VZCZCXRO6941
RR RUEHLMC
DE RUEHTG #2392/01 3632150
ZNR UUUUU ZZH
R 292150Z DEC 06
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC 4476
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 0138
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0549

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002392 
 
SIPDIS 
 
STATE FOR WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL, OES/STC 
PAMELA BATES 
STATE PASS 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: Can Fish Oil Scale? Honduran Biodiesel Initiative Could 
Clash with U.S. Tax Incentives 
 
REF: A. 2006 Tegucigalpa 2030 
 
 ¶B. 2006 Tegucigalpa 1935 
 
¶1.  Summary: A GOH initiative to develop more energy independence 
may be in danger due to U.S. incentives that provide up to USD $1 in 
tax credits for biodiesel refined in the U.S.  The GOH plan to 
import over 1 million African Palms could conceivably meet about 30 
percent of Honduras' diesel requirements, saving the country 
millions of dollars in fuel imports and providing a measure of 
control over its energy future.  But if U.S. tax incentives convince 
U.S. companies to import the bulk of Honduras' African palm oil into 
the U.S., only small scale initiatives in Tilapia fish oil and pine 
nuts would be left to supply the Honduran domestic biodiesel market. 
 Greater diversification in biodiesel feedstock may be the key to 
Honduras' energy future.  End Summary. 
 
 
AFRICAN PALMS SET TO TRIPLE 
 
 
 
¶2. As reported reftels, the GOH has launched a plan to increase 
considerably the number of African Palms under cultivation with the 
intent to refine a significant portion of the harvested palm oil 
into biodiesel.  The agrarian portion of the project is currently 
underway, with an agreement to import about 1.2 million African Palm 
oil plants from Malaysia having been signed last March 2006.  The 
palms will be planted on approximately 200 thousand hectares of land 
on Honduras' humid north coast, almost tripling production from the 
80 thousand hectares currently under cultivation. 
 
¶3. Moises Starkman, the biodiesel czar appointed by President Jose 
Manuel "Mel" Zelaya Rosales to run the project, has stated 
consistently that job growth is the number one goal of the upstream 
agrarian project.  With an estimated 1.5 jobs generated per hectare 
of land under African palm cultivation, the program could produce as 
many as 300 thousand new jobs.  The palms would be cultivated in 
clusters, run primarily by cooperatives that would recruit new land 
owners to grow the palms while offering access to financing and 
training in return (details on this innovative financing scheme to 
be reported septel).  In response to environmental concerns 
(fertilizer run-off and deforestation of existing trees, to name a 
few), Starkman offered to talk further with USAID reps to identify 
and address any concerns that might exist. 
 
¶4. Currently several large processing facilities exist to convert 
the palm fruit into palm oil.  One producer, Dinant corporation, has 
been exporting the bulk of the palm oil while using an increasing 
amount as a blend in its consumer products (Note: Dinant holds the 
regional distribution license for Mazola products.  End Note). 
Currently palm oil is Honduras' fifth largest export at about USD 56 
million per year.  Dinant has also been refining more and more palm 
oil into biodiesel - its processing plant's production is currently 
estimated at 6 thousand gallons of biodiesel a day, with a planned 
expansion to approximately 32 thousand a day by mid to late 2007. 
 
 
THE CONSUMER TRIALS: ENERGY INDEPENDENCE FOR HONDURAS? 
 
 
¶5. The projected increased level of available biodiesel will be 
vital for the downstream consumer trials now underway.  Starkman 
initiated a limited trial of several hundred city buses that would 
run on a 5 percent biodiesel blend (Note: Diesel engines can 
normally run up to 20 percent biodiesel - B20 - without 
modifications.  End Note).  The trial was meant as much to educate 
the population that biodiesel does not harm car engines as it was to 
promote the use of an alternative fuel.  Starkman's plan is to 
increase the percentage of diesel used in the trial to 20 percent by 
mid-2007. 
 
¶6. A similar type of consumer trial sponsored by the mayor of 
Tegucigalpa has focused on overhauling the engines of about 60 city 
buses and using 100 percent biodiesel from the beginning.  (Note: 
Blends containing over 20 percent biodiesel may corrode certain 
parts and clog the engine with residue from diesel usage.  The 
engine needs to be cleaned and parts replaced to operate effectively 
with 100 percent biodiesel, particularly in the case of the aged bus 
fleet in Honduras.  End Note).  As opposed to Starkman's plan, the 
mayor's plan will source its fuel from Tilapia fish oil.  Currently, 
Tilapia fish farms in the central Honduran lake of Yojoa produce 
approximately 1500 gallons of biodiesel per day. 
 
 
TEGUCIGALP 00002392  002 OF 003 
 
 
¶7. The consumer plan calls for a financing of about USD $1500 per 
bus to overhaul the bus engines, then a software-driven payback 
mechanism that would recoup the financed amount over a period of 
time to be determined.  The software would be connected to the 
biodiesel pump, charging the user a fraction more per tank and 
keeping a personalized record of expenditures, much like a debit 
card.  The mayor's project qualified for a USTDA definitional 
mission to better clarify the project's business plan. 
 
 
U.S. TAX INCENTIVES MAY CHANGE EQUATION 
 
 
¶8. EconOff hosted several businessmen from Missouri-based biodiesel 
company American Biofuels October 25; their mission was to 
investigate the sourcing of biodiesel feedstock outside the U.S. 
Per the executives, the U.S. market for biodiesel is approximately 1 
billion gallons a year, while supply is only about 200 million 
gallons a year (Note: Per other industry sources, the 1 billion 
gallon a year demand figure would constitute about 2% - B2 - of the 
45 billion gallon a year diesel market in the U.S.  If the blend was 
increased to B20, the biodiesel market could be as high as 9 billion 
gallons a year.  End Note). Moreover, the current biodiesel 
feedstock and refinery projections place potential supply at only 
700-800 million gallons in the next few years.  The implication is 
that the demand for biodiesel will remain strong for the foreseeable 
future. 
 
¶9. In order to help meet the demand and stimulate U.S. based 
refining capacity, a federal excise tax credit was issued in 2004 
that equates to almost USD 1 dollar in credits per refined gallon of 
biodiesel (Note: H.R. 4520, or the American Jobs Creation Act of 
2004, offers one US cent per percentage point of biodiesel blended 
with petroleum diesel for "first use" oils.  End Note).  The 
incentive is targeted towards developing feedstock and refining 
capacity in the U.S.; hence there is little incentive to source 
refined biodiesel outside the U.S. Consequently, companies 
interested in developing refining capacity, like American Biofuels, 
are actually looking internationally for potential sources of 
biodiesel feedstock.  Palm oil is one of the most efficient sources 
of biodiesel, and outside of Malaysia and Indonesia, one of the 
largest suppliers of African Palm oil is Honduras. (Note: Guatemala, 
at 40,000 hectares of African Palms under cultivation, has about 
half the current production of Honduras and offers a regional 
alternative.  End Note). 
 
¶10. The executives from American Biofuels were extremely interested 
in the developing African Palm oil industry in Honduras, and were 
close to closing a deal with one palm oil cooperative to help 
construct a palm oil processing facility and take all the finished 
palm oil that they could produce.  The African Palm industry in 
Honduras includes between 5 to 6 cooperatives and 11 processing 
companies, but is dominated by Dinant corporation and its owner, 
Honduran businessman Miguel Facusse.  Up to this point Facusse has 
been an ardent supporter of Starkman's African Palm-oil based 
consumer trial, and has committed to expanding his 6000 gallon a day 
biodiesel processing facility to over 30,000 by the end of 2007. 
With production improvements in the 3 other African Palm-based 
biodiesel refineries in Honduras, the supply of biodiesel could 
increase from the current 14,000 gallons a day to over 50,000 a day 
in the near future, providing the means to meet the demands of the 
consumer trial and potentially President Zelaya's goal of replacing 
30 percent of imported diesel by the end of his term. (Note: 
Current diesel imports into Honduras are about 650,000 gallons per 
day, implying a total biodiesel production of around 200,000 gallons 
per day to reach this ambitious goal. End note.) 
 
¶11.  Starkman's trial, however, requires that biodiesel use be 
non-compulsory, in order to qualify for carbon-credits and allow the 
market to more efficiently select the type of fuel to be used. 
Consequently, there has been little mention of how and under what 
terms Starkman will contract the upstream biodiesel suppliers to 
provide sufficient biodiesel for expansion of his plan after the 
consumer trial ends.  The American Biofuels executives, on the other 
hand, have started plans to develop a large scale African Palm 
oil-based refinery in the U.S. to capitalize on the tax credit and 
have spoken openly about signing contracts specifying volume 
commitments with their Honduran cooperative.  (Comment: It is hard 
to believe that Facusse, faced with a monetary decision whether to 
refine the Palm oil into biodiesel or ship the feedstock African 
Palm oil to the U.S. would opt for any decision that does not 
maximize his profit.  Given the heavy financial incentive to refine 
the palm oil in the U.S., the lack of import duties in the new CAFTA 
 
TEGUCIGALP 00002392  003 OF 003 
 
 
environment, and easy access to the major ports of Puerto Castillo 
and Puerto Cortes, it is easy to envision Facusse and the other 
producers shipping virtually their entire supply of African Palm oil 
to U.S. based refiners like American Biofuels. End Summary). 
 
 
FISHY STORY: DIVERSIFICATION MAY ENSURE SUCCESS OF TRIALS 
 
 
¶12.  In light of the U.S. based refining incentives, Starkman's 
downstream consumer trial could be in jeopardy.  However, the 
complementary consumer trial proposed by the mayor of Tegucigalpa 
may offer an intriguing alternative.  The mayor's decision to source 
their biodiesel from Tilapia fish oil may guarantee at least a 
limited supply of biodiesel from a source other than African Palm 
oil.  Moreover, recent initiatives to plant pine nut plants and 
construct biodiesel refineries in remote areas of central Honduras 
may give the consumer markets another option.  That said, there are 
questions about the scalability and long-term sustainability of 
using such varied feedstocks.  Per the American Biofuels executives, 
biodiesel refineries constructed at the scale necessary to meet the 
forecasted demand work most efficiently when optimized for one 
particular type of feedstock.   EconOff and the mayor's office have 
made preliminary plans to showcase all the biodiesel initiatives to 
the USTDA consultant to determine the best way to ensure the 
survival of the consumer trials, and perhaps give some measure of 
energy independence to Honduras. 
 
¶13.  Comment:  The lack of energy independence remains a hot-button 
political issue in Honduras and, with U.S. tax incentives positioned 
to take most if not all of the promising African Palm oil 
production, diversification of feedstock may be the key to the 
survival of the nascent consumer trials.  At issue is whether the 
current palm oil alternatives of Tilapia and pine nuts can scale 
sufficiently to offer a sustainable supply for the long term.  Post 
hopes that the USTDA definitional mission will help marry the two 
consumer trial initiatives, and perhaps help determine the best way 
to ensure a stable supply for the domestic market. End Comment. 
 
Williard