VZCZCXYZ0000
OO RUEHWEB

DE RUEHMU #2116/01 2570114
ZNY CCCCC ZZH
O 140114Z SEP 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1279
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1178
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002116 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN/TLERSTEN 
SAN JOSE FOR CS/JMCCARTHY 
DEPT PLEASE PASS TO USTR AND OPIC 
 
E.O. 12958: DECL: 09/12/2017 
TAGS: EINV EPET ETRD NU
SUBJECT: NICARAGUA: GOVERNMENT RETURNS EXXON FUEL DEPOT 
 
REF: A. MANAGUA 2055 
     ¶B. MANAGUA 2016 
     ¶C. MANAGUA 1952 
 
Classified By: Classified By: A/DCM Jerome Oetgen, Reason: E.O. 12958 1 
.4 (b) and (d) 
 
¶1. (C) Summary.  Exxon representatives informed the Embassy 
that Esso/Nicaragua's Corinto I fuel depot was returned to 
Esso/Nicaragua during the afternoon of September 13.  This 
triggered the signing of a memorandum of intent between the 
government and Esso/Nicaragua, stating Esso's willingness to 
negotiate the use of Corinto I for the handling of imported 
Venezuelan gasoline and diesel.  Exxon also promises to 
consider purchasing Venezuelan crude oil for its Managua 
refinery through Petronic, Nicaragua's state-owned petroleum 
importing and distribution company.  In recent days, the 
government has reiterated a series of complaints against 
Esso/Nicaragua for nonpayment of taxes and environmental 
crimes.  None seem valid, but this will likely not stop 
politicized courts or Ortega-controlled tax institutions from 
ruling otherwise, should the government want to reassert 
pressure against Esso in future. End Summary. 
 
¶2. (C) Esso/Nicaragua Country Manager Joaquim de Magalhaes 
told Econoff that the return of Corinto I fuel depot to Esso 
took place during the afternoon of September 13.  De 
Magalhaes described the transfer as "uneventful."  Judge 
Socorro Toruno appeared at the site around 1:00 p.m. to 
deliver the order reassigning control of the plant to 
Esso/Nicaragua.  This triggered the signing of the agreed 
upon memorandum of intent between the government and 
Esso/Nicaragua regarding future cooperation in the import of 
Venezuelan petroleum products. 
 
¶3. (C) In the end, the government agreed to Exxon's demand to 
return Corinto I and requirements to manage potential safety 
issues caused by state-owned Petronic modifications to 
Esso/Nicaragua's storage tanks.  Exxon's inspection Corinto I 
storage tanks is still ongoing at the drafting of this cable. 
 However, De Magalhaes told Econoff that so far there are no 
surprises; he is still waiting for the final report. 
 
¶4. (C) The memorandum of intent addresses Esso/Nicaragua's 
willingness to negotiate the use of Corinto I (either through 
contract, lease, or sale) to receive imported Venezuelan 
gasoline and diesel.  Total capacity of the seven tanks in 
question is 22,000 barrels.  This falls far short of a normal 
shipment of between 80,000 and 120,000 barrels, but is what 
Petronic lacks at the Port Corinto to do the job.  Esso's 
eighth tank in Corinto I holds 30,000 barrels, but actively 
used.  Esso's second facility, Corinto II, handles the 
balance and the bulk of Esso's storage needs at the Port of 
Corinto. 
 
¶5. (C) Esso/Nicaragua also promises to consider purchasing 
Venezuelan crude oil through Petronic for its Managua 
refinery.  The refinery processes around 21,000 barrels per 
day.  we believe that the proceeds of these purchases will be 
subject to Venezuela's commitments to ALBA, i.e., 25% of the 
revenues routed to an ALBA development bank and 25% routed to 
an ALBA fund.  We note that the annual oil import bill for 
Nicaragua is around $600 million.  The Nicaraguan government 
wants to source at least 50% of this from Venezuela in a form 
subject to ALBA commitments. 
 
¶6. (C) The government has given no indication that it is 
backing away from a series of claims against Esso/Nicaragua 
involving tax evasion and environmental crimes.  In fact, the 
government has recently reiterated these claims.  None seem 
valid, but this fact will likely not stop politicized courts 
or Ortega-controlled tax institutions from ruling otherwise, 
should the government want to reassert pressure on Esso in 
future.  The memorandum of intent includes the notion that 
the government will sit down with Esso to work through these 
issues. 
 
¶7. (C) Esso/Nicaragua has provided us with the following 
breakdown of government claims against the company, including 
charges of environmental crimes and negligence, as of 
September 7, 2007. 
 
Tax Assessment Arising from a Fiscal Audit of 2003-2006 
--------------------------------------------- ---------- 
 
¶8. (C) Esso/Nicaragua received a request from Nicaraguan tax 
authorities to conduct a tax assessment during the period 
2003-2006.  The scope of the assessment, which is still in 
progress, includes the corporate income tax, value added tax, 
energy consumption tax, and withholding taxes.  The 
government later expanded the period of the assessment to 
1996)2007, despite the fact that there is four-year statute 
of limitations on tax violations.  Esso will cooperate with 
the government's request for information, but is opposing the 
expansion of the assessment period. 
 
Customs Duties $6 Million 
------------------------- 
 
¶9. (C) Nicaraguan Customs claims that Esso/Nicaragua's 
refinery owes $6 million in unpaid duties related to crude 
oil imports.  Esso opposes the claim because petroleum is 
exempt by law from import duties.  Esso argues that importing 
the oil in question before filing for a tax exemption amounts 
to administrative problem requiring an administrative 
solution.  This was the claim that started the attachment 
order on Corinto I. 
 
Tax Notice Claiming $6 Million Payment 
-------------------------------------- 
 
¶10. (C) The first part of this notice is the government's 
claim that Esso/Nicaragua failed to pay $2 million in income 
tax during the period 2003-2006.  To make this claim, the 
government ignores the 25% tax rate that the government 
granted to Esso/Nicaragua under the terms of Esso's 
investment contract.  Instead, the government argues that 
today's 30% tax rate should apply, though it was instituted 
after the government signed the contract with Esso.  Esso 
argues that its investment contract is still valid under 
Nicaragua's foreign investment law and that the 25% rate 
still applies.  Esso has letters from tax authorities 
acknowledging this point. 
 
¶11. (C) The second part of this claim adds $4 million in 
unpaid energy consumption taxes (IEC) for the period 
1995)2007.  Here, the government challenges a credits taken 
for value added taxes in IEC returns.  Esso/Nicaragua plans 
to appeal on the grounds that it has obtained government 
approval to take these credits.  Esso argues that the logic 
of the IEC regime was to incorporate various taxes into a 
single tax on petroleum products. 
 
Tax Notice Claiming $40 Million in Unpaid Taxes 
--------------------------------------------- -- 
 
¶12. (C) This claim centers upon Esso/Nicaragua's supposed 
failure to pay $5 million in withholding taxes during the 
period 1993-2007.  Another $35 million is assessed on owed 
interest.  Esso claims that it properly paid this tax.  Tax 
authorities are still reviewing Esso's documentation to this 
effect. 
 
Tax Notice Claiming Unpaid Municipal Taxes of $5 Million 
--------------------------------------------- ----------- 
 
¶13. (C) In a long standing dispute, municipal authorities 
charge that Esso/Nicaragua, Shell, Texaco, and Petronic 
should pay a municipal business license fee assessed as a 2% 
tax on sales.  The companies lost their appeal, but 
petitioned the Supreme Court, where a final decision is 
pending.  The companies are braced for defeat, but argue that 
the law states that the sale of petroleum products is exempt 
from all municipal taxes.  Esso's share is $5 million. 
 
Environmental Crime ) Puerto Sandino 
------------------------------------ 
 
¶14. (C) The government has charged two Esso/Nicaragua 
executives with criminal negligence for the (severe) weather 
related spill of oil residue during contracted fuel tank 
cleaning in October 2006.  Esso has fully cooperated with 
authorities in cleaning up the spill and monitoring clean up 
activities.  The area has been thoroughly cleaned and 
certified by the responsible environmental agency.  No major 
or irreversible damage has occurred.  The six months 
limitation for a speedy trial has lapsed, but since December 
2006 the two Esso executives are prevented from departing the 
country. 
 
Environmental Negligence ) Oil Pipeline 
--------------------------------------- 
 
¶15. (C) Vandals cut the oil pipeline leading from the Port of 
Sandino to Esso/Nicaragua's refinery in Managua.  Esso 
promptly notified authorities, filed a police report, and 
began clean-up of the area.  Nonetheless, the Municipality of 
Managua fined Esso, and the Ministry of the Environment and 
Natural Resources is initiating an administrative charge 
against Esso. 
TRIVELLI