CHAD WANTS OIL PAYMENT IN BARRELS NOT DOLLARS

UNCLAS SECTION 01 OF 02 NDJAMENA 000089

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E.O. 12958: N/A
TAGS: PGOV ECON EPET ETRD PREF EINV US CD
SUBJECT: CHAD WANTS OIL PAYMENT IN BARRELS NOT DOLLARS

REF: 09 NDJAMENA 551

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SUMMARY
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1. (SBU) ESSO-Chad's General Manager has told us that the
GOC has formally requested a change in payment practices for
Chad's oil royalty. The government, entitled to 12.5 percent
of daily output as royalty, has now requested payment
"in-kind" vice payment in currency, breaking with the set-up
in effect since exports began. ESSO's GM said he believed
that Chad now wanted the prestige of selling its own oil on
the world market instead of having ESSO sell it for the
government, although both he and the IMF seem to believe that
Chad's revenue will decline under the new arrangement since
brokers and middlemen will charge transactions costs for
services that ESSO has been providing for little or no fee.
The change in payment practice may in the end not be realized
as the GOC still has many technical and international audit
challenges to overcome. In the meantime, ESSO's GM told us
that the Chinese continue well-driving and refinery-building
apace but without any finalized agreement with the GOC, a
calculated risk that ESSO would not take in the same
circumstances. END SUMMARY.

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ROYALTY IN KIND
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2. (SBU) Stephane de Mahieu, ESSO-Chad's General Manager,
told Ambassador February 2 that the GOC had officially
communicated its intent to receive oil royalty "in-kind"
instead of via the existing cash payment formula in place
since oil exports began. De Mahieu explained that countries
usually take royalty payments in-kind but Chad had asked ESSO
to sell the government's share given the country's lack of
expertise and production capability. Chad's royalty, under
agreements with ESSO, is 12.5 percent of daily output,
equivalent to some 16,000 bpd at current production level.


3. (SBU) Reasons for the government's desire to switch
course at this time are unclear. De Mahieu said he believed
the GOC was motivated by the prestige factor of selling its
own oil. As ESSO's Kome plant has no facilities for truck
loading and all export meters are located at the offshore
terminal, Chad must take delivery of the oil at ESSO's Kribi
terminal off the Cameroonian coast, leaving it with limited
options for selling the oil. The government would most
likely sell to a trader who would then resell the oil. Chad
could deliver the oil directly to buyers, but would have to
assume all transport risks. A theoretical option could be to
use the crude as collateral for a loan that the GOC might be
seeking.


4. (SBU) By all accounts, the GOC will earn less revenue on
selling its oil directly than taking cash from ESSO's sale on
the government's behalf. De Mahieu noted that ESSO charges
minimal fees for selling Chad's 12.5 percent royalty stake,
whereas both a trader and the Chadian state oil company would
take cuts amounting to much more. IMF ResRep Karangwa, with
whom we spoke February 4, estimated that Chad could lose up
to 30 percent of revenue in transaction costs. Given the
small volume of oil to sell, Chad does not command a large
enough market share to negotiate overly favorable prices,
according to de Mahieu, who said that almost two months would
be required for Chad to fill a standard 950,000 barrel tanker.


5. (SBU) The change in payment may in the end not be
realized, as several obstacles remain. Public and private
international lenders, including WB, IMF, and EIB, will be
interested in reviewing Chad's intended actions with respect
to oil sales and could conclude that the plan violates
existing loan and other oil agreements. De Mahieu also noted
that the Minister of Petroleum and the director of the state
oil company were unaware of the government's plans until the
presidency officially notified ESSO of its desire to receive
payment in kind. The state oil company told ESSO it was not
yet in a position to have technical discussions on the issue,
although de Mahieu advised us that ESSO could easily be ready
within the 90-day window allocated in the original agreements.


NDJAMENA 00000089 002 OF 002


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CHINESE WORK WITHOUT FINAL AGREEMENT
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6. (SBU) De Mahieu also noted that the Chinese continued
importing material and breaking ground on their oil projects
in Chad, all without a final agreement from the GOC. The
ESSO chief said that Chinese National Oil Company (CNOC) had
already drilled 40 wells, but without any way to produce the
field as the refinery is at least two years away and
connection to the ESSO pipepline four to five years. De
Mahieu estimated that the Chinese had spent at least USD
100M, with more equipment arriving daily. De Mahieu said
that ESSO would only take a calculated risk like the one the
Chinese were taking for a big field guaranteed to make a
profit, not a 20-25K bpd concern like the Chinese had in Chad.

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COMMENT
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7. (SBU) While royalty in-kind payments are within the GOC's
rights and are common practice in other oil-producing
nations, the reasons behind the government's request for this
change are unclear. Chad's output level will not command
enough of the market to make the GOC a significant player,
and there are no indications that GOC officials have suddenly
developed expertise in the oil market. Instead, the GOC's
actions seem to follow other recent efforts by President Deby
to portray Chad as a stable, peaceful nation capable of
running its own affairs. END COMMENT.


8. (U) Minimize considered.
NIGRO