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FM AMEMBASSY TEGUCIGALPA
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RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0495

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002030 
 
SIPDIS 
 
DEPT PASS TO WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL, 
OES/STC PAMELA BATES 
DEPT PASS TO USTDA for KMALONEY 
USAID FOR LAC/CEN KSIENKIEWICZ 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ENRG PREL PGOV SENV TRGY ETRD HO
SUBJECT: Honduras: Latin American-Caribbean BioFuels Initiative 
 
REF: A. 2006 State 164558 
 ¶B. 2006 Tegucigalpa 1935 
 ¶C. 2005 Tegucigalpa 836 
 
TEGUCIGALP 00002030  001.4 OF 004 
 
 
¶1.  Summary: This cable responds to ref (A). Despite confusion and 
controversy in the traditional energy sector, Honduras has made real 
progress in biofuel development.  Efforts are focused primarily on 
biodiesel, mainly through the cultivation of African Palm oil, and a 
consumer trial is now underway involving several fleets of city 
buses.  The willingness and potential to produce ethanol appears to 
exist, but outside of a few ambitious plans no definitive action has 
yet been taken.  With the supply of African Palm oil-based biodiesel 
set to triple within the next 2 years, the fuel may eventually be 
able to meet up to 30 percent of Honduras' diesel requirements.  End 
Summary. 
 
---------------------------------- 
TRADITIONAL ENERGY SECTOR OVERVIEW 
---------------------------------- 
 
¶2. The current Honduran fuel market is dominated by Diesel and Fuel 
oil (Bunker) and characterized by a limited number of importers. 
Specifically, the country used 15.7 million barrels of refined fuel 
in 2005, with the distribution as follows: Bunker 40%, Diesel 35%, 
Regular and Premium mogas (motor fuel) 18%, LPG 3%, and all else 3%. 
 Importers include HonduPetrol, Texaco, Exxon, Shell and DIPPSA. 
While Shell contracts separately for fuel imports, the company uses 
Texaco facilities to off-load, store and distribute downstream. 
DIPPSA physically imports but uses Exxon to contract shippers. 
(Note: Trafigura Beheer B.V., a Dutch oil products trader, has 
recently signed a deal with DIPPSA to provide their fuel in lieu of 
Exxon.  End Note). 
 
¶3. State energy company ENEE uses the bunker plants to power over 60 
percent of their electricity.  The break-down of total energy 
inventory is as follows: 
 
ENEE Energy Capacity By Source 
 
Thermal (mainly Bunker)  63 percent 
Hydroelectrical  33 percent 
BioMass     4 percent 
 
HonduPetrol and Texaco source their bunker from Switzerland-based 
trader Glencore International A.G., which supplies approximately 85 
percent of all bunker fuel imports into Honduras.  Owned by business 
magnate Freddy Nasser, HonduPetrol supplies bunker fuel to 
electricity generation customers including Nasser companies Emersa 
and EMCE, as well as Nasser confidant Schukry Kafie's Luffusa 2 and 
Luffusa 3 plants (Note: Luffusa 1 uses diesel.  End Note). Only 
thermal energy provider Elcohsa operates independently of Nasser and 
Kafie, importing its bunker through Texaco. 
 
¶4. In 2005, concerns that the limited number of importers permitted 
industry collusion that could artificially keep prices high led the 
GOH to form a select commission charged with recommending to the GOH 
a strategy to break the perceived oligopoly and allow greater 
competition (ref B).  Ironically, the commission proposed a 
government-led bid for one company to import all of Honduras' 
requirements in each type of fuel category for an initial period of 
one year.  While the bid continues, debate over whether the bid will 
succeed given numerous legal challenges clouds the process in 
uncertainty. 
 
------------------ 
BIODIESEL OVERVIEW 
------------------ 
 
¶5. Honduras' biofuel potential centers around African Palm-based 
biodiesel.  In April 2006, President Jose Manual "Mel" Zelaya 
Rosales announced that within five years and with the help of the 
Brazilian government and the Inter-American Development Bank, 
biodiesel will meet thirty percent of Honduras' fuel needs (ref C). 
Currently, there are approximately 80 thousand hectares devoted to 
African Palm plantations, located on the country's humid north coast 
region.  Until this year the fuel was used principally to power 
machinery belonging to businessman Miguel Facusse's Dinant 
corporation.  Dinant is a diversified food products company that 
uses African Palm oil as an ingredient while exporting the balance, 
principally to the U.S.  Overall, African Palm oil is Honduras' 
fifth largest export at $56 million per year. 
 
¶6. Currently there are four biodiesel refineries in Honduras using 
African Palm oil, producing approximately 14 thousand gallons of 
 
TEGUCIGALP 00002030  002 OF 004 
 
 
biodiesel a day.  In addition to Dinant, the other producers include 
HonduPalma, Jaremar, and Coapalma.  With escalating fuel prices over 
the past year, Dinant has devoted more and more palm oil to 
biodiesel production, peaking currently at 6 thousand gallons a day. 
 With new improvements now underway at their big plant in Trujillo, 
however, Dinant is anticipating expanding production of up to 32 
thousand gallons a day by the end of 2006. (Comment: There is some 
concern that Dinant could quickly dominate the biodiesel market. 
End Comment). 
 
¶7. A fifth plant, located near the fresh water lake of Yojoa, 
produces approximately 1500 gallons a day of biodiesel from Tilapia, 
a fast growing fish raised on a multitude of aquaculture farms.  The 
producer, Aquafinca, is planning to bring production up to 10 
thousand gallons a day within a year.  Honduras is currently Central 
America's top exporter of Tilapia at USD 30 million a year, with 20 
percent growth expected in 2006.  Another biodiesel initiative using 
ten thousand pine nut plants is currently in a pilot phase in a 
remote area in central Honduras. 
 
---------------- 
ETHANOL OVERVIEW 
---------------- 
 
¶8. While the GOH has shown an interest in developing ethanol from 
sugar cane, currently the country's 65 thousand hectares under 
cultivation are used to produce raw sugar for export and internal 
consumption (Note: A small plant exists to produce refined sugar. 
End Note).  The industry employs about 25 thousand workers directly 
with about 150 thousand benefiting indirectly.  All production, 
commerce and distribution are privately owned, with seven large 
regional mills sending their production to the Sugar Miller's 
Association (CISA), which distributes nationwide.  Forty-nine 
percent of the crop is cultivated by large producers, with fifty-one 
percent cultivated on 1,650 independent farms.  Most of the 
plantations are located in the northwest, with smaller producers in 
central and southern Honduras.  Regional crushing capacity is as 
follows: 
 
CRUSHERS NAME    CRUSHING CAPACITY 
      (METRIC TONS) 
 
Azucarera Hondrena, S.A.   81,266 
Azucarera Choluteca, S.A.  41,499 
Azucarera Chumbagua, S.A.  30,558 
Azucarera La Grecia, S.A.  97,641 
Azucarera Yojoa, S.A.   33,080 
Azucarera Tres Valles, S.A.  45,571 
Azunosa      48,591 
 
  Total    378,206 
 
Note: There is one plant that produces refined sugar with a capacity 
of 35 thousand short tons per year. 
 
¶9.  Sugarcane overall is Honduras' sixth most important agricultural 
crop, accounting for about 5 percent of agricultural GNP.  That 
said, Honduran sugar cane producers are considered inefficient by 
regional standards, with yields of 85.84 metric tons per hectare. 
Bagasse, the biomass remaining after sugarcane stalks are crushed to 
extract their juice, is used for electrical power generation by the 
mills.  Harvesting methods still use an annual burning, which covers 
most of the region in heavy smoke and routinely shuts down all air 
traffic to major cities for several days each year.  Concerted 
action to reduce this source of pollution has been stymied by the 
powerful sugar industry. 
 
¶10.  Sources from the sugar industry have stated that they want to 
add an additional 10 thousand hectares of sugar cane to begin 
producing ethanol as a gasoline additive (Note: a production car can 
use up to 10 percent ethanol with mogas without modifications.  End 
Note).  The sugar industry is requesting USD 80 million from the GOH 
to help expand the effort.  Recently, a Canadian investor group 
announced a USD 150 million investment in sugar cane cultivation on 
45 thousand hectares with the express purpose of producing ethanol. 
They forecast initial production of about 7,300 gallons per day 
generating about four thousand new jobs.  Additionally, a group of 
investors from Taiwan have indicated that they plan to invest up to 
USD 30 million in the planting of 20 thousand hectares of Cassava, 
also known as yuca.  The plant could eventually produce over 10 
thousand gallons of ethanol per day.  (Comment: The willingness and 
capability to expand ethanol production appears to exist.  While the 
focus may be on biodiesel, potential exists for a more coordinated 
effort to promote ethanol for domestic consumption or for export. 
 
TEGUCIGALP 00002030  003 OF 004 
 
 
End Comment). 
 
------------------------------------- 
BIOMASS MAY HELP ENEE IN COMING YEARS 
------------------------------------- 
 
¶11. For state-run energy company ENEE, the primary renewable energy 
components come from Hydroelectric sources.  El Cajon, a large dam 
in central Honduras, produces the most energy at 300 MW.  Overall, 
only 37 percent of ENEE's potential energy comes from renewable 
sources.  President Zelaya recently came to an agreement with the 
government of Taiwan on a multi- billion USD project to start 
another dam project called Patuca III, a project that has faced 
considerable grass roots level resistance.  A wind energy project 
that has been mired in controversy could potentially add another 30 
MW. 
 
¶12. Currently only about 4 percent of ENEE's energy inventory comes 
from biomass sources, principally sugar bagasse and similar residue 
from African palm production.  Both sources use the biomass to power 
their own production facilities while selling any extra capacity to 
ENEE at a relatively cheap 6.3 cents per KiloWatt Hour (KWH) (Note: 
ENEE averages between 11 and 12 cents per KWH overall.  End Note). 
A Florida based company called eGrass (www.egrass.com) just signed 
an MOU with ENEE to provide 240 MegaWatts (MW) from two plants using 
a high-yield perennial herbaceous crop that can be harvested 
year-round.  Officials from eGrass indicate that the land has been 
identified and production of electricity could start within two 
years, providing a quick and environmentally friendly way to meet 
ENEE's crushing energy needs (Note: With energy requirements on the 
northern business centers growing at over 10 percent, the eGrass 
proposal could constitute ENEE's baseline energy requirement in 
¶2009.  End Note).  The deal, which would commit ENEE to purchase the 
energy at around 7.5 cents per KWH, is pending review by the 
committee council that runs ENEE. 
 
---------------------------------- 
AFRICAN PALM BIODIESEL INITIATIVES 
---------------------------------- 
 
¶13. Dinant's efficiency in production caught the eye of the GOH, 
which was desperately looking for fuel alternatives as it struggled 
with enacting the national fuel bid.  The GOH responded by 
appointing former Congressman Moises Starkman (uncle of former ENEE 
General Manager Leion Starkman) to led the effort to find a solution 
in the capacity of a minister-level biodiesel "czar."   Starkman's 
charter was not only to reduce Honduras' energy dependency and gain 
some measure of control over prices at the pump, but to increase 
employment and clean-up the environment in the process. 
 
¶14. Starkman noted Dinant's ability to increase production capacity 
and quickly recommended an increase in the number of African Palm 
trees under cultivation.  In March 2006 GOH Minister of Agriculture 
Hector Hernandez signed an agreement with Malaysia to import an 
additional 1.2 million palm plants, which would bring the total 
number of hectares under cultivation to 200 thousand.  Per 
Starkman's calculations, palm oil production would stimulate 1.5 new 
jobs per hectare resulting in 300,000 new jobs as the trees begin to 
produce the oil.  Equally as important, Starkman recommended that 
the future plantations be located in several underdeveloped areas, 
including Puerto Lempira in Honduras' remote Mosquitia region, 
bringing desperately needed infrastructure development, jobs and a 
reliable fuel source. 
 
¶15. While the increased hectares under cultivation takes the 
estimated two years to bring additional biodiesel to market, 
Starkman has undertaken a consumer trial to introduce biodiesel to 
the Honduran public.  The trial officially started in August 2006, 
and will involve 620 city buses in the capital city of Tegucigalpa 
and northern industrial hub of San Pedro Sula.  The independent 
owner of these buses have agreed to start using a 5 percent 
biodiesel blend (B-5) from participating gasoline stations, a blend 
that will be increased incrementally over the following four months 
to B-20.  The idea is to not only to gradually clean the engines 
(Note: biodiesel actually cleans the carbon build-up from years of 
diesel usage.  End Note) but to educate consumers that biodiesel can 
and will work efficiently in their car engines.  The trial may soon 
move to the northern city of La Ceiba.  Overall, Starkman has 
estimated that his pilot will reduce the overall diesel bill for 
Honduras by at least USD 2 million. 
 
¶16.  A similar initiative is being launched by the mayor of 
Tegucigalpa Ricardo Alvarez.  He plans to finance the initial engine 
cleaning of up to 60 city buses with the intent of running them from 
 
TEGUCIGALP 00002030  004 OF 004 
 
 
the start on 100 percent biodiesel (B-100).  Per the mayor's 
coordinator, former Minister of Industry Irving Guerrero, 
approximately 5 bus engines per week will be cleaned and potentially 
modified at a cost of approximately USD 1,500 each (Note: some older 
engine parts may corrode if used with biodiesel.  End Note).  The 
city will provide financing for the initial cleaning, and use a 
software program to collect a nominal payment from the bus owners at 
the pump.  The payments will gradually pay down the USD 1,500 over a 
set period of time.  (Comment: Guerrero requested and was approved a 
U.S. Trade Development Authority grant to promote this project.  A 
consultant is now being hired to help better develop the project 
specifics.  One possible area of focus is car manufacturer 
certification of biodiesel in their engines.  Fuel industry 
representatives and gasoline station owners have expressed concern 
over the response of manufacturers if consumers begin to complain. 
End Comment.) 
 
¶17. Starkman and Alvarez have both made their projects 
non-compulsory, with the expressed intent to qualify for carbon 
emissions credits offered by the Kyoto Protocol.  Carbon credits are 
measured in units of certified emission reductions (CERs), which are 
equivalent to one ton of carbon dioxide reduction. Developed 
countries that have exceeded the levels can either cut down 
emissions, or borrow or buy carbon credits from a developing country 
like Honduras.  Starkman has outlined a sampling program to measure 
the reduction annually, and has estimated the potential payment at 
several million USD.  Traditional fuel industry sources have argued 
for a compulsory B-5 blend available at all service stations, to 
ensure a consistent supply and equivalent tax benefits for suppliers 
(Comment: There would be no taxes levied on the biodiesel portion. 
The potential revenue loss from biodiesel blends is an issue for the 
GOH, which may limit the overall use of biodiesel in the economy. 
End Comment). 
 
--------------- 
LEGAL FRAMEWORK 
--------------- 
 
¶18.  In order to promote the use of renewable fuels in Honduras, a 
biofuels law was introduced to Congress in 2005.  The law sought to 
bring together the need for energy independence, new jobs, and 
reduced pollution within a judicial framework.  Taxes are the most 
important issue: the law would exempt biofuel-related activity from 
all taxes for a period of twelve years.  The exemption would include 
income, sales, and import taxes and would cover activities relating 
to biofuel studies and the construction, maintenance, and operation 
of biofuel plants.  The law also calls for the creation of a 
Biofuels Technical Unit under the Ministry of Industry and Trade 
that would formulate and recommend public policies for the 
development of local biofuel products in conjunction with the 
energy, agro-industry, and agricultural sectors.  The law has 
languished in Congress for several months, however, principally due 
to political factors (Note: The bill was introduced by a member of 
the nationalist party, now in opposition after last November's 
elections.  It has yet to win a place on this Congress' agenda.  End 
Note).  A similar bill promoting renewable sources of electricity 
has also languished, but was re-introduced by the Zelaya 
Administration in early October 2006.  The bill has yet to pass and 
faces stiff opposition from entrenched interests linked to 
fossil-fuel fired electricity generators. 
 
¶19.  Comment:  The lack of energy independence remains a major issue 
in Honduras and, while 30 percent biodiesel usage may be a stretch, 
African Palm oil represents at least a hope of gaining some control 
over energy prices.  The country's humid north coast is ideal for 
the African palm, and the expected employment and reforestation 
benefits may be on target.  As one energy expert from the World Bank 
pointed out, however, only once in recent history has biodiesel been 
price-competitive with diesel, and only for a brief period of time. 
Correspondingly, the GOH needs to evaluate the fiscal impact of 
blending a high percentage of tax-exempt biodiesel into the nation's 
fuel supply.  On ethanol, while the will and raw materials exist, 
lack of downstream infrastructure and a stalemate on the proposed 
law has limited advancement.  If ethanol can gain the traction of 
African Palm-based biodiesel, though, Honduras may yet gain some 
degree of energy independence. End Comment. 
 
Ford