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DE RUEHMU #0063/01 0190031
ZNY CCCCC ZZH
R 190031Z JAN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1938
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1204
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 000063 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN/RGREENE 
SAN JOSE FOR CS/JMCCARTHY 
DEPT PLEASE PASS TO USTR AND OPIC 
 
E.O. 12958: DECL: 01/17/2017 
TAGS: EINV EPET ETRD NU
SUBJECT: NICARAGUA: EXXON REACHES AGREEMENT WITH GOVERNMENT 
ON VENEZUELAN OIL, TAXES, AND FUEL STORAGE FACILITIES 
 
REF: A. 2007 MANAGUA 1952 
     ¶B. 2007 MANAGUA 2016 
     ¶C. 2007 MANAGUA 2116 
     ¶D. 2007 MANAGUA 2055 
     ¶E. 2007 MANAGUA 2539 
 
Classified By: Ambassador Paul A. Trivelli, Reason: E.O. 12958 1.4(b) a 
nd (d) 
 
¶1. (C) Summary. Local ExxonMobil officials report that their 
negotiations with the Government of Nicaragua over the sale 
of its storage tanks at the Port of Corinto and the purchase 
of crude petroleum from Venezuela are drawing to a successful 
conclusion.  On December 14 2007, ExxonMobil and Petronic, 
Nicaragua's state-owned oil company, signed an agreement 
providing for Petronic's use of storage tanks at Corinto I 
for a fee, retroactive to the date that the government seized 
the tanks.  ExxonMobil expects that an agreement to sell 
ExxonMobil storage facilities at Corinto I to Petronic and an 
agreement to purchase Venezuelan crude from Petronic, both on 
commercial terms, along with an exchange of letters settling 
tax claims against ExxonMobil will be signed sometime during 
the week of January 21, 2008.  The Sandinista side appeared 
divided and disorganized during the negotiations.  In the 
end, however, Economic Advisor to the President Bayardo Arce 
was able to gather his side to move the negotiations forward. 
 End Summary. 
 
¶2. (C) ExxonMobil General Manager Joaquim de Magalhaes and 
former General Manager and now consultant Augustin Fuentes 
report that negotiations with Petronic over the sale of 
storage tanks at Corinto I and the purchase of crude 
petroleum from Venezuela are drawing to a successful 
conclusion  Negotiators have agreed on the terms and all 
that remains is for ExxonMobil lawyers in Fairfax, Virginia 
to complete their review of the agreement texts and exchanges 
of letters.  De Magalhaes and Fuentes expect that Fairfax may 
require small, technical changes. 
 
¶3. (C) This brings to a close a saga that came to a head when 
the Nicaraguan courts issued a tax lien on ExxonMobil's fuel 
storage tanks at Corinto I, which was used as a pretext for 
seizing Corinto I on August 17, 2007 (Ref A).  Specifically, 
the lien was granted for failure to pay or obtain a waiver to 
pay a value added tax on two shipments of imported oil.  The 
government finally returned these facilities on September 13, 
2007 (Ref C).  On December 14 2007, ExxonMobil and Petronic, 
Nicaragua's state-owned oil company, signed an agreement 
providing for Petronic's use of these facilities for a fee, 
retroactive to August 17 2007, i.e., the date they were 
seized.  ExxonMobil expects that an agreement to sell Corinto 
I to Petronic and an agreement to purchase Venezuelan crude 
from Petronic, both on commercial terms, along with an 
exchange of letters settling all outstanding tax claims 
against ExxonMobil will be signed the week of January 21, 
¶2008. 
 
Payment for Services Rendered at Corinto I 
------------------------------------------ 
 
¶4. (C) In the "hospitality agreement" signed on December 14 
2007, Petronic agreed to pay ExxonMobil for the use of its 
fuel storage tanks at Corinto I retroactive to August 17 
2007, the date of seizure.  Petronic has agreed to pay a 
little over a dollar per barrel of oil stored at Corinto I. 
The agreement was signed at an impromptu ceremony in front of 
television cameras and the press before the government closed 
for the Christmas holidays.  Minister of Energy Emilio 
Rappaccioli used the event to publicize the government's 
intention to have ExxonMobil buy Venezuelan crude through 
Venezuela's Bolivarian Alternative for the Americas (ALBA) 
financing scheme that returns 50% of the purchase price to 
Nicaragua. 
 
Terms of Sale for Corinto I 
--------------------------- 
 
¶5. (C) De Magalhaes told Econoff that the terms of the sale 
to Petronic of the fuel storage tanks at Corinto I are 
market-based; the final price is below ExxonMobil's asking 
price but above what Petronic offered.  The sales agreement 
grants ExxonMobil the right to use the largest tank (holding 
30,000 gallons) for two years at no charge.  (Note: That tank 
represents more than half of the storage capacity available 
at Corinto I.)  In addition, ExxonMobil retains ownership of 
its firefighting station to serve its much larger Corinto II 
fuel storage facility.  ExxonMobil will continue to provide 
water pumping station services to support firefighting at 
Corinto I for a period of one year, during which Petronic 
must install its own pumping station.  De Magalhaes and 
Fuentes expect this agreement will be signed the week of 
January 21, 2008 in Managua. 
 
Purchase of Venezuelan Crude 
---------------------------- 
 
¶6. (C) De Magalhaes and Fuentes told Econoff that ExxonMobil 
has agreed to purchase crude oil from Venezuela on commercial 
terms.  ExxonMobil lawyers in Fairfax, Virginia are putting 
the finishing touches on the agreement now.  DeMagalhaes said 
that the purchase agreement is based on a New York Mercantile 
Exchange (NYMEX) "gulf coast" price formula.  Essentially, 
ExxonMobil agrees to purchase all crude oil to be refined in 
Nicaragua from Petronic, which in turn will source the oil 
through a joint venture with PDVSA, called ALBANISA. 
Petronic is reportedly a minority partner in ALBANISA with a 
45% share.  The agreement gives ExxonMobil what it hopes will 
be a secure supply of Mesa 30, a quality crude that is 
sometimes hard to find.  Should Nicaraguan demand for heavy 
fuel oil rise, ExxonMobil has the option to source heavier 
crude from Venezuela to achieve higher yields of fuel oil 
from its refinery located near Managua. 
 
¶7. (C) Under the terms of the agreement, ExxonMobil will take 
delivery of the oil in Venezuela and transport it to 
Nicaragua on its own vessels.  This arrangement means that 
Petronic will sign its oil sales agreement with ExxonMobil 
Sales and Supply Corporation as opposed to Esso/Nicaragua, 
the subsidiary that conducts ExxonMobil's business in 
Nicaragua.  Once the oil is on the water, ExxonMobil has the 
option of shipping it wherever it is needed.  ExxonMobil also 
has the option of sourcing elsewhere should PETRONIC (through 
ALBANISA and PDVSA) be unable to load a ship within five days 
of plan.  In addition, PETRONIC will be liable for demurrage, 
thereby shifting some of the risk of doing business with 
PDVSA to Petronic and the Nicaraguan government.  De 
Magalhaes expects that purchases of crude oil will total 
$400-500 million dollars in 2008 for 6.5 ) 7.0 million 
barrels of oil.  Purchases in 2009 should exceed 7.2 million 
barrels -- i.e., about 600,000 barrels per month. 
 
Tax Issues 
---------- 
 
¶8. (C) Central to ExxonMobil achieving an agreement with the 
government was resolving the onslaught of tax claims filed 
against the company.  At one point, tax claims totaled $70 
million dollars, the approximate book value of ExxonMobile 
assets in Nicaragua.  Essentially, these claims will be 
resolved by a series of side letters to be exchanged when the 
crude oil sales agreement is signed. 
 
¶9. (C) Most of the tax claims involved the alleged failure of 
ExxonMobil to pay value added tax at the time of importation, 
despite the fact that several laws explicitly state that the 
petroleum industry is not subject to this tax because a 
separate regime prevails.  Indeed, there is no mechanism in 
place to recover value added tax along the supply chain. 
Further, ExxonMobil argues that its refinery would not be 
commercially viable if it had to pay the 14% value added tax 
on crude oil when its competitors did not pay a tax on 
refined product.  In the end, the government agreed to throw 
out all claims beyond the 4-year statute of limitations (the 
lion's share of the claims were between 4 and 15 years old) 
and put a cap on what remained.  A face saving arrangement 
requires ExxonMobil to pay on what remains, but allows the 
company to credit "every cordoba" against the selective 
consumption tax that it owes, thus nullifying the charge. 
 
¶10. (C) Another significant tax claim revolved around which 
corporate tax rate should apply to ExxonMobil.  In 1995, 
ExxonMobil was granted the right to be taxed at a 25% rate 
(vice 30%) as an incentive to upgrade and modernize its 
refinery after the ravages of the 1980s.  In 2002, the 
government reduced the corporate tax rate for all firms to 
25%, making the incentive moot.  In 2007, the government 
again raised the overall corporate tax rate to 30%, but 
assured ExxonMobil in a letter that the 25% rate would 
continue to apply in its case.  The issue was resolved during 
the negotiation when ExxonMobil accepted to the 30% rate and 
the government agreed not to assess the 5% difference 
retroactively. 
 
Sandinista Negotiating Tactics 
------------------------------ 
 
¶11. (C) The Nicaraguans deployed quite a few Sandinista 
economic officials in strong-arm tactics against ExxonMobil 
-- including Economic Advisor to the President Bayardo Arce, 
Petronic President Francisco "Chico" Lopez, Petronic General 
Manager Rodolfo Zapata, Minister and Vice Minister of Energy 
Emilio Rappaccioli and Lorena Lanza, National Electric 
Company President Ernesto Martinez Tiffer, Director General 
for Tax Walter Porras and Director General for Customs Eddy 
Medrano, as well as several lawyers.  Regulator David 
Castillo and members of the business federation COSPEP also 
participated in some meetings as facilitators. 
 
¶12. (C) Fuentes reports that as a group, the Sandinista side 
holds a very simplistic view of business, does not understand 
the oil industry, and lacks understanding of the importance 
of reliability and safety.  De Magalhaes comments that the 
Sandinista side does not seem to realize that its mafia-like 
behavior, threats, and propaganda are not necessary to 
negotiate commercial deals.  Both felt that the Sandinista 
side lacks confidence in its ability to negotiate and always 
believes that companies are lying to them.  The Sandinistas 
always state publicly that the other side is demanding too 
much and giving too little, while the exact opposite is true. 
 
¶13. (C) Politics and party rank clearly play a role for the 
Sandinista side.  De Magalhaes and Fuentes report that the 
presence of party apparatchik Chico Lopez changed the 
behavior and attitude of others.  With Lopez present, 
Rappaccioli would talk about the revolution and his 
experience working with Ortega in the 1980's.  Though as 
Petronic President, Lopez is supposed to report to 
Rappaccioli, in practice the opposite seems to be true.  This 
reversal of authority caused de Magalhaes and Fuentes to view 
Rappaccioli as a second tier player who always waits for the 
politicos to come to terms on an issue before speaking.  When 
Rappaccioli is free of his political yoke, however, he is a 
more pragmatic player. 
 
¶14. (C) Bayardo Arce played a calming role, although the most 
thuggish tactics occurring immediately before he arrived on 
the scene were perhaps by his design.  De Magalhaes and 
Fuentes found Arce to understand business and willing to take 
a more pragmatic and forward looking approach to resolving 
issues.  Lopez, on the other hand, often shows up with a roll 
of papers to support his arguments about what he claims 
people said two months ago.  Both de Magalhaes and Fuentes 
commented that Lopez and Arce seem to be rivals.  Each would 
tell ExxonMobil to go the other first to get a chop, and then 
come back to them.  Both Arce and Lopez seem to derive most 
of their power from their relationship with President Ortega. 
 
¶15. (C) De Magalhaes and Fuentes found Director General for 
Tax Walter Porras and Director General for Customs Eddy 
Medrano more ideologically oriented.  However, Porras is a 
more sophisticated and respectful person.  Nevertheless, on 
one occasion Porras entered into a shouting match with 
ExxonMobil lawyers.  Director General for Customs Eddy 
Medrano is not very well educated and shouts a lot.  An 
engineer by training, Petronic General Manager Rodolfo Zapata 
is the easiest with which to work, but stays quiet when 
important issues are discussed.  Fuentes, who prides himself 
in getting along with just about anybody, complained that he 
simply could not tolerate ENEL President Ernesto Martinez 
Tiffer, who he found to have "a level of knowledge that was 
below zero." 
TRIVELLI