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C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 000225 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
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 AND WBASTIAN 
STATE PASS USTR FOR AMALITO 
 
E.O. 12958: DECL: 02/02/2017 
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN PRESIDENT ZELAYA SAYS HE BACKS FUEL 
SECTOR LIBERALIZATION, BUT TIME IS RUNNING OUT 
 
REF: A) TEGU 0170 AND PREVIOUS 
 
Classified By: AMB Charles Ford for reasons 1.4 (b,d) 
 
¶1. (C/NF) Summary:  President Zelaya says he wants a 
market-based fuel sector reform, but the GOH must reach a 
deal with the international oil companies (IOCs) before 
domestic pressures force him to move back towards a national 
import scheme.  A recent deal in principle with Honduran fuel 
storage owner DIPPSA provides a needed piece for sector 
liberalization, but it could also be used as a next step 
towards a national import scheme.  A recent visit by Conoco 
representatives underscored that the pressure is still on 
from some quarters to adopt a state-run fuel import monopoly. 
 President Zelaya has gotten about as much political and 
economic benefit from that proposal as he is likely to get. 
Any more steps he takes towards a state takeover of the 
sector would only erode those gains, and expose Honduras to 
lawsuits and loss of investor confidence.  Post therefore 
finds Zelaya's professed support for market opening credible, 
since it is now in his political self-interest to engineer a 
GOH exit out of the nationalization scheme.  His challenge 
will be to craft an exit strategy that preserves his gains 
but also convinces the public that liberalization is the 
appropriate next step in the GOH's cost-cutting plan. 
Zelaya's rhetoric has begun to lay the groundwork for this 
delicate maneuver, but GOH actions have yet to catch up.  The 
GOH needs to close this deal soon, perhaps during upcoming 
talks with the IOCs on February 5 and 6.  Failing that, the 
GOH will engage in talks with U.S. firm ConocoPhillips by 
February 9 as a potential monopoly supplier to a GOH-run 
national import scheme. Post and the private sector remain 
constructively engaged in supporting a policy of 
liberalization.  The questions now facing Post and the IOCs 
are whether Zelaya will keep faith with his new-found market 
orthodoxy, and whether he has the ability to deliver on his 
promise. End Summary. 
 
¶2. (C/NF) Since January 25, President Jose Manuel "Mel" 
Zelaya Rosales has made several public comments preparing the 
ground for a GOH pivot out of the current state-run import 
proposal and into a move towards a liberalized market.  On 
distinct occasions he has called for liberalization of the 
market, praised the competitive fuels markets that exist in 
El Salvador and Guatemala, and warned Hondurans against 
getting "tied to just one company."  On February 1, for the 
first time Zelaya told the public that if Honduras were to 
sign ("aunque firmemos") with ConocoPhillips as a sole source 
supplier, there would be no further price reductions for 
gasoline as a result of the scheme.  Presidential advisor 
Arturo Corrales has for several weeks publicly said that any 
savings would come from changes to the GOH pricing formula 
and not from savings on imports, but this was the first time 
Zelaya himself has said this to the public.  Minister Enrique 
Flores Lanza told EconChief that this tactic had slowly 
opened a political space in which Zelaya now feels he can 
move towards liberalization. 
 
¶3. (C/NF) Zelaya has also repeatedly told Ambassador and 
others privately that he now supports fuel sector 
liberalization, and seeks an exit from this crisis that 
includes the IOCs currently operating in Honduras.  It was on 
Zelaya's personal instructions that Corrales first engaged 
with the IOCs in November 2006, and it was Zelaya's decision 
to dispatch Corrales and Minister Flores Lanza to El Salvador 
on January 18 with orders to seek a genuine accommodation 
with the IOCs.  Given his penchant for ad-libbing during his 
public remarks, Zelaya was almost certainly also the author 
of his recent rhetorical shift away from any mention of the 
fuel import solicitation.  Publicly and privately, Zelaya has 
clearly adopted a market-based approach to the fuels issue. 
The questions now facing Post and the IOCs are whether Zelaya 
will keep faith with his new-found market orthodoxy, and 
whether he has the ability to deliver on his promise.  In 
private discussions, the GOH seems increasingly anxious to 
 
TEGUCIGALP 00000225  002 OF 003 
 
 
conclude a deal with the IOCs.  A ConocoPhillips delegation 
returns to Honduras on/about February 8 to sign the exclusive 
 contract it won under the previous plan to nationalize 
imports.  The GOH feels it must reach a market-based deal 
with the IOCs by then, or it might not be able to withstand 
domestic political pressures to move ahead with the state-run 
import scheme and sign with Conoco. 
 
¶4. (C/NF) In the meantime, the GOH has been locked in a 
contest of wills with Honduran fuels importer/distributor 
DIPPSA over using DIPPSA storage facilities.  Under DIPPSA's 
contract with the GOH, DIPPSA is required to allow the GOH to 
use the facilities if needed during an emergency, for which 
DIPPSA will be paid a fair price.  The GOH calculated that a 
fair price, based on industry standards, would be USD 0.015 
to 0.022 per gallon of throughput.  The GOH padded this 
figure generously and offered DIPPSA USD 0.03; DIPPSA 
demanded 0.065.  Unwilling to pay such a high fee, the GOH 
noted that DIPPSA was contractually obligated to accept a 
fair offer, and threatened to take DIPPSA to court over this 
violation of the contract.  In the end DIPPSA blinked, and 
initial reports indicate that the GOH and DIPPSA have settled 
on a price of 0.037 per gallon.  Setting this price is a key 
component of reforming the port fees portion of the fuels 
pricing formula (which the GOH seeks to reduce from USD 0.112 
per gallon to approximately 0.06).  The international oil 
companies (IOCs) cautiously support this effort as a means to 
reduce price distortions in the state-run pricing formula and 
to deliver cost savings to the Honduran consumer.  This and 
other fee reductions have been the tent-pole of IOC/GOH talks 
since the breakthrough January 18 meetings in El Salvador. 
 
¶5. (C/NF) Confusing to the IOCs, however, was a simultaneous 
public exchange of letters between the GOH and 
ConocoPhillips, in which Conoco said that once the storage 
issue is resolved, the firm would enter into an exclusive 
delivery contract with Honduras.  The pressure to negotiate a 
deal with DIPPSA was therefore also in the interest of those 
who oppose liberalization and instead want to see state 
control over the sector and a sole-source contract signed 
with Conoco.  As a result, both the pro-liberalization and 
pro-nationalization forces see the DIPPSA deal as a victory 
for their cause.  President Zelaya claims he pursued a deal 
with DIPPSA as part of putting the pieces in place for fuel 
sector liberalization.  Many others, however, continue to 
push for the nationalization of the sector and see this same 
agreement with DIPPSA as an important step along that path. 
 
¶6. (C/NF) Further clouding the issue was the surprise 
lightning visit on February 1 by a senior representative for 
Conoco.  Following closed-door meetings with Minister Enrique 
Flores Lanza in which the DIPPSA deal was presumably 
presented to Conoco, the representative held a press 
conference in which he announced that "We don't want to be 
involved in any expropriation or nationalization.  Those are 
words we don't like."  He went on to say, though, that once 
the GOH has guarantees of terminal availability, Conoco would 
sign a contract to supply the GOH with fuel. In an email 
following his visit, the Conoco representative told EconChief 
that "things are proceeding quite well now.  Conoco should be 
signing (an exclusive import contract with the GOH) next 
week."  The contract with DIPPSA, once signed, therefore also 
benefits Conoco in its quest to secure exclusive rights to 
supply fuel to the GOH. 
 
¶7. (C/NF) These recent positive developments are in keeping 
with Zelaya's public and private assurances, but they do not 
irrevocably commit the GOH to a path of market 
liberalization.  Reaching a deal with DIPPSA does not close 
the door to a GOH takeover of the sector, should Zelaya fail. 
 The IOCs are impatient with the GOH's political posturing, 
but most continue to bargain in good faith.  In a telcon with 
Ambassador, senior executives of Esso (ExxonMobil) expressed 
their frustration with the lack of clarity in the process and 
the poor communication from the GOH on developments. 
 
TEGUCIGALP 00000225  003 OF 003 
 
 
Ambassador explained that this issue has much political 
baggage in Honduras, particularly for President Zelaya.  It 
is taking a significant amount of effort by Zelaya to 
convince the public that a GOH shift away from the announced 
nationalization of imports and towards liberalization is the 
right move.  Zelaya says he has reconciled himself to this 
course of action, but he must now get Honduran public opinion 
on-board, and that will take time.  Ambassador urged the 
companies to continue to support this effort, recognizing the 
political risks Zelaya is running and the public and private 
maneuvering that might be required.  The IOCs met Flores 
Lanza, Corrales, and Minister of the Presidency Yani 
Rosenthal on February 2 to continue talks.  Esso delivered "a 
hard message" emphasizing its support for the reform process 
but also the urgency of moving quickly on it, given 
continuing losses that the companies face.  The GOH presented 
the IOCs with a pricing formula reform proposal, and 
requested feedback by February 5. 
 
¶8. (C/NF) Comment: Regardless of whether Zelaya can deliver 
liberalization of the fuels sector or opts to pursue 
state-run importation, setting a reasonable price with DIPPSA 
for storage was a necessary step.  Conclusion of those talks 
was something of a step forward.  Post is optimistic that 
Flores Lanza's public comments about that deal clearing the 
way to create a government administered import regime are 
intended to keep pressure on the IOCs to bring their best 
offers to the table as soon as possible.  Zelaya has 
realized, and is trying to communicate to the public, that 
the savings from any state-run sole-source contract would be 
slight.  It appears he also understands that the legal and 
political damage from pursuing a nationalization scheme could 
be significant.  Therefore, he faces the choice of either 
pocketing the political benefits and price cuts he's already 
obtained and moving on to liberalization, or of pursuing a 
national import plan, poisoning investor relations, and 
exposing Honduras to multiple lawsuits, all with little 
likelihood of additional cost savings.  Since Zelaya is both 
a populist and a political pragmatist, we expect he will take 
his winnings and move on, rather than pick a fight that he 
will ultimately lose even if he wins.  We don't discount the 
chance that certain other players will take one more run at 
the nationalization scheme.  But, if Zelaya can withstand 
those pressures, we think his political instincts might work 
to our advantage in finally moving Honduras towards a 
competitive fuels market.  End Comment. 
 
FORD 
FORD