CHAD OIL PROJECT: 6 YEARS AND 6 BILLION

UNCLAS SECTION 01 OF 04 NDJAMENA 000198

SIPDIS

SENSITIVE, SIPDIS

TREASURY FOR OTA
DEPT FOR AF, EB, ENERGY FOR CAROLYN GAY AND GEORGE
PEARSON
LONDON AND PARIS FOR AFRICAWATCHERS
DAKAR FOR FCS/GREENE

E.O. 12958: N/A
TAGS: ECON EFIN ENRG PGOV EPET ELAB CD
SUBJECT: CHAD OIL PROJECT: 6 YEARS AND 6 BILLION
DOLLARS LATER

1.(SBU) SUMMARY: Six years and six billion dollars
later, the Chad oil project boasts an impressive list
of accomplishments, despite operating in one of the
world's least developed and most isolated countries.
Employing over 5,000 Chadians and purchasing some $143
million annually in local goods, the project alone is
the major economic actor in Chad. While Chad's oil
receipts have skyrocketed due to high international oil
prices, the Esso-led oil consortium has had to invest
in new wells to offset lower than expected production.
This has added to land pressure in a region already
experiencing high land use. Successful by conventional
measures, the project still runs the risk of being
viewed unfavorably by Chadians due to pressures for
uncontrolled government spending on security (financed
by oil income),the slow trickle down of oil wealth and
discomfort by local communities at the size of the
consortium's footprint. End Summary.

INTRODUCTION
--------------


2. (SBU) Slightly over six years from the official
start date, and after six billion dollars worth of
investment, the Chad/Cameroon oil pipeline is one of
the most closely studied projects in "responsible" oil
management in Africa. This cable examines the current
status of the Chad oil project based on Esso's own
reporting, reporting from monitoring bodies created for
the project, and discussions with NGOs, the business
community and consortium executives. (Note: this
report focuses on the Chad-based oil-field project
rather than the totality of the Chad/Cameroon pipeline.
End note)

NEW WELLS AND ADVANCED TECHNOLOGY TO OFFSET LOWER
OUTPUT
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3. (U) Since operations officially started in October
2000, the Chad oil consortium, composed of ExxonMobil,
Chevron and Petronas has opened 369 production wells in
Chad. Twenty more wells are scheduled to come on line
in 2007. The daily output of 155,000 barrels is less
than anticipated, and the pipeline is running at about
40% capacity. In meetings with Emboffs, company
executives have stressed that, in order to maintain the
flow of oil at the current rate, the project must
continue to add production wells and improve existing
oil well productivity. Exploration continues in
Mangara (a hard four hour drive from Kome base camp)
where Esso has set up a complete remote drilling camp.


4. (U) Chad is believed to have reserves of 1.5 billion
barrels (according to Oil and Gas Journal),but
experience to date has shown that extraction is
challenging; consortium executives caution that much of
those reserves may not be recoverable. In fact,
underground water and Chad's topography have created
some unique technical difficulties for Esso: in 2006
Esso installed high pressure water injection systems to
push water deeper underground into the oil deposits.
By 2007, what was originally a $4 billion investment
had ballooned to $6 billion as a result of the need to
add new wells and modify existing wells.


5. (U) Despite the lower than expected output, Chad's
oil revenues for 2006 skyrocketed. This was due in
part to the higher price of oil but also a function of
the government's strong-arming consortium partners
Chevron and Petronas on alleged taxes owed. Esso's
end of year report shows that Chad's receipts
(royalties, pipeline income, taxes and fees, permits
and duties) jumped from $299 million in 2005 to $777.4

NDJAMENA 00000198 002 OF 004


million in 2006. Chad's overall revenue since project
start-up is $1.289 billion, according to Esso figures.

IMPACT ON LOCAL COMMUNITIES
--------------


6. (U) The most recent report of the International
Consultative Group (French acronym GIC) - one of a
number of monitoring mechanisms set up by the World
Bank - gave the Chad oil project reasonably good marks
in 2006 for work on mitigating environmental risks and
assisting local communities. By contrast, the report
was critical of the Government of Chad's monitoring
mechanisms and the management of the 5% of royalty
revenues for the oil-producing region. The GIC report
noted a "degradation of cohabitation" between the local
communities and the consortium where the former's sense
of encroachment by the oil "footprint" is not offset
sufficiently by an improvement in quality of life.

OIL SPILLS, FLARING AND ROAD DUST
--------------


7. (U) Environmental concerns surrounding the project
have focused on the possibility of oil spills, on the
health impact of dust from trucks on non-paved roads,
and on gas flares. Esso's annual report indicates that
nine small spills took place in 2006. Ranging in size
from less than a liter to 40 barrels, the spills were
considered insignificant. In 2006, to the discomfort
of the local population, the Consortium launched a $25
million flare reduction program in response to
unexpectedly large volumes of gas from the new
Moundouli oilfield. Esso claims that the flare is 40 -
80% less than other facilities that operate in similar
production areas. The GIC recommendations urged Esso
to continue to seek to reduce the flare, and to develop
a communications strategy with communities to alleviate
concerns about the health impact of the flare.
Responding to widespread complaints from local
residents concerning the dust kicked up by heavy
traffic on the non-asphalted roads, the consortium
agreed to pave 14 additional kilometers of oilfield
road area (on top of the 9.5 k. paved in 2006). Other
roads continue to be treated with water or industrial
molasses to reduce dust.

LAND COMPENSATION AND LAND PRESSURES
--------------


8. (U) Total individual land-use compensation paid by
the consortium over the last year totaled more than
$1.1 million in cash and in-kind payments. (As only
the state owns land, farmers are compensated for lost
crop opportunities.) In all, more than $8 million has
been paid out in land compensation to 4,000 land users
for 2,900 hectares of land since project inception in

2000.


9. (U) The consortium has required more land than
originally anticipated, both for new oil wells as well
as for electrical lines and other facilities, which has
presented a growing challenge in an area already
experiencing land pressure. By their own admission,
the consortium fell behind in reclaiming land (once the
temporary construction phase was over) and formally
returning it to the villages. Recovering from this
backlog was a major focus of work in 2006 and will
continue in 2007 with the hopes of clearing the backlog
of 654 hectares. The GIC commented favorably on the
acceleration in land restoration and restitution
program and on Esso's decision in 2006 to change the
size of the oil well pad size (thus encroaching less on
village land).

NDJAMENA 00000198 003 OF 004



SHORT TERM GAINS BY COMMUNITIES; LONGER TERM PROSPECTS
IN DOUBT
-------------- --------------


10. (U) The GIC report noted a "degradation of
cohabitation" between the local communities and the
consortium. A land use study commissioned by the
c0onsortium determined that affected villages and
households were "materially and significantly better
off." However, the study also pointed out that the
benefits would fade over time, and that in the long run
the villages needed to acquire new land to allow for
crop rotation and fallow field. They noted, however,
that traditional land-use acquisition mechanisms were
not working. In response, Esso has embarked on a
project for long-term land replacement in conjunction
with experts and stakeholders in order to help increase
the supply of farm land in the oil-field area. In
addition, a supplemental program funded at $1 million
will compensate for loss of communal land.

SECURITY AND SHAKEDOWNS
--------------

11. (U) The GIC 2006 report remarked on the number of
spontaneous complaints of abusive and corrupt gendarmes
voiced by local communities, and underscored that one
of the foremost preoccupations in the region was
insecurity. They also heard objections to what the
population perceived as an Esso-imposed 6 pm curfew to
fight against theft. Esso itself has reported serious
losses from pilferage and theft at rigs and has brought
in former Chadian state security officials to advise
them on strategies for reducing losses, but state that
they have never called for a curfew. The GIC also
noted that the government had removed some local
authorities in response to the infamous 10% which local
chiefs were levying on individual compensation.
Nonetheless, the GIC reported the 10% continued to be
demanded in some areas.

LABOR, TAXES AND REGULATION
--------------


12. (SBU) Post has reported extensively on the
consortium's frequent run-ins with Chad's labor unions
and tax and regulatory authorities. The most high-
profile case involved alleged underpayment to pipeline
workers for overtime. Esso eventually accepted the
judgment handed down by Chad's highest judicial body,
and some $12.5 million in back payments were made to
former workers starting in late 2006. Less dramatic,
(but much regretted by temporarily omelette-less
workers) was a 2006 incident where Chadian authorities,
acting on very unsound science, insisted on burning a
shipping container's worth of eggs imported from the
United States (broken, separated, packed in dry ice)
because of Avian Influenza concerns. Esso recognizes
that - particularly as the price of oil rises - they
are considered a prime "cash cow" by Chadians in a
country sorely lacking other inflows. Like other
companies in the formal sector in Chad, they face a
plethora of labor related law-suits and a fine-tooth
scrutiny by tax officials which they feel is driven
more by the government's financial situation on any
given day (or by individual greed) than by anything
else.

LOCAL BUSINESS CREATION AND EMPLOYMENT
--------------


13. (U) Wage payments to the 5,413 Chadian employees
workers totaled over $16 million in 2006. Of these
employees, 176 were in "supervisory" positions; most

NDJAMENA 00000198 004 OF 004


were in skilled or semi-skilled work. Purchase of
local goods and services in 2006 totaled $143.1
million. Examples of local business creation include a
new waste management business linking Chadian and
Cameroonian companies. These sums notwithstanding, an
oft-heard complaint from the Chadian businesses
community is that Esso does not buy locally. In
response to these complaints, Esso has organized
meetings with the Chamber of Commerce to discuss
upcoming business opportunities.

CHAD MONITORING
--------------


14. (U) The GIC found that the National Technical
Committee for Monitoring and Control and the Petrol
Office at Doba (French acronym UPD) were non-
operational due to lack of staffing and non-payment of
salaries. The report urges the government not to wait
for possible World Bank support to these units, but to
immediately provide the necessary financing. They
warned that the state of the institutions rendered the
GOC incapable of monitoring its own interests and those
of the local populations. Other non-functioning
Chadian institutions highlighted by the GIC were a
micro-credit program, the stalled regional development
plan, and problems plaguing management of the 5%
destined for the oil producing region from the oil
royalties. The GIC reported that the "5% projects"
had limited impact, favored urban rather than rural
populations, and had been chosen by President Deby
himself rather than by a participatory process
involving local populations.

COMMENT
--------------


15. (SBU) The consortium has changed Chad's political
and economic landscape in many ways, by and large for
the better, providing job opportunities, income and a
demonstration of ways of doing business that are far
from the Chadian experience. However, avoiding a
"Niger Delta" scenario requires both the consortium and
the Government of Chad to play their roles in ensuring
- respectively - good management of the project and
good management of oil revenues. The project puts the
Government of Chad and the consortium under the
microscope; Esso has been in a better position from the
start to understand the implications of failing to
project good corporate citizenship and has had the
means to do so; the GOC, by contrast is sorely lacking
in the human resources, the institutions, and most
critically, the political will to fully play its role.
Wall