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