(C) BELIZE: GOVERNMENT TO SHUT DOWN THE ONLY

C O N F I D E N T I A L BELMOPAN 000165

SIPDIS

SIPDIS

FOR WHA/CEN - R. BEAL

E.O. 12958: DECL: 03/19/2018
TAGS: PREL EPET EINV BH
SUBJECT: (C) BELIZE: GOVERNMENT TO SHUT DOWN THE ONLY
PRODUCING OIL COMPANY?

Classified By: Charge Leonard A. Hill for reason 1.4(b) and (d)


1. (C) SUMMARY: With no warning, the GOB is sending mixed
signals about its intentions regarding Belize Natural Energy,
the sole oil-producing company in Belize. BNE is a Belizean
corporation but has significant U.S. investment. The timing
of a government letter telling BNE to remedy seven
deficiencies or face termination of its production sharing
agreement suggests poor internal coordination within Dean
Barrow's new administration. The company has replied to all
points raised and we are urging the government to respond
promptly and favorably to avoid discouraging investment in
the energy sector. END SUMMARY.


2. (C) Embassy learned late in the day March 17 that the
GOB had sent a "Notification of Intention to Terminate
Production Sharing Agreement" to Belize Natural Energy (BNE),
the sole company in Belize producing oil. BNE's principal
shareholder is a U.S. entity, CHx, headed by Denver
businessman Alex Cranberg (protect).


3. (C) According to the letter, from Natural Resources
Minister Gaspar Vega, BNE is in violation of the terms of its
production sharing agreement (PSA) with Belize. The seven
deficiencies cited range from failing to make required
royalty payments to failing to complete a transfer of a 10%
working interest in BNE's Spanish Lookout field to the GOB,
to "a general attitude of nonchalance on the part of BNE
particularly toward the Geology and Petroleum Department."
The letter gives BNE 30 days to remedy the deficiencies or
"the matter will be taken back to Cabinet to contemplate
cancellation."


4. (C) Ambassador and EmbOffs met with Cranberg and Susan
Morrice, another director of BNE, shortly after the letter
was received. Cranberg suspected BNE was being "sandbagged"
by mid-level government officials with whom BNE has had a
sometimes-contentious relationship. He noted that Minister
Vega had appeared uncomfortable delivering the letter, and
that in a subsequent meeting with Minister of State Elvin
Penner, Penner had told him that the Cabinet had not actually
approved the text.


5. (C) Cranberg met briefly March 18 with PM Dean Barrow,
who seemed surprised by the tone and contents of the letter
but did say that he understood there were some problems with
BNE's operations and the letter was intended to put the firm
on notice to tighten up its practices. He also said that,
with oil prices so high, a windfall profits tax seemed
appropriate. Cranberg subsequently met with the CEO (Deputy
Minister equivalent) of Natural Resources who was
conciliatory and said "this will all be resolved, don't
worry." (NOTE: The meeting with the PM had been scheduled
for some time. BNE originally planned to use it to inform
Barrow that the firm intended to increase its investment by
US$200 million to drill multiple additional wells. This
would be the largest foreign investment to date in Belize.
We had discussed having the Ambassador attend this rollout of
the BNE investment plan, but decided not to do that once it
became clear that BNE would put the expansion on hold until
the status of its PSA is resolved. END NOTE.)


6. (C) COMMENT: Neither the Embassy nor BNE had advance
notice that the Ministry was preparing to send such a strong
letter, surprising given that we have met with all of the
players, in some cases multiple times, since the election,
always stressing the need for predictability and transparency
in the natural resources sector. BNE sent a comprehensive
response to the letter on March 18, which should put to rest
the possibility of Cabinet considering termination of the
PSA. However, it seems clear that the GOB is looking to
ratchet up the tax take from the oil sector, most likely
through a windfall profits tax as the PM suggested. The new
government's recent Throne Speech (septel) noted without
specifics that all Belizeans would get access to oil
revenues.


7. (C) The timing of the letter was particularly poor -- on
the eve of the PM's visit to the White House and just as BNE
was about to propose a major new investment -- leading to
questions of how well the Barrow government is coordinating
internally. If this becomes a pattern it will call into
question what we have been told about the government's
openness to investment and how it plans to improve the
economy. Both BNE and the GOB are seeking to avoid publicity
in this dispute, and we are urging the government to respond
promptly and favorably to BNE's letter. Failure to do so
will leave a cloud over not only BNE but over the whole

energy sector and could discourage further investment in
exploration.


8. (C) Our impression is that, overall, BNE has behaved
responsibly in its operations here. It seems clear, however,
that management has not been communicating effectively with
the regulators and probably has taken a "nonchalant" attitude
toward some of the obligations under the PSA. In BNE's
defense, however, this is the way business is often done
here, where slow-moving government bureaucracies can lead to
frustration and delay. Case in point: had BNE not been
aggressive in moving forward after the PSA was signed the
company would likely still be waiting to drill its first
well. Whatever technical violations BNE has committed -- and
one that was not mentioned in the letter was operating a
small refinery without a permit for months -- do not appear
to us to justify terminating the agreement. Penalizing the
one successful company in the industry is not a good way to
encourage others to risk money to find energy here. END
COMMENT.
HILL