VZCZCXYZ0000
RR RUEHWEB

DE RUEHZP #2105/01 2991530
ZNR UUUUU ZZH
R 261530Z OCT 06
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 9231
INFO RUCNDT/USMISSION USUN NEW YORK 0227
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS PANAMA 002105 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR WHA/EPSC CORNEILLE 
DEPARTMENT FOR EB/ESC/IEC IZZO 
DEPARTMENT FOR S/P MANUEL 
DEPARTMENT FOR OES/STC PAMELA BATES 
DEPARTMENT FOR OES/OGC G.THOMPSON 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PREL PGOV SENV PM
SUBJECT: LATIN AMERICA-CARIBBEAN BIOFUEL INITIATIVE 
 
REF: A. STATE 164558 
 
     ¶B. PANAMA 2005 
     ¶C. PANAMA 651 
 
¶1. (U) SUMMARY. Below is post's response to Reftel A.  END 
SUMMARY. 
 
---------------------------- 
ENERGY SECTOR - HYDROCARBONS 
---------------------------- 
 
¶2. (U) Panama's energy sector consists of the hydrocarbons 
industry and the electricity sector.  Panama's hydrocarbons 
industry was 100% private until July 2006 when the GOP passed 
legislation authorizing the creation of a state-run 
hydrocarbons entity.  GOP vision for this entity remains 
divided between utilizing a state-run entity to negotiate and 
participate in regional energy initiatives and recognition of 
the inherent conflict between regulating an industry in which 
they are an active participant.  To date, the state-run 
entity, Empresa de Generacion (EGESA) is in its inception 
phase with a pending finance request to the GOP of $300 
million .  The private sector hydrocarbons industry consists 
of Chevron-Texaco, Exxon-Mobil, Shell-BP and two national 
companies Accel and Delta. 
 
¶3. (SBU) At this time, fuel importers are required to onsell 
wholesale product based on an "import parity price" (IPP). 
This is a formula determined by the Ministry of Industry and 
Commerce (MICI) based on international transportation and 
commodity prices.  MICI recalculates the IPP every two weeks. 
 MICI also publishes a "suggested retail price" weekly. 
Distributors are not legally required to adhere to this price 
but exceeding this price can be perceived as "price gouging" 
by the Panamanian consumer.  During the 2006 spike in oil 
prices, MICI leaned heavily on the petroleum companies to 
minimize the pass-through of along price increases to 
consumers. 
 
--------------------------- 
ENERGY SECTOR - ELECTRICITY 
--------------------------- 
 
¶4. (U) Panama's electricity sector is divided into 
generation, transmission and distribution companies.  This 
sector was privatized in the late 1990's when the GOP sold 
49% of its holdings to the private sector.  The GOP remains 
an active participant in the electricity market through its 
partial ownership in each of the three areas and because the 
Panama Canal Authority (ACP) is also allowed to sell excess 
hydro electricity generated by the operation of the Canal to 
the distribution companies.  The GOP heavily subsidizes 
electricity for low income residents. 
 
¶5. (SBU)  About 64% of Panama's electricity is hydro 
generated.  The GOP is actively pursuing additional 
hydroelectricity capacity to reduce the country's dependency 
on thermal electricity, as Panama imports 100% of its fossil 
fuel consumption.  Generation capacity has not kept pace with 
demand.  By law, the distribution companies are required to 
contract for 100% of the electricity demand.  In the years 
following privatization, spot market prices were lower than 
contract prices and these companies began contracting for 
only about 70% of the demand with short term contracts.  The 
absence of long term supply contracts discouraged investment 
in new capacity by the industry.  MICI reversed this trend in 
2005 and several new hydroelectric plants as well as the 
conversion of an existing marine diesel plant to coal are 
underway.  However, Panama can be expected to remain 
dependent on expensive thermal electricity from the spot 
market to meet demand through 2008 when new (and cheaper) 
capacity is expected to come on-line.  Panama is actively 
pursuing the completion of the Central American electricity 
grid under the MesoAmerican Energy Initiative. 
 
------------------------------ 
HOST COUNTRY FUEL DISTRIBUTION 
------------------------------ 
 
¶6. (U) Panama currently uses bunker C and marine diesel for 
thermoelectricity generation and gasoline and diesel for 
transportation.  Passenger vehicles use motor gasoline 
(MOGAS) and buses and some passenger vehicles use diesel 
(Gasoil).  According to the GOP, Panama's 2005 hydrocarbon 
consumption was 14.8 million barrels.  The transport sector 
consumes 7.8 million, industry consumes 5.3 million and 
residential use consumes .945 million.  Within the transport 
sector, taxis and buses consume 3.6 million gallons of gas 
and 2.8 million gallons of diesel per year.  Further 
information is available at 
www.mici.gob.pa/hidrocarburos/consumonacional 2006.html. 
 
¶7. (U) The GOP is also actively exploring the importation 
liquid natural gas from Colombia.  Media reports state that 
Panama uses 100 million cubic meters of natural gas a day. 
 
¶8. (U)  At this time, there is no reliable measure of the use 
or availability of flex fuel cars in Panama.  In the last six 
months, two companies have begun selling kits to run existing 
vehicles on LP gas.  Although there is no legal impediment to 
the use of ethanol/gasoline blends, none of the current fuel 
suppliers/distributors offer the product.  Further, many 
automobile manufacturers do not guarantee performance when 
using alternative blends and it may negate the warranty on a 
vehicle. 
 
-------------- 
SUGAR INDUSTRY 
-------------- 
 
9.(U) In recent years, the Panamanian sugar industry reported 
lower production and profits claiming excess world supply and 
the decreased U.S. Tariff Rate Quota (TRQ).  During 2006, the 
U.S. increased the TRQ and the industry is reporting profits 
and planning to increase production.  Increased profit and 
high oil prices spurred interest in ethanol by the industry. 
The industry proposed to the GOP the doubling of the current 
sugar cultivation area through tax breaks and other 
protectionist measures against foreign competitors, primarily 
Brazil.  This legislation is under review by the governing 
committee in the Panamanian legislature.  In its current 
form, it may contain provisions in violation of Panama's WTO 
obligations. 
 
¶10. (U) All of Panama's sugar producers burn the fields 
before harvesting to increase efficiency and improve labor 
conditions.  One foreign company (an alcohol producer) 
expressed concern about the environmental damage and stated 
its intention to try alternative practices, including 
mechanized harvest.  However, as low cost labor is plentiful 
in Panama, the industry is not incented to invest in 
expensive mechanization for environmental reasons.  Post's 
Foreign Agricultural Section (FAS) staff could not find an 
instance of citizen action against sugar cane field burning. 
 
¶11. (U)  The total area under sugar cultivation in Panama is 
19,200 hectares.  Some 12,400 hectares are owned among 
Panama's four sugar producers and 6,400 hectares are 
subcontracted from private farmers.  Production is 
concentrated in Panama's central provinces.  One hectare of 
sugar cane can consume up to 60,000 liters of water per day 
with usage diminishing as the plants mature.  The most common 
fertilizer in use is UREA.  Also prevalent is Potassium 
Molibdate (MOP) and Diamine Phosphate (DAP).  The four 
privately owned and operated refineries produce 143,000 
metric tons of sugar each year.  The industry employs 3,800 
people during the low season and up to 8,500 during the high 
season.  All four mills burn bagasse as an energy source. 
One of the four mill owners told FAS staff that the sugar 
cultivation area could be tripled but would require 
additional land purchases and/or subcontracts to farmers. 
 
----------------------------------- 
INVESTMENT CLIMATE - LAND OWNERSHIP 
----------------------------------- 
 
¶12. (U) Panamanian law allows the private ownership of land 
by foreigners.  However, at this time only 30% of Panama's 
sovereign territory is properly surveyed and titled. 
Panama's land management bureau (CATASTRO) is currently 
receiving Inter-American Development Bank (IADB) funding to 
complete the land surveying and titling process.  Law 2 
passed in February of 2006 asserted the GOP's authority over 
Panama's coastal and island areas as concessionary property 
(similar to land lease in Hawaii).  Development of these 
areas requires the negotiation of a concession agreement with 
the GOP. 
 
¶13. (U) Significant portions of Panama are classified as 
Rights of Possession (ROP) land.  ROP property technically 
belongs to the government but occupants who can demonstrate 
they reside on the property, derive their primary subsistence 
and perform regular maintenance on the property for 15 years 
or more, can be awarded prescriptive rights (legal 
recognition that the property "belongs" to them.)  However, 
ROP, even with a certificate issued by the Department of 
Agriculture's Agrarian Reform (MIDA - Reforma Agraria) is 
susceptible to legal challenge.  The majority of Panama's 
indigenous population lives on ROP property, often within 
specially designated tribal lands (comarcas). 
 
--------------------------- 
INVESTMENT CLIMATE - ENERGY 
--------------------------- 
 
¶14. (U)  At this time, Panama has little to no environmental 
regulation specific to the production or refining of 
bio-fuels. 
 
¶15. (SBU) Panama is a global transportation and logistics 
center with highly sophisticated port facilities.  The 
availability of fuel storage tanks, however, is limited. 
Until recently, all fuel storage was owned or leased by the 
existing petroleum industry.  The GOP is negotiating an 
agreement with Chevron Texaco to take back several tanks on 
the Pacific coast near the entrance to the Panama Canal. 
 
¶16. (U) Panama has world class engineering and construction 
firms.  The market for these services as well as the related 
skilled and construction labor is extremely tight due to 
Panama's housing and construction boom, upcoming Canal 
expansion and a proposed $5 billion petroleum refinery in 
Puerto Armuelles (Refs B & C). 
 
¶17. (U) In the period after privatization (1999), electricity 
generation companies building new power plants could import 
material and equipment duty free and several did.  However, 
one U.S. company had several million dollars of duty 
incorrectly assessed.  Despite receiving a favorable ruling, 
they have yet to receive these funds back from the GOP. 
 
18.(U) In October 2006, the GOP proposed a new law which 
would introduce ethanol to Panama as of March 15, 2008.  The 
law provides the guidelines for the promotion and development 
of the use and production of ethanol.  The law establishes a 
minimum 5% ethanol blending requirement and allows the 
transport fleet and power generation sector to use up to 10% 
ethanol/gasoline blend.  The GOP contracted a private 
consulting firm to determine whether the proposed production 
of 16 million gallons of ethanol per year is beneficial. 
Media reports state it is estimated this would require an 
investment of $50 million and an additional 16,000 hectares 
of sugar cultivation.  The draft legislation considers the 
use of maize, banana, soya, manioc and/or sorghum for the 
production of bio-diesel as well. 
 
¶19. (U) Panama has an Association of Renewable Energy 
Producers (APPER).  On October 12 and 13, this association 
reportedly hosted the First Conference of Central American 
and Caribbean Renewable Energy Investors in Panama's City of 
Knowledge.  Renewable energy experts from the European Union 
are scheduled to visit Panama November 13 to 30 to assist 
this group in defining strategies to promote the use of 
renewable energy in Panama, establish a foundation for Panama 
to work with the EU in the transfer of technology, and 
potentially establish the City of Knowledge as a pilot site 
for the exploration of alternative energies. 
 
¶20. (U) Panama will host an OAS General Assembly meeting in 
June 2007.  The GOP has proposed the meeting's theme as 
"Energy for Development".  This, together with the UN 
Commission on Sustainable Development's two year cycle 
focused on energy issues could offer a useful platform to 
promote biofuels in the region. 
 
------- 
COMMENT 
------- 
 
¶21. (U) The GOP has a clear interest in exploring alternative 
energy sources and reducing its dependence on foreign oil. 
The transportation, financial and construction industries in 
Panama are highly developed and sophisticated.  Panama also 
has available agriculture capacity and inexpensive labor. 
These factors create a positive environment for investment in 
alternative energy sources if bio-fuels can be shown to be 
viable and profitable.  The challenge for the GOP is to 
enable market-driven solutions without undue government 
intervention.  It would be helpful if the OAS and UN CSD 
processes could show clear examples where private sector 
driven solutions have achieved real results. 
ARREAGA