NICARAGUA: MKJ SIGNS OIL EXPLORATION AGREEMENTS

C O N F I D E N T I A L MANAGUA 000460

SIPDIS

SIPDIS

STATE FOR WHA, WHA/CEN, WHA/EPSC, EEB/CBA, EEB/IEC
STATE PASS TO OPIC
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
SAN SALVADOR FOR MMCGEE

E.O. 12958: DECL: 04/14/2018
TAGS: EPET ENRG EINV ECON PREL NU
SUBJECT: NICARAGUA: MKJ SIGNS OIL EXPLORATION AGREEMENTS
WITH THE GOVERNMENT (AGAIN),INFINITY STILL ON HOLD

REF: A. 07 MANAGUA 01217

B. MANAGUA 00185

Classified By: Ambassador Paul Trivelli, Reasons 1.4 (b) and
(d)


1. (C) Summary. President of MKJ Eric Conrad and Nicaraguan
Attorney General Hernan Estrada signed oil and gas
exploration and production concession agreements for two
offshore blocks located 60 miles off the coast of Nicaragua
in the Caribbean Sea on April 8. The agreements are
essentially identical to those signed by the previous
administration, but declared void by the Supreme Court for
lack of consultation with the local governments of the
Autonomous Region of the North Atlantic (RAAN) and the
Autonomous Region of the South Atlantic (RAAS). MKJ has
agreed to sell the two blocks to Noble Energy of Houston,
Texas in the near future. Infinity Energy Resources awaits
the outcome of Ministry of Energy and Mines consultations
with RAAN and RAAS authorities on two other offshore
concessions that the Supreme Court declared void for similar
reasons. End summary.


2. (C) On April 8, President of Louisiana-based independent
oil company MKJ Eric Conrad and Nicaraguan Attorney General
Hernan Estrada signed oil and gas exploration and production
concession agreements for two offshore blocks located 60
miles off the coast of Nicaragua in the Caribbean Sea. The
agreements are essentially identical to those signed by the
previous administration, but declared void by the Supreme
Court for lack of consultation with the governments of the
Autonomous Region of the North Atlantic (RAAN) and the
Autonomous Region of the South Atlantic (RAAS). MKJ did make
minor adjustments to align the revenue sharing portions
allotted to each autonomous region and provide some
additional funding to the Ministry of Energy and Mines for
training.

Signing Ceremony in the Midst of RAAN Turmoil
--------------


3. (C) The Attorney General's office sought to limit press
coverage to the signing ceremony to avoid questions about the
political turmoil in the RAAN. Citizens there took to the
streets -- and violence erupted -- after the Supreme
Electoral Council announced that it would postpone elections
scheduled for November in three municipalities. No one from
the RAAN attended the ceremony. However, Minister of Energy
and Mines Emilio Rappaccioli showed, as did representatives
of the Southern Atlantic region, MKJ partner Noble Energy,
and the Ambassador.

MKJ to Sell Rights to Noble Energy
--------------


4. (C) MKJ plans to transfer its rights to partner Noble
Energy in the near future. If the government does not
approve the consignment of concession rights to Noble Energy,
Noble Energy may simply acquire MKJ. Internationally, Noble
Energy currently manages oil and/or gas projects in
Argentina, Chile, Ecuador, Equatorial Guinea, Israel, the
Mediterranean Sea, the North Sea, and Suriname.


5. (C) The two blocks, named the Tyra Bank and the Isabel
Bank, each cover approximately 400,000 hectares in water
depths of between 50 meters and at least 1000 meters. To
date, no exploration has been undertaken within these blocks
and only limited seismic data exists. Noble Energy will
perform an environmental impact study before conducting
seismic studies and a geophysical analysis to determine
whether an exploratory well and/or a drilling plan is
justified.

Satisfying the Supreme Court Ruling
--------------


6. (C) The "new" concessions are the result of a 2006 Supreme
Court ruling (prompted by an FSLN-inspired legal complaint)
that the government should have consulted the RAAN and the
RAAS before concluding the original concessions, despite the
fact that both concession blocks fall outside the 33-mile
territorial waters granted to the autonomous regions by the
Nicaraguan constitution. MKJ originally won the concessions
as the result of an international tender in 2003. In 2004,
MKJ signed concession agreements for a six-year primary
exploration period followed by a thirty-year production
period. The concessions that MKJ signed on April 8, 2008,
refresh the clock for both of these periods.

Renegotiations Sandinista Style
--------------


7. (C) At one point in the renegotiation of the concession,
President Ortega pressed MKJ to meet with representatives of
Petroleos de Venezuela (PDVSA) to discuss possible
collaboration on the project. MKJ had little desire to do
so, since partner Noble Energy brings all the capital,
technology, and production capabilities needed to pursue the
project. Nevertheless, Rappaccioli organized several
meetings with PDVSA, only to have PDVSA fail to show. At
Ortega's personal request, MKJ representatives flew to
Caracas to meet with PDVSA. In Caracas, PDVSA confirmed
that, indeed, it had no interest in MKJ's project and the
Nicaraguans soon dropped the issue.


8. (C) At another point in the consultation process, the
Ministry of Energy and Mines requested that MKJ fund expenses
for the RAAN and RAAS councils to conduct an extraordinary
session to review the concessions. Nicaraguan law provides
for such a request, as long as funding is not contingent upon
a favorable decision. MKJ notified the Embassy and the
Overseas Private Investment Corporation (its political risk
insurer) of the Ministry's request in advance. In the end,
the Ministry organized the extraordinary sessions, where it
presented MKJ's proposed concession agreements. MKJ did not
attend. The governing councils of the RAAN and the RAAS
approved the concessions.

Infinity Energy Resources Still on Hold
--------------


9. (C) Kansas based Infinity Energy Resources participated in
the same 2003 tender and signed an exploration and production
agreement for two offshore concessions adjacent to MKJ's.
The Supreme Court ruled that Infinity Energy Resources
concessions were invalid for the same reason as MKJ's.
Infinity awaits the outcome of Ministry of Energy and Mines
consultations with the RAAN and the RAAS. Neither MKJ nor
Infinity is affected by the ongoing dispute over territorial
waters between Nicaragua and Columbia that is before the
International Court of Justice (Ref B).


10. (C) In general, Infinity has benefited from having MKJ
work through many issues with the government and the
governing councils of the RAAN and the RAAS. Infinity has
received no pressure, for example, to include PDVSA as a
partner. However, Infinity and the Ministry of Energy and
Mines must explain fundamental differences to the RAAN and
RAAS governing councils between its concessions and MKJ's
concessions. At the same time, politics are getting in the
way.


11. (C) Earlier in 2008, President Ortega insisted that
Sandinista political operative Lumberto Campbell be
Infinity's point person for gaining approval from the RAAN
and the RAAS governing councils, replacing a well-known and
popular representative from the indigenous population. This
switch clearly upset Campbell's opponents, as both the RAAN
and the RAAS governing councils made a point of failing to
approve Infinity's concessions. Ongoing political turmoil in
the RAAN over the government's postponement of elections in
three important municipalities threatens to make the growing
divide within the RAAN governing council insurmountable for
Infinity and the Ministry of Energy and Mines in the near
term. The RAAS governing council has generally supported
both MKJ and Infinity's projects, but its approval cannot be
taken for granted in the current politically charged
environment.

Nicaraguan Interest in OPIC Housing Finance
--------------


12. (C) Both MKJ and Infinity are political risk insurance
clients of the Overseas Private Investment Corporation
(OPIC). OPIC President and CEO Robert Mosbacher visited
Nicaragua on several occasions during the past year to
encourage reinstituting these concession agreements and to
advance OPIC programs. President Ortega has expressed strong
interest in OPIC financing and development programs to help
low-income Nicaraguans own their own home. OPIC has
indicated its willingness to consider such programs as soon
as oil exploration concessions have been restored.

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


13. (C) MKJ's path to its concession has been lengthy and
tortuous. Nonetheless, the way is now clear for MKJ and/or
Noble Energy to undertake serious exploration for oil and/or
gas. We expect that Infinity will eventually sign a new
concession as well. The Government of Nicaragua has made the
process painful, but in this case at least, it has done the
minimum necessary to let an international investment go
forward.
TRIVELLI