HONDURAN GOVERNMENT REVIEWING OIL COMPANY OFFERS;

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000170

SIPDIS

SIPDIS
NOFORN

STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, EB/CBA, AND WHA/CEN
STATE FOR D, E, P, AND WHA
STATE FOR S/ES-O MMILLER AND MSANDELANDS
TREASURY FOR AFAIBISHENKO
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK
COMMERCE FOR MSELIGMAN AND WBASTIAN
STATE PASS USTR FOR AMALITO

E.O. 12958: DECL: 01/25/2017
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN GOVERNMENT REVIEWING OIL COMPANY OFFERS;
CONOCO STILL ON HOLD PENDING SETTLEMENT OF STORAGE QUESTION

REF: A. A) TEGU 0149 AND PREVIOUS

B. B) TEGU 0151

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


1. (C/NF) As of mid-day January 26, the GOH and the
international oil companies (IOCs) continue their quiet
dialogue over reforms to the fuels pricing formula. If the
proposed reforms can deliver cost savings to the consumer
while moving the market towards liberalization, the GOH
appears inclined to accept such proposals instead of moving
forward with a pending plan to nationalize the fuels import
sector. If the GOH takes control of imports, it will seek to
sign a contract with U.S. firm ConocoPhillips to supply its
fuel needs for the coming year. However, it would also
likely need to invoke legal proceedings to seize control of
privately owned storage facilities in order to move forward
with this plan. It appears to Post that the GOH is now
seeking a way to avoid such an outcome.


2. (C/NF) EconChief spoke separately to both Esso
(ExxonMobil) and Texaco about the state of talks. Both firms
met with the GOH in San Salvador last week and both
subsequently accepted the GOH offer to present proposed
pricing formula reforms. The companies briefed GOH fuels
advisor Arturo Corrales on their proposals on January 22 and
23, and submitted written drafts of the proposals on January

24. Both companies felt their offers were quite reasonable
and in keeping with the ideas floated at the San Salvador
meetings. The GOH has not formally responded to the
companies yet, though both companies indicate a willingness
to entertain counteroffers.


3. (C/NF) In separate conversations with EconChief and
Ambassador, Corrales was very upbeat, saying that the offers
received were "very, very close" to what was discussed in
Salvador. Corrales briefed President Jose Manuel "Mel"
Zelaya Rosales on the plans on January 25. In yet another
confirmation of the GOH's intent to liberalize (and
apparently to begin distancing itself from implementing the
national import scheme),Zelaya did not once mention the fuel
bid solicitation in his January 25 speech to Congress
celebrating his achievements after one year in office.
Instead, he said, "We need to continue to advance the process
of transparency in the distribution of petroleum products.
We must create conditions that allow the companies now in the
country to enter into free competition and competition based
on prices and markets, for the benefit of better fuel prices
to consumers. We cannot continue with the state bound to the
international companies, but rather we have to let them enter
a process of competition to begin to liberalize the fuels
market for the benefit of the consumer, as they have done in
Guatemala and El Salvador. This is the pact to which we as
Honduras must subscribe, to break with any kind of
arrangement that does not benefit the market."


4. (SBU) On January 26, ConocoPhillips sent a letter to the
GOH that, according to Conoco representatives, "confirms
Conoco's interest in the business and requests information on
the tank farm and operator." Post does not yet have a copy
of that letter, but it appears the letter was much more
specific than that. According to public remarks by Minister
Advisor for Legal Affairs and chief negotiator on the fuels
issue Enrique Flores Lanza, the letter from Conoco rejects
the GOH proposal to provide fuel storage by seizing privately
owned tanks from DIPPSA and Esso. According to Flores Lanza,
Conoco is requesting the GOH produce written authorization
from DIPPSA consenting to use of those tanks. Flores Lanza
said that the GOH will meet with DIPPSA President Henry
Arevalo on Monday to discuss this matter.


5. (C/NF) Comment: Events of the past few days make it
increasingly clear that the GOH is laying the groundwork for
a course correction away from a national import scheme and

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towards a liberalized market. It speaks volumes that the GOH
received the Conoco letter on Friday morning and is willing
to wait until Monday to begin a discussion with Arevalo.
Post assesses that if the GOH were still serious about the
Conoco offer, they would have summoned Arevalo to a meeting
immediately, or at the latest the following day. The
President's choice not to mention the fuel bid solicitation
in his speech is equally noteworthy, and suggests that his
rejection of "any kind of arrangement that does not benefit
the market" is aimed not just at the alleged oligopolists,
but also at the proposed state-run monopoly that would have
been the centerpiece of the national import scheme.


6. (C/NF) Comment continued: The GOH has become increasingly
aware of the risks to its reputation and investment climate
that pursuing a strategy based on government seizures of
sectors and assets would bring. If the GOH can reach
accommodation with the IOCs, and can sell the idea to the
public, it can obviate the need for those heavy handed
tactics and avoid the risk of major international lawsuits.
As a result, the GOH's enthusiasm for signing a sole-source
contract appears to be waning as the other IOCs present
viable alternatives to the bid solicitation plan. Zelaya
will deliver a major one-year anniversary speech on Saturday.
Post assesses that he might well use that opportunity to
make even more explicit the GOH choice to forego state
interventionism in the fuels market and instead pursue market
liberalization and competition. We're not chilling the
champagne yet, but we have plugged the refrigerator back in.
End Comment.

FORD
FORD