HONDURAN GOVERNMENT TO MEET OIL INDUSRY REPS IN

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000098

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: 01/17/2017
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN GOVERNMENT TO MEET OIL INDUSRY REPS IN
SALVADOR FOR "LAST CHANCE" DIALOGUE

REF: TEGU 0091 AND PREVIOUS

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


1. (C/NF) Summary: A GOH delegation led by Minister Enrique
Flores Lanza has agreed to travel to Salvador on January 18
to engage with the international oil companies in a last
ditch effort to find an exit to the current fuel sector
crisis. Flores Lanza proposed two topics for the Salvador
talks: (1) modification to the pricing formula for gasoline,
and (2) liberalization of the fuels market in Honduras.
Successful talks could induce the GOH to abandon the bid
solicitation process, reform the pricing formula, and allow
the companies currently operating to remain in Honduras. Both
the GOH and the companies have told Post that they understand
this really is their last chance, and that they are prepared
to be flexible and creative at the negotiating table. Many
things could go wrong over the coming days, but Post
considers it a major victory that we have persuaded both
sides to sit down for a reasoned dialogue. End Summary.


2. (C/NF) Following an intensive round of discussion between
Post and the GOH -- including a January 16 Ambassador call on
President Jose Manuel "Mel" Zelaya Rosales -- the GOH as
agreed to meet "one last time" with representatives of the
international oil companies. Similarly, following calls from
Ambassador and EconChief to executives of Texaco and Esso
(ExxonMobil),those companies have agreed to meet the GOH
representatives. Post has stressed to both sides that this
meeting must be a serious and good-faith effort to reach a
mutually acceptable outcome. Both sides must win something,
and both must be prepared to think creatively and perhaps
accept less than they hoped for. Both the GOH and the
companies have told Post that they understand this really is
their last chance, and that they are prepared to be flexible
and creative at the negotiating table.


3. (C/NF) On January 17, EconChief spoke with Minister
Counselor for Legal Affairs Enrique Flores Lanza, who said
that he would travel to San Salvador on January 18 to meet
with oil company representatives to seek a resolution to this
crisis. He will be accompanied by Arturo Corrales, who for
the last three months has been quietly negotiating with the
companies on behalf of President Zelaya. Flores Lanza
meanwhile was appointed by Zelaya on January 16 to be the
primary point of contact for any discussions about the oil
bid solicitation or the announced takeover of the storage
facilities. Ambassador quickly confirmed with Zelaya that
Corrales would retain his role. (Comment: Corrales had
built up some credibility with the companies, and has
significant understanding of the energy sector. Post assesses
that his presence will help facilitate discussion and could
moderate Flores Lanza's positions. Flores Lanza has long
been a proponent of the bid solicitation. While he is
loyally carrying out his President's directive to engage in
these talks, Post questions whether his heart is in it. End
Comment.)


4. (C/NF) Flores Lanza accepted EconChief's suggestion that
while the GOH needs a short-term victory at the pumps, the
firms need stable investment climate and would support
longer-term moves toward sector liberalization. Flores Lanza
proposed two topics for the Salvador talks: (1) modification
to the pricing formula for gasoline, and (2) liberalization
of the fuels market in Honduras. Lanza opened the door fairly
wide, saying that the possibility of the current importers
staying in Honduras was on the table, and even that a
politically and financially acceptable offer from the
companies could induce the GOH to abandon the bid
solicitation process entirely. In other words, if the
companies can meet the GOH's immediate political needs, the
GOH might embark on market liberalization while allowing
current importers to continue doing business in Honduras more
or less unhindered.

TEGUCIGALP 00000098 002 OF 002




5. (C/NF) Post spoke with both Esso and Texaco to strongly
encourage them to meet with Flores Lanza and Corrales, and to
come prepared to deal. Both companies subsequently accepted
the offer to meet with the GOH delegation. (Note: The
meetings will take place in Salvador because several oil
executives left Honduras when threatened with arrest for
alleged economic sabotage. However, Attorney General
Leonidas Rosa Bautista told Ambassador on January 16 that his
instructions to his prosecutors were to make no moves to
arrest any oil company executives. The GOH clearly was using
the threat of arrest as a pressure tactic, and Post views the
GOH delegation's willingness to fly to Salvador for the talks
as a gesture of conciliation as well as a recognition of the
oil companies' legitimate concerns. End note.) Flores Lanza
told EconChief that the meetings will take place on January
18, but the delegation is prepared to stay an extra day if
circumstances warrant.


6. (C/NF) Comment: Post has been working hard for over a
year to convince the GOH that the bid solicitation process
was an ill-conceived one that infringes investor rights and
reduces competition in the marketplace. As of January 10, we
had been informed that Zelaya was on the verge of canceling
the solicitation process outright and moving aggressively
towards market liberalization. However, following his
meetings with Nicaraguan President Daniel Ortega and
Venezuelan President Hugo Chavez on January 11, Zelaya
returned a changed man, issuing fiery denunciations of
"energy terrorism." Two days later, following an eight hour
closed-door debate, Zelaya was persuaded to issue his decree
announcing GOH intent to take over private sector storage
facilities. Post's public expression of concern over this
action seems to have led the GOH to constructively re-engage
with the companies. At the same time, the decree shocked the
companies sufficiently to finally motivate them to take these
talks seriously. Many things could go wrong over the coming
days, but Post considers it a major victory that we have
persuaded both sides to sit down for a reasoned dialogue.
End Comment.

Ford
FORD