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
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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
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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
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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
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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