VZCZCXRO2078
RR RUEHKN RUEHMJ
DE RUEHKN #0011/01 0271000
ZNR UUUUU ZZH
R 271000Z JAN 08
FM AMEMBASSY KOLONIA
TO RUEHC/SECSTATE WASHDC 1943
INFO RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHHMUNA/USPACOM HONOLULU HI
RHMFIUU/USPACOM REP GUAM ISLAND GU
RUEHMJ/AMEMBASSY MAJURO 0327
RUEHKN/AMEMBASSY KOLONIA 2277

UNCLAS SECTION 01 OF 02 KOLONIA 000011 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP PDAS GLYN DAVIES AND EAP/ANP 
INTERIOR FOR OIA DIRECTOR NIKOLAO PULA 
 
E.O. 12958: N/A 
TAGS: EPET ENRG ECON PGOV FM RM
SUBJECT: POHNPEI'S FUEL SITUATION HEATS UP 
 
REF: 07 KOLONIA 000146 
 
¶1.  (SBU) Summary.  Pohnpei's outgoing governor engineered a 
secretive memorandum of understanding on fuel between the 
 
SIPDIS 
Pohnpei Utilities Corporation and a South Korean firm.  Signed 
before the closing date and review of bids on the PUC's 
Invitation to Bid for fuel, the MOU appears to be in violation 
of Pohnpei law.  Mobil Oil reportedly is suing in retaliation. 
Managing this controversy will be Governor Ehsa's first 
political test and could reveal much about the nature of 
Pohnpei's new leadership and its approach to the FSM's core 
issues of energy and federalism.  End summary. 
 
¶2.  (U) In the final weekend of his administration, then-Pohnpei 
Governor Johnny David reportedly flew with a small contingent of 
Pohnpei Utilities Corporation (PUC) executives to Guam, where 
they negotiated a memorandum of understanding between PUC and SK 
Shipping, a subsidiary of South Korean chaebol SK Corporation. 
The MOU is for a fuel supply agreement that would enable PUC, 
the largest consumer of fuel on Pohnpei, to break from its 
dependence on Mobil Oil Micronesia, Inc. (MOMI), which has 
operated a fuel monopoly in the Federated States of Micronesia 
(FSM) since 1965. 
 
¶3.  (U) The FSM and Mobil are exploring ways to refashion their 
relationship.  Last year, the FSM Government created the 
National Fuels Corporation (NFC), which was designed to use a 
nearly USD 10 million loan from the Bank of Guam to purchase and 
assume all MOMI operations in the FSM, contingent on approval by 
all four FSM states (Chuuk, Kosrae, Pohnpei and Yap).  The 
corporation was also to commit the FSM to a new five-year supply 
contract with MOMI.  All four states apparently indicated their 
acceptance of the plan at a meeting of the Chief Executive 
Council (consisting of the FSM president, vice president, and 
state governors), albeit with certain understandings.  Pohnpei 
and Yap, in particular, claimed to have relied on the assurance 
that the NFC would operate the fuel facilities on a temporary 
basis only, with divestment of the facilities to their 
respective states to occur upon each state's purchase of those 
facilities.  Yap continues to support the plan, but Pohnpei 
retracted its support for the NFC soon afterward, when it became 
aware that divestment would require the unanimous consent of the 
Chief Executive Council and could occur only after the FSM 
Government had cleared all contractual obligations. 
 
¶4.  (SBU) The Pohnpei Legislature cited the differences in 
understanding as one of several reasons for its opposition to 
joining the NFC.  The legislature raised other concerns, 
including environmental and anti-trust liability, fears of 
adverse consumer impact, and the proposed corporation's 
susceptibility to political pressure.  Some suggest that the 
final point may partly have been code for the lawmakers' 
opposition to the role of controversial former FSM Speaker Peter 
Christian of Pohnpei in the leadership of the NFC. 
 
¶5.  (U) On December 11, 2007, the PUC advertised an Invitation 
to Bid that was not to close until January 23, 2008.  The 
closing date notwithstanding, Governor David and the PUC 
representatives reportedly signed their MOU with SK Shipping on 
January 12.  (Because no copy of the MOU has been publicly 
released, Embassy cannot confirm the date.) 
 
¶6.  (U) On January 16, MOMI wrote to newly-inaugurated Governor 
John Ehsa to summarize the benefits to Pohnpei of MOMI's bundled 
offer to the FSM and to complain that PUC had violated due 
process by executing a supply contract with another supplier 
before the closing date for bids.  On the same day, the PUC 
claimed in a letter to MOMI that its MOU with MOMI's competitor 
was necessary to secure "open competition that would otherwise 
be lost because of hostile maneuvering" and that in any case 
would not preclude PUC from accepting a more preferential offer 
from MOMI. 
 
¶7.  (U) On the afternoon of January 18, MOMI representatives 
called on Ambassador to brief her on developments and to share 
with her an advance copy of a letter from their attorney 
addressed to the PUC with copies to the FSM and Pohnpei 
leadership.  The letter accused PUC of subverting the 
competitive bid process established by Pohnpei law and closed by 
threatening to "utilize all available legal remedies" were the 
situation not rectified by January 21.  MOMI informed Ambassador 
that its shareholders had agreed to file a restraining order 
against PUC on January 21. 
 
¶8.  (U) During dinner with Deputy Chief of Mission on January 
16, Governor Ehsa related how PUC had enthusiastically shared 
with him its proposal for using a different source for fuel for 
 
KOLONIA 00000011  002 OF 002 
 
 
power plant operations.  Ehsa said he had told them that, as 
governor, he needed to take a larger view; he feared that the 
diminution in bulk purchases from Mobil would lead to higher gas 
prices and more that offset any gains to the consumer.  He was 
satisfied that his points had effectively punctured PUC's 
argument. 
 
¶9.  (SBU) In Ambassador's first courtesy call on Governor Ehsa 
on January 18, Ehsa informed her of his intention to call on all 
parties to observe a "time out" for 30 days before taking any 
further action.  His stated goal was to resolve the controversy 
as amicably as possible with minimal damage.  He suggested that 
PUC could re-let the bid in conformity with the law.  On January 
24, a source advised that Mobil Oil had sent, and then 
retracted, a letter to President Mori declaring its intention to 
end all operations in the FSM.  That evening, Embassy officers 
learned that Mobil Oil had filed suit against the PUC. 
 
¶10.  (SBU) Comment.  Ehsa likely will repudiate the deal with SK 
negotiated by his predecessor, then lead Pohnpei into endorsing 
the National Fuels Corporation.  After all, Ehsa probably won 
his election as governor in large part through the generous 
support of his wealthy mentor, former Speaker Peter Christian. 
It is unlikely Ehsa will support Pohnpei's continued hold-out 
against joining the NFC, given the importance to him of 
Christian's backing.  In fact, when Ehsa paid his courtesy call 
on President Mori in Palikir, Christian accompanied him and did 
much of the talking.  When Ehsa and Christian left, Mori asked 
his staff: "what was that about?"  Answered a leading cabinet 
officer, "Christian just wanted to show you who is really in 
charge in Pohnpei."  If Ehsa is truly playing cat's paw to 
Christian, he will support the establishment of the NFC. 
 
¶11.  (SBU) Comment continued.  Oil has many uses, politically as 
well as physically.  Oil is a salve, a critical commodity around 
which the loose Micronesian federation could organize and 
progress toward stronger unity, in much the way that the 
European Community first evolved from a commodity union for coal 
and steel.  Optimistically, the National Fuels Corporation could 
provide the initial structure for such cooperation.  Oil is also 
a flammable.  Rising oil prices are causing the island economies 
to become ever more precarious and destroying the prospects for 
the United States and the FSM to achieve our joint goals of FSM 
economic self-sufficiency by the year 2023.  Replacement of MOMI 
by a publicly-owned corporation is probably not the panacea many 
hope.  The neighboring Republic of the Marshall Islands has 
suffered chronic fuel shortages ever since MOMI pulled out one 
year ago, and a power outage again looms for Majuro because an 
SK tanker was delayed by severe storms.  Kosrae's state-owned 
Micronesian Petroleum Corporation has encountered problem after 
problem, at one point completely running out of fuel and at 
another causing Continental Micronesia, the sole international 
carrier in the FSM, to suspend flights to Kosrae for several 
weeks because of tainted fuel.  In fact, the move to a National 
Fuel Corporation could be disastrous if it creates insurance or 
other liability issues that force Continental Micronesia to 
curtail or cease altogether its service in the islands.  This 
would likely result in the collapse of the FSM economy and 
conceivably cause the political dissolution of the FSM. 
Finally, oil is also a lubricant, which in Micronesia seems to 
increase its viscosity at election time.  Ehsa understands that. 
 MOMI's monopoly has been expensive for Pohnpei, but it has 
assured stable fuel supplies.  To maintain that stability while 
transitioning to the NFC will be a major challenge for the FSM 
and particularly Pohnpei's new Ehsa-Christian leadership tandem. 
 End comment. 
PRUETT