SENEGAL'S STRATEGY TO ADDRESS ITS ENERGY CRISIS

UNCLAS SECTION 01 OF 05 DAKAR 002364

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EB/ESC/IEC, EB/IFD/ODF, AF/EPS AND AF/W
AID/W FOR AFR/WA AND AFR/SD
TREASURY FOR OIASA/IDB
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS
USDOC FOR 4510/OA/PMICHELINI, AROBINSON-MORGAN/KBOYD
USDOC FOR 3131/CS/ANESA/OIO/GLOOSE/GLITMAN/MSTAUNTON

E.O. 12958: N/A
TAGS: ENRG EINV ECON EPET KMCA SG CH IR LY MO
SUBJECT: SENEGAL'S STRATEGY TO ADDRESS ITS ENERGY CRISIS

REF: DAKAR 1746 AND PREVIOUS (NOTAL)

DAKAR 00002364 001.2 OF 005


SUMMARY
--------------

1. (SBU) As we enter the ninth month of Senegal's energy crisis,
the GOS and energy parastatals have outlined a number of steps that
they hope will stabilize the situation. With presidential and
parliamentary elections in February 2007, there is widespread
agreement among sector analysts that the energy crisis must be
brought under control by the end of October before the political
campaign hits full stride and it becomes more difficult to make hard
decisions. In meetings with EmbOffs, industry insiders shared
short-term and medium-terms plans to address Senegal's growing
energy crisis. However, the most significant, and perhaps most
distressing aspect of the GOS actions is the increased imposition of
government control on the sector, including the re-acquisition of
shares of Senegal's troubled petroleum refinery, and the creation of
an "Emergency Fuel Fund," the oversight of which has not yet been
explained. END SUMMARY.

-------------- --------------
WAS PRESIDENT WADE IN THE DARK ABOUT THE ENERGY CRISIS?
-------------- --------------

2. (SBU) On September 19, EmbOffs met with Samuel Sarr, the
Director General of SENELEC (Senegal's government-owned electricity
transmission/distribution monopoly). Sarr reported that those
surrounding President Wade were "lying" to him about the critical
state of Senegal's energy crisis and claimed that he "sounded the
alarm" as early as January 2005, when he claims to have sent memos
to the Minister of Energy anticipating the impact on Senegal of the
alarming rise in the price of crude oil. After receiving no
reaction from the Minister of Energy and Mines, Sarr claims to have
raised the issue with Prime Minister Macky Sall through official
channels. It was only on July 4, 2005, when Sarr had an audience
with President Wade was he able to bring his concerns to the
President's attention more forcefully. At that time, according to
Sarr, President Wade directed the Prime Minister to devise a
strategy to address the energy situation. Eventually, in December
2005, the Prime Minister convened an inter-ministerial meeting on
the energy situation. According to Sarr, the suggestion to
re-establish an "Emergency Fuel Fund" (EFF) was raised; however, a
vote was never taken. By February, Senegal was feeling the impacts
of high oil prices and resulting petroleum shortages and frequent
electricity cuts and brownouts.


3. (SBU) Taking the difficult but necessary steps to deal with
electrical outages will likely prove difficult for the GOS, which is
already in the midst of a highly-charged electoral season, with
presidential and parliamentary elections due to be held in February.
In order to have the means to keep current on its accounts with
fuel suppliers, and GE/GTi, SENELEC is pining its hopes on gaining
approval for a hike in electricity prices to reflect the utility's
true costs. Senegal's electricity regulatory board indicates that
the cost per kilowatt/hour will need to rise by at least 15
percent.


4. (SBU) Since the shut down of the Societe Africaine de Rafinage
(SAR),Senegal's only refinery, in April 2006 and after the sell off
of its remaining stocks of refined product in August 2006, consumer
petroleum product imports shifted to the limited storage capacity at
the Port of Dakar. However, due to the lack of sufficient
infrastructure, SENELEC has been unable to get its imported fuel to
its Cap de Biche power stations, which are adjacent to SAR and some
20 kms from the Port of Dakar. The inability to get fuel to the Cap
de Biche site contributed to the deficit on the power grid in
August, which was further compounded when GTi Dakar stopped
operations due to the lack of payments by SENELEC (reftel).


5. (SBU) On September 26, Mr. Jean-Michel Seck, the Managing
Director of SAR, told EmbOffs that recently concluded negotiations
with the GOS would permit SENELEC to off-load and store its heavy
fuel imports at the refinery to facilitate the supply of Cap de
Biche. At the same time, Total/Senegal has restarted the
importation of heavy fuel --15, 000 tons destined for SENELEC and
3,000 tons earmarked for the local manufacturing industry, which
should ease the strain placed on SENELEC and local manufacturers who
have been forced to use gasoil due to the lack of heavy fuel in
country. (NOTE: The gasoil used by SENELEC and local manufacturers

DAKAR 00002364 002.2 OF 005


is 50 percent more expensive than the heavy diesel fuel normally
used by manufacturers. END NOTE.)

-------------- ---
EMERGENCY FUEL FUND AND RESTRUCTURED FUEL PRICES
-------------- ---

6. (SBU) According to industry insiders, the Council of Ministers
agreed on September 7, 2006, to re-establish an emergency fuel fund
(EFF),whereby fuel dividends would be retained by the GOS. Any
decrease in fuel prices will likely not be passed on to the consumer
through lower prices at the pump, but instead diverted into the
fund. (NOTE: This fund had been abandoned in 1998 in accordance
with an energy sector liberalization initiative spearheaded by the
World Bank. END NOTE.)


7. (SBU) Concomitant with the establishment of the EFF, the
Ministers agreed to establish a new, presidential-appointed
"National Committee" to manage the Fund and establish long-term fuel
purchasing contracts. The "National Committee" is expected to be
composed of government officials in the energy sector and all
licensed fuel importers. As the GOS hopes to begin issuing
procurement tenders for yearlong contracts by December, it is
anticipated that the "National Committee" will be established
imminently. Details are not yet available on the terms of reference
for the committee or the management and accountability details for
the EFF.


8. (SBU) And finally, after much prodding by the fuel suppliers and
SAR, the Ministry of Energy will restructure fuel prices based on
c.i.f Northwest Europe reference for the import-price parity in
place of the lower f.o.b. Mediterranean reference point, thereby
enabling SAR to reap a higher margin upwards of USD 8 million
annually for the refinery. (NOTE: The import-parity price was one
of the major sources of contention between the GOS, suppliers and
SAR. The GOS' move to align with the c.i.f. Northwest European
price reference should help SAR meet its financial commitments and
secure supplies. However, on the flip side, due to the duty
structure associated with the c.i.f. Northwest Europe reference, the
GOS will lose significant tax revenue. END NOTE.)

-------------- --------------
FUEL CREDITS FROM IRAN, LIBYA, MOROCCO AND NIGERIA
-------------- --------------

9. (SBU) According to Mr. Carmello Sagna, the Director of
Hydrocarbons, fuel credits will be given to Senegal by "Friends of
Senegal," including Morocco, Nigeria, Iran, Libya and perhaps other
oil producing countries. More specifically, Mr. Mahammed Dionne,
Chief of Staff to the Prime Minister, informed EmbOffs that Iran
will deliver heavy crude on 90-day payment terms with the first
shipment expected sometime in October. Prior to accepting Iran's
offer, the GOS reached an agreement with Total to swap Bonny Light
fuel for the Iranian fuel, which due to technical limitations,
cannot be refined by SAR. Petrosen, Senegal's government-owned
petroleum company, will take possession of the Iranian fuel credit
as Iran stipulated that this be a government-to- government
transaction, according to Dionne. On September 28, as Senegal's
Minister of Energy and Mines announced that SAR should resume
industrial operations by November, EmbOffs anticipate that they will
resume operations with the fuel credits provided by "Friends of
Senegal."

-------------- ---
MOROCCO TO ASSIST SENELEC IN BUILDING FUEL DEPOT
-------------- ---

10. (U) In another major effort to establish an adequate supply of
fuel for electricity generation, SENELEC, apparently using powers of
eminent domain, has recently appropriated space at the Port of Dakar
for the construction of a dedicated fuel depot. According to
industry sources, the GOS plans to have tanks built in Morocco and
shipped to Senegal where local companies will install them. The
cost of the project reportedly stands at USD 150 million and is
expected to be completed within 18 months. SENELEC, the biggest
heavy fuel consumer in Senegal, uses 700,000 tons of fuel annually
and, according to officials at the Ministry of Energy, can no longer
depend on SAR for its fuel needs. (NOTE: In January 2006, SAR
signed a contract with SENELEC restricting its supply to 25 percent
of SENELEC's needs. However, despite the signing of the contract,
when Total and Shell refused to supply SENELEC due to non-payment

DAKAR 00002364 003.2 OF 005


issues, SAR supplied 100 percent of SENELEC's fuel needs. END
NOTE.)

-------------- -
CHINESE TO BUILD 250 MW COAL-FIRED POWER PLANT
-------------- -

11. (SBU) While Sarr informed Embassy officials that the Chinese
will begin construction on the previously announced 250 MW
coal-fired power plant in January 2007, the Director of Hydrocarbons
is skeptical about the Chinese offer. Nonetheless, three possible
sites -- Bargny, Sendou, and Kaolack have been identified for this
new facility, which is expected to be commissioned in 2009. The
winner of SENELEC's tender published earlier this summer for the
construction and operation of a second, 125 MW coal-fired plant,
will be offered the maintenance of the 250 MW Chinese plant.

-------------- --------------
SENELEC PUSHES WORLD BANK TO DISBURSE FOR KOUNOUNE 1
-------------- --------------

12. (SBU) SENELEC's Sarr was in Washington, DC, in mid-September to
push the IFC and World Bank, to disburse funds for the 60 MW
Kounoune I diesel power station -- Senegal's second IPP after
GE/GTi. Sarr was also scheduled to meet with U.S. hedge fund
Contour Global, which may become an equity partner in Kounoune I,
joining Mitsubishi Heavy Industry, which has already injected USD 54
million into the project, and Lebanese partner Matelec. Originally
scheduled to be inaugurated in June 2006, SENELEC does not
anticipate that Kounoune I will be operational before the end of
December 2006. Another problem, which complicates the operation of
Kounoune I, is the lack of a fuel pipeline between the port and the
power plant.

-------------- --------------
GOS INCREASES SAR HOLDINGS, HOPING IT RESUMES SHORTLY
-------------- --------------

13. (SBU) Director of Hydrocarbons Sagna informed us that the GOS
now owns 33.6 percent of SAR, having recently purchased 12.3 percent
from shareholder Total. Reportedly, President Wade, who views SAR
as a strategic asset, especially with the GOS' continued optimism
that someday oil will be discovered in the country's Exclusive
Economic Zone, gave a directive to the Treasury for Senegal to
acquire a majority stake in SAR's operations. However, analysts
believe that SAR cannot be competitive with refineries in Cote
d'Ivoire and in Ghana (and perhaps not even compared to other
sources of imported products, without major -- perhaps USD 300-400
million -- new investment and the right to charge an additional 36
CFAF/liter in the price of its refined fuel. SAR's outdated
production technology can refine only one category of crude oil
[Bonny Light], which originates from Nigeria and is more expensive
to process. The GOS plan, if there is one, to both increase shares
of SAR and find new capital for improvements is not at all clear.)
(NOTE: Before it suspended operations, SAR refined 1.2 million tons
of crude annually while the country needs 2.0 million tons. Sagna
believes that Total has a desire to pull out of SAR and concentrate
on its investment in SIR (the Ivoirian refinery which has a capacity
to refine 4 millions tons of crude annually). Total is likely also
content to rely on the direct import of refined product whose
benefits accrue directly to its trading arm Total Outre Mer. END
NOTE.)


14. (SBU) SAR Managing Director Seck informed EmbOffs that it has
paid off USD 81.6 million in financial debts or 50 percent of its
total finance-related debt. It is renegotiating payment plans with
its suppliers Total, Shell, Trafigura and Vitol and hopes that one
of these companies will respond to its new fuel tender. SAR's
efforts to update its accounts receivables from SENELEC are not
clear. (NOTE: According to Seck, SAR ceased importing crude oil
for industrial activities on April 20. Seck indicated that SAR has
also stopped its commercial activities (refined oil products
imports) in August, since not one supplier responded to its tender
to import fuel in August, owing to its outstanding commercial debt.
However, now that repayment plans have been established and the debt
whittled down to approximately USD 260 million through offshore
borrowing, SAR is hopeful that fuel traders will respond to this new
tender, and the refinery can resume its commercial trade of
importing refined product. (NOTE: Embassy underestimated SAR's
outstanding commercial debt in reftel. END NOTE.) SAR officials
hope to begin refining once the new fuel price structure has

DAKAR 00002364 004.2 OF 005


completed the administrative vetting circuit and has been signed by
President Wade.

--------------
THE "GOOD NEWS" - OR NOT
--------------

15. (U) Despite the fact that there is limited fuel supply in the
interior of the country, that SAR is not refining or importing fuel
at the moment, and that GTi and its 50 MW of electricity remain shut
down for lack of payment, Senegalese energy officials see light at
the end of the tunnel and expect Senegal's energy crisis to be
resolved "soon". They point to a possible October release of a new
energy strategy, the receipt of fuel credits, the likely revision of
commercial pricing structures, and the recent start-up of SENELEC's
Bel Air Wartsila plant, which will add 60 MW to Senegal's power grid
-- although this addition has been temporarily offset by GTi's shut
down. The possible early 2007 start for the Kounoun 1 plant is also
reason for optimism.


16. (SBU) Others are not so positive. One of Senegal's leading
private economists, Mohamadou Diop, recently offered a very
pessimistic view of the GOS' political and commercial management of
Senegal's energy sector. In his view, the energy crisis will
continue "for years;" he is fearful of an expansion of power
outages. Donors are also ready to be direct with the GOS. On July
13 a delegation of donor representatives, including Ambassador
Jacobs and USAID Director Olivier Carduner, as well as the French
Ambassador, and representatives of the IMF, the World Bank, the
European Union, and the UNDP shared their concerns regarding the
deteriorating economic situation with the Prime Minister and
specifically mentioned SENELEC management as one of a handful of
issues that could seriously impact GDP growth rates in 2006. The
donors noted that continued delays in application of electricity
price increases would cause an increase in GOS subsidy payments to
110 billion CFAF (USD 220 million) in 2006. Donors also raised
concerns about the lack of transparency in financing mechanisms for
the Kounoune II plant which gives the impression that the GOS is
diverging from previously stated energy policies.


17. (SBU) Privately, World Bank officials indicated that SENELEC
under Sarr's leadership had bypassed all World Bank efforts to
assist in restructuring and modernizing the utility and that SENELEC
was conducting financial deals with no donor consultation or
transparency. The Kounoune I plant is the last World Bank-supported
power plant and its construction was delayed by a year in an effort
that seemed aimed at improving bidding prospects for a firm
preferred by Sarr.


18. (SBU) Nevertheless, the Government is undoubtedly under
political pressure to do something and to do so quickly. With the
2007 campaign and elections looming, energy shortages have been
publicly linked by opposition parties and the media to broader
electoral issues, such as the weakening economy and allegedly failed
social policies. If Wade is going to show a positive impact on key
issues prior to the election, he will need to take action relatively
quickly. At the same time, he will not want to make any difficult
decisions likely to alienate any of his most ardent followers too
close to the election date.

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

19. (SBU) Post remains skeptical about the near-term effectiveness
of both the GOS' emerging energy plan and its ability to implement
necessary, but politically difficult measures. Reverting to a more
centralized, state-managed energy sector might create a near-term
boost in fuel and electricity supplies, if the Treasury can find the
funds to assure new imports of fuel and get SENELEC back on track
with its creditors. However, in the longer-term, it is very
unlikely that a nationalized SAR will attract outside investment for
the necessary modernization. At the same time, with the IMF
publicly raising concern about Senegal's handling of an airport
departure tax in order to finance a new international airport, the
GOS' rush to re-create a previously discredited Emergency Fuel Fund,
without taking the necessary steps for transparency and
accountability, could prove to be one more source of flagging donor
and investment confidence in Senegal. END COMMENT.


DAKAR 00002364 005.2 OF 005


Jacobs