GROWTH OF RESOURCE NATIONALISM - COTE D'IVOIRE

C O N F I D E N T I A L SECTION 01 OF 02 ABIDJAN 001208

SIPDIS

SIPDIS

DEPARTMENT FOR EEB/ESC/IEC/EPC GLENN GRIFFIN

E.O. 12958: DECL: 11/27/2017
TAGS: EPET EINV ECON PGOV IMF IV
SUBJECT: GROWTH OF RESOURCE NATIONALISM - COTE D'IVOIRE
ENERGY PARASTATAL PLAYS HARDBALL TO ACQUIRE ASSETS OF U.S.
FIRM DEVON ENERGY

REF: A. SECSTATE 150999


B. ABIDJAN 1036

Classified By: EconChief EMassinga, Reasons 1.4 (b.d)


1. Summary. Because of its lucrative potential, Cote
d'Ivoire's oil and gas sector is vulnerable to resource
nationalism and signs of the government's willingess to abuse
its position are evident. U.S. firm Devon Energy reports the
parastatal PETROCI has attempted to strong-arm it into
selling its Ivorian assets at below-market value. Devon
executives allege that PETROCI has used its personal
connections with the government to deflate prices Devon
receives for natural gas as well as sabotage efforts of other
foreign companies to acquire Devon's Ivorian assets. End
Summary.


2. (C) Resource nationalism has raised its head in the
energy sector, through the manner in which natural gas has
been priced and also through efforts by parastatal PETROCI to
manipulate gas prices in order to purchase oil and gas
production assets owned by foreign firms at below
market-value prices (reftel b). U.S. oil and gas firm Devon
Energy, the second largest oil and gas producer in Cote
d'Ivoire, has been subject to strong arm tactics by PETROCI
to sell its Ivorian assets.


3. (C) According to a senior Devon executive, the company's
contract to provide gas from its off-shore Ivorian fields,
negotiated in the mid-1990s when gas prices were
substantially lower, fixes natural gas prices at roughly one
fourth that of the current price of gas produced by
competitors CNR (Canadian) and Foxtrot (a 80/20 percent
consortium between French company Bouygue and PETROCI). That
contract was signed in 2003 and expires in March of 2008; at
the time the contract was signed, global gas prices were
lower and the Ivorian government squeezed the company further
by prohibiting it from flaring gas associated with oil
production; this prohibition forced the company to offer gas
at a low price, if it wanted to continue oil production.


4. (C) According to the Devon executive, the Ministry of
Energy and Mines (MoE, the purchaser of the natural gas) has
refused to renegotiate a rise in the purchase price of
natural gas to cover the sharp rise in energy costs since
2003 (Note: Devon's crude oil production sharing agreement
with Cote d'Ivoire was not affected by the gas price dispute.
End Note). This refusal removed the incentive for Devon to
proceed with a planned USD100 million upgrade of its
infrastructure, which would double oil output and more than
double gas production.


5. (C) In the spring of 2007, Devon publicly announced its
intention to sell its African properties
and concentrate on a major new discovery in the Gulf of
Mexico. PETROCI quickly made known its desire to purchase
Devon's Ivorian assets and production network. Devon
executives have told Emboff that PETROCI, as part of its
strategy to acquire Devon's assets, pressured the MoE to
refrain from renegotiating Devon's gas production contract in
order to keep Devon's asking price down. Additionally, once
the highest bidder on Devon's Ivorian assets was identified
(a Houston-based U.S. firm),Devon executives assert that
PETROCI (whose DG, Fadiga Kassoum, has close ties to
President Gbagbo) used its influence with the MoE to block
visas for the interested firm's due diligence team for four
months. This issue was finally resolved in early December
but only through the intervention of Devon's corporate
headquarters. The due diligence team visited the week of
November 19, and traveled to the offshore production platform
to review onshore gas treatment and distribution
infrastructure, and meet key Devon staff.


6. (C) Should Devon's HQ in Houston choose to accept the
high bid, its production contract in Cote d'Ivoire gives the
government the right to review the potential purchase for
technical competency and financial solvency. Devon
executives believe this clause could give PETROCI yet another
opportunity to exercise undue influence to obtain Devon's
assets at a reduced cost.


7. (C) For the first time ever, revenue from petroleum and
gas production in 2006 outstripped revenue from cocoa and
coffee as the country's top income source generator, with the
former generating approximately USD 1.35 billion versus USD
1.1 billion in export revenue for the latter. (Note: most of

ABIDJAN 00001208 002 OF 002


the revenue comes from crude production.) Sources differ on
the current level of crude oil production, but President
Gbagbo remarked publicly on October 31 that the country
produces 50,000 barrels per day, and hopes to reach 100,000
in 2008-2009, and even 200,000 by 2010. The World Bank, IMF
and African Development Bank are conducting three audits of
the energy sector to determime actual levels of revenue and
their use. One audit is of the state-owned refinery (SIR),a
second covers PETROCI, and the third covers the electricity
generating industry. All three audits should be complete by
the end of 2007. The IFIs' energy audit team spoke to Devon
executives before the visa question noted in para 4 was
resolved. Post will remain in contact with Devon and keep
Department apprised of any developments.
NESBITT