C O N F I D E N T I A L MANAGUA 002539

SIPDIS

SIPDIS

DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN/TLERSTEN
DEPT PLEASE PASS TO USTR AND OPIC

E.O. 12958: DECL: 12/06/2017
TAGS: EPET ENRG EINV ETRD NU
SUBJECT: NICARAGUA: ORTEGA PRESSURES EXXONMOBIL TO BUY
VENEZUELAN OIL

REF: A. MANAGUA 2116

B. MANAGUA 2055

C. MANAGUA 2016

D. MANAGUA 1952

Classified By: Classified By: CDA Richard M. Sanders, Reason: E.O. 1295
8 1.4 (b) and (d)


1. (C) President Ortega announced on December 5 that he had
instructed the Ministry of Energy and Mines and others "to
quickly work out a proposal to nationalize the importation of
oil." Ortega wants Nicaragua to import all oil from
Venezuela to take advantage of Hugo Chavez' offer to
contribute half of the resulting revenues to the Bolivarian
Alternative (ALBA) Development Bank and Fund. As operators
of the country's only refinery, ExxonMobil supplies more than
70% of the country's liquid fuel needs, including fuel oil
used to generate electricity. ExxonMobil further imports the
majority of refined product (gasoline and diesel) to
supplement refinery supply. ExxonMobil is willing to discuss
a supply contract to import Venezuelan crude oil, but wants
to sign the fuel storage and sales agreement first, as was
agreed in a memorandum of understanding in September. Talks
on crude oil imports are supposed to be in parallel with
discussions on a laundry list of tax charges lodged against
ExxonMobil by the Ortega administration. Recently, Ortega
has publicly referred to "transnationals that import oil" as
members of a "mafia," and castigated ExxonMobil for behaving
like "true mercenaries (and) speculators" while "bleeding the
Nicaraguan people." On December 6, Foreign Minister Samuel
Santos called CDA Sanders to a meeting with Minister of
Energy Emilio Rappaccioli and Petronic President Francisco
Lopez, who gave their version of events.

Ortega Appoints Study Commission
--------------


2. (SBU) President Ortega announced at the closing session of
the fourth National Security and Defense course for the
Ministry of Defense and the Military on December 5 that he

had instructed the Ministry of Energy and Mines (MEM),
Nicaraguan Institute of Energy (INE), National Electricity
Company (ENEL), and Albanisa (a joint enterprise between
Petronic and the Venezuelan national oil company PDVSA) "to
quickly work out a proposal to nationalize the importation of
oil." Ortega wants Nicaragua to import all oil from
Venezuela to take full advantage of Hugo Chavez' offer to
contribute half of all resulting revenues to the Bolivarian
Alternative (ALBA) Development Bank and Fund.

ExxonMobil and Glencore Primary Importers
--------------


3. (C) Currently, ExxonMobil (U.S.) and Glencore (Swiss)
import almost all oil consumed in Nicaragua. As operators of
the country's only refinery, ExxonMobil supplies more than
70% of the country's liquid fuel needs, including fuel oil
used to generate electricity. ExxonMobil further imports the
majority of refined product (gasoline and diesel). Glencore
imports the rest under a contract with Petronic, the national
oil company, that expires in 2009.

Ortega Administration Pressure
--------------


4. (C) Both ExxonMobil and Glencore have been subject to
intense pressure by the Ortega administration to import
Venezuelan oil. In April 2007, the Ortega administration
challenged the legitimacy of Glencore's 10-year contract.
This resulted in Glencore importing essentially all of its
refined product from Venezuela, i.e., about 4000 barrels per
day. The Ortega administration then launched a host of
questionable tax claims agaiNtDkuIQ\Mobil agreed
to negotiate the use and eventual sale of the fuel storage
facility that was seized. In each instance, once Glencore
and ExxonMobil accommodated the Ortega administration, their
near term legal challenges disappeared.


5. (C) More is at stake with ExxonMobil than with Glencore

and the road has been bumpier. ExxonMobil tells us that it
has negotiated an agreement for the use and sale of the
Corinto fuel storage facility, but that the Ortega
administration is refusing to sign. Instead, the
administration is demanding to negotiate the sale of
Venezuelan crude oil to ExxonMobil's refinery. ExxonMobil
wants to sign the fuel storage and sales agreement first,
according to the order of events set forth in September's
memorandum of understanding. ExxonMobil also wants to make
progress on the laundry list of tax charges that the Ortega
Administration has initiated. (Refs A, B)


6. (C) In November 2007, FSLN stalwart and Economic Advisor
to the President Bayardo Arce replaced Francisco Lopez
(Petronic President and former FSLN Treasurer) as point
person for negotiations with ExxonMobil. Arce appears to be
charged with getting ExxonMobil to agree to buy Venezuelan
crude, and is not above using heavy-handed pressure tactics.
This may explain why in recent weeks Ortega has publicly
referred to "transnationals that import oil" as members of a
"mafia," and castigated ExxonMobil for behaving like "true
mercenaries (and) speculators" while "bleeding the Nicaraguan
people." Ortega also charged ExxonMobil with being
"uncooperative" and "totally negative" to the idea of
"contributing to the Nicaraguan people." "All this would
change," said Ortega at the December 5th event noted above,
"if this transnational would change its attitude, as it had
during period 1979-90...." ExxonMobil is scheduled to meet
with Bayardo Arce on December 7.


7. (C) In the meantime, ExxonMobil has informed us that, in
fact, it is amenable to negotiating the importation of crude
oil from Venezuela. In the past two months (business
confidential information), ExxonMobil has come to terms

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internally with the idea that Venezuelan ships could be used
for transport, provided supply contracts stipulate prompt
delivery, late charges, some supply flexibility, and vessels
used meet ExxonMobil's environmental and safety standards
(i.e., double hulled tankers). This is because the company
would rather not pay demurrage to Venezuelan ports while
waiting for an unreliable PDVSA to load product.

CDA Meets with Key Administration Players
--------------


8. (C) On December 6, CDA was convoked to the Foreign
Ministry to meet with Foreign Minister Samuel Santos, who was
accompanied by Energy Minister Emilio Rappaccioli and
Petronic President Francisco Lopez. Santos led off by saying
that the meeting was being held at the instruction of
President Ortega, and that he, Santos, wanted to make sure
the USG -- and especially the Secretary and WHA A/S Shannon
-- for whom he had high regard, had a "concrete"
understanding of the GON's situation with regard to
ExxonMobil's operations in Nicaragua. He noted the enormous
problem which high energy prices present for Nicaragua and
asserted that the GON had made "enormous efforts" to reach an
agreement with ExxonMobil.


9. (C) Santos soon handed the meeting over to Rappaccioli,
who briefly recounted his version of the events of the
summer-fall of 2006 in which ExxonMobil's unused storage
facility had been seized and used to store a shipment of
Venezuelan gasoline which entered Nicaragua. The crisis
provoked by this act had been resolved with the signature of
a joint memorandum that returned the plant to ExxonMobil, but
which contemplated the import of Venezuelan crude into
ExxonMobil's refinery in Nicaragua, "parallel" to the
negotiation of arrangements for the rental or eventual sale
of the gasoline storage facility. The GON had since been
trying to reach a commercial agreement setting forth terms
which would actually the Venezuelan crude oil to enter
Nicaragua, without success. The inability of the GON and
ExxonMobil to reach an agreement was highly prejudicial to
Nicaragua, which was unable to take full advantage of the
favorable terms which Venezuela offered for its crude through
"Albanisa" a joint Venezuelan-Nicaraguan oil-importation
entity.


10. (C) Petronic President Lopez further elaborated, saying
that Venezuela offered Nicaragua up to 27,000 barrels per
day, but until now Nicaragua has only been able to import
4,000 barrels a day (in the form of refined products) brought

in for Petronic by Glencore. As a result, Nicaragua had lost
$230 million in savings from unused Venezuelan concessional
funding. Lopez noted the great expense the GON is facing in
subsidizing mass transit, and the crisis that the electrical
power sector is facing. Lopez said that ExxonMobil had been
offered extremely attractive terms on price, volumes, and
payment schedules, and would be allowed to use its own ships
(vice those of Venezuela state oil enterprise PDVSA). In the
current circumstances, getting Venezuelan crude oil into
Nicaragua was a matter of "national security."


11. (C) Lopez suggested that the U.S. embassy consider taking
part in future negotiations to assure a successful
conclusion. Santos finished off the GON's presentation by
handing CDA a copy of a memo, dated December 4, from Lopez to
the head of the Nicaraguan Energy Institute (the GON's energy
regulatory authority) entitled "Documentary Recapitulation of
Efforts at Agreements with Esso." Santos also said that as a
"personal, not official" opinion, he wondered if ExxonMobihQY4klQ which was far better than taking impressions
from the press. Their views would be transmitted to
Washington immediately. That said, however, he added that
public remarks by President Ortega calling for
"nationalization" inevitably provoked concern in Washington.
He assured Santos that the USG had no hidden agenda and would
be happy to see the GON and ExxonMobil reach agreement.
While he could not offer any analysis of why the two parties
have not yet reached an agreement; he understood that
ExxonMobil was also looking for resolution of the GON's
claims of large amounts of back taxes due from the company
which were presented at the time of the earlier seizure of
the gasoline storage facility. (Rappaccioli responded that
he had heard that the Mayor of Managua had stated that claims
for local taxes had been resolved; however, GON economic
advisor Bayardo Arce had said that Exxonmobil had not
presented needed invoices for taxes due to the central
government for review). As to the idea of embassy
intervention in the negotiations, CDA noted that at stake
were complex commercial matters that seemed best left to the
parties directly involved.

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


13. (C) Comment: Santos seemed most interested in doing
damage control following Ortega's use of the term
"nationalization," which dominated local headlines the day
before. Rappaccioli and Lopez' spin-filled versions of the
current state of play seemed aimed at getting the USG to
pressure Exxonmobil to bring in the Venezuelan crude oil as
soon as possible, under GON terms.

14. (C) The actions of the Ortega administration over the
past 12 months provide compelling evidence of a lack of
understanding of the oil sector, if not political
incompetence. Readers may remember that during the 2006
elections, the FSLN created Albanica (now defunct and not to
be confused with Albanisa) to import oil under a scheme with
Venezuela that would allow FSLN mayors to derive profits.
When a shipment of diesel finally arrived, Albanica scrambled
to find tanker trucks to transport product to Managua, and
then to distribute the product )- ostensibly to transport
cooperatives and unions. After Ortega assumed power,
Venezuelan President Hugo Chavez announced that PDVSA would
build a $2.5 billion refinery in Nicaragua. Several months
later, Chavez laid a cornerstone at a chosen site, only to
leave the project to a feasibility study that had not been
initiated. Between July and November, the Ortega
administration forced Glencore to provide storage and to
distribute shipments of Venezuelan product. When Glencore
ran short of storage capacity in August, the Ortega
administration charged ExxonMobil with failure to pay taxes.
An administrative oversight was used as the pretext for
seizing the storage capacity from ExxonMobil in time to
offload a Venezuelan vessel. When members of the National
Assembly and the IMF demanded transparency and on-budget
accounting of Venezuelan funds derived from oil sales, the
Ortega administration created Albanisa, a "private entity"

composed of stated-owned enterprises PDVSA (Venezuela) and
Petronic (Nicaragua), to manage Venezuela oil sales
off-budget.


15. (C) While Albanisa may be capable of importing Venezuelan
oil through paper transactions, someone must eventually pay
for it. Without the sales and distribution networks of
ExxonMobil and Glencore, Albanisa cannot generate ALBA funds
from Venezuelan oil. We believe that Ortega's call to
develop proposals to nationalize the importation of oil is
the latest attempt to pressure ExxonMobil into monetizing
Venezuelan oil. Before nationalizing the process, the Ortega
administration will have to convince the National Assembly to
revise legislation governing the sector. If a state-owned
entity does the importing, then ALBA funds would be subject
to National Assembly oversight, something that the Ortega
Administration has been trying to avoid.
SANDERS