VZCZCXRO0195
OO RUEHLMC
DE RUEHTG #0521/01 0742323
ZNY SSSSS ZZH
O 152323Z MAR 06
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1472
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0328
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 0354

S E C R E T SECTION 01 OF 03 TEGUCIGALPA 000521 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN 
STATE FOR S, D, E, P, AND WHA 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
NSC FOR DAN FISK 
 
E.O. 12958: DECL: 03/16/2036 
TAGS: EPET ENRG PGOV PREL PINR VZ HO
SUBJECT: HONDURAN PRESIDENT ZELAYA NOW CLAIMS HE SECRETLY 
WANTED A LIBERALIZED FUELS MARKET ALL ALONG 
 
REF: A. (A) TEGUCIGALPA 482 
 
     ¶B. (B) TEGUCIGALPA 505 
 
Classified By: Classified By: Ambassador Charles Ford for reasons 1.4 ( 
b) and (d). 
 
¶1. (U) This is an action cable.  Please see para 11. 
 
¶2. (S) Summary: In a private meeting, President Zelaya told 
Ambassador he was solely responsible for the decision to move 
to a state-run fuel import regime, but that he had done so in 
the hopes the affected companies could convince the Honduran 
public that it was a bad plan.  The future failure of that 
plan, he said, would give him an opening to liberalize the 
fuels market -- his alleged true aim.  Post is skeptical of 
his explanation, but proposes to engage him on this issue in 
order to quickly test his commitment to move to the 
liberalized market he claims to want.  Separately, former 
President Carlos Flores expressed concerns at the potential 
damage done to the GOH-USG relationship by Zelaya's recent 
statements.  Flores and Zelaya also reported that PetroCaribe 
is off the table as an option.  Post is skeptical and will 
continue watching developments, particularly for signs that 
PetroCaribe is still being pursued by the Zelaya team.  End 
Summary. 
 
¶3. (S) Ambassador met with President Jose Manuel "Mel" Zelaya 
the evening of March 15 to deliver a strong message of 
support for U.S. oil companies facing possible expropriation 
of their assets (ref A).  The unpublicized meeting was hosted 
by former President of Honduras Carlos Flores, who privately 
told Ambassador that he was "stunned" by Zelaya's attacks on 
the U.S. companies in his Monday press conference (ref B). 
Flores said he is frustrated at the apparent mess Zelaya is 
making of relations with the U.S. and sought to mediate a 
rapprochement. 
 
¶4. (S) Zelaya opened by admitting to Ambassador that he had 
met with Venezuelan President Hugo Chavez while in Chile (a 
senior aide had previously denied the meeting took place), 
and that he had only "shaken hands" with Secretary Rice. 
Ambassador noted that the new GOH administration will be 
judged in part by the friends it chooses, and that by meeting 
with Chavez while not even seeking a meeting with Rice, 
Zelaya was sending a message.  Zelaya took this on board, but 
made no comment on the content of his talks with Chavez, 
other than to say that PetroCaribe was not an option. 
Separately, Flores had told Ambassador that the talks were 
fruitless, as Chavez had reportedly rebuffed Zelaya, claiming 
that he (Chavez) had his own problems to deal with and that 
he did not want to provoke the USG further.  He would be 
willing to lend money to Honduras in an emergency, but that 
was as far as he could go.  In effect, Flores said, 
PetroCaribe is off the table.  (Comment:  This does not sound 
like Chavez to us.  We also note that this report contrasts 
sharply with the view of Vice President Elvin Santos, who had 
confided to Ambassador the day before his belief that the 
public tender is specifically aimed at allowing Honduras to 
access PetroCaribe financing.  Santos is now in Washington, 
DC at a Microsoft conference.  End Comment.) 
 
¶5. (S) Discussion then turned to the March 6 decision to move 
forward with an international tender for fuel imports. 
Zelaya told Ambassador that the decision had been his and his 
alone.  According to Zelaya, the numerous ministers that 
incorrectly told Post as late as the afternoon of March 6 
that there would be no decision taken at the meeting that 
evening were not lying, they simply did not know.  Zelaya 
admitted the plan is primarily political theatre and has 
little economic justification. (Indeed, the consultant will 
reportedly get a performance bonus even if the total savings 
realized are as little as USD 20 million.) Zelaya decided to 
announce the plan on March 6 because he feared that street 
protests against fuel prices threatened for March 7 (when he 
would be out of the country) could create a "governability 
crisis." 
 
¶6. (S) Zelaya also told Ambassador that he was disappointed 
 
TEGUCIGALP 00000521  002 OF 003 
 
 
at the weak defense from the oil companies to the proposal. 
He claims his intent had been to allow the companies to prove 
the bid solicitation is a bad idea, thus giving him political 
cover to change course.  (Comment:  Zelaya's recent rhetoric 
-- particularly his implication on March 13 that any failure 
of the plan would be the result of a transnational oil 
company conspiracy to sabotage it, and his subsequent threat 
to prosecute them if there are shortages -- would have made 
it impossible for the companies to follow his alleged 
strategy in any case.    End Comment.) 
 
¶7. (S) Ambassador noted Zelaya's explanation of the political 
motives for the decision, but explained that the results of 
the decision could easily result in a de facto expropriation 
of U.S. investor assets and rights.  In an effort to avoid a 
future crisis over such an issue, the Ambassador said, Post 
requests that the GOH identify senior-level interlocutors now 
to begin discussions of compensation to the companies. 
Zelaya was visibly shocked by the suggestion that the 
decision would require compensation, or that an expropriation 
crisis was a possibility.  Ambassador closed by noting that 
in the event of such a crisis, the USG would intervene 
forcefully in defense of U.S. investor rights. 
 
¶8. (S) In a dramatic shift, Zelaya then told Ambassador that 
he actually would prefer to liberalize the fuels market in 
Honduras, along the lines of El Salvador.  However, he does 
not feel he could stand up to firebrand Juliette Handal, 
leader of the &Patriotic Coalition,8 or to Roman Catholic 
Cardinal Andres Rodriguez, both of whom supported the 
international tender.  He also said he could not stand up to 
the vested interests of the domestic fuel distributors and 
retailers -- who would certainly lose their bloated profit 
margins under any reform plan.  Instead, these constituencies 
must first see the public tender fail, to give Zelaya room to 
propose a liberalization scheme.  Rather than tackle this 
issue, Zelaya will seek to include fuels market reform as a 
performance criterion in the next International Monetary Fund 
agreement, scheduled for April. 
 
¶9. (S) IMF Resident Representative noted separately on March 
15 that inclusion of such a criterion would be "the surest 
way to drive Honduras off the program."  He questioned 
whether the intent of such a request was to give the GOH an 
excuse to later break faith with the Fund agreement.  He also 
noted that some probing of the issue has convinced him that 
little or no analysis of the fiscal impact of the proposed 
import scheme has been conducted.  The IMF review team, in 
Honduras this week, will raise this issue with the GOH as 
appropriate. 
 
¶10. (S) Post proposes two prompt responses to Zelaya's 
announcement of his desire to liberalize the market.  First, 
the USG should seek to immediately engage the Zelaya 
Administration by sending a team to explore his intent to 
create a liberalized fuels market over the next two or three 
years.  Second, Post recommends a senior-level dialogue 
between the affected companies and the GOH.  To date all 
contacts between the companies and the GOH have been at the 
country manager level.  If a crisis or expropriation is to be 
avoided, senior corporate leadership should now get involved. 
 Such talks could be conducted privately, out of the public 
eye, and could be linked to or part of the above discussions 
on reforms and liberalization. 
 
¶11. (U) Action request for State/EB, Energy, and Commerce: 
Post seeks Washington agency assistance in identifying 
technical experts in fuels market liberalization, regulation, 
and administration who could travel to Honduras to engage in 
a dialogue with the GOH on these topics.  If Zelaya is 
serious, the USG should be prepared to support his efforts at 
liberalization.  Such support should be coordinated with the 
World Bank, which also provides intermittent technical 
assistance to the GOH on fuels market issues. 
 
¶12. (S) Comment:  Post does not find Zelaya's alleged 
strategy (using the bid proposal as a straw man to leverage 
reform) credible.  We do not feel the GOH has adequately 
 
TEGUCIGALP 00000521  003 OF 003 
 
 
considered the political and economic fallout of the game 
they have chosen to play -- including but not limited to: its 
budget impact; its impact on the economy; the potential for 
expropriation compensation claims; the damage to investor 
confidence; and strained relations with the U.S.  Post also 
remains unconvinced that PetroCaribe is off the table, and 
will remain alert to signs of moves to access that program by 
the GOH.  We are unsure how to evaluate Zelaya's call for 
liberalized fuel markets, but feel it is too good an 
opportunity to pass up.  If he is serious, a concerted effort 
now could move Honduras towards an open, competitive, more 
efficient market -- essential for long term growth and 
investment.  We should take him up on his offer, and push 
hard for the reforms he claims to seek. 
 
¶13. (S) Comment (continued): Far more troubling is Zelaya's 
apparent strategy of letting difficult issues proceed to 
crisis instead of confronting them.  If he is unwilling or 
unable to exercise leadership when confronted by a relative 
political lightweight like Juliette Handal, how will he fare 
when he must face down the teachers' unions on public sector 
wages later this year?  End Comment. 
 
Ford 
Ford