(S) MOBIL REJECTS FSM PETROLEUM CORPORATION PROPOSAL FOR

S E C R E T SECTION 01 OF 02 KOLONIA 000103

SIPDIS

E.O. 12958: DECL: 7/15/2018
TAGS: ECON PGOV PREL FM CH
SUBJECT: (S) MOBIL REJECTS FSM PETROLEUM CORPORATION PROPOSAL FOR
FINANCING FROM CHINA

CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia,
State.
REASON: 1.4 (b),(d)



CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia,
State.
REASON: 1.4 (b),(d)



1. (S) Summary. In a veil of secrecy, a nascent national
petroleum corporation for the Federated States of Micronesia
(FSM) has begun to purchase fuel storage tanks from Mobil in all
four FSM states. Purchase of the fuel terminals should be
complete by the end of July. The President of Mobil in Guam
helped broker an FSM loan for USD 9.7 million from the Bank of
Guam to ensure direct Guam-based payment to Mobil. Mobil's
President said he rejected a proposal by the FSM to cover
purchase of the tanks and residual fuel by means of a USD 20
million concession loan from China. As the FSM begins to
establish a headquarters for "PetroCorp" on the capital island
of Pohnpei in order to purchase fuel in bulk for the entire
nation, Mobil believes representatives of the new corporation
may return to China to seek a loan to cover costs of future oil
supplies and/or interest payments on the loan from the Bank of
Guam. End Summary.

SECRECY CLOAKS PURCHASE OF FUEL TANKS


2. (C) A national petroleum corporation for the Federated
States of Micronesia (FSM) was established by the FSM Congress
and signed into law by President Emanuel Mori in September 2007.
Since that time, the nascent corporation, which will do
business under the trade name of "PetroCorp or FSMPC," has
struggled to incorporate all four FSM states. Replacing 42
years of Mobil Oil Micronesia service, FSMPC will acquire and
operate fuel storage and wholesale distribution facilities in
Yap, Chuuk, Kosrae and Pohnpei States. During the past year,
Mobil-Guam has worked fitfully with the FSM national and state
governments to try to finalize asset sales and supply
agreements. Mobil President and Guam Country Director Kamal
Singh (Fijian national) described negotiations as the toughest
wrangling he has ever experienced in an 18-year career with
Mobil in the Asia and Pacific region.


3. (SBU) Without notification to the public, a transfer of
state assets to PetroCorp began in Yap last month. Chuuk then
supposedly turned over its assets to FSMPC on July 11. A Mobil
media release in Guam on June 28 anticipated that "a full
transition of Mobil's assets and operations in FSM to the FSMPC
will be completed by the end of July 2008."


4. (SBU) In the absence of public information, speculation on
the Internet chat site Micronesian Seminar has run rife. For
example, one anonymous commentator wrote: "China and FSM can
co-finance gigantic fuel storage tanks in the FSM to assist
refueling of China's submarine fleet program. With larger bulk
fuel purchase, the price of fuel will drop in the FSM. FSM's
economy can skyrocket within a short duration, probably as fast
as China's rate of economic growth." Other commentaries
lambaste the silence of the FSM National Government on the
current transactions and cast doubt on the dependability and
credibility of PetroCorp. The ability to leverage purchasing
power from the higher economy of scale derived from national
versus state purchases is likely to be undercut by the rising
cost of petroleum products, according to industry experts,
possibly exacting a political price for the FSM National
Government.

DEALS FRAUGHT WITH DELAYS - CHINA OFFERS ATTRACTIVE TERMS


5. (C) Since the establishing legislation passed in September
2007, an anticipated USD 9.74 million loan from the Bank of Guam
to acquire fuel storage and delivery assets was delayed pending
a decision in Pohnpei State about whether to join FSMPC. As a
newly elected government in Pohnpei took its time to assess
alternative supply options, Mobil threatened to withdraw from
the deal. Pohnpei only consented to come on board in March 2008
after President Mori, under intense pressure from Mobil, agreed
to sign an indemnification agreement for Pohnpei State
operations. In turn, the FSM National Government received a
back-to-back indemnification from FSMPC, even though the
Corporation still lacks insurance coverage. When Ambassador
Hughes asked Pohnpei Governor John Ehsa how the FSM National
Government could conceivably cover fuel eventualities in his
state, the Governor responded, "That's President Mori's
problem." According to Singh, the indemnification agreements
are "pure paper."


KOLONIA 00000103 002 OF 002



6. (C) With Pohnpei on board, the FSM National Government
announced that the Bank of Guam would finance the purchase of
Mobil assets and FSMPC would commence operations in May.
However, FSMPC continues to lack a Chief Executive Officer,
technical managers and staff. In the absence of FSMPC managers,
negotiations continued under the direction of PetroCorp's
Interim Task Force Chief, Secretary of Resources and Development
Peter Christian.


7. (S) Singh has shared his understanding that Christian made
secret trips to Beijing to secure a loan offer of USD 20 million
at a rate of 2 per cent interest. Singh promised to deliver a
copy of the draft Chinese loan proposal to Ambassador during his
next trip to Kolonia. When Secretary Christian urged Mobil to
accept payment through Chinese financing, Singh said he refused,
fearing unreliability. Instead, Mobil insisted upon and helped
finalize the USD 9.74 million loan from the Bank of Guam. As
fuel storage assets are transferred, Mobil-Guam has begun to
receive payment directly from the Bank of Guam.

FRAGILE FINANCING PORTENDS PETRO-CORP DIFFICULTIES


8. (S) Owing to low revenue generation in the FSM, along with
soaring costs of petroleum, foods and basic products in this
remote island nation, Singh speculated that Secretary Christian
would be tempted to again travel alone to Beijing to seek
Chinese financing, either to help defray the cost of fuel
supplies or to cover interest payments to the Bank of Guam,
which has pegged its loan to FSMPC at 7.5 percent. (Christian
alleged to Ambassador that he had succeeded in securing an
earlier offer of a 6.5 percent interest rate.) Terms of
establishment of the FSMPC, which is a quasi-governmental
corporation, circumvent essential FSM Congressional oversight,
according to Singh.


9. (SBU) In its efforts to ensure "a seamless changeover" and
"product supply continuity," Mobil-Guam's media release states
that Mobil remains committed to an ongoing, phased transfer of
assets in a nation that it has supplied since 1966. Mobil will
remain the sole supplier of FSM fuel for the next five years,
including the sale of gasoline, diesel and jet fuel at market
rates, which FSMPC will distribute to the four states. However,
Mobil does not disembark tankers from Singapore to the FSM until
pre-payment is received. During the first year of transition,
Mobil employees in the FSM, including experienced technicians,
have supposedly agreed to remain in place at their current
salary rates. A petroleum expert from the Pacific Island Forum,
who has contributed constant advice, maintains that FSMPC can
succeed, particularly if the corporation puts out a tender for
future maintenance and delivery services. In the long run,
Pacific island nations may be able to negotiate a competitive
bulk price, he said. Continental Airlines' regional operational
manager commented that Continental will continue to load jet
fuel under the FSM's new arrangement, so long as scrupulous
quality assurance checks meet security standards at the time of
tanking any of its flights. Otherwise, Continental will be
compelled to cancel operations.


10. (S) Comment: Timing of such a complex transition to a
national fuel corporation is clearly complicated by soaring oil
costs. At the same time, tensions among the four FSM states and
the national government are also running high owing in part to
inefficiencies in implementation of declining Compact assistance
and perceived favoritism toward President Mori's home state of
Chuuk. If FSMPC appears to favor any one of the four states in
the supply of oil inconsistent with state payments, dissension
will deepen. Political pitfalls for Secretary Christian
(Pohnpei State) are clear if his hand is revealed in possible
covert loans. In the meantime, many of the fuel tanks in the
FSM are deteriorating and they require costly repairs; Mobil was
reluctant to invest in their overhaul owing to the paucity of
market profit from the FSM. Beijing has supposedly expressed
interest in building all new storage facilities. To maintain
quality assurance standards and purchase sufficient fuel to
avoid blackouts, the FSM will require additional sources of
financing. Some observers believe Secretary Christian, who may
harbor Presidential ambition, will take credit for launching
PetroCorp, and then blame a collapse on FSMPC Board members.
Former FSM Vice President Redley Killion is already a member of
the board, a contender for Governor of Chuuk and a possible
target of blame by Christian.

HUGHES
HUGHES