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Viewing cable 06LIMA4421, BIOFUELS IN PERU PROMISING

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Reference ID Created Released Classification Origin
06LIMA4421 2006-11-20 16:37 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0026
RR RUEHWEB

DE RUEHPE #4421/01 3241637
ZNR UUUUU ZZH
R 201637Z NOV 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 3027
RUEHQT/AMEMBASSY QUITO 0827
INFO RUEHBO/AMEMBASSY BOGOTA 4110
RUEHBR/AMEMBASSY BRASILIA 7092
RUEHBU/AMEMBASSY BUENOS AIRES 2675
RUEHCV/AMEMBASSY CARACAS 9935
RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 0947
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUMIAAA/USSOUTHCOM MIAMI FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC
UNCLAS LIMA 004421 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/AND,/EPSC (FCorneille), EB/ESC/IEC(Izzo) 
DEPT FOR OES/STC (PBates), S/P (GManuel), E 
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