HONDURAN DEBATE ON FUELS LIBERALIZATION VS

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000302

SIPDIS

NOFORN
SIPDIS

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: 02/15/2017
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN DEBATE ON FUELS LIBERALIZATION VS
NATIONALIZATION REACHING ENDGAME?

REF: A. A) TEGU 262


B. B) TEGU 225 AND PREVIOUS

Classified By: AMB Charles Ford for reasons 1.5 (b,d)


1. (C/NF) Summary: The GOH debate over fuels imports now
appears to be on the brink of favorable resolution. Based on
all our recent contacts with GOH officials, it is Post's
assessment that the GOH no longer seeks nationalization of
the fuels sector and is laboring mightily to find a mutually
acceptable but face-saving exit to this situation. They view
the mounting pressure to nationalize as a threat to their
plans, and they seek a deal with the IOCs as soon as possible
in order to avert a worsening of the situation. If the IOCs
determine that this deal is in their best interests, and if
they act with dispatch, Post expects the GOH could reach
agreement with them in the next few days. On the other hand,
if the companies cannot accept the deal, or the GOH gets cold
feet, the nationalization and sole-source supplier plan
remains waiting in the wings. End Summary.


2. (C/NF) The GOH debate over fuels imports -- which began in
October 2005 and reached its nadir on January 13, 2007, when
the GOH announced plans to seize privately owned fuel storage
facilities by force -- now appears to be on the brink of
favorable resolution. In separate comments to the Ambassador
and EconChief on February 13, GOH Minister Enrique Flores
Lanza and GOH advisor on fuels Arturo Corrales both said
President Jose Manuel "Mel" Zelaya Rosales was on the verge
of reaching a deal with international oil companies currently
operating in Honduras, rather than seeking to nationalize the
fuels sector. As Post has reported extensively (reftels),
Zelaya has been moving towards this decision since a January
18 meeting between Flores Lanza and the IOCs in San Salvador,
in which it became clear that nationalizing imports would not
save money. At that meeting the IOCs told Flores Lanza and
Corrales that they are prepared to work with the GOH on
reforming the state-run fuel-pricing scheme to make the
market more competitive and more price-efficient.


3. (C/NF) Since that meeting, the GOH has met several times
with each of the IOCs separately (Shell, Esso, and Texaco) to
solicit proposals that would respect both the political needs
of the GOH and the financial needs of the firms. Shell and
Texaco reportedly made rapid progress in these talks, Esso
much less so. By January 23 all firms had submitted
proposals, and a series of informal talks ensued. It quickly
became clear that Texaco and Shell were each close to tabling
offers that both sides could accept. Esso, however, resisted
modifications to its January 23 proposal and talks between
that firm and the GOH bogged down. In their February 13
calls to Ambassador and EconChief, Flores Lanza and Corrales
said, in effect, that if the companies would submit formal
offers codifying the results of the last week's talks, the
President would accept the deal and end the current crisis.
Post has been in contact with the IOCs throughout this
process, encouraging them to act promptly. Ultimately, we
reminded them, it is the responsibility of the company to act
in its own best long-term interests, whether that be to
accept the deal on offer or to reject it. But, we stressed,
if the IOCs intend to accept the offer, time is of the
essence.


4. (C/NF) Opponents of market liberalization and proponents
of nationalization of the sector (led by Juliette Handal of
the Patriotic Coalition) have meanwhile been busy increasing
public pressure on Zelaya to nationalize imports and sign a
sole-source contract with U.S. firm ConocoPhillips to supply
the GOH with all of Honduras' fuel imports for the year.
According to both Corrales and Flores Lanza, Conoco on
February 13 submitted a signed contract to the GOH that,
while final, included a clause conditioning the deal on
resolution of the fuel-storage issue. According to Flores
Lanza, this represents no substantive change in Conoco's

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position, since Conoco has always conditioned its offer on
the GOH demonstrating it has access to adequate and legally
acquired storage facilities. Flores Lanza told EconChief
that the GOH is not inclined to sign this contract, since it
does not meaningfully move the deal towards closure and, in
fact, could weaken the GOH's leverage to obtain access to
those storage facilities. Nevertheless, news that Conoco had
signed a contract would be a public relations coup for Handal
and her supporters, who are sure to use it to try to sway
public opinion in favor of prompt nationalization. Based on
all our recent contacts with GOH officials, it is Post's
assessment that the GOH no longer seeks such a
nationalization and is laboring mightily to find a mutually
acceptable but face-saving exit to this situation. They view
the mounting pressure to nationalize as a threat to their
plans, and they seek a deal with the IOCs as soon as possible
in order to avert a worsening of the situation.


5. (C/NF) In the meantime, the GOH has also filed suit
against DIPPSA, the Honduran owner of the fuel storage
facilities in question. A clause in DIPPSA's operating
license allows the GOH to use DIPPSA's facilities in times of
emergency and with fair compensation to be paid to the firm.
However, to date DIPPSA has declined to comply with that
clause, prompting the GOH lawsuit for breach of contract. A
straightforward affair, the judge quickly found for the GOH
but could not enforce the judgment because DIPPSA owner Henry
Arevalo has disappeared. Until he can be found and formally
served, the process is on hold. The court could also appoint
a custodian for DIPPSA, but that would be a slow process.
(Comment: Post assesses that the lawsuit was intended both
to keep pressure on the IOCs by keeping the Conoco
alternative alive and to convince the Honduran public that
the GOH is doing everything in its power to reduce fuel
prices for the consumer. The GOH is also likely using the
latter tactic to better defend itself from the coming attacks
by Handal and others when the sole-source contract is not
signed and the sector not nationalized. Finally, we assess
that the lawsuit is also meant in part to pressure Arevalo
personally, who has publicly defied President Zelaya. A
classic cacique (Latin strongman) who runs all policy
personally, Zelaya likely views Arevalo's impudence as
galling and intolerable. End Comment.)


6. (C/NF) If the IOCs determine that this deal is in their
best interests, and if they act with dispatch, Post expects
the GOH could reach agreement with them in the next few days.
That would put Honduras on a path towards rapid
liberalization of its fuels market and would set an important
precedent by rolling back populist and quasi-socialist plans
in favor of the free market. On the other hand, if the
+Ub&~}DQ plan remains
waiting in the wings. If the GOH takes this route, there is
little more Post can do to prevent a likely series of sharply
negative consequences, possibly including several lawsuits by
the IOCs and claims of CAFTA violations. Post remains
cautiously optimistic the GOH intends to choose
liberalization, assuming the companies come forward soon with
a mutually acceptable final offer.

Ford
FORD