NICARAGUA: GOVERNMENT SEIZES EXXON FUEL STORAGE

C O N F I D E N T I A L MANAGUA 001952 SIPDIS SIPDIS DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN SAN JOSE FOR CS/JMCCARTHY DEPT PLEASE PASS TO USTR AND OPIC E.O. 12958: DECL: 08/19/2017 TAGS: EINV ETRD EPET NU SUBJECT: NICARAGUA: GOVERNMENT SEIZES EXXON FUEL STORAGE FACILITY Classified By: Ambassador Paul Trivelli, Reason: E.O. 12958 1.4(b) and (d) ¶1. (C) Summary: After close of business on August 17, local police showed up at Esso/Nicaragua's Corinto I fuel storage facility located at the Port of Corinto and on a judge's order seized the facility. Exxon officials believe that the pretext for the seizure was a tax issue involving the exemption of value added tax. It appears, however, that the governmnet has not observed due process. Esso/Nicaragua has not been party to an administrative proceeding, did not receive a bill for back taxes, nor notified that its property would be seized. Because of safety concerns and the fact that the tanks are old and small, Corinto I is largely in disuse -- but one tank located there is fairly large and still in service, capable of holding 30,000 barrels of diesel fuel. Equally important, Esso/Nicaragua cannot conduct operations at Corinto II without the use of its fire fighting equipment located at Corinto I. Without Corinto II, fuel shortages in Nicaragua will develop in a matter of weeks. We understand that the Port Authority (EPN) has been placed in charge of Corinto I and that welding has been going on all weekend. Petronic and its lessee Glencore have reportedly been asked to facilitate the offloading of diesel from a Venezuelan ship that arrived in Corinto on August 17. Please see Action Requests for USTR and OPIC in paragraphs 6 and 9, respectively. End Summary. ¶2. (C) After close of business on August 17, local police showed up at Esso/Nicaragua's Corinto I fuel storage facility located at the Port of Corinto and on a judge's order seized the facility. Esso/Nicaragua received no document or explanation for the action. Over the weekend, Exxon dispatched its Public Affairs Manager for Central America and the Caribbean to Nicaragua. He is seeking a meeting with President Ortega and other in the Nicaraguan government. In addition, Esso/Nicaragua has posted lawyers in Managua, Corinto, and Chinandega to work the issue. The Pretext -------------- ¶3. (C) Exxon officials believe that the pretext for the seizure was a tax issue. About four months ago a customs audit picked up on Esso/Nicaragua's failure to properly document a tax exemption for a shipment of crude oil. Industry insiders tell us that oil shipments often arrive before all the paperwork is completed. In this case, a delay in getting a bill of lading from the supplier caused a subsequent delay in getting an exemption letter from the Ministry of Finance, resulting in incomplete paperwork. Normally, the paperwork trail can be repaired and a nominal fine paid; life goes on. This time, Customs claimed that Esso/Nicaragua owed $3 million in back value added taxes (IVA). On this pretext, Exxon officials believe, the government seized Esso's Corinto I fuel storage facility. ¶4. (C) Exxon officials point out that the law permits the exemption of IVA on the import of petroleum, and that, indeed, there is no mechanism for Esso/Nicaragua to recover IVA from the end user. In July, Energy Minister Emilio Rappaciolli penned a letter to Attorney General Hernan Estrada fully explaining that under Nicaraguan law, no tax was due on the import in question. In fact, more than one piece of legislation designates petroluem product tax exempt. The Seizure -------------- ¶5. (C) Exxon officials identified Managua judge Hector Pavone as having issued the order to seize Corinto I, the older of the two fuel storage facilities that Esso/Nicaragua maintains at the Port of Corinto. Normally, the National Police would have carried out the order, but in this case it was left to the Municipal Police of Corinto. According to Exxon officials, National Police Chief Granera was aware of the act, but declined to take a position on the matter in a telephone conversation with them. "La Prensa" reported this morning that a Chinandega judge was also involved, and that when questioned following a speech on August 18, President Ortega answered that the case was in the courts, revealing that he knew more than he was willing to say publicly. Exxon officials believe that President Ortega approved the seizure, which is why they want to talk to him. Due Process -------------- ¶6. (C) Exxon officials complain that the government has not observed due process. Esso/Nicaragua has not been party to an administrative proceeding, received a bill for back taxes, nor notified that its property would be seized. Further, Exxon has not received any document notifying the company as to why its property was seized. Indeed, Exxon reports that the complaint and request for "presumptive siezure" was filed by an individual unknown to them and with no prior legal problems with the company. Exxon officials believe that the lack of due process may be the basis for a complaint under CAFTA. Action Request: Post requests USTR to undertake a preliminary analysis, based on the facts presented in this cable, to advise us whether there is reason to believe that CAFTA could be invoked in this case. Esso's Fuel Storage Facilities and Oil Imports -------------- - ¶7. (C) Corinto I is Esso's original storage facility at the Port of Corinto. Because of safety concerns and the fact that the tanks are old and small, the facility is largely in disuse. However, one tank in Corinto I is fairly large and still in service, capable of holding 30,000 barrels of diesel. Corinto I also houses a fire fighting station that serves both Corinto I and Corinto II. This fact is important because Esso/Nicaragua cannot conduct operations at Corinto II without the protection of its fire fighting station across the street in Corinto I. In contrast, Corinto II has five large tanks that can store around 100,000 barrels of diesel and 50,000 barrels of gasoline (Note: Volumes need to be verified.) ¶8. (C) Both Corinto I and II handle refined or partially refined petroleum products. While Esso's refinery supplies most of the country's liquid fuel needs, Nicaragua still imports about 25% of its supply. If Corinto II falls out of operation because of the lack of firefighting equipment or any other reason, fuel shortages will follow in a matter of a weeks. Esso/Nicaragua has already cancelled a vessel scheduled to arrive on August 23. Exxon officials warn that if Corinto II falls out of opertiona, gasoline shortages will develop first wiht premium gasoline. As premium users buy available regular gasoline, shortages of regular gasoline will also occur. Exxon does not want to say this publicly, however, for fear of creating consumer panic. ¶9. (C) All crude petroleum is piped into Esso's Managua refinery via pipeline through Puerto Sandino, nearer Managua. Esso/Nicaragua managers believe that the refinery, pipelines, and storage facilities are covered by Esso's OPIC political risk insurance policy for Nicaragua, but must check. Action Request: Post requests OPIC's insurance division to inform us about the extent of OPIC political risk insurance coverage for Esso/Nicaragua. Subsequent Government Action -------------- ¶10. (C) At first, the government's fuel distribution asset holding company, Petronic, did not appear to be directly involved, nor did Petronic's lessee Glencore. Now, post understands that Petronic and Glencore have been asked to facilitate the offload of diesel from a Venezuelan ship that arrived in Corinto on August 17, but with no place to offload. We understand that the Port Authority (EPN) has been placed in charge of Corinto I and that welding has been taking place there all weekend. Normally, government permission for such work must be given in advance, along with an environmental impact assessment. Unsure about the status of the old tanks, Exxon officials are worried about safety. ¶11. (C) A few weeks ago, Ortega announced that Venezuela would only export finished product to Nicaragua in the near to medium-term. In the past several months, the government has tried to convince Esso/Nicaragua to accept shipments of Venezuelan finished product. Moveover, Exxon operates under tight restrictions on the type of vessels it uses (e.g., doubled hulled ships -- as a consequence of the Exxon Valdez incident) and on delivery times. When Venezuela missed its delivery time a few months ago, Esso/Nicaragua was forced to purchase elsewhere. The Venezuelan vessel showed up later anyway, and reportedly wound up paying a demurrage of $400,000. Exxon officials told us that it could conceivably negotiate an arrangement with Venezuelan Oil Company PDVSA to accept crude petroleum via Exxon vessels. Such an arrangement would serve Exxon's interest in sticking to tight logistical schedules and making maximum use of limited storage facilities in Nicaragua. Exxon Action -------------- ¶12. (C) On August 20, Exxon officials briefed the Ambassador on the state of play. They believe that the seizure is unlawful and possibly a violation of CAFTA. The company wants to meet with President Ortega, Vice President Morales, and Energy Minister Emilio Rappaciolli to press for the retun of the facility. In addition, Exxon's Washington office has contacted Nicaraguan Ambassador to Washington Arturo Cruz. The Embassy issued a statement indicating the seriousness with which we view the seizure and the impact that this has on the investment climate, as well as encouragement for a quick resolution. The Ambassador has talked to both Minister of Foreign Affairs Santos and Minister of Energy Rappaciolli, expressing our deep concern. We continue to work the issue. TRIVELLI