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S E C R E T SECTION 01 OF 06 TEGUCIGALPA 002136 
 
SIPDIS 
 
SIPDIS 
NOFORN 
 
STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, EB/CBA, AND WHA/CEN 
STATE FOR D, E, P, AND WHA 
TREASURY FOR AFAIBISHENKO 
STATE PASS AID FOR LAC/CAM 
NSC FOR DAN FISK 
COMMERCE FOR MSELIGMAN 
STATE PASS USTR FOR AMALITO 
 
E.O. 12958: DECL: 11/09/2036 
TAGS: EPET EINV BBSR ES VE HO
SUBJECT: (S) HONDURAN FUEL BID COULD SUPPORT FMLN, LEAD TO 
EXPROPRIATIONS, AND PIT U.S. FIRMS AGAINST EACH OTHER 
 
REF: TEGU 2048 AND PREVIOUS 
 
Classified By: DCM James Williard for reasons 1.4 (b) and (d) 
 
¶1.  (S/NF) Summary: This cable presents Post's best 
assessment of the current state of play and the political 
intent behind recent and upcoming steps in the bid 
solicitation process for fuel imports into Honduras. Among 
potential pitfalls are: (a) the threatened expropriation of 
millions of dollars of U.S. investor assets and the possible 
stranding of millions of dollars of additional assets; (b) 
the possibility that the winning firm could, wittingly or 
not, become an instrument for influencing upcoming Salvadoran 
elections; (c) the possibility that if a U.S. firm makes the 
short list and requests advocacy support, the USG could find 
competing U.S. firms both being prejudiced by the bid process 
and potentially benefiting from it; and (d) if the bid 
solicitation process is vacated by the GOH for any reason, 
the door could be opened to explicit or veiled deals with 
Venezuela's PDVSA.  There is a relative calm on this issue at 
the moment, as the GOH plots its next move.  The USG should 
take advantage of this pause to do likewise.  As this cable 
makes clear, there are several possible evolutions to this 
process, many of which would present the USG with difficult 
challenges.  End Summary. 
 
¶2.   (S/NF) As reported septel, On November 1 the GOH 
accepted faxed expressions of interest from 15 companies 
interested in supplying fuel to Honduras under the fuel bid 
solicitation.  Post has reported (ref A) on this bid process 
extensively.  Two of the companies were subsequently excluded 
from the process for incomplete bid submissions, leaving 13 
known participants.  Technical review of those bids is 
ongoing, and few details are publicly available.  From 
publicly available accounts, it appears that four U.S. firms 
have submitted bids.  These firms include Conoco Phillips, 
West Port Petroleum, Atlantic Trading, and Luis Dreyfus 
Petroleum.  The GOH has ten working days to complete its 
technical review of potential bidders, and create a short 
list of bidders who will be invited to improve their offers. 
 
¶3.  (S/NF) It is vital that the USG use this short window of 
time to better understand and prepare for the possible 
implications and complications posed by this process moving 
forward.  This cable presents Post's best assessment of the 
current state of play and the political intent behind recent 
and upcoming steps in the bid solicitation process. Among 
potential pitfalls are: (a) the threatened expropriation of 
millions of dollars of U.S. investor assets and the possible 
stranding of millions of dollars of additional assets; (b) 
the possibility that the winning firm in the bid solicitation 
could be Dutch firm Trafigura, which has existing ties to 
left-leaning officials in both Nicaragua and El Salvador and 
could therefore wittingly or not become an instrument for 
influencing upcoming Salvadoran elections; (c) the 
possibility that if a U.S. firm makes the short list and 
requests advocacy support, the USG could find competing U.S. 
firms both being prejudiced by the bid process and 
potentially benefiting from it; and (d) if the bid 
solicitation process is vacated by the GOH for any reason, 
the door could be opened to explicit or veiled deals with 
Venezuela's PDVSA.   Let's examine each of these issues 
briefly. 
 
--------------------------------- 
The Possible Coming Expropriation 
--------------------------------- 
 
¶4.  (S/NF) A longstanding and still unresolved problem faced 
by the GOH involves storage and offloading facilities.  For 
the GOH plan to nationalize and monopolize fuel imports to 
work, the GOH must have sufficient infrastructure available. 
At present they do not.  They have therefore pressed several 
times for U.S. firms Esso and Texaco (the owners of a 
significant percentage of Honduran fuel storage capacity) to 
 
TEGUCIGALP 00002136  002 OF 006 
 
 
agree to allow the winner of the bid solicitation to use 
those facilities.  Esso and Texaco each declined to 
participate in the bid solicitation, and each has declined to 
allow third parties to use its storage facilities, citing 
legal and safety concerns and noting that they intend to 
continue using those facilities themselves for their own 
imports.  The GOH has recently again hardened its rhetoric, 
emphasizing both that the U.S. firms will not be permitted to 
continue importing, and that if necessary the GOH could 
compel use of the facilities. 
 
¶5.  (S/NF) This raises at least three potential property 
rights issues of which Post is aware:  First, these firms 
currently enjoy import access to the Honduran market, and 
have spent decades establishing multi-million dollar 
enterprises here.  The GOH threatens to close that market, 
monopolize imports, and rescind these firms' right to import 
fuels.  This clearly violates the spirit of CAFTA, in that it 
closes the market and decreases competition.  It also might 
constitute a taking by force by the GOH of an existing 
commercial right, with the effect of causing harm to U.S. 
investors. 
 
¶6. (S/NF) Second, while the GOH has denied any intent to 
expropriate U.S. firms' storage facilities, they have 
continually threatened to compel their use if and when a bid 
winner is identified.  A seizure or compelled use of these 
facilities would raise the question of expropriation, and 
could easily lead to international lawsuits or invocation of 
existing bilateral investment treaties.  Even if the GOH does 
not use these facilities, merely rescinding the firms' right 
to import has the effect of stranding the assets, potentially 
another ground for legal action by the firms. 
 
¶7.  (S/NF) Third, these companies have invested tens of 
millions of dollars in downstream infrastructure (gasoline 
stations, for example), an investment that is predicated on 
repayment via long-term contracts to market their brand of 
gasoline.  The GOH threatens to allow service stations to 
abrogate these contracts, again potentially causing 
significant financial harm to U.S. investors.  Similarly, 
denying the firms the right to import would cause breech of 
contract with suppliers, and could force the firms to breech 
their own contracts with their clients.  In other words, if 
they are prohibited from importing, they cannot supply their 
stations, and would therefore be in breech.  Worse, they 
would then be publicly pilloried by the GOH for leaving 
Honduras "unsupplied" with a vital economic commodity, thus 
"proving" that the U.S. firms were never really reliable 
partners.  (Note that in 80 years, even during the worst 
times after Hurricane Mitch, these U.S. firms never once 
failed to supply Honduras with fuel.  Dangerously low supply 
situations have always been handled by swapping with other 
importers, a situation that would be almost impossible once 
the firms are forced to give up their supply networks under 
the new system the GOH seeks to establish. End note.) 
 
--------------------------------------------- ------ 
Could the Bid be Used to Sway Salvadoran Elections? 
--------------------------------------------- ------ 
 
¶8. (S/NF) There are credible reports of Dutch firm Trafigura 
negotiating contracts with left-leaning mayors in Nicaragua 
and El Salvador.  Trafigura is believed to maintain good 
relations with Venezuela, and it is Post assessment that 
these actions are likely motivated more by profits than by 
politics on the part of Trafigura.  Nevertheless, to the 
extent Venezuela is party to any preferential deals with 
Trafigura, such support for FMLN and FSLN mayors fits the 
Chavez agenda of expanding leftist populism in the region. 
Glencore (former employer of the founders of Trafigura) is 
also the largest supplier of bunker fuel for electricity 
generation in Honduras, and manages fuel imports for the 
Nicaraguan petroleum company.  It is unclear if Glencore and 
Trafigura maintain any business ties (though both have spotty 
 
TEGUCIGALP 00002136  003 OF 006 
 
 
records that include accusations of embargo busting, bribery, 
and causing environmental damages.) 
 
¶9. (S/NF) It was clear in the run-up to the recent Nicaraguan 
elections that Venezuelan President Hugo Chavez intended to 
use his petrodiplomacy to support FMLN candidates in 
Nicaragua.  It is unclear to what extent he succeeded, in 
part due to a lack of delivery infrastructure.  (For example, 
a 250,000 gallon delivery faltered in October, when only 
60,000 gallons could be delivered, leading Nicaraguan bus 
companies to reject the delivery and embarrassing Venezuela.) 
 Similar reported deals with Salvadoran FSLN mayors suggest 
Chavez is following the same strategy in preparation for the 
upcoming Salvadoran elections.  To succeed, Chavez would need 
to overcome the infrastructural obstacles that hampered his 
Nicaraguan efforts. 
 
¶10.  (S/NF) Once again, Trafigura enters the picture. 
Credible reports indicate that Trafigura has agreed to 
purchase 50 percent of Honduran gasoline marketer DIPPSA.  In 
addition to 108 gas stations, DIPPSA also owns offloading and 
storage facilities in Tela (on the Atlantic coast) and in San 
Lorenzo (on the Pacific coast, within an easy drive of both 
Nicaragua and Salvador).  If Trafigura were to win, it could 
supply the storage, distribution and marketing (through its 
regional chain of PUMA gas stations) for Venezuelan product. 
Trafigura would be enticed by such a deal, since it would 
dramatically expand its footprint in the region and better 
position it to dominate the market, whether the market were 
liberalized in the future or not.  For its own political 
reasons, PDVSA and the GOV could use Trafigura/PUMA/DIPPSA as 
its agent to deliver the products intended perhaps to sway 
the elections. (Note: Trafigura, through its Copensa 
subsidiary, also has over 600 thousand barrels of storage 
capacity in Puerto Barrios, Guatemala, but it,s on the wrong 
coast and industry experts assess that it would be cost 
prohibitive to transport from there to El Salvador.  End 
Note). 
 
¶11.  (S/NF) For its part, the GOH would support such an 
outcome for several reasons:  the leftist ideologues 
surrounding President Zelaya (Patricia Rodas, Milton Jimenez, 
Enrique Flores Lanza, and others) would support the deal 
because it propels a shift leftward in regional politics. 
Others in the administration might support the plan as a 
popular domestic political move that improves the Liberal 
party's chances for victory in 2009.  Others (including 
activist Juliette Handal) would support the deal because they 
continue to hold the misguided belief that nationalized 
markets are more efficient and deliver cheaper prices than 
competitive ones, and would see success in this bid 
solicitation as vindication (and possible fodder for their 
own political aspirations).  Finally, some in and out of the 
Honduran government are almost certainly angling for an 
illicit percentage of what could be a nearly USD 1 billion 
contract. 
 
¶12.  (S/NF) Such an outcome damages USG interests in at least 
two significant ways; first, it potentially shifts the 
balance of regional power towards Chavez and to the left more 
generally, especially if he is successful in influencing the 
Salvadoran election.  Second, by appearing to lend legitimacy 
to a deeply flawed concept, anything that could be portrayed 
as success in this fuel solicitation undermines support for 
competitive markets and free trade.  That in turn potentially 
threatens U.S. investments elsewhere in the hemisphere, and 
also diminishes already waning support for regional trade 
liberalization treaties.  In its worst manifestations, such 
an outcome could be used to buttress attacks on 
"neoliberalism" and democratic reforms more broadly, further 
contributing to the growing public disaffection for 
democratic institutions already being seen throughout Latin 
America. 
 
-------------------------------------- 
 
TEGUCIGALP 00002136  004 OF 006 
 
 
Why Winning Could Be Worse Than Losing 
-------------------------------------- 
 
¶13.  (S/NF) Let us imagine an entirely different scenario for 
a moment: What if a U.S. firm wins the bid solicitation? 
Conoco in particular has made what appears on the surface to 
be a very attractive offer.  If they are short-listed (or win 
outright), their new contract will come directly into 
conflict with the rights of existing investors Esso and 
Texaco.  This could expose Conoco to lawsuits from these 
firms on the one side, or failure to comply with the terms of 
its bid on the other.  Post is convinced the bid solicitation 
is illegitimate and ill-advised.  But could the USG come out 
against the process if a U.S. firm wins?  That would be 
tantamount to vetoing a one billion dollar contract.  On the 
other hand, how could the USG possibly support, say, Conoco 
if the process itself could lead to the significant financial 
damages outlined above for Esso and Texaco? (Comment: The low 
Conoco offer is puzzling, given the potential conflicts with 
Esso and Texaco.  That said, Conoco works closely with Texaco 
in a number of joint ventures and Post doesn,t rule out the 
possibility that they are working together in some fashion. 
End Comment). 
 
¶14.  (S/NF) Generally, the USG takes a neutral stance in 
advocacy cases where U.S. interests are arrayed on both 
sides.  In this instance, however, such a comfortably neutral 
stance is not tenable, because it would amount to an 
endorsement of an otherwise illegitimate process.  Worse, it 
might be read (correctly) by the GOH and others as the USG 
tying its own hands, rendering itself unable to influence the 
flow of events that might by then be trending in a direction 
that favors Chavez and a resurgent left in the region. 
 
¶15.  (S/NF) For the time being, Post favors a two-pronged 
message:  First, the rights of existing investors must be 
respected.  We support liberalization, not monopolization; 
opening of markets rather than closing them off; and 
increasing competition rather than reducing it.  Any de facto 
or de jure expropriation of existing rights or capital 
investments would have dire consequences, to include hefty 
demands for compensation.  Second, we continue to press for a 
fully transparent solicitation process, carried out according 
to accepted international standards and under market 
conditions.  This message will work well enough in the short 
term, as we doubt the GOH is prepared to meet each of these 
conditions.  Then, once a short list comes out, if there are 
no U.S. firms on it, we can continue to vigorously defend 
existing investment.  But, what to do if a U.S. firm wins the 
bid? 
 
------------------------------------------- 
What If It All Falls Apart?  What's Plan B? 
------------------------------------------- 
 
¶16.  (S/NF) There is yet another scenario, equally disturbing 
in its way:  what if the GOH follows the process to its 
finale, only to see it end in complete chaos?  Based on his 
performance in other political conflicts he has engaged in 
(the taxi strike, the teacher's strike, to name two) it would 
certainly be in keeping with President Zelaya's style to 
allow events to force a crisis rather than for him to 
intervene and demonstrate political leadership.  If that were 
to happen in this case, what is our Plan B?  What is his? 
 
¶17.  (S/NF) In an ideal world, Zelaya would allow the failure 
of this process to emasculate his opponents, proving to the 
Honduran public in the only way remaining to him that the 
plan cannot work:  by letting it fail, publicly and 
dramatically.  A stronger leader could use such an occasion 
to thoroughly discredit his political opponents, rid himself 
of many of the ideologues still stuck in a rose-colored past, 
and open a political space for genuine reform leading to 
market liberalization.  Post assesses that there is almost no 
likelihood Zelaya has such a strategy in mind.  Given several 
 
TEGUCIGALP 00002136  005 OF 006 
 
 
opportunities to marginalize opponents like Juliette Handal 
he has not done so, and in fact in his recent remarks he has 
returned to a restrained but still notably antagonistic 
stance towards the international oil companies (IOCs).  For 
example, Zelaya took time to phone-in an interview from 
Mexico during his visit there in late October, during which 
he accused the IOCs of boycotting and sabotaging the 
solicitation effort.  (At that time the GOH concern was that 
no one would bid.  Zelaya was clearly preparing to blame the 
IOCs if that were to happen.  In the event, there were 
several bidders, including U.S. firms.  This inoculates us 
against the charge of boycotting the process, but his 
leveling the charge nonetheless illustrates Zelaya's 
continuing populist stance.) 
 
¶18. (S/NF) Post is quietly working with several actors, 
notably including the World Bank, to formulate a viable Plan 
B that would set the stage for market liberalization.  Early 
indications are that the private sector and the donor 
community would support such a dialogue.  Work has been 
started on this effort already by the World Bank, and the GOH 
has on several occasions paid at least lip-service to the 
goal of market liberalization.  We are not overly optimistic 
about the chances such a plan will be warmly embraced by 
Zelaya, but we intend to have a viable fall-back on hand in 
the event the bid solicitation self-destructs.  It is our 
hope that if reasoning cannot convince Zelaya to liberalize, 
perhaps circumstance will do so. 
 
¶19.  (S/NF) Does the GOH have a Plan B of its own?  A series 
of GOH missteps (such as failing to check the bid document 
for CAFTA compliance until prodded to do so, and failing to 
ensure the bid process meets applicable Honduran law) lead us 
to suspect the GOH has not thought this process through that 
thoroughly.  A very few powerful actors are each pursuing 
this plan for their own reasons, but none appears to have 
carefully analyzed the economic and legal ramifications of 
what they are proposing, much less outlined alternatives. 
That said, several officials, particularly Minister Enrique 
Flores Lanza, have hinted several times that the GOH is 
prepared if necessary to declare the entire process a 
failure.  In recent meetings with Zelaya and Flores Lanza, 
Ambassador and DCM noted a distinct lightening of mood, and a 
surprisingly casual acceptance of the possibility that this 
year-long saga could end in failure.  Which prompts us to 
ask:  what do they have up their sleeves? 
 
¶20. (S/NF) Flores Lanza is both a lawyer and an ideologue, 
and combines the worst traits of each. He is intelligent and 
devious, but at times apparently invulnerable to reason.  He 
is believed by Post to have been one of the architects of the 
original move to use a PetroCaribe facility to supply 
Honduras with fuel, both because it would bring Honduras into 
a Chavista orbit, and because it could potentially provide 
hundreds of millions of dollars per year to ensure Liberal 
party dominance for years to come.  Post assesses that its 
efforts were instrumental in impeding that deal.  The most 
likely explanation for Flores Lanza's acceptance of a bid 
failure is that he sees that as another bite at the 
PetroCaribe apple.  If a bid solicitation mechanism were to 
fail -- particularly if that failure could be blamed on the 
IOCs and/or the USG -- the GOH could potentially use that as 
justification for simply dropping the pretence and 
approaching Venezuela directly.  A more subtle method might 
make use of Trafigura, veiling any Venezuela connection 
behind a veneer of market respectability. 
 
------- 
Comment 
------- 
 
¶21. (S/NF) Comment: There is a relative calm on this issue at 
the moment, as the GOH plots its next move.  The USG should 
take advantage of this pause to do likewise.  As this cable 
makes clear, there are several possible evolutions to this 
 
TEGUCIGALP 00002136  006 OF 006 
 
 
process, many of which would present the USG with difficult 
challenges.  How can the USG protect existing investors and 
champion free markets, while impeding any efforts by 
Venezuela or its sympathizers to interfere with the upcoming 
Salvadoran elections or the regional political context in 
general?  For tactical reasons, Post has kept a low profile 
for the last few weeks, letting the process unspool.  But 
once the short list is announced, whether the process 
succeeds or fails, the USG could be called upon to maneuver 
with speed and agility in some very treacherous waters. 
 
¶22.  (S/NF) Comment continued:  Post is still attempting to 
ascertain the motivations for and seriousness of Conoco's 
bid.  Post has been in contact with EB/ESC to request their 
support in contacting Conoco representatives in Washington 
for any additional information they might be willing to 
provide.  Several possible explanations for thier bid appear 
possible:  1) Conoco was talked into making a bid by someone 
involved in the process, but isn't really serious; 2) Conoco 
could be working quietly with Texaco and might have made 
separate arrangements for fuel storage, similar to the kind 
of arrangement Post suspects Trafigura has made with DIPPSA; 
or 3) Conoco could be making a strong move into the market -- 
perhaps based on placing higher sulfur content fuel that can 
not be sold in the U.S., or perhaps based on other strategic 
considerations.  Post will continue to watch this issue 
closely, and would welcome any insights Washington-based 
agencies could provide.  End Comment. 
 
Ford 
FORD