VZCZCXYZ0001
RR RUEHWEB

DE RUEHMU #2384/01 2991557
ZNR UUUUU ZZH
R 261557Z OCT 06
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 8017
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS MANAGUA 002384 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR: WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL, 
AND OES/STC PAMELA BATES 
 
E.O. 12958: N/A 
TAGS: ENRG SENV ECON PREL PGOV NU
SUBJECT: NICARAGUA: RESPONSE TO LATIN AMERICA-CARIBBEAN 
BIOFUELS INITIATIVE 
 
REF: A. STATE 164558 
     ¶B. MANAGUA 02051 
 
¶1. (U) Summary:  Nicaragua,s energy sector is heavily 
dependent upon imported oil for electricity production.  High 
oil prices and poor regulation of the energy sector have left 
electricity producers and distributors with empty pockets and 
consumers without electricity.  Nicaragua's climate and soil 
are well suited to sugar cane production and experts predict 
that within five years production will increase by 90% to a 
total of 100,000 hectares.  The country's first ethanol plant 
will begin operation in November 2006, producing 18 million 
liters of ethanol for export to Europe.  An African 
palm-based biodiesel will hit the local market within a year 
and a second biodiesel from oleaginous plants will be 
commercially available in 2008.  Experts worry, nonetheless, 
that market pressures will drive investors away from biofuels 
and into more profitable markets.  Without incentives from 
the GON to pursue alternative fuel sources and a regulatory 
framework to support the long-term growth and success of 
biofuels, the fledgling biofuels sector may never take hold. 
 End Summary. 
 
Energy Production, Distribution, and Use 
--------------------------------------------- 
¶2. (U) Nicaragua is heavily dependent upon imported petroleum 
for electricity production.  The country generates almost 70% 
of its electricity from heavy fuel oil or diesel.  Despite 
huge potential, hydro-power accounts for only 15% of 
electricity installed capacity, but production this year has 
fallen to 10% as a result of drought.  Other "green" energy 
sources such as geothermic and burning of bagasse (biowaste 
from sugar cane harvest) generate 15% of electricity 
production.  Most industrial enterprises and the heavy 
transportation sector are fueled by diesel.  Cars and light 
trucks use gasoline; ethanol is not available on the local 
market. 
 
¶3. (U) Nicaragua partially privatized its energy sector in 
2001 and privately-owned companies now account for 60% of 
production and almost 100% of distribution.  The regulator, 
INE (the National Energy Institute), a creature of the 
National Assembly and headed by a politician, has not managed 
the sector well, creating an inhospitable environment for 
growth.  INE administers electricity prices and issues 
tenders for power production, but has failed to adequately 
deal with rising oil prices, aging infrastructure, and 
growing local demand.  In addition, two-thirds of all 
customers qualify for free electricity through a subsidy that 
must be borne either by paying customers or the government. 
The National Assembly has not appropriated sufficient funds 
to subsidize the sector, putting great financial strain on 
the industry.  Compounding the problem this year has been 
unexpected maintenance on one power plant and low rainfall 
along the river basin behind the country's largest 
hydroelectric dam.  The result has been chronic blackouts and 
power rationing throughout the country. 
 
Sugar Production Booming with Great Potential to Expand 
--------------------------------------------- ---------- 

¶4. (U) Nicaragua is the third largest sugar producer in 
Central America.  Its soil and climate are well suited to the 
task.  Annual rain falls provide most of the water needed for 
growing.  Production yields are among the highest in Central 
America at more than 119 metric tons of sugar cane per 
hectare with an average of 225 pounds of sugar per metric ton 
of sugar cane (compared to an average of 269 pounds per 
metric ton in the United States).  According to the Ministry 
of Labor, the sugar sector employs 35,000 people in the 
fields and supports an additional 100,000 jobs nationwide. 
Many consider Nicaragua's sugar industry to be the 
best-organized in the country. 
 
¶5. (U) Nicaragua,s four large scale sugar plantations and 
four sugar mills are concentrated along the Pacific Coast. 
San Antonio (of the Pellas Group) is the largest producer of 
sugar cane, with more than 28,800 hectares under production. 
The second largest producer, Monte Rosa, has 21,000 hectares 
under production.  The two remaining significant producers, 
Montelimar and Benjamin Zeledon, cultivate 5,000 and 3,000 
hectares, respectively.  The Ministry of Agriculture and 
Forestry (MAGFOR) estimates that an additional 42,000 
hectares of fallow land could potentially produce sugar cane. 
 Experts predict that within five years, a total of 100,000 
hectares will be utilized for sugar production, resulting in 
an almost 90% increase over current production levels. 
 
¶6. (U) The vast majority of sugar cane in Nicaragua is 
harvested by hand, using a method that involves the burning 
of sugar cane fields before harvest.  New MAGFOR technical 
norms, however, set burn limits to control pollution.  As a 
result, mechanized harvesting is becoming more prevelant. 
Industry insiders expect that within three years, 70% of 
sugar cane will be harvested mechanically and that this will 
increase the average yield per metric ton.  All four sugar 
mills burn bagasse to generate electricity.  Together, they 
sell 60 megawatts to a local, independent power producer. 
 
Technical Skills 
---------------- 

¶7. (U) Nicaragua,s total labor force, estimated at 2 million 
workers in July 2005, is largely rural and unskilled. 
Critical shortages of skilled technicians and managerial 
personnel present significant challenges to industry.  An 
estimated 30% of the employed population works in the 
agricultural sector, 52% in services, and 18% in 
manufacturing.  A senior engineer for a Spanish construction 
company working in Nicaragua told Econoff that his company 
delayed the start of a major project by three months to 
search for mid-level mechanical and industrial engineers, as 
well as project managers.  Eventually, the company filled 
half of the available jobs with workers from Spain.  A dearth 
of qualified individuals to work on biofuels development and 
ethanol plants could pose a problem for the advancement of 
alternative energy. 
 
Bio-Refineries and the Environment 
------------------------------------- 

¶8. (U) A 1994 environmental standards law requires that 
certain industries (i.e., leather, dairy, sugar, forestry, 
and meat processors) submit for approval environmental impact 
statements to the Ministry of Environment and Natural 
Resources (MARENA).  The list of industries is not 
comprehensive and many sectors, including bio-refineries, 
currently operate without environmental oversight.  A revised 
version of the 1994 law, which would require all industries 
to submit environmental impact statements, will go to the 
President in November for approval.  A MARENA insider doubts, 
however, that the President will ratify the proposed changes 
because they do not sufficiently centralize authority over 
the regulatory process. 
 
Infrastructure: Ports, Roads, and Transportation 
--------------------------------------------- ----- 

¶9. (U) Nicaragua has no major port on the Atlantic coast, so 
most shippers use Puerto Cortes in Honduras.  Ground 
shipments to and from Puerto Cortes, however, are 
increasingly at risk of being hijacked.  On the Pacific 
Coast, the small Nicaraguan Port of Corinto is capable of 
handling liquid cargo.  Ground transportation from east to 
west is extremely difficult.  There are few paved roads 
linking the Pacific and the Atlantic coasts and, those that 
exist are in poor condition.  Generally, ground 
transportation for heavy cargo to and from ports is readily 
available. 
 
Nicaragua to Produce Ethanol for Export 
------------------------------------------ 

¶10. (U) In November 2006, Nicaragua,s first ethanol plant 
will begin operation.  The Pellas Group, owner of Nicaragua's 
largest sugar plantation and the country's only sugar 
refinery, invested more than $4 million in the development of 
a Pacific coast ethanol plant.  The company holds a one-year 
contract with a single buyer in Europe, who will purchase all 
18 million liters produced.  A Pellas Group spokesperson 
suggested that Pellas is poised to expand production if the 
ethanol plant was successful in its first year.  To date, the 
company has no plans to distribute ethanol domestically. 
 
¶11. (U) Existing infrastructure could support the transport, 
storage, and export of up to three times the Pellas Group's 
estimated annual production of 18 million liters.  The 
ethanol plant is 18 miles from the Port of Corinto, which has 
a 7 million liter storage capacity dedicated to ethanol.  At 
current production levels, Pellas will need less than half of 
this storage capacity at any given time.  Pellas plans to 
transport ethanol from the plant to the Port of Corinto in 
28,000 liter tanker trucks, which it has no difficulties 
procuring. 
 
Biodiesels: Coming Soon 
------------------------- 

¶12. (U) Another private enterprise, Agroindustrias de 
Occidente (AGRINOSA), is venturing into the biofuels market 
with an African Palm-based biodiesel.  AGRINOSA has yet to 
commercialize its product and is months away from completing 
the paperwork needed to enter the local market.  AGRINOSA 
will sell the biodiesel to factories and heavy transportation  
vehicles (two industries that are almost 100% dependent on 
diesel consumption).  A 2005 AGRINOSA study of the energy 
market estimated current domestic demand for biodiesel at 5.6 
million liters per month.  AGRINOSA is capable of producing 
1.4 million liters per month, or 25% of current demand. 
 
¶13. (U) Grupo Cohen, a prominent Nicaraguan investment group, 
has visions of joining AGRINOSA in the biodiesel market. 
They are launching a pilot project to produce biodiesel from 
oleaginous plants (i.e. soybean, sunflower, and peanuts). 
Estimated production capacity is 1.8 million liters per year 
and pilot production should begin within the coming months. 
Grupo Cohen is not commited to a definite timeline, but hope 
to make its product available commercially by mid 2008. 
Neither AGRINOSA nor Grupo Cohen plan to export biodiesel. 
 
 
Challenges to Biofuel Development 
------------------------------------- 

¶14. (U) While the biofuel industry has attracted some private 
investment, a 2005 study by the Instituto Interamericano de 
Cooperacion para la Agricultura (IICA) and MAGFOR suggests 
that the GON will need to take a leading role in alternative 
energy production to sustain long-term production.  The study 
criticized the GON for its "lack of political will" to move 
ethanol or biodiesels forward, pointing to an absence of 
incentives for biofuel production or use. 
 
¶15. (U) Experts fear that investors will abandon biofuels for 
more profitable markets if the GON does not provide 
incentives for alternative fuel production.  In 2005, for 
example, the Pellas Group invested in a new distillery and 
alcohol dehydrator to produce ethanol on a trial basis and 
earmarked 8,000 metric tons of sugar cane for the project. 
When international sugar prices skyrocketed, the company 
stopped ethanol production and processed the cane for sugar 
export.  Without stable prices and incentives to stay in the 
ethanol market, the industry may never develop. 
 
¶16. (U) Pedro Silva de la Maza, project director for San 
Antonio, echoed these concerns.  He believes that cooperation 
among GON institutions is weak and that the biofuels industry 
needs "collaboration and joint planning between the forestry, 
agricultural, and energy sectors" if it is to materialize. 
The problem, he points out, is that "these ministries are 
challenged with immediate problems and have few resources to 
deal with advancing ethanol production." 
 
¶17. (U) Comment: Nicaragua is heavily dependent on imported 
oil and suffers when oil prices rise.  In July 2006, violent 
demonstrations erupted throughout the capital when rising 
fuel prices forced bus companies to increase fares.  Frequent 
and prolonged blackouts spurred protests throughout the 
country in August and September.  Ethanol production could go 
a long way toward alleviating the country's dependency upon 
foreign oil and reducing imports.  Nicaragua has a 
well-developed sugar industry, available fallow land, and 
existing private investment in ethanol and biofuels 
production.  Without incentives from the GON to pursue 
alternative fuel sources and a regulatory framework to 
support the long-term growth and success of biofuels, the 
fledgling biofuels sector may never take hold.  End Comment. 
TRIVELLI