US embassy cable - 05TEGUCIGALPA2424

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 002424 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC, EB/ESC 
ENERGY FOR IA 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EINV, ECON, VE, HO 
SUBJECT:  Honduras Welcomes Planned Central American 
Refinery 
 
REF:  A: MEXICO 06895 
      B: TEGUCIGALPA 02194 
 
1. (U) SUMMARY: A senior Honduran Trade official reacted 
positively to a Central American Refinery proposed by 
Mexico, indicating that a northern Honduran port city would 
be an excellent selection for the site. The enthusiasm may 
change pending the definitive results of the November 27 
Presidential elections. Establishing such a refinery might 
reduce the appeal of Venezuela's PetroCaribe, and may hasten 
the integration of Central America's fuel market.  Where the 
financing will come from remains unclear.   END SUMMARY. 
 
2. (U) In a meeting with Ambassador and EconChief, Honduran 
Trade and Commerce Minister Irving Guerrero expressed 
considerable enthusiasm regarding Mexico's recent proposal 
to build an oil refinery in southern Mexico or Central 
America.  Per ref (a), Mexico has proposed a regional energy 
strategy that includes, among other considerations, the 
construction of a $3.5 billion refinery.  The precise 
location of the project has not been determined, but 
Honduras and several other Central American countries have 
expressed interest in being the site for the refinery.  The 
project would represent significant investment dollars and 
an increase in employment opportunities in the region. 
 
3. (U) Guerrero was confident that Honduras -- with one of 
the best deep-water Caribbean ports (Puerto Cortes) in the 
region, and a planned major road project linking the port to 
El Salvador and Nicaragua -- would be a strong candidate for 
the refinery.  In a recent news article Guerrero said, 
"Honduras is extremely well positioned for this project, 
although obviously other (Central American) countries 
believe that they are just as well positioned." Costa Rica 
has the advantage of an existing, though small scale, 
refinery, while Guatemala is physically located closer to 
Mexican oil wells. 
 
4. (SBU) The November 27 Honduran presidential elections 
have not yet been certified by electoral authorities, but 
unofficially it appears that power will shift to the Liberal 
Party in January.  This change in national leadership could 
have (as yet unknown) impacts on Honduras' position 
regarding the refinery.  Mexico's President Fox has called a 
meeting of Central American Presidents in early December to 
discuss the energy plan.  The GOH has indicated that 
President Maduro is tentatively scheduled to attend, though 
with results of the elections still unconfirmed, that could 
change as well.  Given the economic benefits to Honduras, it 
is likely both presidential candidates would be in favor of 
the plan. 
 
5. (U) A Central American refinery would significantly 
expand the market for Mexico's heavy Maya crude, while 
offering a regional alternative to Venezuela's fledging 
PetroCaribe plan.  While the immediate economic benefits to 
Honduras of a refinery-- job creation and investment -- are 
clear, just how the refined fuel would be distributed 
throughout the region is not.  Each country maintains a 
separate and unique system of pricing and distributing fuel, 
and a centralized approach would require a close 
synchronization of the different policies.  Guerrero noted, 
however, that tariffs on intra-regional fuels trade are 
zero, and harmonization of fuel standards in the region is 
all but complete, with notification to the WTO pending.  The 
only significant obstacle to be overcome, Guerrero said, 
would be administration of sales taxes, which vary 
substantially from country to country. 
 
6. (SBU) Per ref (a), the bulk of the financing for the 
refinery would likely come from the World Bank (WB) or the 
Inter American Development Bank (IDB). However, a WB 
representative based in Honduras indicated that "there was a 
lot of talk about this, but we are not financing it and the 
IDB is not financing it either."  He would not rule out the 
private arms of both institutions being involved, "as long 
as the government isn't involved." Coincidentally, a 
consultant hired by the GOH (ref b) to study fuel pricing 
and distribution in Honduras will soon release his third and 
final report on the issue, in which it is expected he will 
recommend a government tender process for fuel imports.  In 
a meeting with EconChief and EconOff, the consultant 
indicated support for the tender (in which the GOH would act 
as bulk buying agent for refined petroleum products 
imports), which he characterized as a first step towards 
what the consultant considered "a regional approach to 
buying and storing fuel." 
7. (SBU) The Mexican proposal also calls for up to eight 
percent investment from international investors, per ref 
(a).  Major gasoline distributors in Honduras, which include 
Texaco and Exxon, have heard of the planned refinery, but 
have not begun to seriously consider the business case 
aspects with the limited information available. Minister 
Guerrero has requested a meeting with at least one 
distributor (Texaco).  Congressman Jack Arevalo, head of the 
Congressional Committee on Energy, commented that a few U.S. 
companies had expressed interest in investing in the 
refinery, as well as several unidentified Middle Eastern 
countries.  Kuwait reportedly proposed a similar refinery 
project in the Honduran port city of Trujillo in the mid- 
1990s, but the plan never advanced. 
 
8.(SBU) Comment: Assuming economies of scale from a properly- 
sized refinery and an open regional market, a Central 
American refinery could make economic sense for a region 
that has limited control over its fuel supply.  Equally 
importantly, the proposal offers a valuable political 
alternative to Chavez's PetroCaribe scheme, diversifying the 
region away from Venezuela's volatile policies.  A refinery 
located in Puerto Cortes would bring additional investment 
and jobs to the region, multiplying the economic boost it is 
expected to get from increased trade under CAFTA.  We expect 
the refinery proposal will receive careful attention and 
likely support from either a Liberal or National Party 
administration, particularly if a GOH fuel tender is 
implemented in the coming year.  However, much depends on 
the business fundamentals of the venture.  With the WB and 
IDB wary of committing significant funds, more private 
investment then expected may be required.  End Comment. 
 
Ford