FMLN FUEL IMPORTS FROM VENEZUELA DRAW CRITICISM

C O N F I D E N T I A L SAN SALVADOR 000943 SIPDIS E.O. 12958: DECL: 08/08/2018 TAGS: EPET ENRG PGOV PREL ES SUBJECT: FMLN FUEL IMPORTS FROM VENEZUELA DRAW CRITICISM REF: SAN SALVADOR 0128 Classified By: DCM Robert I. Blau for reason 1.4 (b),(d) ¶1. (SBU) Summary. President Saca, other GOES representatives, and businessmen have stepped up criticism of Albapetroleo for selling subsidized Venezuelan diesel below cost. Despite higher transport costs and inconsistent supplies, Albapetroleo has quickly gained over 22% of El Salvador's diesel market. GOES officials criticized the company for concealing evidence of dumping but raised doubts that the company has violated Salvadoran competition law. The GOES granted a construction permit for Albapetroleo's fuel depot, but project management issues will probably delay completion until after the 2009 elections. End Summary. CHAVEZ OIL MARKET SHARE UP; SUPPLY INCONSISTENT -------------- -- ¶2. (U) Albapetroleo was established in 2006 as a joint venture between Petroleos de Venezuela, SA (PDVSA) and a Salvadoran company, ENEPASA, formed by a coalition of mayors from the leftist FMLN party. Venezuela has reportedly offered the company long-term financing of 40% of import costs under the Petrocaribe initiative (see reftel) with proceeds funding social projects and FMLN political campaigns. ¶3. (U) Albapetroleo quickly increased its diesel volumes from 772,500 gallons or 4% of the diesel market in January to 3,192,000 gallons or a 22.7% market share in June. The company gained a higher share (over 31%) of diesel sold through service stations, while making smaller inroads with industrial customers. By February, the company increased its distribution network from 6 to 16 service stations and expanded its reach to 8 stations outside of San Salvador. It has continued to offer retail prices 30-40 cents below competing prices. ¶4. (U) Albapetroleo's diesel imports fell from 2.5 million gallons in March to 2.1 million gallons in April due to supply constraints. Texaco reported that some of its service stations joined Albapetroleo's network but later returned to Texaco after Albapetroleo failed to ensure consistent supplies. Imports later rebounded to 2.4 million gallons in May and nearly 3.2 million gallons in June. Albapetroleo started distributing premium gasoline in July with a lower discount of 12-15 cents. PRIVATE SECTOR AND GOES CRITICIZE DUMPING -------------- ¶5. (C) After meeting with oil industry representatives, the National Private Sector Association (ANEP) called on July 31 for the GOES to investigate Albapetroleo for alleged anti-competitive practices. This follows earlier calls by Shell and a group of 185 gas stations for the GOES to investigate Albapetroleo for selling fuel below cost. Competitors have repeatedly emphasized that Albapetroleo cannot maintain 30-40 cent discounts without losing money. ANEP President Frederico Colorado also criticized Albapetroleo for promoting FMLN's political agenda and warned that El Salvador may repeat Nicaragua's experience where fuel prices rose after the 2006 election. Salvador Rivas, Executive Director of oil industry association ASAPETROL, told Econoff his members are hopeful that ANEP's advocacy may spur the GOES to take action against Albapetroleo. ¶6. (U) The Ministry of Economy (MINEC) revealed on August 7 that Albapetroleo has hidden a 51-cent-per-gallon credit offered to distributors to sell diesel below cost. Minister of Economy Ricardo Esmahan shared evidence of double-billing with one bill showing a price of $3.77 per gallon and another showing the real price of $3.26 per gallon, well below the $3.52 per gallon average wholesale cost. The following day, President Saca announced that he instructed the Ministries of Economy and Finance to investigate Albapetroleo for possible tax evasion or anti-competitive behavior. However, Eduardo Ayala Grimaldi, the President's Chief of Staff, cautioned that Albapetroleo appears to lack the dominant market position required to pursue a dumping case under Salvadoran competition law. ¶7. (C) Earlier this year, El Salvador's independent auditing agency investigated the use of social development funds by municipalities for investment in Enepasa and Albapetroleo. Investigators criticized Albapetroleo for poor cooperation but they have yet to reveal anything illegal. MINEC told Econoffs its own investigations show that Albapetroleo has been careful to pay taxes and follow fuel import regulations. TERMINAL PROJECT WELL-FUNDED BUT POORLY MANAGED -------------- -- ¶8. (C) In June 2008 Albapetroleo began to solicit bids for the construction of its 350,000 gallon fuel depot in Acajutla. Although the company held a ground-breaking ceremony on February 2, it was not able to pour concrete until MINEC approved a construction permit on May 9. A retired U.S. oil industry manager who helped prepare the project's environmental impact assessment told Econoffs that poor, disorganized management will probably delay the project's completion. He expects the company to repeat at least two bid solicitations after receiving inadequate offers. He also reported that the project cost has risen from $40 million to $100 million but the company seems unconcerned by cost overruns. ¶9. (C) FMLN Deputy Hugo Martinez told PolCouns August 8 that while most in the FMLN were pleased with the Albapetroleo project, he was less sanguine. When coupled with the 23-year payback period for 40% of import costs, he sees the potential for scandal or worse, given his view that Albapetroleo's top executives are not known for their managerial skills. COMMENT -------------- ¶10. (C) The GOES is stuck between its business constituency's valid claim of dumping, and its own reluctance to take action in a way that produces higher fuel prices. GOES hesitation has allowed the Chavez regime to create a quasi-legitimate funding pipeline that is already providing up to $3 million per month for the FMLN. GLAZER