VZCZCXYZ0000
OO RUEHWEB

DE RUEHMU #2016/01 2430006
ZNY CCCCC ZZH
O 310006Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1145
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1158
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002016 
 
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: 08/29/2017 
TAGS: EINV EPET ETRD NU
SUBJECT: NICARAGUA: GOVERNMENT STILL CONTROLS EXXON FUEL 
DEPOT 
 
REF: A. MANAGUA 1952 
     ¶B. MANAGUA 1789 
     ¶C. MANAGUA 640 
     ¶D. MANAGUA 788 
 
Classified By: Ambassador Paul Trivelli, Reason: E.O. 12958 1.4 (b) and 
 (d) 
 
¶1. (C) Summary:  Ten days after the government seized one of 
Esso/Nicaragua's fuel depots at the Port of Corinto, it 
refuses to return the facility to Esso without preconditions. 
 The government wants Esso to honor third party contracts 
involving the use of the depot; for safety and liability 
reasons, this is a non starter for Exxon.  The implementation 
of a "peace plan" remains on the table, waiting for Energy 
Minister Rappaccioli to return from Brazil.  Theoretically, 
Exxon is willing to purchase fuel from Petronic, the 
state-owned holding company, but will only negotiate a deal 
after the depot is returned.  In return, Exxon wants 
government harassment, in the form of tax liens and 
accusations of nonpayment, to stop.  While the stalemate 
continues, Petronic controls Esso's facility.  Petronic has 
already offloaded fuel from one Venezuelan vessel and is 
preparing to do the same with another.  We believe that the 
government's driving motivation for its treatment of Esso is 
an overwhelming desire to siphon ALBA funding from the sale 
of Venezuelan petroleum to Nicaragua to fund inter alia the 
creation of 17,000 citizens' councils.  End Summary. 
 
¶2. (C) As reported in Ref A, the Government of Nicaragua 
seized one of Esso/Nicaragua's fuel storage facilities at the 
Port of Corinto on August 17.  The pretext for the seizure 
was a lien for the nonpayment of taxes, placed on the 
property by the Director General of Customs Roberto Zepeda. 
Zepeda charged that Exxon had failed to pay the value added 
tax on imported petroleum product. 
 
¶3. (C) The issue first surfaced more than a year ago when the 
government noticed that Exxon had not filed the proper 
paperwork for an exemption from the value added tax. 
Industry insiders tell us that this is fairly common, as 
ships frequently arrive and are offloaded before all the 
paperwork is finished.  Instead of seeking an administrative 
solution to an administrative problem, the government 
parlayed a paperwork glitch into something much grander to 
suit its purposes.  Customs insists that Esso/Nicaragua owed 
as much as $3 million in unpaid value added tax. 
 
¶4. (C) What makes the claim verifiably specious is that 
Nicaraguan law clearly exempts petroleum products from most 
normal taxes, including the value added tax.  For this 
reason, no mechanism exists for Exxon to collect value added 
taxes along the supply chain.  Instead, the industry 
essentially operates under its own tax regime, centered on 
the energy consumption tax.  As the major supplier of refined 
products to Nicaragua, Exxon helps collect this tax from 
other fuel distributors on behalf of the government. 
 
"We Pay Our Taxes" 
------------------ 
 
¶5. (C) At no time has Exxon accepted publicly or privately 
that the government's charges of tax evasion are correct. 
Exxon spokesmen Alfredo Fernandez-Sivori and Milton Chavez 
have publicly stated Esso/Nicaragua has always paid its taxes 
and is a good corporate citizen, investing in Nicaragua to 
reliably and safely supply fuel to the country and importing 
technology.  Indeed, as a high profile foreign investor and a 
major taxpayer, Esso/Nicaragua has long come under regular 
scrutiny by local tax authorities.  Former Director General 
for Taxation Roger Arteaga was quoted in the press as having 
said that, in his experience, Esso/Nicaragua was meticulous 
about paying its taxes. 
 
"I'd Like a Fuel Depot, Judge" 
------------------------------ 
 
¶6. (C) As the demandeur, Director General for Customs Zepeda 
has the right to go to a judge in a district where an 
Esso/Nicaragua asset resides and demand that a tax lien be 
placed on it.  Zepeda chose an out-of-commission Esso fuel 
depot called Corinto I. 
 
¶7. (C) Nicaraguan law clearly states that custody of a 
 
property subject to a lien "will be awarded to the owner of 
the property," but this did not stop the Sandinista (FSLN) 
judge from Chinandega, Judge Socorro Toruno, from enlisting 
the assistance of armed local police to forcefully remove 
Esso/Nicaragua personnel from Corinto I and awarding custody 
of the depot to Zepeda.  The mission all took place with 
clockwork precision shortly after close of business on 
Friday, August 17. 
 
¶8. (C) Zepeda immediately used his ill-gotten authority to 
request Petronic to prepare Esso's tanks to receive fuel from 
a Venezuelan vessel that had arrived in port the day before. 
The last Venezuelan vessel to call paid demurrage of 
$400,000, and the GON appeared determined that such a delay 
was not going to happen again. 
 
Our Friends at Petronic 
----------------------- 
 
¶9. (C) Petronic is a state-owned holding company whose 
primary responsibility is to oversee a long-term contract 
with Glencore (Swiss) for the supply and distribution of 
petroleum products.  In April, two months after Evo Morales 
nationalized Glencore's mining assets in Bolivia, the 
Nicaraguan government tried to nullify its ten-year contract 
with Glencore in its eighth year, arguing that the government 
official who signed the contract was not authorized to do so. 
 This charge soon devolved into negotiations with Glencore, 
the outcome of which is unclear.  However, Glencore is now 
onboard with the idea of receiving Venezuelan product through 
Petronic. 
 
¶10. (C) The local IMF Representative informs us that as a 
result of IMF negotiations restricting rapid growth in 
foreign debt, the Sandinista Government will no long siphon 
funds from the purchase of Petroleos de Venezuela (PDVSA) 
products through a discount financing scheme as reported in 
Ref B.  Rather, 25% of the proceeds of a sale to Petronic 
will be deposited into a fund supporting a development bank 
and 25% into an ALBA Fund.  To make this work, real companies 
with refining or distributive capacity like Exxon have to buy 
the fuel from Petronic. 
 
Chico and the Man 
----------------- 
 
¶11. (C) The President of Petronic is Francisco "Chico" Lopez, 
who despite some reports that he has resigned, apparently 
still functions as the Treasurer of the FSLN, whose 
headquarters serve as President Ortega's official residence 
and office.  As an accounting master with nimble fingers 
massaging the financial heart of the FSLN, Chico Lopez 
appears to be just the guy Ortega wants to manage his ALBA 
funds. 
 
¶12. (C) We note that in a public scandal last April, Amcit 
Armel Gonzalez implicated Chico Lopez and FSLN Director for 
Organization Lenin Cerna in a $4.5 million extortion attempt 
involving a tourism development in the Department of Tola 
(Ref C).  Although Gonzalez recorded the conversations on 
audio tape verified by experts, Gonzalez has been accused of 
creating false evidence. 
 
Hard Day's Night 
---------------- 
 
¶13. (C) With free run of Corinto I as provided by Judge 
Toruno, Chico Lopez sprung into action.  Within hours, local 
contractors showed up to perform welding and other metal work 
on Esso's tanks to prepare Corinto I to accept 18,000 barrels 
of Venezuelan diesel, i.e., what remained of Venezuela's 
120,000 barrel shipment.  The contractors welded all night. 
Reportedly, 40,000 barrels of diesel and 20,000 barrels of 
gasoline were offloaded to a depot managed by Glencore, and 
30,000 barrels of diesel were offloaded to a depot managed by 
the Nicaraguan Port Authority. 
 
¶14. (C) While contractors continued to weld, President Ortega 
appointed Minister of Energy Emilio Rappaccioli to act as 
point person for the government in talks with Exxon. 
Business Federation (COSEP) President Erwin Kruger offered 
his good offices to broker a deal, and helped Exxon reps to 
initiate discussions with Rappaccioli on August 21. (Ref D). 
 
"What Do You Really Want?" 
-------------------------- 
 
¶15. (C) Exxon soon discovered that the issue was not unpaid 
taxes.  Rappaccioli freely admitted in private conversations 
and then publicly to the press that the government launched 
tax cases against Exxon to pressure the company into 
accepting Venezuelan product ) a bit like the government had 
pressured Glencore into accepting Venezuelan product last 
April.  Exxon rep Augustin Fuentes (protect) told us that 
Rappaccioli also broached the possibility of organizing a 
buyout of Exxon's refinery.  While Rappaccioli had hinted at 
this possibility before, Fuentes paid closer attention this 
time. 
 
¶16. (C) Talks with Rappaccioli continued through the week 
while other parts of the government tried to apply increasing 
pressure on Exxon.  At one point, the government filed twelve 
claims of tax evasion within five hours.  Exxon reps 
calculated that the government's tax claims totaled $57 
million, the approximate book value of Esso/Nicaragua's 
refinery located near Managua. 
 
Misdirection 
------------ 
 
¶17. (C) One of these claims of tax evasion involved the 
supposed nonpayment of corporate income tax over ten years. 
Director General of Taxation Walter Porras publicly stated 
that a company like Exxon should be paying the same income 
tax that everyone else pays.  Under its investment agreement 
with the government, however, Exxon pays 25%.  The general 
corporate tax rate has since been raised to 30%, but the law 
allows agreed rates to remain valid.  At another point, 
Attorney General Estrada questioned whether an investment 
agreement signed by Arnoldo Aleman's famously corrupt 
Director General for Taxation Byron Jerez should be honored. 
Exxon reps inform us Jerez did not sign the agreement, which 
dates back to Violeta Chamorro's government, not Aleman's. 
 
All The News That Is Fit To Print 
--------------------------------- 
 
¶18. (C) Throughout, headlines raged and talk shows chatted 
storms.  Minister of Finance Alberto Guevara, Director 
General of Taxes Walter Porras, and an assortment of 
Sandinista party hacks and diputados continued to rant that 
Exxon owed taxes -- all kinds of taxes.  Managua Mayor 
Marenco claimed that the city's gasoline stations owed 
Managua $90 million for unpaid municipal business licenses 
over the last 10 years -- the case just happens to be pending 
a decision in the Supreme Court.  But the propaganda effort 
did not seem to carry much weight with the press.  In front 
page headlines, La Prensa called the seizure "blackmail" and 
El Nuevo Diario questioned the ramifications of Exxon 
delaying its next shipment of fuel.  Through it all, Ortega 
refused to comment much more than to say that that "the case 
is in the courts."  Exxon spokesmen kept repeating that the 
assertion that Exxon had failed to pay its taxes was patently 
false. 
 
¶19. (C) At an August 23rd signing ceremony for a U.S. Trade 
Development Agency grant to develop a modern ports law, the 
Ambassador emphasized the importance of the rule of law, of 
trade and investment to growth and development, and what the 
United States is doing to help Nicaragua take advantage of 
CAFTA.  He also mentioned how the Exxon case was detracting 
from the image that Nicaragua was a good place to invest.  In 
comments to the press after the event, the Ambassador 
stressed the importance of the rule of law, respect for 
private property, and the need for the government to return 
Corinto I to Exxon.  He continued to encourage both sides to 
sit down to settle their differences.  The Port Authority 
held the signing ceremony at the hotel owned by Foreign 
Minister Samuel Santos and Chief Economic Advisor Bayardo 
Arce, neither of whom bothered to show.  Santos was on the 
agenda, but sent his Vice Minister for Development who 
nervously mouthed a few words he had scribbled on a quarter 
piece of paper. 
 
The Peace Plan 
-------------- 
 
¶20. (C) By August 25, it looked as if Rappaccioli and Exxon 
 
had agreed to an orchestrated exchange of letters in a deal 
that read like an Israeli-Palestinian peace plan.  The basics 
of the deal were pretty much the way Exxon had mapped it out 
a week before. 
 
¶21. (C) In the first phase, Exxon would regain control of 
Corinto I as the result of the Director General of Taxation 
Zepeda's request to Chinandega Judge Toruno to replace Zepeda 
with Esso/Nicaragua's Corinto plant supervisor. 
 
¶22. (C) In the second phase, Exxon would deliver a letter 
stating its intention to sell/rent the seven small tanks 
located in Corinto I, or to use them to receive Petronic 
product.  Exxon also would deliver a letter committing to the 
purchase of 400,000 barrels of crude oil per month from 
Petronic, about 60% of refinery needs.  Presumably, Petronic 
would source the oil from PDVSA at market prices and sell it 
to Exxon.  Exxon would transport the crude on its own ships, 
something that Exxon had wanted to do all along because PDVSA 
is unreliable.  In return, the government would commit to 
jointly reviewing all tax cases that it had thrown at 
Esso/Nicaragua, with a view to resolving any legitimate 
claims and dismissing the rest. 
 
¶23. (C) In the third phase, negotiations on the commitments 
that each side had stated in their letters would take place, 
in parallel.  Exxon's goal is to extract itself from the 
government's onerous tax cases and restore a good operating 
environment for its business.  The government's goal is to 
siphon off ALBA funds from the sale of Venezuelan petroleum. 
 
The Conductor Taps His Baton, But No Orchestra 
--------------------------------------------- - 
 
¶24. (C) On August 27, Judge Toruno showed up at Corinto with 
an order to reinstate Esso/Nicaragua as the custodian of 
Corinto I.  In a cooperative manner, Petronic and 
Esso/Nicaragua inspected the depot to make sure that its 
facilities had not been damaged, and to verify volumes of 
Venezuelan fuel.  Exxon reps told us that there had been a 
few diesel spills.  Before the transfer could proceed, Toruno 
asserted that the reinstatement of Esso/Nicaragua as 
custodian would be conditioned on Petronic's continued 
control of the seven tanks filled with Venezuelan product. 
 
¶25. (C) Exxon refused to allow its Esso/Nicaragua Corinto 
supervisor to sign the order.  The deal broke down. 
Compounding the situation, Energy Minister Rappaccioli had 
had flown to Brazil on August 26.  He was therefore 
unavailable to shepherd implementation of a deal he had 
brokered, leaving Vice Minister Lorena Lanza behind to answer 
the phone. 
 
¶26. (C) On August 29, Judge Toruno unilaterally issued a 
revised order transferring custodianship to Esso/Nicaragua, 
but obligating Esso/Nicaragua to honor Petronic operations on 
its property.  Exxon again rejected the order and refused to 
take control of Corinto I until all non-Esso personnel had 
vacated the premises.  Exxon also refused to take 
responsibility for, or to honor, Petronic contracts that 
involved Petronic's continued use of Corinto I.  Exxon reps 
explained that their refusal is a matter of law, safety, and 
ultimately corporate liability.  On August 30, Exxon 
spokesman Milton Chavez stood up at a press conference in 
front of a long list operational requirements that Exxon 
follows for safety and liability reasons, and are presumably 
ignored by the Petronic usurpers. 
 
¶27. (C) Exxon continues to pursue a mutually acceptable 
solution with the government while it explores legal 
recourse.  Exxon wants to replace the tax lien on Corinto I 
with a bank guaranty; such a guaranty would remove any claim 
that the government may have on Corinto I.  On August 29, 
Chavez and others met with Vice President Jaime Morales 
Carazo, who in an impromptu press conference that followed, 
offered some support, saying that he thought that the asset 
should be returned to Esso. 
 
Exxon's Immediate Concern 
------------------------- 
 
¶28. (C) Of immediate concern to Exxon has been the safety and 
security of both its fuel depots at the port, Corinto I and 
Corinto II.  Former Esso/Nicaragua General Manager Augustin 
 
Fuentes explains that these tanks have been in disuse, some 
for considerable time, and are "not suitable for service" of 
the kind that Petronic is using them.  They require constant 
vigilance, he said.  Some of the tanks have been used 
recently to store lubricants, but not fuel.  One Corinto I 
tank is larger, capable of storing 30,000 barrels of diesel, 
and still in use.  It was in fact full with Exxon product 
when Petronic took management control of Corinto I. 
Moreover, Esso/Nicaragua's fire fighting equipment for both 
Corinto I and II is located in Corinto I.  This has caused 
Exxon to halt all operations at Corinto II for safety reasons. 
 
At the Break of Dawn 
-------------------- 
 
¶29. (C) In the early morning ours of August 30, another 
Venezuelan vessel crept into the Port of Corinto with another 
120,000 barrels of fuel.  Petronic still controls Corinto I 
and is again preparing to offload Venezuelan fuel. 
 
Comment 
------- 
 
¶30. (C) We strongly suspect that the Sandinista rush to 
received Venezuelan fuel is tied to FSLN financing needs, 
inter alia, the creation of 17,000 peoples' councils, an 
initiative recently launched by President Ortega.  Each 
Venezuelan ship offloded by Petronic translates directly into 
$5 million for the GON, given current ALBA financing terms. 
The level of interagency coordination demonstrated by the 
government's assault on Exxon and pressure on Glencore 
reflects direction from the highest levels of Government and 
the FSLN, which, in this case, work out of the same office. 
TRIVELLI