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### Viewing cable 06MANAGUA2384, NICARAGUA: RESPONSE TO LATIN AMERICA-CARIBBEAN

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06MANAGUA2384 | 2006-10-26 15:57 | 2011-06-21 08:00 | UNCLASSIFIED | Embassy Managua

`

    VZCZCXYZ0001
    RR RUEHWEB

    DE RUEHMU #2384/01 2991557
    ZNR UUUUU ZZH
    R 261557Z OCT 06
    FM AMEMBASSY MANAGUA
    TO RUEHC/SECSTATE WASHDC 8017
    INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

` `

    UNCLAS MANAGUA 002384

    SIPDIS

    SIPDIS

    STATE FOR: WHA/EPSC CORNEILLE, EB/ESC/IEC IZZO, S/P MANUEL,
    AND OES/STC PAMELA BATES

    E.O. 12958: N/A
    TAGS: ENRG SENV ECON PREL PGOV NU
    SUBJECT: NICARAGUA: RESPONSE TO LATIN AMERICA-CARIBBEAN
    BIOFUELS INITIATIVE

    REF: A. STATE 164558
         ¶B. MANAGUA 02051

    ¶1. (U) Summary:  Nicaragua,s energy sector is heavily
    dependent upon imported oil for electricity production.  High
    oil prices and poor regulation of the energy sector have left
    electricity producers and distributors with empty pockets and
    consumers without electricity.  Nicaragua's climate and soil
    are well suited to sugar cane production and experts predict
    that within five years production will increase by 90% to a
    total of 100,000 hectares.  The country's first ethanol plant
    will begin operation in November 2006, producing 18 million
    liters of ethanol for export to Europe.  An African
    palm-based biodiesel will hit the local market within a year
    and a second biodiesel from oleaginous plants will be
    commercially available in 2008.  Experts worry, nonetheless,
    that market pressures will drive investors away from biofuels
    and into more profitable markets.  Without incentives from
    the GON to pursue alternative fuel sources and a regulatory
    framework to support the long-term growth and success of
    biofuels, the fledgling biofuels sector may never take hold.
     End Summary.

    Energy Production, Distribution, and Use
    ---------------------------------------------
    ¶2. (U) Nicaragua is heavily dependent upon imported petroleum
    for electricity production.  The country generates almost 70%
    of its electricity from heavy fuel oil or diesel.  Despite
    huge potential, hydro-power accounts for only 15% of
    electricity installed capacity, but production this year has
    fallen to 10% as a result of drought.  Other "green" energy
    sources such as geothermic and burning of bagasse (biowaste
    from sugar cane harvest) generate 15% of electricity
    production.  Most industrial enterprises and the heavy
    transportation sector are fueled by diesel.  Cars and light
    trucks use gasoline; ethanol is not available on the local
    market.

    ¶3. (U) Nicaragua partially privatized its energy sector in
    2001 and privately-owned companies now account for 60% of
    production and almost 100% of distribution.  The regulator,
    INE (the National Energy Institute), a creature of the
    National Assembly and headed by a politician, has not managed
    the sector well, creating an inhospitable environment for
    growth.  INE administers electricity prices and issues
    tenders for power production, but has failed to adequately
    deal with rising oil prices, aging infrastructure, and
    growing local demand.  In addition, two-thirds of all
    customers qualify for free electricity through a subsidy that
    must be borne either by paying customers or the government.
    The National Assembly has not appropriated sufficient funds
    to subsidize the sector, putting great financial strain on
    the industry.  Compounding the problem this year has been
    unexpected maintenance on one power plant and low rainfall
    along the river basin behind the country's largest
    hydroelectric dam.  The result has been chronic blackouts and
    power rationing throughout the country.

    Sugar Production Booming with Great Potential to Expand
    --------------------------------------------- ----------

    ¶4. (U) Nicaragua is the third largest sugar producer in
    Central America.  Its soil and climate are well suited to the
    task.  Annual rain falls provide most of the water needed for
    growing.  Production yields are among the highest in Central
    America at more than 119 metric tons of sugar cane per
    hectare with an average of 225 pounds of sugar per metric ton
    of sugar cane (compared to an average of 269 pounds per
    metric ton in the United States).  According to the Ministry
    of Labor, the sugar sector employs 35,000 people in the
    fields and supports an additional 100,000 jobs nationwide.
    Many consider Nicaragua's sugar industry to be the
    best-organized in the country.

    ¶5. (U) Nicaragua,s four large scale sugar plantations and
    four sugar mills are concentrated along the Pacific Coast.
    San Antonio (of the Pellas Group) is the largest producer of
    sugar cane, with more than 28,800 hectares under production.
    The second largest producer, Monte Rosa, has 21,000 hectares
    under production.  The two remaining significant producers,
    Montelimar and Benjamin Zeledon, cultivate 5,000 and 3,000
    hectares, respectively.  The Ministry of Agriculture and
    Forestry (MAGFOR) estimates that an additional 42,000
    hectares of fallow land could potentially produce sugar cane.
     Experts predict that within five years, a total of 100,000
    hectares will be utilized for sugar production, resulting in
    an almost 90% increase over current production levels.

    ¶6. (U) The vast majority of sugar cane in Nicaragua is
    harvested by hand, using a method that involves the burning
    of sugar cane fields before harvest.  New MAGFOR technical
    norms, however, set burn limits to control pollution.  As a
    result, mechanized harvesting is becoming more prevelant.
    Industry insiders expect that within three years, 70% of
    sugar cane will be harvested mechanically and that this will
    increase the average yield per metric ton.  All four sugar
    mills burn bagasse to generate electricity.  Together, they
    sell 60 megawatts to a local, independent power producer.

    Technical Skills
    ----------------

    ¶7. (U) Nicaragua,s total labor force, estimated at 2 million
    workers in July 2005, is largely rural and unskilled.
    Critical shortages of skilled technicians and managerial
    personnel present significant challenges to industry.  An
    estimated 30% of the employed population works in the
    agricultural sector, 52% in services, and 18% in
    manufacturing.  A senior engineer for a Spanish construction
    company working in Nicaragua told Econoff that his company
    delayed the start of a major project by three months to
    search for mid-level mechanical and industrial engineers, as
    well as project managers.  Eventually, the company filled
    half of the available jobs with workers from Spain.  A dearth
    of qualified individuals to work on biofuels development and
    ethanol plants could pose a problem for the advancement of
    alternative energy.

    Bio-Refineries and the Environment
    -------------------------------------

    ¶8. (U) A 1994 environmental standards law requires that
    certain industries (i.e., leather, dairy, sugar, forestry,
    and meat processors) submit for approval environmental impact
    statements to the Ministry of Environment and Natural
    Resources (MARENA).  The list of industries is not
    comprehensive and many sectors, including bio-refineries,
    currently operate without environmental oversight.  A revised
    version of the 1994 law, which would require all industries
    to submit environmental impact statements, will go to the
    President in November for approval.  A MARENA insider doubts,
    however, that the President will ratify the proposed changes
    because they do not sufficiently centralize authority over
    the regulatory process.

    Infrastructure: Ports, Roads, and Transportation
    --------------------------------------------- -----

    ¶9. (U) Nicaragua has no major port on the Atlantic coast, so
    most shippers use Puerto Cortes in Honduras.  Ground
    shipments to and from Puerto Cortes, however, are
    increasingly at risk of being hijacked.  On the Pacific
    Coast, the small Nicaraguan Port of Corinto is capable of
    handling liquid cargo.  Ground transportation from east to
    west is extremely difficult.  There are few paved roads
    linking the Pacific and the Atlantic coasts and, those that
    exist are in poor condition.  Generally, ground
    transportation for heavy cargo to and from ports is readily
    available.

    Nicaragua to Produce Ethanol for Export
    ------------------------------------------

    ¶10. (U) In November 2006, Nicaragua,s first ethanol plant
    will begin operation.  The Pellas Group, owner of Nicaragua's
    largest sugar plantation and the country's only sugar
    refinery, invested more than $4 million in the development of
    a Pacific coast ethanol plant.  The company holds a one-year
    contract with a single buyer in Europe, who will purchase all
    18 million liters produced.  A Pellas Group spokesperson
    suggested that Pellas is poised to expand production if the
    ethanol plant was successful in its first year.  To date, the
    company has no plans to distribute ethanol domestically.

    ¶11. (U) Existing infrastructure could support the transport,
    storage, and export of up to three times the Pellas Group's
    estimated annual production of 18 million liters.  The
    ethanol plant is 18 miles from the Port of Corinto, which has
    a 7 million liter storage capacity dedicated to ethanol.  At
    current production levels, Pellas will need less than half of
    this storage capacity at any given time.  Pellas plans to
    transport ethanol from the plant to the Port of Corinto in
    28,000 liter tanker trucks, which it has no difficulties
    procuring.

    Biodiesels: Coming Soon
    -------------------------

    ¶12. (U) Another private enterprise, Agroindustrias de
    Occidente (AGRINOSA), is venturing into the biofuels market
    with an African Palm-based biodiesel.  AGRINOSA has yet to
    commercialize its product and is months away from completing
    the paperwork needed to enter the local market.  AGRINOSA
    will sell the biodiesel to factories and heavy transportation
    vehicles (two industries that are almost 100% dependent on
    diesel consumption).  A 2005 AGRINOSA study of the energy
    market estimated current domestic demand for biodiesel at 5.6
    million liters per month.  AGRINOSA is capable of producing
    1.4 million liters per month, or 25% of current demand.

    ¶13. (U) Grupo Cohen, a prominent Nicaraguan investment group,
    has visions of joining AGRINOSA in the biodiesel market.
    They are launching a pilot project to produce biodiesel from
    oleaginous plants (i.e. soybean, sunflower, and peanuts).
    Estimated production capacity is 1.8 million liters per year
    and pilot production should begin within the coming months.
    Grupo Cohen is not commited to a definite timeline, but hope
    to make its product available commercially by mid 2008.
    Neither AGRINOSA nor Grupo Cohen plan to export biodiesel.

    Challenges to Biofuel Development
    -------------------------------------

    ¶14. (U) While the biofuel industry has attracted some private
    investment, a 2005 study by the Instituto Interamericano de
    Cooperacion para la Agricultura (IICA) and MAGFOR suggests
    that the GON will need to take a leading role in alternative
    energy production to sustain long-term production.  The study
    criticized the GON for its "lack of political will" to move
    ethanol or biodiesels forward, pointing to an absence of
    incentives for biofuel production or use.

    ¶15. (U) Experts fear that investors will abandon biofuels for
    more profitable markets if the GON does not provide
    incentives for alternative fuel production.  In 2005, for
    example, the Pellas Group invested in a new distillery and
    alcohol dehydrator to produce ethanol on a trial basis and
    earmarked 8,000 metric tons of sugar cane for the project.
    When international sugar prices skyrocketed, the company
    stopped ethanol production and processed the cane for sugar
    export.  Without stable prices and incentives to stay in the
    ethanol market, the industry may never develop.

    ¶16. (U) Pedro Silva de la Maza, project director for San
    Antonio, echoed these concerns.  He believes that cooperation
    among GON institutions is weak and that the biofuels industry
    needs "collaboration and joint planning between the forestry,
    agricultural, and energy sectors" if it is to materialize.
    The problem, he points out, is that "these ministries are
    challenged with immediate problems and have few resources to
    deal with advancing ethanol production."

    ¶17. (U) Comment: Nicaragua is heavily dependent on imported
    oil and suffers when oil prices rise.  In July 2006, violent
    demonstrations erupted throughout the capital when rising
    fuel prices forced bus companies to increase fares.  Frequent
    and prolonged blackouts spurred protests throughout the
    country in August and September.  Ethanol production could go
    a long way toward alleviating the country's dependency upon
    foreign oil and reducing imports.  Nicaragua has a
    well-developed sugar industry, available fallow land, and
    existing private investment in ethanol and biofuels
    production.  Without incentives from the GON to pursue
    alternative fuel sources and a regulatory framework to
    support the long-term growth and success of biofuels, the
    fledgling biofuels sector may never take hold.  End Comment.
    TRIVELLI

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