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DE RUEHTG #0077/01 0142000
ZNY SSSSS ZZH
O 142000Z JAN 07
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4608
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0508
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0556

S E C R E T SECTION 01 OF 05 TEGUCIGALPA 000077 
 
SIPDIS 
 
SIPDIS 
NOFORN 
 
STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, EB/CBA, AND WHA/CEN 
STATE FOR D, E, P, AND WHA 
STATE FOR S/ES-O MMILLER AND MSANDELANDS 
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: 01/13/2032 
TAGS: EPET EINV ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAS EXPROPRIATES U.S. OIL COMPANIES' STORAGE 
FACILITIES 
 
REF: TEGU 0076 AND PREVIOUS 
 
Classified By: CDA James Williard for reasons 1.4 (b,d) 
 
¶1. (S/NF) Summary:  On January 13, the GOH announced in a 
surprise decision that it would be compelling use of 
privately-owned oil import and storage facilities in 
Honduras.  It remains unclear which facilities are affected, 
but at a minimum Honduran firm DIPPSA and U.S. firm Esso are 
subject to the new decree.  The language of the decree says 
the measures are "temporary" but GOH officials have said that 
the duration is "indefinite."  The decree calls for just 
compensation, but that price is to be set by the GOH, and 
negotiations to lease some of those facilities had previously 
broken down when the GOH offered only half of what DIPPSA 
felt was a fair price.  The GOH also unilaterally cut 
gasoline prices by up to USD 0.42, which would reportedly 
leave many importers selling below cost.  Finally, the GOH 
has ordered a criminal investigation into the oil companies, 
charging them with economic sabotage for allegedly 
undersupplying the Honduran market with gasoline in order to 
create a fuel crisis.  Both the private sector and Post are 
gravely concerned about both how these measures will be 
carried out and about the strongly negative message they send 
to current and potential investors.  Oil company executives, 
meanwhile, have found it prudent to leave Honduras.  End 
Summary. 
 
¶2. (S/NF) Contrary to assurances given to Post on January 12 
by GOH negotiator Arturo Corrales and assurances given by 
President Zelaya to Vice President Elvin Santos (and passed 
to Charge), the GOH Council of Ministers on January 13 
decreed that the GOH would expropriate existing private 
sector oil offloading and storage facilities.  The decree 
cites a clause in the contract between Honduran fuel importer 
DIPPSA and the GOH that reportedly permits the GOH to compel 
use of DIPPSA's storage facilities in times of national 
emergency.  Because the joint-venture PetroSur facility (50 
percent owned by Esso and 50 percent by DIPPSA) also falls 
under this agreement, Esso's facilities will be expropriated 
as well.  Minister of the Presidency Yani Rosenthal confirmed 
that Esso facilities would be covered by the decree, but 
opined that Texaco's (which reportedly do not have a similar 
clause) would not.  However, in public statements Minister 
Counselor for Legal Affairs Enrique Flores Lanza said that 
the decree would cover all companies. 
 
¶3. (U) The specific text of the decree (Article 2) reads as 
follows: 
 
The Honduran state will exercise for the public benefit its 
contractual right to use the fuel storage terminals of the 
distribution companies now in the country, by means of 
payment of a just compensation.  The Government guarantees to 
continue the process of the international solicitation for 
fuel imports with the company that presented the best offer. 
 
(Note:  The company referred to in the second sentence, the 
one that presented the best offer under the highly 
contentious bid solicitation process, was U.S. firm 
ConocoPhillips.  Under that process, the GOH will nationalize 
all imports, and contract for a year's supply with a single 
fuel supplier.  However, despite an apparent obligation to 
have done so by early January, the GOH and ConocoPhillips 
have not yet signed a contract.  According to public remarks 
by Minister Flores Lanza, ConocoPhillips declined to sign any 
contract for delivery of fuel until the GOH could demonstrate 
it had storage capacity for those deliveries.  This demand 
apparently triggered the GOH action to seize control of the 
private facilities owned by DIPPSA and Esso.  End Note.) 
 
¶4. (SBU) In addition to the expropriation, the decree also 
unilaterally lowers gasoline prices by up to eight lempiras 
(about USD 0.42) per gallon, citing declines in international 
 
TEGUCIGALP 00000077  002 OF 005 
 
 
prices and "savings" from the fuel import solicitation 
process.  Regarding the first of the two justifications, the 
GOH already sets all prices for gasoline, based on a formula 
that reacts to a 22-day rolling average of international 
prices.  Under this arrangement, the GOH has the right to 
change prices, but the January 13 decree does so in a manner 
that violates all existing procedures and leaves the 
international oil companies (IOCs) with no effective guidance 
as to how to price their product.  Given that the price 
changes were to take effect at 0600 on January 14, at least 
one company (Esso) said it might have to keep its stations 
closed until this matter is cleared up.  The second 
justification for the price reduction is the illusory savings 
claimed by the GOH from the bid solicitation process, and is 
based on not counting a reported seven line-items of import 
costs, and then using the ConocoPhillips offer (still 
unsigned) as a baseline reference price.  Minister Rosenthal 
said all of these price cuts would come from the importer's 
profit margins, and that the profit margins of the (Honduran) 
transporters and marketers would not be touched.  According 
to rough calculations by Presidential negotiator for fuels 
Arturo Corrales, this means the IOCs are being instructed to 
sell their product below cost.  In his January 13 public 
remarks, Rosenthal shrugged this off, noting that the IOCs 
could still make adequate profits in other segments of their 
value chain. 
 
¶5. (C/NF) During the late night (2100 hours local) press 
conference, in which President Jose Manuel "Mel" Zelaya 
Rosales personally read the text of the Council of Ministers 
decree, Zelaya also said the GOH has instructed the 
prosecutor's office to initiate a criminal investigation of 
the IOCs to identify the cause of last week's alleged fuel 
shortages.  As previously reported, those "shortages" were 
limited to a few gas stations and according to the companies 
involved were the result of a delayed tanker delivery. 
Reports of the alleged shortage prompted Zelaya on January 11 
to label the IOCs "energy terrorists" and to call for the 
Council of Ministers meeting.  Ironically, we are told a 
tanker was being unloaded even as the President made his 
remarks on January 11 denouncing the IOCs for refusing to 
supply the Honduran market.  As a result of that incident, 
the GOH reportedly issued an arrest warrant for the country 
representative for Royal-Dutch Shell Oil Company, accusing 
that the shortage was deliberate economic sabotage.  In the 
wake of that (still unverified) report and the President's 
subsequent remarks of January 13, senior representatives of 
Shell and Texaco have already left Honduras, and 
representatives of Esso are strongly considering the same 
move. 
 
¶6. (C/NF) EconChief spoke with several key actors immediately 
following the announced government takeover.  All expressed 
shock and grave concern about this action.  Their initial 
reactions follow: 
 
-- Esso:  Said its lawyers are looking at the specifics of 
the contract, since the GOH alleges the joint venture 
Esso/DIPPSA storage facility in San Lorenzo is covered by a 
clause in the DIPPSA contract that allows the GOH to compel 
use of the facilities.  Esso also noted that the announced 
change in price for gasoline violates the current procedure 
for the GOH to announce price changes, and cannot be legally 
acted upon by the firm.  Facing two contradictory decrees on 
pricing, Esso feels that it might need to keep its stations 
shut until the matter is resolved.  Esso also noted its 
concern that the product (diesel and gasoline) currently in 
storage is property of the importing firms, and questions 
whether that product has also been seized.  Finally, based on 
reported threats to arrest IOC executives for alleged 
economic sabotage, Esso is considering pulling its expatriate 
staff out of the country immediately. 
 
-- Texaco:  Texaco's country representative is already out of 
 
TEGUCIGALP 00000077  003 OF 005 
 
 
Honduras, but EconChief reached him in El Salvador.  He 
reports a lack of concrete information, noting in particular 
that it remains unclear whether the GOH action covers the 
Texaco offloading and storage facilities in Honduras.  He 
felt the GOH likely to arrest IOC executives if given the 
chance, and therefore left Honduras following reports of such 
a warrant being issued against Shell executives. 
 
-- DIPPSA: President of DIPPSA told EconChief that he was 
caught as much unawares as anyone by the sudden decision to 
take over his and other firms' facilities.  He said he had 
come to no agreement with the GOH about this, was not 
previously informed about the action to come, and that he 
opposes it.  DIPPSA had been in negotiations with the GOH to 
lease storage services to the GOH at a price of USD 0.065 per 
gallon of throughput.  Talks stalled when the GOH had 
reportedly refused to pay more than USD 0.03.  The next round 
of talks was scheduled for Monday, January 15.  DIPPSA 
President Henry Arevalo told EconChief he will not violently 
resist the takeover of his facilities, but that he feels it 
is trespassing and illegal taking and that he will require 
the GOH to act.  "If (the GOH) wants (my facilities) they 
have to come take it."  (Note:  Asked precisely how the GOH 
intended to take over the facilities and whether troops would 
be used, Minister Rosenthal told EconChief that the details 
have not yet been worked out.  Similarly, the GOH does not 
know how or when it might compensate the rightful owners. 
The GOH still owes oil companies an estimated USD 10 to 15 
million in reimbursements from the recent gasoline price 
freeze, in place from April through the autumn of 2006, that 
the GOH compelled the companies to absorb. End Note.) 
 
-- Presidential negotiator Arturo Corrales:  As reported 
previously, Corrales was dispatched (first quietly then 
officially) by Zelaya to negotiate with the IOCs.  Zelaya 
continued to hope the IOCs would relent and allow use of 
their facilities; they did not do so.  However, once changes 
to the pricing formula were put on the table as a topic for 
discussion, the IOCs were willing to work constructively 
with Corrales and the GOH to identify savings for the 
consumer and help the GOH find a face-saving exit to this 
situation.  Corrales reported progress in these talks as of 
January 12, and had scheduled another round of meetings for 
January 15-17 to move further towards a resolution. 
Moreover, this effort was being conducted in the context of a 
proposal for a broader move over the next 2-3 years towards a 
liberalized fuels market in Honduras, like those already in 
place in Salvador and Guatemala.  Post was actively 
supporting such a dialogue, and had obtained agreement from 
the World Bank to use its good offices to host a neutral 
discussion of next steps towards liberalization. 
Nevertheless, a downbeat Corrales told EconChief on January 
13 that he, too, had been shocked by the decision, and that 
he was trying to reach the President to discuss the matter. 
In Corrales' view, he had been dispatched to dialogue in good 
faith with the companies.  The President's decision to 
expropriate undercut any progress Corrales had made and 
destroyed his credibility as an honest broker.  Corrales 
understands the profound damage this decision is likely to do 
to Honduras' investment climate, but for the moment he 
appears to Post to be out of the decision-making loop. 
 
-- Shell:  Shell's fuel imports are delivered both 
independently and in conjunction with Texaco deliveries. 
EconChief could not reach Shell for comment, but other 
sources reported the following:  Though some individual 
stations in San Pedro had run dry, Shell cited high gasoline 
sales over the heavily-traveled Christmas holiday and a minor 
shipping delay as the causes.  Shell had already made 
arrangements with Texaco for additional shipments (which 
arrived on January 11) and was seeking GOH permission for 
overland imports from Salvador to resupply any service 
stations that had sold out of any product.  Shell immediately 
publicly denied that there was a "shortage."  Shell denied 
 
TEGUCIGALP 00000077  004 OF 005 
 
 
any intentional undersupplying of the market.  In the face of 
GOH threats to charge the company with economic sabotage, 
Shell representatives have reportedly left Honduras. 
 
-- Honduran Private Sector:  The President of the Honduran 
private sector umbrella organization COHEP, Mario Canahuati, 
contacted EconChief on January 13 as part of a late-night 
emergency conference call with the President of the Honduran 
Manufacturers Association Jesus Canahuati and others, to 
express their grave concern about this turn of events. 
Canahuati complained that far more than just a legal dispute 
with the IOCs, this expropriation will negatively impact 
investment inflows, could jeopardize Temporary Protected 
Status (TPS) renewal, and could by extension lead to slower 
growth, higher unemployment, more emigration, and higher 
rates of criminality in Honduras.  EconChief noted that the 
USG will need to analyze events before taking a formal 
position, but that the reaction would be negative to some 
degree.  In addition, affected firms retain their right to 
file lawsuits, and prospective investors are likely to be 
scared away by this turn of events, particularly when paired 
with Nicaraguan President Daniel Ortega's embrace (both 
literally and figuratively) this week of Chavez and his 
socialist ideals.  EconChief said that it is far too early to 
speculate on the fate of TPS, but that most Members of the 
U.S. Congress likely know little about Honduras, and if their 
enduring image of Honduras is of a country that expropriates 
U.S. investor assets, that will certainly complicate any GOH 
effort to generate good will on the Hill. 
 
-- President Zelaya:  Post has not spoken directly with 
Zelaya yet, but his public remarks are instructive.  In 
justifying the nationalization of all oil imports, the 
creation of a monopoly supplier, and the expropriation of 
U.S. and Honduran privately-owned storage facilities to 
accomplish this, Zelaya said, "We felt obligated to take 
these necessary measures for development, measures that 
increase confidence in investment, and that demonstrate this 
government has a pact with its people and with the productive 
sectors to find solutions.  The Honduran public knows me, and 
my respect for foreign investment, and also my continuing 
belief in property rights and especially in the rules of a 
free market, which make it possible for private enterprise to 
develop in this country in an atmosphere of free competition." 
 
¶7. (C/NF) Comment:  To say that the GOH has the right in a 
period of national emergency to compel use of private 
facilities seems to Post to do little more than reiterate a 
basic privilege that all governments claim -- that of 
exercising eminent domain if absolutely necessary. 
Therefore, a debate over whether the GOH has a legal right to 
expropriate seems misplaced.  Nevertheless, how the GOH 
chooses to exercise this prerogative holds significant 
concerns for U.S. investors.  These concerns include 
effective compensation; ownership of the current fuel 
inventory; contractual obligations downstream; safety and 
insurance related concerns; and the safety of company 
executives.  To this list Post would add the strongly 
negative signal such a move sends to potential future 
investors.  The GOH is saying, in essence, that if investors 
do not capitulate to GOH demands at the negotiating table, 
the GOH will simply take their investments over by force. 
Finally, given the legal and technical complexities involved, 
Post does not discount the possibility of fuel shortages over 
the coming weeks.  Current importers have not said so, but it 
seems likely they will need to halt all imports for the time 
being, and no contracts (not to mention legal, financial, and 
logistical arrangements) yet exist with the new monopoly fuel 
provider, ConocoPhillips, for future fuel imports.  Post 
assesses that other participants in the previous talks, 
including Corrales, were acting in good faith and were 
genuinely surprised by the President's somewhat capricious 
and certainly demagogic decision to expropriate.  That Zelaya 
could then justify such an action as improving the investment 
 
TEGUCIGALP 00000077  005 OF 005 
 
 
climate and defending property rights tells you all you need 
to know about the root cause of this disaster.  End Comment. 
 
Williard 
WILLIARD