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STATE FOR WHA/CEN, WHA/EPSC, EB/ESC

E.O. 12958: N/A
TAGS: ENRG EPET EMIN TBIO SENV EINV PINR VE NU
SUBJECT: NICARAGUA: AMBASSADOR MEETS NEW MINISTER OF ENERGY AND MINES

REF: A. MANAGUA 0640

¶B. MANAGUA 0196
¶C. 06 MANAGUA 2384
¶D. MANAGUA 0781

¶1. (SBU) Summary. The Ambassador called on the new Minister of Energy and Mines Emilio de Jesus Rappaccioli Baltodano on February 14 to introduce himself and discuss energy issues in Nicaragua. Rappaccioli summarized recent changes to energy sector governance, including the creation of the Ministry of Energy and Mines. He told the Ambassador that his primary focus will be to increase access to electricity for the poor, especially in rural areas, and the provision of power to productive sectors of the economy. In addition, Rappaccioli wants to “rehabilitate” Petronic, so that it can play a more collaborative role with Petroleos de Venezuela (PDVSA). Rappaccioli outlined his views on and Nicaraguan developments in the petroleum sector, biofuels, as well as hydroelectric, geothermal, and wind power. He welcomed the continuation of technical assistance on regulatory matters, but did not expressly commit himself. End Summary.

¶2. (SBU) The Ambassador called on new Minister of Energy and Mines Emilio de Jesus Rappaccioli Baltodano on February 14 to introduce himself and discuss energy issues in Nicaragua. Rappaccioli was joined by his Vice Minister Lorena Lanza Espinosa and Secretary General Donald Espinosa Romero. Earlier in her career, Lanza served in the Ministry of Trade, Industry, and Development in the Directorate of Hydrocarbons. Most recently, Espinosa served as the Director of Hydrocarbons at the Nicaraguan Institute of Energy. Rappaccioli told the Ambassador that his primary focus will be to increase access to electricity for the poor, especially in rural areas, and the provision of power to productive sectors of the economy. Rappaccioli outlined developments in the hydropower, biofuels, and wind generation. He envisions roles for both private and public sector investment in the energy sector. He did not talk much about mining, except to note that existing mines are primarily in private hands. (Note: Canadian-based Triton owns the rights to three small gold mines in Nicaragua, output from which is exported to the United States at 90-95% purity for refining.)

A New Ministry
————–

¶3. (SBU) Minister Rappaccioli opened the meeting with a brief summary of recent changes to energy sector governance. All functions of the National Commission on Energy (CNE) have been folded into the new Ministry of Energy and Mines (MEM), along with many of the functions of the Nicaraguan Energy Institute (INE), including the authority to grant permission for power generation, contract for power distribution, and award exploration and production concessions to mining ventures and oil and gas companies. The Ministry of Trade, Industry, and Development (MIFIC) will transfer its Directorate of Mines to MEM soon. When this occurs, MEM will bear responsibility for all policy as it relates to electricity, renewable energy, hydrocarbons, and investment in the mining and energy sectors. The power to regulate consumer prices on electricity and propane gas will remain with INE.

¶4. (SBU) Rappaccioli confirmed that Empresa Nacional de Electricidad (the state-owned national electric company, ENEL) and Petronic (the state-owned oil and gasoline distributor) will report to MEM. MEM will supervise the contract with Glencore (SWITZERLAND) for the management of Petronic, and the contract with Union Fenosa (Spanish) for the management of Nicaragua’s two power distribution companies, Disnorte and Dissur.

Making Way for Venezuela
————————

¶5. (SBU) Rappaccioli told the Ambassador that he intends to “rehabilitate” Petronic so that it can play a more collaborative role with Petroleos de Venezuela (PDVSA, the Venezuelan National Oil Company) on the importation and distribution of Venezuelan fuel, the construction of a Venezuelan proposed refinery and transithsmus pipeline, and perhaps oil and gas exploration in Nicaragua. Currently, Petronic is little more than a holding company, contracting the use of oil storage and offloading facilities as well as Petronic’s retail gasoline stations to Glencore. Since Petronic’s contract with Glencore remains in force until June 2009, Rappaccioli is looking to create some other entity in the interim to manage fuel purchases from Venezuela and serve as a counterpart to PDVSA. Rappaccioli believes that such an interim company could forge an arrangement with Glencore for the use of Petronic facilities to receive and store oil, diesel, and gasoline from PDVSA at the Port of Corinto for distribution to power producers, public transport companies, and businesses throughout the country — and even the ESSO refinery over the medium term.

¶6. (SBU) Under the Venezuelan scheme, Rappaccioli explained that 40% of the cost of the fuel would not come due for 25 years (Ref A). If Nicaragua imports $200 million worth of oil from Venezuela in 2007, for example, then as much as $80 million would be available to spend on health, education, and rural development programs. Rappacciolli expects that Nicaragua will conclude a contract for the supply of fuel through Corinto with Venezuela by April. (Note: In 2006, Nicaragua imported $656 million worth of petroleum products, $209 million from Venezuela and $191 million from Mexico.)

Oil and Gas Exploration
———————–

¶7. (SBU) The Ambassador inquired about progress on removing the injunction on exploration concessions off the Atlantic coast awarded to U.S. firms MKJ and Infinity (Ref B). He told the Ambassador that the companies had recently visited MEM, and that the ministry is reviewing their cases. He added that MEM had requested the contracts from INE, but INE had not yet done so. Rappaccioli added that “it is in the interest of the government to resolve the situation as quickly as and in the best form possible.” Contrary to claims supporting the injunction, Rappaccioli observed that the concessions appeared to be “external,” i.e., falling outside the purview of the autonomous regions on the Atlantic. Another positive development, he said, is that Foreign Minister Santos had taken an interest in the case. (Note: In a previous decision, INE had stopped the clock on the concessions to MKJ and Infinity, so that milestones missed as a result of the injunction will not jeopardize the ability of the companies to fulfill the terms of their concessions.)

¶8. (SBU) Rappaccioli did not mention the recent find of Canadian-based Norwood Resources, which has an onshore exploration concession along the Pacific Coast. On the day of this meeting (February 14), Norwood announced that it found gas, condensate, and light oil in separate zones in its exploration well at San Bartolo Rodriguez. The discovery was made below 6000 feet in various tubidite sands. Norwood said that it plans to drill another exploratory well into a similar geological structure located 11 kilometers away.

Biofuels
——–

¶9. (SBU) Rappaccioli said that he thought that Nicaragua could increase ethanol and biodiesel production either for export or domestic use, estimating the potential to substitute up to 30% of Nicaragua’s gasoline requirement in the near term. (Note: Nicaragua may be able to almost double the land under sugar cane production over the next five years, to 100,000 hectares (Ref C).) With more sugar cane production, Rappaccioli observed, power generated from bagasse would also grow. He noted that the Atlantic coast had started to produce biodiesel from African palm for export to nearby Costa Rica, and that there is the potential to produce much more.

¶10. (SBU) The Ambassador offered to bring a U.S. expert to Nicaragua to discuss the prospect for expanding biofuel production in Nicaragua. Rappaccioli tacitly approved of the idea, suggesting that Grupo Pellas also make a presentation on its ethanol production. Rappaccioli added that Pellas’ first shipment of ethanol recently sailed to Europe, and that the next shipment will go to the United States.

¶11. (SBU) Rappaccioli told the Ambassador that President Ortega would soon send a biofuels bill to the National Assembly. (Note: Since this statement, Ortega has joined President Chavez of Venezuela in publicly criticizing ethanol production and U.S. policy on biofuels, stressing food security and the need to keep food and fuel markets separate. In March, Ortega cancelled a trip to Brazil where he was supposed to sign a bilateral cooperative agreement to promote ethanol production. (Ref D))

Hydropower
———-

¶12. (SBU) Rappaccioli believes that Nicaragua has great potential to develop hydropower and hinted that a pipeline of feasibility studies is in the works. Rappaccioli said that ENEL is looking at constructing several small hydroelectric dams. (Note: ENEL has sought assistance from the U.S. Trade and Development Agency for a feasibility study for a 15 MW hydroelectric dam at El Barro). For some time, a group of investors comprising COPALAR has floated a proposal to construct a large hydroelectric dam on the Rio Grande of Matagalpa, which could generate as much as 900 MW and cost more than $1 billion to build. Legislation facilitating the project is pending before the National Assembly. Rappaccioli told the Ambassador that a decision on COPALAR would be made by the end of the year, adding that Mexican billionaire investor Carlos Slim had shown interest in the project during his recent visit to Nicaragua. (Note: Rappaccioli lists COPALAR as one of his consulting clients on his curriculum vitae between 1997 and 2006.)

¶13. (U) Note: Nicaragua currently sources 80% of its electricity from power plants that import oil for fuel. Installed capacity is roughly 650 MW, which meets current demand, but leaves no room for error and is inadequate in the context of projected rising demand. In fact, the lack of new investment in power generation presents a serious obstacle to investors, often raising the cost of a project. ITG Cone Denim’s $100 million denim plant under construction in Ciudad Sandino, for example, includes a $20 million power plant as part of its investment so that the assured supply of power is not an issue. End Note.

Geothermal Power
—————-

¶14. (SBU) Rappaccioli wants Nicaragua to further develop its potential to generate power from geothermal sources. He mentioned the Israeli (Ormat) Italian (ENEL), and Salvadorean investment in a geothermal plant at Momotombo which generates about 20 MW. He also mentioned the Canadian, U.S., and German investment at San Jacinto, now named Polaris, lamenting the fact that San Jacinto is only generating about 7.5 MW although it had the potential to produce 66 MW. As the President of INE eleven years ago, Rappaccioli said that he had signed the contract to develop San Jacinto and not much had happened since. He told the Ambassador that the government was reviewing Polaris’ concession. (Note: Shortly after this meeting, the Attorney General’s office announced its opinion that Polaris’ poor performance constituted sufficient grounds for the government to void its concession. Polaris has been fighting back, pointing out negotiated changes to its concession and work program with INE, and the company’s declaration of force majeure in 2004 as a result of the worldwide shortage of drilling equipment.)

Wind Power
———-

¶15. (SBU) Rappaccioli welcomed the recently launched wind generation project in the Department of Rivas, terming it a very positive development. The $80 million Amayo wind farm involves the erection of 19 wind propelled turbines manufactured in India by a Danish firm and installed by a Spanish firm. The previous day, Vice Minister Lanza attended the signing ceremony for Amayo’s power purchase agreement to supply up to 40MW to Union Fenosa. The project is the brainchild of U.S., Guatemalan, and Nicaraguan investors.

¶16. (SBU) Rappaccioli told the Ambassador that another wind farm similar to Amayo is under development for the Department of Chontales. The plan is to produce up to 20 MW for ENACAL, the state-owned water company. ENACAL will manage the pluses and minuses with Union Fenosa, and thus channel excess power to the grid.

¶17. (SBU) Rappaccioli described the prospects for generating wind power in Rivas and Chontales as excellent, especially during the dry season. Nevertheless, the nature of the enterprise is that sometimes power will not be available. Whatever power these two wind farms generate, he observed, they will be cost competitive, constitute a domestic energy source, and reduce the requirement for oil imports.

Technical Assistance: Energy Regulation
—————————————

¶18. (SBU) The Ambassador explained that before the change in government on January 10, USAID brought two energy experts to Nicaragua to consult with energy sector stakeholders and the government on Nicaragua’s energy regulatory regime, especially as it pertained to power generation and tariffs. Rappaccioli replied that he would welcome the continuation of such technical assistance, but did not expressly commit himself. (Note: A USAID consultant visited during the week of March 19 to explore the possibility of advancing technical assistance in this area.)

Biography: Emilio de Jesus Rappaccioli Baltodano
——————————————— —

¶19. (SBU) Emilio de Jesus Rappaccioli Baltodano returns to government after a hiatus of ten years. From 1979 to 1990, he headed the Nicaraguan Energy Institute under the Sandinista regime. During this time, Rappaccioli earned the nickname “Don Rapagon” (Sir Outage, with a play on the “R” in his last name), for his many power rationing schemes. Rappaccioli continued at the Nicaraguan Energy Institute during the administration of Violeta Barrios de Chamorro. From 1995 to 1997, he served as President of the state owned Nicaraguan Electric Company (Empresa Nicaraguense de Electricidad, ENEL). For the past 10 years, he worked as an international consultant. During this period, he served as President of the FSLN’s National Commission on Judicial and Ethical Affairs.

¶20. (SBU) Rappacciolli received his bachelor’s degree from the University of Central America in Managua and a master’s degree in civil engineering from Northeastern University in Boston, Massachusetts. In the early 1970’s, he taught engineering at the University of Central America and National University of Nicaragua. He remains an active member of the American Association of Civil Engineers, the Nicaraguan College of Engineers, and the Association of Engineers and Architects. He is 65 years old (DOB: 5/5/41), married, and has children.

TRIVELLI

DE RUEHMU #0788/01 0822106
ZNR UUUUU ZZH
R 232106Z MAR 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 9600
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1025
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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