US embassy cable - 05PANAMA2342

UNCLAS SECTION 01 OF 02 PANAMA 002342 
 
SIPDIS 
 
DEPT FOR WHA/CEN 
AND EB/ESC 
DEPT PASS USTR AMALITO 
 
E.O. 12958: N/A 
TAGS: ENRG, EIND, EPET, ETRD, PM, ENIV, ECONOMIC AFFAIRS 
SUBJECT: GOP AT ODDS WITH PETROLEUM INDUSTRY 
 
This cable is the first in a two part series on the Energy 
Sector in Panama 
 
1.SUMMARY (SBU) The sharp increase in global oil prices 
prompted demonstrations and transportation strikes during 
September and October.  In a country where 40% of the 
population already live in poverty, the price of a basic 
commodity has more than doubled this year.  The GOP responded 
by abruptly changing existing fuel price regulations and 
giving itself a legal avenue to potentially assume control of 
privately owned storage facilities.  The GOP also exempted 
the transport sector from diesel fuel tax, losing revenue at 
a time of budget deficit.  The petroleum industry maintains 
these short term solutions have caused them economic harm, 
jeopardized the investment climate, and damaged the 
relationship between the industry and the GOP.  In the 
absence of a cohesive energy plan designed to reduce 
dependence on foreign oil, the GOP is scrambling to deflect 
responsibility and appear proactive through the hasty 
announcement of energy development projects of undetermined 
viability, benefit or length.  No plans to participate in 
Venezuela's Petrocaribe have been announced.  END SUMMARY. 
 
--------------------------- 
GOP CHANGES OIL PRICE RULES 
--------------------------- 
 
2.  (U) Panama imports 100 percent of its fossil fuel and 
despite excellent use of hydro electricity, almost half of 
Panama's energy consumption depends on oil.  Three global 
petroleum companies currently service the Panamanian market, 
Chevron-Texaco, Exxon-Mobil and Shell-BP.  Exxon-Mobil and 
Chevron-Texaco representatives told Emboffs that regulatory 
and market reforms in Panama from 1992 to 2002 successfully 
created a highly competitive market and some of the lowest 
prices in Central America. 
 
3. (SBU)  Since September 2003, the rack price of imported 
fuel in Panama has been published every 14 days by the GOP 
using international costs of supply, transport and storage. 
In September 2005, the GOP began lowering the effective 
period to 7 days whenever global oil prices fell and held to 
the 14 days whenever global oil prices rose, making it 
impossible for an importer to calculate costs or project 
revenue.  Exxon-Mobil President of the Inter-Americas, Jesse 
Owens told Emboffs he did not expect to profit on every 
shipment to Panama, but that the actions undertaken by the 
GOP had made the market unprofitable for the foreseeable 
future. 
 
4. (SBU) In April 2005 the GOP changed existing regulations 
to allow the occupation and utilization of the country's only 
fuel storage infrastructure (currently owned and operated by 
Chevron-Texaco) "for any situation which might affect the 
supply of refined products."  Chevron-Texaco country manager 
believes this undermines the integrity of their substantial 
in-country fuel storage assets. 
 
5. (SBU)  The GOP has also foregone diesel fuel tax revenue 
to reduce prices for the transport industry, through a 
designated list of retail outlets who may sell diesel tax 
free.  Industry representatives maintain that this list of 
distributors does not correspond to the purchasing patterns 
of the transport industry and the allocated volumes far 
exceed those used by the transport industry.  In conjunction 
with the American Chamber of Commerce, the industry has 
protested their forced compliance with this program, 
asserting it could result in a black market in diesel. 
 
6.  (U) An Amcham board member and retired oil executive told 
Econoff that the GOP's politically expedient attempts to 
shelter the populace and the economy from the impact of 
rising global oil prices were potentially more destabilizing 
than the prices themselves because they threatened the 
stability of the supply and reduced revenue at a time of 
deficit hindering the GOP's ability to invest in alternate 
fuels. 
 
--------------------------------- 
GOP RESPONSE TO INDUSTRY CONCERNS 
--------------------------------- 
 
7. (SBU) Vice-Minister of Industry Manuel Paredes told 
Emboffs the GOP feels squeezed between domestic 
constituencies expecting to be shielded from the global rise 
in fuel prices and the fuel companies expecting to make a 
profit.  Paredes questioned the financial damages claimed by 
the petroleum companies, suggesting they write off their 
losses against their global profits.  However, he conceded 
the GOP had erred by destabilizing existing regulation. 
Emboffs emphasized the importance of a stable investment 
climate to Panama's development strategy.  Paredes said the 
GOP is structurally incapable of administering a secure and 
transparent diesel fuel subsidy program for the transport 
sector such as checks, ATM cards, or coupons directly to the 
transport fuel purchasers. 
 
8.  (SBU) In August 2005, the GOP announced its first policy 
on hydrocarbons and alternate energy sources.  This "policy" 
is a hastily cobbled together set of desired infrastructure 
and capacity with minor efforts at conservation.  (To 
conserve energy, new government working hours are 7:30 am to 
3:30 pm.)  To diversify its energy sources, the GOP proposes 
recouping its refining capacity through a joint venture with 
Mexico, a natural gas pipeline with Columbia, and the 
development of alternate fuel sources such as wind, solar and 
peat.  However, neither the financial viability nor the 
projected length of any project has been established. 
 
9.  (SBU) Comment:  As Panama is not in a position to 
meaningfully affect the global price of oil, avoiding further 
degradation of living standards requires the GOP to tackle 
the long-term challenges of high unemployment, disparate 
income distribution, corruption, and completing Social 
Security and Judicial reforms.  Industry representatives told 
Emboffs that the rack price and effective period had 
stabilized at an acceptable level but made it clear they did 
not want to subsidize GOP short term political solutions 
again.  End Comment. 
ARREAGA