CHAD: ESSO CONCERNED ABOUT FUTURE OPERATIONS

UNCLAS SECTION 01 OF 03 NDJAMENA 001080

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR AF, EB, ENERGY FOR CAROLYN GAY AND GEORGE PEARSON,
TREASURY FOR OTA, LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PGOV CD
SUBJECT: CHAD: ESSO CONCERNED ABOUT FUTURE OPERATIONS


1. (SBU) SUMMARY: In the wake of Chad's renewed diplomatic
ties with the People's Republic of China, Esso is concerned
that Chad's intention to re-negotiate the conventions with
the Consortium and develop a national oil company portend a
desire to do business with another more accommodating oil
partner (read China). END SUMMARY.

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TIME TO RENEGOTIATE THE CONVENTION
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2. (SBU) On August 17, Esso Country Manager Ron Royal
invited Ambassador Wall to the company's new office building
in N'Djamena. After asking for the Ambassador's read of the
new diplomatic environment following renewed ties with Sudan
and the PRC, Royal expressed his concern that the
Consortium's presence may be challenged with the entry of
China into Chad's economic scene. Royal showed the
Ambassador a letter, sent two days after the August 8
presidential inauguration, from the Ministry of Petroleum to
Esso asking the Consortium to begin a process of
renegotiating certain clauses of the 1988 Convention between
Esso and the GOC. In the letter, Minister of Petroleum
Mahamat Nasser Hassane stated that, while the 1988
Convention had already been renegotiated numerous times, the
"positive changes" in the country's economic environment
required another examination of the Convention.


3. (SBU) Royal told Ambassador Wall that he and others in
the Consortium believed that the "positive changes" referred
to renewed diplomatic cooperation with China. Royal said
that following talks with Consortium partners Chevron and
Petronas, he would respond by asking the Minister to clarify
the aspects of the 1988 Convention that the GOC would like
to re-examine. Royal would also note that changes to the
Convention could not be done unilaterally, and would require
the approval of the Consortium. Finally, he would state
that any attempts to renegotiate the Convention would cause
the Consortium to reconsider its commitment to building an
oil refining topping plant that would be used to manufacture
diesel for local consumption. Royal told the Ambassador
that if the GOC continued to press this issue, Esso would
take the matter to an international arbitration setting.

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THE NATIONAL MARKETING COMPANY
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4. (SBU) Royal added that the Chadian National Assembly's
recent decision to approve the development of a national oil
company to market the country's crude oil could also have
implications for the future of the country's oil activities.
According to him, the creation of a national company would
now mean that the Chadians could receive liquid crude to
sell on the oil markets, instead of cash royalty payments.
This arrangement, of course, would require renegotiation of
the GOC agreement with the World Bank, and the Consortium
would be hesitant to accept an arrangement of direct crude
oil distribution, given the lack of controls to ensure that
crude oil is marketed and distributed in a transparent
fashion.


5. (SBU) However, China, Royal noted, would have no qualms
about assisting Chad's crude oil marketing efforts. He
added that the Chinese could easily assist the Chadians in
selling Doba crude. Royal also suggested that the Chinese
might obtain these rights as a payment for building large in-
country infrastructure projects (which the Chinese had
apparently done in other African countries). According to
him, Minister of Infrastructure Adam Younousmi told Royal

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earlier in the week that Chinese firms had already expressed
interest in constructing roads, railroads, and even
establishing a ferry service between Chad and Nigeria. With
respect to the World Bank agreement, Royal argued that as
long as China was willing to pay off Chad's World Bank oil
pipeline loans, the GOC would be free to establish a
national marketing company without any restrictions from the
World Bank.

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SEPTEMBER 30 TAX PAYMENT LOOMING
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6. (SBU) Royal also said that future tax payments to the GOC
might throw another wrench into the company's operations.
He pointed out that the next tax payment for Exxon-Mobil was
due September 30. While the amount was small compared to
past payments (nearly 17 million USD),the manner of payment
would be potentially significant. Royal indicated that
World Bank Chad-Cameroon Country Manager Marie-Francoise
Marie-Nelly had stated that prior to the tax payment
deadline, the Bank would ask Esso to deposit the payment
into the Citibank escrow account, which was part of the
World Bank agreement with the GOC. However, this
contradicted the actual GOC Petroleum Revenue Management Law
(Law 002),which stated that indirect revenues would be
deposited directly into the Public Treasury.


7. (SBU) Royal noted that while this discrepancy had always
existed, the status of indirect tax payments was much more
high profile, given the projected increase in tax revenues
and the Bank's attempts to commit the GOC to spend its
indirect revenues on poverty reduction. Royal told the
Ambassador that even if the World Bank instructed Esso to
deposit its tax payments into the escrow account, the
company would probably not wish to violate Chadian law and
would deposit the revenues into the public treasury if the
GOC so requested. He feared that this action would create
tensions between the Bank and GOC similar to last year's
disagreement over revising the revenue management law, which
would once again place Esso in a difficult position.

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PETROLEUM MINISTER'S COMMENTS ON RENEGOTIATION
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8. (U) During an interview with the BBC on August 21,
Minister of Petroleum Hassane stated that the GOC wanted to
re-negotiate the convention with Esso to permit the national
oil company to be part of the Consortium. He asserted that
the Consortium members should not have a problem with this
decision by the Government, as the convention has undergone
a number of changes in the past several years. Hassane also
said that should the Consortium refuse, the GOC would still
go forward and obtain World Bank permission to market its
own crude. He added, "if China say they want to be leaders
in Chad's oil industry, we will not refuse. If they want to
build a new pipeline we will have no problem."

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COMMENT
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9. (SBU) Attempts to renegotiate the convention and talks of
a national oil company for the marketing of Chad's crude oil
are not new developments. However, the presence of China,
which Chad could view as an alternative to Esso to assist in
the country's oil production, might give the GOC the
confidence to challenge the Consortium's resistance to
renegotiation of the convention or implementation of a

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national oil marketing company. China's presence may also
impact the GOC's relations with the World Bank in the
treatment of indirect oil revenues. To the extent that
China is willing to support the GOC's fiscal needs, the
leverage of the Bank over Chad's indirect tax receipts might
be weakened.


WALL