VZCZCXRO9155
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. 
 
------------------ 
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