Methane Development: Commercial Dispute Roils Lake Kivu

UNCLAS KIGALI 000193

SIPDIS

DEPARTMENT FOR AF/C
DEPARTMENT FOR AF/EPS: JEFF BURNHAM
DEPARTMENT PASS USTDA: NED CABOT
DEPT OF COMMERCE WASHDC
DEPT OF ENERGY WASHDC

SIPDIS

E.O. 12958: N/A
TAGS: EINV ENRG ETRD EPET BTIO RW CG
SUBJECT: Methane Development: Commercial Dispute Roils Lake Kivu
Waters

REF: 04 KIGALI 218


1. SUMMARY. Hopes of resolving Rwanda's acute energy crisis through
the development of methane gas in Lake Kivu continues to be
frustrated; this time by disputes between the GOR and Dane
Associates. Accusations fly from both sides, but the result is that
a solution to the unreliable, inadequate, and expensive supply of
energy that impedes future economic development is potentially
jeopardized. END SUMMARY.


2. The GOR signed a memorandum of understanding (MOU) with Dane
Associates (a special purpose company formed by several engineering
and equity firms) in July 2002 to extract methane gas from Lake
Kivu, and a shareholders agreement in August 2005 to define the
roles and responsibilities for each party in the joint venture,
Kibuye Power 1 (KP1). Dane holds 70% ownership in KP1, while the
GOR maintains 30%. The project was initially designed as a pilot
proof-of-concept, to be dismantled after 1-2 months. By October
2005, Dane and the GOR agreed it made more sense to commercialize
the plant to supply much-needed electricity after the test, so the
Gisenyi-KP1 plant was re-budgeted to produce 5 MW of energy. The
follow-on plans for a 35MW plant in Kibuye remained unchanged.


3. Tension has risen between the two sides, as the project,
initially scheduled to be completed mid-2006, has been delayed many
times over. The current impasse results from the GOR refusing to
grant KP1 a promised soft loan of RwandanFrancs10 million
(approximately USD 18,500) for the 35MW project.


4. The GOR accuses Dane Associates of incompetence and dishonesty,
and seeks to dissolve KP1. The case was first heard in court on
February 14, after an unsuccessful February 8 mediation. Most of
the dispute surrounds Dane's use of the funds made available for the
project. Minister of Energy, Albert Butare, claims that two audits
have shown that funds have not been accounted for properly. Butare,
along with other officials, also publicly claim that Dane is a
"briefcase company" without any substance. While the GOR lost its
court case to remove Dane from KP1, it has blocked progress on the
project by withholding funds and by refusing to renew their price
purchase agreement (PPA). Dane seeks international arbitrage to
resolve the dispute and honor the existing terms of agreement.


5. On the other hand, Dane Associates Director, Hans Hoeg
Henrichsen, points to Dane's shareholders Wartsila, a leader in
power plant construction, and Ludan, a recognized expert in gas
extraction and processing, as proof of their technical expertise,
and questions why the GOR refuses to agree to have the company
audited by the Office of the Auditor General. Henrichsen and fellow
director Peace Rwivanga, claim that other business entities are
maneuvering to take over Dane's concessions for the methane
extraction. Dane's understandable fear is that another investor
will take advantage of the groundwork they've laid and bypass the
start-up costs they've incurred (feasibility studies, master plan,
environmental impact assessments, etc.) to realize the incredible
opportunity in Lake Kivu. These costs are at the heart of the
commercial dispute, as the GOR states that Dane has failed to
produce evidence of such expenditures.


6. COMMENT. Whatever the merits of the claims by each side, Rwanda
desperately needs affordable energy supplies. This project promises
to unlock vast methane resources and help resolve Rwanda's energy
crisis. Thus, every conflict and potential problem raises concerns.
Both Dane and the GOR claim that this dispute will not delay the
proof-of-concept project which is scheduled to be completed by the
end of March, but it will be challenging to accomplish this project
unless the two sides come to a new understanding.

ARIETTI