CHAD: DEBY MEETS WITH ESSO, RESPONDS TO WOLFOWITZ

C O N F I D E N T I A L NDJAMENA 000244 SIPDIS SIPDIS LONDON AND PARIS FOR AFRICA WATCHERS, TREASURY FOR OTA, ENERGY FOR GPERSON AND CGAY E.O. 12958: DECL: 02/18/2015 TAGS: CD ECON EFIN ENRG EPET PGOV SUBJECT: CHAD: DEBY MEETS WITH ESSO, RESPONDS TO WOLFOWITZ REF: NDJAMENA 243 AND PREVIOUS Classified By: ECONOMIC/CONSULAR OFFICER JITU SARDAR FOR REASONS 1.4 (B) and (D) ¶1. (C) SUMMARY: President Deby has raised with Esso the possibility of severing links with the World Bank, and ordering a shut-down of the Consortium's operations. For its part, Esso has noted the grave implications of such actions, and is proposing a possible compromise to reopen dialogue among the parties. The GOC's letter responding to the World Bank's February 6 letter continues to call for unfreezing the escrow account. END SUMMARY. - - - - - - - - - - - DEBY MEETS WITH ESSO - - - - - - - - - - - ¶2. (C) In a meeting with the Ambassador on February 17, EssoTchad Country Manager Ron Royal discussed an impromptu meeting he had with President Deby on February 14, which was also attended by Minister of Finance Abbas Tolli, Minister of Plan Mahamat Hassan, and National Oil Coordinator Haroun Kabadi. During the meeting, which Royal described as extremely cordial and informal, Deby candidly raised the possibility that he was contemplating severing ties with the World Bank if an agreement was not quickly reached, and noted the possibility that Esso may be asked to shut down its oil production if the escrow account was not unfrozen in the near future. ¶3. (C) Royal told Deby that both actions would have serious consequences for the country. Dismantling oil operations and forcing the World Bank to leave, he argued, would jeopardize the reputation of the country and the possibility of future foreign investment. He specifically stated the Government would be breaking its contractual loan agreements by shutting down production, since it was a stakeholder through the presence of the Chad National Oil Company (TOTCO). Deby responded by saying that he did not understand why the loan agreements were applicable to the GOC, since they were written in English, and not French or Arabic, languages more familiar to Chadian authorities. ¶4. (C) Royal also told Deby that the next step for the GOC should be to respond to the World Bank's February 6 letter offering to send a technical assessment mission. Royal noted that GOC officials had previously criticized the World Bank's proposal for a technical assessment mission because of concerns that the mission's inevitably negative findings on Chad's budgetary situation would allow Wolfowitz to claim justification for the Bank's measures to freeze the escrow account. Royal said that he advised the GOC to accept the team, since it was the only way to continue the dialogue. ¶5. (C) Royal noted that he told Deby that the Consortium would soon be in a position to pay income taxes to the GOC. He explained that while the GOC receives 12.5 percent of gross revenues in the form of royalty payments, it will receive 60 percent of the Consortium's profits through the income tax payments. He described that to Deby as a "very good deal for the Government." Deby, according to Royal, appeared surprised by this fact, and asked for specifics, which Royal said he would provide once the specific information was available. - - - - - - - - - - - - - - - - - - - - - - GOC RESPONSE TO THE BANK & ESSO'S PROPOSAL - - - - - - - - - - - - - - - - - - - - - - ¶6. (C) Following the meeting with President Deby, Royal met separately with National Coordinator Kabadi on February 15. Kabadi told Royal that the GOC had sent a letter to the World Bank that day, and President Deby had signed the letter before he left for Paris. In the letter, the GOC asserted that while it hoped to reach an agreement with the World Bank, it considered the lifting of the freeze of the escrow account as a necessary precondition for a positive negotiating climate. (NOTE: The Embassy, which received a copy of the letter from Esso, has forwarded it to AF/C.) ¶7. (C) Royal told the Ambassador that Esso anticipates that Wolfowitz will respond unfavorably to the letter. He feared that a negative response from the Bank would trigger a "melt-down" and collapse of the Chad Oil Project. Under this scenario, the GOC would ask Esso to transfer royalties to a GOC account in Cameroon that was associated with the Bank of Central African States (BEAC). Once Esso refused, based on its contractual obligations to deposit the money into the Citibank account, the GOC would shut down production, forcing private investors to recall their loans, and effectively ending the project. ¶8. (C) Royal said, in order to avert this scenario, he is contemplating a two-step approach 1) continue to press for a waiver of the February royalties from the World Bank and 2) propose to the Bank that the escrow account be partially unfrozen. Royal's idea would be to transfer thirty percent of the revenues (i.e, the percentage of revenues that would flow directly into the public treasury under the revised law) to the GOC. Royal expressed hope that this may be an acceptable solution for both parties. He believed it conformed to the parameters of the previous revenue management law, and permitted the GOC to obtain some badly needed revenue. Royal asked the Ambassador if the Embassy would be willing to support this type of compromise, stating that no action would only lead to a melt-down. The Ambassador promised to consider the proposal and advise Washington. - - - - COMMENT - - - - ¶9. (C) We have been telling Chadian ministers and advisers at every opportunity that the solution to their stand-off with the World bank is to accept its proposal to send a fact-finding team immediately and without preconditions. The letter sent last week confirms that President Deby had decided to reject that proposal. Esso's fear is that the longer the escrow account remains frozen and royalty payments pile up, the more pressure will build on Chadian authorities to direct the Consortium to shut down production. A rational calculation from Chad's point of view would suggest that a stop-order would be self-defeating, If production stops now, Chad would lose out on the windfall in tax payments from production over the rest of the year that would begin flowing into Deby's treasury next year. But Deby's comments about the possibility of expelling the World Bank and his ignorance about Chad's agreements with the World Bank on the pipeline deal depict a leader terribly ill-advised and grossly uninformed. In this state of mind, we would not put it passed him that he might issue the stop-order. ¶10. (C) Obviously Esso is acutely concerned about the blow this would cause its interests in this over USD four billion project. We forward the proposal it hopes could unblock negotiations in sympathy for its position, but not with our endorsement. If Washington nonetheless determines that it would be appropriate to extend such an olive branch, we believe it would be better to allow Esso to hand over 15 percent, rather than 30 percent, of the royalty payments. That amount represents the share of royalties that would have been going into the general budget account under the previous, unrevised oil law. But we believe such an offer should be conditioned on Chad's willingness to accept the World Bank's mission and cooperate in implementing its recommendations. WALL