a S:: *... , [, ,111wz~~~~.. | i g,:~E.. HONDURAS PETROLEUM SUPPLY MANAGEMENT March 1991 ESMAP Strategy and Programs Division Industry and Energy Department The World Bank Washington, D.C. 20433 FOREWORD Tbis report b the ret of a study conducted in July 1989 by the Joint UNDP/WorId Bak Eergy Sctor Magement Assistance Progrme (ESMAP). The sudy was conducted by a working group under the supervision of and with the msace of Mr. Salvador Rivera, Task Mnaga (ESMAP), Ken Hornby (consultant, ESMAP), A. Rios (consltant, ESMAP) and Rodrigo Leiva (consultant, ESMAP). The working group benefited from discussig and received the collaboration of Mr. Adalberto Chavez Pett, Norma Rauda, Jesus Orellana at the Comision Admi del Petroleo (CAP), Mr. Rafael Ochoa at the Infrastructure Department in SECPMAN, Ms. Graciela Santos at the Central Bank, Texaco Management and, at the initiating stage, Mr. Zia MN from the World Bank. Ms. Susna Zurbaran and Mr. Ahmed Basbarat provided secretarial assistance. CUIRENCY UQIVALT Cmemy Uni - Lavin (L) 1 USS-L.2 a 1 USS = L.S.3 h/ Raoo prvlig in July 1989 at the time of the mission's visit. hi Ae as of anuary 1991. F isa Januay 1 to December 31 B or Bbis. Barrel (42 U.S. gallons) BCF 24 Bolivar Coastal Fidds crude (240 API Gavity) CIF Cot, Insurance and Freight D Day DWT Dead Weight Ton ETA Esdmated Time of Arrival PO Fuel Oil FOB Free on Board ft. Feet gal. U.S. Gallon GP Gneral Pupe K One Tbousand L Lempira LOC Letter of Credt LPG Liquified Petroleum Gas LR-l Large Range (Class 1) LT Long Ton MR Medium Range MT Metric Ton NCE Net Capital Employed 87R 87 Research Octe Motor Gasoline 95R 95 Research Octane Motor Gasoline S & T Supply and Tramportation USS U.S. Dollar yr. Year ACROSM AFRA Average Freight Rate Assessment CAP Petroleum Admnisave Commission MARAVEN A Venezuelan Petroleum Company (A subsidiary of PDVSA) PDVSA Petroleos de Venezuda, S.A. (he national Oil Company of Venemela) PEMEX Mexican Oil Company REFTEXSA Texaco Refinery at Puerto Cortes TEX-TRADER Teaco International Trader, Inc. TABLE OF CONTENTS EXECUTIVESUMMARY AND RECOMMENDATIONS .... ............. i-vi CURRENT PETROLEUM SUPPLY ARRANGEMFNTS ................... 2 MheEconomy .......................................... 2 BackgroundandProspet .................................. 2 Petroleum and the Economy .. ............................... 3 Currn Petroleum Supply Arrangements ............................ 6 RefiieryOperation ............................... 6 Backgronmd and CurrentSituation .............................. 6 Overview ........................................... 7 Product Demand and Foreast ................................ 8 Refinery Takage ....................................... 10 Refinery Operaion ............... .1......... 11 Cost Comparsons: Crude Refining vis-a-vis Product Imports ......................................... 12 Options to ncrese Efficiency ............ .. ....... 15 Crude Procuremen . ....................................... 17 Supply Contracts ........................... ............ 17 Crude Tnker Sizs ....................................... 18 AfSa ad WorldseWeSyste ...................................... 18 Crude Freight Arrangement .............. . .. ............ 18 Flexibility and Opdmization of Crude Procurement ......................................... 20 Summary of Recommendations, Constrai and Timing .......................................... 21 Finisied Products Procurement ..... ............................ 21 Supply Conact ........................................ 21 Finised Products Freight . ................................. 22 Other bsues bwolving Products .............................. 22 Summary of Recmmendations: Constain and Timing ........................ . ................ 25 11. ALTERNATE CRUDE AND PRODUCT SUPPLY POSSIBILIES.... ........ 26 E3imination of Certain Supply and Transporta- tion Possiblities ... .................................... 26 PrcsisgCru de atThrdParty Reftnery ........................ 28 Term Arrangement for Pd Pcurdses ........................ 30 Voyage/Term Arrangemen for Crude Transportation ..... .......... 31 VoyageTerm Arrangemen for Products Tranisportation .............. 32 Liberaitdon of Petroleum Impors ........ 32 niprmoe Fret Rt for Fuel 0R EBqos . ...................... 33 SummaryofRe nse0l,CbonstraiUtandTlmnlg .......... ..... 33 IDL CURRENT FINANaALNFORMATON SYSFTE ... ..................... 3S Fborast of Foren Excdanp Needs ............................. . 3S Badround ...........................................*.* 3S PropbdePses ...........................w r 36 Implement_ion and TminWg of Recb grem de ...................... .................... 36 Letters ofCrdit EforFrigh it adIrne onhd Ltte lmnoxCrat .................................. .... 37 Pwle Wd, di Ld Of Crf Proess ........u.e.............. .................. 37 nnda ............................................. 47 ZI mI A I.D and Timing of_/ AgialrecoclitonoeEcde ..... .. .. . .. .. .. .. ... . .. . .. ......... 40 Smmaiof PovernmentReenuw .........................fP 41 Vo. rEIHcC"Eforh CnDe ...D...NS S E ........................ 42 ProposemedS Puc edFeature of SisedmP.ctB ......... ..................... 43 LettenofCreditfor FnWgk ad h =e on Cnue ShrarIfmt ..................................... 45 OdurblpmS ............... ................ 4S TSstodPames*ntfrCnde ................................. 45 Suppol1n I s a mnFlland T1 ...g of R. ..n. . 5 S p bi' ................... ...... . 46 Mm AEdes ..................................... ... 47 Eeennn3kand Uw of the Esdom Exc^ed ........................... 47 n~~of de Acou Exoedef t be Pid ............................ 47 ALAW u R nFibof Exbednte ................................ 48 Advoe an Excdeft Reedve by CA W .............................. 48 Sumay of Gmm R_8em fiom do Pauex bIkdsay ......................... 49 Sumnmay Of R P c n II-IIP0 iomandlmingu .......................... 49 IV. ENHANCEFDINFORMA7AlON SYSTEW ................................... 50 PfroposodSystom . .................................... SO h"90-^Sind Iimng OfRxJdba Ptpose Structlm anld Featme of Sytm ................................. 53 Go"SIbnfomaion ....................................... S3 Sy"m Codes ................ ........... 53 Spodg Systm Ffes ..................................... S3 P~~~fot _ ........................ 54 ANNEXES 1 Program for the Liberalization of Downstream Peoleum Market 2 Cost Comparison of Running Crude at Texaco 3 Texaco Refinery & Retur on net Capital Employed Year 1988 4 1988 ARA and Worldscale Rates 5 Comparative Costs of Pewoleuna Supply Cases 6 Job Description of CAP's Supply & Transportation Coordinator 7 Monthly Program Form for Imported Crude and Products 8 Monthly Program Form for Imported Crude and Products 9 Form for Request to Central Bank for Crude LOC 10 Form for Request to Central Bank for Refined Prducts LOC 11 Form for Request to Cental Bank for Crude Transport. & Ins. LOC 12 Form for Liquidation of Crude LOC 13 Form for Liquidation of Refined Products LOC 14 Form for Liquidation of LOC for Crude Freight and 15 Calculo del Valor CIF de las Importaciones a Recibir por la Refineria Texaco de Honduras, CA 16 Present Crude Information Flow Chart 17 Pre Refined Products Information Flow Chart 18 Chronology of Texaco Payment for Crude 19 Example of the Development of the Excedene for Crude Cargo that Loaded March 2, 1989 20 Factura ComercWau 20 Calcudo de Excedente Estimado (Anualizado) 21 Resumen Compra-Vena de Petrol Cndo yRon do 22 Facura Comerca 23 Factura Comercia 24 Poposed Framework for Crude Inormation Flow Chart TABLES I Rcon dt for Immediate ementation ........................ iv 2 Rtemndion stbeImplemented afterAgreement. v 3 Reonmmendaios wh CAP has S. & T. Expetise . .. ........ vi 1.1 Ho sGovernment Reveue from PeroleumIndustry ........ 4 1.2 Petroleum Price Stmcture - January 1991.......... S 1.3 Fuel Oil Expots from Teao Reflney (1983-1988). ..... 7 1.4 Refinery Yields and Product Demand, 1988 ........ ...... 9 1.5 EnAd Product Demand Ir per Anw, % .. ........ . . . ... 9 1.6 Petroleum ProductDemandandForecastto199S . .................. 9 1.7 Teuo Rdfinery Product Tankage Analysis .. . .. . . . . . . 10 1.8 Texaco Refinery Opaating Cost ex Fuel .......................11 1.9 Cost Comparison of Running Crude or Importng Products and Adjusig Results to Reflect Imrovemwens in each cm ........................ se1 1.10 Recommendations Associated with Refinery Opeations .................... 17 1.11 Toaner Sizes and ypical Drafs .......................................... 18 1.12 Recommendations and Timng Summary ............................. 21 1.13 Takage Utilization at the Proposed Petela ...... .................... 24 1.14 Tankage Capacity for Selected Petroleum Products ................. ...... 24 1.15 RecommendationsandTimingSummary ..... ........................ 25 2.1 Crude and Product Supply and Transportation Alternatives .. . ............... 26 2.2 Summary of Comparative Costs of Petroleum Supply Cases.. ...............29 2.3 Possible Improvementso Alternate Supply Cases . . . .30 2.4 Recomme dationsand Timing Summary .......33 3.1 RecommendaionslAgreementsandTimingSummary . . . .36 3.2 Recommendations/Agreeents and rming Summary . . . .41 3.3 Recommendations/Agreements and Timing Sumary . . . .46 3.4 Summary of Recommendations and ring .....49 4.1 Recommendations/Agreementsnd Timing Summary . . ................... 52 EXECUTIVE SUMMARY AND RECOMMENDATIONS 1. This projeat is a follow-up to the Honduras Energy Assessment report of 1986. In July 1989, and October, 1990, ESMAP missions visited Honduras to: i) evaluate current petroleum supply arrangements, identify main issues and options to enhance the efficiency of the system; (ii) review the mechanisms in place to monitor financial revenues derived from import and internal distribution of petroleum products; and iii) implement a seminar for Government officials on downstream pJetroleum industry operations. 2. This report is divided in two parts: Supply Management and Financial Management. Part one comprises Chapter I and JI and reviews current supply arrangements and options to enhance the current system. Part two includes Chapters m and IV, reviews current mehanisms to monitor financial revenues and proposes changes to enhance this system. The mission has designed and implemented an information system at the Petroleum Administrative Commission (CAP) to enhance the monitoring of procurement operations and the scheduling of petroleum supplies vis-a-vis foreign exchange availability. A four-day seminar on petroleum industry operations took place on October 1990 and was attended by participants from the six Central American Countries. Petroleum Setor anization 3. Petroleum consumption in Honduras is about 16,000 Bbl/d (US$130 million in 1989). Petroleum demand has been growing at about 7.2% per year during the last four years. The Texaco- owned refinery in Honduras reflnes about 60% of petroleum products consumption; the remaining 40% is also imported by Texaco. 4. The Petroleum Adminstrative Commission (CAP) has, under decree 94 of 1983, the exclusive right to purchase and resell crude and petroleum products. Tbe CAP is responsible for the purchasing of crude oil and reselling it to the Texaco Refinery, and the setting of product prices at each point in the supply chain up to the retail level. In practice, Texaco is in charge of all the logistical aspects related to the supply transportation, and distribution of both crude and petroleum products. 5. For finished products, the Texaco Refinery has a finished products CIF purchase agreement with Tex-Trader that covers the supply and transportation ef refined petroleum products delivered to the Texaco refinery in Puerto Cortes. 6. Domestic distribution is carried out by private companies: Texaco, Esso, Shell, Dippsa, Copena, Pehon and Tropigas. These companies, as well as the Texaco refinery, operate within the boundaries of the cost and pricing structure set by the Government; this has led to demnwds by the distributos to increase the margins to keep pace with inflation and required new investments. ll- 'be ImII 7. 'Me main Petroleum Supply issues facing Honduras are at both macro and subsectoral loves. 8. Macro, At the macro level, lack of foreign exchange has created petroleum shortages, forcing the Goverment into arreas with Texaco. Additonally, inadequate planning in petroleum procurement by CAP has led to p emn ifficiencies, reflected in additional coss to the Governume. Just in 1988, the Govenmm nurrd unnecessary fancW charges of about US$1.5 million, cawd boti by delays in the process of opening Leters of Credit and lack of forecasts of fbrehk=n exchange needs at the Central Bank; this problem has ben compounded by the lack of transparency or acountability by the istiuions involved in the procurement system, paricularly in CAP's operations. 9. 'he permanet solution to this problem is linked to the process of required economic adjustment and economic gowth. The failure to take corretive action and continue operating in a crisis siion will inae_ the cost of petroleum supplies while reducing the fiscal contibution of revenes deived from the Imt of crude/product and of sales at the retail level; in addition, there will be asociated costs to the economy caused by the shoages. Under current circsances, the only oretive masure that the Gov fmen can tak I to coordinte an acceptable level of peroleum supply in relation to availability of harurrenc and encourage the efficient use of Petroleum, i.e. a lower ene/GDP ratio. 10. Subal. At the sub-actoral level, the issue is of an insituonal nature. nstionally, under the cuaret system: I there is a lack of tanp ency and accountability in the ulatory system, which, fuirther, does not provide incentives to reward efficient operions ad penalize uneoonomic operaons i.e. cntly, the reinery operates on the basis of an unwritten agreement to receive a gudar 10 million L.mpiras-wlthout assurance of profit ce, thus creatng uneranty on hture invs -while the dinuo must work witin the lim of an imposed priing structue; ii) the Govermet has both a policy aW operational role in the proement of crude and petroleum product, thus craing a conflict of intr i.e. the Govmen's exclusive right to import petroleum crude/products and price cool polices have prevented any competition In the sub-sctor; and ii) conequety, there an absn of economic criteria to set petoleum prices, subsidies and taxes. 11. As a conequn of tbb institutional issue, the downstem petroleum industry opets unter a cost-plus system. As a ret, in 1988, the cost t the ecnomy of the Governmen's decsion to runa crude veus im products was In the US$812 million range; for the fuue, this oppornity ost wi change accding to the crudepice differtils in aional markets. Domestic petroleum prices, which have bhtorically been above their import parity cost, were, as of January 1991, under a crss-subsdy system (Table 1.2). * ill - 12. To address this issue, the mission has evaluated alterative arngem which would allow more competition, transparency and the consequent reducion of premet costs while mantaining security of supply and quality control of petroleum products. 13. Ibis report concludes that a fst opdon for Honduras is to move towards the phased liberalization of the petroleum Import system. (Annex I gives a description of phases involved in liberalization of the market). A first phase would include the liberalization of petroleum Imports and a second phae would tackle domestic distibution and libalization of petroleum prices. 'Me Govemment would: (0) play a coordinating role to achieve economies of scale; (ii) regulate and dictate norms for safety of depots and quality control of products; (iii) ensure that CIF prices reflect least-cost options; and iv) ensure a competiive market for supply and distrlbution of petroleum products. 14. This option would eliminate any Government interventon regarding the operaions of the Texaco refinery, since the refinery would choose, according to the market, to: (a) condtue to operate at ex-refinery prices equal to import parity prices, (b) shut down an convert the ankage to a products terlmnal, or (iii) to de-botdeneck and reduce opeting costs. Ibis option would not proeude the Govenment from continuing implementing the San JosE Accord. IS. Tle constraints to liberaize in a single step are of a leslative and logistical naue, i.e. lack of streamlined legislation to allow the cotuction of petroleum fastructure i.e. storage faciltles, lk of tained indiviuals in the Government to monitor a compedtive petroleum industry operation, and the unprdictability of access to foreign ecshange. The phased deregulation of the petroleum supply and distribution system will have w be done shorly, otherwise ontiouing inflation and devaluation will require Goverment determied price adjustments that under the curnt system are likely to lag behind requirments and lead to breowns in the economic adjustent process. 18. Ibe many recomm at included throughout ths report are sumarized bere In more ner terms and ar by their constraints and by the tming of their implemeaon. Ibe sic cb...modatios dhat can be implemented immediaely ar listed in Table 1. - iv - Tible Is RRCOtUENDATIONS F IMMDIATE INPLEHENTATION R eooendations Remarks laow Refinery Oeration * Start negotiations between Goverreent * Needed to provide Refinery incentives nd Texaco on new format operating to operat efficiently and to aLlow tong agreement linked to parity co8t of range planning. Refinery operations woutd imported products. be optimized. - Continue with San Jose Accord crucd and To be done by Texaco Refinery's optimize- evaluate economics of other crudes. tion model. - Sond LOC requsts to CAP for iported * Avoids delays In the LOC process. products, with adeqate anticipation. * Run crude optimization analysis to determine Refinery has agreed to do this and advise most economicl composition after each CAP accordingly. crude or product price change. - Provide CAP with annual forea st of crude, - Should use latest prices and data broken product ports and F0 ewhorts. down by quarters. Rofinery agreed to use new form to dothis as well as a new format for the monthly forecast. 2. at * Strengthen technical and economic knowlede - Nay take time to find qualified of staff through In house training program, eandidate. to be provided by Supply and Transport specialist (S9T). - Advise refinery iWan Central Sank opens LOC and - CAP has agreed to this. nWn corepdent Sank pays the LOC. - Retain Refinery's LOC request nmber throught - CAP has agreed to this. LOC pocess including liquidation of LOC. - Insur that Central ank has monthly and annual - CAP agreed to trnsmit to the Central forecast of foreign exchWne needs for crude and Dank the new form being used by the products. Refinery. Traresit LOC rquests to Central lank as son as - CAP agreed to do this. they ar received. = Un d new forms for LOC requests wa - CAP sareed to do this. Forms will be liquidations, sent as soon as comploted. - Prepre Action Plan for liberalzaution of petro - Detailed staes are shown in Annex 1. tia iwports and dereulation of retalt prices. C. Ban * Imlqement use of Refinery forecasts of US - Ncessary to provide proper plenning of needs for crude and prdcts In order to wvitabtle funds. Possibly will mvoid prioritfae USS needs vwrSUS availability of penalties and other costs associated with funds. d.datl In openinr LOC's. - Promptly handlo LOC requests for full con- Open LOC's par contract stipulations. Avoid tractual complianco ond acknowledge their penalties and extra costs. Central ank has recofpt. agreed to acknowlede LOC requests. Table 12 (Cont'd) RECOIMNSATIOhS FOR IUDIATE INPLEUNTATION Recauendations R kerks * Use only correspondent buns approved by - Avofd costly delay. The foreign exchaw Sellers. Wdvise W when correspondent situation sAt first be normlized. Central bank poys the LOC. aM agreed to notify CAP Wm LOC Is paid. - Advise CAP more pretly on total costs of a LOC. * Wllft ailow total liquidetion sonr. - use the new LOC request form proposed by mission * Central Bank has agreed to it. * Retain Refinery LOC reut rumber as pert - Central Sank ha agreed to do this. of the LOC sabor assigned by Central Bank. Source: Nission developed. 19. After a new formal operating agreement including profit formula and remittance rights has been negotiated, between the Government and the Texaco Refinery, the rerommendations below can be implemented. TAble 2: RECOSMENDAT IONS TO U INPLEMENTED AFTER AI;EEINYT R_c ations Remrks TexKg of RsIn= 1. Install equipment to steady voltage and *ill mI fnimze refinery shutdowis. automatically start standby generators. 2. laplement profit/operational iprovements: * Such items would be contifmally O Inrease Salable product yiel,. worked on with constant pfroVe- O * Install new product tenkage. ments. No incentive to do anything O - Reduce operating costs. with present arra.oment. O - Undertake de-bottleneckfng and off iiency projects. Source: Nfssion developed. 20. Several items could be impoved in the very short term (negotiate fuel oil outlet, imprve FO backhaul freight, establish new pricing basis for imported products, etc.) but, to do so, CAP should have a refinery and petroleum supply and transportation specialist available to assist in the negotiatons. When such expertise is available, the recommendations shown in Table 3 can be implemented. For longer tem benefits associated with possible advantages of term product agreemens, term crude and product transportation agreements, possible offshore procesing arrangements, and the advent of other North and South Coast product teminals, it is essential that CAP have a full time Supply and Transportation Coordinator. Table 3 also includes recommendatons associated with the full time S. & T. Coordinator, and hence, are for the longer term. -vi - jjg: *EC_1aUh USW CAP UAS *. & T. EPTIN eicom Rmar 111th Short Tm AdvIoa tS mnhs 1. intitiate oilmntatimn of libwratlution * Ma. of petroleA mrket. 2. REwis p ste for rn mai terminaLs Coordination reqired to avoid refiery to better tlest epoeted opeatlone. n I*le production probltms w product run-outs. the required coordiation role for offtakes ad iqwort qontities. Monitor product Altity. S. Talks with PVA on choice of crues that * To obtain the eomicat heavier might be available uwer San Jose Accord crudes more suited to caemuion for third party processing. avaltable In Curwcao. 1ura: Nission developed. 21. One of the overall objectives of this project is to imrove efficiency and control by streamlng the main financial paper flow and other docmeion dealing with fimds paid and coUected. Ihe Mission reviewed the proposed compuerized system with CAP and diussed with the Texaco Refinery and the Cental Bank the involvement expected ffom them. Report format changes, new reports and foms were presented to each, some to be implemented mamully as soon as they were in place. 'no Mission recved a positive respowne from everyone and a totl agreement. Technical support wa discussed and agred to with the data processing personnel of the Mistry of Economy and Commerce, SECPLAN and the Central Bank. lhe following progms will make up the overall proposed system tha wfll be implemend at that time: (a) Anual and Monthly Forcas of Volume and Value of Crude and Refined Product Imports and Fuel Oil Exports. (b) Request for LOC. (c) Invoicing. (d) Liquidation of LOC. v -l PART ONE SUPPLY MANAGEM Part One evaluates currlet petoleum supply arang . AlternAtle supply arrangements wbich would generse a leat cost supply ar explaie and recommended. Ways and means for recruitment of supply and quality control ar ituced. -2 - I. CURRENT PETROLEUM SUPPLY ARPANGEMENTS 1.1 Tbis chapter provides: (i) an overview of the links between the economy and downstream petroleum operations; and (ii) an overview of current petroleum supply arrangements and room for improvement. The Economy 1.2 The Honduran economy is going through a period of crisis characterized by a chronic balance of payment disequilibrium, a large fiscal deficit, and an inability to fully service external debt obligations of about US$3.3 billion. 1.3 The Governments' fiscal deficit has been increasingly financed through the domestic financial system-as external financing sources have dried up-and through the accumulation of external arrears. As of 1987, the external public debt of Honduras represented about 66% of GDP, and debt service payments were equivalent to 23% of exports of goods and services. Backeround and Prsects 1.4 Extensive Government intervention, the world recession, deteriorating terms of trade, and the adverse political climate in Central America all contributed to an economic slowdown in the early 1980s, particularly affecting private investment. Exports grew only at a rate of about 3.7% and a balance of payments crisis was avoided as big capital inflows took place, linked mainy to the construction of the hydropower project El Cajon. 1.5 In 1987, the combination of a drop of international coffee prices, Honduras' main export, and a decline of voluntary external financing to the public sector( from US$227 million in 1985 to IUS$23 million in 1987) precipitated a balance of payment crisis. In response, the Government allowed an accumulation in arrears, increased the money supply to finance the public sector deficit and permitted the expansion of the spread between the official and parallel exchange rates( from 25% to 100% in 1989). 1.6 For the future, the Government has defined, in cooperation with the Bank, an adjustment program to taclde both short-term macroeconomic issues and medium-term structural issues. This program has close links to the improved efficiency of public sector institutions. Along those lines, this report evaluates in detail the petroleum procurement operations carried out by the Government through the CAP and recommends short and medium term measures to improve the effciency of those operations. -3 - Petroleum and the Economy 1.7 During the 80s, the petroleum sub-sector was a fiscal revenue generator, mainly in the form of the excedente, taxes and duties; prices were, overall, at a level well above their import parity cost. Still, distortions were maintained into the pricing structure, distortionsthat have become more acute since March 1990. Overall, petroleum pricing policy is not formulated under economic principles, but under financial or fiscal targets, which will become harder to control under a highly inflationary environment. 1.8 Fincial Exceden Until March 1990, the Government of Honduras had maintained the ex-refinery product prices at the same levels they were during the era of high crude/product prices of several years ago. Since crude/product prices were relatively low and the Government allowed the refinery a fixed profit while covering all the costs of the refining operation, there was a significant surplus of income left in the refinery that went to the Central Treasury; this surplus grew from equivalent US$5.5 million in 1985 to US$71 million in 1988. This amount was called the 'Excedente' or the surplus remaining after all the costs and fixed profit were covered. An amount of Excedente was paid with each crude cargo by the Refinery to CAP, the administrator. This payment represented the actual surplus shown at the month's closing of the Refinery books after covering all the costs and allowing Lempiras 833,333 per month gross profit. This was divided equally to the number of crude cargoes that were paid until the following month's closing. This surplus or Excedente was paid together with the actual FOB cost of the crude plus any fimancing costs. Under today's high prices, there is not anymore excedente. 1.9 By contract between CAP and the Texaco Refinery, CAP is entitled to 1.5% of the value of all the crude purchases by the Refinery. This is known as 'Comision Manejo de Gobierno and is intended to cover the cost of administration of the crude contract including the cost associated with LOC's. The 1.5% is calculated on the FOB of the crude to the Refinery which includes the FOB value to CAP, any finance charges and the Excedente on each crude cargo. 1.10 Fiscal Revenue. In 1988 the Government had fiscal revenues of US$40.76 million on duties and taxes related to petroleum product imports and distribution. -4 - Iable 1 O Nls R1 G0WEIRT IUNE MM 1 IIWRY (Us $ Niltiom) 1. Ct11n aid 'r1x # 1985 1986 1967 1988 a) Iud Ol o Iqao*ts 8.05 6.53 6.47 k/ 8.41 &/ b) Produet lIports 18.00 18.46 20.39 18.31 c) Consuqption Tax 8.59 9.01 10.08 11.74 d) ef tinery Incow Tax 2.30 2.30 2.30 2.30 Sub-total 36.94 36.30 39.24 40.76 2. Other a Excedente 5.50 45.04 53.48 77.9 TOTAL 42.44 81.34 92.72 118.69 / Incom tax from the petroleun distribution and retailer coqanies are not available. kY Includes Ianejo (uS$1.47 million). I/ Includes IaneJo CS2.04 million). jouM: CP, Central Bnk of Nondurcs and Mission estiates. 1.11 Pricing of Petroleum Prducts While the scope of this report does not include a detailed analysis of petoleum pricing policy, its results, issues and options; this section gives an overview of the isues surrounding petroleum pricing. There is, undoubtedly, a need to carry out an in depth energy pricing study. 1.12 The most important signal for the efficient supply, distribution, and consumption of petroleum products is the pricing oliy and the inatiniional structre to carried it out. In Honduras, this pricing policy ppearsJt to have been based mostly on financial or fiscal grounds rather dn under economic principles regarding efficiency, in nation to consumers, and allocation and mobilization of resources. 1.13 The 1981-89 period did not see any adjustment of petroleum prices for inflation; unti March 1990, retail prices remained unchanged in nominal terms, thus, declining in real terms by about 30%. Regarding their levels, by and large prices remained above their import parity cost. 1.14 For the 90s the sitation is completely different, Honduras is now living in a higher inflationary environment, currency movements of the Lempira are a new element, and intrational prices of petroleum products are more volatile. Recent volatility in international petroleum prices has aggravated this situation and, as of October 1990, both the strucure and levels of prices were distorted: the levels on some of the fuels were below their economic cost. Further, the pricing strucatre has differenials between fuels i.e. Kerosene vis. Diesel and Gasolines, which have acted as an incentive to l/ kt Is t dear dtere is a "p$dng po*cyi o such, h objeedsv, a srateV for its # ad -$85. Zs mit or dilute Kerosene with other fues, as a consequence, subsidized keosene Is reaching the industrW sector ad automobile owners, but not those poor secto which were suppose to beneft fom the subsidy. TAILE 1.2 PETROLEW PRICE STWCURE -JAIIARY 15, 191 zone 5-Teguigaps TUN UNITS NOS " AV-JET CO KR DIESEL F.O. FOB USSA/S 0.8753 0.9737 0.93 0.9147 0.50S Freigth & IntwanU e USt10 0.0389 0.042 0.042 0.044 0.042 Firncial Chargs US$mS1 0.008 0 0.008 0.008 0.008 In-transit Losses USS/S 0.0025 0.0025 0.0025 0 0 Dawrage US$/1S6 0.0011 0.0011 0.0011 0.0011 0.0011 CIF US$/US1 0.9258 1.0193 1.0273 0.96O 2 0.5668 CIF In Lerpiras Lps/AS0 4.9067 5.4023 5.444 5.131S 3.0040 Central Bt Charges Lps/USG 0.0687 0.0756 0.0762 0.0718 0.0421 Duty- 15 CIF Lps/USG 0.7360 0.8103 0.8167 0.7697 0.406 DECItEE 85-5X CIf Lps/USG 0.2453 0.2701 0.2722 0.2566 0.1502 Terminal Losses Lps/USe 0.0236 0.0157 0.0157 0.0049 0 I:MT PARITY e Lps/USG 5.9804 6.5741 6.6256 6.2345 3.6469 Refinery Costs Lps/USG 0.1838 0.1838 0.1838 0.1U38 0.1838 Refinery Margin Lps/USG 0.078M 0.0787 0.0787 0.0787 0.0787 Ref inery-Incom Tax Lps/USG 0.0527 0.0527 0.052 0.0527 0.0527 X-REFINERY COST Lps/JSG 6.2956 6.88 6.9408 6.5497 3.9621 OTHE SUBSIDIES Direct Goverment Sbsidy To Refinery Lps/USG -2 0 0 0 .0.5 Cross Subsidy * Lps/USA 3.8615 4.1231 -4.7035 0.8602 -1.504 other Lps/US6 -0.1109 .0.1109 -0.1109 *0.1109 -0.1109 EX-RACK PRICE Lps/USG 8.042 10.9015 2.1264 5.558 1.6472 Cmnsiaption Tax-7X LpsAUSG O.5632 0.7631 0.1488 0.3891 0.1M StbfIlization Fud Lps/USG 0.1S 0.15 0.15 0.15 0.15 Price to Distrfbutor LpA/USG 8.753 11.8907 2.3161 6.088 1.9657 Distributor's Margin LpsAl; 0.105 0.12 0.0812 0.105 0.045 Transport Cost Lps/USG 0.3932 0.3693 0.3181 0.3688 0.266 Retaler's Nargin Lps/USG 0.5368 0 0.2546 0.382 0 Consuwr Price LpsIUSG 9.794 12.3039 3.0791 6.9497 2.4401 ° It exctudes terminal/port fees which in an open mrket would be about LpISASG.1260 *0 From Gasolines and Av.jet to other fuels. Source: Mission estimtes, CAP. -6 - 1.15 Taxation or subsidy considerations are not properly analyzed, and as Table 1.2 shows there is not component in the price structure for maintenance of road infrastucture. The orny taxes and duties included are Ad-Valorem import tax (15%), consumption tax (7%), and a specific stabilization fund. 1.16 Institvtionally, the Ministry of Economy, under CAP's advice, is responsible for setting petroleum prices, including margins for transportation and distribution. Given its operational orientation, the CAP or any other institution, including SECPLAN and the DGH, have not made any effort to establish norms or regulation aimed at establishing the necessary conditions for an increased level of competition in the petroleum market, or to efficiendy regulate what Government officials sometimes call an industry characterized by being a natural monopoly. Indeed, current legisation in the hydrocarbon law, and at the General Directorate of Transport restricts the entrance of new participants in the construction of bulk oil storage facilities and gas stations. Current Petroleum Supply Arrangements 1.17 This Section evaluates current supply arrangements and the issues surrounding current operations, including crude and finished product procurement. The recommendations listed here take into account current constraints in the Honduran institutions that are in charge of petroleum procurement, i.e., inadequate human resource training, financial and technical constraints. 1.18 The main issues addressed in this section are those related to the improvement in the operaion of the refinery and the procurement of both crude and refined products. The recommendations dwell on the assumption that foreign exchange will be made available and scheduled to meet petroleum needs. Refin=r Qnention Backtroun and Qu=r SitatL 1.19 In 1989, the lack of foreign exchange resulted in a series of petroleum supply disruptions which, in turn led to unplanned Z rationing. This was compounded by the fact that the exchange Deparment of the Central Bank did not prepare a forecast of foreign exchange needs for crude and finished product imports. In the July-September period, the Government had overdue payments to Texaco of about US$21 million; in the same period, the Government incurred unnecessary expenditures of US$230,000 due to a combination of erratic scheduling of petroleum supplies vis-a-vis foreign exchange availability. In spite of these problems, Texaco has done an efficient and commendable job in collaborating with the Government in maintaining the security of supply. ZI There doa not seem to be any condngency plan to face spply d onw. - 7- 1.20 This situation was partially resolved when Texaco agreed to finance new crude supplies expecting that payment would be made in the next 60 days. In January 1990, the overdue payments forced Texaco to suspend any new shipments of crude and product. The recurrence has a negative impact from a fiscal viewpoint, the degree depending on levels of rationing, and will result in losses for the Honduran economy while adversely affecting any economic adjustment program. Overview 1.21 The Texaco Refinery, located at Puerto Cortes, is a hydroskimming type refinery with a capacity of 14k Bbls. per stream day. It was built in 1968 and designed to run a light, reconstituted Venezuelan crude because of the limited local fuel oil market. In the early years of its operation, flexibility was provided by processing the tailor-made Venezuelan reson-crude which matched refinery yield to demand. In recent years, since the San Jose Accord agreement, the flexibility of having an ideal recon crude has disappeared and the El Cajon hydro project was completed, thus reducing fuel oil demand. 1.22 The refinery was designed with only limited crude and product tankage, which is a major problem today in importing finished products as well as exporting fuel oil. Surplus fuel oil can only be exported in small parcels (60k Bbls). Hence there have been ony limited opportunites for economical export sales. Table 1.3 shows the amount of fuel oil exported over the last several years. Ta3te1.3: FUEL OIL EXPORTS FRON TEXACO REFINERY (1983-1988). (K Berrets) 1983 1984 1985 1986 1987 1988 FO Exports 125.4 210.2 255.3 125.2 105.2 278.7 Surce: CAP 1.23 Due to limited fuel oil exports, the refinery has not opated at capacity for any sustained leng of time since reopenig in 1982, running only about 50% of capacity in most years. With the current cost-plus operation, in which the Refery receives 10,000K Lempiras before tax annually regardless of the thruput and the fc that Texaco Interational Trader, Inc. (Tex-Trader) is making some profit on importng products, there is rendy an incentive for the Refinery Ml to maximize crude thruput under today's afrangement. The refinery operated at 8.5k Bbls/day in 1988, the highest average thruput since 1982. The refinery operated at 10.4k Bbls/day for the first three months of 1989 while exporting 90k barrels of fuel oil. 1.24 Since the positive announcement, in mid 1987, of the constrction of a new product import tminal at the port of Tela, the refinery seems to be trying to maximize crude runs to demonstrate to the Government of Honduras the importance of the refinery operation and to reinforce their desire to continue a lOng term presence in Honduras. However, their efforts to maximize economical crude thruput have been impaired due to: - 8 - (a) Delays by the Ceral Bank in opeing Letters of Credit for crude cargoes d limited crude ankage has required the refnr to shutdown due to lack of crude. There were two 6 day shutdowns for this reason during the first tn months In 1988. Shortage of foreign exchge when neoded cauwd these delays. (b) Changes by the Comision Admintdora del Petroleo (CAP) on the rinery's progrm to import the more economical crude, fom stms crde to Venezuelan crude because payment s made in 60 days vesus 30 days for the Mexicao crude. Shortage of fin echange when needed was the reason for these uneconomic decisions. (c) CAP's cancellation of crude caroes on several occasions in faor of importing fiihed products when there were extree shortages of foreig exchange. Both Venuda and Mexico, as suppliers of crude, require tha the Letts of Credit be opend prior to loading. Tex-Trader has been willing to deliver imported products prior to having the Letter of Credit in place in order to accommodate the Goverment of Honduras. Thi btentonal payment delay has been abused to the extent that as of July 1989 Lters of Credit (LOC) for Tex-Trader have not been opened or paid for some US $20 million worth of crude freight and finished products. (d) Needed tank repairs in 1987 and 1988 caused opeational disrupdons becase of limited ankage in the refinery. A new cathodic protection system has now bee installed. (e) Many power-dips and outages. The refinery shifted itB dectric power source to the power utility (ENEE) in late 1987. This has proved to be an ureliable source. There were 22 such incidens in the fis 10 months of 1988. The refinery should stall equipment to sure steady voltage and to automatically start their standby diesel geneators when necessary. (f) Opetional problems at the refiney, i.e., steam boilers, with many of these problems initiated by voltage drop: Tere were 11 boier stdows in the first 10 monSt of 1988 (this is in addition to those 22 shutdowns due to voltage drop and power outage). The refiney is curary completng the isallation of a new steam trine geneor for sqppted boiler power supply. amu:1urm 1.25 The Honduras product demand mix is middle distllae oriented (61%). A comprio of avage refiy yields and product demands is shown in Table 1.4. - 9 . J&te 1.6: REFINERY YIELDS AND PRDUCT ODA, 1968 Refinery Production, X D_ar, % . Gasoline 18 21 Niddle Distillates 43 61 Fu.l Ofl 36 15 ur.e: Texaco Refinery, CAP ad Mission estimtes. 1.26 If the refinery could operate at 12k Bbis. per calendar day capacity, the total required major products imports would amount to 4.5k Bbis/day (1988 demand) based on a 94% salable products yield and would produce 2.0k Bbls/day of export fuel oil. In 1989, fuel oil demand grew 28% over 1988. The main reason for this was increased bunker sales. Tbe growth rate for superior gasoline demand was 15.5.1% in 1989 over 1988 while middle distillates demand grew 10.% over the same period. Total products demand grew 10.32% in 1989 over 1988 due largely to the fuel oil demand increase. As a reference, between 1985 and 1989, total products grew at 8.1% per year. Two growth scenarios were developed to forecast the product demands for superior 1995 as shown in Table 1.S. Tabte 1.5: ESTIMATED PRIODCT DENAND INCREASE PER A11E, X LPG & Jet A-1 & Kerosen & total '^sotlne Dlesel Fuet Oit Products Scenario I 4 7 1 5.1 Scenrio II 6 10 3 7.7 Source: Mission estimates. 1.27 As shown in Table 1.6, the total products growth rate is projected to be S.1% per yea and 7.7% per year in Scenario I and 11, respectvely. Using the above growth rates, product demand frecat were developed for 1995. Igle 1.6: PETROLEUI PWT DEM AND FORECT TO 195 (k Barrels) IltAc Forecst 1985 1986 1987 198 99. : 1995 Scenario I it LPG 145 147 153 180 142 236 270 GASOLINE, 95" 443 485 576 634 32 85 9 GASOLINE, R 364 399 421 437 442 S75 657 KEROSENE 289 296 299 319 344 342 392 JET A-1 330 350 396 432 424 694 842 DIESCL 2041 1886 2140 2355 2589 3781 4589 fUEL OIL 508 406 576 744 2 797 915 TOTAL 4140 399 4561 5101 56s Mo0 618 I~fl: CAP wd Mission Estimte. - 10- R da a 1.28 The refinery, at today's capacity, becomes less relevant to the total needs of the country in 1995. By 1995 with the refinery operating at 12k Bbls./day, product imports would amount to 10. 1k Bbls./day and 13.4k Bbls./day in Scenarios I and n, respectively. 1.29 If the refinery capacity has not changed by 1995, crude tankage requirements will also remain unchanged from today's needs (unless the Port Authorities dredge the shipping channel and turning basin that would allow crude cargoes of 320-350k Bbls. Thus, creating a need for an additional 200k Bbls. of crude tankage). On the other hand, the refinery's product tankage, while being extremely limited today as a product import terminal for the total demand, will present a totally inoperable situation in 1995 without additional product tankage or additional product import terminals on the North Coast. An analysis of the Refinery product tankage, using 1988 product demands, is shown in Table 1.7. Although this type of analysis is more suited to evaluating terminals (without products also being produced daily), it still demonstrates the lack of product tankage at the Refinery. lte 1.7: TEXACO REFINERY PRODUCT TANKAGE ANALYSIS TANK UNAVAILABLE AVAILABLE 1988 NE CAPACITY, CAPACITY, CAPACITY, DEMAND, DAYS REQUIRED DAYS POUCT K BBLE. K 8BLS. K BBLS. D SUPPLY CUSICO WELY LPG 4.3 k 0.6 3.7 1 23 - 23 GASOLINE, 95R 34.0 3.8 30.2 1737 17 6 11 GASOLINE. 87R 30.0 3.8 26.2 1197 22 7 15 KEROSENE 14.0 1.5 12.5 874 14 6 81 JET A-1 30.0 2.8 27.2 1184 23 a 15 DIESEL 136.0 7.4 128.6 6452 20 6 14 FUEL OIL 112.0 6.7 105.3 28032 38 6 32 a The number of days of required cushion is dependent on the nusher and size of tanks in each pro- duct service, whether the refinery is operating and at what level, and one day for discharging product, two days for testing Jet A- 1, and a five day loadino range. the standard five day lo- ading ranoe could be reduced in this analysis to allow larger iiport parcels. k Includes two new 30,000 gallon tanks currently uwder construction. £ Kerosane, at eight net days supply, is not the limiting product because of availafle Jet A-1 (gsme product) spplies S Only represents the LPG that is produced in the Refinery. Shortfall Is ieported through another terminfl. I Includes 7648/0 of fuel oil exports. Smc: Mission estimates. 1.30 In this analysis, the limiting product tankage is that of premium gasoline at 11 net days spply (plus 2 or 3 more days by reducing the loading range due to the refinery's own production). With the refinery opating at capacity, the clean product imports wIll amount to about 5,050 Bbls./day (1988 demand) indicating that the cargoes would have to be between 55-70k Bbls. (Sk Bbls./day x 11 or 14 days). At a crude thruput of 8.5k Bbls.lday, as was the case in 1988, clean product imports amounted to about, 6,300 Bbls./day and cargoes were between 70-90k Bbls. - 11 - 1.31 Because the Texaco Refinery is currently operating under a Government established a cost-plus arrangement, it is not possible to determine the economics' of its operation using usual methods. For the country, the marginal cost of operating the refinery is equal to the differential with the parity cost of imported products. To give a "directional indication" of what is best for the Honduran economy, a cost comparison has been made of a Refinery operating case and an imported products only case. This shows that the refinery rumnning crude is about US$8-12 million more costly for specific cargoes in March, May and July, 1988; this situation varies according to the crude-product price differential. These results confirm the experience of similar sized refineries in the region, namely, that a cost-plus basis is the only arrangement whereby Governments can mahtain operation of these units. 1.32 Small hydroskimming refineries are not as economical as large conversion-type refineries. However, with good crude/product price relationships, as it was the case during 1988 and previously during the 1970's, small bydroskimming refineries can be marginally profitable. But this also means that the small refineries must maximize thruput. In the case of the Texaco Refinery, this also means an economical export outlet for fuel oil. 1.33 A summary of the Texaco Refinery operating costs for the years 1985-1988 is shown below. Refinery operating costs are usually reviewed and compared excluding the cost of refinery fuel because the refinery sells itself the fuel consumed and, hence, there is no effect on the refmery's profit loss). Tale1.8: TEXACO REFINERY OPERATING COST EX FUEL (K Lempiras) 198 1985 1986 1987 1988 X of Operating Costs Salaries, es & benefits 3052 3564 3755 4Or 30 Naterials, s8piIes 3166 4205 5194 4486 30.5 Dredging 786 03 1481 870 5.9 Purchased utilitfes 1 31 304 1021 6.9 Depreciation 1148 1184 1203 1249 8.5 Home office charges 380 370 684 863 5.8 Sank comuissions 1834 1870 32 21 .14 Other _63 14.. 15 JZ4 12.3 Total operating costs, ex fuel 11W30 13693 14I78, 1,691 JSS million 5.7 6.3 7.2 7.3 Refinery crude urs, Kg 2602 1472 2317 3109 Cost per barrel, ae fuel, Lp./8L 4.35 9.30 6.25 4.73 USW/BL 2.1 4.65 3.12 2.36 Refinery fuel costs US$ mition 3.4 1.7 2.2 2.0 1.34 Tbe above refiney costs are high relative to refineries in the 14,000-25,000 BPSD feed. A factor for this low efficiency is the reduced thruput at which the refinery has been operating, a factor outside the control of Texaco management. - 12- 1.35 The category of Materials, Supplies, & Maintenance is generally higher than the rule of thumb average over time of 25% of total costs, excluding fuel, which comparble refineries maintain. In this four year span, the costs were 31.5% of total costs ex fuel. The amounts for depreciation in all years and the home office charge in 1988 are all normal, (in economic terms, the refinery is a sunk cost, thus depreciation would be excluded). Purchased utilities, excluding refinery fuel, is US$.16 per barrel which is an acceptable figure. 1.36 To operate the refinery or to use it as a terminal for importing finished products is not a decision that can be changed every few months as crude/product prices change. Even more, it is a decision that should be taken by Texaco, as market conditions dictate. To shutdown the refinery would require releasing all the process unit technicians (operators) and the majority of the technical and mechanical department technicians, engineers and skilled craftsman. Also, the process units would have to be properly mothballed, which could cost as much as $1 million. This action can not be easily reversed. Rehiring of a competent, technical and skilled staff would be difficult and would require at least one year's training for some positions costing some $0.5 million plus a similar amount to de- mothball. Shutting down the refinery would also require the cancellation of today's crude supply contracts unless such crude was sold to another Refinery for processing products for Honduras. If cancelled, after several years, these contcs probably would not be allowed to be re-negotiated. cost ComDarisons: Crude Refining vis-a-vis Product Imnort 1.37 As an 'indication,' three cost comparison cases were developed at different crude and Product siuations during 1988 showing the Texaco Refinery runnig crude and the Refinery operating as only a products imt terminal. These annualized cases were based on data generated by the £eflinyiS computerized progmm that were run for the three dates shown and detailed in Annex nI. The cost calculated wer the tol costs of the two types of operations excluding all duties, import and income taxes and the Excedente (surplus), all of which is received by the Government The total U.S. dollar costs were also detmined for each case. The difference between total costs and total U.S. $ costs iS any cost in Lempiras such as utilities, fuel oil export tax, local commissions and expenses associated with letters of credit, after tax profit and 90% of the fixed operatig costs. 1.38 Tbese cases show that the Refinery Running Crude is more costly by $8-12 million/yr. than using the Refinery as a product import teminal and also requring $4-S million more U.S. dollars. It must be remembered tat this situation bas been generated not by Texaco but by the Government's decision to work within the bounderies of a cost-plus system without the expe at CAP to efficienty regulate or enforce a cost-plus system or move towards a more competitive environment. 1.39 The Imported Product cases assumed that the Refinery crude tanks were converted to product tankage and thereby allowing the use of filly loaded GP vessels. Tbis assumption decrased the Imt products freight by US$9 million/yr. by eliminating dead freight as compared to the current rates for importing products. It was also assumed that the Refinery would receive a dtruput fee equal to that which CAP has offered to Telaport (3 U.S. cents/gal.) of which 0.5 U.S. cents/gal. was assumed to be profit. Onetime costs for mothblling the Refinery process units (estimated at $1.0 million) and the cost - 13 - for cleaning and converting the crude tiaks (estimated at $0.5 million) were not added to the Imported Poducts cases and, therefore, are not included in the cost comparisons. 1.40 'he Refinery Crude Running cases were based on the typical Refinery operation in 1988. However, there are a number of items that could improve the opertn of the Refinery, as follows: (a) Increase the salable product yield from 93% usoe In the Refinery progam to 95% or 95.5% which is within the capability of the actual Refinery opeion as demonstrated in early 1989. Improvements in salable product yield can be done through efficiency projects and energy conservation and loss reduction projects Oower tower pressure, minimize excess air, improve combustion, use of more insulation, reduce steam leaks, improved metering, etc.). (b) Add additional fuel oil and clean products ankage to allow fuel oU exports and clean product imports to be made in fully-loaded GP sized ships. Honduras is very short on product tankage and incentives must be given to encourage Texaco and other, to invest in tankage. (c) Negotiate an outlet for surplus fuel oil and an improved back-haWl fight rate for its transportation. One possibility would be to produce straight pipestill bottoms and sell as visbreaker feed to the Maraven Refinery in Curacao; both effortu could improve net back from fuel oil $1-2IBbl. (d) Fully utilize all flexibilities allowed for in the availability of different crudes and recon components under the PDVSA contract, thereby optimzing for the most economical feedstock (including butane spike which alone would produce $260k/ye savings to Honduras for each 1%). Another emple shows that, if Lamr crude was substited for Ceuta crude, some USS 986K/year could be saved by Honduras. The Refinery is now making some of these optimum-operation type decsion. (e) Undertake de-botleneckg projects of the refiery process units to obtain additional inexpensive capacity, improved efficiency and operaon wprove boiler ad furnace efficiencies, maximizing available preheat, etc.). Could obtain 20-30% inexpensive additional capacity from debottlenecking. I (f) Diligently work toward reducing refinery opeati costs. J/ the con pledon ofir rpo1, de refinery is undMAS ewl projects dte mwntioed In de rqut, lucuain addiWond tak, new preoning una (Amine Srubber/Am eoe st), medwo boiebr Inaimuenten, ad stue for d,-botknckng. - 14- 1.41 If the refinery improvement ideas could be implemented, the cost comparisons in Annex n1 would change. Also, the Government could negotiate that the Texaco Refinery import products at a more favorable FOB price than the Tex-Trader Caribbean posting, i.e. the low of Caribbean posting which is a commonly-used FOB pricing basis. Checking a number of Caribbean posting during 1988, Tex-Trader posting were 0 - $1 .261Bbl. higher than the low of posting with averages of $.42 - $.631Bbl. higher. Therefore, both the "Import Products" and *Refinery Crude"cases could be improved by at least $.42/Bbl. The comparison shown in Table 1.7 uses an average of the three pricing cases shown in Annex I and adjusting both the 'Running Crude" and 'Import Products' cases to reflect the possible refinery improvements (paragraphs 1.40(a) - 1.40(f)) and to import products at $.42/Bbl. less than today's arrangement. 1.42 The above cost comparison now indicates that running crude in the Refinery would save $1.0 million/yr. in foreign exchange as compared to importing products. However, on total costs, the 'Running Crude' case is more costly by $2.3 million/yr which is essentially the difference in the amount of after tax profit. As before, this comparison does not include the one-time expenses associated with the 'Import Products" case of $1.0 million estimated for moth-balling the Refinery process units and $0.5 million estimated for cleaning the crude tanks and making the necessary piping changes. With the current income tax rate of 46%, the Government of Honduras will also benefit considerably from a more improved and efficient operation of the Refinery. Some of these benefits will generate income that is not available today. 1.43 The initiation, completion and operation of the refinery improvement ideas outlined in paragraphs 1.40 (a-f) requires a stable, and fair agreement between the Government of Honduras and the Texaco Refinery with incentives to accomplish efficiency and penalties for inefficient operations. There is no present formal arrangement covering profits for the refinery. The profit allowed of 10,00OK Lem- piras/year (before tax) is on an ad-hoc basis and there is no assurance of profit remittance rights. The urrent arrangement does not reward efficiency or improved operation. With an aura of uncertinty and no incentives for improved operation, no long range planning or needed investments are hitherto being done or undertaken. 1.44 The current profitability of the Texaco Refinery requires fiurter clarification. Based on a 5,400K Lempiras after tax profit and a net capital employed at the end of 1988 of 34,886K Lempiras (excluding the intercompany payable to the Home Office representing unpaid product imports), the nominal return is 15.5%. Tbis is based on an exchange rate of 2 Lempiras/U.S.$. The U.S. dollar reurn would also yield 15.5%. However, during the past three years, a "parallel market" exchange rate has been used increasingly for remitting U.S. dollars abroad. Using the same set of basic data from the above calculation, the Mission calculated the returns at a 4 Lempiras/U.S.$ exchange rate (except for plant, property and equipment which remained at the 2 LempiraslU.S.$ rate, the historical exchange rate). On this basis, the reurn in U.S. dollars decreases to 9.8% shown in Annex m. This is an unacceptable return for the private sector investor if he must invest in foreign currency and take revenues in Lempiras. - 15 - I-ble J.9: COST COIIPAISON OF RUNNIG CRUDE OR IMPTING PROOIJCIS AND ADJUSTING RESULTS TO REFLECT IMPROVEENlTS IN EACH CASE (f millions) Run Riport Run Crude vs. Crude Products lport Products Total Costs, Exc. Duties& Taxes & Gov't. Surplus - 123.8 113.7 10.1 Total U.S. S Costs f 113.2 106.9 6.3 1. Improve Salable Prod. Yield (1.9)w *-- (1.9) by 2.5X(300 8/Dx365xS16.92/S). 2. Added F.O. Tankage: (3.90 S/LTx 1.745 x 140-60) (0.80W C1.1)W 0.3 6.7 60 Added Clean Tankage: Dead freight premium=S2.09/8. (4.1) (4.1) 3. Rnprove netback for export Fuel Oil (6131(B x 2 5/8) (1.2) ... (1.2) 4. Fully utilize all flexibility under crude contracts:(Estimated) (1.2) (..1.2) 5. leprove efficiency and operation (Estsd.) (0.5) (0.5) 6. Reduce Op. Costs (S400k reduced fuel plus $200k other) (0.6) .-. (0.6) 7. Reduce Rmport Product Prices by 80.01/gal. (0.8) (2.2) 1.4 Revised Total Costs. excl. Duties, Taxes & Gov't. Surplus ' 112.7 110.4 2.3 Revised Total U.S. S Costs 102.6 103.6 (1.0) pj From Annex II (Average of the three pricing cases). b/ Based on average crude CIF cost. ./ Running crude (6131K5 export fuel oil) or iaporting products (8051S3 fuel oil demand). a/ Clean products volume is 1938 18 in "Run Crudes case. Average freight included in Refinery program to cover dead freight was $2.09/Bbl. 3/ Total costs reflect both USS and Lempiras based costs. Source: Mission estimates. Options to Increase Efficiency 1.46 As shown in this chapter, the current regulatory system established by the Government has not provided an incentive to optimize investments and economic decisions. The mission has evaluated five options to address this issue, namely: fjrg, to continue the current operation agreement under which Texaco is given a fixed after-tax profit of Lempiras 4.6 million regardless of their level of efficiency and operations. As illustrated in Annex 1, this alternative had an economic cost of about US$8-12 million in 1988. This figure will vary depending on the crude-product price differential. Additionally, this -16- option will undoubtedly be umnageable If inflation and devaluation require frequent adjustmen In the il prices. Ibis option b not favorable fiter to the Government or Texaco E. 1.47 Seod, to liberalize the supply system and, consequently, retail pnces wkh the elimination of the cumet price structure and maintain only the monitoring of the CIF prices (see Annex 1). RetIl prices will depend only on the cost efficiency of each company and will fluctuate wit Inteational prices and the exchange rate, the refiny will choose to continue operat at ax-refiany prices equal to import parity plus a thruput fee or to mothball and work as a terminal, the Governme will review the Taxation system according to its budgeting requirements (mcluding road n, and the Government could consider some tax incentives for the construction of new storage faciliies. The drawback of immediately implementing this option is the lack of adequate storage facility to avoid monopolistic operation, the need to train Government staff on petoleum operations, and the lack of foreign exchange, and the lack of regulatory laws to incentive competition in supply and distribution of petroleum products. 2 1.48 Third continue operating the refinery and induce efficiency through pricing mecham by setting up the ex-refinery price equal to a CIF parity cost formula of importing products as defined by the Government. In this option the refimery, distributors and major consumers would be allowed to direcdy import petroleum products and/or crude oil. This option would force the Refinery to operate at an optimum thruput, to import when is more economic to do so or shut down the refinery, and reduce operating costs to become profitable. Ibis option would require an agreement on profit remittance rights, and to implement a mechanism to adjust local prices to devaluation and inflation. Tle negative aspect of this option is that the clearing price (the formula CIF price) may be at times above the lowest CIF price available through bidding or deregulated markets. 1.49 E1rth under which petroleum products are supplied to the import terminals by the company with the successful Government approved competitive tender. In this case the ex-reflney price is defined by the optimum CIF bid plus duties and taxes and the terminal fee, plus adjustments for devaluation. This option implies considerable level of Government intervention. Currendy, however, Honduras does not have the staff or technical expertise to do compeitive tender arrangements. Trainin of staff would be needed in supply and transportation. 1.50 The fifth option is an extension of the current system plus remittance rights, and requires a new, formal agreement with Texaco linked to the import parity cost plus a profit formula which would provide incentives for the Refinery to invest in projects to reduce plant losses and operating costs, increase energy conservation, decrease fuel consumption and, generally, improve Refinery operations. Also, it would provide an incentive to maximize crude throughput and the yield of salable products, it would encourage the Refinery to invest in product tankage which is urgendy required. It will also I/ AddondUy, Texao WY1 condne to beficed t*h die inabty of reWng tdhepros hus ceat a levd of ncer wildy eh may hme an ew inveawnts. I/ It tok aboew 4 yea of paper wo* to a local conpany to bid a new buk oU iluinal. WM thu precedea, edhr odl conan have shd ww lnveamnt pla. - 17 - provide an incentive for the Refimery to make d-boenecking investm incmse capacity at low cost and to ensure that adequate long range planning is being done. 1.51 The negative aspects of this fifth arangement include the cumbersome admintion and iervention by the Government, and the fac that the commercW risks are taken mainly by the Govenment. 1.53 In summary, in order to increase efficiency in the proem ent and distribution system it is recommended that Texaco's Refinery operation be linked to the parity cost of imported petroleum products (option three), followed by the liberalization of all petroleum imports and the deregulation of the distribulation system, including margins and retail prices (option two). Toble 1.10: RECOMMENDATIONS ASSOCIATED VITH REFINERY OPERATtONS Recomandations Constraints Timing 1. Continue operation at Texaco Refinery/Gov't. format Start agreement nego- Refinery, provided that iaproved agreement. imptementation tiations imediately. arrangement tinked to import of alt the other recomw- parity cost are put In place. endbtfons shown here would Distributors and major consumers isprove economics. allowed to import. 2. Iplementation of profit/operational Acceptance, fair, formal After agreement fmprovement ideas: agreement between Gov't. finalized, such items - Increase salable product yield. and Refinery. would continually be - Install new product tankage. worked an and projects - Undertake de-bottlenecking and undertaken. long range efficiency proJects. - Reduce refinery operating costs. 3. Refinery to install equipment to Capital Investment. No In place one year from steady voltage and to automati- formal profit agreement signing a formal catty start standby diesel with Govot. agreement. genrators. 4. Gradual liberalization of petroleum Government mist prepare detatiled Should start imediately imports snd deregulation of local proposal including training of prices. local staff. Souree- Developed by mission. Crude Purmnent Suppl Contracts 1.54 CAP has the responsibility for purchasing the crude requirements for the Government of Honduras. 1.55 CAP has FOB-type crude supply contracts for 6,000 BbJs.Iday of Isthmus crude and 6,000 Bbis./day of Ceuta reoon crude from PEMEX and PDVSA, respectively, under the conditions of s8- the San Jose Accord. lhe tes of these contra are for one year and they are modified/extendeJ anually. CAP sells the crude to the Texaco Refinery at Puerto Cortes under term of a crude purchase/sale contract that expired on January 27, 1986 but continues to be the basis for the crude purchase/sale. This contract also authorizes the Refinery to provide the necessary freight and insurance for each cargo. Crude Tanker Sizes 1.56 The Texaco Refinery utilizes its transportation affiliate, Tex-Trader, to handle the freight and insurance for each crude cargo. The Refinery maintains, by dredging some 150,000 cubic yards per year, a safe draft at the refinery dock of 32 feet wbicb is also the current maximum safe draft of the ship channel and turning basin. This depth limits the size of the crude cargoes, depending on the dead weight tonnage of the vessel, as shown in Table 1.11. Vessels larger than a GP class would have to be light- loaded in order to arrive at a safe draft of 32 feet. Table 1.11: TANKER SIZES AND TYPICAL DRAFTS Typical Tanker Atra Categpry Typical Fully-Loaded Category Class Range, KDWT SIZES, KMDW Draft, Feet Gwneral Purpose GP 16.5 - 25* 19 - 22 31 - 33 Nediun Range MR 25 - 45 35 - 38 36 - 37 Large RangeV-I LR-1 45 - 80 t 45 S so 39 - 41 a Tankers in this category are normally of the 19 - 22 KDWT size. b Tankers with sizes between 25 - 32 KDVT are nicommn coupered to availability of the 32 - 50 KDWT size. ource: mission estinates from Llovd's Tanker Register. AFRA and Worldscale System 1.57 A list of monthly AFRA's for 1988 for GP, MR, and LR-1 vessels are included in Annex IV. The same Annex includes some Worldscale flat rates for voyages associated with Honduras for both the first half and second half of 1988. Worldscale flat demurrage rates are also shown for tonnage up to 45,000 DWT. Starting in 1989, Worldscale rates are being published using the metric system (S/MI) and the monthly AFRA adjustments are being quoted for a much narrower range of vessel sizes (MT's). For this study, all references to AFRA and Worldscale were based on the system that was in place for 1988 and for which all the data is available. Crude Freight Arrangenen 1.58 The Refinery requests that CAP arrange for crude cargoes of 180,000-220,000 Bbls. (about 24,000-29,000 LT, depending on the crude). This requested cargo size is basically between two normally-sized tanker categories with ship availability typical of 19 -22 KDWT in the GP category and 32 - 50 KDWT in the MR category. As a consequence, tankers of 32 - S0 KDWT sizes are being used - 19 - with resultant dead freight charges. However, using MR vessels with their lower freight rate and incurring up to 6,000 LT of dead freight Is essentily equal to using fully-loaded GP vesels with their higher freight rates. Tex-Trader has a dead freight costing formula for using MR vessels that limits the amount of dead freight that can be charged. The total MR vesse freight rate cost (mcluding dead f*eight) would never exceed an amount it would cost if the cargo had been delivered on a GP vessel. Therefore, the present arrangement of requesting 180,000-220,000 Bbls. cargoes and the use of MR vessels with the current dead freight formula should be continued to take advantage of the possibility of using the MR vessel, when available, with lower freight rates, but never having to incur dead freight charges greater than if the total cargo was transported on a GP vessel. 1.59 The current Tex-Trader crude freigbt contract for Honduras is a good amngement. The advantages can be summarized as follows: (a) Tex-Trader is a large organization with its own and chartered tankers as well as access to other shipping to ensure obtaining tankers when required. With only 336kB of available crude tankage in the Refinery (two tanks) and after deducting the seven days required cushion for replenishment (3 day loading range, I day loading, 1 day discharging and 2 days settling) there is only another six days supply available after providing space for a 180kB cargo (or three days supply when importing a 220kB cargo) and operating at maximum crude thruput. Consequenty, it is critical to be able to provide a ship in the required date range. (b) If the tanker market became tight, being with a major oil company with its own fleet would be beneficial compared to total reliance on spot market availability which, even today, is a relatively thin market. (c) Freight rates are based on Worldscale system with AFRA adjustments. The AFRA system is based on actual average chartering costs incurred 15 to 45 days prior to the month used. Therefore, it does reflect the level of the actual tanker market, although it is a slightly delayed reflection. (d) Dead freight costs, associated with MR vessels, are limited to the rate of using a filly loaded GP vessel or less under the present costing formula. 1.60 It is recommended that the current crude freight arrangement be continued at this time. 1.61 The Texaco Refinery advised that the Port Authority for Puerto Cortes has long range plans to dredge the ship channel and turning basin to a 38 feet safe draft. At that time, the Refinery should review the economics of building an additional crude tank and, also, to keep the dock dredged for a safe draft of 38 feet. The annual savings in freight costs, using light loaded 50k DWT's, should be more than adequate to provide an acceptable return for the investment. Under today's operating -20- arangement, such savings would pass to the Government of Honduras via an increased 'Excedefte'. Any new arrangement must include some incentive for the refinery to make this type of investment. Flexibility and QOtimization of Cmude Procurement 1.62 CAP indicated that they have agreement from PDVSA for considerable flexibility under the crude supply contract regarding types of crude, recon components and the amounts of each but holding to the total availability of 6,000 barrels/day of recon crude. Only receny the refinery has been made aware of this flexibility. Since the refinery has a good computer optimization model, the Mission recommended, and the refinery has agreed, to run this program each time there is a significant change in crude and product prices to determine the most economical feedstock composition. 'he refinery then advises CAP who, in turn, determines if PDVSA would supply the proposed composition. Since April, 1989, the Venezuela recon crude has been optimized and has included at least 1.0% butane (based on a verbal recommendation by the mission) and changes have been made in other components as well. 1.63 If these optimizations had been implemented in 1988, Honduras would have saved $26OK/year in LPG product imports costs for each 1.0% butane recon component and $986K/year if mar crude had been substituted for Ceuta crude (Based on prices as of November 15, 1988). 1.64 Operation under the present crude supply contracts offers an opportunity for optimizing crude choice (Venezuelan or Mexican crudes) which the Refinery has the capability of doing through use of its computer optimization model. When the Refinery is operating at capacity (12,000 Bbls./day), there is no choice to run Venezuelan versus Mexican or vice-versa except for optimizing the composition of the Venezuelan recon. However, if the Refinery is having operating problems and is running less than 12,000 barrels/day, the optimum crude to be maximized can be determined and the Refinery should prepare their running plans accordingly. Computer programs that were run using prices in effect for February 25, April 8 and July 7 (all in 1988) all concluded that Isthmus crude was the most economical choice. Although the refinery requested more Isthmus crude, CAP deliberately changed a couple of the cargoes to Venezuela recon because of the 60 credit terms with Venezuela (versus 30 days credit with Mexico). This costly decision was due to lack of sufficient foreign exchange when needed. 1.65 In 1988, Isthmus crude only made up 42% of the crude charge that averaged 8,518 Bbls./day when the Isthmus crude should have made up 70% of the total. Ibe annualized computer program results for April 8 and July 7 cases indicates that the Government of Honduras lost an opportunity of increasing the amount of their differential (profitability) by 11.3 million lempiras and 15.1 million lempiras, respectively. 1.66 The annualized computer program also calculates the total U.S. dollar outflow for each case. The annualized results for the April 8 and July 7 cases indicates that the actual operation versus the optimum, cost the Government of Honduras some US$5.7 million and US$7.3 million in foreign exchange, respectively. Of course, these two sets of results are annualized, offering limited data and the programs were not run each time a recon component, crude or product price change took place duing the year. However, there is no question about the overall conclusion that Isthmus crude should have been -21- maximized; only the exact madtude of what I cost the Govenment of Hondu is difficut to dermine. This demonsta that Government intervention on operation Issues Is far fom efficient. It I reommended that the Refinery be kept up to date ngarding prices on all crudes and recon componen ad that the computer program be run each time there is a significant chage in product or feedtock prices. 1.67 A smmay of the recommentions associated with crude procement and the iming of their inplementation is shown below. Tabte1.12 REI CNhDAT IONS AM TIMING SUSAY Recomeendations Constraints Timing 1. Optimization of crude choice by one Has now been iqptlented. coqiuter to maximize mast economical crude after each significant crude or product price change. 2. Continuation of the current crude None continue present contract freight arrangements. this time. 3. Uhen Goverrmnnt dredges ship Gov*t plans Long term. Requires Refinery hannel and turning basin, Refinery to iqirove to have incentive for now tank to maintain dock at 38 ft. and port. construction in their operating build additional crude tankage. ageroent with 0verment. Source: Mission developed. Finished Products r t Supply ContrS 1.68 The Texaco Refinery bas a finished products CIF purchase agreement with Tex-Trader that covers the supply and transportation of refied petroleum products delivered to the Texaco Refinery installation at Puerto Cortes. The conta is based on Tex-Trader Caribbean postng and payment within 60 days with financing charges for the second 30 days. As of October 1990, the Refinery was the ondy teminal available in Honduras to import these products. Asphalt, Avgas and LPG are imported by others, in small parcels, through their own limited facilities. The arrangement being used by the Texaco Refinery for importing finished products has been acceptable to CAP since there ae no other cumrt altenatives to insure hat the product shortfall will be continuously covered. Tbis sittion should changc once the new terminal in the port of Tela is operational. -22 - E,Fd 6zFr 1.69 The lack of product tankage at the Texaco Refinery allowed cargoes of up to about 90,000 barrels during 1988. As a consequence, the freight element in the CIF price for the products is high as It includes dead freight and multi-port discharge costs, even though it is based on Worldscale AFRA adjusted rates. In June, 1989, due to a last-minute cancelled crude cargo (ack of fbreign exchange), an urgent product import was made with only 59KB and incurred a freight rate of $25.81/LT. Emergency product imports are developed outside the normal shipping plan by Tex-Trader and do not benefit from shared transportation to other Texaco locations. There was about 65% dead freight on this shipment. Other Issu Involving Products 1.70 New Terminal at Tela. Because of the need for additional product tnkage and a desire to have another product import terminal, the Government of Honduras has set up a list of cumbersome prerequisites for any party wishing to construct a marine terminal for the purpose of importing finished product shortfalls. One such terminal has been constructed by Dippsa at Tela. While the participation of other parties in petroleum product imports is a positive step, there are several items included in the list of prerequisites that need modification, such as: (a) The amount of required storage is stated to be 230-250k Bbls. distributed in such a way to allow importation of each clean product produced by the refinery plus aviation gasoline. The terminal being constructed at Tela originally involved 9 tans with a total installed capacity of 226 K Bbls. As shown in Table below, that tankage configuration would only pernit cargoes of 125k Bbls. with every third cargo of 132k Bbls. This is based on the 1990 (Scenario I) demand and with the refinery operating at capacity (12k BID). A lower than capacity crude rate and/or the higher product demand in later years would reduce the permitted cargo size even firther (in 1995, a cargo would be required every eight days with the tankage configuration shown in Table 1.13 with a maximum permitted cargo of 81k Bbls.). At the minimum 280k Bbls. of total tankage is required. With such tankage, the permitted cargo size in 1990 could be as high as 194k Bbls. and in 1995 the cargo size could be 153k Bbls. CAP advised the Mission during the last visit that two additional tanis were being constucted that will bring the total installed tank capacity to 280K Bbls. Their sizes were not made known to the Mission. (b) Tbe required import volume must be made in 180,000 Bbls. cargoes. Tbis is an odd- sized cargo. A fully loaded GP vessel (19-22KDWT commonly available size) would be more practical to insure no dead freight with cargoes of 150-168 k Bbls. (c) All offshore product purchases, ocean freight and insurance to be done through the offices of CAP. At this time, CAP does not have the expertise to handle this. A knowledgeable supply and transportation person with industry experience on all aspects of petroleum product quality will be needed. In addition, such a person would have to coordinate all the local marketers purchases from the refinery and from any third party -23 - terminal to insure that sufficient ullage in all products always exists at the Refnery so that maximum crude runs are always maintained. (d) Ile prerequisites, as written, infer that a new terminal would be handling the Import of all the products shortfall (quantities not produced by the refinery). Since the refinery has product tankage (although limited at this time) and currently handles all product importations, the refinery should also be considered as a viable product importer too. If the Refinery builds additional tankage so that fully loaded GP vessels could be used, they must also be considered as a legitimate import terminal. This wIll insure that Honduras is receiving its finished products at the lowest CIF prices. (e) The prerequisites, as written, do not adequately cover the very important subject of product quality. As mentioned in (c) above, product quality must first be addressed in the offshore acquisition of the products. Then, again when the products reach Tela aboard a vessel (in-transit contamination). The Mission understands that only one receiving line is being constructed and without pigging installations. The receipt of products into PetroTela tankage will involve some product contamination (with or without pigging). With pigging, there would be a small amount of product downgrading which would be manageable. No provisions are being made to check product quality on- shore. After receipt of products into PetroTela the handling and blending off of the batch interfaces bas not been considered. Normally, the major product distributors will not lift products from any terminal without full assurance that all key specifications are within the proper limits. The laboratory testing results and analyzes of eah tank ready for delivery must be available to all distributors before each product is loaded for sale to the consumer (quality certificates). (t) The contract, which was submitted to the Congress for its approval, places the CAP as exclusive buyer for products, thus promoting furtier Govemment intervention. (g) The contract, as written, guarantees a terminal margin. This will not give any incentive to be efficient; sucb pratice sbould be discontinued under the libeaization of the petroleum market. -24 - table 1,.3: TANKAGE UTILIZATION AT TNE OPOSED PETROTELA - 199w) ki Net Total Tank Losu Tk. PWeble Days / Days Prodct Shortfall,B/D Cap.,KB Btn.,KB Cap.,KB swty Cushion sqply 95" Nos 400 21.0 1.5 19.5 49 7 42 UNoas 833 42.0 3.0 39.0 47 6 41 KeroseI n 200 10.0 1.0 9.0 45 7 38 Jet Al 1,287 42.0 3.0 39.0 30 9 21 Diesl 4,005 101.0 6.5 94.5 24 6 18 IV Awn 120 10.0 1.0 9.0 75 9 6 Totat 7,071 226.0 16.0 210.0 2 cargoes: (7,071 - 120) x 18 ds 125K Obts. I cargo : (7,071 - 120) x 18 day (120 x S4 days) 132K bl. t Not including the two new tanks 54KB (size and service of each not spacifled), Product shortfall with refinory qperating at capacity (12 KBID). I/ Cushion coaprised of a typical 5 day loading date rangoe, I or 3 days for settling and testing (3 days for aviation products) and I day shutdown of tanks when receiving cargo. If more than one tank in service the I day shutdown to receive cargo is not necessary. t Diesel Is limitinr product at 18 days (i.e., an import is required every 18 days). ourca: Nission estimates. 1.71 Petroeum Prducts SaLe Caacit for Future Demand. Honduras will require new storage capacity in the next five years. The failure to add new capacity may bring some disruptions ad may hamper the entace of new compies into the importation of products. Essentily, all of the bulk product tankage in the country is located at the Texaco Refinery, and PetroTela in the future. As the table below shows, there will be 12-29,days supply of clean products in 1995 (assuming no C o mi nation of products nor problems of foreign exchange) and up to 36 days supply of fuel oil. 'Me rinery is constucting 60k Bbls. of clean product storage which would add another 5 days supply. While this capacity is adequate to supply the country with 2.5 cargoes per month, it is inadequate to sutain any seious emergency or delay; additionally, and equaly important, the lack of storage capacity may preclude new competition derived from companies inrested in importing petroleum products, from eonr into the market. Iabl j.1j: TANKAGE CAPACITY FOR SELECTED PlROLEUM PROI4CTS (1995) Net net Tankage Unmafl able Avl lable 1995 DeYs Required Deys capacity Capfaty Cawpity Dmwd suply Cushion Suply KBS K8L KUBL$ B8LJD Days 9S R NOas 55 S.3 49.7 2,611 19 7 12 sr a Nos 72 6.8 65.2 1,m80 36 7 29 Kerosene 24 2.5 21.S 1 074 20 7 13 Jet A-1 72 5.8 66.2 2,307 29 a 21 DOesol 237 13.9 223.1 12,572 18 6 12 Fuel Ofl 112 6.7 1fLJ 2 42 6 36 s Nisfon estimates. -25 - 1.72 The location of the present storage (Texaco Refinery) and the proposed terminal (Tela) is away from the large consuming centers (Tegucigalpa and San Pedro Sula) and, therefore, not ideally locatd for national security. To improve this situation, a clean products terminal should be evaluated to be constructed in San Pedro Sula and be supplied by pipeline from the Texaco Refinery. This would put the new storage at one of the major consuming centers as well as placing the new tankage in route to the largest consuming center. Such a project should be considered by the Government of Honduras to be developed by private investors. It must be accepted that adequate emergency product supplies and their associated facilities are a costly undertaking and are usually financed by a surcharge passed to the consumer. However, in this particular case, the possible terminal in San Pedro Sula, supplied by pipeline, would eliminate road transportation costs now being incurred and this would provide a portion of the overall costs. Summary of Recommendations. Constraints and Timing 1.73 A summary of the recommendations associated with product procurement and the tming of their implementation is shown below: Table t.l5: RECoWMENDATIONS AND TINING StUMARY Recoamendation Constraints Timing 1. To strengthen regulation and Lack of expertise In Head to hire and train enforcement for new marine CAP to handle coordination a supply nd transportation terminals i.e. 2MdWuct ltv and technical role specialist with product uea p ize. safet . CAP to stipulated in prerequisites. quality expertise. advise iport needs and that ne Terminal does not have excLusive supply rights, rather, the new terminal's operation should be stbJect to cospeti- tion with Texaco's facilities. 2. Review project associated Ability of investors to obtain Long Term. with proposed new terminal fds an support to undertake in san Pedro Sula (Supplied by project for national security pipeline). Determine cost and purposes. econmices. Say"f: Nission developed. -26 - II. ALTERNATE CRUDE AND PRODUCr SUPPLY POSSIBILITIES 2.1 The various crude and product supply and transportation possibilities reviewed in this chapter are shown below. TALE W CRUDE AND PRWCT SUPPLY AND TRANSPORTATICN ALTERNATIVES SUPPLIES TRANSPOTATION Crude Products Crud. Products 1. Current arrangement Current Arrarnement Current Arrwowent Current Arrgement using San Jose Accord purchasing from with Texaco. with Texaco. crude at Texaco Texaco at Tex-Trader Refinery. prices. 2. Spot market crude Spot mrket import Spot market for crude Spot market for through Texaco Refinery. through Refinery. Tanker. clean product tonnwae. 3. Term Arrangement with Bidding term arrange- Bid for voyage/term Bid for voyage/term OiL Producing cowntry nent by the coverreent arrangement with arrangement with for Texaco Refinery with major oil major oil coqmies. major olI or third party. companies or other coFan iss. suppliers. 4. Processing crude at Products availlbe from third party Refinery. processIng crude at third party Refinery. S. Liberalization of Arranged by each coepeny Product lIports. uvdr an sgreed freisht formula or provided under a pooted arrangement. Swim: Developed by Nission. ECliminatioil of SEupply and TjX9dw bsibuilies 2.2 There are certain crude, product and transportation possibilies that require discussion and then will be discarded because of teir impracticality in transporting and ptoviding supplies to Honduas at this dme or in the fiture, as follows: (a) Spot Market Crude Srmlies. he crude spot market is usually an availability in large quantities or on large ships that would require lighbting. Small refinesie have limited flexibiity to handle the variety of spot market crudes available with no opportunity to blend for a more constant quality fedstock. Plant design of most small hydrokmming refinies is highly heat integrated which requires feedstock similar to their original design. Quality of spot market crudes is quite vaied. Sulfir, vanadium and salt cone as well as whether the crude is basically naphthenic or parfiic could bea factor that would not allow the crude to be rn at a particular refinery from a unit process or -27 - product quality standpoint. The limited crude tankage in the Texaco Refinery results in providing four (4) days supply in addition to the normal replenishment three (3) days cushion and would require that the crude be available and arranged for with esntially no room for delays. Also, in times of tight crude supplies, the spot market disappears. Therefore, the basic variable nature of spot market crudes offering acceptable qualities and the need for precise scheduling eliminates this supply possibility for the Texaco Refinery. Tbe possibility of benefits of the spot market price could be completely offset by the need to lighter. Even if the Refinery has additional crude tankage in the future, there are too many other detrimental factors to consider the spot market as a suitable, adequate and assured crude source for Honduras. It is recommended that crude supplies from the spot market not be considered further. (b) Term Arrangements for Crude Supnlies. The possibility of purchasing crude under a term agreement from an oil producing country, either for running in the Texaco Refinery or for third-party processing, has less advantages than purchasing crude under the terms of the San Jose Accord. The advantages of using San Jose Accord crude are as follows: Security of crude supplies should be considered better than term arrangements, which are usually for one year, because of the general concept/philosophy of the San Jose Accord in which the supplier countries have agreed to provide crude as general assistance to Caribbean/neighboring countries. - Generally, prices for term crude supply contcs are essentially the same as the prices being used under the San Jose Accord. - Purchases under the San Jose Accord allow long term (15 year) loans at 6% interest for up to 20% of the purchased value. Honduras has utilized this benefit. - In the past, Venezuela and Mexico have allowed countries purchasing San Jose Accord crude to have it processed at third-party locations as long as the country receives the resultant products. - Consequenty, term aragements for crude supplies will not be considered fiuther. If crude is required as the least cost option for processing in the Texaco Refinery or by a third-party, only crude supplies available under the terms of the San Jose Accord will be considered. (c) Crude TCnrtatirL Cfude transportation is discussed in detail in pragraphs 1.53 and 1.54 and concludes that the current freight arrangement with Tex-Trader is the reommended method at this time. No firther consideration will be given to utilizing the Spot market for crude tankers. A bidding arrangement with the major oil companies by voyage or on term is a possible long term option for crude transportation and is discussed below. - 28- (d) . lbe cu t product tankage in the Texaco Refnery is very limited as discussed before. Therefore, ships must be chartered for a specific fixed loading range date with very litde opportunity for flexibility to change this date range without affecting the cargo size or causing a product run-out. The ability to charter GP sized clean tankers on the spot market for such a precise schedule would be risky. The spot market for clean GP vWessels is a thin market. Owners of many of these vesss will not transport leaded products and this restriction is being used more and more making the availabiliy of suitable tankers on the market even more scarce. With the present amount of product ankage at the Refinery, product import voyages will incur considerable dead freight on GP sized vessels. In 1988 when the crude charge was only 8.5k Bbls./day, import parcels of up to 90k Bbls. were possible. On three voyages reviewed, the average dead freight paid by the Government amounted to $37k per vessel. However, another $lOk per vessel could have been charged if Texaco had not utilized the same ships on multi-port dicharge voyages. With the refinery operating at capacity, import parcels will be 55 -70k Bbls in 1989 with substantially higher dead freight costs. Because of the need to fix a vessel to a very precise loading schedule, the leaded products restrictions affecting availability of GP clean tankers in the spot market and higher dead freight charges without multi-port discharge possibilities, it is recommended that clean products tansportation not ry on the spot market. (e) So Market Educl Snu ies. Products available on the spot market are offered in full cargo lots which can not be considered by Honduras. With limited product tankage at the Texaco Refinery, part cargoes of three or four products wih specific qualities have to be arranged with assure of anilability and with very little flexibiity in the required loading dae range. Therefr the spot market should not be considered as a source for Honduras product import needs in the short term. Poesssing Crde at Third Part Refinry 2.3 In Annex V, the possibility ofpurchasing crude under the San Jose Accord and processing it at a a third party rfinery (Curacao) was reviewed. For comparative purposes, four cases were developed. Tbe Base Case ren the aurent opeation of the Texaco Reinery with all product impors at Tex-Trader prices and a dead freight prmm. These prices are an averge of those used in the three cases in Annex 11. Cases I and 11 are based on processing two crude slates in Curacao and using Tex-Trader prices on all shortfIll product purchases. Crude btnsported on 50 KDWT tankers and the products to Hondura on fully loaded GP's. Case m represes a product import case (refinery is shut down but opeaes as a terminal). A smmary of the Annex V cost comparison cases is shown below. These ca are only intended to indicate directional results. -29 - Tbte- 2.j: SWIARY OF COWPARATIVE COSTS OF PETRMOEI suPLY CASES (Excludes duties, taxes, and surplus to covet) (K Dollars) Base Case Case I Case 11 Case III Texaco Refin.ry Curacao Refinery Curacao Refinery l port Products Run S.9KVD Isthaus 6.0X8/D BCF 24 6.0KB/D Lagotraco direct to Texaco Run 6.0KB/D Ceuta Recon 5.9KB0/ lsthaus 5.9KB/D lstimis Refinery on full Current Product laport Shortfall Products Shortfalt. Products GP vessels. Arrangemmnt Purchased at Tex-Trader Purchased at Tex-Trader Products purcha- sed Tex-Tradbr Posting Posting Posting Total Costs (a) 124,973 (b) (c) 110,365 (b) Xc) 117?316 116.158 (a) Crude and product prices are average of the three cases showm in Annx 1. (b) Processing arrangaent includes $1.25/B processing fee delivery of 95 *slabte product yiteld and a minor product exchange based on value (1.3 ObIs. F.O. per 1.0 86b. diesel and 1.2 3b61. diesel per 1.0 8bt. 95P Gasoline). (c) Crude transported to Curacao on 50K DWt tankers. Products transported to Honduras on fully losded GP vestels. 11oure: Nission estimates. 2.4 lhe results of these cost comparisons, indicate that processing a heviler than present crude at Curacao is kdirectionall* the lowest cost case. The processing crude at Curacao aes are intended to give only directional costs since the exact unit processes that would be used and the restt yields may be different than those assumed. However, even another $O.50/Bbl. procesing fee would only add another $2.2 million to the overall cost. Additional crude combinatons could have been worked using lower priced crudes that may be more sitable to the conversion equpmem available at Curcao. More familiarity with the Curacao Refinery was needed as well as knowing what other tpes of crude PDVSA would be willing to supply under the San Jose Acoord. Tbe heavier cheper crudes would result in tie least cost cases. Each of the cases could be improved somewhat, with the Base Case having the largest possible improvement potential, as shown below. - 30 - Table 2.3: POSSIBLE IMOVEMENTS TO ALTERNATE SUPPLY CASES (K Dollars) (K Dollars) aeCaso Casso Case I Case a I 1. Products purchased at S.01/gal. less than today 814 548 551 2,213 2. Texaco Refinery to lrprove eatable yiold to 95.5X. (valued at average crude price) 1853 3. Additional clean product tankge to allow use of full OP's. 4050 (Dead freioht Premiwum2.09/0) 4. Additional fuel oil tankage to allow exports in full tP's. 828 S. Improvemnt in optimizing available feedstock from Venezuela. 1246 (a) 6. Improve outlet for F.O. export (Est. a $21). 1226 * 7. Reduce Operating Costs, (Est.) 600 TOTAL COST REDIICTON 10.617 548 551 2,213 TOTAL COST FRON TABLE 2.2 1293 110. 11731 116.1 TOTAL COST AFTER IMPRVEENTS 114,356 109 81 l6o 13 9M (a) Exmple: 1X butane spike would sve $26OK/yr. Runing Lamar crude would be $986K/yr. more profitable to Nonduras than ruinr Cet crul In 1988 (lov. 1988 prices). 2.5 After these Improvemen adjustments, the Base Case is es ally the same cost as Importing products (Ce m11) but not as economical as processing the heavier crudes in Curacao. The overall difference betweon operating an improved Texaco Refinery or procesing at Curacao is $4.5 million/year. This may not be justified when consideing any political desirability of keeping the Texaco Refinery operaing (provision of jobs, total payroll effects on Puerto Cortes, etc.). It is recommended that conversations be held: (i) between CAP (together with a petroleum specialist) and PDVSA regading a wider choice of crudes under the San Jose Accord and (ii) between CAP (together with a petroleum speciist) and Maraven regarding possible procsing at Curacao with a need to obtain yields from vario crudes and assodated product pricig. The processing at Curacao cases can then be evaluated more accely. Term emont fag Product PurebaWe 2.6 lhe current arrangement for purchasing the product shortfal for Honduras is basically a term contract at Tex-Trader Caribbean posting. This contrt (between Tex-Trader and the Texaco Refiey) should be improved by the intervention of CAP requesting that the FOB products price be changed, to perhaps as much as the Low of Caribbean posting. Ibis should be done immediately and represents about all CAP should do in the short term. - 31 - 2.7 Caribbean posting should be the basis of FOB product pricing into Honduras. For the fint 22 cargoes of clean products imports in 1988, the Texaco Refinery compared the CIF product cost using the mean of U.S.Gulf prices (adjusted for quality and volume) with the actual CIF product cost using Tex-Trader Caribbean posting. After 1,844,375 barrels of product ($41.5 million), the actal CIF costs were $58k lower than if the mean of U.S. Gulf prices and a U.S. Gulf source had been used. Consequendy, U.S. Gulf prices should not be considered as an altrnae pricing basis for Honduras but rather the mean or low of Caribbean posting should be the basis. The Esso postings should not be included with the Caribbean posting since they are higher being based on product availability at the Bahamas (outside of the Caribbean). 2.8 When CAP has a well-trained Supply and Transportation (S. & T.) Coordinator in place, there may be some advantage to submit requests to the major oil companies and other suppliers, such as Maraven, Trintoc, Petrojam, etc., to bid on six month or, more preferably, one year supply arrangements. Usually such agreements tie their prices to price changes with Caribbean posting or U.S. Gulf prices. The term arrangement allows the supplier to be able to arrange for the needed crude to produce the products required under the contract and, the longer the term, the firmer the arrangement is likely to be with the best pricing. CAP can not enter into such arrangements without a qualified S. & T. Coordinator who is able to analyze bids, understand and be familiar with product quality and the value and importance of each specification. Therefore, it is recommended that CAP employ the highest qualified S. & T. person available and insure that he receives further training in S. & T. matters. Annexa VI lists the details of the job description for the S. & T. Coordinator. Ywa ArmgMentos lrCrude IrrDOnation 2.9 The recommended crude freight arrangement at this time is the one that exists today. However, when CAP has a qualified S. & T. Coordinator in place, it may be worthwhile to consider requesting bids from all major oil companies for a term freight arrangement (one year). With present crude tankage, the only hope for benefits would be from the possible alignment with a company that could provide more tankers of the 25-32K DWT size and, thereby, improve the freight rate (ess dead freight). On the other hand, the present arrangement is a good one and may not be worth jeopardizing. Arrangements for crude freight by voyage should definitely not be considered at this time because Honduras would be uncovered with regard to any transportation commitment during an era of limited crude tankage (ittle or no flexibility in providing tankers on a specific date range and needing a major oil company's commitment on the use of their fleet and their access to other shipping). 2.10 In the long term when CAP has a S. & T. Coordinator and additional crude tankage has been constructed and the Refinery's dock is at 38 feet (after the Puerto Cortes Port Authority dredges the ship channel and turning basin to 38 feet of safe draft), it would definitely be advantageous to Honduras to request yearly bids for crude transportation from all the major oil companies. Yearly arrangement undertaken by the oil companies also allow them to plan their total chartering needs which reinforces their commitment to assure coverage. Such an arrangement would provide Honduras with the most economical crude freight cost while providing the assurance of coverage when needed. Even with additional crude tanage in the long term and with a S. & T. Coordinator, it is not recommended to consider arrangements -32 - for crude freight by the voyage. During tight aker market conditions, there is no commitment to aure coverage which b a very important fctor for Honduras. 2.11 At the presetime, clean products freight should continue to be provided by Tex on the prese AFRA adjusted Worldsce bais, allowing Texaco to use its own or long term chartered vessels and with the possibility of economizing when having multi-port discharge voyages. 2.12 When additional product tankage has bee constructed in the Refinery and/or another third party marine teminal is availabe on the North Coast, fully loaded GP-sized tankes can be used. With CAP's S. & T. Coordinator in place, CAP could mange for yearly bids from all the major oil companies to supply coverage for Honduras. This would be a very economical way to obtain the required tonnage and have assurance of coverage. Under such arrangements, the major oil company has the opportnity to inciude the Honduras requirement with their own in order to fix their total in-chartering needs. This would result in the most economical coverage. 2.13 When there is additional product tankage in the Refinery and or another third party even with a S. & T. Coordinator, CAP should not consider arranging product transportation on a voyage by voyage basis. There is too much risk being able to fix a tanker when needed and, over the long term, the freight rates would probably not be compeive with a term arrangement. Also, a voyage by voyage arrangement would most likely involve brokers whose fees are 3% and higher. Therefore, it is recommended tiat biddable term arrangements be used in the longer term (when additional product tankage is available) and not to rely on voyage by voyage coverage. 2.14 This option coincides with the recent economic policies adopted by the Government, particularly monetary policies. Under this option the Government would strengthen its regulatory capacity to allow the free importation of petroleum products, and consequent deregulation of retail prices. As a reslt: i) the price will depend on the cost efficiency of each company and will fluctuate with the Interntional price and the exchange rate; ii) the refinery would chose either to continue operating based on maket conditions or convert the crude tankage to clean products; iii) as the market grows, new companies could enter and compete in the market; and iv) the Goverment would review the petroleum taxation system according to requirements at the exchequer. The major constrain to adopt this measure in the foreseeable future is the lack of tanage capacity (an entry barrier), foreign exchange restrictions, the lack of laws regulating the rental of sorage facilities to other parties and Government staff experieace in petroleum operations. The use of Goverment approved pooled competitive tenders could be done in the medium term after training of Government staff. -33 - Imoroved Freight Rate fr Fuel Oil Exports 2.15 Fuel oil exports are transported as backhaul on ships that have just delivered cude to the Texaco Refinery. Backhaul freight should be very cheap freight. It is recommended that CAP (together with a petroleum transportation specialist) negotiate a fair backhaul rate with Tex-Trader in order to improve the fuel oil net-back to the Texaco Refinery. Summa gf Recmmendations. Constrait and Timing 2.16 A summary of the recommendatons associated with alternate crude and product supply and transporttion possibilities and the timing of their implementation is shown below. Table 2.4: RECOIIENDATIONS AMD TIMING ShWIMY Recomwendatfons Constraints Timing 1. Spot market not be considered for crude supplies. None Immediately. 2. San Jose Accord term arrangement for one Immediately. crude is proferable over ail others. 3. Spot market not to be considered for product suppties. gone Imnediately. 4. CAP and POVSA should hold talks to determine total Need petrolaen As soon as petrolte choice of crudes avaflable under San Jose Accord for specialist to specialist avafleble. third party processing. assist in talks. 5. CAP and Naraven (Curacao Refinery) should hold Need petroletu As soon as petrolem talks to obtain yield data from various crudes, specialist to specialist available. processing fee, total recovery and product prices assist in talks. for a possible processing arrangement. 6. Continue operating Texaco Reffnery with new 60v't. Need to negotiate new As soon as new :onduras agreement on profit and remfttances linked agrement agreement in place. to fmport parity cost. T. Spot market not to be considered for crude None lumedfately. transportation. S. Voyae by Voyage arranoements for crude transportation None Inedfately. should not be done in either the short or long term. 9. Improve FOB pricing aspect of current product supply CAP to hold talks Shoutd start this arrangement fram Tex Trader Caribbean posting to low with Texaco Refinery and imiedistety When of Caribbean posting. Tex-Trader. Short term Advisor Is advisor needed. available. 1O.Spot mrket not be considered for product transportation.Mone lImediately. 11.Voyage by voyae arrangements for product trans- None Imediately. portation should not be done in either the short or tong term. 12.Current product freisht arrangement should continue. None Immediatety. 13.1prove beckhaul freight rate for fuel oit exports by Need petroteum transportation As soon as trans. negotiation with Tex-Trader. specialist to assist in talks. speciatist avaitable. 14. To prepare proposal and requirements for VItt require short term Short term tiberalifation of petroteum imports. assistance. Sorce: Mission developed. .34- PART II lbis section evaluates the current financial system to monitor those transactions related to the importion of crude and products and proposes an enhanced system to structure the planning and scheduling at different levels. . 35 - m. CURRENT FINANCIAL INFORMATION SYSTEM 3.1 The current flow of information includes the generation of reports Involved in the purchase and sale of crude and the purchase of rdined petroleum products and lead as required for the supply of petroleum products, and the calculatio.. of revenues generated from the excedente, which is subject to changes from price variations. 3.2 Tbe main issue is the lack of planning and scheduling at different levels. The mission's proposed system will produce the requests for LOCs and their liquidations, CAP's crude and Excedente invoicing to the Texaco Refinery and will provide the BCH with monthly and annual forecasts of foreign exchange needs for the supply of petroleum products. 3.3 The remainder of this chapter shows the main bottlenecks on the current system, including the forecast of foreign exchange needs, issues in LOCs, and Issues surrounding the calculation of the excedente. Forecast of Foreign Exchange Needs 3.4 As of January 1990, the Exchange Department of the Central Bank did not prepare forecasts of foreign exchange needs for crude and finished product imports nor of the foreign exchange r6quirements from other sectors of the economy. The Mission believes that the lack of adequate planning to meet these needs is the chief contributor to the costly delays that arise and the uneconomic decisions that are taken when letters of credit are needed, assuming that there is sufficient foreign exchange available. A lack of foreign exchange even more strongly supports the need to forecast requirements in order to prioritize them against the availability of funds. According to the Exchange Deatment of the Central Bank, an attempt was made to prepare such forecasts and the pertinent information was solicited from the various sectors of the economy; however, their attempts failed for lack of cooperation. 3.5 Insofar as crude and finished products needs are concerned, the Texaco Refinery currently provides CAP with monthly import requirements of both crude and refined products for the next three months before the tenth (1O") of the month. These estimates also include the loading date range at the loading port and the expected time of arrival (ETA) at the discharge port. CAP, upon receipt of these estimates, calculates the value of the cargoes using current prices. These estimates are forwarded to the Central Bank for planning purposes according to CAP. The Central Bank maintains, however, that they do not receive these astimates. -36- 3.6 Two forms have been designed to provide the Cental Bank with annual foresb and montly updates for the next three moths of the estimated volume and value of crude and products imports. The forecsts will also include the estimated value of fuel oil exports which should be of value to the Central Bank in anticipating foreign exchange proceeds since each export parcel i worth approximately $S500k based on early 1989 prices. Annex VII shows the annual forecast format and Anne VM the monthly updates format. 3.7 The Refinery has agred to prepare all the forecasts based on their mnning plan and using current crude and product prices and freight costs. Tbe Refinery will forward these new forecasts fiom to CAP. 3.8 CAP has agreed to provide the Central Bank with the annual forecasts and the monthly updates for the next three months of the estimates of volume and value of crude and product impor. CAP will send all this forecast information to the Central Bank immediately after receipt and appropriate review. Tbis will be done be mail until both the Central Bank and CAP have a direct line modem and computers. The annual forecasts must be made available to the Central Bank no later than January 10t ad the monthly updates no later than the 10th of each month. The implementation of obtning an annual forecast of foreign exchange needs will allow the Central Bank to know when foreign exchange is needed and, at the same time, if necessary, allow them to prioritize the country's needs against the availability of funds. bWmRlfnnation and Timing of Recommendations/Agreemet 3.9 A summary of the agreements reached regarding the forecast of foreign exchange needs and the timing of their implementation is shown below. table 3.1: RECa.ENDATIOUS/AGREEMENtS AND TINtMG SUXAAY Recomandatfons/Agreeomnts Constraints Timino 1. Ref inery will have their computer Need to program the Tim. for refinery p rogra prepare the agreed upon forecast of reports preparations. to sumsrize data 1nto proper requflrt"nts reports using the new formt. Will use telex or formats. Fax until CAP's computer, Nodm and Printer are in place. 2. CAP agreed to provide the Central None inedistely, even If parts Sank with annual forecasts and monthly of the data production mUSt Updxtes for the next three months of be done by hand. the estiated value of crude nd product ifports in order the Central Sank can prioritize their dollar need.. WitI be prepared bV the Refinery based on their runming plan ond current crude, product and freight eosts. souree: Mission developed. -37. Lees of Cedt 3.10 Crude purchases from Venezuela and Mexico under the San Jose Accord must be paid with irrevocable lemers of credit (LOC's). These LOC's have individual financial chdar istics. In the case of purchases from Venezuela, the LOC is opened for the estimated volume of the cago plus or minus 10% and must be issued and confirmed at least seven days prior to loading the tanker. Credit tems are 60 days from loading. The fit 30 days carry no flnancing cost. The second 30 days auries a finance charge based on the prime rate prevailing on date of loading as published by Citibank New York. With respect to purchases from Mexico, the LOC is opened for the estimated value of the crgo plus or minus 15% and for the estmated quantity plus or minus 10%, and must be issued and confirmed five days prior to the first day of the window of the loading date range. Credit terms are 30 days from date of loading with late payments subject to a finance charge also based on the prevailing prime rate on the date of loading as published by Citibank New York. In both casmm, payment must be made through banks acceptable to the sellers. 3.11 LOC's are also required for payment of the freight and insurance to Tex-Trader on crude deliveries, the CIP cost of imported finished products by Texaco and lead imported by Texaco. With respect to the feight and insurance on crude shipments, CAP requests the necessary LOC's when advised by the Texaco Refinery. These LOC's must be issued and available no later than five days prior to loading and must also be paid within 30 days from date of discharge. There is no provision with respect to a finance charge In the event of late payment. Regarding the supply of refined products, Tex-Trader must be notified five days prior to loading that the LOC has been opened. Credit forms are 60 days from date of arrival. A gallonage price element is included in the CIF price of each product representing the cost of the additional 30 days credit extended to the buyer based on the prime rate as published by Citibank New York in effect on the date the gallonage price element is determined by Tex-Trader. This price element is subject to revision at the sole discretion of the seller but no more than once a qwater. Problems AssociateL witk the Letter of Credit Process 3.12 In reviewing the LOC process during 1988, the Mission believes that there is litleregard for contract compliance. A part of this problem is the lack of adequate fbrecsting by the Central Bank of its foreigp exchange requirements to pay for crude and imported products. This disregard for contract compliance sends the wrong signal to the sellers, particularly, if different supply agements were to be negotiated in the future. This negligence in connection with the current LOC's process causs the following problems: (a) Because the LOC's for crude purchases are seldom available prior to the loading date as specified in the cnrde contract, loading is delayed until the LOC is confirmed. Ibis can be and, in fact, was very expensive in 1988, not only in increased financing costs, but also in terms of demurrage costs and refinery shutdowns. Based on the analysis of the - 38 - rIformation available for year 1988, financing costs on crude purchases amowne to approximately WA ($350K for Venezuela crude and $120k for Mexican crude. In two separae occasions, the refinery shut down for approxixately 6 days each time due to low crude Inventories caused by LOC's delays. The aggregate cost of these two shutdowns has been estited at SA1Mk plus the attendant demurrage costs of about lIlIk. Tbe cos of these two shutdowns as well as the demurrage can not be recovered. Demurrage costs for the year 1988, exduding those mentioned above, have been estimated at about S30k. Demurrage costs actually recorded by the Refnety in 1988 were $175,000. Demurp charges, however, are historically delayed in being billed but will evenally be settled by the Refinery. (b) Both sellers of crude have provided CAP with lists of approved banks to be used. Nevertheless, the use of correspondent banks not approved by the sellers has caused many delays in opening a LOC acceptable to the seller. Ibis reduces the time available to have the LOC's in place because the sellers' banks require that additional safety clauses be included in the LOC's from banks not originally approved by the them. CAP advised that the Central Bank will open LOC's with smaller banks when it lacks the foreign exchange necessary to open the LOC for the full amount as required by baks approved by the sellers. Smaller banks will open the LOC for less than 100% of the value of the LOC. (C) Tex-Trader Is not being paid on time for refined product imports, nor are the LOC's being opened in accordance with the terms of the agreement (5 days before loading). As of July 20, 1989, there were five cargoes already discharged, totalling $10.8 million for which the corresponding LOC's had not yet been opened. (d) Tex-Trader is not being paid on time for crude freight and insurance. The agreemen calls for payment 30 days from date of discharge. As of July 20, 1989, there were six Invoices past due for a total of $1.3 million for which the corresponding LOC J had not been opened. Neither of the agreements for the supply of refined products and crude freight and insurance provide for fince charges in the event of late payment. 3.13 Csts the Fm: The aggregate cost of delays associated with timely crude LOC openings for year 1988, as discussed above, was over US$1 million. Financing charges on crude cargoes cost another $4 . Under the present ad-hoc agreement with Texaco, the refinery is allowed a profit of 10,000K Lempiras per year before tax, and, thus, this entire cost is borne by the Government of Honduras. 3.14 As mentioned earlier in connection with LOC's for refined products, a gallonage price dement is included in the CIF price of each product representing the cost of the additional 30 days credit. For the year 1988, this cost has been estimated at $400K or the equivalent to U.S. $0.004/gallon. This is a hidden cost ta can easily be overlooked since it is recorded as part of the CIF price and not as a fiancing cost. Tbere is no provision for finance charges in the event of payment after the 60 days stipu- -39- latet by the contract. Although it is not uncommon for Tex-Trader to receive payment after the due date because the LOC has not been opened on time or not opened at all. Imprvmn Remmendd for Letter of Crdit Process 3.15 Following are the recommendations to be implemented for improving the LOC's process: (a) CAP has agreed to provide the Central Bank with an annual forecast, updated monthly for the next three months, based on crude and Imported finished product volume and value estimates provided by the Texaco Refinery. This will allow the Central Bank to program their foreign exchange needs and ensure availability when required. Based on the data available for year 1988, savings in reduced demurrage and shut down costs would have amounted to $L.OQk. (b) Only correspondent banks approved by the sellers should be used. However, this may not be feasible during periods of extreme shortages of foreign exchange and more time should then be allowed to get the LOC's in place. (c) Although small, time and cost savings can be achieved by eliminating unnecessary typing. Each application for a LOC by CAP to the Central Bank consists of a cover letter accompanied by a Form CB-17 entitled " Solicitud de Credito Documentadow. This form has been enhanced to include the pertinent information now included in the cover letter, such as, loading date range, flexibility of volume and value, when the LOC must be in place and approved, and the Seller's prtinent data, such as name, address, departments, telephone and telex numbers, etc. Annex IX, Annex X, and Annex XI represent the proposed forms agreed to by CAP and the Central Bank to substitute for Form CB-17 and the cover letter now used. Also, Annex XII, Annex Xm and Anne XIV represent the proposed forms agreed upon by CAP to be used for the liquidation of the LOC. Both the request and liquidation forms will be incorporated into the information system. (d) Annex XV, entided 'Calculo del Valor CIF de las Importaciones a Recibir por la Refinerfa Texaco de Honduras, S.A." is prepared by CAP upon receipt of Tixaco's request to open a LOC on their behalf in favor of Tex-Trader to import refined products. This report is prepared and forwarded by CAP to the Central Bank together with the application for the LOC. This document is again prepared if there is a change to the original amount of the LOC. The preparation of the report allows CAP to verify the value of the LOC requested by the Refine. This table- will be generatd by the proposed system. For this purpose, current refined product prices, insurance and freight costs will be maintained in the computer files. (e) CAP and the Centra Bank have agreed to acknowledge receipt of requests for LOC. CAP has also agreed to inform the Refinery when the Central Bank has opened the LOC with the correspondent bank and when the latter pays the LOC upon notification by the - 40 - Cent Bank. Tbis will keep the Refinry informed as to the status of their requst utl payment is made. Also, as a mean of facilitating comnications and cross-rerncing between the Refinery, CAP and the Cental Bank, it has beon ag hat ithe Refinery's request number for a LOC be retained througb the enire LOC process up to and including the liquidation of the LOC. This is necesary because the Cental Bank does not assign a LOC number until the LOC Is opened wih the correspondent bank. In this manner, the LOC wfll be identified from the moment the request is made by the Refiny to CAP. The Cental Bank will add the Reinery number to the number assignd by them, i.e., 288/89-C4 (where C4 rents the Refiery number). (f) Regarding LOC for freight and insuace on crude cargoes, CAP waits unil the taker has loaded to request the LOC from the Central Bank. CAP has agreed to request the Central Bank to open the LOC immediately upon receipt of the request from the Refiny so that LOC can be opened according to the terms of the contract (although expired, all other terms are being followed). (g) With respect to LOC's for refined products, these must be opened five days prior to loading as called for by the terms of the agreement in order at the stipulated payment dat of 60 days from aival at Puerto Cortes is made on time. 3.16 It i remed that all credit tem for payments be reduced to 30 days. This refers to al CAP payme on crude purchases frm Venzela and all payments for crude freight and surance. Tis also refers to the Texaco Refinery payments for crude ad "ExcedeW to the Government of Hondur and to Tex-Trader for Imported finished products. Tbis will save apprximatly $S amually based on 1988 data available. It is reatized, however, that this in m mcanot be implemented unti the breign excange sition is nomalized axn more planning is underken by the Cent Bank. 3.17 A summay of the ag associated with LOC's and the timing for teir implemeion is shown below. -41 - Table 3.2: RECO#U£EDATIONS/AGREEKENTS AND TIMING SUSIARY R _eations/Agreemmnts Constraints T ifng 1. Reduce all credit term for purchase and Requires contract Cannot be iople- payments to 30 days. Estimated annual renegotiations mented unti savings: $M7k. foreign exchange situation is normlized. 2. Central Sank and CAP undertake responsibility Lack of foreign Imuediately to insure that there is contract coptilance exchane. In the processing of all LOC s. Costs in 1988: USS1 million. 3. CAP and the Central Bank have agreed to use namially untfh Short term, as the new forms for the Request to open a LOC. Conpater System soon as new forms is on strem. are available. Long tem, during program irplaontation mission. 4. CAP has asreed to use the new form for all Ntumally until Short term, as soon liquidations of LOC's. cooputer system as ;mw form are is on stream. available. medium term during program fople- mentatfon. S. CAP and the Central Bank have agreed to None lmediately acknowledge receipt of requests for LOC$s from the Refinery. 6. CAP has agreed to inform the Refinery None Immediately Central lank has opened the LOC with the correspondent banks. 7. CAP has asreed to inform the Refinery then None Inmediately the corrs _ nt bank has paid the LOC once notified b; the Central Bank. 8. CAP and the Central Mank have agreed to None Imediately retain the Refinery's request number for a LOC through the entire LOC process up to and including the liquidation of the LOC. 9. Use corrs dt banks approved by sellers. Nay not be feasible Uhenever possible daring perioda of extreme shortae of foreiln e e. 10. Elimination of unne*essary typing and forms one lImediately not required. Source: Nssion developed. Communicadon and Flweon lw 3.18 The pres flow of Somnication and documentaton betwee the Texaco Refinery and CAP and between the latter and the Centr Bank in connection wit the LOC's in paymaet of crude (FOB), finishd products (CIF) and crude trn ation and inuac costs has been reviewed. A brief dscription of these proces and their problems are detailed in the following parg hs. -42- 3.19 'Me cufrent procedure used for crude procurement for each cargo is represented as a flow diagram in Annex XVI and can be described as follows: (a) lbe Refinery sends CAP a telex, before the tenth of each month, that contains a forecast of crude cargoes required for the following three months. In the event that the following month's cargoes need to be changed due to an unexpected shutdown, etc., revisions to the forecast are telexed to CAP by the Refinery. The forecast used to only indicate whether the crude is Isthmus or a Venezuelan recon with the required ETA ranges at the loading port and at Puerto Cortes. Now, with agreement to use the new formats for forecasts, the value and details of the recon composition are also provided. A fuel oil export schedule is included indicating the volume and which ship it will be backhauled on. Since April 1988, 220,000 barrels crude cargo sizes have been requested. (180,000 barrds before). Also, since April, the Venezuelan recon composition has included 1% Butane (none in prior cargoes). Also, a more economically recon composition has been ordered. Texaco has agreed to run crude optimization programs whenever crude or product prices change in order to determine which crude is most economical, and then to notify CAP. However, in two recent occasions, while Isthmus crude was most economical, CAP decided in favor of Venezuelan crude due to more favorable credit terms (60 days for Venezuelan crude vs 30 days for Mexican crude). (b) CAP then telexes PEMEX and/or PDVSA of the following mouth's cargoes indicating the desired loading date range, the type of crude/recon and the size of the cargo. (c) PEMEXIPDVSA then advises CAP by telex that the proposed loading date range is acceptable or suggest an alternate date range. (d) CAP telexes the Refinery that the proposed loading date range is acceptable or advises the altee date range suggested by the supplier. (e) If an altnate loading date range has been suggested, the Refinery must confirm its acceptnce to CAP by telex. CAP, in turn, telexes such confirmation to the supplier. (f) Tle Refinery advises Tex-Trder, as soon as the crude supplier has confirmed the loading date range, for the need of a tanker, the required loading date range, volume, crude type and the loading pot (g) When the Refinery receives a tanker nominaon for ech specific loading, this informaton is telexed to CAP who, in turn, telexes the information to PEMEX or PDVSA. CAP also names the crude cargo inspectors to be used. The Refinery telex also icludes the expected freight rate and insurmce cost. -43 - Ob) CAP sends a separate letter to the Central Bank, about 30 days prior to the loading date, requesting that a Letter of Credit (LOC) be opened for each of the following month's cargoes. The letters specify the volume, crude type, the loading date range and the value. The value has been determined by CAP using the required crude and fuel oil prices found In Platt's Oilgram in the case of the Isthmus crude pricing formula or the latest advised crude and recon component prices received from PDVSA in the case of the Venezuelan recon crude. In the future, the Refinery has agreed to include the value of the cargoes in the annual and monthly forecasts forwarded to CAP. 'The lees to the Central Bank do not always contain sufficient information regarding the number of days the LOC must be in place prior to the loading date (Venezuelan crude) or the first day of the loading date range (sthmus crude). Data is sometimes lacking with regard to the flexibility of the volume and value as required by contract. The new forms agreed to by CAP and the Central Bank for the request to open LOC will include all pertinent information. 3.20 The Central Bank, upon receipt of the application, will undertake the task of securing a correspondent bank. In one instance where data was available, it took the Central Bank 12 days to establish the LOC with the correspondent bank. This delay was caused by using a correspondent bank not originally approved by the Seller and was no doubt used because of lack of foreign exchange at the time. 3.21 CAP also receives, after each cargo, the telex invoice trom the Seller with actual loaded quantity, copy of bill of lading ad shipping documents with quantity and quaity information for verification. The invoice is verified against the LOC documentation received from the Central Bank and the information posted to a worksheet. 3.22 CAP also sends letter to the Central Bank requesdng LOC's for the freight and insurance asoated with eac crude cargo. These LOC's must be in place 5 days prior to loading. 3.23 There is the need for more consistency of data and control which woud verify each invoice and payment These features will be provided by the computer system that will be implemented. Also, there is a need to eliminate the delays mentioned above. The LOC's are seldom approved on the dates specified by the agreements with the Sellers. These delays are costly and will give the impression that there is litde regard for contract compliance. The cost consequences and recommendations for improvement were discussed in Section VI. Procurement PrduMr for Refined Produhc 3.24 The curret procedure used for the procurement of finished products is represented & a flow diagram in Anmn XVI and can be described as fllows: (a) Tle Refinery provides CAP a three month forecast of its product imports monthly. Also, as soon as the Refinery is arranging the next product import, a letter is sent to CAP - 44 requesting that a LOC be opd. CAP has agreed to provide the Central Bank with annual frecasts and monthly updates for the neut three months of the volume and vlue of crude and rfined products prepard by the Refery. (b) CAP sends letter to the Central Bank requesting that a LOC be opened on each caro, a instuctions ar received from the Refinery. (c) 'he Refery contac Tea-Trader and requests the specific needs for the CIF delivery of products. (d) The importaion of asphalt (except for govemment asphalt imports which are brought in under the San Jose Accord loan), avgas and LPG by others is bandled in the following maner: 1. At the beghinng of eab year, the imporfting company advises CAP, by letter, of its total requirements for the year. 2. CAP sends leer to the Central Bank authoring these imports and requesting ta LOC's be made available as needed by the importing companies. 3. The import company then handles eacb import, when needed, direy with the Cental Bank witout fiarher involvement of CAP. Since these importu are offloaded at diffeet small terminals, in small parcels and on specity criers, their prcurement and freight angemets are more efficiendy handled by the imporfi company tha wih any fute involvement by CAP. 3.25 BasedontheLOC doal n sample available, the Texaco Refinery's request to CAP to open a LOC on their beaf in faor of Tex-Trade ws dated May 21, or approximately 15 days prior to disbchge. According to the tem of the Texmo Refiy/Tea-Trader agreement, the LOC should be confirmed in Cora Gables no later than five days prior to loading (May 28th in this case). Texaco reered to tbis N in thiok letter to CAP. Twelve days After the date of Texaco's letter, CAP rquests the Ce Bank t open the -OC. This b acally 5 days aft the date when the LOC shod have been conirmed. It was not untl June 30 tlat the Ctal Bank requested their spondent bank in Mimito open the LOC. Each pat, int case, was at ault fr wait too long before requestig or intatg acto. 3.26 The ageent with Tea-Trader cals for payment no latethan 60 days aft dischge. From the oavailable, te LOC, refd o above, ws paid on time or very close to It. However, according to ceralons held In Hondus with Texaco management in November, 1988 and more recty in Cor Gables, k Is ot uncommon for the LOC's to be paid after their due date. As an exMPle, a LOC in the mot of $2.9 mllion for rdine products due on June 23 was paid on July 18. -45 - 3.27 The delays experienced in securing LOC's for refined ptoducts could also be cosdy in terms of dismptions. To date, Texaco has not imposed fiancial charges on the late additional days beyond the 60 days stipulated. There is no provision with respect to a finance charge In the event of late payment. Letrs of Credit for Freight and Insurance on Crude Shipment 3.28 In the case of LOC's for freight and insurance on crude cargoes, the process is also initiated by the Texaco Refinery. Based on the LOC documentation available, the Texaco Refinery's request to open a letter of credit in favor of Texaco Panama Inc. was dated October 22, 198g. The letter also indicated that payment is due within 30 days from discharge, sceduled for Noveber 5 -10. On November 14, CAP requested the Central Bank to open the LOC. There is no fiuther documention and, therefore, it could not be ascertained whether or not the LOC was paid on time. The Refinery should have requested a LOC sooner. CAP was not responsive at all in their request to the Central Bank. 3.29 The importation of asphalt (except for government asphalt), avgas and LPG is handled directly by the marketing companies. At the beginning of each year, the import company advises CAP, by letter, of their anmnal requirements. CAP sends letter to the Central Lnk authorizing these imports. Tbere is no further involvement by CAP since the importng companies handle the imports during the year directly with the Central Bank. Texaco Payment for Crude 3.30 In the agreement between the Texaco Refiny and the Government of Honduras, Texac has 60 days fom date of loading to pay for the crude. ITe chronology of two crude cargo payments, one from Venezuela and one from Mexico has been reiewed and are shown in Annex XVm. The Mission's analysis of these two payments is as follows: (a) With respect to the Venezuelan crude, the tanker loaded on May 13E. On July 7, CAP forwarded to Texaco all shipping documents, two invoices (one invoice for the FOB value of the cago plus financing and Excedente, and a seprte one for the 1.5% Manejo) and a receipt as ackmowledgment of paymeLt. Texao remited to CAP the tot of the two invoices on July 11. On the sam day, CAP endorsd the check and forwarded it to the Central Bank wit pernent imuct as to the aount where the check was to be deposited, etc. CAP, under the agreement with Veneula, has 60 days from loading date to pay for the crude. Tbe last 30 days are ubject to a fnance dge based on the prime rate published by Citibank New York. Texaco Refnery bas 60 days to pay CAP from date of loading, but there is no fince cost. Therefore, the finance cost paid to Veneela is borne by the Government of Honduras. Based on data available, this cos amounted to approximaty $350k In 1988. - 46 - (b) Regarding the Mexican crude cargo, the tanker loaded on July 2. On August 30, or 58 days after loading, CAP forwarded to Texaco the letter with the shipping documents, invoices and receipt. On the same day, the Texaco Refinery paid CAP. 'he following day, August 31, the check was endorsed by CAP and forwarded to the bank. (c) Under the terms of the agreement, CAP pays Mexico 30 days after loading but must wait another 30 days to collect from the Texaco Refinery. The Central Bank provides CAP financing for 30 days until the crude cargo is paid by the Refinery and charges CAP accordingly. The finance charge is based on the prime rate prevailing on the date of loading as published by Citibank New York. CAP charges this finance cost to the Refinery as part of the cost of the crude. Although this is not within the terms of the expired agreement between the Government of Honduras and the Refinery, the Mission was informed by CAP that this procedure was verbally agreed to by the three parties. Implemenao and Timing of RKmmWd1ions/Agrements 3.31 A summary of the recommendaions/agreements associated with communications and document flow and the eiming of their imple on is shown in Table 3.3. Table 3t3: REMCoUENDATIONS/AGREEOENTS AND TINING SUINARY RecosndationslAgr_ments Constraints Timfng 1. Central Bank will contact corre spondFnt t foreign exchange Imedfately imedietely upmn receopt of application for LOC. situation mut be wmalized. 2. Texaco f tneary insure that their request to CAP None Imuediately for LOC*s for oported produrts are In place with aoequate anticipation (mniM. three weeks). 3. C wIll trarsmit the Ref inery's request for LOC's None Immedfately for isoted proiats iusudiately upeon reeipt of the request. 4. The Central Bean will open the required LOC's for Foreign exchane lmediately ported products as soon as requested to do so situation mat by CAP. normalited. $airces Nission developed. -47 The Excedent Detemination and Use of the EstimatedExedent 3.32 At the beginning of each month, the Texaco Refinery sends to CAP a computrd report package prior to the receipts of the crude cargo or cargoes scheduled for that month. One report is the spreadsheet entitled Programa de Estimacion de Costos Anualizados de REFTEXSA' and is prepared using annualized costs and revenues, except that the latast crude and product prices are used. Mhe computer program generating this report also caculates tie eimated Excedet for the year. Another report in this package shows the estmated price of the crude cargo or cargoes ihat the Refinery will receive during the month. Tbis estimated price Includes the estimed cost of the crude to CAP wing the latest prices, any finace charges and the estiae Excedete for the crude cargo. Thi etmatd Excedente Is based on the annualized calculations included in the spreadsheet disussed above. bhe esdmated 1.5%n manejo on the Refinery's FOB cost of the crude is also included in the calculations. For Govemment and Customs purposes, CAP's CIF cost of crude is defined as the Refinery's FOB cost. The Refinery uses these estimated cost to establish necessary reserves on their boob until the actu amounts are inown. Deermination of the Actual Excedente to be Paid 3.33 The total Excedente actally paid with each crude cargo by the Refey to CAP (who forwards it to the Treasury account in the Centrd Bank) is made up of two part. First is the net surplus on the Refinery books each month after deducting the monthly before tax profit of 833,333 Lempias. This surplus amount is located in "Cost of Sales". his net surplus amount is paid at the tme any crude cargo is due for payment from the month's closing date to the next month's dosing date. If two cargoes are due for payment during this period, the amount of the net surplus is divided equally between the cargoes. Second, included in the month's closing of 'Cost of Sales" is the estimated Excedente amount dha was reserved for each crude cargo that has not yet been paid (payment is due 60 days fom the loading date). Tbe estimated Excedente reserved for the crde cargo is added to the net surplus pordon and the sum of the two iste actua amount of Excedene that is invoiced by CAP and paid by the Refinery. 3.34 The detumination of the monthly net surplus requires further clarification. The import duties covered by Decretos D14/54 and D8S (the refinery is exoneaed from the Arancelario tax on crude) are based on the CIF price which includes the Excedente. Also, the 1.5% Manejo charge is based on the CIF price which includes the Excedente. Consequently, the gross surplus as dmined at month's closing includes an amount for taxes and an amount for Manejo. The .D surplus is tat amount remaining after the two amounts (for taxes and manejo) have been deducted. 3.35 Immediately after the month's closing, the Refinery calculates, for each crude cargo due for payment until the next month's closing, the correct final amounts for the Manejo and the correct fal amounts of the D14/54 and D85 taxes to detmine the net surplus. This net surplus is added to the total -48 - amount tha had bee eved fr tat cargo (CAP's FOB, fincing costs and the estimate Excedene). All of this Informaon is forwarded to CAP who prepar an invoice to the Refinery broken down as to CAP's actul FOB and financing cost (both as invoiced to CAP from the crude seller) and the balance is the amount of Exceden t i8 due for that cargo. An example of the development of the Excedente for the hypothetical crude cargo is shown in Annex XIX. 3.36 In the past, aftr the end of each yea CAP preWed an annual calculation to dermine the Excedente. The method was based on a cash accounting method and without taking into account any changes to crude or product inventories in the Refinery. It is not possible to reconcile the Excedwe calculaed in thb manner wih the totl amount of Excedente that was actually paid on each crude cargo during the year. 'Me Refinery's bools are maintained following the accounting accual method. That is, in a given month, only the crude processed (each barrel of crude and products maintains its own price in inventory) would be charged to production costs. ITis may include crude from several cargoes received over the last month or two as well as the cunt month. Crude in inventory has its actual or estimated Excedente included in its unit value. Tbe Excedente paid during the month is paid on a past cargo received whether or not that cargo was processed or taken to inventory in the given month. Therefore, CAP's annual attempt to reconcile the Excedente should be discontinued. 3.37 Another year-end c4dculation that would produce an estimated annual Excedente would involve takdng an average of each monXt annualized estimation of the Excedente. The latest prices for crude and products are used each month. However, this represents a cash accounting method as well and would not be a reconciliation. Tbe Mission does not believe CAP can gain from any attempt to reconcile the annua Excedent calculated on a casb accounting basis with the actual Excedente paid during the year. 3.38 In order to insure that proper accounting practices are being followed by the Refinery, CAP could request that qualified government auditors review the Refinery's books. This would insure at the Excedene determinations made by the Refiney are correct. Advance on Excedente Received by CAP 3.39 lTere ae times during the year when CAP invoices the Refinery for *Excedente Advance' based on information supplied by the Refinery. The Government, rather than waiting undl payment for the next crude cargo or cargoes is due and as soon as the Refinery has closed its books for the month, requests the Refinery to remit the Excedente portion of the upcoming payments as shown on their boolk. The 1.5% Manejo is correcty calculated on this Excedente Advance and is also invoiced and paid by the Refinery. Then, when the payment is due on the crude cargo or cargoes (i.e., befre the next month's closing), the invoice only contains an amount for CAP's FOB plus the finmcing charge and the Manejo on those amounts. -49- 3.40 ITb Excedente Advance is called the Complweetalo by CAP bae it has been erroneously applied to the last cargo paid. In order to keep the computized records pur for each carp, CAP has aWeed to treat this payment by the Rdinery an advanc and to invoice it a such. Tbe proposed forms for inoicing for the Excedent Advanc are induded in Annex XX. Sun1may of Go9lm ent Revenues fiom the Pstroeum InduB 3.41 The amount of revenue generated for the Governent from the Excedente was simat to be equivalent to US $71.4 million in 1988, up from US $52.9 million in 1987. With crude and product prices higher nOw than last year, the amount of Excedente expected in 1989 will be lower than that generated in 1988. The totl revenue generated for the Government from dudies and taxes from the petroleum industry plus the Excedente amounts to US $42.44 million in 198S growing to US $118.66 million in 1988. Summ= of Recommendetions and JIing 3.42 A summary of the recommendations associated with the Excedente and the timing of their implementation is shown in Table 1 1.1: Taig 1,4: 3IMRY OF RtECOSUNDATIOUS AND YINING Recasndmations Constraints Timrng 1 CAP not to undertake wnnal reconeclla- mor Ia ediate tions of Exeadente becausm of different accountin methods used. 2. CAP to reoqst qualified Goverruent None Any time auditors to review Refinery accounting procedures and books. 3. CAP has asreed to change invoicing Need conputer program After program procedore Ahen invoicing for an in operation. has ben instat ted. Exedednte Advance to assist couiput.rization. so - IV. ENHANCED IMORMATION SYSTEM 4.1 The proposed Petroleum Fhancia Information System is designed to monitor the financial flow involved in the purchase and sale of crude and the purcha of refined petroleum products and lead for the supply of petoleum products to Honduras. The system produces the requests for LOC and their liquidations. CAP's crude and Excedente invoicing to the Texaco refinery and provides the Cental Bank with monthly and annual foreign exchange forecasts for the supply of petroleum products. 4.2 Eventually, all communications between CAP and the Central Bank and CAP and the Texaco Refinery will be via modem. Communications referred to are the requests for LOC's and subsequent changes, acknowledgments of LOC's requests, notification by Central Bank that LOC's have been opened with the correspondent bank, as well as of subsequent payments, forecasts of foreign exchange needs, costs incurred in processing LOC's, liquidations of LOC's, Refinery's advice to CAP on price of crude to be paid by the Refnery, CAP's invoices to the Refinery for crude purchases, etc. 4.3 At the present time, the members of CAP's Administrative Commission are provided monthly with an eight page report containing calculations of the estimated Excedente (annualized) and other miscellaneous operational and stattical data. This report is entitled 'Proyeccion Costos e Ingresos Anualizados REFlEXSA". The report is manually prepared by CAP. At times, CAP makes changes to the Refinery spread-sheets dat and incorpaes these changes into the report distributed to the Administrative Commission. As a substitute for the report, a revised package will be prepared for distribution. The package, agreed to by CAP, consists of two newly designed report forms plus the current report on the Excedente paid to date by the Refinery and which is prepared manually by CAP at the present time. 4.4 The first new report is entitled "Calculation of Estimated Excedente (Annualized)" and provides a complete detail of all estimated refinery revenues and costs resulting in the estimated Excedente for the year. This is shown in Annex X. The second new report is entitled 'lncome to the Government of Honduras from Refinery Operations and includes all taxes and other income, also on an annualized basis, derived from the operations of the Texaco Refinery. Both of these reports will be computer generated by the Refinery together with their present spread-sheet. The third report, which is currently prepared on the Excedente paid to date, wIll be generated by CAP's computer. This is shown in Annex XXII as an example of how it would have looked after the fourth crude cargo in 1987. 4.5 To assist CAP in the review and analysis of the estimated Excedente, the Refinery has agreed to expand the General Sales and Cost of Sales sections of the Income Statement which is currently being sent to CAP. 4.6 The Refinery notifies CAP of the total value of each crude cargo in order for CAP to invoice the Refinery. This amount includes the atual cost to CAP of the crude purchased from Mexico -51 - or Venezuela, any finance charges on the purchse and the corresponding accrued Excedente for the crude cargo as calculatd by the Refiney. 4.7 The invoice to the Refinery for crude purchases has been redesigned. Tbe new format has been agreed to by CAP. The invoice package, consisting of cover letter, invoices, receipt, calculation of the financing cost and recon crude API adjustment, in the case of Venezuelan crude, will be generated by the computer once all pertinent data is entered. Once printed for delivery to the Bank of London and Montreal in exchge for the check in payment for the crude, it is only necessary to attach the shipping documents, which are part of the invoice package, for transmission to the Refinery. The revised invoice and receipt package is shown in Annex XXII (pages 1-4). 4.8 CAP's invoicing procedure to bill the Refinery for the "Excedente Advance* will be the same as for crude purchases. 4.9 The proposed computerization will also have the added benefit of freeing people's time, now devoted to clerical activities, so that more analysis and system improvements can be made. 4.10 CAP has agreed to a system of centralized records and monitoring capabilities. Tbe franework provides the records needed for the complete accounting of crude, refined products, crude freight and insurance and Excedente and the desired monitoring of the various components. There are other reports and communications improvements that can be done by the Ministry's data processing personnel at a later date and which are not vital to the control of moneys being paid and collected. These can be undertaken over time by the Ministry of Economy computer data processing personnel or equivalent from SECPLAN. The proposed framework for the computerized crude information flow as being proposed by the Mission is shown in Annex XXII. lae-mentatign and Timing of Recommendatigns/Agreements 4.11 A summary of the recommendations and agreements associated with the computerization of LOC's, annual forecasts and monthly updates for the next three months of crude and refined products imports, calculation of Excedente and the invoices to Texaco and the timing of their implementation is shown below. -52 - Table 4.1 flCUUI AIA EENENTS IL? RecoinmndstionlAereem_nts Constraints Timing 1. All coiniestiU beteen W and the Central Bk Nee camutemr Wd Od Nardeere ha been WW CAP mW the Teico Re finey wIll be via mode. fn CAP nd Central Sank. frstalled id training coWtted dring the progrm impl mutatoin mission. 2. Ninistry of E eomy has agreed to handl the oone As Ineeded oe technical aspects of the computer operation. systm is an stress 3. Naintenwce to be cntracted to a reliable local N etlier. 4. CAP ha designted two eloyey to be trained as Woed Equfpmn In place. Trafning provided coqputer operators (one as back-up). dring the program ipmleoentation omison beck in July 1990. S. Train computer operator tployses at Central Bank. Dedicated ilpmt to on in July 1990. be instatted. 6. A naw report of the Excedente (anatlzed) ha been Needs to be programed. Time for Refinery agreed to by CAP. UIIt be coq3uter gerated by the prograr to Refinery. suuarise data fnto proper formt. T. A new eport that includes all revenues from taixes Needs to be programed. Tim for Reffnery and other incme to the Govenmnt of NoWnerws has programer to ben agreed to by CAP. Vill be couputer genrated swirixe data into by the Refinery. proper forwmt. S. CAP has agreed to replace report OProyeeccon Costos Programing required Tim for Refiney * Ingresos Amualisados REFTEXSA0 sent to the an equipment in programer to Adefnistratfve Comission wfth the reports desribed pce. produce tabtls In in No. 6 an 7 above plus a report on the t of No. 6 and T. Excedente paid to date. 9. CAP has agreed to provide the Centrat nk with The foreat mst be Imeiately, even wsaml forecasts d monthly quxltes for the next programed by Refinery. If pert of the data three mnths of the estifmted value of crude and production anst produet iwports. These forecasts will be prepared be don by hand. by the Reffrery. 10. Cseputerizatfon of the invoices to the Refinery for None Imediately crude purhases and for any Excedente Advance. -S3 - Proposed tncure and Featur of System 4.12 Unique codes wUI be assigned to each terminal, crude, crude component product Cost fooe , etc. This will permit a) the gwuping of all cost compone under their correspondig LOC, which will also be identified by its asigned number, and b) the consolidation of all homogeeous cnxes (by source), products, costs, etc., for the prepration of sttstcal report. The dou asmitted by modem wIll be stored in files and used as da entay, and available for information at a later da. This will allow the computerization of staical reports to be done by the Ministry's dat pessing pesonel as needed in the fuue. Tbe system will be flexible eogh to accept chages, reaning th orgial data and all revisions, i.e., LOC's which are opened for an estimated value of the cargo may be revised several times due to price or volume changes. 4.13 Each of the following will be identified by its own fluily of codes. (a) Terminals. (b) Types of crude. (c) Recon cmde componens associated with Venexuelan crude. (d) Crude gravity adjustment element. (e) Different Texas crudes and fuel oil associated with 8stmu Crude pricing. Mf Each refined product. (g) Cost feature, such as, FOB, freight, isurance, tele costs, commissions on opening LOC's, exchange commissions, finance cot, etc. SUpporng StM Files 4.14 The system will have the following supporting files that will be maintined and changed whenver any of the prices or rates change: (a) Crude prices. (b) Product prices. (c) Supplies and Source Codes .54- (d) Prime Rates, Citibak, New York (e) Exchange rate. 4.15 All the reports to be producod wll be associated with a general report name of that system. The various general reporting systems will be: (a) Annual and Monthly Forecasts. (b) Request to Open Letter of Credit (this system has three distinct reporting procedures and various reports associated with each covering crude, relfined products and crude freight/ insurance). (c) Invoicing. (d) Liquidation of Letters of Credit (this system has three distinct reporting procedures covering crude, refined products and crude freight/insurance). The report showing the calculation of the estimated Excedente (annualized) is provided each month as put of the procedure to open the letters of credit for crude during that month and, therefore, part of that system. The report showing the amount of act Excedente paid to date is produced as part of the Invoicing system. 4.16 The system must be able to automatically calculate the financing cost, for verification purposes, in those instances when payment is made after 30 days. An example: Interest rate at 10% on value of LOC for Venezuelan Crude for 30 days: Formula: U.S. Dollar Value x.100 I 30 360 = Financing Cost The financing cost is calculated on the actual amount paid per Seller's invoice. 4.17 In order to avoid duplication erors in handling dual currencies, the system will always use a Lempiras for U.S. dollars exchange rate, dividing or multiplying as necessary to make the required conversion. - 55- AnnexI Page 1 of 3 HONDURAS PROGRAM FORt THE LlBDERALIZAIION D2EDOWNSTREAM PETROLEUM MARKE 1. Q 'To deregulate the refn, importion, export, storage, ransrt and wholesale and retail distribution of petroleum products inch,ding LPG, asphalt, lubricant and others with the objective of obt a better allocation of resources and introducing more efficiency and tramsparency to the secor. 2. Phases or Imlementation Ihe current legal and operational structure of the hydrocarbon subsector allows the liberalization of the petroleum in two phases: First Phase: Pre-liberalization. This phase wfll include: (i) Designing a pricing mechanism to fix prices to reflect the opportunity cost of petroleum products, while simulating those that would prevail in a deregulated market to be implemeted in the second phase. (ii) Allowing refiners, distrbutors and major consumers to directly import petroleum products and/or crude oil. Second Pt : Liberizaidon Implemetation will include total deregulation of refining, imporation, exportation, transportation and wholesaletretail distribution of petroleum products through the decontrol of retail prices and removal of entry barriers to the petroleum market. 3. Elan Qf Action (a) To allow a private bulk oil terminals to operate under industry standards, making sure that they have the freedom to oper Its installations and set its tariffs to third parties as regulated by market conditionu. Their oprtig contracts should not impose on the Govenment and third paries the obligation to rent their facilities. - 56 - A= I Page 2 of 3 (b) The Centra Bank must estlish parent and nondiscrmina try rles to have access to foreign exchange for the importaion of petroleum products/crude. (c) The Administrative Petroleum Commision (CAP) must establish a pricing mechnism for ximum ex-refnry prices based on the imprt parity oncept (defned by an agreed FOB price of a e market, feight, sura, import tarf, unloading, and storge). (d) The pricing mecbanism, ex-renery, referd to above in item (c), rquires elimination of curee procedues, including fixing refiery margins. Following such elimination, profits and losses will be a consequence of the refneries advantages vis-a-vis import parity pries. Under this strucure, the refiney will have total operational feedom (evel of utilization, refinig or importing products). This structure will siula the oWeraion of a refinety in a competiie maket. (e) To abolis the export tax for petoleum poducts (cul for fud oil) in coSiStet way wi the strucural adjustmen progm beg caTried out by the Governm . This would allow the reiney to compete in equal conditions with impot products. (t) To make explicit in the pring stucue, pecific taxes to the comer, including mount per gallo and mechanism foredj (g) To make explicit in the pridng strue the level of subsidies by products; and to define a prom for their gadual eiminaton to mabe prices reflect their economic cost. (h) To etablish a pricing stcture for petroleum products, allowmg their automaic adjumet ev time that the vaiatons in the vaiables used for its detemination bring a cage in the price to h c me geatr thadn 5%. Speclficaily, in this stuctre the price would be indexed to the exchange rate, and the ditbution margim (wholesale, transport, and ret) to the ius rpresenng costs and investm (CPI, Wage index, e.) smn (a) To rei and modify the legilon and norms for the conouction and operaion of oil soe faclies, transt and di ibuon ofpetoleum producs. (Arcle 11 and Decree 319, Article 117 and Decree 1276 in the Hydrocabon Law). Ihe objectives to achieve trou tis modificaion are: (I To be and non dicrim o; - 57 - Page 3 of 3 (ii) To have streaMlined and safe procedUres to authorize the insallation of gas stations and bulk sorae facilities. (dii) To allow an easy enae and exit to the market and free competition. (b) Specifically, the am must exclude from the regime of operation conts (Hydrocarbon Law) the constuction and opeation of petroleum bulk terminals. (c) To establish the decontrol of retail prices, includipg imports, refining, transportation, wholesales and retail distribution, through the elimination of petroleum products from the list of controlled prices in Aricle 30, Decree 41-89. - 58 - Page 1 of 2 COST COMPARISCN OF RUNNING CRUDE AT TEXACO NARCH 4. 1988 JAY 27. 1988 RUN CRfUE IMPORT PRODUCTS RUN CRUDE LULlS I=m K SLR L $ flJIL K S LUOL WlOL K S ISTHMUS CRUDE 2,139 13.40 28,663 2,139 15.56 33,283 CEUTA CRUDE (a) 1,205 17.44 21,015 1,205 17.44 21,015 KEROSENE DECON (a) 372 20.06 7,462 362 20.69 7,697 DIESEL RECON (a) 613 17.43 10,685 613 19.74 12,101 MEXICAN CRUDE FREIGHT 2,139 0.82(b) 1,754 2,139 0.75(c) 1,604 MEXICAN CRUDE INS. 8 .033% 10 12 VEN. RECON CRUDE FREIGHT 2,190 0.98(c) 2,146 2,190 0.89Cc) 1,949 VEN. RECOI CRUDE INS. a .033x 14 14 HANDLING CHARGE (1.S FOS)Cd) 1,017 1,111 EXPORT F. 0. (613) 7.93 (4,861) (613) 10.26 (6,277) FUEL OIL EXPORT TAX S 1X 49 63 LEAD/CATALYST COSTS 485 -- 485 UTILITIES EX REF. FUEL (f) S11 511 FIXED COSTS 4,329 1.58 6,840 5,329 1.05(g) 5,595 4,329 1.58 6,840 PRODUCT IMPORTS: CIFCh) LPG (1) 59 30.00 1,770 GASOLINE, 95 R 71 22.58 1,603 604 20.72 12,515 71 25.58 1,816 GASOLINE, 87 R 160 20.29 3,246 512 18.48 9,462 160 24.29 3,886 KERO/JET 379 24.37 9,236 860 22.37 19,238 379 23.59 8,941 DIESEL 1,328 22.98 30,517 2,489 20.98 51,970 1,328 23.47 31,168 FUEL OIL 805 14.00 11,270 OANK CtOMISSION (1.42 CIF)(d) 624 1,613 641 LESS FIONACING CNARGES (j) (332) (860) (341) AFTER TAX PROFIT (g) 2.700 604 2.700 TOTAL COSTS EXCL. DUTIES, TAXES AND SURPLUS TO GOVERNMENT 123,384 113,177 129,219 TOTAL U.S. S COStS (k) 112,873 106,462 118,621 LEGEND: (a) a Asumes that Venezuelan crude invo1ies would be paid In 30 days with no finance charges. (b) a Mexiean crude freight on March 4 is based on actual cargo. (c) a Freight rate based on Uorldscale flat for the voyae, adjusted with monthly AFRA for MR vessels of 30,000 LT cargo capacity. (d) a Rersents estimates of costs 1ncurred in processing LOC's (33X of figure is USS Cost). (e) a Fuel Oil ewport price estimted based on relationship of Gulf spot and Tax-Trader posted prices in other time perfods. (f) a Cost of refinery fuel covered by crude purchases. (g) Thruput fee cost for isportfng products assumed to be 2.5 cent/gallon ihich is 0.5 cents/gallon less than the fee idhch has been offered by CAP to Telaport. The remining 0.5 cents/gallon is assumed to be gross profit. (h) a Assume clean products transported in fully loaded GP's In the Rsport Prockcts Cases because refinery crude tanks converted to proAct arvfce. (f) a LPG CIF price astimated at 30.00/bbl. (j) a AsAss that eurrent 30 day ffnancing charge for product imports Is eliminated by paying in 30 days. tk) a Assuum that 10% of fixed operating costs are US S costs. SURMCEs TEXACO REFINERY, CAP AND MISSION ESTIMATES. - 59 - Annex n Page 2 of 2 OR IMPORTING PRODUCTS REFINERY JULY 8. 1988 IMMPRT PRODUCTS RUW CRUDE IMPORT PRODUCTS K BLS !k JK L K BLS SML K J K AILS lalL K $ ISTHMUS CRUDE 2,139 13.92 29,7T5 CEUTA CRUDE (a) 1,205 17.44 21,015 KEROSENE RECON (a) 372 17.96 6,681 DIESEL RECON (a) 613 15.33 9,397 MEXICAN CRUDE FREIGHT 2,139 0.74(c) 1,583 MEXICAN CRUDE INS. O .033% 10 VEN. RECON CRUDE FREIGHT 2,190 0.88(c) 1,927 VEN. RECON CRUDE INS. G .033% 13 HANDLING CHARGE (1.5% FOB) 1,003 EXPORT F. 0. (613) 8.75(e)(5,364) FUEL OIL EXPORT TAX a IX 54 LEAD/CATALYST COSTS 485 UTItLITES 511 FIXED COSTS 5,329 1.05(g) 5,595 4,329 1.58 6,840 S,329 1.05(g) 5,559 PRODUCT IMPORTS: CIF LPG (f) 59 30.00 1'M 59 30.00 17770 GASOLINE. 95 R 604 23.61 14,260 71 25.82 1,833 604 23.96 14,472 GASOLIRE, 87 4 512 22.36 11,4"8 160 24.35 3,896 512 22.54 11,540 KERO/JET 860 21.47 18,649 379 22.25 8,433 860 20.25 17,415 DIESEL 2,489 21.24 52,866 1,328 20.78 27,596 2,489 18.88 46,992 FUEL OIL 805 14.10 11,351 805 14.10 11,351 BANK COKISSSION (1.4% CIF) 1,676 585 1,569 LESS FINANCING CHARGES (g) (891) (311) (834) 604 2.700 604 TOTAL COSTS EXCL. DUTIES. TAXES AND SURPLUS TO GOVERNMENT 117,328 118,662 110,474 TOTAL U.S. S COSTS (h) 110,571 108,182 103,789 Anuat lIzed volume balances besed on Refinery Coaqutor prooram and votuams represent 1988 Forecasted demand) - 60 - h M Page 1 of 1 TEXACO REFINERY % RETURN ON NEr CAPfTAL EMPLOYED YA 1988 (In Thousad) CAM I" CmE II" Profit Uefoe Tax tO,OOO 5%000 10,000 2,500 Inrie Tax - 4.Z- _.60 1.M Profit After Tax 5.400 LSM .-L0 h IIET CAPITAL MLOE Current Asets 49.42 24,741 49,482 12,371 Not PPE - Cost" 20,047 10,024 20,047 10,024 Other Aset 8,430 4,215 8,430 2,108 Liabilities -ocsI,MLL2UI War_ t403£ M 11768 34,86 17,443 34.86 13,735 2 Return (after tax) 15.5 15.5 15.5 9.8 (a) Aus_ owxcbae rate of 2 L irs I U.S. S. Cb) Assum beeu rate of 4 LeWpira a I U.S. S. fc) Cost rd dep eciation teaslattes at exclwne rate proalting at tim of sWesition. Cd) Ectudas intercoq.nv psyobe to ho office. Soure: Tco Refineryd wNissale pin ped. - 61 - AnasIV Pop I of I A. MIlX Ionth Ng._ L- Jwmiry 161.5 126.0 83.3 Februry 169.3 135.1 83.4 March 175.4 142.5 92.7 April 176.2 131.5 94.9 Nay 176.6 129.9 88.3 Juw 180.9 130.S 91.5 Juty 185.2 136.2 5.3 Awust 171.0 13.4 89.6 Septe6wb 142.8 135.7 87.6 October 181.4 135.5 68.3 monlber 1.0 137.0 66.4 Oecemr -W2 JU flJ TEA AVRAE 174.5 134.7 89.3 3.WDSCALE FLAT NM. "I if Jas-Ju-az. Igo I -e ...18 DWmnt, Ta.Iuro Cortes 3.80 3.58 Costzacolcos/Pmrto Cortel 3.45 3.26 Curwao/Puerto Core$ 4.02 3.80 Los Nines~ertO ot 3.35 3.19 A. MLAF Vessel .Catemer 8 Month _ wE Li-I Pwmto CardanPurto Corte 4.13 3.86 CsoutoslcoslCuracao 4.02 3.71 Punts Carda,SCuraco 1.74 1.69 C. WIULALE FLUT DOEIW. S 15,000- 19,999 3,300 3,050 20,000 - 24,999 4,400 4,050 25.000 - 2,99 5,5"0 5,100 30,000 - 34,99 6,800 6,300 35,000 - 39,999 ,050 7,450 40,000 - 4,99 9,300 8,5so IV N by vl catory GP 16,500 - 24,"9 owls on 8,000 - 44,9"9 U's Li-I 45,00- 79,9t9 DSt's Mm tYeco Rtef bry - 62 - Annex V Page 1 of 3 COMPARATIV CQST OE pE3ROL=M SIJPPLY CASES (Based on Estimated 1988 Demand and prices as annualized on March 4, May 27 and July 8, 1988 as shown in Annex II) Crud Freight to Curacac Vemala: BCF 24- 6,000 B/D x 365 x 514.40/B $ * 31,536k Freight /- 51.74/LA x .893 x 2190KB/7.038B/LT a 483k Insrawce - #2,019k x .033K a Ilk CIF RACAO a $32,030k Laotreco - 6,000 B/D x 365 x $17.60/8 a W38,544k Est. Freight hi- S1.74/LT x .893 x 2190KB/7.31B/LT a S 465k Insurance - $39,009 x .033X * s 13k CIF CURACAD a $39,022k NeAxi: Isthas - 5,860 B/D x 365 x $14.29/8 I/ a 530,566k Est. Freight W- 54.02/LT x .893 x 2139K/7.4A/LT * S 1,038k Insurance - $31,604 x .033X S 10k CIF CURACAO * 531,614k Products Freiaht to Haiwkras LPG - 144KB x $13.30/B g/ a 51915k Peg. Gasotine - S12XB x $3.80/LY x 1.745/8.7B/LT x 1.15 5 449k Prem.Gesoline * 604KB x S3.80/LT x 1.745/8.6B/LT x 1.15 * S S36k Kero/Turbo * -86B x #3.80/LT x 1.745/7.9B/LT x 1.15 a $ 830k Diesel - 2489KB x $3.80/L0 x 1.745/7.B/LT x 1.15 a 52531k F.O. - 805Km x S3.8O/LT X 1.745/6.70/LY a * 7 FREIGHT TO PUERTO CORTES X * 57058k Progessinf Fee to Curac: (2190 KB + 2139 KB) .995 x $1.25/Ba * 5384k Balwnces at CurasM 1. BCF 2Ilsthmu Cobiination. KB' 1988 Honduas W Diattllatfon/Refnmin Vf i Total Demad F.O. Refinery Plus Ocea Outright KM& lstha gai Cars lb Yfetd Lost Exch Purchases LPG 33 76 109 - 17 126 144 - 18 Rev. aolifne 171 92 263 172 43 512 77 Pram. Gasoline 201 410 611 - 611 604 (7) Kero/Turbo 131 156 287 - 287 860 573 Diesel 479 624 1103 722 1825 2489 10 654 Fuel Ofil I W mg (1719) _ M 8lS (3) - 2070 2022 4092 1719 4092 5414 1322 2. La_treca/Isthms _ olnetioK + L1 "Sep Nanwras Y DiafiItatfon/RefornM Vinn Total Dnd -oaas Refinery Plus Ocen Outright ina lobthms IQI Uhra fla Y1eldma 2 Lass Exc Purchases LPgIt 56 76 132 12 1" 144I Reg.Ghsolint 211 92 303 - 119 422 512 * 90 Prel.6soline 238 410 648 648 604 (44) Koo/Turbe 159 156 315 - 315 860 545 Diesel 632 624 1256 - 502 1758 2489 53 678 Fuel Oil Z. Mi 1&B (1194) _61 80 80 2070 2022 4092 1194 4092 S414 1313 - 63 - AnneL V Page 2 of 3 Produt Purchases From Curacao 1. gCF 24/ Isthmu C-ombination: Product _KS,_ 8S/KS LPG 18 16.70 301 Re. Gasoline 77 20.20 155 Kero/Turbo 573 20.34 11,655 Diesel -di 19.25 1Z.590 Total 1322 26,101 2. Laaotreco/Isthmus Combination: Reg.GasolIne 90 20.20 1,818 Kero/Turbo 545 20.34 11,0tS Diesel 678 19.25 1.3 Total 1313 25,95S COST SUT ARY FOR PROCESSING IN CURACAO. KS BCF 24- Laegotreco Iathmu IsthmA Crude Cost CIF Curacao 63,644 70,636 Processing Feea S1.25/B 5,384 5,384 Product Purchases in Curacao 26,101 2S,955 Product Frefght to Honduras 7,058 7,058 Product Insurance to Honduras 36 36 Refinery Terminalling Costs 2 $1.05/B 5,685 5,685 Bank Comfission 2 1.4X CIF 1,525 1,525 Crude Handling Charge a 1.51 FOB --2 1-037 Total 110,365 117,316 Run Crude at Texaco Refinerv a L $'B KS Buy Isthmus Crude FOB 2139 14.29 30,566 Isthmus Frt. $3.28 x 1.745/7.48/LT 2139 0.77 1,647 Isthnus Insurance 8 .033X 11 Buy Ceuta Crude FOB 1205 17.44 21,015 Buy Kero Recon FOB 372 19.57 7,280 Buy GO Recon fOB 613 17.50 10,728 Von. Recon Ft. $3.86 x 1.745/7.49 2190 0.92 2,015 Van. Recon Insurance a .033x 14 Crude Handling Charge, 1.5X FO6 1,044 Export F.O. t613) 8.98 (5,505) Export F.O. tax a Ix 55 Lead/Catalyst Costs 485 Utilities ex Ref. Fuel 511 Fixed Costs 4329 1.58 5,595 Import LPG CIf 85 30.00 5,100 Import Reg. Gasoline CIF 160 28.98 3,677 Import Prem. Gasoline CIF 71 24.66 1,751 IWport Kero/Turbo CIF 379 23.40 8,868 Import Diesel CIF 1328 22.41 29,760 Less Finaneing I/ (328) Bank Commission 8 1.4X CIf net -Am Total 124,973 -64 - Page 3 of 3 tinat _ut _em RDef er Iom.t LK FS 441.0 .0 tort Ra. asoltin P9 512 20.20 10,32 Import Prm. asboline M0 21.61 13,173 lot W/Turbo m so 20.34 17,492 lort Diet PO am 19.25 47,913 Iqort Fuet oil FM S 13.06 10,529 Prolast Froeiht to Nwodrs hI 7.5 ProWwt Inhurue to Nndwas 36 sank Comissoi 1.41 CIf 1,525 opeati Cost at Twminil 514 1.05 -Lo Total 116,158 Moteos V Pries taken frm Toexo cOAtr pom deOucting $0.92/BbI. freight for VeneZUean Crude an SO.7/bI. for Nexiacn crue. / Lt-31 AMA's bos ean 198 serage. V LPS freight estivated at $140/NT. # Crude oan to at 0.58. gV Prodect yields few CAce processing ftimeted (M5 salble proackts on crude charge). g Product owcan lost 0.5 for LPG, golotins d re/Turbo, 0.46 for diesel end 0.252 for futel oil. V Prodct exha.wes sed basd an price (1.3 Ibls. F.O. a 1.0 Obt. of diesel; 1.2 IbIs of diles 81.0 Ibts. of 3 gsline). fr ProdteCt ited into Refinry,Aen operating as a teinal, done an fully loaded GP vesmls. Volum of LG in eech ca in "tl to the munt produced in the sxilm LPG production case. Asim proActs are paid in 30 day thee elImnoting the financing chargs. -65 - Page I of 2 JOB DESCRIPTION OF CAP's SUPPLY & TRANSPORTATION COORDINATOR 1. Famliazation wih crude supply conacts. Provid nofications to suppliers of volume overgesishorfls in order to retain dghts to crude. 2. Assist in renegotiation of crude supply conucts. 3. Review the Texaco Refinery's r ons for Venezuelan Recon Crude compositions ad basically understand reasoning. 4. Develop working relationship with countepr in the Tauco Refinery, PDVSA and PEMEX. 5. Maintai a coordinator's role with Central Bank to insr LOC's a always timely in place. 6. Keep Texaco Refinery contnually apprised of all cude/recon component prices that are received fom PETROVEN and maintain a complete up-odat pricing file. 7. Audit each Venezuelan recon crude invoice, Including the necessay gv adjustments. 8. Mantin an up-todate pncing fle on U.S. Gulf crudes and flel oils that relate to the Ishmu crude priciSg formula and audit each invoice. 1. Understand the product quality specifications of each product, their individual impoae and which can be related to price. 2. Condiually be ionnfed on the products market and mainain up-o-date product pricing files. 3. Fmliarization with Canbbean postings, U.S. Gulf posgs and other pricing bases t may be appropriate for the sWply of products to Hondua. 4. Develop working relationships with the product supply pesonnel ociaed with all the major oi companies and other supplies (Mave Trintoc, Perojam, etc.). S. Maintain a coodnator's role witi the Central Bank to insure LOC'S are always timely in place. -66 - AnMex VI Page 2 of 2 6. Request bids for product supply under term agem and analyze the quotes regarding prlcm, quality, payment tem, etc. 7. Present analysis of product supply bids with recommendation and ranking of each to CAP's Technical Committee for approval, when necessary. 8. Audit all product invoices. 9. If other terminals ae constructed in Honduras, must coordinate all marketer's product liftings from the Refinery and terminals as well as develop the product import schedules to each location. 1. Know about tanker characteristics and how they reate to the physical facilities available at the Texaco Refinery and other terminals in Honduras. 2. Must understand how freight rates are developed and their relation to bunker prices, port charges and tanker availability. 3. Understand deadfreight and demurnage, their causes and limitations. 4. Continually be informed on the tanker market. 5. Develop working relationships with several reliable, prominent, international tanker brokers as well as the transportation persoMnnel associated with all the major oil companies. 6. Understand the spot tanker market and how to request and evaluate biddable term freight arrangements. 7. Know about voyage charters, term charters, term freight arrangements and the Worldscale/AFRA freight system. 8. Present ocean freight contract proposals to CAP's Technical Committee for approval, when necessary. 9. Audit all freight invoices including charges for deadfeight and demurrage. 10. Arrange all cargo insurance coverage. - 67 - Annex VIl Page 1 of 1 REFINERIA TEXACO DE IHONDURAS, S.A. PROGRAMACION TENTATIVA SOBRE IMPORTACION DE PETROLEO CRUDO Y REFINADOS PARA EL AIO 19 ENERO/MARZO ABRIL/JUNIO JULIO/SEPT OCT/DEC TOTAL (1) (1) (1) (1) ) BBLS. $US BBLS. $US BBLS. $US BBLS. $US BBLS. $US MILES MILES MILES MILES MILES MILES MILES MILES MILES MILES CRUDO (FOB) REFINADOS (CIF) FLETE/SEGUROS DE CRUDO _ __ TOTALS _____ - - - VALOR DE EXPORTA- CION DE F.O. - (1) BASADO EN PRECIOS VIGENTES EN NMERO , 19 (2) PARADA DE LA REFINERIA PROGRAMADA PARA _ PREPARADO Y SOMETIDO A LA COMISION ADMINISTRADORA DEL PETROLEO DEL MINISTERIO DE ECONOMIA Y COMIERCIO EN ENERO , 19 . REFINERIA TEXACO DE HONDURAS, S.A. GERENTE GENERAL - 68 - ADML m Page I of I REFIWRA TEXACO DE HONDURAS, S.A. PROGRAMAaION TENTATIVA SOBRE IMORTACION DE PETROLEO CRUDO Y REFINADOS PARA LOS MESES DE 1ULJIO AG2SQYSIEMBR DE 1988 (1) $Us 1ZCHC DE BLs. $US, MILES VALOR EMB PRODUCTO lRSZDNCIA S SLES UPOTAC12 FOeI tJULIO~~~MLI ZLE WQ Z 4-6 REFINADOS (CI?) TEX-TRADE 90 2,100 7-9 CRUDO (FOB) VENEZUELA 180 3,400 22-24 RZFINADOS (CI?) TEX-TRADER 85 2,000 FLETE/SEG. CRUDO - i SUB-TOTAL 355 7.655 549 1-3 REFINADOS (CI?) TEX-TRADER 87 2,055 10-12 RFINADOS (CI?) TEX-TRADER 95 2,250 18-25 REFINADOS (CI?) TEX-TRADER 95 2,240 23-25 CRUDO (FOB) VENEZUELA 180 3,400 26-28 RFINADOS (CIF) TEX-TRADZR 90 2,220 FLUTE/SEG. CRUDO __160 SUB-TOTAL 547 12.325 - SltPTI_MR 4-6 CRUDO (FOB) VEEZUELA 180 3,400 13-15 REFINADOS (CIF) TEX-TRADER 74 1,750 20-22 CRUDO (FOB) MEXICO 180 3,400 27-29 REFINADOS (CIF) TEX-TRADE 80 1,690 FLETE/SEG. CRUDO - 330 SUB-TOTAL 514 10.570 .S540 TOTAL 1,416 30.550 1.080 "SADO EN PGIOS VIGENTES EiN 19- PREPARADO Y SOTETIDO A LA COIII8ION ADMINISTRADORA DEL PZTROLEO DEL MINISTERIO DE ECONOMIA Y COMERCIO EL Dt ,_19. RSFINSRIA TEXACO DE HONDURAS, S.A. GERENTE GENERAL - 69 - Al Banco central De Honduras ANMZt IX page 1 of SOLICITUD W: CRUNMDIOC____A__ _NO.__D_t__R__ PARA COMPAtA DRt CaDD LUGAR V FECIIHA SEOORES: SIRVANSE ENITIR POR CUENTA DE COPISION ADHINISTRADORA DEL PETROLEO (INISTERIO DE ECONOtIA) UN CREDITO DOCUMENTADO IRREVOCABLE: REVOCABLE POR CORREO AEREO - CABLE ..A FAVOR DB VAltOR CARTA DE CREDITO (EN NUKEOS) (EN LETRAS) -PARA CURRIR PEDIDO DE: FECHA DE EMBARQUE: ESTA CARTA DE CREDITO DEBE ESTAR ABIERTA: EL PLAZO DEL CREDITO DEBE SER DE DIAS A CONTAR DE LA FECRA DE . EL PAGO 0 PAGOS DEBERAN EFECTUARSE CONTRA ENTREGA DE LOS DOCUMENTOS DESCRITOS A CONTINUACION Y'MARCADOS CON UNA X: _FACTURA COMERCIAL __AUTENTICADA POLIZA 0 CERTIFICADO DE SEGtRO __COMOCINIENTO DE EMBARQUE NECOCIABLE NO NEGOC1ABLE GUIA AEREA __FACTURA CONSULAR LEGALIZADO GUIA TERRESTRE CO D1 APERTURA PRIKERA REVISION(A) SEGUNDA REVTSION(S) TERCERA RENISION(C) GO BARRILES MO.NACIONAL BARRILES NO.NACIONAL BARRILES NO.UACIONAL BARRILES NO.IACIONAL ISTHO CEUTA RECON LAGOTRECO RECON VALOR CD APERTUJRA(0 .25%) OTROS GASTOS(1.0%) ---------___ __ _ __ __ _ EL SEGURO DEBE CUSRIR LOS RIESGOS SIGUJIENTES:__________B_______ ASTA:____________ EL DESPACHO DE LA HERCADERlA DEBE VERlFICARSE POR VIA: TERRESTRE MARITIMA AEREA -_ _ _ PUERTO DE INGRESO FOBS __ _ FAS CIF_ CAF_ EMBARQUES PARCIALES PERMITIDOS SI__ NO_ MANIFESTANDO A USTEDES ESTAR CONFORME CON LAS CONDICIONES ESTIPULAOAS AL REVERSO DE LA PRESENTE. NOS SUSCRlPINOS HUY ATENTAHENTE FIRMA AUTORIZADA DEL SOLICITANTE - 70 - Al Banco Central De Honduras ANNEX X SOLICITUD DR CREDITO DOCUKMIWADU NO. DR R_F Page 1 of 1 PARA CORNPRA DR PRODUCTOS REFINADOS LUGAR Y FECHA SEWteRES: SIRVANSE EMITIR POR CIIENTA DE COMISION ADHINISTRADORA DEL PETROLEO (MINISTERIO DE ECONOMIA) UN CREDITO DOCUHENTADO IRREVOCABLE: REVOCABLE POR CORREO AEREO CABLE A FAVOR DE VALOR CARTA DE CREDITO (EN NUMEROS) (EN LETRAS) PARA CUBRIR PEDIDO DE: FECIIA DE EMBARQUE: ESTA CARTA DE CREDITO DESE ESTAR AB1ERTA: El. PLAZO DEL CREDITO DEBE SER bE DIAS A CONTAR DE LA PECHA DE EL PAGO 0 PAGOS DEBERAN EFLCEUARSE CONTRA ENTREGA DE LOS tXUKETOS DESCRITOS A CONTINUACION Y KARCADOS CON UNA X: FACTURA COHERCIAL AUTENTICADA ___POLIZA 0 CERT[FICADO DE SEGURO CONOCINIENTO DE ENDARQUE_ NEGOCIABLE NO NEGOCIABLE __GUIA AEREA FACTURA CONSULAR LEGALIZADO GCUA TERRESTRE C__ DI APERTURA PRIKERA REVISIONtA) SEGUNDA REVISION(B) TERCERA REVISION _O BARRILES|HO.1NACIONAL BARRILES MO.NACIONAL BARRILES MO.NACIONAL BARRLLES nO.NACIONAL GASOLINA-EXTRA GASOLINA-REG. D.P. KEROSENE DIESEL OIL FUEL OIL LEAD FLETE SEGURO VALOR CD AI'ERTURA(0.25f) CANB[O(I.0X)__ OITROS GASTOS( I . O%)__ _ _ _ ___ _ _ _ _ __ _ _ _ _ __ _ _ _ _ _ TOTAL El. SEGURO DEBE CUBRIR LOS RIESGOS SIGUIENTES: HASTA: EL DESPACIIO DE LA HERCADERIA DEBE VERIFICARSE POR VIA: TERRESTRE MARITIMA__ AEREA _ PUERTO DE INGRESO FOB FAS __ CI? _CAF E9BARQUES PARCIALES PERMITIDOS SI NO MANIFESTANDO A USTEDES ESTAR CONFORME CON LAS CONDICIONES ESTIPULADAS AL REVERSO DE LA PRESENTE, NOS SUSCRIBtMUS HUY ATENTAIENTE FIRMA AUTORIZADA DEL SOLICITANTE - 71 - Al Banco Central De Honduras ANNEX XI SOJLICITUD DE CREDI O DOCUINMTADO NO. DS REF _ Page 1 of 1 PARA CONPRA DS FLII T. BEGRO DE CRUDO LUGAiR Y FECKA SERORLS: SIRVANSE EnITIR POR CUENTA DE COMISION ADMINISTRADORA DEL PETROLEO (MINISTERIO DE ECONOHtA) UN CREUITO IOCUHENTADO IRREVOCABLE: REVOCABLE POR CORREO AEREO CABLE A FAVOR DE VALOR CARTA DE CREDITO (EN NUNEROS) (EN LETRAS) PARA CUBRIR PEDIDO DE: _ __ FECHA DE EMBARQUE: ESTA CARTA DE CREDITO DEBE ESTAR A81ERTA: * EL PLAZO DEL CREDITO DEBE SER DE DtAS A CONTAR DE LA FECHA DE . EL PAGO 0 PAGOS DEBERAN EFECTUARSE CONTRA ENTREGA DE LOS DOCUHENTOS DESCRITOS A CONTINUACION Y MARCADOS CON UNA X: ___FACTURA COMERCIAL __AUTENTICADA POLIZA 0 CERTIFICADO DE SEGURO __CO_ OCINIENTO DE EMBARQUE NEGOCIABLE NO NEGOCIABLE __GUIA AEREA ___FACTURA CONSULAR LEGALIZADO IGUA TERRESTRE H O N E D A N A C I o N A L co Di PRINERA SEGUNDA TERCERA GO APERTURA REVISION(A) REVISION(B) REVISION(C) FLETE-ISTHO FLETE-CEUTA RECON FLETE SEGURO-ISTMO SEGURO-CEUTA RECON SEGURO . .- VALOR CD APERTURA(0.25t) .CAHBIO(l.0X) OTROS GASTOS(1.O%) TOTAL EL SEGURO DERE CUBRIR LOS RIESGOS SIGUIENTES:_ HASTA: EL DESPACHO DE LA MERCADERIA DEBE VERIFICARSE POR VIA: TERRESTRE__ HARITIMA_ AEREA_ PUERTO DE INGRESO _FOB FAS- CIF _CAE EMBARQUES PARCIALES PERMITIDOS SI_ NO MANIFESTANDO A USTEDES ESTAR CONFORME CON LAS CONDICIONES ESTIPULADAS AL REVERSO DE LA PRESENTE, NOS SUSCRIBIHOS HUY ATENTAMENTE FIRMA AUTORIZADA DEL SOLICITANTE - 72 - Page I of I LIQUIDATION CD - PARA CRUDO PROCEDENCIA DEL CARGAMENTO VALOR ORIGINAL DE APERTURA( )U_ FECHA VALOR BEVISADO A ( _)_ . FECHA VALOR RMSVIADO A ( ) VALOR FINAL FACTURA TE (_ ) _ PlZCAlA GASTOS DE CORSPONSAL _ COMISION DE APERTURA (.25% S/_ ) CONISION DR CAEBIO (.40% 8/ ) OTROS GASTOS (DETALLAR) SUB-TOTAL _ HA8s COSTO FINUNCIRRO ACTUAL (1) LIQUIDACION TOTAL (IGUAL A DEBITO DEL BANCO CENTRAL) (1) CALCUO DZL COSTO FINACIERO (A) HOMBRE DEL BM0C FZCNA DE CARGA DEL BMWO _ 1h EN QOM CD DEBS ESTAPR ABIMA PS CM ACTUAL DE APERTURA FJO DR PAGO POi DANo CORRESPON _ (A) MUDTg= X INRS A 30 DIM a COSTO FINMOZER ACTUAL 360 DIAS - 73~ -ANNEX XA Page 1 of 1 LIQUIDATION CD _ PARA PRODUCrOS REFINADOS PROCEDENCIA DEL CARGAMENTO VALOR ORIGINA DE APRT ( ) FECHk VAOR REVISADO A ( ) VALOR RVISADO A ( ) FECHA VALOR FINAL FACTURA TLEX ) _ FECHA GASTOS DE CORRESPONSAL _ OOISION DE AERTURA (.25% S/ ) COUISION DE CAXIO (1.0% S/ )__ OTROB GASTOS (DETALLAR) BOB-TOTAL LIQUIDACION TOTAL (IGUAL A DEDITO DEL DACO CENTRAL) w0NBR3 DEL BAROO VECH& DI CARGANET DEL DRRCO FECHA EN QUt CD DEI3 ISTAR ABIERTA FECCHA ACTUAL DR APERTUPA FElCI DE PAGO POR BANCO CORRESPONSAL - 74 - -hINEX XIV Page 1 of I LIQUIDATION CD PARA FLET E Y SEGURO DE CRUDO PROCEDENCIA DEL CARGAMENTO VALOR ORIGINL DR APZRTURA( _ ) VALOR RZVISADO A (_ ) - - VALOR REVISADO A ( ) VALOR FINAL FACTURA TLEX( ) GASTOS DE CORRESPONSAL _ COI8SION DI APETURA (.25% S/) -0MISION DE CANIO (I. 0 S/ OTROS GASTOS (DITALLAR) U-TOTAL LIQUIDACION TOTAL (IGUAL A DEIXTO DEL DM0O CENTA) NOMDRE DEL BARO0 71CMh DR CARGANENTO DL DCARO FuClA EN OU CD DDE BISTAR ABIRT_ 11CM ACTUAL D APERTURA_ PtCII DE PAGO POR DNCO CORRESPONSAL_ - 75 - ANNEX XV Page I of 1 SECRETARIA DE ECONOMIA REPUBLICA DE HONDURAS COMISION ADMINISTRADORA DEL PETROLEO (CAP) ANEXO AL OFICIO CAP - 310-87 CALCULO DEL VALOR CIF DE LAS IMPORTACIONES A RECIBIR POR LA REFINRIA TEXACO DE HONDURAS, SA ENTRE EL unitario Total Cantidad Fob Fob Flete Seguro Valor Cif Productom (Bble) ($/Bbl.) ($) (S) ($) (S) GABOLINA 95 OCTAOS 10,000 25.20 252,000.00 14,088.00 95.80 266,163.80 GASOLIKA 87 OCTANOS 5,000 24.00 120,000.00 6,872.90 45.70 126,918.50 BSPIRITU DE PBTROLZC (D.P. XZROSENE) 6,000 23.67 142,000.00 9,079.40 54.40 151,133.80 DIESEL OIL 35,000 23.26 814,000.00 55,851.10 313.10 870,164.20 T 0 T A L 56,000 23.71 1,328,000.00 85,871.40 509.00 1,414,384.40 I) Precios Fob: Curacao SlPlatt's a la fecha mis recargo financiero segdn prime rate vigente. 2) Flete: $.13.00 T/L. 3) Seguro: 0.036% S/Fob + Flete. 4) $5.619.70 menos que lo solicitado. - 76 - ADDS X1W Page of I of 3 r central Bank 1 (1) (1:A) (I ) (12A)(2{) (2) > <-(4) ( (3)- Venezuela (5) > ~~~(6)-> Texaco 1(9)- > or Refier k -(16) C Ak P (10) -> i I z~17) - (23) Meico -__18) _1- CA. (14)- -Trader Cap's Technical CinmieJon -77 - Pago 2 of 3 PRESENT CRUDE INFORMATION FLOW CHART (Note for Pe I of hIs1nex) I. Teaco noties CAP by Tde of thf cruder eqWromebyothe 10th of themon prior to the mondh of the shipmen, includig Ftoposed loadi dat rages. This toele includes the rude reqirements for the next three months. 2. Telex ntfication to Seller of Texaco's proposed loading date rnge. 3. Telex notification by Seller to CAP ageeing to loading date ra or requestng a dffertit loading date. 4. Telex to Texaco by CAP reusting _ of loadig dae rge proposed by Sdler. S. Texaco's telex of accnce to CAP. 6. CAP's telex confirmation to the Seller. 7. Ship omination communcat bet Tex Rdinery and Tex-Tuder. 8. Teamco's telex advice to CAP on ship nomia 9. CAP's advice tD Seler on ship nmWini 10. CAPs wdfication to Seler on indent inpect. 11. CAP's leter request to Centrd Bank to open LOC for crude purche (FOB). A rquesd In writ as requrd. 11A. Central Bank acknldges CAP's LOC reques. Necesy arm also acknowedged. Cen bs ntiae ctio tos LOC with Bank. 12. At Texaco's request CAP requt Ceal Bak to open IOC for paymet of fright and Inurance on crud shipmen 12A. Centrd Bank anowges LOC reust 13. Telex Invoice from Seler to CAP with f loaded qut and pfice, includig any finaing chags incurred. - 78 - Annex XVI Page 3 of 3 14. Crude cargo accompanied by corresponding Bill of Lading. 15. Seller forwards to CAP shipping documents and quantity/quality reports approximately 15 days afler loading. 16. CAP frwards to Texaco copy a shipping documents and quantity/quality reports for verification. 17. Texaco ndotiles CAP actual quantty received and the total value of the cargo calculation which by difference of CAP's FOB and fincing charges is the total Excedente or surplus. The amount of the Moajo is also shown. 18. CAP forwards to Texaco an invoice for payment of crude, Excedente (surplus remaining) and 1.5% Manejo (handling fee). 19. Payment of crude, Excedente and 1.5% Manejo by Texaco to Central Bank through CAP. 20. Cental Bank provides CAP with informatien of all costs related to the LOC. CAP prepares liquion report. 21. Report 'Projection de Costos e Intgresos Awaizados REFTEXSA* forwarded to all members of CAP's Tenical Commission. gro: CAP and Mission Developed. - 79 - Annex XVII Page 1 of 1 PRESENT REFINED PRODUCTS IFORMATION FLOW CHART I I CENSALB~ZMTL ANKI (3) (4) (5) TNXACO (1)- CAP REIFINERY ( 2 ) (Also for LEAD) Notes: 1. Monthly telex to CAP by Texaco of flnshed products import requirements for the next the months. 2. Texaco's written request to CAP to open LOC on their bhealf im favor of Tex-Trader fbr the CIF cost of refined products. 3. CAP's letter request to Central Bank to open LOC for the CIF cost of refined products. Amendment requested in writing as required. 4. Central Bank acknowledges CAP's LOC request. Necesary amendments are also acwowledged. Central Bank initiates action to secue LOC. 5. Cenral bank provides the Texaco Refinery with information of all costs related to the LOC. CAP is provided a copy. CAP prepares liquidation report. Surc: CAP and Mission Developed. - 80 - Page I of I CIRONOLOGY OF TVACO PAYlMNT FOR CRUDE VEN MEX * Loadagdate May 13 July2 * CAP se lowr to Tcaco Riney with peti e xnt plus two sepaa oib, one for th POB value of the cawo and a sepat on tocover the-15%Majo. Arecip 88 _i- of psyrmeA4 X Wm encosed withd de lot. July 7 Aug 30 * Texac mit check to CAP unde cover lte. Check s for the tot mount of th two inices. July1 Aug30 * CAP endors t check and forwad k to th Central oank wt perin a deon for desit. July11 Aug31 Payment to seleras u per credit tm of oonrct July 13 Aug 2 * Payment made: Days from loading date. 60 30 - 81 - "M xI& Pqge l of 2 EXAMPLE OF THE DEVELOPMET OF THE EXCEDENTE EOR CRUDE CARGO THAT HOA ADMAC 2.19IM A. CHROOOg OF CRGO IDUMARY 25 - Refinery advises CAP of estimated prlces of the crude cargoes scheduled for loading in March. XARCH 2 - Cargo loading date. MARCH 5 - Cargo discharged in Refinery booked at estimated price. APRIL 15 - Refinery closes books for March. APRIL 17 - Refinery advlses CAP of the total value of the crude including Excedente. The final amount of the Manejo is also advised. APRIL 29 - CAP invoices Refinery. APRIL 30 - Refinery pays CAP for the crude cargo. B. BSTIMATED PRICE DEVELOPMENT Proposed volumet 180,000 Barrels of Isthmus Price Build-up: FOB Isthmus 29.900 Lps./Bbl. Finance Charge 0 8.5% 0.210 Lps./Bbl. Al gst'd. Excedente 21.,84 Lps./Bbl. Y' Proposed Price 51.994 Lps./Bbl. Total Values 9,358,920 Lps. 1.5% Manejo: 140,383.80 Lps. Refinery uses this proposed price to book the crude on arrival. c. REFINERY INCOME STATEMENT FOR MARCH 31 CLOSIFg General sales 100,500,450 cost of sales 930260,000 Gross Profit 7,240,450 operating Costs 4,730,450 Non-Operating Charges 10,000 Profit Beforo Tax 2,500,000' Included in the Cost of Sales is the amount accrued for the March 2 crude cargo. Based on that accrued amount for the cargo, there are also accrued amounts for the D14/54 and D85 taxes and the Manejo, both associated with that cargo. There is also a gross surplus that is made up of additional amounts for the D14/54 and D85 taxes and the Manejo and the resultant net surplus (portion of the total Ixcedente). The D14/54 tax used last year has now been eliminated. An Arencelaris tax is now included. - 82 - &NNEX XK Page 2 of 2 D. REINRy'XS ADVICS T GM OF Ca GM VAtMU Actual volume per bill of ladings 179,924 Barrels Cargo as originally booked 6 51.994 9,354,968.45 Net surplus from month end closing i,9.246.S1 Amount to be paid to CAP for crude 11,285,214.96 Associated Manejo on cargo I 1.5% 162,28 Total amount due to CAP for cargo 9 Notes$ "Price determined in the Refinery annualized Spreadsheet calculation of the estimated Excedente. Y Price used by Refinery to accrue a value for the crude cargo until total actual determination is made after month end closing. ' The before tax profits is fixed at 833,333.33 Lempiras per month. i The net surplus is distributed equally over each crude cargo that will be paid before the next month's closing date. Sources Mission developed. -83- Annex XX Page I of 3 TEGUCIGALPA, D.C. (FECHA) SENOR VICE PRESIDENTE & GERENTE GENERAL REFINA TEXACO DE HONDURAS, S.A. INGENEERO MANUEL J. CRESPO PUERTO CORTES ESTIMADO INGENIERO: ADJUNTO REMiTIMOS DOCUMENTACION REFERENTE A ANTICIPO DE EXCEDENTE COMO SIGUE: FACTURA CONERCIAL NO._ RECIBO DE FACTURA NO. EL PAGO DEBERA HACERSE EN MONEDA DE CURSO LEGAL MEDIANTE CHEQUE CERTIICADO, EMITIDO A FAVOR DE LA COMISION ADMINISTRADORA DEL PERTOLEO (CAP) ATENTAMENTE MNSIRO MINISTERIO DE ECONOMIA - 84 - ANX Page 2 of 3 Saavtad de E0booia y Coardo Republi de Hoadww ECBO AbC1DE E2CEDENT RECIBIMOS DE REFINERIA TEXACO DE HONDURAS, S.A. LA CANTIDAD DE LPS POR CONCEPTOS DESCRITOS EN NUESTRA FACTURA COIERCIAL QUE A CONTINUACION DETALLAMOS: Valgr:LemDias FACTURA COMERCIAL NO. _ TEGUCIGALPA, D.C., (FECHA) MINISTRO MINISTERIO DE ECONOMIA - 85 - ANNEXAX Page 3 of 3 Secetari de econoema y Comerdo RepubUca de Honds FACTURA COMERCLAL FACTURA NO. TEGUCIGLPA, D.C. CARGO POR ANIICEPO DE EXCEDENE MAS COMISION DE MANEJO DE 1.5% CUYO VALOR DESCRIBIMOS A CONT7NUACION: ANTICIPO DE EXCEDENTE Lps. COMISION DE MANEJO DE 1.5% Lps. VALOR TOTAL DE FACTUR Lps. POR: COMISION ADMINISTRADORA DE PETROLEO - 86 - EX - Page 1 of I !CALCULO) DEi ECXCED13 LIMBO (ANUALtIZADO) (lin Miles) Total INGRESOS Barril pIa Leua 10LEu Ventas Locales de Productoc xxx xxx Exportaciones de Fuel Oil menus Impuesto (1%) xxx xxx otros Ingreboo - .xL TOTAL DE INGRESOS xxx xxx COSTOS IMPORTACION DE CRUDO Crudo Venezolano, FOB xxx x=x Crudo Mexicano, PFO Bm x TOTAL de Crudo, FOB xxx xxx Flete y Seguro xxx Costo Financiero xxx Tutal de Crudo, CIF xxx Manejo de Gobierno (1.5% cif + Ixcedente) xxx D14/54 (5% CIF + Excedente) + 12% Recargo xxx D85 (5% CIF + Excedente) xxx Demora + Comisiones Bancariac (Demora) xxx Comisiones Bancarias Sabre ?leto xxx Gastoa de Inspectores xxx COSTO TOTAL DE IMPORTACION DS CRUDO xxx INPORTACION DE PLOMO costo de Importacion + Comisiones Bancarias (Clr) xxx D14/15 (1ot CIF) + 12% Recargo xxx D85 (5% CIF) _xxx COSTOS TOTAL DR INPORTACION DE PLOW xxx IMPORTACION DE PRODUCTOS Coatos de Importacion (CIF) 3xx xxx D14/15 (10% CIF) + 12% Recargo xxx D8S (5% CI?) xxx Arancelarios + 12% Recargo xxx Consularios (8 FOB lncl. Costa Financiero) xxx Demora + Comisiones Bancarias (Demora xxx Comision-s Bancarias (Productos) COSTOS TOTAL DE INPORTACION DE PRODUCTO0 xxx COSTOS DS REFINRRIA Costo Total de Operaciones xxx (Ingreoos)/Costos no Operacionales (noto) xxx Utilidad Bruta de Refineria xxA. COSTOS TOTAL DE RIFXNERIA axx TOTAL DX COSTOS xxx RICEDENTE (TOTAL de INGRESOS monos TOTAL de COSTS) xx - 87 - ANNE X Page I ofI CONISION ADRINISTRADORA DEL PETROLEO RESUNEN COMPRA-VENTA DE PETROLEO CRUDO Y RECONSTITUIDO (PERIOD: de ENERO -) No. Carta Fecha de go. earrlli Valor Venta F.O.. Vator Excedente Prec1o Prieo Camisaon de Ewroua vetos (llles/Lps) Cowra M/ Pagdo Pot La Vents Capra Vanejo Crdidto (N1 tes/Lps) Reffiwrle Promedlo Pr fedlo (NI les/Lps) (Ni lus/Lps) LPu/Bbts. Lps/lbls. 43/87 11-01-87 120,30. 1s569.8 4,761.9 10,857.9 130.00 39.75 234.6 61/8? 14-02-87 129,983 12,380.6 4,683.5 7,697.1 9f.28 36.05 185.7 95/7 060-3-87 137,429 7,161.2 4,813.6 2,347.6 S2.11 35.03 107.4 113/87 21-03-87 lin.hR2 1S1608 4,L 21L0949.1 104.73 36.22 am TOTALES MAST LA FECNA 518,294 48,862.4 19,010.7 29,85.? 732.9 Al IncIuye Coto tFinanlero a to Tasou Preferencft Vlg.ntge a la feche dit conocirmlsto de Embarque. - 88 - 88 - AN~~~~NEX ,XXIII Page I of 4 Secretaria de Economia y Comercil Republica de Honduras CAP._ Tegucigalpa, D.C. Seflor Vicepresidente y Gerente General Refineria Texaco de Honduras, S.A. Ingeniero Manuel J. Crespo Puerto Cortds. Eesdmado Ingeniero: Adjunto encontrar6 copia de la documentacion referente a nuestra venta de barriles netos de Petroleo el cual fue emnbarcado el dia en el arribando el dia La documentacion que se remite incluye: Factura Comercial No. CAP- - Recibo por facturas anteriores -_ Factura Comercial No. Bill of Lading Acuse de Recibo del Capidtn Certificado de Origen y Autenticidad Mainfiesto de carga Aviso de Listgo Informe del Inspector: Reporte del Tiempo Reporte de Calidad Reporte de Cantidad - Reporte del Buqaue El vencimiento de nuestra Carta de Credito es al dia apreciando se sirva gestionar el pago a la mayor brovedad posible a fin de poder cumplir con nuestra obligacion con el Banco Cental de Honduras sin nhua demora en la fecha indicada. El pago debrd bacse en moneda de curso legal, mediante Cheque Certificado emitido a favor de la Comision Aistadora del Petrolco (CAP). Name of Minister of Economy Ministerle de Economia - 89 - ANNEX XXlU Page 2 of 4 FACTURA COMERCIAL FACUTURA NO. No. CARTA DE CREDITO TEGUCIGALPA, D.C. _ FECHA CONSIGNADO A REFINERIA TEXACO DE HONDURAS, S.A. POR LA VENTA FOB DE PEIROLEO MAS COMISION DE MANEIO DE 1.5%, CUYA CANTIDAD, VALOR Y REFERENCIAS DESCRUVUNIS A CIBTUBYACUIB: PUERTO DE EM ARQUE FECHA DE EMBARQUE NUMERO DE EMBARQUE BUQAUE TANQUE TRANSPORTADOR NACIONALIDAD BUQUE TANQUE BARRILS BRUTOS: BARRILES NETOS: TONS LARGAS BRUTAS: TONS. LARGAS NETAS: jED I SI L/B US$S/B LEIRAS $US …-- --- PRSCIO FOB (BBL.NETO) COSTO FIANCIRRO -x DIAS PRICIO - FOB HSu CONSTO FIN. ZXCZDBNT TOTAL PRECIO COMISION DE MANWO (1.5%) VALOR TOTAL DE FACTURA POR- COMISION ADMRA, DE PETROLKO - 90 - A . , Page 3 of 4 Secroaria de Economia y Comercio Republica do Hondus RE=IB =O La Reocblmos de 1a Rinerla Texaco de Honduras, S.A. 1a cantidad de Lps. por los conceptos descritos en nuestra fhura comorciel y que a continuacion detallamos: Descripcio n Factura ComerWial No. CAP- Name of Mister of Economis M sarie do Economia - 91 - ANNEX XXIII Page 4 of 4 Secretaria de Economia y Comercio Republica de Honduras CALCULO PRECIO DEL CRUDO DE VENEZUELA Y COSTO FINANCIERO (cd.___ ) 1. CALCULO PRECTO CRUDO a _ API Description $ / Barril Precio Crudo a API Mas: Ajuste por _ decuna de gradis a cebtavos de dolar por cada ddcima de gravedad API PRECIO Crude_ a API I. CALCULO COSTO FINANCIERO Costo Fob $ X Prime Rate X 30 dias 360 dias $ X % X 30dias - $ 360 dias I - 92 ANNEX XXIV Page I of 1 PROPOSED FRAMEWORK FOR CRUDE INFORMATION FLOW CHART Texaco Refinery LOC# Texaco Ref. Exec- Telex to CAP Seller Telex dente Calculation 3 MOS. FCST Invoice to CAP Valid For Loading 3 MOS. FCST Volume Month $ 1 b. . Value . Fin. charge LOC# (1) (5) (2) LOC# CAP requests CAP Invoice CAPC toreue to Texaco Central t n o Refinery (3) v . _..F0 central '&-'O-fxnj'A . FOB 3 .C .(7) - . Excdentc =< CAP . . 1.5% Manejo ILOC#- i> Central Bank (4) (6) Refinery Determines Telex to Corres- . -_.Total amount due to pondent Cank tor be paid for crude Open LOC and cargo from Month confirmation (10) (9) (8) closing info. and to CAP ,f,ainadvises CAP. LOC* Central Bank LOCI LOC Liquidation CAP to Central Bank X to CAP for Deposition of Texaco pays CAP Total CosW Texaco's Payment for Crude Cargo The LOC# (Letter of Credit No.) will tie all invoicing and payments together, except for the three months forecast and the calculation of the actual "Excedente" for the year. Although CAP is not involved in the payment of LOC for refined products and crude freight and insurance, similar flow charts can be used to gather the data necessary for the preparation of statistical reports.