VZCZCXYZ0003
OO RUEHWEB

DE RUEHMU #1952/01 2330028
ZNY CCCCC ZZH
O 210028Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1061
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1145
RUEHSJ/AMEMBASSY SAN JOSE 5290
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L MANAGUA 001952 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN 
SAN JOSE FOR CS/JMCCARTHY 
DEPT PLEASE PASS TO USTR AND OPIC 
 
E.O. 12958: DECL: 08/19/2017 
TAGS: EINV ETRD EPET NU
SUBJECT: NICARAGUA: GOVERNMENT SEIZES EXXON FUEL STORAGE 
FACILITY 
 
Classified By: Ambassador Paul Trivelli, Reason: E.O. 12958 1.4(b) and 
(d) 
 
¶1. (C) Summary:  After close of business on August 17, local 
police showed up at Esso/Nicaragua's Corinto I fuel storage 
facility located at the Port of Corinto and on a judge's 
order seized the facility.  Exxon officials believe that the 
pretext for the seizure was a tax issue involving the 
exemption of value added tax.  It appears, however, that the 
governmnet has not observed due process.  Esso/Nicaragua has 
not been party to an administrative proceeding, did not 
receive a bill for back taxes, nor notified that its property 
would be seized.  Because of safety concerns and the fact 
that the tanks are old and small, Corinto I is largely in 
disuse -- but one tank located there is fairly large and 
still in service, capable of holding 30,000 barrels of diesel 
fuel.  Equally important, Esso/Nicaragua cannot conduct 
operations at Corinto II without the use of its fire fighting 
equipment located at Corinto I.  Without Corinto II, fuel 
shortages in Nicaragua will develop in a matter of weeks.  We 
understand that the Port Authority (EPN) has been placed in 
charge of Corinto I and that welding has been going on all 
weekend.  Petronic and its lessee Glencore have reportedly 
been asked to facilitate the offloading of diesel from a 
Venezuelan ship that arrived in Corinto on August 17.  Please 
see Action Requests for USTR and OPIC in paragraphs 6 and 9, 
respectively.  End Summary. 
 
¶2. (C) After close of business on August 17, local police 
showed up at Esso/Nicaragua's Corinto I fuel storage facility 
located at the Port of Corinto and on a judge's order seized 
the facility.  Esso/Nicaragua received no document or 
explanation for the action.  Over the weekend, Exxon 
dispatched its Public Affairs Manager for Central America and 
the Caribbean to Nicaragua.  He is seeking a meeting with 
President Ortega and other in the Nicaraguan government.  In 
addition, Esso/Nicaragua has posted lawyers in Managua, 
Corinto, and Chinandega to work the issue. 
 
The Pretext 
----------- 
 
¶3. (C) Exxon officials believe that the pretext for the 
seizure was a tax issue.  About four months ago a customs 
audit picked up on Esso/Nicaragua's failure to properly 
document a tax exemption for a shipment of crude oil. 
Industry insiders tell us that oil shipments often arrive 
before all the paperwork is completed.  In this case, a delay 
in getting a bill of lading from the supplier caused a 
subsequent delay in getting an exemption letter from the 
Ministry of Finance, resulting in incomplete paperwork. 
Normally, the paperwork trail can be repaired and a nominal 
fine paid; life goes on.  This time, Customs claimed that 
Esso/Nicaragua owed $3 million in back value added taxes 
(IVA).  On this pretext, Exxon officials believe, the 
government seized Esso's Corinto I fuel storage facility. 
 
¶4. (C) Exxon officials point out that the law permits the 
exemption of IVA on the import of petroleum, and that, 
indeed, there is no mechanism for Esso/Nicaragua to recover 
IVA from the end user.  In July, Energy Minister Emilio 
Rappaciolli penned a letter to Attorney General Hernan 
Estrada fully explaining that under Nicaraguan law, no tax 
was due on the import in question.  In fact, more than one 
piece of legislation designates petroluem product tax exempt. 
 
The Seizure 
----------- 
 
¶5. (C) Exxon officials identified Managua judge Hector Pavone 
as having issued the order to seize Corinto I, the older of 
the two fuel storage facilities that Esso/Nicaragua maintains 
at the Port of Corinto.  Normally, the National Police would 
have carried out the order, but in this case it was left to 
the Municipal Police of Corinto.  According to Exxon 
officials, National Police Chief Granera was aware of the 
act, but declined to take a position on the matter in a 
telephone conversation with them.  "La Prensa" reported this 
morning that a Chinandega judge was also involved, and that 
when questioned following a speech on August 18, President 
Ortega answered that the case was in the courts, revealing 
that he knew more than he was willing to say publicly.  Exxon 
officials believe that President Ortega approved the seizure, 
which is why they want to talk to him. 
 
 
 
Due Process 
----------- 
 
¶6. (C) Exxon officials complain that the government has not 
observed due process.  Esso/Nicaragua has not been party to 
an administrative proceeding, received a bill for back taxes, 
nor notified that its property would be seized.  Further, 
Exxon has not received any document notifying the company as 
to why its property was seized.  Indeed, Exxon reports that 
the complaint and request for "presumptive siezure" was filed 
by an individual unknown to them and with no prior legal 
problems with the company.  Exxon officials believe that the 
lack of due process may be the basis for a complaint under 
CAFTA.  Action Request: Post requests USTR to undertake a 
preliminary analysis, based on the facts presented in this 
cable, to advise us whether there is reason to believe that 
CAFTA could be invoked in this case. 
 
Esso's Fuel Storage Facilities and Oil Imports 
--------------------------------------------- - 
 
¶7. (C) Corinto I is Esso's original storage facility at the 
Port of Corinto.  Because of safety concerns and the fact 
that the tanks are old and small, the facility is largely in 
disuse.  However, one tank in Corinto I is fairly large and 
still in service, capable of holding 30,000 barrels of 
diesel.  Corinto I also houses a fire fighting station that 
serves both Corinto I and Corinto II.  This fact is important 
because Esso/Nicaragua cannot conduct operations at Corinto 
II without the protection of its fire fighting station across 
the street in Corinto I.  In contrast, Corinto II has five 
large tanks that can store around 100,000 barrels of diesel 
and 50,000 barrels of gasoline (Note: Volumes need to be 
verified.) 
 
¶8. (C) Both Corinto I and II handle refined or partially 
refined petroleum products.  While Esso's refinery supplies 
most of the country's liquid fuel needs, Nicaragua still 
imports about 25% of its supply.  If Corinto II falls out of 
operation because of the lack of firefighting equipment or 
any other reason, fuel shortages will follow in a matter of a 
weeks.  Esso/Nicaragua has already cancelled a vessel 
scheduled to arrive on August 23.  Exxon officials warn that 
if Corinto II falls out of opertiona, gasoline shortages will 
develop first wiht premium gasoline.  As premium users buy 
available regular gasoline, shortages of regular gasoline 
will also occur.  Exxon does not want to say this publicly, 
however, for fear of creating consumer panic. 
 
¶9. (C) All crude petroleum is piped into Esso's Managua 
refinery via pipeline through Puerto Sandino, nearer Managua. 
 Esso/Nicaragua managers believe that the refinery, 
pipelines, and storage facilities are covered by Esso's OPIC 
political risk insurance policy for Nicaragua, but must 
check.  Action Request: Post requests OPIC's insurance 
division to inform us about the extent of OPIC political risk 
insurance coverage for Esso/Nicaragua. 
 
Subsequent Government Action 
---------------------------- 
 
¶10. (C) At first, the government's fuel distribution asset 
holding company, Petronic, did not appear to be directly 
involved, nor did Petronic's lessee Glencore.  Now, post 
understands that Petronic and Glencore have been asked to 
facilitate the offload of diesel from a Venezuelan ship that 
arrived in Corinto on August 17, but with no place to 
offload.  We understand that the Port Authority (EPN) has 
been placed in charge of Corinto I and that welding has been 
taking place there all weekend.  Normally, government 
permission for such work must be given in advance, along with 
an environmental impact assessment.  Unsure about the status 
of the old tanks, Exxon officials are worried about safety. 
 
¶11. (C) A few weeks ago, Ortega announced that Venezuela 
would only export finished product to Nicaragua in the near 
to medium-term.  In the past several months, the government 
has tried to convince Esso/Nicaragua to accept shipments of 
Venezuelan finished product.  Moveover, Exxon operates under 
tight restrictions on the type of vessels it uses (e.g., 
doubled hulled ships -- as a consequence of the Exxon Valdez 
incident) and on delivery times.  When Venezuela missed its 
delivery time a few months ago, Esso/Nicaragua was forced to 
 
 
purchase elsewhere.  The Venezuelan vessel showed up later 
anyway, and reportedly wound up paying a demurrage of 
$400,000.  Exxon officials told us that it could conceivably 
negotiate an arrangement with Venezuelan Oil Company PDVSA to 
accept crude petroleum via Exxon vessels.  Such an 
arrangement would serve Exxon's interest in sticking to tight 
logistical schedules and making maximum use of limited 
storage facilities in Nicaragua. 
 
Exxon Action 
------------ 
 
¶12. (C) On August 20, Exxon officials briefed the Ambassador 
on the state of play.  They believe that the seizure is 
unlawful and possibly a violation of CAFTA.  The company 
wants to meet with President Ortega, Vice President Morales, 
and Energy Minister Emilio Rappaciolli to press for the retun 
of the facility.  In addition, Exxon's Washington office has 
contacted Nicaraguan Ambassador to Washington Arturo Cruz. 
The Embassy issued a statement indicating the seriousness 
with which we view the seizure and the impact that this has 
on the investment climate, as well as encouragement for a 
quick resolution.  The Ambassador has talked to both Minister 
of Foreign Affairs Santos and Minister of Energy Rappaciolli, 
expressing our deep concern.  We continue to work the issue. 
TRIVELLI