CHAD WANTS OIL PAYMENT IN BARRELS NOT DOLLARS

UNCLAS SECTION 01 OF 02 NDJAMENA 000089 SENSITIVE SIPDIS STATE FOR AF/C, S/USSES NSC FOR GAVIN LONDON FOR POL - LORD PARIS FOR POL - BAIN AND KANEDA ADDIS ABABA ALSO FOR AU 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 -------------- SUMMARY -------------- ¶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. -------------- ROYALTY IN KIND -------------- ¶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 -------------- CHINESE WORK WITHOUT FINAL AGREEMENT -------------- ¶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. -------------- COMMENT -------------- ¶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