Identifier
Created
Classification
Origin
07TEGUCIGALPA77
2007-01-14 20:00:00
SECRET//NOFORN
Embassy Tegucigalpa
Cable title:  

HONDURAS EXPROPRIATES U.S. OIL COMPANIES' STORAGE

Tags:  EPET EINV ENRG PREL BBSR NI VE HO 
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VZCZCXRO7857
OO RUEHLMC
DE RUEHTG #0077/01 0142000
ZNY SSSSS ZZH
O 142000Z JAN 07
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4608
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0508
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0556
S E C R E T SECTION 01 OF 05 TEGUCIGALPA 000077 

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
STATE PASS USTR FOR AMALITO

E.O. 12958: DECL: 01/13/2032
TAGS: EPET EINV ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAS EXPROPRIATES U.S. OIL COMPANIES' STORAGE
FACILITIES

REF: TEGU 0076 AND PREVIOUS

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

S E C R E T SECTION 01 OF 05 TEGUCIGALPA 000077

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
STATE PASS USTR FOR AMALITO

E.O. 12958: DECL: 01/13/2032
TAGS: EPET EINV ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAS EXPROPRIATES U.S. OIL COMPANIES' STORAGE
FACILITIES

REF: TEGU 0076 AND PREVIOUS

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


1. (S/NF) Summary: On January 13, the GOH announced in a
surprise decision that it would be compelling use of
privately-owned oil import and storage facilities in
Honduras. It remains unclear which facilities are affected,
but at a minimum Honduran firm DIPPSA and U.S. firm Esso are
subject to the new decree. The language of the decree says
the measures are "temporary" but GOH officials have said that
the duration is "indefinite." The decree calls for just
compensation, but that price is to be set by the GOH, and
negotiations to lease some of those facilities had previously
broken down when the GOH offered only half of what DIPPSA
felt was a fair price. The GOH also unilaterally cut
gasoline prices by up to USD 0.42, which would reportedly
leave many importers selling below cost. Finally, the GOH
has ordered a criminal investigation into the oil companies,
charging them with economic sabotage for allegedly
undersupplying the Honduran market with gasoline in order to
create a fuel crisis. Both the private sector and Post are
gravely concerned about both how these measures will be
carried out and about the strongly negative message they send
to current and potential investors. Oil company executives,
meanwhile, have found it prudent to leave Honduras. End
Summary.


2. (S/NF) Contrary to assurances given to Post on January 12
by GOH negotiator Arturo Corrales and assurances given by
President Zelaya to Vice President Elvin Santos (and passed
to Charge),the GOH Council of Ministers on January 13

decreed that the GOH would expropriate existing private
sector oil offloading and storage facilities. The decree
cites a clause in the contract between Honduran fuel importer
DIPPSA and the GOH that reportedly permits the GOH to compel
use of DIPPSA's storage facilities in times of national
emergency. Because the joint-venture PetroSur facility (50
percent owned by Esso and 50 percent by DIPPSA) also falls
under this agreement, Esso's facilities will be expropriated
as well. Minister of the Presidency Yani Rosenthal confirmed
that Esso facilities would be covered by the decree, but
opined that Texaco's (which reportedly do not have a similar
clause) would not. However, in public statements Minister
Counselor for Legal Affairs Enrique Flores Lanza said that
the decree would cover all companies.


3. (U) The specific text of the decree (Article 2) reads as
follows:

The Honduran state will exercise for the public benefit its
contractual right to use the fuel storage terminals of the
distribution companies now in the country, by means of
payment of a just compensation. The Government guarantees to
continue the process of the international solicitation for
fuel imports with the company that presented the best offer.

(Note: The company referred to in the second sentence, the
one that presented the best offer under the highly
contentious bid solicitation process, was U.S. firm
ConocoPhillips. Under that process, the GOH will nationalize
all imports, and contract for a year's supply with a single
fuel supplier. However, despite an apparent obligation to
have done so by early January, the GOH and ConocoPhillips
have not yet signed a contract. According to public remarks
by Minister Flores Lanza, ConocoPhillips declined to sign any
contract for delivery of fuel until the GOH could demonstrate
it had storage capacity for those deliveries. This demand
apparently triggered the GOH action to seize control of the
private facilities owned by DIPPSA and Esso. End Note.)


4. (SBU) In addition to the expropriation, the decree also
unilaterally lowers gasoline prices by up to eight lempiras
(about USD 0.42) per gallon, citing declines in international

TEGUCIGALP 00000077 002 OF 005


prices and "savings" from the fuel import solicitation
process. Regarding the first of the two justifications, the
GOH already sets all prices for gasoline, based on a formula
that reacts to a 22-day rolling average of international
prices. Under this arrangement, the GOH has the right to
change prices, but the January 13 decree does so in a manner
that violates all existing procedures and leaves the
international oil companies (IOCs) with no effective guidance
as to how to price their product. Given that the price
changes were to take effect at 0600 on January 14, at least
one company (Esso) said it might have to keep its stations
closed until this matter is cleared up. The second
justification for the price reduction is the illusory savings
claimed by the GOH from the bid solicitation process, and is
based on not counting a reported seven line-items of import
costs, and then using the ConocoPhillips offer (still
unsigned) as a baseline reference price. Minister Rosenthal
said all of these price cuts would come from the importer's
profit margins, and that the profit margins of the (Honduran)
transporters and marketers would not be touched. According
to rough calculations by Presidential negotiator for fuels
Arturo Corrales, this means the IOCs are being instructed to
sell their product below cost. In his January 13 public
remarks, Rosenthal shrugged this off, noting that the IOCs
could still make adequate profits in other segments of their
value chain.


5. (C/NF) During the late night (2100 hours local) press
conference, in which President Jose Manuel "Mel" Zelaya
Rosales personally read the text of the Council of Ministers
decree, Zelaya also said the GOH has instructed the
prosecutor's office to initiate a criminal investigation of
the IOCs to identify the cause of last week's alleged fuel
shortages. As previously reported, those "shortages" were
limited to a few gas stations and according to the companies
involved were the result of a delayed tanker delivery.
Reports of the alleged shortage prompted Zelaya on January 11
to label the IOCs "energy terrorists" and to call for the
Council of Ministers meeting. Ironically, we are told a
tanker was being unloaded even as the President made his
remarks on January 11 denouncing the IOCs for refusing to
supply the Honduran market. As a result of that incident,
the GOH reportedly issued an arrest warrant for the country
representative for Royal-Dutch Shell Oil Company, accusing
that the shortage was deliberate economic sabotage. In the
wake of that (still unverified) report and the President's
subsequent remarks of January 13, senior representatives of
Shell and Texaco have already left Honduras, and
representatives of Esso are strongly considering the same
move.


6. (C/NF) EconChief spoke with several key actors immediately
following the announced government takeover. All expressed
shock and grave concern about this action. Their initial
reactions follow:

-- Esso: Said its lawyers are looking at the specifics of
the contract, since the GOH alleges the joint venture
Esso/DIPPSA storage facility in San Lorenzo is covered by a
clause in the DIPPSA contract that allows the GOH to compel
use of the facilities. Esso also noted that the announced
change in price for gasoline violates the current procedure
for the GOH to announce price changes, and cannot be legally
acted upon by the firm. Facing two contradictory decrees on
pricing, Esso feels that it might need to keep its stations
shut until the matter is resolved. Esso also noted its
concern that the product (diesel and gasoline) currently in
storage is property of the importing firms, and questions
whether that product has also been seized. Finally, based on
reported threats to arrest IOC executives for alleged
economic sabotage, Esso is considering pulling its expatriate
staff out of the country immediately.

-- Texaco: Texaco's country representative is already out of

TEGUCIGALP 00000077 003 OF 005


Honduras, but EconChief reached him in El Salvador. He
reports a lack of concrete information, noting in particular
that it remains unclear whether the GOH action covers the
Texaco offloading and storage facilities in Honduras. He
felt the GOH likely to arrest IOC executives if given the
chance, and therefore left Honduras following reports of such
a warrant being issued against Shell executives.

-- DIPPSA: President of DIPPSA told EconChief that he was
caught as much unawares as anyone by the sudden decision to
take over his and other firms' facilities. He said he had
come to no agreement with the GOH about this, was not
previously informed about the action to come, and that he
opposes it. DIPPSA had been in negotiations with the GOH to
lease storage services to the GOH at a price of USD 0.065 per
gallon of throughput. Talks stalled when the GOH had
reportedly refused to pay more than USD 0.03. The next round
of talks was scheduled for Monday, January 15. DIPPSA
President Henry Arevalo told EconChief he will not violently
resist the takeover of his facilities, but that he feels it
is trespassing and illegal taking and that he will require
the GOH to act. "If (the GOH) wants (my facilities) they
have to come take it." (Note: Asked precisely how the GOH
intended to take over the facilities and whether troops would
be used, Minister Rosenthal told EconChief that the details
have not yet been worked out. Similarly, the GOH does not
know how or when it might compensate the rightful owners.
The GOH still owes oil companies an estimated USD 10 to 15
million in reimbursements from the recent gasoline price
freeze, in place from April through the autumn of 2006, that
the GOH compelled the companies to absorb. End Note.)

-- Presidential negotiator Arturo Corrales: As reported
previously, Corrales was dispatched (first quietly then
officially) by Zelaya to negotiate with the IOCs. Zelaya
continued to hope the IOCs would relent and allow use of
their facilities; they did not do so. However, once changes
to the pricing formula were put on the table as a topic for
discussion, the IOCs were willing to work constructively
with Corrales and the GOH to identify savings for the
consumer and help the GOH find a face-saving exit to this
situation. Corrales reported progress in these talks as of
January 12, and had scheduled another round of meetings for
January 15-17 to move further towards a resolution.
Moreover, this effort was being conducted in the context of a
proposal for a broader move over the next 2-3 years towards a
liberalized fuels market in Honduras, like those already in
place in Salvador and Guatemala. Post was actively
supporting such a dialogue, and had obtained agreement from
the World Bank to use its good offices to host a neutral
discussion of next steps towards liberalization.
Nevertheless, a downbeat Corrales told EconChief on January
13 that he, too, had been shocked by the decision, and that
he was trying to reach the President to discuss the matter.
In Corrales' view, he had been dispatched to dialogue in good
faith with the companies. The President's decision to
expropriate undercut any progress Corrales had made and
destroyed his credibility as an honest broker. Corrales
understands the profound damage this decision is likely to do
to Honduras' investment climate, but for the moment he
appears to Post to be out of the decision-making loop.

-- Shell: Shell's fuel imports are delivered both
independently and in conjunction with Texaco deliveries.
EconChief could not reach Shell for comment, but other
sources reported the following: Though some individual
stations in San Pedro had run dry, Shell cited high gasoline
sales over the heavily-traveled Christmas holiday and a minor
shipping delay as the causes. Shell had already made
arrangements with Texaco for additional shipments (which
arrived on January 11) and was seeking GOH permission for
overland imports from Salvador to resupply any service
stations that had sold out of any product. Shell immediately
publicly denied that there was a "shortage." Shell denied

TEGUCIGALP 00000077 004 OF 005


any intentional undersupplying of the market. In the face of
GOH threats to charge the company with economic sabotage,
Shell representatives have reportedly left Honduras.

-- Honduran Private Sector: The President of the Honduran
private sector umbrella organization COHEP, Mario Canahuati,
contacted EconChief on January 13 as part of a late-night
emergency conference call with the President of the Honduran
Manufacturers Association Jesus Canahuati and others, to
express their grave concern about this turn of events.
Canahuati complained that far more than just a legal dispute
with the IOCs, this expropriation will negatively impact
investment inflows, could jeopardize Temporary Protected
Status (TPS) renewal, and could by extension lead to slower
growth, higher unemployment, more emigration, and higher
rates of criminality in Honduras. EconChief noted that the
USG will need to analyze events before taking a formal
position, but that the reaction would be negative to some
degree. In addition, affected firms retain their right to
file lawsuits, and prospective investors are likely to be
scared away by this turn of events, particularly when paired
with Nicaraguan President Daniel Ortega's embrace (both
literally and figuratively) this week of Chavez and his
socialist ideals. EconChief said that it is far too early to
speculate on the fate of TPS, but that most Members of the
U.S. Congress likely know little about Honduras, and if their
enduring image of Honduras is of a country that expropriates
U.S. investor assets, that will certainly complicate any GOH
effort to generate good will on the Hill.

-- President Zelaya: Post has not spoken directly with
Zelaya yet, but his public remarks are instructive. In
justifying the nationalization of all oil imports, the
creation of a monopoly supplier, and the expropriation of
U.S. and Honduran privately-owned storage facilities to
accomplish this, Zelaya said, "We felt obligated to take
these necessary measures for development, measures that
increase confidence in investment, and that demonstrate this
government has a pact with its people and with the productive
sectors to find solutions. The Honduran public knows me, and
my respect for foreign investment, and also my continuing
belief in property rights and especially in the rules of a
free market, which make it possible for private enterprise to
develop in this country in an atmosphere of free competition."


7. (C/NF) Comment: To say that the GOH has the right in a
period of national emergency to compel use of private
facilities seems to Post to do little more than reiterate a
basic privilege that all governments claim -- that of
exercising eminent domain if absolutely necessary.
Therefore, a debate over whether the GOH has a legal right to
expropriate seems misplaced. Nevertheless, how the GOH
chooses to exercise this prerogative holds significant
concerns for U.S. investors. These concerns include
effective compensation; ownership of the current fuel
inventory; contractual obligations downstream; safety and
insurance related concerns; and the safety of company
executives. To this list Post would add the strongly
negative signal such a move sends to potential future
investors. The GOH is saying, in essence, that if investors
do not capitulate to GOH demands at the negotiating table,
the GOH will simply take their investments over by force.
Finally, given the legal and technical complexities involved,
Post does not discount the possibility of fuel shortages over
the coming weeks. Current importers have not said so, but it
seems likely they will need to halt all imports for the time
being, and no contracts (not to mention legal, financial, and
logistical arrangements) yet exist with the new monopoly fuel
provider, ConocoPhillips, for future fuel imports. Post
assesses that other participants in the previous talks,
including Corrales, were acting in good faith and were
genuinely surprised by the President's somewhat capricious
and certainly demagogic decision to expropriate. That Zelaya
could then justify such an action as improving the investment

TEGUCIGALP 00000077 005 OF 005


climate and defending property rights tells you all you need
to know about the root cause of this disaster. End Comment.

Williard
WILLIARD