PETROLEUM EXPLORATION CONCESSIONS ON THE MOVE IN

UNCLAS MANAGUA 000764 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/CEN, EPSC, EB/ESC STATE PASS TO E.O. 12958: N/A TAGS: EINV EIND EPET PGOV BMGT NU SUBJECT: PETROLEUM EXPLORATION CONCESSIONS ON THE MOVE IN NICARAGUA REF: (2005) MANAGUA 02551 ¶1. (SBU) Summary: The President and Vice President of MKJ Exploration Inc. - a small, independent gas and petroleum exploration company - announced to the Ambassador on March 30 that MKJ is approaching the end of a hopefully successful three-and-a-half-year effort to obtain two concessions for the exploration of oil and gas along Nicaragua's Atlantic Coast. MKJ gave "high marks" to the leadership at the National Energy Institute (INE) that took over in December 2005 after Nicaragua's failed one-year experiment with a Superintendent for Public Utilities (SISEP) in energy, telecommunications, water and consumer affairs. Post, at all levels, has mounted a commercial advocacy effort aimed at efficient final negotiation of concession contracts for MKJ and Infinity Energy Resources, Inc, another independent energy company with Atlantic Coast concessions pending. It is possible that that concession contracts for MKJ and Infinity could be finalized in April, in time for a ceremonial signing during the planned visit of OPIC President Robert Mosbacher in May. (OPIC insures MKJ, Infinity and a third project with US participation, Industria Oklahoma-Nicaragua S.A. (Oklanicsa).) On April 26, 2004, Oklanicsa signed its 845,000 acre onshore concession with the GON and 11 months later received its environmental permits, subsequent to the GON's environmental impact analysis. Anticipating possible political, bureaucratic and technical delays in the fulfillment of environmental impact analyses for the MKJ and Infinity concessions, post has begun to build goodwill and capacity among public sector actors in the energy sector through training, technical assistance and public affairs programs. End Summary. ¶2. (SBU) MKJ Exploration Inc. Vice President and General Counsel Brent Abadie, who is based in Matairie, LA, has spearheaded a three-and-a-half year effort to establish two exploration and exploitation concession 70 miles off of Nicaragua's Atlantic Coast. The MKJ concessions encompass two exploration sites in shallow to moderate waters above the continental shelf in areas known as the Tyra Bank and the Isabel Bank. At stake are potential oil reserves of approximately two million acres with a possible yield in excess of nine billion barrels. The concession bid round closed January 2003, the concession resolutions were awarded May 2003 and a lengthy negotiation ensued through December ¶2004. The identical terms of the concessions - contract language is the same except for the names of the bank - call for exploration periods of six years and production periods of 30 years. MKJ expects to begin the exploration phase within 24 to 26 months with a budget of $55 million. US publically-traded companies Noble Energy of Houston, TX and Energy Partners of New Orleans, LA will participate in the project. ¶3. (SBU) Just as MKJ neared completion of its concession negotiations with INE in late 2004, the National Assembly promulgated a law to establish a Superintendent of Public Services (SISEP),an umbrella entity proposed to oversee directorates of energy, telecommunications, water/sewer and consumer affairs. The SISEP concept, perhaps reasonable in its original design, was in it implementation a disguise for an unconstitutional usurpation of executive branch powers by the legislature, and a creature of the Ortega-Aleman pact (reftel). One immediate result of the ensuing regulatory chaos was to freeze all contracting authority by INE. MKJ, despite effective local counsel and regular tactical advice from the Embassy, was not able to achieve any movement in finalizing its concessions until the Framework Law reinstated INE's authorities and David Castillo became INE's new Director in November 2005. Since December 2005, ECON has provided regular diplomatic intervention at INE to encourage efficient completion of contract negotiations, and the Ambassador urged the same in a December 12, 2005 meeting with David Castillo and in subsequent conversations. During a March 30 meeting with the Ambassador, MKJ President Eric Conrad and Brent Abadie gave "high marks" to Castillo and his renewed team for quick progress. The one hiccup in an otherwise smooth process had been an INE demand that MKJ cover exorbitant professional fees, including notarial fees to INE lawyers. MKJ successfully negotiated the fees to a more reasonable level; however, given that similar charges have yet to be assigned to another US concession, Post will revisit the issue with INE to seek a policy of transparent and fair assignment of professional fees. Post will also support OPIC and MKJ efforts to receive a side letter from the GON to overcome a contract clause that waives subrogation against the GON. The offending contract language contradicts the OPIC Bilateral Agreement specifying the transfer of interests from the US investor to OPIC if OPIC pays a claim. ¶4. (SBU) During the last week of March, President Bolanos authorized Attorney General Alberto Novoa to sign MKJ's Tyra and Isabel banks concessions for the GON. Econoff met with Attorney General for Environmental Affairs Lisandro D'Leon on April 3 to inquire about prospects for a quick signing of the concessions. D'Leon responded that such signatures are routine and he foresaw no obstacles. Any delay would be justifiably related to Novoa's workload. Post will follow the concessions through to conclusion, as needed. On April 4, Ambassador raised the issue with Foreign Minister Caldera, who promised to urge a quick signature. Likewise, post will continue to offer diplomatic support for the Tyra and Perlas bank concessions of Infinity Energy Resources, Inc. Infinity has also concluded its contract negotiations with INE since December 2005 and expects to sign the concessions in late April or early May 2006. If all continues apace, MKJ and Infinity will shortly become the second and third US exploration and development concessions signed during the Bolanos administration. The first involved the March 31, 2003 award of a 845,000 acre onshore concession along Nicaragua's Pacific Coast to Industria Oklahoma-Nicaragua (Oklanicsa). On April 24, 2004 Oklanicsa signed its exploration and development concession - becoming the first such contract to be signed in Nicaragua in 40 years - and its environmental permit was received in March 2005. Oklanicsa is 70 percent owned by the Norwood Resources, a oil and gas firm out of Vancouver, Canada. The US participation, and driving force behind the project, hails from Atoka, OK in the person of Harold Witcher. OPIC has insured all three projects. ¶5. (SBU) Post has been assiduous in its efforts to build goodwill and capacity among those GON agencies that will have permitting authority over current and future concessions. INE's Executive Secretary will participate in a May 2005 International Visitors program on environmental protection and sustainable development. The Ambassador has discussed with his Dutch counterpart the possibility that the Netherlands' active environmental portfolio might be attentive to efficient and effective environmental impact assessments. Finally, USAID is currently reviewing training and technical assistance projects to help the GON manage transparent and objective environmental reviews for offshore exploration. ¶6. (U) MKJ leadership responded positively to the Ambassador's request that they consider a ceremonial signing, involving OPIC leadership, in mid-May. Abadie added that the March 30 publication of a positive, front-page story on the concessions in the left-leaning El Nuevo Diario had forced him to reconsider his instinctive desire to maintain a low profile. Under the circumstances, MKJ welcomed the publicity opportunity. Post has raised the same possibility with Infinity leadership. TRIVELLI