GOH PURSUING PETROCARIBE DEAL

C O N F I D E N T I A L TEGUCIGALPA 001818 SIPDIS SIPDIS STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, WHA/CEN STATE PASS TO USTR E.O. 12958: DECL: 11/26/2017 TAGS: ENRG EPET PGOV PINR PREL HO SUBJECT: GOH PURSUING PETROCARIBE DEAL REF: A. REF A: 06 TGG 0809 ¶B. REF B: 07 TGG 0493 ¶C. REF C: 07 TGG 1792 Classified By: Ambassador Charles Ford for reasons 1.4 (b) and (d). ¶1. (SBU) This is an action request. Please see paragraph 6. ¶2. (SBU) Summary: Facing severe losses at state-run electric energy company ENEE, in addition to increasing losses stemming from gasoline subsidies, the GOH is pursuing a package of solutions that includes a deal with PetroCaribe. Such a scheme has been considered before (ref A) but was abandoned due in part to strong USG efforts -- including two meetings between POTUS and President Zelaya (ref B) -- as well as technical considerations. It is unclear how seriously the GOH is pursuing the current negotiations with PetroCaribe. The GOH negotiating team is headed by Minister to the President Yani Rosenthal, who initiated talks this morning (26 Nov 2007) with the Government of Venezuela. Additional details will follow when available. End summary. -------------- Details of the PetroCaribe Solution -------------- ¶3. (SBU) A multitude of actions are being considered to solve Honduras' financial problems in the fuel and energy sector, which together represent annual losses of 3 percent of GDP. These actions include: -- A PetroCaribe deal to provide 100 percent of the bunker (heavy fuel oil) needed for electricity generation, and 30 percent of the mogas (automobile fuel, both gasoline and diesel). Details are yet to be finalized but typically would include payment of 50% of the price up front, with the balance paid through low-interest, long-term financing. -- A possible rate increase and subsidy reduction for fuel and electric tariffs. -- A joint GOH / independent fuel import company to finance and construct a new set of public fuel import terminals. As Presidential Legal Advisor Flores Lanza explained to Emboffs, these "free access" terminals will allow the independent gas station owners to purchase fuel from a greater number of importers. According to both Flores Lanza and Minister to the President Yani Rosenthal, the savings from the PetroCaribe deal would be "invested" in hydro power projects, rural electrification, and ENEE transmission and distribution networks. ---------------------------- Potential Problems with a PetroCaribe Deal -------------- -------------- ¶4. (SBU) The negative aspects of a PetroCaribe deal are numerous. Apart from political entanglements, the acquisition of long-term debt to finance short-term consumption, and supply uncertainties, Luis Kafie -- proprietor of the large Lufussa electric power generation plants -- informed Econoff that no GOH official had approached him regarding the feasibility of having PetroCaribe supply bunker. However, when Lufussa looked into the idea three years ago, it found Venezuelan crude did not meet quality control specifications and was not price competitive. On the mogas side, the GOH has no way to store or distribute the fuel. Daniel Mencia, Exxon's representative in Honduras, informed Econoff that the independent stations account for only 15 percent of volume. Thus, in order to have PetroCaribe provide 30 percent of Honduran mogas, the GOH would need either to build new terminals or use those belonging to the IOCs. This is exactly the same roadblock the GOH faced with a previous plan to import 100 percent of mogas from a single supplier (ref C). -------------- -------------- Potential Benefits with a PetroCaribe Deal -------------- -------------- ¶5. (SBU) Taking on long-term debt via PetroCaribe represents a short-term solution to GOH budget pressures. If the savings were invested in a transparent, fiscally responsible manner, the deal could represent an attractive financing option. Due in part to the huge uproar caused when ex-President Maduro raised gas prices in 2005 (ref C),Zelaya has told the Ambassador that he fears a popular backlash if he raises electricity tariffs. If so, the PetroCaribe deal could be an opportunity to keep below-cost electric tariffs stable by passing the true costs on to future generations and/or international donors. On the other hand, the deal could be a bluff designed to give Zelaya political cover if he does raise rates after examining all possible alternatives. ¶6. (C) Comment: Whether the GOH is serious about PetroCaribe is anybody's guess. Presidential Legal Advisor Flores Lanza told Exxon's Mencia this is all a bluff; Mencia does not believe him. Some parts of the GOH package of energy solutions, in particular rate increases, could be good; as always, the devil would lie in the details and the implementation. The Ambassador has received information that some GOH ministers are in favor of joining ALBA (Bolivarian Alternative for the Americas),which would effectively align Honduras with Venezuela. Though these ministers are outnumbered, there is clearly some high level interest in moving toward a PetroCaribe deal. Action request: Post would appreciate USTR comments on whether the potential GOH - PetroCaribe deal violates CAFTA-DR or other GOH treaty obligations. End Comment. FORD