VZCZCXRO9331
OO RUEHLMC
DE RUEHTG #0302/01 0461916
ZNY CCCCC ZZH
O 151916Z FEB 07
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4958
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0539
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 0589

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000302 
 
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: 02/15/2017 
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN DEBATE ON FUELS LIBERALIZATION VS 
NATIONALIZATION REACHING ENDGAME? 
 
REF: A. A) TEGU 262 
 
     ¶B. B) TEGU 225 AND PREVIOUS 
 
Classified By: AMB Charles Ford for reasons 1.5 (b,d) 
 
¶1. (C/NF) Summary:  The GOH debate over fuels imports now 
appears to be on the brink of favorable resolution.  Based on 
all our recent contacts with GOH officials, it is Post's 
assessment that the GOH no longer seeks nationalization of 
the fuels sector and is laboring mightily to find a mutually 
acceptable but face-saving exit to this situation.  They view 
the mounting pressure to nationalize as a threat to their 
plans, and they seek a deal with the IOCs as soon as possible 
in order to avert a worsening of the situation.  If the IOCs 
determine that this deal is in their best interests, and if 
they act with dispatch, Post expects the GOH could reach 
agreement with them in the next few days.  On the other hand, 
if the companies cannot accept the deal, or the GOH gets cold 
feet, the nationalization and sole-source supplier plan 
remains waiting in the wings.  End Summary. 
 
¶2. (C/NF) The GOH debate over fuels imports -- which began in 
October 2005 and reached its nadir on January 13, 2007, when 
the GOH announced plans to seize privately owned fuel storage 
facilities by force -- now appears to be on the brink of 
favorable resolution.  In separate comments to the Ambassador 
and EconChief on February 13, GOH Minister Enrique Flores 
Lanza and GOH advisor on fuels Arturo Corrales both said 
President Jose Manuel "Mel" Zelaya Rosales was on the verge 
of reaching a deal with international oil companies currently 
operating in Honduras, rather than seeking to nationalize the 
fuels sector.  As Post has reported extensively (reftels), 
Zelaya has been moving towards this decision since a January 
18 meeting between Flores Lanza and the IOCs in San Salvador, 
in which it became clear that nationalizing imports would not 
save money.  At that meeting the IOCs told Flores Lanza and 
Corrales that they are prepared to work with the GOH on 
reforming the state-run fuel-pricing scheme to make the 
market more competitive and more price-efficient. 
 
¶3. (C/NF) Since that meeting, the GOH has met several times 
with each of the IOCs separately (Shell, Esso, and Texaco) to 
solicit proposals that would respect both the political needs 
of the GOH and the financial needs of the firms.  Shell and 
Texaco reportedly made rapid progress in these talks, Esso 
much less so.  By January 23 all firms had submitted 
proposals, and a series of informal talks ensued.  It quickly 
became clear that Texaco and Shell were each close to tabling 
offers that both sides could accept.  Esso, however, resisted 
modifications to its January 23 proposal and talks between 
that firm and the GOH bogged down.  In their February 13 
calls to Ambassador and EconChief, Flores Lanza and Corrales 
said, in effect, that if the companies would submit formal 
offers codifying the results of the last week's talks, the 
President would accept the deal and end the current crisis. 
Post has been in contact with the IOCs throughout this 
process, encouraging them to act promptly.  Ultimately, we 
reminded them, it is the responsibility of the company to act 
in its own best long-term interests, whether that be to 
accept the deal on offer or to reject it.  But, we stressed, 
if the IOCs intend to accept the offer, time is of the 
essence. 
 
¶4. (C/NF) Opponents of market liberalization and proponents 
of nationalization of the sector (led by Juliette Handal of 
the Patriotic Coalition) have meanwhile been busy increasing 
public pressure on Zelaya to nationalize imports and sign a 
sole-source contract with U.S. firm ConocoPhillips to supply 
the GOH with all of Honduras' fuel imports for the year. 
According to both Corrales and Flores Lanza, Conoco on 
February 13 submitted a signed contract to the GOH that, 
while final, included a clause conditioning the deal on 
resolution of the fuel-storage issue.  According to Flores 
Lanza, this represents no substantive change in Conoco's 
 
TEGUCIGALP 00000302  002 OF 002 
 
 
position, since Conoco has always conditioned its offer on 
the GOH demonstrating it has access to adequate and legally 
acquired storage facilities.  Flores Lanza told EconChief 
that the GOH is not inclined to sign this contract, since it 
does not meaningfully move the deal towards closure and, in 
fact, could weaken the GOH's leverage to obtain access to 
those storage facilities.  Nevertheless, news that Conoco had 
signed a contract would be a public relations coup for Handal 
and her supporters, who are sure to use it to try to sway 
public opinion in favor of prompt nationalization.  Based on 
all our recent contacts with GOH officials, it is Post's 
assessment that the GOH no longer seeks such a 
nationalization and is laboring mightily to find a mutually 
acceptable but face-saving exit to this situation.  They view 
the mounting pressure to nationalize as a threat to their 
plans, and they seek a deal with the IOCs as soon as possible 
in order to avert a worsening of the situation. 
 
¶5. (C/NF) In the meantime, the GOH has also filed suit 
against DIPPSA, the Honduran owner of the fuel storage 
facilities in question.  A clause in DIPPSA's operating 
license allows the GOH to use DIPPSA's facilities in times of 
emergency and with fair compensation to be paid to the firm. 
However, to date DIPPSA has declined to comply with that 
clause, prompting the GOH lawsuit for breach of contract.  A 
straightforward affair, the judge quickly found for the GOH 
but could not enforce the judgment because DIPPSA owner Henry 
Arevalo has disappeared.  Until he can be found and formally 
served, the process is on hold.  The court could also appoint 
a custodian for DIPPSA, but that would be a slow process. 
(Comment:  Post assesses that the lawsuit was intended both 
to keep pressure on the IOCs by keeping the Conoco 
alternative alive and to convince the Honduran public that 
the GOH is doing everything in its power to reduce fuel 
prices for the consumer.  The GOH is also likely using the 
latter tactic to better defend itself from the coming attacks 
by Handal and others when the sole-source contract is not 
signed and the sector not nationalized.  Finally, we assess 
that the lawsuit is also meant in part to pressure Arevalo 
personally, who has publicly defied President Zelaya.  A 
classic cacique (Latin strongman) who runs all policy 
personally, Zelaya likely views Arevalo's impudence as 
galling and intolerable.  End Comment.) 
 
¶6. (C/NF) If the IOCs determine that this deal is in their 
best interests, and if they act with dispatch, Post expects 
the GOH could reach agreement with them in the next few days. 
 That would put Honduras on a path towards rapid 
liberalization of its fuels market and would set an important 
precedent by rolling back populist and quasi-socialist plans 
in favor of the free market.  On the other hand, if the 
+Ub&~}DQ plan remains 
waiting in the wings.  If the GOH takes this route, there is 
little more Post can do to prevent a likely series of sharply 
negative consequences, possibly including several lawsuits by 
the IOCs and claims of CAFTA violations.  Post remains 
cautiously optimistic the GOH intends to choose 
liberalization, assuming the companies come forward soon with 
a mutually acceptable final offer. 
 
Ford 
FORD