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C O N F I D E N T I A L SECTION 01 OF 05 TEGUCIGALPA 000463 
 
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 AND WBASTIAN 
STATE PASS USTR FOR AMALITO 
 
E.O. 12958: DECL: 03/15/2017 
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN FUEL SOLICITATION: FOOL ME TWICE, SHAME 
ON ME 
 
REF: A. A) TEGU 368 AND PREVIOUS 
     ¶B. B) 06 TEGU 1881 
 
Classified By: AMB Charles Ford for reasons 1.4 (b,d) 
 
¶1. (C/NF) Summary: The GOH has decided to put the fuel 
solicitation process on a back burner.  While this offers 
hope the planned state takeover of the fuel import sector 
might never take place, it leaves the plan with enough life 
in it for the Zelaya administration to play political games 
with it indefinitely, continuing to make life miserable for 
the current group of fuel importers.  On March 2, the GOH 
reneged on nearly all it had promised over the last month 
about moving towards a competitive market in fuels.  At the 
March 2 meeting the GOH announced it would continue the fuel 
import solicitation process (designed to monopolize the 
sector under state control), continue negotiations with 
ConocoPhillips (the firm that would supply the state under 
the nationalization plan), and move forward with a plan for 
the state to construct a two million barrel fuel storage 
facility (the last piece needed to move forward with 
nationalization).  At the meeting the GOH also implicitly 
rejected the international oil companies' (IOC) proposals for 
reforming the fuels pricing formula, mandating instead that 
the pricing structure would remain as it is. Pricing 
adjustments will not be made more flexible or efficient by 
allowing them to move with the market price, but will instead 
remain in the hands of the state-run Petroleum Administration 
Commission (CAP), which will continue to set prices every two 
weeks.  Finally, the GOH called on all supporters of the 
solicitation/nationalization scheme to rejoin the GOH in its 
efforts, apparently extending an olive branch to Juliette 
Handal and the Patriotic Coalition.  As of March 13, two IOCs 
have now filed suit against the GOH, chief negotiator Arturo 
Corrales has refused to play any further part, and Minister 
Flores Lanza could provide no indication that the GOH has a 
clear vision of how to prevent what could be a coming train 
wreck.  The decision now lies with the IOCs whether this 
issue must move to a legal or trade complaint venue for its 
resolution.  End Summary. 
 
¶2. (C/NF) The March 2 meeting had originally been scheduled 
for February 27, and was generally expected to be the venue 
where President Jose Manuel "Mel" Zelaya Rosales would unveil 
his new plan to create competitive fuel markets.  Given his 
strong public statements over the last month, Post also 
expected that the meeting would be the decisive showdown with 
Handal, in which the President would once and for all assume 
a leadership role in the process and marginalize Handal and 
her disruptive Coalition.  However, we and other observers 
became increasingly concerned when the GOH postponed the 
meeting and stopped returning calls, leaving all to wonder 
what would actually be presented.  The meeting was then moved 
to March 2, a day when Zelaya himself would be out of the 
country, another ill omen.  Despite these red-flags, the IOCs 
and other participants had little option but to watch and 
wait. 
 
¶3. (C/NF) Representatives of ChevronTexaco -- the U.S. firm 
that has been most engaged in seeking a mutually acceptable 
outcome to this situation -- described the meeting as "very 
bad," and is considering seeking a meeting between their 
President and President Zelaya to convey its concerns. 
ExxonMobil requested a meeting between its corporate 
President and President Zelaya to express its grave concerns, 
and has quietly retained counsel, should it need to pursue a 
legal case.  Even Arturo Corrales, repeatedly put forward as 
Zelaya's personal representative to these talks, told 
EconChief he felt "disappointed and deceived" by the outcome. 
 (Note:  Corrales was not present at the meeting, and it is 
rumored that the current public attacks on his meter-reading 
business, SEMEH, are in retaliation for his role in seeking a 
market-based solution to the fuels issue. On March 5, the GOH 
announced that his contracts would be unilaterally cancelled. 
 
TEGUCIGALP 00000463  002 OF 005 
 
 
 End Note.)  Minister Enrique Flores Lanza -- who presented 
the GOH position at the March 2 meeting -- refused for 
several days to return calls made to either his office or 
personal phones.  When reached on March 5, Flores Lanza 
claimed that the new GOH position was entirely consistent 
with the pro-liberalization stance and was little more than 
an attempt to create some political room for maneuver while 
moving towards free markets.  (Comment:  For all the reasons 
outlined below, Post does not find this explanation credible. 
 End Comment.) 
 
¶4. (C/NF) The meeting itself was reportedly primarily a media 
show.  The GOH invited not only the IOCs, but also 
representatives from throughout the fuels distribution chain 
(those most opposed to liberalization, since it would 
threaten their padded margins) and even representatives of 
the taxi drivers' union.  The taxi drivers' union, recall, 
was the blunt object with which Handal battered the GOH in 
late 2005 and early 2006, paralyzing the city with road 
blockages and precipitating adoption of the nationalization 
plan.  The absence of Zelaya and Corrales at the meeting, and 
the presence of several vocally anti-liberalization groups 
clearly stacked the deck against any market-based outcome. 
(Comment:  Interestingly, Handal herself was not present. 
Rumor has it she was touring the countryside, drumming up 
grass-roots support for a possible run at the Presidency. 
End Comment.)  Mario Canahuati, former Ambassador to the U.S. 
and President of private sector umbrella group COHEP, was 
also present at the meeting, allegedly to represent the 
interests of the private sector.  In our view, Canahuati is 
already campaigning for President, and emerged from the 
meeting to declare unhelpfully that he has always supported 
the Patriotic Coalition but also price reform, and that he 
favors increased competition in the sector, but also the GOH 
plan to construct the new fuel storage facility. 
 
¶5. (C/NF) The meeting produced a seven-point communique, 
which appears in every respect to be a rout of market reform 
and liberalization. 
 
(Point 1) The GOH will maintain the current pricing formula. 
 
Analysis: Reforming this formula (especially in light of 
continuing losses being absorbed by the IOCs) had been the 
key focus of over a month of quiet talks between the GOH and 
the IOCs.  No mention of any current or future reform is made 
in the communique, calling into question the GOH's good faith 
in engaging in those talks. 
 
(Point 2) Negotiations with ConocoPhillips will continue. 
 
Analysis: These talks had all but ended by February 24, and 
the GOH had successfully laid the blame for the breakdown on 
the U.S. citizen consultant and on Conoco.  Conoco's only 
role in this process would be as monopoly supplier to a 
GOH-run national fuel import regime.  Restarting these talks 
therefore has only one obvious purpose: to allow the GOH to 
once again pursue a nationalization scheme. 
 
(Point 3) The bid solicitation process will continue and the 
GOH will seek court authorization to take over DIPPSA's 
privately-owned fuel storage facility. 
 
Analysis:  Obtaining control of these fuel tanks would allow 
the GOH to move forward with its state-controlled fuel import 
plan.  Fifty percent of one storage facility is property of 
ExxonMobil, so there are potential implications for U.S. 
investor rights in such a decision.  Because the current 
lawsuit is based on a clause in a contract that Exxon became 
party to when it purchased its stake in the tank farm, 
however, the legalities of such a decision are unclear. 
 
(Point 4) The current state-run fuel pricing mechanism will 
not be reformed, but instead will remain in the hands of the 
 
TEGUCIGALP 00000463  003 OF 005 
 
 
GOH's Petroleum Administration Commission (CAP). 
 
Analysis:  Prices will adjust only once every two weeks, and 
that decision must be approved by the political authorities 
within the GOH (at times, this has meant requiring approval 
by the President himself).  The CAP is presided over by Lucy 
Bu, a long-time ally and former special assistant to Juliette 
Handal. 
 
(Point 5) The GOH will move forward with a plan to build its 
own 2 million barrel fuel storage terminal. 
 
Analysis: Industry experts, including the U.S. consultant who 
proposed this scheme in the first place, admit that there is 
already an oversupply of fuel storage in Honduras.  There is 
therefore no economic justification for this new project. 
Rather, building these tanks appears intended solely to give 
the GOH the freedom to pursue its intended position as sole 
importer of fuels into Honduras.  In short, this project is a 
clear signal that the nationalization scheme has not been 
rejected, but merely postponed until the GOH has all the 
pieces in place to make it happen.  As for the existing 
privately-owned storage tanks, which would become stranded 
assets under such a scheme, the U.S. consultant once told 
Post, "They (Esso, DIPPSA, and Texaco) can sell their tanks 
for razor blades." 
 
(Point 6) Any market reform will happen only in the 
medium-term, and only after a full discussion among all 
involved sectors. 
 
Analysis:  Post supports both transparency and participatory 
decision-making, but in the context of this document and 
given the participants to this meeting, this point appears to 
signal that the GOH is prepared to put off adopting 
market-based reform indefinitely.  The lukewarm language and 
long timelines in this point are jarringly discordant with 
the pro-market rhetoric Zelaya had been invoking recently. 
 
(Point 7) The full text of point seven reads: "We call on all 
sectors, organizations, and persons who have supported this 
process to continue supporting the government in its efforts 
to find more favorable alternatives and fair fuel prices for 
the Honduran people, based the laws of the free market." 
 
Analysis:  Given the composition of the audience and in the 
context of all of the above, point seven is perhaps the most 
disappointing.  In it, the GOH appears to extend an olive 
branch to the Patriotic Coalition, the taxi drivers' union, 
and all the other anti-reform elements that had until 
recently driven this process towards state-control.  Where 
the GOH had been on the verge of dealing a decisive blow to 
this group, it now appears the GOH has instead once again 
empowered them.  This is certain to re-ignite the underlying 
dispute and to protract any resolution for months or perhaps 
years.  By that time, with its own storage tanks in hand, the 
GOH could decide to simply take over the sector itself. 
Despite this point's token mention of the free market, the 
"process" to which this point refers is one aimed at 
increasing state intervention in the sector, and when those 
that supported this process think of "more favorable 
alternatives" they are not thinking of price efficiency and 
competition, but rather of state controls and subsidies. 
 
¶6. (C/NF) On March 9 EconChief followed up with Corrales, who 
admitted he "could not say he was optimistic."  Corrales 
"hoped and prayed" the GOH would do the right thing, since he 
did not see what other alternative it has, but he said its 
actions over the last week have been like "running back into 
a burning building you've just escaped."  Corrales said if 
the GOH is to have any hope of salvaging the situation, it 
must immediately undertake to reform the pricing formula, 
explicitly and publicly end the nationalization process and 
the solicitation for a monopoly fuels provider, and engage 
 
TEGUCIGALP 00000463  004 OF 005 
 
 
the IOCs in talks on liberalizing the fuels sector.  Even if 
the GOH were to do all of that, he said, it is unclear if it 
could repair the damage done.  Corrales agreed with EconChief 
that the GOH by its action destroyed whatever credibility it 
had with the IOCs.  Two of the IOCs (Shell and Trafigura) 
have now filed suit against the GOH, and at least one other 
(Esso) has retained counsel. 
 
¶7. (C/NF) Post sees little that could entice the IOCs back to 
the table to negotiate with a government in which they no 
longer have any faith.  Corrales agrees, and told EconChief 
that he has refused the President's request to play the 
intermediary in any attempt to re-engage with the IOCs.  He 
said his credibility with the IOCs had been destroyed by the 
GOH's actions and that if he were to re-engage he would 
appear to the IOCs to be complicit in the GOH's duplicity. 
On March 13, Minister Flores Lanza told EconChief that he 
understood the IOCs have likely lost faith in the process and 
agreed that the GOH must move beyond words to actions.  That 
said, two weeks have passed and the GOH has not yet decided 
how it plans to proceed.  Flores was unwilling to commit to 
more than saying the GOH will work to clarify its position, 
perhaps over the coming week.  Ambassador and EconChief have 
each made it clear to the GOH that Post put its credibility 
on the line in bringing the IOCs to the table, and we were 
gravely disappointed by the GOH failure to follow through on 
its commitments from those talks.  As a consequence, we are 
no longer in a position to offer informal policy advocacy on 
this issue.  In our view, the decision now lies with the IOCs 
whether this issue must move to a legal or trade complaint 
venue for its resolution. 
 
¶8. (C/NF) Comment:  When he first came into office in January 
2006, Zelaya talked a great game about free markets and 
international trade, and we believed him.  Yet from the time 
of CAFTA's April 1 entry into force, Zelaya has done little 
to act on his words, and much to call into question his real 
dedication to free markets (detailed extensively ref B). 
Yet, when Zelaya claimed in January 2007 to have embraced 
free markets as the solution to his fuel sector concerns, we 
again believed him.  Once again, his government's actions 
belie his words.  We are deeply disappointed that Zelaya has 
again failed to marshal the political will to make the right 
choice.  Worse, he led all participants to believe he would 
carry out this plan.  They invested a great deal of time and 
prestige in a good faith effort to negotiate a mutually 
acceptable solution, only to find themselves ambushed once 
again at a media circus event, as if we were back in the bad 
old days of summer 2006.  Worse, the GOH inviting the most 
disruptive elements back into this process suggests that 
Zelaya has returned to form -- provoking crises in order to 
ride to the rescue, yet unwilling to spend the political 
capital to avoid such crises in the first place. 
 
¶9. (C/NF) Comment, continued: The historical precedents are 
ominous.  Zelaya, for example, twice undercut his own 
negotiating teams in the 2006 wage dispute with teachers.  In 
each case, Zelaya encouraged the teachers to reject the deal 
his own negotiators had put on the table and press for more. 
The crisis dragged on and three successive negotiating teams 
were formed and then replaced.  Finally, Zelaya acceded to 
every demand the teachers had made, despite the severe fiscal 
dislocations that decision implies for future GOH budgets. 
If this analogy of the teachers talks holds in the fuels 
case, it suggests Zelaya does not actually intend to resolve 
this matter.  He might instead allow it to smolder 
indefinitely, and perhaps even stoke the fire from time to 
time when it seems politically expedient to do so.  This 
might be the normal game played in Honduran domestic 
politics, but the IOCs cannot continue for much longer down 
this path while losing money each day and living in a world 
of uncertain investor protections.   February's last-ditch 
negotiations were a leap of faith by the IOCs, and it now 
appears that faith might have been repaid with betrayal. 
 
TEGUCIGALP 00000463  005 OF 005 
 
 
Unless Zelaya were to reverse this latest policy shift, Post 
does not see how this process can be saved, and even that 
might not be enough. 
 
Ford 
FORD