Biofuels Watch: Wikileak on setting up Costa Rican ethanol plant :: LATIN-AMERICA-CARIBBEAN BIOFUELS INITIATIVE

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06SANJOSE2259
SUBJECT	RESPONSE TO ACTION REQUEST REGARDING
DATE	2006-10-13 19:07:00
CLASSIFICATION	UNCLASSIFIED
ORIGIN	Embassy San Jose
TEXT	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. ------------------ ELECTRICITY SECTOR ------------------ ¶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. ----------------------------- PETROLEUM, DIESEL AND ETHANOL ----------------------------- ¶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. -------------- SUGAR INDUSTRY -------------- ¶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. -------------------------- CURRENT INVESTMENT CLIMATE -------------------------- ¶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. ------- COMMENT ------- ¶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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