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Cablegate: Response to Action Request Regarding

Published: Fri 13 Oct 2006 07:07 PM
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RR RUEHBI RUEHCD RUEHDE RUEHGD RUEHGH RUEHHM RUEHJO RUEHLN RUEHMA
DE RUEHSJ #2259/01 2861959
ZNR UUUUU ZZH
R 131959Z OCT 06
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 6319
INFO RUCNOSA/OVERSEAS SECURITY ADVISORY COLLECTIVE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
UNCLAS SECTION 01 OF 02 SAN JOSE 002259
SIPDIS
SIPDIS
E.O. 12958: N/A
TAGS: ECON PREL PGOV XK XL XM
SUBJECT: RESPONSE TO ACTION REQUEST REGARDING
LATIN-AMERICA-CARIBBEAN BIOFUELS INITIATIVE
REF: STATE 164558
1. Summary. Energy production and distribution in Costa Rica are
controlled by two parastatal entities. If the U.S.- Central
America-DR Free Trade Agreement (CAFTA-DR) is ratified and comes
into force before the March 2008 deadline, CAFTA-DR will require
opening of some sectors of the economy, but the treaty requires no
market opening in the energy sector. Except for an on-going pilot
project, Costa Rica has little experience with biofuels. The
privately owned sugar industry is currently in a sound financial
condition. End Summary.
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ELECTRICITY SECTOR
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2. The electricity-telecommunications monopoly, Instituto
Costarricense de Electricidad (ICE) controls all electricity
production and distribution in Costa Rica. Ninety-five percent of
electricity is produced from renewable non-fossil fuel sources,
primarily hydroelectric generation with small amounts of wind,
geothermal and solar production. In the past ICE has purchased
small amounts of electricity from co-generators, however, recent
press reports indicate ICE is not interested in renewing these
contracts once they expire. Some sugar mills use bagasse for
electric power generation and the larger mills sell excess power to
ICE.
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PETROLEUM, DIESEL AND ETHANOL
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3. Refinadora Costa Rica de Petroleo, RECOPE, is the parastatal
entity that controls fossil fuel supplies in Costa Rica. No oil or
gas is produced domestically, but is purchased by RECOPE from
foreign suppliers including Venezuela. RECOPE operates the
country's only refinery and also controls all distribution of oil,
gas and diesel supplies, although individual gasoline service
stations are independently owned and operated. The Government of
Mexico has discussed the possibility of establishing a regional
petroleum refinery but no decision has yet been made on where it
might be located.
4. RECOPE is operating an ethanol pilot project scheduled to run
from February 2006 to February 2007. The pilot project involves 62
gas stations along Costa Rica's Pacific coast that are selling a
92.5% gasoline/7.5% alcohol mixture. Ethanol is being sold at the
same price as regular gasoline even though the product costs RECOPE
more to produce and the energy content is slightly less. If the
pilot program is successful RECOPE has expressed interest in
investing in increasing production and distribution capacity.
Currently there are two ethanol production plants and one
dehydration/alcohol upgrading plant in Costa Rica. At least one of
the plants is currently increasing capacity and investing in newer
equipment. However, during the short to medium term ethanol
production from these plants is programmed for export, not for the
domestic market. The European demand for ethanol is high and Costa
Rica has never exported even half its allowable quota under the
Caribbean Basin Iniciative (CBI). The local press has reported that
by the end of 2006 RECOPE will request bids for purchase of
bio-diesel.
5. The Arias administration has recently proposed creation of a
National Commission on Biofuels involving the Ministry of Production
(MIPRO), the Ministry of Environment and Energy (MINAE), RECOPE, the
Chemical Engineers Guild, oil palm growers representatives, the
Chamber of Agriculture, the Sugar Cane Producers Chamber, ICE and
the governmental entity that regulates prices for fuels, ARESEP.
The purpose of the commission is to propose short, medium and long
term strategies for use of ethanol and bio-diesel, including needed
legal reforms. Among the strategies to be considered is a tax
benefit to lower costs and encourage use of biofuels. In addition
to sugar cane, the commission will also study the possible use of
yucca and sorghum to produce biofuel.
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SUGAR INDUSTRY
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6. Costa Rica's sugar industry is privately owned. Approximately
53,000 hectares are planted in sugar cane. Average yield during the
2004/2005 crop year was 77.3 kg/hectare. At the industrial level
one cubic meter of water is required to process one metric ton of
cane. At the farm level, sugar cane requires an average minimum of
1,500 millimeters of water per hectare during the season, with
location of the farm being an important variable. In Costa Rica
sugar cane is planted at altitudes that range from sea level to
1,700 meters.
7. Sugarcane harvesting methods in Costa Rica include burning in the
field, which is regulated by a decree issued by the Ministry of
SAN JOSE 00002259 002 OF 002
Health in l996. Legal actions have been initiated by environmental
groups against some of the larger mills which provides a further
incentive for mechanizing operations.
8. Industry profitability depends on the international price
situation as well as the allocation of the U.S. and domestic sugar
market quotas. With higher world prices during the last marketing
year the industry is generally in a sound financial position. Large
producers are increasingly mechanizing operations, partly motivated
by a serious labor shortage. The potential for ethanol expansion
will depend upon the price of complements (denatured alchol from
Brazil), substitutes (petroleum and ethanol produced elsewhere) and
the relative costs of production in countries with preferential
access to the U.S. market under CAFTA or CBI.
9. President Arias's family owns one of the largest sugar producers
in Costa Rica.
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CURRENT INVESTMENT CLIMATE
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10. Because CAFTA-DR has not yet been ratified, many investors are
currently cautious. Some are already beginning to make investments
elsewhere in the region to hedge their bets in the event that
CAFTA-DR is either not ratified or that the implementing legislation
necessary to bring the agreement into force will not be passed
before the February 29, 2008 deadline.
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COMMENT
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11. The moment seems ripe for biofuels in Costa Rica. Biofuels help
polish the country's "green" image, provide new opportunities for
farmers and lessen Costa Rica's 100% dependence on foreign sources
of petroleum. The single biggest boost to the nascent biofuels
industry likely would be for the GOCR to mandate use of a certain
percentage blend so that the industry could use that guaranteed
domestic market to justify ramping up capacity.
LANGDALE
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