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