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UNCLAS SECTION 01 OF 03 CARACAS 003374 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/EPSC FAITH CORNEILLE 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EINV VE
SUBJECT: VENEZUELA LAUNCHES UNREALISTIC ETHANOL PLAN AGAIN 
 
REF: A. CARACAS 1209 
     ¶B. CARACAS 3224 
     ¶C. CARACAS 1397 
 
This message is sensitive but unclassified, please treat 
accordingly. 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU)  On October 26, PDVSA unveiled their Ethanol 
Agro-Energy Development Project, designed to produce over 10 
million barrels of ethanol per year by 2012.  The plan 
differs very little from previous PDVSA ethanol plans in 
scope, but incorporates new social development models.  The 
ethanol will be produced from sugar cane, rice, and yucca, 
and will replace ethanol imports from Brazil that are used as 
a gasoline additive.  Despite serious problems in the 
existing sugar industry (from sugar refinery issues to price 
controls to property destruction by squatters), the PDVSA 
plan seeks to double the amount of land used for sugar cane 
cultivation.  The plan's "social projects" promote BRV-style 
business models (cooperatives, social production enterprises 
and endogenous development).  PDVSA explicitly stated they 
would work together with the National Land Institute, paving 
the way for more takeovers of "idle" land holdings and 
"reform" in favor of agricultural cooperatives.  PDVSA's 
plan, in short, is unrealistic.  End Summary. 
 
-------- 
THE PLAN 
-------- 
 
¶2. (SBU)  During an invitation-only seminar on October 26-27, 
PDVSA unveiled its ambitious USD 1.3 billion Ethanol 
Agro-Energy Development Project.  PDVSA's goal is to replace 
MTBE, a gasoline blending component the BRV began to use 
instead of leaded gasoline in May 2005, with 
domestically-produced ethanol.  Currently, Venezuela imports 
ethanol from Brazil.  The BRV has already signed memoranda of 
understanding with Brazil and Cuba for initial importation of 
equipment. 
 
¶3. (SBU)  Egly Ramirez, the Manager for PDVSA's Ethanol 
Project, said the plan calls for construction of 17 
processing plants with a combined 10.2 million barrel per 
year capacity by 2012.  The facilities will produce ethanol 
from sugar cane, rice and yucca.  The plan calls for 320,700 
hectares of new cultivation (230,000 hectares in sugar cane 
alone), and possible incorporation of other cereals and 
biomass into future production.  The processing plants would 
be scattered around Venezuela's northern axis, and the pilot 
project -- set to begin operating in 2007 -- is in Lara 
state.  The pilot project is adjacent to the Pio Tamayo Sugar 
Refinery, though subsequent plants will be separate from 
refineries.  All ethanol plants will have a "social 
component" that includes promotion of social production 
enterprises (Ref A), cooperatives, endogenous development 
projects, and the creation of a "harmonized" rural 
environment. 
 
¶4. (SBU)  In July 2005, PDVSA announced a sugar cane-based 
ethanol plan called "Proyecto Etanol," that called for 
construction of 14 new sugar refineries, 300,000 hectares of 
new cultivation, and importation of initial equipment from 
 
CARACAS 00003374  002 OF 003 
 
 
Brazil.  Six months later, in February 2006, PDVSA unveiled 
yet another ethanol plan called "Plan 474," which promised 
25,000 daily barrels of ethanol production from 276,000 
hectares of new sugar cane cultivation and construction of 15 
sugar refineries.  PDVSA stated they would begin importing 
25,000 barrels per day from Brazil until they could supplant 
imports with domestic production.  Today, Venezuela continues 
to use MTBE as a gasoline additive and is only incorporating 
1,000 barrels a day of ethanol for this purpose in eastern 
Venezuela (Ref B).  The total amount of MTBE used is unknown. 
 
------------------------- 
CURRENT AGRICULTURAL WOES 
------------------------- 
 
¶5. (SBU)  Even while the BRV dreams of new uses for sugar 
cane, over the last year Venezuela has suffered from repeated 
sugar shortages.  Demand for sugar exceeds local production 
by nearly 300,000 metric tons.  Only 110,000 hectares are 
currently used for sugar cane cultivation (compared to the 
230,000 hectares PDVSA wants for new cultivation).  Venezuela 
has 15 sugar refineries, four of which are partly or wholly 
owned by the state.  Of these, Cumanacoa Refinery has 
significant efficiency problems; Ezequiel Zamora Refinery is 
embroiled in a massive corruption scandal; and Santa Elena 
Refinery was closed for months in 2006 due to a worker death 
and ensuing investigation.  Venezuela was forced to import 
sugar from Brazil to make up for the deficit. 
 
¶6. (SBU)  Serious problems with sugar refineries, coupled 
with price controls that don't cover production costs, and 
over 4,000 hectares of sugar cane destroyed by squatters (to 
lower property value) in Yaracuy state alone, resulted in 
chaos for the Venezuelan sugar industry in 2006.  During the 
unveiling of PDVSA's plan, an audience member asked how 
Venezuela could possibly produce ethanol given all the 
problems with sugar, to which Ramirez simply answered that 
PDVSA would assist the Ministry of Agriculture in the 
construction of three more sugar refineries. 
 
--------------------------------- 
HOW CAN VENEZUELA BE COMPETITIVE? 
--------------------------------- 
 
¶7. (SBU)  According to Ramirez, Venezuela will be as 
competitive in ethanol production as Brazil (which has 
production costs of USD 0.40 a gallon or lower).  To achieve 
this, PDVSA will manage the entire production chain 
(prohibiting imported raw material or providers from outside 
their network), use automated and "technologically advanced" 
production methods, implement crop rotation like Brazil and 
Cuba, and provide "preferential financing."  However, the 
president of the Venezuelan Federation of Agriculture 
(Fedeagro) said that PDVSA had approached individual farmers 
to set aside only 15-20 hectares of existing sugar cane for 
ethanol, wishing to distribute production among as many 
farmers as possible instead of increasing production at the 
most efficient existing operations. 
 
------------------------ 
LAND REFORM IMPLICATIONS 
------------------------ 
 
¶8. (SBU) During his presentation, Egly Ramirez noted that 
PDVSA will cooperate with the National Land Institute (INTI) 
to "change the agricultural structure and transform the 
 
CARACAS 00003374  003 OF 003 
 
 
social fiber" of Venezuela.  Another PDVSA employee working 
on the Ethanol Project mentioned separately that new 
cultivation and construction would use only government land. 
(Comment: Implicit in Ramirez' statement is a push for 
BRV-style land reform -- expropriations or takeovers of large 
"idle" land holdings to be turned over to rural peasant 
cooperatives (Ref C).  End Comment). 
 
------- 
COMMENT 
------- 
 
¶9. (SBU)  It's very difficult to imagine how in five years, 
Venezuela will not only have a fully-operational ethanol 
industry, but one as profitable and efficient as Brazil's. 
Given Venezuela's inability to produce the sugar it needs for 
domestic consumption, it hard to believe that PDVSA can 
double the amount of cultivated land (for sugar cane) and fix 
all the problems with the sugar refineries by simply building 
new ones.  PDVSA has clearly shown an inability to execute 
previous versions of its ethanol policy.  At most, PDVSA will 
produce a modest amount of ethanol to offset imports of the 
product.  As with many of PDVSA's grandiose plans, this one 
will likely fall far short of expectations.  Merely changing 
the name of the ethanol plan is unlikely to produce better 
results.  End Comment. 
BROWNFIELD