VZCZCXRO5211
PP RUEHMA RUEHPA
DE RUEHDK #2364/01 2721709
ZNR UUUUU ZZH
P 291709Z SEP 06
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 6441
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0088
RUEHRB/AMEMBASSY RABAT 0782

UNCLAS SECTION 01 OF 05 DAKAR 002364 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EB/ESC/IEC, EB/IFD/ODF, AF/EPS AND AF/W 
AID/W FOR AFR/WA AND AFR/SD 
TREASURY FOR OIASA/IDB 
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS 
USDOC FOR 4510/OA/PMICHELINI, AROBINSON-MORGAN/KBOYD 
USDOC FOR 3131/CS/ANESA/OIO/GLOOSE/GLITMAN/MSTAUNTON 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON EPET KMCA SG CH IR LY MO
SUBJECT: SENEGAL'S STRATEGY TO ADDRESS ITS ENERGY CRISIS 
 
REF: DAKAR 1746 AND PREVIOUS (NOTAL) 
 
DAKAR 00002364  001.2 OF 005 
 
 
SUMMARY 
------- 
¶1.  (SBU) As we enter the ninth month of Senegal's energy crisis, 
the GOS and energy parastatals have outlined a number of steps that 
they hope will stabilize the situation.  With presidential and 
parliamentary elections in February 2007, there is widespread 
agreement among sector analysts that the energy crisis must be 
brought under control by the end of October before the political 
campaign hits full stride and it becomes more difficult to make hard 
decisions.  In meetings with EmbOffs, industry insiders shared 
short-term and medium-terms plans to address Senegal's growing 
energy crisis.  However, the most significant, and perhaps most 
distressing aspect of the GOS actions is the increased imposition of 
government control on the sector, including the re-acquisition of 
shares of Senegal's troubled petroleum refinery, and the creation of 
an "Emergency Fuel Fund," the oversight of which has not yet been 
explained.  END SUMMARY. 
 
--------------------------------------------- ---------- 
WAS PRESIDENT WADE IN THE DARK ABOUT THE ENERGY CRISIS? 
--------------------------------------------- ---------- 
¶2.  (SBU) On September 19, EmbOffs met with Samuel Sarr, the 
Director General of SENELEC (Senegal's government-owned electricity 
transmission/distribution monopoly).    Sarr reported that those 
surrounding President Wade were "lying" to him about the critical 
state of Senegal's energy crisis and claimed that he "sounded the 
alarm" as early as January 2005, when he claims to have sent memos 
to the Minister of Energy anticipating the impact on Senegal of the 
alarming rise in the price of crude oil.   After receiving no 
reaction from the Minister of Energy and Mines, Sarr claims to have 
raised the issue with Prime Minister Macky Sall through official 
channels.   It was only on July 4, 2005, when Sarr had an audience 
with President Wade was he able to bring his concerns to the 
President's attention more forcefully.  At that time, according to 
Sarr, President Wade directed the Prime Minister to devise a 
strategy to address the energy situation.  Eventually, in December 
2005, the Prime Minister convened an inter-ministerial meeting on 
the energy situation.  According to Sarr, the suggestion to 
re-establish an "Emergency Fuel Fund" (EFF) was raised; however, a 
vote was never taken.  By February, Senegal was feeling the impacts 
of high oil prices and resulting petroleum shortages and frequent 
electricity cuts and brownouts. 
 
¶3.  (SBU) Taking the difficult but necessary steps to deal with 
electrical outages will likely prove difficult for the GOS, which is 
already in the midst of a highly-charged electoral season, with 
presidential and parliamentary elections due to be held in February. 
 In order to have the means to keep current on its accounts with 
fuel suppliers, and GE/GTi, SENELEC is pining its hopes on gaining 
approval for a hike in electricity prices to reflect the utility's 
true costs.  Senegal's electricity regulatory board indicates that 
the cost per kilowatt/hour will need to rise by at least 15 
percent. 
 
¶4.  (SBU) Since the shut down of the Societe Africaine de Rafinage 
(SAR), Senegal's only refinery, in April 2006 and after the sell off 
of its remaining stocks of refined product in August 2006, consumer 
petroleum product imports shifted to the limited storage capacity at 
the Port of Dakar.  However, due to the lack of sufficient 
infrastructure, SENELEC has been unable to get its imported fuel to 
its Cap de Biche power stations, which are adjacent to SAR and some 
20 kms from the Port of Dakar.  The inability to get fuel to the Cap 
de Biche site contributed to the deficit on the power grid in 
August, which was further compounded when GTi Dakar stopped 
operations due to the lack of payments by SENELEC (reftel). 
 
¶5.  (SBU) On September 26, Mr. Jean-Michel Seck, the Managing 
Director of SAR, told EmbOffs that recently concluded negotiations 
with the GOS would permit SENELEC to off-load and store its heavy 
fuel imports at the refinery to facilitate the supply of Cap de 
Biche.  At the same time, Total/Senegal has restarted the 
importation of heavy fuel --15, 000 tons destined for SENELEC and 
3,000 tons earmarked for the local manufacturing industry, which 
should ease the strain placed on SENELEC and local manufacturers who 
have been forced to use gasoil due to the lack of heavy fuel in 
country.  (NOTE:  The gasoil used by SENELEC and local manufacturers 
 
DAKAR 00002364  002.2 OF 005 
 
 
is 50 percent more expensive than the heavy diesel fuel normally 
used by manufacturers.  END NOTE.) 
 
--------------------------------------------- --- 
EMERGENCY FUEL FUND AND RESTRUCTURED FUEL PRICES 
--------------------------------------------- --- 
¶6.  (SBU) According to industry insiders, the Council of Ministers 
agreed on September 7, 2006, to re-establish an emergency fuel fund 
(EFF), whereby fuel dividends would be retained by the GOS.  Any 
decrease in fuel prices will likely not be passed on to the consumer 
through lower prices at the pump, but instead diverted into the 
fund.  (NOTE:  This fund had been abandoned in 1998 in accordance 
with an energy sector liberalization initiative spearheaded by the 
World Bank.  END NOTE.) 
 
¶7.  (SBU) Concomitant with the establishment of the EFF, the 
Ministers agreed to establish a new, presidential-appointed 
"National Committee" to manage the Fund and establish long-term fuel 
purchasing contracts.  The "National Committee" is expected to be 
composed of government officials in the energy sector and all 
licensed fuel importers.  As the GOS hopes to begin issuing 
procurement tenders for yearlong contracts by December, it is 
anticipated that the "National Committee" will be established 
imminently.  Details are not yet available on the terms of reference 
for the committee or the management and accountability details for 
the EFF. 
 
¶8.  (SBU) And finally, after much prodding by the fuel suppliers and 
SAR, the Ministry of Energy will restructure fuel prices based on 
c.i.f  Northwest Europe reference for the import-price parity in 
place of the lower f.o.b. Mediterranean reference point, thereby 
enabling SAR to reap a higher margin upwards of USD 8 million 
annually for the refinery.  (NOTE:  The import-parity price was one 
of the major sources of contention between the GOS, suppliers and 
SAR.  The GOS' move to align with the c.i.f. Northwest European 
price reference should help SAR meet its financial commitments and 
secure supplies.  However, on the flip side, due to the duty 
structure associated with the c.i.f. Northwest Europe reference, the 
GOS will lose significant tax revenue.  END NOTE.) 
 
--------------------------------------------- ----- 
FUEL CREDITS FROM IRAN, LIBYA, MOROCCO AND NIGERIA 
--------------------------------------------- ----- 
¶9.  (SBU) According to Mr. Carmello Sagna, the Director of 
Hydrocarbons, fuel credits will be given to Senegal by "Friends of 
Senegal," including Morocco, Nigeria, Iran, Libya and perhaps other 
oil producing countries.  More specifically, Mr. Mahammed Dionne, 
Chief of Staff to the Prime Minister, informed EmbOffs that Iran 
will deliver heavy crude on 90-day payment terms with the first 
shipment expected sometime in October.  Prior to accepting Iran's 
offer, the GOS reached an agreement with Total to swap Bonny Light 
fuel for the Iranian fuel, which due to technical limitations, 
cannot be refined by SAR.  Petrosen, Senegal's government-owned 
petroleum company, will take possession of the Iranian fuel credit 
as Iran stipulated that this be a government-to- government 
transaction, according to Dionne.  On September 28, as Senegal's 
Minister of Energy and Mines announced that SAR should resume 
industrial operations by November, EmbOffs anticipate that they will 
resume operations with the fuel credits provided by "Friends of 
Senegal." 
 
--------------------------------------------- --- 
MOROCCO TO ASSIST SENELEC IN BUILDING FUEL DEPOT 
--------------------------------------------- --- 
¶10.  (U) In another major effort to establish an adequate supply of 
fuel for electricity generation, SENELEC, apparently using powers of 
eminent domain, has recently appropriated space at the Port of Dakar 
for the construction of a dedicated fuel depot.  According to 
industry sources, the GOS plans to have tanks built in Morocco and 
shipped to Senegal where local companies will install them.  The 
cost of the project reportedly stands at USD 150 million and is 
expected to be completed within 18 months.  SENELEC, the biggest 
heavy fuel consumer in Senegal, uses 700,000 tons of fuel annually 
and, according to officials at the Ministry of Energy, can no longer 
depend on SAR for its fuel needs.  (NOTE:  In January 2006, SAR 
signed a contract with SENELEC restricting its supply to 25 percent 
of SENELEC's needs.  However, despite the signing of the contract, 
when Total and Shell refused to supply SENELEC due to non-payment 
 
DAKAR 00002364  003.2 OF 005 
 
 
issues, SAR supplied 100 percent of SENELEC's fuel needs.  END 
NOTE.) 
 
--------------------------------------------- - 
CHINESE TO BUILD 250 MW COAL-FIRED POWER PLANT 
--------------------------------------------- - 
¶11.  (SBU) While Sarr informed Embassy officials that the Chinese 
will begin construction on the previously announced 250 MW 
coal-fired power plant in January 2007, the Director of Hydrocarbons 
is skeptical about the Chinese offer.  Nonetheless, three possible 
sites -- Bargny, Sendou, and Kaolack have been identified for this 
new facility, which is expected to be commissioned in 2009.  The 
winner of SENELEC's tender published earlier this summer for the 
construction and operation of a second, 125 MW coal-fired plant, 
will be offered the maintenance of the 250 MW Chinese plant. 
 
--------------------------------------------- ------- 
SENELEC PUSHES WORLD BANK TO DISBURSE FOR KOUNOUNE 1 
--------------------------------------------- ------- 
¶12.  (SBU) SENELEC's Sarr was in Washington, DC, in mid-September to 
push the IFC and World Bank, to disburse funds for the 60 MW 
Kounoune I diesel power station -- Senegal's second IPP after 
GE/GTi.  Sarr was also scheduled to meet with U.S. hedge fund 
Contour Global, which may become an equity partner in Kounoune I, 
joining Mitsubishi Heavy Industry, which has already injected USD 54 
million into the project, and Lebanese partner Matelec.  Originally 
scheduled to be inaugurated in June 2006, SENELEC does not 
anticipate that Kounoune I will be operational before the end of 
December 2006.  Another problem, which complicates the operation of 
Kounoune I, is the lack of a fuel pipeline between the port and the 
power plant. 
 
--------------------------------------------- -------- 
GOS INCREASES SAR HOLDINGS, HOPING IT RESUMES SHORTLY 
--------------------------------------------- -------- 
¶13.  (SBU) Director of Hydrocarbons Sagna informed us that the GOS 
now owns 33.6 percent of SAR, having recently purchased 12.3 percent 
from shareholder Total.  Reportedly, President Wade, who views SAR 
as a strategic asset, especially with the GOS' continued optimism 
that someday oil will be discovered in the country's Exclusive 
Economic Zone, gave a directive to the Treasury for Senegal to 
acquire a majority stake in SAR's operations.  However, analysts 
believe that SAR cannot be competitive with refineries in Cote 
d'Ivoire and in Ghana (and perhaps not even compared to other 
sources of imported products, without major -- perhaps USD 300-400 
million -- new investment and the right to charge an additional 36 
CFAF/liter in the price of its refined fuel.  SAR's outdated 
production technology can refine only one category of crude oil 
[Bonny Light], which originates from Nigeria and is more expensive 
to process.  The GOS plan, if there is one, to both increase shares 
of SAR and find new capital for improvements is not at all clear.) 
(NOTE:  Before it suspended operations, SAR refined 1.2 million tons 
of crude annually while the country needs 2.0 million tons.  Sagna 
believes that Total has a desire to pull out of SAR and concentrate 
on its investment in SIR (the Ivoirian refinery which has a capacity 
to refine 4 millions tons of crude annually).  Total is likely also 
content to rely on the direct import of refined product whose 
benefits accrue directly to its trading arm Total Outre Mer.  END 
NOTE.) 
 
¶14.  (SBU) SAR Managing Director Seck informed EmbOffs that it has 
paid off USD 81.6 million in financial debts or 50 percent of its 
total finance-related debt.  It is renegotiating payment plans with 
its suppliers Total, Shell, Trafigura and Vitol and hopes that one 
of these companies will respond to its new fuel tender.  SAR's 
efforts to update its accounts receivables from SENELEC are not 
clear.  (NOTE:  According to Seck, SAR ceased importing crude oil 
for industrial activities on April 20.  Seck indicated that SAR has 
also stopped its commercial activities (refined oil products 
imports) in August, since not one supplier responded to its tender 
to import fuel in August, owing to its outstanding commercial debt. 
However, now that repayment plans have been established and the debt 
whittled down to approximately USD 260 million through offshore 
borrowing, SAR is hopeful that fuel traders will respond to this new 
tender, and the refinery can resume its commercial trade of 
importing refined product.  (NOTE:  Embassy underestimated SAR's 
outstanding commercial debt in reftel.  END NOTE.)  SAR officials 
hope to begin refining once the new fuel price structure has 
 
DAKAR 00002364  004.2 OF 005 
 
 
completed the administrative vetting circuit and has been signed by 
President Wade. 
 
------------------------ 
THE "GOOD NEWS" - OR NOT 
------------------------ 
¶15.  (U) Despite the fact that there is limited fuel supply in the 
interior of the country, that SAR is not refining or importing fuel 
at the moment, and that GTi and its 50 MW of electricity remain shut 
down for lack of payment, Senegalese energy officials see light at 
the end of the tunnel and expect Senegal's energy crisis to be 
resolved "soon".  They point to a possible October release of a new 
energy strategy, the receipt of fuel credits, the likely revision of 
commercial pricing structures, and the recent start-up of SENELEC's 
Bel Air Wartsila plant, which will add 60 MW to Senegal's power grid 
-- although this addition has been temporarily offset by GTi's shut 
down.  The possible early 2007 start for the Kounoun 1 plant is also 
reason for optimism. 
 
¶16.  (SBU) Others are not so positive.  One of Senegal's leading 
private economists, Mohamadou Diop, recently offered a very 
pessimistic view of the GOS' political and commercial management of 
Senegal's energy sector.  In his view, the energy crisis will 
continue "for years;" he is fearful of an expansion of power 
outages.  Donors are also ready to be direct with the GOS.  On July 
13 a delegation of donor representatives, including Ambassador 
Jacobs and USAID Director Olivier Carduner, as well as the French 
Ambassador, and representatives of the IMF, the World Bank, the 
European Union, and the UNDP shared their concerns regarding the 
deteriorating economic situation with the Prime Minister and 
specifically mentioned SENELEC management as one of a handful of 
issues that could seriously impact GDP growth rates in 2006.  The 
donors noted that continued delays in application of electricity 
price increases would cause an increase in GOS subsidy payments to 
110 billion CFAF (USD 220 million) in 2006.  Donors also raised 
concerns about the lack of transparency in financing mechanisms for 
the Kounoune II plant which gives the impression that the GOS is 
diverging from previously stated energy policies. 
 
¶17.  (SBU) Privately, World Bank officials indicated that SENELEC 
under Sarr's leadership had bypassed all World Bank efforts to 
assist in restructuring and modernizing the utility and that SENELEC 
was conducting financial deals with no donor consultation or 
transparency.  The Kounoune I plant is the last World Bank-supported 
power plant and its construction was delayed by a year in an effort 
that seemed aimed at improving bidding prospects for a firm 
preferred by Sarr. 
 
¶18.  (SBU) Nevertheless, the Government is undoubtedly under 
political pressure to do something and to do so quickly.  With the 
2007 campaign and elections looming, energy shortages have been 
publicly linked by opposition parties and the media to broader 
electoral issues, such as the weakening economy and allegedly failed 
social policies.  If Wade is going to show a positive impact on key 
issues prior to the election, he will need to take action relatively 
quickly.  At the same time, he will not want to make any difficult 
decisions likely to alienate any of his most ardent followers too 
close to the election date. 
 
------- 
COMMENT 
------- 
¶19.  (SBU) Post remains skeptical about the near-term effectiveness 
of both the GOS' emerging energy plan and its ability to implement 
necessary, but politically difficult measures.  Reverting to a more 
centralized, state-managed energy sector might create a near-term 
boost in fuel and electricity supplies, if the Treasury can find the 
funds to assure new imports of fuel and get SENELEC back on track 
with its creditors.  However, in the longer-term, it is very 
unlikely that a nationalized SAR will attract outside investment for 
the necessary modernization.  At the same time, with the IMF 
publicly raising concern about Senegal's handling of an airport 
departure tax in order to finance a new international airport, the 
GOS' rush to re-create a previously discredited Emergency Fuel Fund, 
without taking the necessary steps for transparency and 
accountability, could prove to be one more source of flagging donor 
and investment confidence in Senegal.  END COMMENT. 
 
 
DAKAR 00002364  005.2 OF 005 
 
 
Jacobs