US embassy cable - 03TEGUCIGALPA1645

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 001645 
 
SIPDIS 
 
SENSITIVE 
 
GUATEMALA FOR COMATT 
STATE FOR WHA/CEN 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, EINV, ECON, HO 
SUBJECT: AES Attempts to Salvage 200MW Energy Contract and 
El Faro Project 
 
REF:  a) 01 TEGUCIGALPA 2872, b) 02 TEGUCIGALPA 02207, c) 02 
 
TEGUCIGALPA 02857, d) 02 TEGUCIGALPA 03184, e) 02 
TEGUCIGALPA 03273, f) 02 TEGUCIGALPA 03416, g) 02 
TEGUCIGALPA 03479 
 
THIS CABLE CONTAINS PROPRIETARY BUSINESS INFORMATION THAT 
SHOULD BE KEPT CLOSE HOLD. 
 
1. (SBU) AES Honduras' efforts to salvage its 200MW energy 
contract, awarded and signed Christmas day, 2002 (ref g) 
despite having overcome an unfair government procurement 
process and political influence, may be reaching the end of 
the road this month.  Apparently, due to financial and 
management restructuring, the company leadership have 
directed staff to cease any spending on the El Faro project 
in Honduras and instead find partners willing and able to 
meet conditions of the contract.  Although a U.S. oil and 
gas company with substantial interest in the Central 
American region is currently studying potential partnership 
in the LNG-powered project, any final decisions are months 
away.  Closing of an interim deal and payment of the 
required performance bond by a potential local partner, the 
Larach Group, has been delayed by Larach's concerns over the 
liability of committing to a project of this size.  On July 
3, AES requested authorization for a contingency plan that 
allows the project to be scaled down and use bunker fuel if 
financing for the LNG plant is not forthcoming in the next 
six months.  On July 9, the GOH refused to grant this 
authorization.  The GOH is threatening to cancel the 
contract and begin legal proceedings by mid July if AES does 
not pay the five million dollar performance bond.  End 
summary. 
 
--------------------------------------------- 
AES' Battle to Build Project and Win Contract 
--------------------------------------------- 
 
2. (SBU) For more than three years, AES has sought to build 
a regional 540 MW gas-turbine electric power project fueled 
with liquefied natural gas in Puerto Cortes.  The El Faro 
project was designed to provide power not only to Honduras 
but also El Salvador and other Central American countries. 
Throughout the process, AES requested and received extensive 
advocacy from the Embassy and US agencies in Washington. 
Post has treated this advocacy case as a priority because of 
the U.S. commercial interest, the important contribution of 
the project to lowering electricity costs in Honduras, and 
the potential for spurring investment and regional 
integration.  The Embassy has been in constant contact with 
decision-makers in the Honduran government at the highest 
level.  A contract to supply 200 MW of electricity by 2006, 
using natural gas, to the Honduran electric power utility 
ENEE was finally awarded in late 2002 and ratified in 
February. 
 
3. (SBU) To win this contract, AES had to overcome several 
obstacles including political influence stalling the 
processing of the project's environmental permit, several 
modifications to the bid specifications favoring local 
companies, six delays in the bid opening date (from January 
until July, 2002) and indications of an unfair evaluation 
process after the bid opening.  The "winning" local company, 
Lufussa was not disqualified despite the incompleteness in 
its offer related to transmission capacity.  The Ambassador 
and Embassy staff supported the company in insisting that 
the government acknowledge the flaws in the award process. 
This advocacy contributed to the government's eventual 
decision in early December 2002 to invalidate the tender and 
subsequently provide awards to both Lufussa (210 MW contract 
deliverable within two years) and AES (200 MW contract 
deliverable within four years) (Ref f, g).  Once the 
decision was made, the GOH rushed AES Honduras into a take- 
it-or-leave-it deal, insisting that the contract presented 
on December 24 be signed by December 27, without changes or 
time to send it in for corporate review, which AES Honduras 
President Carlos Pineda did.   Subsequently, the AES 
contract became a political football in the Honduran 
Congress, but eventually was approved, signed by the 
President in February and published in March. 
 
4. (SBU) In the meantime, AES Corporation in the US was 
undergoing financial and management restructuring.  A 
December settlement with creditors did not include any 
capital financing for the Honduras project.  Gas prices 
spiked in the run-up to the war in Iraq and have stayed 
relatively high since, complicating financing arrangements. 
AES' newly appointed chief of the Central American region 
visited Honduras to explore the possibilities of switching 
to a coal-fired plant.  He concluded it was unfeasible both 
legally and politically (especially since the company had 
spent three years pushing the benefits of bringing gas to 
Central America).  The company then directed the manager of 
AES Honduras to find partners to assume the development 
costs of the project.  AES has emphasized in conversations 
with Econoffs that the company had lost confidence in 
Honduras and its investment climate. 
 
--------------------------- 
AES Strategy for Next Steps 
--------------------------- 
 
5. (SBU) Thus, since February, AES Honduras has sought to 
find both a local partner and an international energy 
company to buy into the project.  These deals have not 
closed as quickly as hoped, and the company appears to be 
running out of time. 
 
6. (SBU) One US oil and gas company, active in Central 
America, is seriously studying a major investment (with 
majority control) in the El Faro project, and has begun its 
own internal studies of the project.  The company would 
bring to the table sufficient funding for the project 
(avoiding the need for a financing package) and its own gas 
reserves.  Investment by this multinational, or one like it, 
would allow the El Faro project to proceed in its original 
form using LNG and meeting all specifications of the 
original emergency contract.  A final decision will not be 
forthcoming, however, until at least November 2003. 
 
7. (SBU) To meet the immediate needs of providing a 
performance bond and final paperwork for an operating 
permit, AES is negotiating to sell a large majority of its 
shares now (up to 90 percent) to the Honduran Larach Group. 
Larach has been interested in participation in El Faro for 
quite some time, but realization of the difficult financing 
prospects for the LNG terminal has delayed the completion of 
the deal.  Recent news of high gas prices and a violent 
kidnapping attempt in June of Luis Larach, one of the 
principal negotiators, also affected the timing. 
 
8. (SBU) To square the circle, on July 3, AES proposed to 
ENEE and the GOH that the government agree that the 
investors would have the flexibility to build a thermal 
plant based on bunker fuel, if financing for the entire LNG 
project could not be found in the next six months.  The 
proposal would give the comfort level to the Larach group to 
sign its deal with AES and put down the five million dollar 
performance bond immediately. 
 
------------- 
GOH Reactions 
------------- 
 
9. (SBU) Since March, President Ricardo Maduro, Minister of 
the Presidency Luis Cosenza and a number of presidential 
advisors have approached the Ambassador and other Emboffs 
with strong concerns about the delays in payment of the 
performance bond and news that AES was not planning on 
maintaining a significant interest in the project.  The GOH 
perceives, probably correctly, a big political risk that 
AES' exit strategy will be seized upon by political 
opponents who have criticized Maduro for months for bowing 
to pressure (read interference) from the USG in ultimately 
supporting the AES project.  Note: GOH authorities are deaf 
to any suggestion that they brought these problems on 
themselves by badly mishandling the 2002 tender process, 
forcing an unfinanceable contract down AES' throats over 
Christmas, or refusing to provide the flexibility that would 
allow the company time to bring in a multinational energy 
partner into the equation.  End Note. 
 
10. (SBU) By June, the government began sending letters to 
AES insisting on compliance with the contract and laying the 
groundwork for legal proceedings against AES for breach of 
contract.   In early July, AES received some encouragement 
to provide the details of the contingency plan for bunker 
fuel.  However, on July 9, a negative reply was received 
from the General Manager of ENEE. 
 
11. (SBU) Upon receipt of the letter, AES requested Embassy 
advocacy with President Maduro and his top advisors to 
reconsider the decision.  Without taking a formal position, 
Econcouns participated in a conference call with AES 
officials in Honduras and the U.S. late on July 9 to explain 
our understanding of the GOH's view of the picture and 
Embassy limitations in defending the company's decision on 
an exit strategy immediately after contract signature. 
 
--------------- 
Embassy Comment 
--------------- 
12. (SBU) This is not necessarily the end of the project, 
but the July 9 decision bodes badly.  The GOH apparently 
decided that if AES is exiting the project and proposing 
that a conventional thermal project be substituted for the 
gas version, there is no need for the GOH to respect its 
side of the contract, especially with other well connected 
domestic electricity producers willing to pick up the 
contract.  Time will tell over the next few weeks if the 
Larach Group investors can convince the GOH otherwise.  If 
the contract is lost and the GOH does sue AES Honduras, that 
will also complicate (if not doom) the efforts to continue 
attracting a sizable investor for the gas project itself. 
While the Embassy believes the July 3 AES proposal was 
probably the best possible given the exit-strategy decision, 
we do not recommend any formal advocacy for AES at this 
time. 
 
PALMER