Manuel "Mel" Zelaya asked
specifically for at least 6 U.S. cents back in margin, saying
he would leave the other 6 U.S. cents "on the table" if
Zelaya proved serious about liberalizing the fuels market by
the end of the year. (Comment: Strangely, the Exxon reps
reported that Zelaya was "out of it" and "completely
confused" during the entire call. End Comment).


3. (C) The inconclusive teleconference was followed by a
meeting in Florida between Exxon and Presidential advisors
Yani Rosenthal and Enrique Flores Lanza, where a near
agreement was reached per Exxon reps. Flores Lanza told
EconChief on June 11 that he supported the proposal and,
after discussions with President Zelaya "the day before," he
was optimistic that a deal could be made. Post was informed
subsequently that Rosenthal told Exxon reps the same day that
President Zelaya would not approve the deal, and that Exxon
and the other importers needed to be more "creative."
(Comment: Exxon characterized the Florida meeting as a
classic Honduran run-around: while quickly sending the
President's top advisors to Exxon headquarters appeared
impressive on the surface, it masked confusion and
uncertainty underneath. Rosenthal's frankness with Exxon is
the most surprising, and may be tied to the fact that he may
be soon leaving his post. Flores Lanza's comments to
EconChief appeared, as usual, to have been only to please
without any real substance. End Comment).


4. (C) In a June 28 meeting with EconChief, Exxon
representatives reiterated the increasing financial strain
that all local importers are now under. A recurring GOH
policy of freezing pump prices has forced the importers to
shoulder much of the burden ) since February, price freezes
have cost Exxon approximately USD 1.7 million. While the GOH
has reluctantly paid costs associated with the price freezes
in the past, the payments only arrive after many months of
discussions. Because of the unprofitable situation, all of
the companies are now reevaluating their operations in
country.

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WHO WILL BREAK FIRST?
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5. (C) While Exxon and Texaco are both heavily invested in
facilities and infrastructure, Shell, with only a handful of
gasoline stations and recent divestitures in the Dominican
Republic, may consider reducing their presence or pulling out
altogether. (Comment: All three major transnationals have

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indicated to Post that they may reduce operations, but only
Shell's comments sound credible. End Comment). Most at risk
is Honduran fuel company DIPPSA, which recently completed a
50 percent sale to Dutch fuel trader Trafigura Beheer, B.V.
DIPPSA controls almost 40 percent of the premium fuel market,
and a failure to supply the market or meet payments for their
shipments would throw the market into turmoil. (Comment:
DIPPSA owner Henry Arevalo sold 50 percent last year to
Trafigura because of the financial strain at that time. Now,
with their profit situation worsening and an on-going legal
battle with the GOH over use of their terminals, they are
undoubtedly feeling a severe financial squeeze. End Comment).


6. (C) A preview of what may happen in the near future was
experienced June 28. Citing unspecified supply problems,
DIPPSA failed to provide sufficient premium fuel to a
multitude of their stations. Consumers quickly shifted to
other stations, where demand jumped substantially.
Fortunately, demand was met by Texaco and Exxon by hauling
fuel from well-stocked positions in the south to cover the
spot shortages. While the supply situation has equalized,
legal issues continue to follow DIPPSA, mainly accusations
that they have not provided for the legal minimum of a 15-day
inventory stock.

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PROACTIVE DIALOGUE
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7. (C) While the importers continue to be attacked in the
press by the gasoline station owners (represented by retailer
association ADHIPPE),transportation unions, and the
Patriotic Coalition (represented by former Ministry of
Industry and Commerce minister Juliette Handal),they have
failed to develop any positive campaign on their own. With
limited success engaging the GOH as an interlocutor, Post
organized a first of its kind meeting between the importers
and opposition groups July 7 to facilitate conversation and
plan a series of similar meetings.


8. (C) The meeting helped to determine that both groups held
misconceptions regarding the fuel delivery process that were
not supported by facts. They also agreed that the GOH had
played a limited role as an interlocutor and it was worth
agreeing on certain principles and providing a solution
directly to the government. The talks soured towards the
end, however, as a recent Texaco decision to fire a transport
company has turned into a major issue and may result in a
work stoppage July 12 organized by trucking companies.
Despite the shift in focus away from the larger fuel pricing
issue, the group agreed to meet again, on July 20.


9. (C) COMMENT: With fuel shortages growing and real threats
to the fuel supply chain becoming clear, the GOH role as a
problem solver remains weak and ineffective. President
Zelaya continues to subsidize pump prices while forcing
importers to supply at a loss, an unsustainable position that
will take but one external shock (a hurricane, a sustained
strike, more constriction in supply from Nigeria, etc) to
disrupt the already strained supply network. Even without a
shock, DIPPSA's precarious position may result in sustained
shortages that cannot be met by existing importers.


10. (C) COMMENT (CONT): While one potential response to a
sustained shortage is for the GOH to send the military in to
control DIPPSA's terminal and storage facilities, as has been
done recently with state energy company ENEE and the state
prison system, that would not solve the import problem. A
further scenario is for Zelaya to request immediate aid from
Venezuelan President Hugo Chavez through a shipment from his
state fuel company PDVSA, though the ability for even a major
fuel company to put together and deliver a sizable shipment,
particularly over time, is highly questionable. Post will
continue to stimulate dialogue between the importers and
opposition groups, which may serve as a valuable forum to
respond to emergency situations if disaster does strike. END
COMMENT.
WILLIARD