PETROLEUM SECTOR IN COTE D'IVOIRE - AMBASSADOR'S

C O N F I D E N T I A L SECTION 01 OF 03 ABIDJAN 000130 SIPDIS SIPDIS DEPARTMENT PASS TO USTR C.HAMILTON EEB FOR E.REPKO, KDIZOGLIO AF/W FOR EMILY PLUMB DAKAR PASS TO FAS R.HANSON, FCS S.MORRISON PARIS FOR G. D'ELIA OTTOWA FOR E.STEELE ACCRA PASS TO USAID P.RICHARDSON TREASURY FOR D.PETERS, R.HALL DEPARTMENT OF ENERGY FOR M.MANUS E.O. 12958: DECL: 02/26/2018 TAGS: ENRG EPET ECON EFIN EINV PREL PGOV IV SUBJECT: PETROLEUM SECTOR IN COTE D'IVOIRE - AMBASSADOR'S MEETING WITH PARASTATAL PETROCI; DEVON DEAL UPDATE REF: 2007 ABIDJAN 1208 Classified By: Econoff EMassinga, Reasons 1.4 (b,d) ¶1. (C) Summary. Ambassador met with Kassoum Fadika, Director General of state-owned PETROCI for a tour d'horizon of the energy production business in Cote d'Ivoire. Fadika discussed production problems that he says have limited oil production to 50,000 b/d and described the cost structure of the business. Fadika did not mention profit figures explicitly, but said Petroci is using its revenues to purchase more oil revenue streams and to invest in refining and other downstream industries. PETROCI is trying to attract bigger firms to explore offshore, and is open about its aggressive effort to acquire the assets of U.S. company Devon Energy. Fadika expressed some concerns related to the structure of the newly created Extractive Industries Transparency Initiative National Committee. End Summary. PETROCI's Production, Revenue Base, Profit -------------- ¶2. (SBU) The Ambassador met with Kassoum Fadika, Director General of fully-owned parastatal oil company PETROCI, on February 8, and discussed the extractive energy sector in Cote d'Ivoire, PETROCI's role and structure, and potential future investments in deep and ultra-deep oil fields. Fadika said that since a 1994 restructuring, Cote d'Ivoire no longer grants or auctions oil exploration and production blocks on a concessional basis, but rather uses a production sharing structure. Fadika said this vehicle allows the foreign operator to retain enough oil to fully recover its exploration and production costs (so-called "cost oil", which includes a built-in capital cost recovery mechanism) and then share the "profit oil" with PETROCI and the government on a pre-determined basis. ¶3. (SBU) Fadika said that top producing oil field Espoir, for example, operated by Canadian company CNR, splits the 20 percent that is deemed "profit" oil at 28.5 percent for the company, 20 percent for PETROCI, and 51.5 percent for the government. The Baobab oil field splits the 20 percent of oil deemed "profit" oil at just three percent for the company and 47 percent and 50 percent for PETROCI and the Treasury. In terms of gas, the biggest gas producing fields Foxtrot and Lion (operated by French company Bouygues and U.S. Devon respectively) deem 60 percent of production as "profit" gas, but the profits are split very differently - 32 percent of the profit goes to Devon, whereas only 3 percent goes to Bouygues, while PETROCI gets 8 percent of profits from the Devon field and 47 percent from Foxtrot (Note: the aforementioned percentages checked against a draft energy audit performed by Fred J. Sexsmith of Vancouver, Canada for the IMF/WB/AfDB mandated audit of the sector. Audit has been sent to DOE/EIA via unclass email. End note) ¶4. (C) Fadika addressed head-on the widespread notion that Cote d'Ivoire is producing more oil than it admits. He said Cote d'Ivoire produces slightly more than 50,000 barrels per day, with CNR's Espoir field producing 30,000 b/d and CNR's newer field Baobab producing between 27,000 and 28,000 b/d. Baobab had initially been producing over 50,000 b/d, leading to total production of over 80,000 b/d, but sanding of the production flow caused production to drop dramatically. Production was shut down for a year after a filter didn't solve the problem. To address the issue, CNR decided to hire a new exploratory drilling rig to drill five new production holes. Fadika said PETROCI and CNR hope production will rise to 50,000 b/d this year, and are optimistic that a new technology to limit sand encroachment will avoid previous problems. Speaking of CNR's older Espoir field, Fadika said he hoped production would rise to 30,000 b/d in 2008. Asked if production and revenue are being accurately reported, Fadika said that "perhaps companies are not being truthful" since PETROCI personnel have been denied access to the production platforms. He also opined that the Ministry of Mines and Energy could be "playing games" with revenue and ABIDJAN 00000130 002 OF 003 failing to fully report. ¶5. (SBU) Fadika did not specify what PETROCI's profits were, nor cite a specific figure of how much the government earns in revenues from oil profits, taxes, etc. He said revenue estimates are based on "prudent" price ranges of $40-50 per barrel. Historically, Fadika said PETROCI has used its profits to develop the overall petroleum market in Cote d'Ivoire. PETROCI-generated capital built the national oil refinery (SIR),the national oil pipe and storage network and has been invested in a chain of petrol stations. Fadika said PETROCI has also used its revenues to increase its ownership stake and improve profit-sharing terms in certain producing fields. Difficulties, Plans for the Future -------------- ¶6. (SBU) Fadika said that a major problem Cote d'Ivoire has had with petroleum production is that it has historically worked with smaller foreign producers. These "young" companies aren't equipped with the latest technology and don't have deep capital pockets. In the three phases of production (exploration, drilling, production),smaller companies can spend one to two years in the exploration (seismic studies and interpretation) phase alone, while bigger firms can cut that substantially by marshaling more resources. For example, a large firm can rent enough exploratory rigs for three and four years at a time to pursue multiple drilling sites within a concession block, with each rig costing $600,000 per day. A small firm can manage perhaps only one rig at a time, and can't be assured it will have it for more than 6-12 months due to the intense demand for equipment caused by high oil and gas prices. As a price for their involvement, Fadika said bigger players demand more of the profit oil, richer cost oil formulas and lower prices to bid on concession blocks. Those conditions, according to PETROCI, are hard to accept, especially for a country such as Cote d'Ivoire, which is eager to develop its modest reserves. ¶7. (C) Fadika said PETROCI is actively courting Anadarko (www.anadarko.com),a Houston-based firm whose CEO was previously the head of Ocean Energy, whose Ivoirian assets were acquired by Devon several years ago. The deal would see Anadarko purchase the drilling rights to block 109 (a field in western Ivoirian waters featuring depths of 1000-3000m), but is not ready to be inked. Exploration and production of 109 could cost over $700 million, a sum that by definition may require the involvement of a major firm. In addition to block 109, Fadika expressed high hopes that blocks 01 and 401 (rights currently owned by Devon and U.S. firm Vanco respectively) will be actively explored this year. Fadika said that many of the existing concession blocks are available now, and most of those already bought are not being actively explored. Responding to a question on the matter, Fadika said Chinese oil companies are interested in Ivoirian concessions, but only in purchasing actively producing fields with a proven reserve, not in exploring and bringing on line new ones. ¶8. (C) Fadika said President Gbagbo has given PETROCI and the Ministry of Mines and Energy the task of obtaining better contract terms with potential partners. He has demanded they get the percentage of "cost oil" down to 65 percent in new production fields, vice 20 percent in the biggest oil producers. This would leave more "profit oil" and thus boost PETROCI and government revenues. Devon's Sale of Ivoirian Assets -------------- ¶9. (C) Fadika criticized Devon management for the sale of its Ivoirian assets (reftel),saying the company failed to inform PETROCI of its intention to sell, as it is required to do under its contract. Fadika noted that PETROCI has the right of first refusal, which Devon undermined by failing to preview the sale before soliciting bids. Fadika said that PETROCI knew that London-based Afren (www.afren.com, headed ABIDJAN 00000130 003 OF 003 by former OPEC Secretary General and Nigerian Oil Minister Dr. Rilwanu)) was the highest bidder, and that PETROCI has entered into negotiations with that company to 1) allow the bid to go forward and 2) purchase a share of Afren. (Note: Subsequent to the Ambassador's meeting with PETROCI, Emboff saw Devon's local director, who said that PETROCI's efforts to "strong-arm" Afren into taking PETROCI on as a partner after Afren bid on Devon's Ivoirian assets "would be a big SEC no-no" if discovered. End note) PETROCI's View of the Extractive Industries Transparency Initiative National Committee -------------- ¶10. (C) Ambassador asked about the recent announcement of the membership of the Extractive Industries Transparency Initiative National Committee (septel). Fadika said he was unsure if the right people and organizations had been named, and volunteered that he had not been invited to the launch ceremony. Fadika explained that a transparency structure he had been considering would have been more effective in 1) monitoring production, 2) contract execution, and 3) management of "cost oil" so that operators don't routinely go outside of strict budget controls. Fadika said he understood the Ministry of Finance was "under the thumb of the IMF" and had to accept its dictates. ¶11. (C) Comment. Fadika, a U.S.-trained engineer and businessman, appeared to want to engage openly and forthrightly. While his descriptions of how PETROCI uses its profits was somewhat vague, his plans for the future and description of challenges facing his company seemed typical for his industry. Clearly, Fadika wanted to show his company's hands are relatively clean, and that if any shenanigans are going on, they are the actions of other arms of the government or (intriguingly) foreign production companies. Embassy will follow developments in this industry, and efforts to bring greater transparency to it, very closely. NESBITT