THE IMPACTS OF AFRICAN RIFT VALLEY GEOTHERMAL

C O N F I D E N T I A L SECTION 01 OF 03 DJIBOUTI 000111

SIPDIS

DEPT FOR OES ATTN: FERNANDO ECHAVARRIA; DEPT ALSO
FOR JEFFREY HAENI;
DEPT PASS TO USAID FOR GORDON WEYNAND; DOE FOR
FRANCIS HODSOLL

E.O. 12958: DECL: 01/26/2014
TAGS: ECON EFIN ENRG SENV TRGY EINV DJ
SUBJECT: THE IMPACTS OF AFRICAN RIFT VALLEY GEOTHERMAL
DEVELOPMENT FACILITY ON THE ENERGY MARKET IN DJIBOUTI.

REF: SECSTATE 347715

CLASSIFIED BY: Tim Smith, Charge' AE Djibouti, Reason
1.5 (B)


1. (U) SUMMARY: The involvement of the African Rift
Geothermal Development Facility (ARGeo) has the potential
to bring an end to the stalemate in the negotiations
between the Government of Djibouti (GODJ) and the private
American company Geothermal Development Associates (GDA).
The proposed GDA project at Lake Assal has been in the
negotiation phase since 1999.

POST'S RESPONSE TO QUESTIONS IN SECSTATE 347715
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2. (U) A. International aid for geothermal infrastructure
development in the region is a priority need. Geothermal
development, which is extremely capital intensive, is not
possible without international aid because the Rift Valley
countries are among the poorest in the world. This
assistance to the region would promote coordination,
stability and collaboration between the countries in
the region.


3. (C) B. There are no overt barriers which would affect
the development of geothermal energy. Djibouti's purported
advantages for potential investors, including an open trade
policy, a stable currency, substantial tax breaks, and
other incentives are less substantial than they may first
appear. In practice, the attractiveness of Djibouti for
foreign investors is greatly marred by the necessity for
under the table dealings, the fact that virtually all
economic activity is controlled by government owned
monopolies, and frequent problems with a corrupt judiciary.
However, because the high cost of energy exacerbates the
poverty in Djibouti, there is strong political will to
develop a cheaper source of energy, including geothermal
reserves.


4. (U) C. The Ministry of Energy, which has overall
responsibility for geothermal development projects, has
repeatedly requested USG technical assistance. USAID
technical assistance that clearly identified the potential
geothermal resources available in Djibouti might assist
post in supporting its MPP goal of economic development.
Energy costs are one of the greatest barriers to foreign
direct investment in Djibouti. To date, there have been
only partially funded feasibility studies done by the
United States Trade and Development Agency (USTDA).
U.S. Embassy Djibouti does not have any existing resources
earmarked for geothermal projects.

GOVERNMENT OF DJIBOUTI PERSPECTIVES
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5. (U) In order to more clearly explain the situation
surrounding the negotiations on the proposed GDA geothermal
project, below are summaries of the views expressed in
recent meetings with key government officials involved in
the project. These meetings were an effort to gather
information and brief the new Political/Economic Officer
on the history and current position of the geothermal
project in Djibouti.


6. (SBU) MEETING WITH HOUSSEIN RAYELEH, MINISTRY OF
ENVIRONMENT: TUESDAY, JANUARY 13, 2004.
Discussed the local dynamics of the geothermal project with
GDA and the ARGeo conference. Rayeleh said that the
Ministry of Environment was doing the planning for the
ARGeo meetings at the beginning of March because the
Ministry of Energy did not have the manpower. Rayeleh
mentioned that the sentiment in the government was
favorable to geothermal possibilities, but that there were
certain officials (namely the director of Electricite de
Djibouti-EDD, the government run electricity monopoly)
who were stalling the project because they want to keep
control of the power and keep the prices high.


7. (SBU) MEETING WITH SECRETAIRE GENERALE ABDI FARAH CHIDEH
AT MINISTRY OF ENERGY: WEDNESDAY, JANUARY 14, 2004.
Discussed the GDA project and why it had stalled. Chideh's
opinion was that there were several problems with the
project and that GDA was poorly organized. First, the
resources had not been confirmed and there was more research
needed. Second, the fact that GDA wanted a signed agreement
for the exploration and exploitation without proper
confirmation of the resources was unreasonable. Third,
that to request a Purchase Power Agreement (PPA) without
confirmation of resources, how could GDA know how much it
would cost for the production per kW. Fourth, that GDA
needs to explain more clearly how they will finance the
project. Chideh mentioned that GODJ did not have full faith
that GDA could complete the project because it does not have
the resources to finance the project itself. In response to
the statement, that once the agreements were signed GDA
would be able to raise the capital necessary, Chideh said
that all the Ministry asked was that GDA followed the proper
"internationally recognized methods" for conducting a
project. Chideh did not elaborate what he meant by this.


8. (SBU) MEETING WITH DIRECTOR GENERAL DJAMA ABDI GUELLEH AT
ELECTRICITE DE DJIBOUTI (EDD): THURSDAY, JANUARY 15, 2004.
Guelleh, an engineer by trade, detailed the technical
problems that have been found in the exploration process
and why GODJ wanted to do more research on the resources.
The majority of the discussion was centered around the price
that GDA wants in the PPA ($0.12 per kW). He brought up the
point that GDA sells electricity to power companies in
Nevada at five cents and those power companies in turn
sell it at seven cents per kW. He said that 12 cents was
too high. He pointed out that the diesel fuel purchased
for EDD's electricity production was nine cents per kW.
He calculated this figure by saying at the commercial price
of 28 cents per kW, the cost of diesel, including the 33
percent tax rate on all purchased materials, made up 40
percent of the total price. He said that if GDA agreed to
sell the electricity to EDD at seven cents, he would sign
tomorrow. Guelleh seemed to doubt that GDA had completed
enough research to start production and stated that only
five million dollars would be needed for the government
to explore the resources sufficiently. Guelleh also
expressed concern over GDA asking the GODJ to sign a
guarantee for the project and that if GDA failed, Djibouti
would have to pay. Econ/Commercial Assistant, Abdi
Mahamoud Abdi, said that this was apparently an issue
last year and had been resolved because funding had been
found from other sources. To this, Guelleh responded that
if that was the case and GDA would agree to seven cents,
the project should go ahead.


9. (SBU) MEETING WITH DIRECTOR GENERAL DR. JALLUDIN MOHAMED
AT CENTRE D'ETUDES ET DE RECHERCHES DE DJIBOUTI (CERD):
WEDNESDAY, JANUARY 21, 2004.
Dr. Mohamed detailed the research and exploration process
of geothermal energy in Djibouti since before the country's
independence. Included in his history of the exploration
were the reasons each project attempt had been abandoned.
The most common reason given was lack of funding or interest
from international investors. He said that the deeper
reserve at Lake Assal, which has the best energy potential,
was abandoned because the water had such a high salt content
that scaling and corrosion were an obstacle that could not
be overcome due to the sheer cost of the potential solution.
Dr. Mohamed explained that the second reserve at Lake Assal
has not been tested for how much potential energy it could
produce, but that the problem of scaling and corrosion
would not be a factor. In answer to the question of why
there were such differing answers as to the reason the
project had stalled from the other key players in the
geothermal project, Dr. Mohamed replied that his opinion
was that it was not a matter of ulterior motives, but more
a matter of confusion. Dr. Mohamed explained that Djibouti
has not had any experience with private investment
negotiations and that much confusion has been caused by a
lack of knowledge of the process. His opinion was that
the negotiations needed to be brought to the table for a
fresh start and that with the aid of the ARGeo project
expertise, the different concerns would be easily
alleviated.
COMMENT
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10. (SBU) Post feels that the information gathered in the
above meetings does not fully explain the stalemate in the
geothermal project. Background information on the
Secretary General of the Ministry of Energy and the

SIPDIS
Director of EDD lead post to believe that their intentions
are not devoid of self-interest and the reasons for the
delays may go beyond the concerns they expressed. EDD's
Djama Guelleh received $2 million in emergency Economic
Support Funds (ESF) to pay back oil fees in April of 2003.
Guelleh is the cousin of the President of Djibouti, speaks
impeccable English, and due to his influence is probably
the center of both the problem and resolution.


11. (SBU) Post lacks the necessary technical expertise to
evaluate figures given us by the various government
officials. Post is also lacking the GDA point of view
and their expertise in the geothermal field. In order to
find the truth of the matter, the two halves of the story
are needed. The outside influence and expertise provided
by ARGeo may be the best hope for forward movement on
this project, as it may clearly delineate the obstacles
in place. END COMMENT.
SMITH