HONDURAN PRESIDENT CALLS U.S. OIL COMPANIES

S E C R E T SECTION 01 OF 04 TEGUCIGALPA 000076

SIPDIS

SIPDIS
NOFORN

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

E.O. 12958: DECL: 01/11/2036
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN PRESIDENT CALLS U.S. OIL COMPANIES
"ENERGY TERRORISTS" BUT STILL SEEKS NEGOTIATED RESOLUTION

REF: TEGU 2372 AND PREVIOUS

Classified By: CDA James Williard for reasons 1.4 (b,d)


1. (S/NF) Summary: Honduran President Jose Manuel "Mel"
Zelaya Rosales returned "a changed man" from meetings with
Nicaraguan President Daniel Ortega and Venezuelan President
Hugo Chavez on January 10. Zelaya was clearly frustrated at
his continuing inability to resolve Honduras' energy
problems, and lashed out when (incorrectly) informed upon
landing that gasoline shortages were imminent. Zelaya called
U.S. oil companies "energy terrorists" for refusing to
support what they view as an illegal nationalization of fuel
imports by either participating in the bidding or allowing
the GOH to use their storage facilities. Zelaya implied in
his January 11 public remarks that a January 13 Council of
Ministers emergency meeting would take up the question of
expropriating these assets, but by January 12 had softened
his views and told Vice President Elvin Santos that
nationalization would not be raised at that meeting.
Presidential envoy Arturo Corrales has worked to calm the
President, noting that the President's information that
importers were boycotting Honduras to cause a fuel shortage
was incorrect and was "disinformation" on the part of certain
groups with anti-oil company agendas. Corrales will continue
his shuttle diplomacy between the GOH and the oil companies,
seeking an exit strategy. In the mean time, he is confident
the Council will ask only for an analysis of the situation.
Vice President Santos conveyed three possible exit strategies
to Post, but two involve the likely non-starter proposal to
let the GOH use U.S. firms' storage facilities. Post is
troubled that Zelaya acted in such a provocative and
demagogic manner, especially based on incorrect information.
We noted to Corrales and to Santos that even if such threats
are not carried out, they inflict real damage on potential
investors' perceptions of Honduras. Post is also concerned
that in his frustration Zelaya could reach out to Chavez and
PDVSA. End Summary.


2. (S/NF) Vice President Elvin Santos told Charge on January
12 that President Zelaya had returned from the inauguration
of Nicaraguan President Daniel Ortega "a changed man."
Zelaya was deeply frustrated that after a year of effort he
has still failed to fix Honduras' energy problems, while
Ortega could simply take advantage of pledges from Venezuelan
President Hugo Chavez to fix similar problems in Nicaragua.
According to Santos, Zelaya in sidebar with U.S. Assistant
Secretary of State Tom Shannon requested that POTUS intervene

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to convince U.S. firms to cooperate with the Honduran
nationalization plan. Lacking such cooperation, he said, he
"would have no choice" but to turn to Chavez.


3. (S/NF) Santos confirmed what Post had heard previously,
that Zelaya prior to his trip to Nicaragua had been on the
verge of declaring the entire fuel solicitation void.
According to Santos, Zelaya would have blamed Minister of the
Presidency Yani Rosenthal for the failure. Zelaya did not do
so because declaring the bid a failure would have also
implicated Presidential Legal Advisor Enrique Flores Lanza, a
lifelong Zelaya friend. (Comment: Santos also said that it
was Flores Lanza who had first mis-informed the President of
the impending fuel shortage, setting off the President's
outburst. Flores Lanza has been a strong supporter of the
fuel nationalization plan all along, and continues to do
whatever he can to see it come to fruition. Post does not
discount the possibility that Flores Lanza deliberately
sought to inflame the President with his incorrect reports of
boycotts by the oil companies. End Comment.)


4. (U) In a January 11 press conference, President Jose
Manuel "Mel" Zelaya Rosales accused the international oil
companies (IOCs) in Honduras of being "energy terrorists" for
refusing to allow the GOH to use their oil storage
facilities. He said that an emergency Council of Ministers
meeting would be convened on January 13 to takes "sovereign

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decisions" to resolve the matter once and for all. Asked if
this meant nationalization of the facilities owned by
companies including U.S. firms Exxon and Texaco, Zelaya
replied "Picture it happening (Imagineselas)."


5. (S/NF) In a meeting with Charge the evening of January 11,
Minister of Foreign Relations Milton Jimenez sounded
desperate, pleading for the Ambassador,s help in getting the
U.S. companies to "collaborate". He argued that Texaco and
Exxon must help Honduras out of its political problem. He
said that the country is destabilized by the companies'
refusal to participate in the bid, by their refusal to rent
their fuel storage facilities, and by their delaying
deliveries. Jimenez continued to maintain that the
government wants to liberalize the market, but that the
companies won't participate in this process either. He
requested that Ambassador Ford somehow help Honduras by
getting the U.S. companies to cooperate.


6. (C/NF) The GOH believes that it owes Mel's election to his
promise of lowering prices at the gas pump and that he can
not fail to do this. Post has pointed out in the past that
the government sets the price here ) not the companies )
and that the GOH could lower prices today by changing their
pricing formula, which benefits private gas station owners
and transporters. It is clear, however, that Zelaya will not
substantially alter the formula because he is afraid of
street demonstrations led by Juliette Handal's Patriotic
Coalition. Charge replied that the companies are in fact
willing to discuss liberalization of the markets. But, from
their point of view, they already have the right of access to
the market and they have contractual agreements with their
suppliers that they must meet. For those reasons, they chose
not to participate in the bid, which they think is illegal.
He added that we do not have any information as to whether
they intend to sue or not, but this is something the
companies themselves need to determine.


7. (C/NF) According to Presidential confidant and designated
negotiator with the oil companies, Arturo Corrales, Zelaya's
anger was sparked by reports that Shell and Texaco had
organized a boycott of deliveries of gasoline to Honduras.
These reports were false and were immediately rebutted by
Shell and Texaco, which pointed out that at the moment the
President was making this accusation, a gasoline tanker
bearing a mixed Shell and Texaco shipment was being unloaded
in Puerto Cortes. Corrales believes the disinformation was
spread by Juliette Handal, President of the Patriotic
Coalition, the group that pushed for the nationalization of
all fuel imports into Honduras. When a careful analysis of
the savings is conducted, Corrales says, the import scheme
Handal favors saves only 0.3 lempiras, or less than USD 0.02
per gallon -- far less than advertised and too little to
justify a move to a monopoly system administered by the
state. Unable to show big savings, Handal is seeking other
ways to attack the current importers, Corrales said.


8. (C/NF) Corrales told EconChief he has now been formally
appointed the President's representative to the companies on
this issue (a role he has unofficially encumbered since
November). In that role, Corrales will be meeting
individually and as a group with the affected companies,
seeking a resolution that meets the political needs of
lowering prices while respecting investor rights and existing
contracts. Representatives of the U.S. firms confirmed to
EconChief that these meetings are ongoing. It is unclear
what the elements of such a deal would look like, but it
would include changes to the margins applied in the fuel
pricing formula. Post assesses that the deal would also have
to reaffirm the current importers' right to continue
importing fuel.


9. (C/NF) Asked if this means the GOH will declare the fuel
solicitation process void, Corrales proposed a politically
brilliant alternative: that the GOH declare the solicitation

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process was entirely successful, because it banished forever
the illusion that there are major cost savings to be had in
fuel imports (that is, the false accusation that importers
are gouging Honduras). Instead, the proposal would be to
affirm that only very thin savings can be obtained at the
point of import, but other, more significant savings could
come from reforming the pricing formula. EconChief
reiterated, and Corrales agreed, that this reform to the
state-run pricing formula must be done in the context of a
medium-term strategy to liberalize the fuels market, not
instead of it.


10. (C/NF) Corrales told EconChief that he believes he has
succeeded in convincing the President that he was
misinformed. He has proposed and feels "90 percent"
confident that the Council of Ministers will request nothing
more than a thorough review of the proposals and their
projected savings, perhaps by January 17. That should give
Corrales and the companies more time to continue talks, and
for the issue (and perhaps the President) to cool down.


11. (S/NF) Late on January 12, Vice President Santos called
Charge to relay Zelaya's remarks to him that nationalization
would not be raised at the Council of Ministers meeting on
January 13. This follows the Charge's emphatic remarks to
Santos that such an action would severely damage Honduras'
image, both in the eyes of investors and of U.S.
policymakers. In Charge's presence, Santos had contacted
Minister Rosenthal and delivered the same message, concluding
with a clear declaration that he opposed any move to
nationalization. Rosenthal apparently carried this message
to Zelaya, who upon reflection appears to have decided to
de-escalate the situation, at least temporarily.


12. (C/NF) In his call to Charge, Santos also conveyed
Zelaya's new bottom line: Zelaya would be willing to end the
year-long stalemate over oil imports under one of three
scenarios. First, if the current importers can beat
ConocoPhillips offer, Zelaya would vacate the bid process and
use the new offer as a benchmark price for continued imports
by current importers. Second, the importers could "loan"
their storage facilities to the GOH for a year to allow them
to move forward with nationalization of imports and a move to
monopolization of the sector. Third, the firms could lease
the tanks to the GOH for the same period and for the same
reason.


13. (C/NF) Comment: Post views the second and third options
as likely non-starters with the companies, each of which has
repeatedly refused to loan or lease their storage several
times already during this process. While presented as a
compromise exit strategy, these two offers are at base
nothing more than a request that the GOH get its way and the
firms capitulate. That seems unlikely. The final
alternative -- beating the ConocoPhillips price -- might be
negotiable, but probably poses legal problems for the firms.
The firms cannot legally collude on pricing. Further, such a
process might be condemned as non-transparent, and might open
the firms to charges of price gouging in the past. Post
notes this GOH proposal with interest, but feels constrained
in its ability to present it to the U.S. firms, since that
could be viewed by ConocoPhillips as assisting one group of
U.S. firms (Esso and Texaco) to out-bid another U.S. firm
(ConocoPhillips). Such a proposal is likely already at the
heart of ongoing talks hosted by Corrales with the companies.


14. (S/NF) Comment continued: This episode highlights
several disturbing aspects of Honduras' self-inflicted fuel
crisis. First, the President is receiving deliberately
incorrect information from politically motivated groups, and
is acting on it without first conducting minimal due
diligence to see if it is correct. Second, Post is very
concerned that Zelaya's instinctive reaction was to threaten
the companies with expropriation. Even had the rumors of
supply shortages been true, this reaction was demagogic and

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exaggerated. The mere threat, whether carried out or not,
will further damage Honduras' reputation in the eyes of
future potential investors. Finally, Post notes that this
outburst occurred just as Zelaya returned from the
inauguration of newly-elected leftist President Daniel Ortega
of Nicaragua, on the margins of which ceremony Zelaya also
reportedly met with Venezuelan President Hugo Chavez and
reassured him that Honduras remained open to PDVSA. Post
assesses that Zelaya's threat to turn to Venezuela if he
doesn't get his way is a real one, and could open the door to
significantly stronger Venezuelan influence in both Nicaragua
and Honduras.

Williard
WILLIARD