CHAD'S NEW PETROLEUM CODE

UNCLAS SECTION 01 OF 02 NDJAMENA 000419

SIPDIS

SENSITIVE
SIPDIS

PARIS AND LONDON FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ETRD EPET EFIN PGOV CD
SUBJECT: CHAD'S NEW PETROLEUM CODE

REF: NDJAMENA 403


1. (SBU) Summary: Representatives of the ExxonMobil-led oil
consortium view Chad's new Petroleum Code as presenting a
reasonable framework of incentives and obligations for
foreign companies interested in oil exploitation. The Code
is ambiguous on whether companies with existing agreements
are required to conform to the new law, but it does contain
incentives to do so. While deciding how to proceed on that
front, the Consortium will also have to decide (at the end of
2008) whether to renew its exploration permit or to focus on
existing production. In the current price environment,
Chad's reserves - while not inconsiderable - are very
expensive to exploit. Acknowledging that the Chinese operate
under different pricing assumptions, the Esso Country
Director felt that it might be too expensive for them as
well. The Consortium expects to pump 150,000 barrels a day
for the next 18 months after which production will decline.
End summary.

"NOT OBJECTIVELY BAD"
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2. (SBU) In a meeting with the Ambassador May 9, new Esso
country Director Stephane de Mahieu commented that Chad's
newly adopted Petroleum Code was "not objectively bad." He
pointed out that, on the royalty side, the numbers were a bit
higher (16.5 percent vice Esso's current 12.5 percent rate)
but the tax rates (40 - 75 percent depending on conditions of
profitability) were compatible with the Consortium's current
agreement. Some customs exonerations were better than in the
existing Convention. The Code allowed for "project sharing
agreements," a kind of agreement now quite widespread
according to Mahieu. (Under project sharing a company makes
all of the upfront investment and the country's profits wait
until their share of the investment costs are written off.)
The new Code also permitted the government to be a partner
when negotiating production permits.


3. (SBU) Mahieu said that the Esso lawyers were still
studying whether Esso will be obliged to conform to the Code.
The Consortium has a "stability" clause in its existing
convention with the Government of Chad (GOC) and other
articles which stipulate that any changes must be agreed to
by all parties. The new Code recognizes that contracts could
benefit from a stability clause (thereby seeming to validate
the sanctity of stability clauses); however, in the
transition articles, the new Code states that existing
contracts have twelve months to decide whether to roll over
into the new Code; if they elect not to, they will need to
conform to the decree which sets up a Commission charged with
renegotiating existing contracts. Mahieu explained that the
Consortium would carefully examine the new Code and use the
twelve months to formulate a common position. Unwilling to
predict the outcome of those deliberations, he did venture
that adjustments to the existing Convention could be
considered.

ESSO CONTINUES TO SUFFER HARASSMENT FROM GOC
--------------


4. (SBU) Mahieu acknowledged that one incentive to
renegotiate would be using the leverage gained to "end the
harassment." He complained about the unchecked activities of
low-level functionaries who contnue to find trivial excuses
to threaten to stop production. In addition, although Esso
had accepted a government-brokered deal between the
Consortium and the labor unions, they could not accept the
unions' refusal to accept a "labor truce" in the two year
period during which their demands would be met. Mahieu was
particularly unhappy that the Government was siding with the
unions on this issue. Esso has refused to sign contracts
that do not have a two-year "truce." In retaliation, the
Ministry of Labor had stopped issuing work permits to Esso
staff. Mahieu welcomed the naming of a new Oil Project
Coordinator, Ahmat Acyl, and expressed his hope that Acyl
would be empowered as a "trouble-shooter" rather than simply

NDJAMENA 00000419 002 OF 002


act as a figure head. (Comment: The U.S.-educated Acyl is
the brother of first lady Hinda Deby but has an educational
background relevant for position. End comment.)

EXPLORATION PROSPECTS NOT BRIGHT
--------------


5. (SBU) Mahieu said that the Chinese were "working over"
the exploration area under permit recently purchased from
Encana (Canada). However, he didn't see the usual "flurry of
activity" (such as investment in public works) which usually
attended Chinese investment in the oil sector. He also felt
that, under current market conditions, even the Chinese would
have a hard time seeing the viability of exploiting some of
Chad's more complicated reserves. As far as Esso was
concerned, at the end of 2008 they will be at the end of the
second phase of their exploration permit. From the current
area being explored they have developed six fields and
continue to explore other opportunities. The results to date
had been disappointing. They have 18 months to decide
whether to request a third phase of exploration or to return
the acreage to the state and focus on what they have. Mahieu
explained that Chad certainly had more oil, but oil prices
needed to be more than USD 65 a barrel for exploitation to be
viable. He stated that Esso will be able to sustain 150,000
barrels a day for the next 18 months. Beyond that, the
volume would be dependent on pricing. If the price was
right, they could certainly bring new technologies to
extracting oil that was deeper and more complicated to
exploit.

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


6. (SBU) It appears that the GOC has realized that providing
incentives to the oil consortium to renegotiate is a sounder
course of action than forcing a show-down. Despite the
continued labor and tax issues which the Consortium is
experiencing, this is a positive development. The sobering
figures on Chad's expected oil returns in the next two years
validate the warning of the international financial
institutions (reftel) that the Government's spending spree
will be seriously crimped soon.
WALL