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.

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DEBY MEETS WITH ESSO
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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.

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GOC RESPONSE TO THE BANK & ESSO'S PROPOSAL
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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.

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COMMENT
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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