CHAD DELIVERS OIL ULTIMATUM

UNCLAS SECTION 01 OF 02 NDJAMENA 001089

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 DELIVERS OIL ULTIMATUM



1. (SBU) SUMMARY: Over the weekend, President Deby announced
that the Government of Chad is instructing Oil Consortium
members Chevron and Petronas to "close operations" and leave
the country immediately, for alleged failure to pay income
taxes. He has also announced the creation of a national
commission to begin the process of renegotiating the 1988
Convention with the Consortium. Earlier in the week,
Chevron and Petronas stated that, based on their 2000 tax
arrangement with the GOC, they do not owe any taxes at this
time to the Government. Chevron, Petronas, and Exxon-Mobil,
the oil consortium's operator in Chad, are still considering
their response to the GOC's announcement. END SUMMARY.

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DEBY TELLS CHEVRON AND PETRONAS TO LEAVE
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1. (SBU) On August 26, President Idriss Deby Itno convened
an inter-ministerial council meeting, which also included
members of the country's National Assembly and local press,
to announce that the Government of Chad was instructing Oil
Consortium members Chevron and Petronas to leave the
country, for what the GOC asserted was the companies'
failure to pay income taxes it owed the Government.
(COMMENT: Chevron and Petronas do not actually have a
presence in the country, as Exxon-Mobil is the sole operator
for the Consortium. However, Chevron has requested three
American employees who work jointly for Esso and Chevron to
depart on the next available flight. END COMMENT)


2. (SBU) President Deby also announced that the GOC would
create a national commission to begin negotiations on
amending the 1988 Convention with Esso in order to include
the Government as a full-fledged member of the Consortium.
Deby asserted that Chad, like Esso, should be able to
benefit from the income generated from the country's oil
production. He also announced the GOC's intention to press
charges against those officials who negotiated the tax
arrangement with Chevron and Petronas in 2000. He claimed
that these officials were not authorized to negotiate this
arrangement, and should be held accountable for their
actions (NOTE: While he did not mention their names,
Minister of Petroleum Mahamat Nasser Hassan is one of the
individuals implicated in the negotiation of this tax
arrangement. It is unclear if charges have been officially
filed against him).

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CHEVRON AND PETRONAS' EXPLANATION OF THE ISSUE
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3. (SBU) Representatives from Chevron and Petronas briefed
Ambassador Wall on August 23 on recent discussions with GOC
officials on the tax dispute between the Government and the
Consortium partners. Carole Rock, Chad country manager,
explained to the Ambassador that both Chevron and Petronas
had entered into an agreement with the GOC in 2000 to
receive specific tax benefits while conducting their
operations (these arrangements followed Chevron and
Petronas' decision to replace Elf and Shell as Consortium
partners in 2000). After filing their 2005 income tax
returns in March of 2006, the GOC began to question the fact
that Chevron and Petronas' tax payments were nowhere near
the range of Exxon Mobil's payments in 2006. In particular,
they objected to the fact that, unlike Exxon- Mobil, Chevron
and Petronas did not have a specific depreciation schedule,
which permitted the Consortium partners to claim more tax
deductions than they are entitled to receive.


4. (SBU) According to Chevron and Petronas, the non-

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proportional manner in which the Consortium divided its
distribution and profit of crude oil sales meant that
Chevron and Petronas did not necessarily pay taxes
proportional to Esso's taxes (in fact, Rock asserted that
using Esso's depreciation scale, Chevron would only owe the
GOC close to 2 million USD for 2005). Rock said that
Chevron and Petronas conveyed their willingness to the GOC
to discuss changes to the amortization schedule.


5. (SBU) Nevertheless, according to the Chevron
representative, the GOC notified the companies on July 25
that the 2000 tax benefits agreement was not valid. The GOC
asserted that officials who negotiated the agreement were
not authorized by the Government to make such arrangements.
Rock said that Chevron and Petronas could not accept the
GOC's response, because the Government appeared to be
violating its contractual obligation with the Consortium.
She noted that during a meeting with Minister of Finance
Abbas Tolli earlier in the day, the Finance Minister said
that the GOC was sticking to its position, asserting that
bilateral arrangements must go through a legal process and
be approved by the Chad's National Assembly, and therefore
the tax benefits arrangement was not approved through the
normal legal mechanism (Minister of Petroleum Mahamat Hassan
Nasser reiterated the GOC position to the company
representatives on the following day). Rock and Petronas
Country Manager Alais Yonus told the Ambassador that while
Chevron and Petronas would use all available diplomatic
means to resolve the tax dispute, the possibility of
international arbitration with the GOC always existed.

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ESSO FORMULATING ITS RESPONSE
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6. (SBU) Concerning the President's announcement of a
national commission to renegotiate the Convention, Esso
Country Manager Ron Royal, who was also present at the
August 23 meeting with representatives with Chevron and
Petronas, told the Ambassador that the Consortium partners
agreed that, consistent with Article 38 of the Convention,
which states that any renegotiation of the Convention
required approval from both parties, the Consortium would
not/not agree to any renegotiation plans. However, Esso
Public Affairs Advisor Miles Shaw told Economic/Consular
Officer on August 26 that, given the GOC's recent decision
against Chevron and Petronas, the Consortium would consult
with partners to reconsider its strategy given the new
developments.

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COMMENT
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7. (SBU) Deby's announcement is clearly the boldest move by
the GOC against the Consortium. The Government appears to
have an overall strategy to pressure the oil companies to
reap greater benefits from the country's oil production.
The presence of China as a potential oil player is probably
emboldening the GOC in its endeavor to alter its arrangement
with the Consortium. We will report on reactions from the
Consortium as soon as they become available.


WALL