DJIBOUTIAN GOVERNMENT COMMITTED TO PURSUING

UNCLAS SECTION 01 OF 04 DJIBOUTI 000447

SIPDIS

STATE PASS TO DEPT OF ENERGY - FOR STEVE RICHARDS, FRANCIS
HODSOLL, LINDSAY ROLAND, ALLAN JELACIC, ROY MINK, BOB
DIXON, JOEL RENNER, GORDON BLOOMQUIST, TOM SPERL;
STATE PASS TO USGS - FOR MIKE FOOSE AND BRENDA PIERCE;
STATE PASS TO USAID - FOR GORDON WEYNAND, WALTER HALL, MARK
SCHLAGENHAUF, MARK MURRAY, KEVIN WARR, SEAN MCCLURE,
HERSCHELLE CHALLENOR;
STATE PASS TO EPA - FOR MYRA FRAZIER;
STATE PASS TO OPIC - FOR MARYSUE SHORE AND SAM SMOOTS;
STATE PASS TO USTDA - FOR HENRY STEINGASS AND CARRIE
WALCZAK;
STATE PASS TO EX-IM - FOR JOHN RICHTER;
STATE FOR BOB MANNING, JEFF HAENI, FERNANDO ECHAVARRIA,
JULIA ROTTIER, GRIFF THOMPSON;
DOC FOR AARON BRICKMAN AND JOSEPH AYOUB.

E.O. 12958: N/A
TAGS: EAID ECON EFIN ENRG SENV PREL DJ GM XW
SUBJECT: DJIBOUTIAN GOVERNMENT COMMITTED TO PURSUING
GEOTHERMAL ENERGY

REF: A. SECSTATE 347715

B. DJIBOUTI 00111 (NOTAL)


1. (U) SUMMARY: Djibouti was the site of a kick-off
conference for the African Rift Valley Geothermal
Development Facility (ARGeo) March 17-20, 2004. The
conference focused on energy needs in Djibouti, next
steps for the exploration and exploitation of
geothermal resources in Djibouti and lessons learned
by Kenya and other geothermal experts. The ARGeo
project is a collaborative effort of United Nations
Environment Program (UNEP),Global Environment Fund
(GEF),and the German Development Bank (KFW). ARGeo
is designed to aid the Rift Valley countries in
developing their geothermal energy resources within
the public and private sectors. The project
organizers see Djibouti as a prime take-off point
for the ARGeo program, as there has already been
research done on geothermal resources, a private
investor identified, and donor interest in the
project noted. The Government of Djibouti
(GODJ) publicly expressed its commitment to pursuing
geothermal energy as an answer to the high cost of
energy, which stymies business growth and exacerbates
high unemployment. END SUMMARY.

THE DJIBOUTIAN PERSPECTIVE
--------------

2. (U) The African Rift Valley Geothermal Development
Facility conference opened March 17 in Djibouti.
Pol/Econ and Econ/Comm Assistant attended all sessions.
Acting Djiboutian Minister of Energy, Saleban Omar
Oudine, made opening remarks and also read a message
from President Ismail Omar Guelleh. (Note: The current
Minister of Energy, Mohamed Ali Mohamed, is
convalescing in France. Oudine currently holds the
position of Minister of Commerce and Industry.) The
Government of Djibouti (GODJ) has placed importance on
reduction of poverty in Djibouti. Both Oudine and
Guelleh named reduction of energy cost as essential
for economic growth and the fight against poverty.
GODJ sees the cost of fuel energy as a major
inhibitor to economic growth and diversification of
energy sources, including geothermal energy, as the
solution. President Guelleh's message emphasized the
importance of ARGeo to Djibouti's geothermal development.
He also implored all Rift Valley countries to consider
seriously and take advantage of the ARGeo initiative.
The acting Minister of Energy re-iterated President
Guelleh's request to the international community to
assist Djibouti in its efforts to develop its
geothermal resource.


3. (U) Electricite de Djibouti (EDD),the Ministry of
Energy, the Agence National pour le Promotion de
l'Investissement (ANPI) and experts from the Centre
des Etudes et Recherche de Djibouti (CERD) presented
the current state of energy needs and investment in
Djibouti. All electricity in Djibouti is currently
generated by diesel fuel power plants. EDD sells
electricity at rates of 41 Djiboutian Francs (DF) for
residential consumers, 51 DF for commercial users, and
52 DF for bulk consumers (approx. 23, 29 and 29 cents
US). EDD quoted average total cost of production at
around 20 cents. Of that amount fuel costs are between
seven and nine cents. The bulk of the remaining cost of
production is reportedly taxes on materials imported
for production. With the proposed geothermal power
plant by Geothermal Development Associates (GDA),an
American company based in Nevada, EDD could buy
electricity at approximately half current costs and
bypass the taxes on imported materials.

LESSONS LEARNED AND ADVICE
--------------

4. (U) The conference brought together major geothermal
developers from all over the world to discuss the ARGeo
program and offer insights to the GODJ on how to progress
with geothermal energy. Kenya was the most effective
delegation as one of the first African countries to
develop geothermal energy with private investment and a
long history of government run development. The Kenyan
perspective promoted continuous but staged development,
with the government bearing a significant portion of the
exploratory risk. Kenya emphasized the benefits of
geothermal energy as a green resource and offered its
assistance in the development process. The experts from
Kenya commented that the best way to develop geothermal
industry was to start with a small plant (5MW),train
locally, learn early how the process works, and later
move to a larger plant (30 MW and up). However, the
Kenyans and other visiting experts highlighted the
point several times that a larger plant is always more
economical.


5. (U) Among the most salient pieces of advice offered
by the Kenyans, was the admonition to provide an
enabling environment for private investment by providing
solid fiscal and legal regimes, as well as charging
private investors low customs duties and taxes. Kenya
also emphasized the advantage of having private
companies run power generating facilities, keeping
government money free to fund other programs.


6. (U) Closing session debates were contentious over
the best way to develop geothermal resources in
Djibouti. One camp, which included the Djiboutians,
promoted the "start small and learn as you progress"
method to mitigate the risk of investment to the
government. The other side of the table, urged
Djibouti to take the opportunity that was presented
with the 30 MW plant proposed by GDA. GDA countered
that it would not have come back after 5 years of
negotiation if it were not sure that the project
would succeed. GDA also assured GODJ that the full
brunt of the risk of investing in Djibouti would be
shouldered by GDA and its investing partners.

HOW ARGEO WILL WORK
--------------

7. (U) ARGeo is designed to provide access to
information, experience, technical and material
assistance; identify obstacles to development and
propose solutions; identify financial mechanisms to
manage risks; eliminate technical barriers; and
reduce overall risk. GEF, KfW and Italy have made
US$ 1 million available for the preparation phase
of ARGeo. The program is expected to be active by
early next year. The project organizers stated that
a team of experts would be visiting each of the
eligible countries to assist them in preparing
their proposals. GEF requests that the countries
then submit the proposals to them to be considered
for funding and assistance.


8. (U) Within the framework of ARGeo there are two
funds that will assist countries in the development
process. The risk coverage fund will help reduce
the direct cost to governments associated with
exploratory and production drilling. The transaction
counsel fund will provide resources for governments
to get the necessary technical and financial advice
throughout the PPA and contract negotiations. These
funds will contribute a portion, not fully fund the
projects proposed. GEF emphasized that private
companies chosen for projects should be able to prove
that they have adequate financing at their disposal
for all stages of the project.


9. (U) Ambassador and Pol/Econ met twice at the
Embassy with Martin Booth, President of GDA, and
Stephen Hirsch, UNEP Geothermal Consultant, to
discuss outcomes of the conference and private
meetings to explore their vision of next steps in
GDA's quest of a contract to develop geothermal
energy in Djibouti. Booth stated his belief in
the continued interest of his company in pursuing
the project, but that project financing remains his
company's single greatest hurdle. Ambassador
suggested possible interlocutors for GDA in terms
of financing possibilities, including some of the
development funds of Gulf countries. She also urged
that opportunities with Overseas Private Investment
Corporation (OPIC) be explored. Booth pledged to
pursue both options. Ambassador also conveyed to
Booth the willingness of the Embassy to do all that
it could to support and eventual contract proposal
from GDA to the Government of Djibouti.


10. (U) COMMENT: At the beginning of the conference,
the GODJ seemed unconvinced of the practicality of
geothermal energy. At the end of the conference,
however, it appeared more convinced. The GODJ stated
at the end of the conference that it wanted ARGeo to
be the framework it worked through to develop
geothermal energy with private sector involvement.
The GODJ also mentioned its interest in developing
small-scale/ off-grid applications, such as small
local plants that serve a specific area not reached
by the main power grid.


11. (U) COMMENT CONTINUED: There was contention
between the GODJ and GDA on output capacity of a
proposed geothermal facility. The GODJ focused on
perhaps a small initial plant generating only 5 MW
of power. GDA made clear, however, that it would
not be interested in building a facility that would
provide less than 30 MW of power. The general
consensus at the end of the conference was that the
ball is in ARGeo's court, and that the Djiboutians
are waiting for the first move to come in the form
of an ARGeo funding and assistance package.
END COMMENT.
RAGSDALE