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