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