VZCZCXRO9321
OO RUEHLMC
DE RUEHTG #0086/01 0162309
ZNY SSSSS ZZH
O 162309Z JAN 07
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4629
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S E C R E T SECTION 01 OF 03 TEGUCIGALPA 000086 
 
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: 01/15/2032 
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN PRIVATE SECTOR OPPOSES ANNOUNCED GOH 
INTENTION TO SEIZE OIL FACILITIES; ESSO VOWS TO FIGHT BACK 
 
REF: TEGU 0077 AND PREVIOUS 
 
Classified By: CDA James Williard for reasons 1.4 (b,d) 
 
¶1. (S/NF) Summary:  Lawyers for U.S. firm Esso admit that 
expropriations can be legal if carried out properly and 
effectively compensated, so they continue to monitor closely 
the GOH's implementation of its January 13 decree announcing 
its intention to take control of private sector oil storage 
facilities.  However, they say, the GOH requirement to sell 
gasoline inventories at below cost is equivalent to 
confiscation, which is illegal and which they will forcefully 
challenge.  For the time being Esso will continue fuel 
deliveries to Honduras, in part to avoid any breaches of 
contract with its customers.  That said, Esso clearly feels 
that this time the GOH has "crossed the line."  Esso seeks a 
strong, public USG denunciation of this GOH attack on private 
investment.  The breadth of the Honduran private sector has 
also come out against the surprise GOH move, and several 
opposition political parties have criticized the intended 
takeovers as well.  Independent gasoline service stations 
will suffer significant financial losses as they, too, are 
forced to sell their inventories below cost.  After a year of 
cheering on the GOH as it sought to nationalize the fuels 
sector (as long as only the international oil companies were 
made to suffer the price), the small gas station owners 
suddenly find their own losses from this policy a bitter pill 
to swallow.  End Summary. 
 
¶2. (C/NF) Following the GOH's January 13 decision to go 
forward with seizing control of privately-owned oil storage 
facilities, U.S. firm Esso privately told EconChief that it 
would fight back.  To date, Esso has made no public 
statements on the announced takeovers.  In reviewing the 
GOH's decree, Esso lawyers admit that under certain 
circumstances expropriation or similar acts, if effectively 
compensated, can be legal.  However, they say that Esso 
signed no contract with the GOH similar to DIPPSA's, and 
therefore that the clause in DIPPSA's contract allowing the 
GOH to take control of installations in an emergency is not 
binding on Esso.  Esso will therefore request from the GOH a 
legal justification for its action.  However, Esso lawyers 
draw a clear distinction between the compelled use of the 
facilities and the requirement to sell existing inventories 
below cost.  In their view, that act constitutes 
confiscation, not expropriation, and is therefore clearly 
illegal.  Esso country representative Daniel Mencia estimated 
the value of these gasoline and diesel inventories at up to 
USD 20 million, just for Esso.  "This time the Honduran 
government has crossed the line," Mencia said. Echoing COHEP 
President Mario Canahati's January 13 plea to EconChief, 
Mencia says Esso is seeking a strong, public USG denunciation 
of this GOH attack on private investment. 
 
¶3. (C/NF) As the GOH plan to nationalize imports has 
developed over the last year (reported extensively, reftels) 
Mencia has found himself toning down the positions taken by 
his headquarters.  In this instance, however, he does not 
think that will be possible and predicts that Esso's reaction 
will be "very strong."  Mencia did not leave Honduras, as 
other companies' executives have done, and Esso lawyers 
discarded the possibility of closing gasoline service 
stations, fearing that would give the GOH legal grounds for 
more radical actions.  (Note: Similarly, Texaco service 
stations also opened on time and are selling gasoline at the 
new prices. End Note.)  Regarding future deliveries, Mencia 
confirmed that Esso has tanker deliveries scheduled through 
April.  Unless ordered to stop by the GOH, Mencia intends to 
continue servicing his consumers, lest he breach existing 
contractual obligations.  Mencia admits, however, that his 
headquarters could decide otherwise, or that the GOH could 
order Esso to halt such deliveries. 
 
¶4. (C/NF) Mencia indicated that he felt betrayed by the GOH 
 
TEGUCIGALP 00000086  002 OF 003 
 
 
action, coming as it did in the midst of ongoing negotiations 
over how to resolve the current fuel import situation 
amicably.  The President's representative to those talks, 
Arturo Corrales, had even called Esso's Vice President in the 
U.S. to confirm that he was the GOH's lead on this issue and 
that he was carrying out President Zelaya's personal 
instructions in this matter.  That call was placed on Friday 
night, January 12.  The following day, the President 
announced his intention for the GOH to forcibly take control 
of those same assets.  Despite apparently having his 
credibility destroyed by this turn of events, Corrales has 
remained loyal to the President, though his remarks subtly 
chastise the executive for his ill-considered actions.  In a 
January 14 interview, Corrales felt that the damage from the 
takeovers could be contained if the GOH walked this policy 
back and moved promptly towards liberalization of the sector. 
 If the GOH were to act immediately to reverse it, perhaps 
the announced takeovers would be dismissed by observers as a 
negotiating tactic, he speculated.  (Comment:  Post is 
pleased to see Corrales continues to seek an exit to this 
worsening crisis, but finds his assessment altogether too 
sanguine that the GOH has not already done severe damage to 
its image and its investment climate with this announced 
seizure of assets and inventories.  End Comment.) 
 
¶5. (C/NF) On January 15, EconChief again spoke with DIPPSA 
President Henry Arevalo, who said he is "extremely worried" 
about the situation.  He confirmed that he will keep his 
January 15 meeting with the GOH.  That meeting had been 
intended to continue talks over leasing his storage 
facilities, but Arevalo will now use the opportunity to learn 
more about the seizure decree and the GOH's plans for 
executing it.  Arevalo will also deliver a strong message 
that he rejects the announced takeovers, and that the only 
course remaining to the GOH is to move towards liberalization 
of the fuels market.  Arevalo also made his opposition public 
in a January 15 interview in which he decried the lack of GOH 
respect for private investments and said that in Honduras 
"there is no juridical security."  (Comment:  Arevalo also 
gets credit for one of the wittiest published attacks on the 
fuel bid solicitation process, when he told reporters that 
the savings from the solicitation process would barely be 
enough for the GOH to pay-off the reporters to report that 
the solicitation was a success.  End Comment.) 
 
¶6. (SBU) Surprisingly, the Honduran private sector has nearly 
universally denounced the GOH action, fearing that it will 
"send the wrong signal" to investors.  According to both 
press accounts and private discussion, the Honduran 
Manufacturer's Association (AHM), the Industrialists 
Association (ANDI), the Chamber of Private Enterprise 
(COHEP), and the two largest Chambers of Commerce have all 
come out against the announced takeovers. 
 
¶7. (U) Similarly, the Honduran political class is skeptical. 
Congressional leader of the minority Nationalist Party, Juan 
Orlando Hernandez, questioned the move, saying, "This is an 
extremely sensitive matter, because we do not want to appear 
to the rest of the world like a state that, when something 
doesn't go its way, simply takes the investments away from 
investors, whether domestic or international.  That scares 
away investment."  Leader of the tiny but centrist opposition 
party PINU, Olban Valladares, also questioned the move, 
saying, "The cure could be worse than the disease." 
 
¶8.  (C/NF) In an ironic twist, even the Association of 
Independent Gas Station Owners (ADHIPPE) has come out against 
the move.  Following brisk winter vacation fuel sales, many 
independent gas station owners had recently refilled their 
tanks. The new decree, by forcing them to sell below cost, 
will inflict significant financial losses on these small 
businesses.  ADHIPPE President Sarahi Silva has given both 
print and radio interviews highlighting this problem, and 
lamenting the fact that ADHIPPE members should be negatively 
 
TEGUCIGALP 00000086  003.2 OF 003 
 
 
impacted by the GOH actions when ADHIPPE has been one of the 
staunchest supporters of the GOH move to nationalize fuel 
imports. 
 
Williard 
 
 
 
FORD