CHAD: ESSO FEARS STOP ORDER

UNCLAS NDJAMENA 000142

SIPDIS

SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS, TREASURY FOR OTA,
ENERGY FOR GPERSON AND CGAY

E.O. 12958: N/A
TAGS: CD ECON EFIN ENRG EPET PGOV
SUBJECT: CHAD: ESSO FEARS STOP ORDER

REF: NDJAMENA 109 AND PREVIOUS


1. (SBU) SUMMARY: Esso is concerned that the World Bank's
response to the Consortium's request for a waiver could
prompt President Deby to ask the Consortium to halt oil
production. Esso has also pointed out the possibility of an
income tax windfall from the Consortium into the GOC's
coffers, perhaps as early as March 31, much sooner than
expected. These payments, if they take place, could have a
significant impact the GOC's negotiating position in its
talks with the World Bank. END SUMMARY.

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ESSO DOES NOT GET WAIVER FROM WORLD BANK
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2. (SBU) On January 27, Esso Country Manager Ron Royal and
Public Affairs Advisor Miles Shaw briefed the Ambassador Wall
on the latest developments between Esso, the GOC, and the
World Bank. According to Royal, after discussions between
the World Bank and Exxon-Mobil the prior week (see refs),the
Consortium expected the Bank to provide Esso and the other
consortium partners a waiver allowing them to temporarily
retain the January royalties rather than paying them into the
Citibank escrow account. However, Royal stated that on
January 25, Exxon-Mobil headquarters in Houston received a
letter from the International Bank for Reconstruction and
Development (IBRD) asking the Consortium to deposit revenues
into a Citibank "dispute resolution account" controlled by
the IBRD. The money would then be transferred to the
Citibank escrow account on February 7.


3. (SBU) Royal explained that Exxon-Mobil and other members
of the Consortium were unhappy with the letter from the IBRD,
as it contradicted the Consortium's request for time to allow
the parties to negotiate a resolution of the status of the
escrow account. Royal also noted that the GOC would most
likely not accept any action on the part of the Consortium to
transfer royalty payments to any/any account controlled by
the World Bank. He reported that the Minister of Petroleum
had told him point blank that if Esso deposited the royalties
into the escrow account, they would be forced to stop
production. Shaw added that the Consortium hopes the IBRD
will change its instructions and send a second letter
providing the waiver requested, but it is not clear whether
the IBRD is willing to do so.


4. (SBU) A demand by the government to shut down production
would be catastrophic, according to Royal. It raises the
likelihood of defaults on a host of private loans (ranging
from U.S. Ex-Im Bank, COFACE, and ABN-Amro). Shaw added that
that according to the 2004 Convention between the Consortium
and the Government, an "unreasonable request" by the GOC
(such as a halt in production due to Esso satisfying its
contractual obligations to the World Bank) could be rejected
by Esso. However, the Minister of Petroleum could force a
shutdown indirectly, by revoking all worker permits of
expatriate employees for Esso, effectively halting
production. Royal raised the possibility of needing to
discuss the matter with President Deby, and said he may need
to ask Ambassador Wall to accompany him to such a meeting.


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ESSO'S INCOME TAXES TO THE GOC
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5. (SBU) During the meeting, Royal also revealed that due to
the continued high price of oil, Esso was now in an
income-tax paying position. He explained that in the past,
based on the Convention with the GOC, the Consortium was
permitted to receive tax-credits when expenditures surpassed
revenues. Given the enhanced revenue in 2005, the GOC was
expected to receive between USD 80 and 200 million in income
taxes from all the Consortium partners. If the price of oil
continued to remain at current levels, GOC revenues from
income taxes as well as royalty payments could be as high as
USD 500 to 600 million a year in the coming two years. Both
Royal and Shaw noted that the Government is currently asking
the Consortium for data on this matter, and they are not
certain if GOC officials are aware of the possible revenue
windfall that awaits them. However, the Esso officials
pointed out that if the GOC was aware of this possibility,
their negotiating position with the World Bank would be
significantly altered in upcoming discussions in Paris.


6. (SBU) Royal explained that Chadian taxes fall due March
31st, and hence the government would expect to start reaping
some of the 2005 tax benefits by then. However, the big
gains for 2006 might be delayed due to the fact that under
Chadian law, taxes are paid by trimester, and are estimated
based on the previous year's taxes (with a recalculation at
the end of the year to factor in increases or decreases due.)
Given the consortium's lower tax obligation in 2005, the
bulk of taxes for 2006 would not be due until the end of 2006
in the "recalculation." However, it is expected that the GOC
would request an advance tax payment.

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COMMENT
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7. (SBU) The Consortium is seriously concerned that the GOC
may force a shut-down in production if a waiver is not
provided for the January royalties. Such an action would
have grave consequences for Exxon-Mobil's participation in
the Chad oil project. Esso believes the IBRD should consider
the broader implications of such an action. A potential
revenue windfall, which would reduce the GOC's reliance on
financial assistance from the donor community, would
doubtless affect its negotiating position during its
discussions with the World Bank, and possibly hinder any
rapid compromise between the two parties.

WALL