WHAT DID SENEGALESE DO BEFORE THEY HAD CANDLES?;

UNCLAS SECTION 01 OF 04 DAKAR 001100

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/IFD/ODF, EB/ESC/IEC, AF/EPS AND AF/W
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS
USDOC FOR 4510/OA/PMICHELINI, AROBINSON-MORGAN/KBOYD
USDOC FOR 3131/CS/ANESA/OIO/DHARRIS/GLITMAN/MSTAUNTON

E.O. 12958: N/A
TAGS: ENRG ECON EPET SG
SUBJECT: WHAT DID SENEGALESE DO BEFORE THEY HAD CANDLES?;
SENEGAL'S WORSENING ENERGY SITUATION



1. (U) SUMMARY: The latest political joke making the
rounds in Dakar these days is: "What did Senegalese do
before they had candles? ... They had electricity."
Unfortunately, Senegal's chronic electricity shortages are
no laughing matter and continue to have adverse economic,
social and political repercussions. Two important
factors, which came to a head simultaneously to spur the
crisis, were: a) the inability of the Government of
Senegal (GOS) to pay subsidies on butane gas to the the
Societe Africaine de Rafinage (SAR),the country's only
oil refinery, which resulted in the recent shut down of
its operations, and b) the failure of Senegal's national
electricity company Senelec to honor it financial
commitments to its two main suppliers: Shell, which
provides 60 percent of its fuel needs, and Total.


2. (U) Because of its financial shakiness, SAR's Board of
Directors recently refused to rubber stamp the refinery's
long-standing practice of buying crude oil on debt.
Shell, simultaneously cut off its fuel supply to Senelec
and threatened to stop providing fuel on credit as Senelec
had racked up a USD 10 million debt with Shell. The
actions taken by SAR's Board of Directors and Shell have
had a ripple effect on Senegal's entire energy sector,
most visibly causing electricity outages in businesses and
households for several hours a day.


3. (U) Although quantitative estimates vary according to
source, the situation is without doubt, causing a
noticeable decrease in industrial output and commercial
sales and will impede GDP growth. As the 2007
presidential and legislative elections loom, an economic
slowdown could weaken the political resolve needed to push
ahead with necessary economic reforms.


4. (U) Although the GOS has paid an announced USD 30
million on its outstanding debt to SAR, which has enabled
the refinery to resume the importation of crude oil,
discussions are underway on the remaining outstanding
debt, which is estimated to be approximately USD 130
million. With World Bank support, the GOS has hired an
outside consultant to reconcile the discrepancies
surrounding the financial dispute between the GOS and SAR,
and assist the GOS with harmonizing the price structure
within the petroleum industry. However, given that SAR
and the oil oligarchs (Total, Shell and Exxon/Mobil)
control the petroleum scene in Senegal, the GOS, caught
between a rock and a hard place with little wiggle room,
is completely at the mercy of SAR and its shareholders --
Total, Shell and Exxon/Mobil. END SUMMARY.

POWER OUTAGES IN DAKAR AND OTHER CITIES
--------------

5. (U) Long power outages struck Senegal hard this last
quarter, causing serious concern about potential economic
and political shocks. With outages extending 12 to 15
hours in most areas of Dakar and in secondary cities,
businesses and households alike have become more
vociferous in their complaints. Reports on the blackouts
appear daily in the press. Generators and candles have
become two of the most sought after commodities, with
cheap Chinese generators flooding the market. Reportedly,
one can buy a small generator for as little as USD 300 to
operate a tailor shop. Businesses that could tolerate
short outages in the past must now either invest in their
own power sources or shut their doors. According to local
reports, the outages have contributed to the closure of
many small and medium-sized enterprises (SMEs) in the food
processing, textile and tourism sectors. Larger companies
are reporting declines in output of upwards of 30 percent
and have had to begin rolling brownouts at their
manufacturing facilities to be able to continue to
manufacture. Senegalese garment manufacturer Indosen has
released more then 1,000 permanent and temporary workers.

DELINQUENT PAYMENTS: GOS, SENELEC, AND OIL RETAILERS
-------------- --------------

6. (U) The GOS and Senelec are embroiled in a number of
financial disputes with the oil suppliers, which have
resulted in seriously weakening Senegal's economic
development. The Government began subsidizing butane in
1973 in response to a World Bank effort to fight
desertification and deforestation. While the GOS
continues to subsidize the price of refined petroleum

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product and butane gas, the Government halted its subsidy
payments to SAR approximately seven months ago. The GOS
claims that SAR and the distributors of butane gas have
not provided them with invoices for payment. The GOS has
already paid SAR USD 30 million; SAR reports that the
Government still owes USD 130 million, which includes
interest. Though the GOS challenges this figure, it has
agreed to pay USD 79 million (CFA 42 billion) toward the
debt. Negotiations are in progress between the two
parties as an independent Canadian firm assesses the
dispute with supported from the World Bank. Hired by the
GOS, the Canadian firm has also been asked to audit the
price structure of imported oil and to analyze the
government's indebtedness to SAR. Once the independent
consultant has reviewed SAR's claim, the GOS has said that
it stands ready to pay the entire USD 49 million still
owed. (COMMENT: Based on rough estimates, outstanding
subsidies for butane gas alone are approximated at USD 50
million of the GOS debt to SAR. SAR's shareholders are:
Total 54.4 percent, Shell 23.8 percent, Exxon/Mobil 11.8
percent, and Petrosen 10 percent. SAR has a nominal
capacity to refine 17,000 barrels/day, or approximately 1
million tons per year, and supplies the national market
and in part, the petroleum needs of neighboring countries.
END COMMENT.)


7. (U) The accumulation of the GOS' unpaid subsidies has
weakened SAR's financial standing, forcing it to absorb a
portion of the difference between buying petroleum at
world market prices on the spot market, and selling gas
and refined petroleum products to domestic customers at
lower prices, fixed by the Government. Industry sources
estimate that SAR currently owes USD 160 million to the
banking sector, which is separate from the government
debt. Rumors abound that SAR is trying to squeeze the GOS
by artificially inflating the amount that the Government
owes to cover SAR's debts to the banks. Since the end of
2005, SAR's Board of Directors has refused to rubber stamp
SAR's long-term practice of buying crude oil on bank
credit.


8. (U) Shell, on the other hand, which provides 60
percent of Senelec's petroleum needs, cut off its fuel
supply because of outstanding payments and has imposed an
USD 11 million credit limit on Senelec. Once this
threshold is reached, Shell simply halts the supply of
petroleum to Senelec. Faced with this unprecedented
dilemma, Senelec has turned unsuccessfully to SAR and
Total to secure fuel on credit. Senelec's total debt to
Shell and Total amounts to estimated USD 50 million.
Exxon/Mobil stopped supplying fuel to Senelec in 2005 due
to similar issues related to non-payment.


9. (U) Senelec is the biggest consumer of petroleum
products in Senegal, averaging 400,000 to 500,000
tons/year. SAR cannot supply more than 25 percent of
Senelec's needs.

GE/GTI DESERVES PART OF THE BLAME
--------------

10. (SBU) Senelec's Director General Samuel Sarr has
publicly accused GE/GTi, the U.S. independent power
producer (IPP) of being partially responsible for the
outages. GE/GTi has attempted to refute Senelec's
accusations, indicating that when operational, GTi
supplies only 22 percent of Senelec's normal load. (NOTE:
GE/GTI halted production on December 26, 2005 and invoked
the "force majeure" clause in the "Power Purchase
Agreement" (PPA),due to a fire in its gas turbine, which
severely damaged its operations with an estimated loss of
USD 2 million. GE/GTi has made insurance claims for the
damaged equipment, and has faulted Senelec's earlier power
outages and surges for the fire. On May 2, 2006, GE/GTi
resumed operation of its 35 MW gas turbine and its 15 MW
steam turbine to add its full 50 MW to Senelec's grid.
END NOTE.)


11. (U) In the meantime, one of Senelec's 30 MW plants at
Cap de Biche has gone down. While reasons for the
shutdown are unknown, obsolete equipment is probably to
blame, according to industry outsiders.

OIL PRICE STRUCTURE ANOTHER SOURCE OF TENSION
--------------

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12. (U) Senegal's price structure of petroleum products
is rigid. It is composed of a number of price elements
that can be divided into international and domestic. The
international element or Basic Fuel Price (BFP) is based
on an import-parity principal, which is a fixed price and
is a major source of contention between the GOS and the
oil suppliers: Shell, Total and Exxon/Mobil. The domestic
elements, including port rights and a value-added tax
(VAT),are harmonized community taxes set by the West
African Monetary and Economic Union (WAEMU or UEMOA).
Within the current price structure, a 53.30 percent tax on
premium grade gasoline and a 38.8 percent tax on diesel
are deposited directly into Senegal's national treasury.
The price at the fuel pump reflects changes in world
market prices or on the BFP, but Senegalese consumers have
been relatively shielded by recent price hikes due to the
GOS' subsidies on every liter of gas sold at the pump.
When the GOS does not pay subsidies, the entire energy
sector enters a state of disarray as demonstrated by
recent developments. As the price of crude oil has
increased, the GOS is having to revise its price structure
every four months and raise the price at the pumps.
However, the distributors are not realizing any gains from
the price hikes due to the BFP ceiling.


13. (U) While the GOS attempts to protect consumers at
the pump, distributors claim that the current price
structure is artificial and that it hampers the
development of the retail petroleum sector. Due to thin
profit margins under the current price structure,
distributors claim that they are not interested in
investing in further capital improvements. Nor are they
inclined to bring in more product than absolutely
necessary. Whereas jet fuel and marine fuel are not
regulated, companies like Exxon/Mobil claim to be focusing
their attention to this "international trade" and not on
stockpiling refined product for local consumption due to
the BFP ceiling. Senegal's six, networked storage
facilities are owned by Total, Exxon/Mobil and Shell. Oil
suppliers, authorized since 1998 to import and stock
refined petroleum, are technically required by the GOS to
maintain a security stock of 35 days. (COMMENT:
Exxon/Mobil sources find this proposition unrealistic,
arguing that Senegal does not have a storage capacity to
maintain a 35-day security stock. END COMMENT.)


14. (U) The petroleum suppliers are calling for price
liberalization to ameliorate the energy situation in
Senegal and demand that the import-parity principal be
aligned with the European/American oil commodity market
price instead of that set by the Mediterranean oil
commodity market, for which the ceiling is substantially
lower than the market price set within the
European/American oil commodity market. According to
Senegal's Ministry of Energy, the international oil
suppliers (Shell, Total, and Exxon/Mobil) would gain an
additional USD 15 million annually if the GOS were to
switch to the European/American price standard.

LIGHT AT THE END OF THE TUNNEL
--------------

15. (SBU) If the World Bank-financed Canadian auditor
does not recommend aligning the import-parity price with
the European and American market price, SAR and the main
distributors (Total, Shell, and Exxon/Mobil) have
threatened to cease their operations in Senegal. GOS
officials take the threat seriously, are in regular
discussions with the petroleum suppliers to keep the lines
of communication open, and hope to avert a complete
shutdown. The Canadian consultant is expected to complete
his assessment by the end of May 2006.


16. (U) On April 23, 2006, the GOS and the oil suppliers
reached a consensus and raised the fuel price at the pump
by 3.6 percent, from CFA 602 to CFA 624 per liter (USD 1 =
cfa 515) for premium grade gasoline. For diesel product
there was a 4.8 percent increase, from CFA 514 to CFA 539
per liter. Despite the increase in prices at the pump,
petroleum suppliers will not see an increase in their
coffers though.


17. (U) On a related note, the GOS through Petrosen is
planning to purchase Exxon/Mobil's 11.8 percent share in
SAR at a cost of USD 2.5 million. Additionally, it is

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reported that the GOS is pressuring Total to sell 11.8
percent of its shares to Petrosen to make the GOS the
second largest shareholder in SAR after Total, thereby
increasing the GOS' influence in the refining sector.
Carmello Sagna, Director of National Committee of
Hydrocarbons, criticized such a move on the grounds that
GOS does not have enough financial muscle to contribute to
the necessary overhaul and maintenance required of the
refining sector. He argues that the GOS should focus on
building more storage facilities and on liberalizing the
imports of refined petroleum products to local
distributors such as Elton, Touba Gaz and others.

COMMENT
--------------

18. (U) The significant deterioration of Senegal's energy
sector over the last few years is negatively affecting its
economy, which has been on a ascending path since 1994.
Although quantitative estimates vary according to source,
the power shortages without doubt, are causing business
losses of output and sales, and will contribute to a
slowdown in GDP growth.


19. (U) As the 2007 presidential/legislative elections
approach, there is also the political impact to consider.
Both the GOS and Senelec are under pressure to find a
solution and are finally trying to schedule power outages
to enable people to plan their activities around them.
However, the situation will only be a short reprieve if
the current price structure is not corrected. Energy
demand will continue to grow as the economy grows and as
the Government expands electricity availability throughout
the country. If the Government fails to implement new
sustainable, long-term energy policies in the near future,
Senegal will plunge into another electricity crisis within
the next year or two.


20. (SBU) Post will report septel on the impact of
Senegal's energy crisis on the local business community
and Senegal's GDP growth, as well as the impact on
neighboring countries. Post will also address Senegal's
medium and longer-term proposals to address this crisis.
In the short term, President Wade has reportedly sought a
diplomatic solution by asking President Chirac to weigh in
with French petroleum supplier Total, SAR's major
shareholder, and Wade also found some relief when Morocco
agreed to provide refined fuel to Senelec in April. END
COMMENT.

JACKSON