NICARAGUA: OIL CONCESSIONS TO U.S. COMPANIES

C O N F I D E N T I A L MANAGUA 001217

SIPDIS

SIPDIS

STATE FOR WHA, WHA/CEN, WHA/EPSC, EEB/CBA, EEB/IEC
STATE PASS TO OPIC
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: DECL: 05/11/2017
TAGS: EPET EINV ECON PREL NU
SUBJECT: NICARAGUA: OIL CONCESSIONS TO U.S. COMPANIES
CAUGHT IN JUDICIAL LIMBO

REF: MANAGUA 285

Classified By: Ambassador P. Trivelli for reasons 1.4 b&d.


1. (C) Summary: On 10 August, 2006, a court in the Southern
Autonomous Atlantic Region (RAAS) accepted a writ of
injunction/relief against the Attorney General for signing
oil exploration concessions with two U.S. companies without
having properly consulted with the governments of the
Autonomous Atlantic Regions (RAAN and RAAS). The Supreme
Court must now decide whether the Attorney General acted
improperly. The Attorney General, the companies, and the
energy regulator all filed responses to the case stating that
the concessions were issued within the framework of Law 445
limiting RAAN and RAAS authority over Caribbean waters.


2. (C) The Ambassador has discussed the situation with the
Vice-President, the Foreign Minister, and the Minister of
Energy, without resolution. While the new Minister of
Energy, who now has authority over concessions, says the
contracts are proper, the Attorney General and FM assert that
the oil companies must still win approval from the RAAN and
RAAS governments. MKJ's lawyers believe there may be some
Sandinistas using the case to cancel the concessions and hand
them over to Venezuela. While recent visits by MKJ and
Infinity have elicited positive responses from GON, RAAN, and
RAAS leaders, it is clear the companies are caught in
Sandinista efforts to curry favor with the Atlantic coast.
End Summary.

Background on Concessions
--------------


2. (U) In April 2006, two U.S. companies, MKJ International
and Infinity Energy each signed oil exploration concession
agreements with the GON after completing six years of
negotiations. This process included extended negotiations
with the RAAN and RAAS Directive Councils (governments),as
the concessions were off Nicaragua's Caribbean coast. Law
445, passed during negotiations in 2003, limited RAAN/RAAS
authority over Nicaragua's Caribbean waters to three miles
from the coast and 25 miles around any islands. This
legislation essentially shifted the MKJ and Infinity
concessions to national waters and freed the companies to
negotiate only with the central government. Changes in the
energy regulator in 2005 further delayed the negotiations and
approval process. In April 2006, the Attorney General
finally signed the concession agreements in the name of the
President, granting the companies six years to complete
environmental impact statements, geological soundings, and
commence exploration. The contracts also incorporate a
30-year production sharing agreement should exploration prove
successful. U.S. publicly traded Nobel Energy will
participate in the MKJ project.

The Case
--------------


3. (C) On 10 August, 2006 a court in Bluefields (RAAS)
accepted a writ of injunction/relief against the Attorney
General for signing the concessions without having properly
consulted with the RAAS and RAAN Directive Councils. The
petitioners are Sandinistas, as is their attorney. Once the
writ was accepted, it moved to the Supreme Court (CSJ) which
must determine if the Attorney General acted improperly and
the injunction is therefore valid. The CSJ accepted the case
within the 60-day limit, but has not issued a final decision
on the injunction. There is no time limit for the CSJ to
issue such a decision (reftel).


4. (SBU) At the end of August, the Attorney General filed a
response to the writ and MKJ and Infinity presented papers as
"parties affected." The National Institute of Energy (INE),
the energy regulator and chief GON negotiator of the
concessions, sent the Attorney General additional evidence to
support the GON's position that the concessions were properly
completed with the required consultations. The Attorney
General never presented the additional evidence to the CSJ.


5. (SBU) All the documents state that the concessions were
issued within the framework of law 445; meaning that the writ
of injunction has no legal basis. Maps included in the
papers demonstrate that the concessions were drawn to ensure
that they were in national waters, outside of the RAAN/RAAS
25 mile administrative zone. Thus, consultations with, and
approval from, the Directive Councils were not required.

Actions since August
--------------


6. (SBU) While the injunction stopped MKJ and Infinity's
ability to complete the environmental impact statements and
begin seismic testing, it did not automatically stop the six
year concession clock. In November, when it became clear
that the CSJ was not going to move quickly, INE halted the
clock by suspending the concessions, pending resolution of
the case.


7. (SBU) The Ambassador discussed this case with the outgoing
Bolanos administration and with the current Vice-President,
Foreign Minister, and Minister, Vice-Minister and Secretary
General of Energy (newly created ministry assuming concession
responsibilities from INE). According to Vice Minister of
Energy Lorena Lanza Espinosa, Minister of Energy Emilio
Rapaccoli personally reviewed MKJ and Infinity's contracts
and declared them to be proper. The Ministry, therefore,
stands by the concessions but claims it cannot take any
action while the case is in the CSJ. It is up to the
Attorney General's office to defend the GON's position.
(Note: During a meeting with Infinity, the Attorney General
stated that while he cannot tell the CSJ what to do, he has
also not told them so far what decision to make. End note.)

A Possible Wrinkle
--------------


8. (C) VM Lanza did raise a possible loophole the CSJ could
use to declare the writ of injunction valid and allow for a
possible cancellation of the concessions. While the
negotiations concluded under the terms of Law 445, they began
while the RAAN/RAAS still exercised authority over Caribbean
waters. Under previous laws, INE was required to announce
the conclusion of the negotiations and begin a 60-day public
comment period. During such a period the RAAN and RAAS
Directive Councils could have raised concerns that would have
been addressed before the concessions were signed. As such
consultations do not apply under Law 445 because the
concessions are outside RAAN/RAAS waters the 60-day notice
period did not place. The CSJ may say it should have because
the negotiations began under the old laws.

The Sandinista Angle
--------------


9. (C) Attorney General Hernan Estrada and Foreign Minister
Samuel Santos suggested to MKJ and Infinity that it would be
helpful if they gain formal approval on the concessions from
the RAAN/RAAS Directive Councils. The FM told Infinity that
the GON is "focused on giving the communities a little more."
He stated that the concession contracts may need to be
"fixed around the edges" to increase assistance to RAAN/RAAS.
The Chief Justice of the CSJ told MKJ's lawyers that he has
been directed to hold off on any action on the writ until
RAAN and RAAS issue approvals. MKJ's lawyers believe that
the Ortega Administration is trying to re-extend RAAN/RASS
authority over all the Nicaraguan Caribbean waters as a way
to curry favor with the strongly anti-Sandinista regions. By
making MKJ and Infinity obtain official RAAN/RAAS approval,
the Sandinistas could create a defacto granting of such
authority, even though it contradicts existing law.
Secretary General of Energy Donald Espinosa, one of the lead
negotiators of the concessions for INE, told econoff that
such a position could jeopardize "serious" interest in future
bid solicitations for the remaining concessions in
Nicaragua's Caribbean waters.


10. (SBU) The RAAN and RAAS Directive Councils have made no
public pronouncements on the case. Both MKJ and Infinity
have visited the regions to assess the situation. They found
Directive Councils upset with the GON at being excluded from
the concession process, but very supportive of the projects
and the companies. Informal conversations have circled
around the RAAN and RAAS getting higher royalties at the back
end of the deals, but nothing is on paper. The law is not
clear on whether such agreements can be done directly with
the councils or must go through the Ministry of Energy. Both
Directive Councils have promised to have the full RAAN and
RAAS Councils vote on the concessions in the near future.

OPIC's Role
--------------


11. (C) MKJ and Infinity both have OPIC political risk
insurance for their concessions, which the companies could
invoke as early as September 2007. According to OPIC, the
current writ of injunction can be interpreted as a de-facto
expropriation and the companies could receive payment. In
such a situation, OPIC would re-evaluate its position in
Nicaragua. OPIC changing its risk assessment on Nicaragua
could lead to Ex-Im and private banks increasing their risk
evaluations, making money for investment in Nicaragua more
expensive and limiting new projects.

A possible Venezuela Angle
--------------


12. (C) MKJ's lawyers have suggested that the writ may
actually be a legal ploy by some Sandinistas to cancel the
concessions so they can be handed over to Venezuela's PDVSA.
They claim to have been asked if MKJ would consider jointly
exploiting the concession with PDVSA. During post and
Infinity's separate meetings with the GON, such a suggestion
has never been raised.

Comment
--------------


13. (C) It is becoming increasingly clear that MKJ and
Infinity are caught in Sandinista efforts to curry favor with
the Atlantic coast. While the GON members willing to discuss
the case have all been supportive of the companies, it is
clear they are unwilling to move until the RAAN and RAAS
approve the concessions. However, the GON's short-term focus
on winning over the Atlantic coast is blinding it to the
long-term costs of these actions. Giving the RAAN and RAAS
Directive Councils a voice in the negotiation of concession
contracts increases the work and time these will take, likely
dissuading potential bidders on any future bid solicitations
for the 100-plus remaining Caribbean blocks. Additionally,
should Nicaragua be seriously considering giving PDVSA a
central role in the concessions, the GON might be surprised
at PDVSA's limited exploration capability. The GON would do
better to take swift action to advance the U.S. companies'
concessions so that if oil is discovered, other foreign
companies would want to come to Nicaragua to explore. End
comment.
TRIVELLI