VZCZCXRO2182
RR RUEHLMC
DE RUEHSN #2513/01 2902056
ZNR UUUUU ZZH
R 172056Z OCT 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 4048
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 03 SAN SALVADOR 002513 
 
SIPDIS 
 
DEPT FOR WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL, OES/STC 
PAMELA BATES 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PREL PGOV ES
SUBJECT: LATIN AMERICA-CARIBBEAN BIOFUELS INITIATIVE RESPONSE 
 
REF: STATE 164558 
 
SUMMARY 
------- 
¶1. This cable responds to reftel.  There is significant interest in 
El Salvador to promote biofuels, but to date concrete actions have 
not been taken.  The GOES is working on legislation to promote 
ethanol production, storage, and sales.  The law would mandate a 
90/10 gasoline/ethanol mix, a mixture that normal gasoline engines 
can use without modification.  Interest in ethanol production has 
grown with the increase in global petroleum prices.  The GOES views 
ethanol use as a way to decrease dependence on petroleum imports 
(over $900 million in 2005) and to stimulate the agricultural 
sector.  Brazilian companies are exploring investment opportunities 
in El Salvador in the renewable energy sector.  End summary. 
 
ETHANOL EXPORTS AND DOMESTIC USE 
-------------------------------- 
¶2.  The GOES, led by the Ministry of Economy and the Ministry of 
Agriculture, in conjunction with the Salvadoran Sugar Association, 
has been working on legislation that would promote ethanol 
production, storage, and sales.  The legislation would create an 
incentive to produce ethanol to supply the U.S. market; CAFTA 
reserves for El Salvador an export quota of 5.2 million gallons of 
ethanol in the first year, and the quota will increase by 1.3 
million gallons every year.  CAFTA requires that this ethanol be 
distilled in El Salvador but not necessarily from locally grown raw 
inputs.  For local use, the law would mandate a 90/10 gasoline 
ethanol mix, a mixture that normal gasoline engines can use without 
modification. 
 
¶3.  Interest in ethanol production has grown with the increase in 
global petroleum prices.  The GOES views ethanol use as a way to 
decrease dependence on petroleum imports (over $900 million in 2005) 
and to stimulate the agricultural sector.  According to Julio 
Arroyo, Executive Director of the Salvadoran Sugar Association, 
gasoline mixed with ethanol produced from sugarcane in El Salvador 
can be competitive when oil prices are higher than $40 - $50 per 
barrel.  He also said that when using locally grown sugar cane, 80 
percent of the revenues generated from ethanol production would go 
directly to farmers, with 20 percent going to the refiners. 
 
FACTS AND FIGURES 
----------------- 
¶4.  In 2005, El Salvador imported $900 million of petroleum 
products, including approximately $455 million in direct gasoline 
imports or petroleum to be refined into gasoline.  Assuming ethanol 
could be produced at the price of gasoline, a 10 percent ethanol mix 
would mean $45.5 million generated in the local market, with $36 
million of that in the rural agricultural sector.  The current 
breakdown of the fuel market in El Salvador is estimated to be 57 
percent diesel, 26 percent regular gasoline, and 17 percent premium 
gasoline--a total of 343.1 million gallons per year. 
 
THE SUGAR INDUSTRY 
------------------ 
¶5.  Although El Salvador lacks environmental regulations for 
bio-refinery, two local companies produce ethanol, Las Cabaas 
Refinery and The Salvadoran Sugarcane Company (CASSA): 
 
--Las Cabaas Refinery: In 1987, Las Cabaas sugarcane mill 
installed machinery to produce ethanol and ran it for 4 years. 
(Note:  This was to supply ethanol to mix with gasoline, a voluntary 
pilot project which some gasoline stations participated in between 
1987 and 1991.  End note)  In 2005, with an investment of $800,000, 
they refurbished the existing equipment, giving them the ability to 
produce 31,700 gallons per day from raw sugarcane or 15,850 gallons 
per day using molasses, a byproduct of sugar refining.  To date they 
have only tested small batches and have not run at capacity.  Ana 
Mariella Rivas, the General Manager at Las Cabaas, told emboffs 
they worry about competition from Brazil but believe they can find a 
market for their product in the United States.  (Note: Rivas also 
said they are looking for ways to dispose of the vinasse, a 
byproduct of the distillation process high in potassium but 
extremely acidic, of which 20 gallons is created for each gallon of 
ethanol.  She suggested they it may be used as fertilizer, with 
careful Ph monitoring. End note.) 
 
--The Salvadoran Sugarcane Company (CASSA): A joint venture between 
CASSA, Cargill, and the American Renewable Fuel Suppliers resulted 
in the construction of a $10.5 million alcohol dehydration plant in 
Acajutla.  The plant has the capacity to produce 60 million gallons 
of ethanol a year but hasn't yet been tested to this level.  The 
plant began operations in September 2005 and is now dehydrating 
Brazilian alcohol to re-export to the United States under CAFTA-DR. 
 
¶6.  The GOES is also experimenting with an ethanol and biodiesel 
pilot project to determine their economic and technical feasibility. 
 
SAN SALVAD 00002513  002 OF 003 
 
 
 El Salvador does not have flex-fuel vehicles, but the decision to 
move forward with ethanol/gasoline mix could represent an 
opportunity for flex-fuel (running up to 85 percent ethanol) car 
manufacturers, such as Toyota and Volkswagen. 
 
¶7.  According to Julio Arroyo, Executive Director of the Salvadoran 
Sugar Association, to produce 15 million gallons of ethanol per 
year, which is the estimated need for a 10 percent ethanol mix, El 
Salvador would need 4 ethanol plants producing 31,700 gallons per 
day running for 120-150 days per year.  Arroyo estimates an 
additional 7,000 hectares of sugar would need to be planted, 
creating 4,000 new jobs.  Currently, 72,000 hectares are under sugar 
cultivation and 7,000 farmers grow sugarcane.  The construction of 
an ethanol plant that could produce 31,700 gallons per day would 
require an initial investment of $10 to $12 million. 
 
¶8.  The Salvadoran Sugar Association, Las Cabaas, and CASSA are 
anxious to see the passage of legislation to promote ethanol use 
through tax incentives for production and local usage.  They are 
concerned about competition from Brazil, which has a well-developed 
industry and lower operating costs.  One local fuel producer, Esso, 
which owns a share of the RASA refinery at Acajutla, is not worried 
about increased competition from ethanol, but is concerned that its 
production will be subsidized by the sugar industry and the true 
costs of production will be hidden.  The petroleum companies in the 
Salvadoran market have also cautioned that the use of a 
gasoline-ethanol mix not be mandatory unless adequate supply were 
guaranteed.  Neither industry representatives nor Director of 
Hydrocarbons and Mines at the Ministry of Economy Gina Hernandez 
could provide a timetable for passage of the legislation.  Julio 
Noltenius, Executive Director of CASSA, believes that high fuel 
prices will drive other sugar mills to invest in ethanol production 
plants, even if there is no government legislation in place. 
 
¶9.  Note: With few exceptions, foreign citizens and private 
companies can freely establish businesses in El Salvador. Foreign 
firms can also own essential national infrastructure. End note. 
 
PORT FACILITIES 
---------------- 
¶10.  Currently, El Salvador's only cargo seaport is located in 
Acajutla.  However, the Japan Bank for International Cooperation 
provided a $129 million loan to finance development of port 
facilities, including a terminal, peripheral equipment, and access 
roads at La Union Port (formerly Cutuco Port) located southwest of 
Fonseca Bay, at the eastern end of El Salvador.  Puerto de La Union 
will offer excellent infrastructure by 2009.  Its 117 hectares will 
have one terminal for containers, two for receiving and distributing 
grains, and one for passenger traffic.  Thus, El Salvador will soon 
have additional facilities to accommodate vessels to transport 
ethanol to the United States.  The port is 185km by highway and 
252km by rail from San Salvador. 
 
BRAZIL LOOKING FOR OPPORTUNITIES 
-------------------------------- 
¶11.  In May of this year, Plinio Nastari of Datargo, a Brazilian 
Consulting Company, met with the Salvadoran Sugar Association, the 
Salvadoran Private Sector Association (ANEP), the Salvadoran Chamber 
of Commerce, and the Ministry of Economy to describe the Brazilian 
history with ethanol production and offer advice on investment in 
renewable energy.  On June 2, a Brazilian trade delegation visited 
El Salvador seeking new investment opportunities with the local 
industry, including renewable energy. 
 
ENERGY SECTOR 
-------------- 
¶12.  In 1998, the government privatized electricity distribution and 
established an electricity market separated among generation, 
transmission, and distribution.  The law established an electricity 
market in which generators bid power into the market based on the 
price of their generation.  However, the GOES is seriously 
considering shifting to a cost based pricing mechanism. 
 
¶13.  Distribution is controlled by two U.S. companies with a 
combined investment of $699 million.  In 1999, CEL sold its shares 
of a 265 MW thermal generation facility to an American company at a 
cost of $210 million and its shares of Nejapa Power to another 
American company at an estimated cost of $212 million.  During the 
dry season, both companies provide more than 50 percent of the total 
energy produced in the country.  The government owns all 
hydroelectric resources and 85 percent of a geothermal company. 
 
¶14.  SIGET (the electricity and telecommunications regulator), sets 
end-user tariffs every six months.  Energy cost is calculated as the 
average cost of the last 6 months that was negotiated in the spot 
market.  There is no government mandated ethanol blending 
requirement. 
 
 
SAN SALVAD 00002513  003 OF 003 
 
 
COMMENT 
------- 
¶15.  At current gasoline prices (approximately $3.10/gallon for 
regular unleaded gasoline) using a 10 percent ethanol mix makes 
economic sense.  Both Julio Arroyo and GOES officials admit it will 
not lower fuel costs, but rather offers an opportunity to keep more 
of that $3.10/gallon in El Salvador.  The sugar industry's support 
for the ethanol legislation--especially the support of CASSA and the 
wealthy Regalado family--make it likely that ethanol legislation 
will be passed sooner rather than later.  End comment. 
 
Barclay