VZCZCXYZ0010
RR RUEHWEB

DE RUEHMU #2539/01 3412118
ZNY CCCCC ZZH
R 072118Z DEC 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1753
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1196
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002539 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN/TLERSTEN 
DEPT PLEASE PASS TO USTR AND OPIC 
 
E.O. 12958: DECL: 12/06/2017 
TAGS: EPET ENRG EINV ETRD NU
SUBJECT: NICARAGUA: ORTEGA PRESSURES EXXONMOBIL TO BUY 
VENEZUELAN OIL 
 
REF: A. MANAGUA 2116 
     ¶B. MANAGUA 2055 
     ¶C. MANAGUA 2016 
     ¶D. MANAGUA 1952 
 
Classified By: Classified By: CDA Richard M. Sanders, Reason: E.O. 1295 
8 1.4 (b) and (d) 
 
¶1. (C) President Ortega announced on December 5 that he had 
instructed the Ministry of Energy and Mines and others "to 
quickly work out a proposal to nationalize the importation of 
oil."  Ortega wants Nicaragua to import all oil from 
Venezuela to take advantage of Hugo Chavez' offer to 
contribute half of the resulting revenues to the Bolivarian 
Alternative (ALBA) Development Bank and Fund.  As operators 
of the country's only refinery, ExxonMobil supplies more than 
70% of the country's liquid fuel needs, including fuel oil 
used to generate electricity.  ExxonMobil further imports the 
majority of refined product (gasoline and diesel) to 
supplement refinery supply.  ExxonMobil is willing to discuss 
a supply contract to import Venezuelan crude oil, but wants 
to sign the fuel storage and sales agreement first, as was 
agreed in a memorandum of understanding in September.  Talks 
on crude oil imports are supposed to be in parallel with 
discussions on a laundry list of tax charges lodged against 
ExxonMobil by the Ortega administration.  Recently, Ortega 
has publicly referred to "transnationals that import oil" as 
members of a "mafia," and castigated ExxonMobil for behaving 
like "true mercenaries (and) speculators" while "bleeding the 
Nicaraguan people."  On December 6, Foreign Minister Samuel 
Santos called CDA Sanders to a meeting with Minister of 
Energy Emilio Rappaccioli and Petronic President Francisco 
Lopez, who gave their version of events. 
 
Ortega Appoints Study Commission 
-------------------------------- 
 
¶2. (SBU) President Ortega announced at the closing session of 
the fourth National Security and Defense course for the 
Ministry of Defense and the Military on December 5 that he 
had instructed the Ministry of Energy and Mines (MEM), 
Nicaraguan Institute of Energy (INE), National Electricity 
Company (ENEL), and Albanisa (a joint enterprise between 
Petronic and the Venezuelan national oil company PDVSA) "to 
quickly work out a proposal to nationalize the importation of 
oil."  Ortega wants Nicaragua to import all oil from 
Venezuela to take full advantage of Hugo Chavez' offer to 
contribute half of all resulting revenues to the Bolivarian 
Alternative (ALBA) Development Bank and Fund. 
 
ExxonMobil and Glencore Primary Importers 
----------------------------------------- 
 
¶3. (C) Currently, ExxonMobil (U.S.) and Glencore (Swiss) 
import almost all oil consumed in Nicaragua.  As operators of 
the country's only refinery, ExxonMobil supplies more than 
70% of the country's liquid fuel needs, including fuel oil 
used to generate electricity.  ExxonMobil further imports the 
majority of refined product (gasoline and diesel).  Glencore 
imports the rest under a contract with Petronic, the national 
oil company, that expires in 2009. 
 
Ortega Administration Pressure 
------------------------------ 
 
¶4. (C) Both ExxonMobil and Glencore have been subject to 
intense pressure by the Ortega administration to import 
Venezuelan oil.  In April 2007, the Ortega administration 
challenged the legitimacy of Glencore's 10-year contract. 
This resulted in Glencore importing essentially all of its 
refined product from Venezuela, i.e., about 4000 barrels per 
day.  The Ortega administration then launched a host of 
questionable tax claims agaiNtDkuIQ\Mobil agreed 
to negotiate the use and eventual sale of the fuel storage 
facility that was seized.  In each instance, once Glencore 
and ExxonMobil accommodated the Ortega administration, their 
near term legal challenges disappeared. 
 
¶5. (C) More is at stake with ExxonMobil than with Glencore 
 
and the road has been bumpier.  ExxonMobil tells us that it 
has negotiated an agreement for the use and sale of the 
Corinto fuel storage facility, but that the Ortega 
administration is refusing to sign.  Instead, the 
administration is demanding to negotiate the sale of 
Venezuelan crude oil to ExxonMobil's refinery.  ExxonMobil 
wants to sign the fuel storage and sales agreement first, 
according to the order of events set forth in September's 
memorandum of understanding.  ExxonMobil also wants to make 
progress on the laundry list of tax charges that the Ortega 
Administration has initiated. (Refs A, B) 
 
¶6. (C) In November 2007, FSLN stalwart and Economic Advisor 
to the President Bayardo Arce replaced Francisco Lopez 
(Petronic President and former FSLN Treasurer) as point 
person for negotiations with ExxonMobil.  Arce appears to be 
charged with getting ExxonMobil to agree to buy Venezuelan 
crude, and is not above using heavy-handed pressure tactics. 
This may explain why in recent weeks Ortega has publicly 
referred to "transnationals that import oil" as members of a 
"mafia," and castigated ExxonMobil for behaving like "true 
mercenaries (and) speculators" while "bleeding the Nicaraguan 
people."  Ortega also charged ExxonMobil with being 
"uncooperative" and "totally negative" to the idea of 
"contributing to the Nicaraguan people."  "All this would 
change," said Ortega at the December 5th event noted above, 
"if this transnational would change its attitude, as it had 
during period 1979-90...."  ExxonMobil is scheduled to meet 
with Bayardo Arce on December 7. 
 
¶7. (C) In the meantime, ExxonMobil has informed us that, in 
fact, it is amenable to negotiating the importation of crude 
oil from Venezuela.  In the past two months (business 
confidential information), ExxonMobil has come to terms 
 
SIPDIS 
internally with the idea that Venezuelan ships could be used 
for transport, provided supply contracts stipulate prompt 
delivery, late charges, some supply flexibility, and vessels 
used meet ExxonMobil's environmental and safety standards 
(i.e., double hulled tankers).  This is because the company 
would rather not pay demurrage to Venezuelan ports while 
waiting for an unreliable PDVSA to load product. 
 
CDA Meets with Key Administration Players 
----------------------------------------- 
 
¶8. (C) On December 6, CDA was convoked to the Foreign 
Ministry to meet with Foreign Minister Samuel Santos, who was 
accompanied by Energy Minister Emilio Rappaccioli and 
Petronic President Francisco Lopez.  Santos led off by saying 
that the meeting was being held at the instruction of 
President Ortega, and that he, Santos, wanted to make sure 
the USG -- and especially the Secretary and WHA A/S Shannon 
-- for whom he had high regard, had a "concrete" 
understanding of the GON's situation with regard to 
ExxonMobil's operations in Nicaragua.  He noted the enormous 
problem which high energy prices present for Nicaragua and 
asserted that the GON had made "enormous efforts" to reach an 
agreement with ExxonMobil. 
 
¶9. (C) Santos soon handed the meeting over to Rappaccioli, 
who briefly recounted his version of the events of the 
summer-fall of 2006 in which ExxonMobil's unused storage 
facility had been seized and used to store a shipment of 
Venezuelan gasoline which entered Nicaragua.  The crisis 
provoked by this act had been resolved with the signature of 
a joint memorandum that returned the plant to ExxonMobil, but 
which contemplated the import of Venezuelan crude into 
ExxonMobil's refinery in Nicaragua, "parallel" to the 
negotiation of arrangements for the rental or eventual sale 
of the gasoline storage facility.  The GON had since been 
trying to reach a commercial agreement setting forth terms 
which would actually the Venezuelan crude oil to enter 
Nicaragua, without success.  The inability of the GON and 
ExxonMobil to reach an agreement was highly prejudicial to 
Nicaragua, which was unable to take full advantage of the 
favorable terms which Venezuela offered for its crude through 
"Albanisa" a joint Venezuelan-Nicaraguan oil-importation 
entity. 
 
¶10. (C) Petronic President Lopez further elaborated, saying 
that Venezuela offered Nicaragua up to 27,000 barrels per 
day, but until now Nicaragua has only been able to import 
4,000 barrels a day (in the form of refined products) brought 
 
in for Petronic by Glencore.  As a result, Nicaragua had lost 
$230 million in savings from unused Venezuelan concessional 
funding.  Lopez noted the great expense the GON is facing in 
subsidizing mass transit, and the crisis that the electrical 
power sector is facing.  Lopez said that ExxonMobil had been 
offered extremely attractive terms on price, volumes, and 
payment schedules, and would be allowed to use its own ships 
(vice those of Venezuela state oil enterprise PDVSA).  In the 
current circumstances, getting Venezuelan crude oil into 
Nicaragua was a matter of "national security." 
 
¶11. (C) Lopez suggested that the U.S. embassy consider taking 
part in future negotiations to assure a successful 
conclusion.  Santos finished off the GON's presentation by 
handing CDA a copy of a memo, dated December 4, from Lopez to 
the head of the Nicaraguan Energy Institute (the GON's energy 
regulatory authority) entitled "Documentary Recapitulation of 
Efforts at Agreements with Esso."  Santos also said that as a 
"personal, not official" opinion, he wondered if ExxonMobihQY4klQ which was far better than taking impressions 
from the press.  Their views would be transmitted to 
Washington immediately.  That said, however, he added that 
public remarks by President Ortega calling for 
"nationalization" inevitably provoked concern in Washington. 
He assured Santos that the USG had no hidden agenda and would 
be happy to see the GON and ExxonMobil reach agreement. 
While he could not offer any analysis of why the two parties 
have not yet reached an agreement; he understood that 
ExxonMobil was also looking for resolution of the GON's 
claims of large amounts of back taxes due from the company 
which were presented at the time of the earlier seizure of 
the gasoline storage facility.  (Rappaccioli responded that 
he had heard that the Mayor of Managua had stated that claims 
for local taxes had been resolved; however, GON economic 
advisor Bayardo Arce had said that Exxonmobil had not 
presented needed invoices for taxes due to the central 
government for review).  As to the idea of embassy 
intervention in the negotiations, CDA noted that at stake 
were complex commercial matters that seemed best left to the 
parties directly involved. 
 
Comment 
------- 
 
¶13. (C) Comment:  Santos seemed most interested in doing 
damage control following Ortega's use of the term 
"nationalization," which dominated local headlines the day 
before.  Rappaccioli and Lopez' spin-filled versions of the 
current state of play seemed aimed at getting the USG to 
pressure Exxonmobil to bring in the Venezuelan crude oil as 
soon as possible, under GON terms. 
¶14. (C) The actions of the Ortega administration over the 
past 12 months provide compelling evidence of a lack of 
understanding of the oil sector, if not political 
incompetence.  Readers may remember that during the 2006 
elections, the FSLN created Albanica (now defunct and not to 
be confused with Albanisa) to import oil under a scheme with 
Venezuela that would allow FSLN mayors to derive profits. 
When a shipment of diesel finally arrived, Albanica scrambled 
to find tanker trucks to transport product to Managua, and 
then to distribute the product )- ostensibly to transport 
cooperatives and unions.  After Ortega assumed power, 
Venezuelan President Hugo Chavez announced that PDVSA would 
build a $2.5 billion refinery in Nicaragua.  Several months 
later, Chavez laid a cornerstone at a chosen site, only to 
leave the project to a feasibility study that had not been 
initiated.  Between July and November, the Ortega 
administration forced Glencore to provide storage and to 
distribute shipments of Venezuelan product.  When Glencore 
ran short of storage capacity in August, the Ortega 
administration charged ExxonMobil with failure to pay taxes. 
An administrative oversight was used as the pretext for 
seizing the storage capacity from ExxonMobil in time to 
offload a Venezuelan vessel.  When members of the National 
Assembly and the IMF demanded transparency and on-budget 
accounting of Venezuelan funds derived from oil sales, the 
Ortega administration created Albanisa, a "private entity" 
 
composed of stated-owned enterprises PDVSA (Venezuela) and 
Petronic (Nicaragua), to manage Venezuela oil sales 
off-budget. 
 
¶15. (C) While Albanisa may be capable of importing Venezuelan 
oil through paper transactions, someone must eventually pay 
for it.  Without the sales and distribution networks of 
ExxonMobil and Glencore, Albanisa cannot generate ALBA funds 
from Venezuelan oil.  We believe that Ortega's call to 
develop proposals to nationalize the importation of oil is 
the latest attempt to pressure ExxonMobil into monetizing 
Venezuelan oil.  Before nationalizing the process, the Ortega 
administration will have to convince the National Assembly to 
revise legislation governing the sector.  If a state-owned 
entity does the importing, then ALBA funds would be subject 
to National Assembly oversight, something that the Ortega 
Administration has been trying to avoid. 
SANDERS