VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #1217/01 1302224
ZNY CCCCC ZZH
R 102224Z MAY 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 0168
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1093
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

C O N F I D E N T I A L MANAGUA 001217 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA, WHA/CEN, WHA/EPSC, EEB/CBA, EEB/IEC 
STATE PASS TO OPIC 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 05/11/2017 
TAGS: EPET EINV ECON PREL NU
SUBJECT: NICARAGUA: OIL CONCESSIONS TO U.S. COMPANIES 
CAUGHT IN JUDICIAL LIMBO 
 
REF: MANAGUA 285 
 
Classified By: Ambassador P. Trivelli for reasons 1.4 b&d. 

¶1. (C) Summary: On 10 August, 2006, a court in the Southern 
Autonomous Atlantic Region (RAAS) accepted a writ of 
injunction/relief against the Attorney General for signing 
oil exploration concessions with two U.S. companies without 
having properly consulted with the governments of the 
Autonomous Atlantic Regions (RAAN and RAAS).  The Supreme 
Court must now decide whether the Attorney General acted 
improperly.  The Attorney General, the companies, and the 
energy regulator all filed responses to the case stating that 
the concessions were issued within the framework of Law 445 
limiting RAAN and RAAS authority over Caribbean waters. 
 
¶2. (C) The Ambassador has discussed the situation with the 
Vice-President, the Foreign Minister, and the Minister of 
Energy, without resolution.  While the new Minister of 
Energy, who now has authority over concessions, says the 
contracts are proper, the Attorney General and FM assert that 
the oil companies must still win approval from the RAAN and 
RAAS governments.  MKJ's lawyers believe there may be some 
Sandinistas using the case to cancel the concessions and hand 
them over to Venezuela.  While recent visits by MKJ and 
Infinity have elicited positive responses from GON, RAAN, and 
RAAS leaders, it is clear the companies are caught in 
Sandinista efforts to curry favor with the Atlantic coast. 
End Summary. 
 
Background on Concessions 
------------------------- 

¶2. (U) In April 2006, two U.S. companies, MKJ International 
and Infinity Energy each signed oil exploration concession 
agreements with the GON after completing six years of 
negotiations.  This process included extended negotiations 
with the RAAN and RAAS Directive Councils (governments), as 
the concessions were off Nicaragua's Caribbean coast.  Law 
445, passed during negotiations in 2003, limited RAAN/RAAS 
authority over Nicaragua's Caribbean waters to three miles 
from the coast and 25 miles around any islands.  This 
legislation essentially shifted the MKJ and Infinity 
concessions to national waters and freed the companies to 
negotiate only with the central government.  Changes in the 
energy regulator in 2005 further delayed the negotiations and 
approval process.  In April 2006, the Attorney General 
finally signed the concession agreements in the name of the 
President, granting the companies six years to complete 
environmental impact statements, geological soundings, and 
commence exploration.  The contracts also incorporate a 
30-year production sharing agreement should exploration prove 
successful.  U.S. publicly traded Nobel Energy will 
participate in the MKJ project. 
 
The Case 
-------- 

¶3. (C) On 10 August, 2006 a court in Bluefields (RAAS) 
accepted a writ of injunction/relief against the Attorney 
General for signing the concessions without having properly 
consulted with the RAAS and RAAN Directive Councils.  The 
petitioners are Sandinistas, as is their attorney.  Once the 
writ was accepted, it moved to the Supreme Court (CSJ) which 
must determine if the Attorney General acted improperly and 
the injunction is therefore valid.  The CSJ accepted the case 
within the 60-day limit, but has not issued a final decision 
on the injunction.  There is no time limit for the CSJ to 
issue such a decision (reftel). 
 
¶4. (SBU) At the end of August, the Attorney General filed a 
response to the writ and MKJ and Infinity presented papers as 
"parties affected."  The National Institute of Energy (INE), 
the energy regulator and chief GON negotiator of the 
concessions, sent the Attorney General additional evidence to 
support the GON's position that the concessions were properly 
completed with the required consultations.  The Attorney 
General never presented the additional evidence to the CSJ. 
 
¶5. (SBU) All the documents state that the concessions were 
issued within the framework of law 445; meaning that the writ 
of injunction has no legal basis.  Maps included in the 
papers demonstrate that the concessions were drawn to ensure 
that they were in national waters, outside of the RAAN/RAAS 
25 mile administrative zone.  Thus, consultations with, and 
approval from, the Directive Councils were not required. 
 
Actions since August 
-------------------- 

¶6. (SBU) While the injunction stopped MKJ and Infinity's 
ability to complete the environmental impact statements and 
begin seismic testing, it did not automatically stop the six 
year concession clock.  In November, when it became clear 
that the CSJ was not going to move quickly, INE halted the 
clock by suspending the concessions, pending resolution of 
the case. 
 
¶7. (SBU) The Ambassador discussed this case with the outgoing 
Bolanos administration and with the current Vice-President, 
Foreign Minister, and Minister, Vice-Minister and Secretary 
General of Energy (newly created ministry assuming concession 
responsibilities from INE).  According to Vice Minister of 
Energy Lorena Lanza Espinosa, Minister of Energy Emilio 
Rapaccoli personally reviewed MKJ and Infinity's contracts 
and declared them to be proper.  The Ministry, therefore, 
stands by the concessions but claims it cannot take any 
action while the case is in the CSJ.  It is up to the 
Attorney General's office to defend the GON's position. 
(Note: During a meeting with Infinity, the Attorney General 
stated that while he cannot tell the CSJ what to do, he has 
also not told them so far what decision to make. End note.) 
 
A Possible Wrinkle 
------------------ 

¶8. (C) VM Lanza did raise a possible loophole the CSJ could 
use to declare the writ of injunction valid and allow for a 
possible cancellation of the concessions.  While the 
negotiations concluded under the terms of Law 445, they began 
while the RAAN/RAAS still exercised authority over Caribbean 
waters.  Under previous laws, INE was required to announce 
the conclusion of the negotiations and begin a 60-day public 
comment period.  During such a period the RAAN and RAAS 
Directive Councils could have raised concerns that would have 
been addressed before the concessions were signed.  As such 
consultations do not apply under Law 445 because the 
concessions are outside RAAN/RAAS waters the 60-day notice 
period did not place.  The CSJ may say it should have because 
the negotiations began under the old laws. 
 
The Sandinista Angle 
-------------------- 

¶9. (C) Attorney General Hernan Estrada and Foreign Minister 
Samuel Santos suggested to MKJ and Infinity that it would be 
helpful if they gain formal approval on the concessions from 
the RAAN/RAAS Directive Councils.  The FM told Infinity that 
the GON is "focused on giving the communities a little more." 
 He stated that the concession contracts may need to be 
"fixed around the edges" to increase assistance to RAAN/RAAS. 
 The Chief Justice of the CSJ told MKJ's lawyers that he has 
been directed to hold off on any action on the writ until 
RAAN and RAAS issue approvals.  MKJ's lawyers believe that 
the Ortega Administration is trying to re-extend RAAN/RASS 
authority over all the Nicaraguan Caribbean waters as a way 
to curry favor with the strongly anti-Sandinista regions.  By 
making MKJ and Infinity obtain official RAAN/RAAS approval, 
the Sandinistas could create a defacto granting of such 
authority, even though it contradicts existing law. 
Secretary General of Energy Donald Espinosa, one of the lead 
negotiators of the concessions for INE, told econoff that 
such a position could jeopardize "serious" interest in future 
bid solicitations for the remaining concessions in 
Nicaragua's Caribbean waters. 
 
¶10. (SBU) The RAAN and RAAS Directive Councils have made no 
public pronouncements on the case.  Both MKJ and Infinity 
have visited the regions to assess the situation.  They found 
Directive Councils upset with the GON at being excluded from 
the concession process, but very supportive of the projects 
and the companies.  Informal conversations have circled 
around the RAAN and RAAS getting higher royalties at the back 
end of the deals, but nothing is on paper.  The law is not 
clear on whether such agreements can be done directly with 
the councils or must go through the Ministry of Energy.  Both 
Directive Councils have promised to have the full RAAN and 
RAAS Councils vote on the concessions in the near future. 
 
OPIC's Role 
----------- 

¶11. (C) MKJ and Infinity both have OPIC political risk 
insurance for their concessions, which the companies could 
invoke as early as September 2007.  According to OPIC, the 
current writ of injunction can be interpreted as a de-facto 
expropriation and the companies could receive payment.  In 
such a situation, OPIC would re-evaluate its position in 
Nicaragua.  OPIC changing its risk assessment on Nicaragua 
could lead to Ex-Im and private banks increasing their risk 
evaluations, making money for investment in Nicaragua more 
expensive and limiting new projects. 
 
A possible Venezuela Angle 
-------------------------- 

¶12. (C) MKJ's lawyers have suggested that the writ may 
actually be a legal ploy by some Sandinistas to cancel the 
concessions so they can be handed over to Venezuela's PDVSA. 
They claim to have been asked if MKJ would consider jointly 
exploiting the concession with PDVSA.  During post and 
Infinity's separate meetings with the GON, such a suggestion 
has never been raised. 
 
Comment 
------- 

¶13. (C) It is becoming increasingly clear that MKJ and 
Infinity are caught in Sandinista efforts to curry favor with 
the Atlantic coast.  While the GON members willing to discuss 
the case have all been supportive of the companies, it is 
clear they are unwilling to move until the RAAN and RAAS 
approve the concessions.  However, the GON's short-term focus 
on winning over the Atlantic coast is blinding it to the 
long-term costs of these actions.  Giving the RAAN and RAAS 
Directive Councils a voice in the negotiation of concession 
contracts increases the work and time these will take, likely 
dissuading potential bidders on any future bid solicitations 
for the 100-plus remaining Caribbean blocks.  Additionally, 
should Nicaragua be seriously considering giving PDVSA a 
central role in the concessions, the GON might be surprised 
at PDVSA's limited exploration capability.  The GON would do 
better to take swift action to advance the U.S. companies' 
concessions so that if oil is discovered, other foreign 
companies would want to come to Nicaragua to explore.  End 
comment. 
TRIVELLI