THE SIX BILLION DOLLAR DEAL: UPDATING THE CHAD

UNCLAS SECTION 01 OF 03 NDJAMENA 000099

SIPDIS
SENSITIVE

STATE FOR AF/C AND AF/SPG
NSC FOR MGAVIN AND CHUDSON
LONDON FOR POL -- PLORD
PARIS FOR POL -- GD'ELIA AND RKANEDA
ADDIS ABABA ALSO FOR AU

E.O. 12958: N/A
TAGS: PGOV ECON PREL EPET EFIN AU SU LY CD
SUBJECT: THE SIX BILLION DOLLAR DEAL: UPDATING THE CHAD
PETROLEUM SECTOR AND CHAD GOVT HARD BUDGET TIMES WITH ESSO
CHAD

REF: NDJAMENA 0079

NDJAMENA 00000099 001.2 OF 003


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SUMMARY
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1. (SBU) ESSO-Chad's General Manager Stephane de Mahieu told
Ambassador March 18 that falling oil prices had devastated
the Government of Chad's budget picture for 2009: the GOC
earned USD 1.2 billion/billion in revenue in 2008, but would
get as little as USD 150 million/million for 2009, largely
because ESSO would turn no profit and so pay no taxes and pay
only reduced royalties and export fees this year. The GOC
had responded initially by "inviting" ESSO to defer calling
back a fourth quarter 2008 overpayment of royalties, which de
Mahieu said ESSO was considering doing. Even so, he estimated
that the GOC would run out of money by May or June. De
Mahieu acknowledged that the GOC was fortunate to have in
hand for 2009 upwards of USD 400 million in 2008 budgetary
surplus and the possibility of drawing on a USD 260 million
line of credit from its regional Bank of Central African
States (BEAC). But even that would not get Chad to the end
of 2009. De Mahieu and Ambassador agreed that the GOC might
be successful in increasing non-petroleum revenues by more
efficient collection of taxes and by undertaking
belt-tightening measures like retiring a bevy of senior army
generals and "bancarising" state salaries by depositing wages
directly into bank accounts to eliminate corruption and
malfeasance. De Mathieu said that he doubted that a
Chinese-built refinery (the first brick was laid last year)
would ever be operational in Chad: its planned capacity was
far too big -- 20 thousand barrels/day, one-sixth of ESSO's
total current production; it would cost too much -- USD
500-750 million -- to justify its construction; and with the
economic downtown, China's short-term demand for fuel was
greatly reduced. Also, China was interested in other
potential fields in Niger and was unlikely to try to develop
more than one regional location.


2. (U) The U.S. investment in Chad's oil sector is the
single biggest American private enterprise investment in
Sub-Saharan Africa. The American economy has been a major
beneficiary of this huge investment. During its construction
phase, the project generated over 1,000 American jobs. Even
under routine operations, the current 260 American jobs
generate over USD 83 million in personal income. Right now,
over 50 percent of the consortium's material purchases and
contracted labor are U.S. based, which represented USD 300
million in 2008. ExxonMobil and Chevron purchased 24 million
barrels of Chad's crude oil in 2008 for distribution and use
in the United States. Finally, to date, over USD two
billion/billion of profit has been returned to U.S.
shareholders through dividends.


3. (SBU) De Mahieu plans to travel Washington in early
April. We recommend that his meetings in AF be at least at
the DAS level and that AF consider putting him on the Acting
Assistant Secretary's schedule if possible. We also think
that a meeting at the NSC might be useful. ESSO Chad's
impact on the U.S. economy is substantial -- see para 10 for
details. In addition, de Mahieu is a sophisticated,
well-informed player in the world of Chadian macroeconomics,
which gives him considerable insight into Chadian political
dynamics as well. He is acutely aware of the security
implications for the ESSO-led consortium's USD six
billion/billion investment for Chad's geopolitical situation
and the GOC's financial strength.


4. (SBU) Chad's oil revenue, on which its ability to pay its
military rests, is a major factor in Chad's stability and
especially its willingness and capacity to cooperate
productively with the humanitarian assistance effort on
behalf of Darfur refugees and the reinforced MINURCAT PKO
designed to protect civilians in eastern Chad. If
developments in Sudan trend negatively, eastern Chad likely
will become the theater for dramatic events that will require
intense cooperation between the GOC with the international
community represented here. END SUMMARY.

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FALLING OIL PRICES LEAD TO GOC BUDGET DIFFICULTY
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5. (SBU) Falling oil prices have had an impact on the
Government of Chad's budget and its agreements with the oil
production company, Esso Exploration and Production Chad
Inc., which is an ExxonMobil-led consortium including
Petronas and Chevron. Stephane de Mahieu, Esso's General
Manager, told Ambassador March 18 that the GOC had earned USD
1.2 billion in revenue in 2008. With the drop in oil prices,
de Mahieu estimated that the GOC would earn only USD 150
million in revenue for 2009 -- oil royalties would be greatly
diminished and Esso would likely not turn a profit, thus
denying the government any tax revenue either. Those
circumstances had led the Minister of Finance to "invite"
Esso to defer calling back a fourth quarter 2008 overpayment
of royalties and to ask whether Esso would consider spreading
out credit over a longer period than called for in the
renegotiated agreement, according to de Mahieu. (NOTE:
Under the prior GOC-Esso agreement that sunsetted at the end
of 2008, Esso prepaid royalities quarterly, on the basis of
the prior quarter's dollar-per-barrel price of oil. With the
significant drop in the price of oil during the October -
December 2008 timeframe, Esso "overpaid" its fourth quarter
royalties to the GOC and is due a refund. END NOTE.)


6. (SBU) With the renegotiated agreement, ESSO will pay
royalties on an ongoing basis and not under the former
quarterly prepayment. De Mahieu stated that the GOC owed
ESSO a large refund and there were no more big upfront
payments to offset it. De Mahieu underscored that he
appreciated the GOC's approach to dealing with the situation.
The GOC was honoring the agreement and coming to the oil
company first, instead of unilaterally changing terms, he
said. ESSO was considering the GOC's request and would
probably respond positively to help even out the GOC's
revenue stream, but de Mahieu cautioned that the ESSO offer
would probably not be as large as the GOC had hoped. De
Mathieu added that the three consortium companies might have
to borrow funds themselves in 2009 from their parent
companies to sustain investment -- critical for continued oil
production.


7. (SBU) With the fall in oil prices, de Mahieu said that he
had figured the GOC's budget would run out by May or June,
including some USD 400 million in 2008 budgetary surplus, at
the government's current spending rate. The Ambassador noted
that World Bank reps (reftel) had told us that the GOC had a
USD 260 million line of credit from its regional Bank of
Central African States (BEAC). De Mahieu wondered about
BEAC's ability to provide assistance when many of the six
member states of the monetary union were heavy oil-producing
countries. Ambassador stated that the GOC was also pursuing
budget-tightening measures, such as retiring army generals
and removing them from payrolls and "bancarising" state
salaries by depositing wages directly into bank account in an
anti-corruption measure.


8. (SBU) De Mahieu made clear that without a significant
increase in oil prices, he could not see any opportunity for
the GOC's budget to recover. He noted, however, that OPEC's
oil production cut was helpful to Chad since the majority of
OPEC's cuts were focused on heavy crude, the type of oil Chad
exports. With OPEC's cut reducing competition in the market,
coupled with high demand for heating oil due to cold winters
in Europe and North America, heavy crude was trading only at
a USD five per-barrel discount to Brent crude, compared with
a USD 20 per-barrel discount last year. Putting the sale and
revenue of oil in context, Mathieu estimated that every USD
ten per barrel change in brent crude prices was equivalent to
USD 300 million in annual revenue for the GOC.

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CHINESE REFINERY NOT LIKELY
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9. (SBU) Turning to the issue of a potential Chinese
refinery, Mathieu offered a variety of facts and figures to
support his belief that a Chinese-built refinery would
ultimately never be operational in Chad. He noted that the
refinery would operate at 20K barrels per day, which was
one-sixth of ESSO's current production capacity in the south.
Using the ESSO model of USD six billion/billlion in
investment to reach that level of production, he figured that
a refinery near N'Djamena would need USD 500 million of
investment, at least. He flatly denied that there was
anywhere near that level of investment by China or any other
entity in Chad. Further, he postulated that with the
economic downtown, China's short-term demand for fuel was
greatly reduced with the lowered demand for Chinese exports.
Additionally, he noted that there were potential fields on
the Niger side of Lake Chad and elsewhere in Niger that
seemed more promising than the Chadian deposits. He said he
thought that the Chinese would ultimately only choose to
develop in one location, not both. Even if the Chinese
project continued development, de Mathieu estimated five
years before the refinery would be producing refined fuel for
local consumption. He noted that the GOC had recently
requested talks with ESSO to produce some heavy product for
GOC use in its southern Chad facility -- a "Topping Plant"
there could refine some oil to be taken by the GOC in lieu of
tax and other revenue.


--------------
ESSO CHAD AND THE U.S. ECONOMY
--------------


10. (U) The U.S. investment in Chad's oil sector is the
single biggest American private enterprise investment in
Sub-Saharan Africa. The American economy has been a major
beneficiary of this huge investment. During its construction
phase, the project generated over 1,000 American jobs. Even
under routine operations, the current 260 American jobs
generate over USD 83 million in personal income. Right now,
over 50 percent of the consortium's material purchases and
contracted labor are U.S. based, which represented USD 300
million in 2008. ExxonMobil and Chevron purchased 24 million
barrels of Chad's crude oil in 2008 for distribution and use
in the United States. Finally, to date, over USD two
billion/billion of profit has been returned to U.S.
shareholders through dividends.

--------------
COMMENT
--------------


11. (SBU) De Mahieu plans to travel to be in Washington in
early April. We recommend that his meetings in AF be at
least at the DAS level and that AF consider putting him on
the Acting Assistant Secretary's schedule if possible. De
Mahieu is a sophisticated, well-informed player in the world
of Chadian macroeconomics, which gives him considerable
insight into Chadian political dynamics as well. He is
acutely aware of the security implications for the ESSO-led
consortium's USD six billion/billion investment for Chad's
geopolitical situation and the GOC's financial strength.


12. (SBU) Chad's oil revenue, on which its ability to pay its
military rests, is a major factor in the nation's stability
and especially its willingness and capacity to cooperate
productively with the humanitarian assistance effort on
behalf of Darfur refugees and the reinforced MINURCAT PKO
designed to protect civilians in eastern Chad. If
developments in Sudan trend negatively, eastern Chad likely
will become the theater for dramatic events that will require
intense cooperation between the GOC and the international
community represented here. END COMMENT.

13, (U) Tripoli minimize considered.
NIGRO