Cablegate: Biofuels in Peru Promising

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R 201637Z NOV 06
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DEPT FOR WHA/AND,/EPSC (FCorneille), EB/ESC/IEC(Izzo)
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TREASURY FOR J. LEVINE
STATE PASS TO EXIM, OPIC, TDA
DEPT OF ENERGY FOR S. LADISLAW
ENERGY INFORMATION ADMINISTRATION FOR CHARLES ESSER

E.O. 12958: N/A
TAGS: ENRG ECON ETRD EAID SENV SNAR PE
SUBJECT: BIOFUELS IN PERU PROMISING

REF: A)State 164558 (B)Lima 3686 (C)State 128599 (D)Lima 4044

1. (U) SUMMARY. Biofuels show promise for Peru, particularly
sugar-based ethanol and a newly-discovered source for bio-oil.
Ethanol blends can produce cleaner fuels for polluted cities; trade
preferences make ethanol attractive for export. A U.S. and several
Peruvian firms have projects underway. Peru's once thriving sugar
cane industry stagnated under past governments but is now
rebounding; Peru's coast may have the perfect conditions for sugar
cane. Existing GOP incentives remain insufficient but are
improving. A U.S. firm's project involving the fast-growing
samoafiber plant will produce bio-fuel for ethanol conversion
plants; samoafiber could provide an alternative to coca. Peru's
extensive Amazon trade with Brazil makes it a logical partner for
biofuel development. END SUMMARY.

ENERGY PRODUCTION IN PERU
-------------------------
2. (U) Peru remains a net energy importer, but when the Peru Liquefied
Natural Gas (LNG) export project comes online in 2010, Peru will
become a net exporter. Electricity generation comes primarily from
hydroelectric and diesel power plants; in some areas directly
related to the Camisea natural gas project (Lima and Pisco),
factories and power plants are powered by natural gas; in addition,
some distant users, such as the Yanacocha mine in Cajamarca, have
converted to trucked natural gas. Liquefied Petroleum Gas (LPG)
supplies heating and cooking needs in the mountains and coast; LPG
is produced at Peru's four oil refineries in the jungle, on the
coast, and at the Camisea fractionation plant in Pisco. Piped
natural gas is increasingly used for cooking in the Lima
metropolitan area where one third of Peru's population lives (Ref
B).

3. (U) Peru's offshore oil production (near Ecuador) is one of the
oldest in South America, but the bulk of Peru's current domestic oil
production, as well as the concession blocks now being developed,
are in the upper Amazon basin (also in the north). Two of Peru's
four refineries are east of the Andes. Poor transportation
infrastructure is a barrier to bringing Amazon gasoline to major
markets: the coastal and mountain cities. Amazon oil is heavy, and
the gasoline remains high in sulfur; as a result, the major cities
suffer serious air pollution.

4. (U) Vehicle power comes primarily from high sulfur diesel fuel
refined in Peru. Government incentives have caused many vehicle
owners to convert to either LPG or vehicular natural gas (called GNV
in Peru); while new GNV retail stations are planned, at this time
there are only two operating in Peru. Conversion of vehicles to gas
power has been slow and gasoline and diesel, potentially with
biofuel components, will remain the major vehicle fuels for years.
With no public transportation of any kind in Peru's major cities,
incentives for biofuels have targeted the private owners that
operate buses and taxis.

SUGAR CANE NOW MORE PROFITABLE
------------------------------
5. (U) Up until the early 1970's, Peru had a thriving and efficient
sugar cane industry along the arid but fertile coast. The Velasco
military government expropriated large agroindustries in 1968, and
gave the sugar cane fields to small farmers. (Agriculture ministry
contacts told us how Peruvian cane producers went to Brazil and
founded profitable sugar cane operations.) Sugar cane production
has languished until recently as small farmer cooperatives had been
unable to produce efficiently.

6. (U) The sugar industry is now becoming more profitable, following a
long privatization process for sugar mills and improved irrigation
systems. USDA data indicates Peruvian sugar cane production employs
over 250,000 people with 81,000 hectares (ha) of sugar cane
currently planted; an additional 68,000 ha are slated for planting.
Domestic demand is about one million metric tons (mt). While Peru's
annual production of 950,000 mt dropped last year due to drought, we
expect production this year to return to the past average. Yields
per hectare and production costs vary greatly among different
operations.

7. (U) A recent consolidation of the sugar industry reflects new
confidence in sugar cane production. The Gloria food corporation
acquired Casa Grande sugar company and is in the process of
increasing the Casa Grande operation from 12,000 to 32,000 ha.
25,000 ha should be planted by next year, coming into production the
following year. This highly efficient operation, producing 85 to 90
mt/ha, should put Peru on track to supply its domestic sugar
demand.

THE WORLD'S BEST PLACE TO GROW SUGAR CANE FOR ETHANOL?
--------------------------------------------- ---------
8. (U) Ethanol has potential that varies with Peru's geography. In
the arid but fertile coast, from which most agricultural exports come,
sugar plantations are a profitable option if the land can be
irrigated. The CEO of Maple Gas Peru, a U.S. investor committed to
ethanol production, noted that Peru might be the best place in the
world to grow sugar cane for ethanol, because of the predictable
climate (it does not rain) - so long as there is sufficient
irrigation. In the arid coast, irrigated water can be shut off to
reliably provide the necessary dry period for fructose
concentration.

9. (U) The Andean Trade Promotion and Drug Eradication Act (ATPDEA)
provided tariff preferences for ethanol export to the U.S. Several
firms have told us that this was the deciding factor for their
decision to invest in sugar cane/ethanol. At least four firms have
committed investments to ethanol operations; a number of other
private companies and trade associations are evaluating the
opportunities associated with a conversion to ethanol production.

10. (U) A promising ethanol project was launched in 2001, at the
beginning of President Toledo's term. With around 10,000 ha
committed to feed the proposed plant in the coca-growing area of the
San Martin Department, the project could have provided an
alternative to coca cultivation. The GOP was backing a proposed
ethanol pipeline that would have tracked with the existing northern
oil pipeline; the project was abandoned when the main proponent,
Vice President Raul Diez-Canseco, resigned after a scandal.

11. (U) There is currently no biofuel production in Peru. Industry
and government experts tell us that delays have been due to its
comparatively high cost, the state of technology and a lack of
subsidies. Some industry observers have told us that the current
high oil prices make it a more attractive economic proposition to
produce ethanol for export-and domestic consumption too, although
Peru's fuels market is relatively small. Barriers to consumer
acceptance of ethanol blends include misconceptions and old engines.
A Sugar Producers' Association official noted to us that more
domestic investment in ethanol will not happen until the government
provides additional incentives.

GOP INCENTIVES SMALL BUT GROWING
--------------------------------

12. (U) The Peruvian Congress passed a law in 2003 to promote the use
of "biofuels;" under the 2005 implementing regulations, gasoline
suppliers are authorized to substitute ethanol for the contaminating
components of high sulfur fuels. The law authorizes domestic fuel
suppliers to sell gasoline with up to 7.8 percent ethanol content
and diesel up to 5 percent ethanol content. The Ministry of Energy
and Mines (MEM) plans to submit new regulations to permit 100
percent of diesel fuels to be biodiesel. A major industry criticism
is that the biofuel law does not currently offer any tax incentives;
biofuels are still subject to excise IGV taxes. A Minister of
Agriculture official told us the GOP is trying to insert biofuel
regulations into the law for the promotion of agriculture. (Biofuel
regulations are currently associated with a Production Ministry
law.) A proposed regulation would allow ethanol producers to import
machinery and equipment tax free.

13. (U) The Garcia administration is determined to promote exports as a
way to develop the country, and agricultural based exports are at
the top of the list. President Garcia and his ministers -
Agriculture, Mining and Energy and the heads of relevant agencies
dealing with environment, investment promotion and counterdrug
issues have all expressed interest in ethanol production. They have
also shown a strong interest in public-private partnerships and in
attracting foreign investment for energy.

14. (U) President Garcia's "Water for Everyone" is one of his top
priorities, designed to provide safe water treatment as well as
increased water for irrigation. In the coast, decent port
facilities make ethanol export relatively easy. Much agricultural
land in the north is devoted to water-hungry rice, which many think
could and should be converted to sugar cane production for ethanol.
Implementation of Water for Everyone by the Ministries of
Agriculture (irrigation) and Housing (water treatment for
municipalities) should lead to more water available for sugar cane
production.

AGRICULTURAL RESEARCH ESSENTIAL
-------------------------------

15. (U) In a meeting with the visiting State Department Science Advisor
on 11/3, representatives from the GOP's science and technology
coordinating agency declared that biofuel research was one of Peru's
research priorities. This was echoed by representatives from Peru's
leading agricultural and engineering universities during the same
visit: research coordinators said biofuel research would be spurred
along several avenues: irrigation to increase coastal hectares for
sugar cane; plant genetics to produce faster-growing sugar cane and
jungle cellulose species; and biofuel production technology. (Note:
Post will also explore how jungle biofuel species could fit into
alternative development programs, as fast-growing cash crops are a
logical alternative to coca. End Note.

ETHANOL PROJECTS UNDERWAY
-------------------------
16. (SBU) Four Peruvian firms have ethanol projects underway. U.S.
firm Maple Gas Peru is currently an oil producer and refiner in the
Amazon basin, and is now investing in ethanol. Maple has almost
completed the groundwork for an extensive ethanol export operation.
The water rights and plant construction permits are basically
finished, and the firm is now adding to its hectarage. Planting is
planned to begin next year. This firm's history of successfully
negotiating its way thought various local, regional and national
water and titling authorities could be a model for other foreign
ethanol projects. The head of the Chinese-Peruvian Chamber of
Commerce announced recently that Chinese investors have proposed to
the GOP investment in an ethanol plant on the northern coast.

JUNGLE BIO-OIL: EXCITING NEW FIND
---------------------------------
17. (U) A U.S.-based company, Somoa Fiber Holdings (SFH) met with
President Garcia in September, who promised support (but no funds)
for development of bio-oil from an Amazon reed, the SamoaFiber (Ref
D), using new technology that can hydrolyze the cellulose into
starch for ethanol. The SFH CEO told us that he would export the
bio-oil (or supply Peruvian plants when built) for conversion to
ethanol. Samoafiber (called cana brava in Peru) reportedly is
endemic to Peru and is one of the fastest-growing plants known.

OTHER BIOFUEL POTENTIAL IN THE JUNGLE
-------------------------------------
18. (U) Grupo Romero, one of the largest food conglomerates in Peru, and
a major sugar producer, has recently announced a soy project in the
jungle geared towards biofuels. In the highland and lowland
jungles, conditions are relatively similar to Brazil's
cane-producing areas. Logistical obstacles to both building ethanol
plants and transport to market are the main obstacles; insufficient
roads exist to the coast, although road infrastructure is also one
of President Garcia's priorities. Riverine export through Brazil,
as occurs now with wood products, would be a good alternative. In
the mountains, ethanol-appropriate crops such as potatoes and corn
are staples; economic development in the southern sierra is one
President Garcia's top domestic priorities.

USG OPPORTUNITIES
-----------------
19. (U) Supporting Peru's suitability in both Amazon and coastal zones
for biofuel development could help reduce Peru's oil imports.
Possible avenues of how the USG might support biofuels production
and domestic consumption in Peru include environmental (no
environmental regulations are currently planned for ethanol); plant
research (Ministry of Agriculture and Agrarian University);
economics of ethanol (alternative development); and water
engineering. Support in these areas could synchronize with other
USG efforts such as EPA's Clean Fuels Initiative and Advancing U.S.
Efforts on Water (Ref C).

STRUBLE

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