VZCZCXRO7822
RR RUEHKN
DE RUEHKN #0103/01 1980349
ZNY SSSSS ZZH
R 160349Z JUL 08
FM AMEMBASSY KOLONIA
TO RUEHC/SECSTATE WASHDC 2069
INFO RHMFISS/CDR USPACOM HONOLULU HI
RUEAIIA/CIA WASHDC
RUEHBJ/AMEMBASSY BEIJING 0062
RUEHKN/AMEMBASSY KOLONIA 2416

S E C R E T SECTION 01 OF 02 KOLONIA 000103 
 
SIPDIS 
 
E.O. 12958: DECL:  7/15/2018 
TAGS: ECON PGOV PREL FM CH
SUBJECT: (S) MOBIL REJECTS FSM PETROLEUM CORPORATION PROPOSAL FOR 
FINANCING FROM CHINA 
 
CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia, 
State. 
REASON: 1.4 (b), (d) 
 
 
 
CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia, 
State. 
REASON: 1.4 (b), (d) 
 
 
¶1.  (S)  Summary.  In a veil of secrecy, a nascent national 
petroleum corporation for the Federated States of Micronesia 
(FSM) has begun to purchase fuel storage tanks from Mobil in all 
four FSM states.  Purchase of the fuel terminals should be 
complete by the end of July.  The President of Mobil in Guam 
helped broker an FSM loan for USD 9.7 million from the Bank of 
Guam to ensure direct Guam-based payment to Mobil.  Mobil's 
President said he rejected a proposal by the FSM to cover 
purchase of the tanks and residual fuel by means of a USD 20 
million concession loan from China.  As the FSM begins to 
establish a headquarters for "PetroCorp" on the capital island 
of Pohnpei in order to purchase fuel in bulk for the entire 
nation, Mobil believes representatives of the new corporation 
may return to China to seek a loan to cover costs of future oil 
supplies and/or interest payments on the loan from the Bank of 
Guam.  End Summary. 
 
SECRECY CLOAKS PURCHASE OF FUEL TANKS 
 
¶2.  (C)  A national petroleum corporation for the Federated 
States of Micronesia (FSM) was established by the FSM Congress 
and signed into law by President Emanuel Mori in September 2007. 
 Since that time, the nascent corporation, which will do 
business under the trade name of "PetroCorp or FSMPC," has 
struggled to incorporate all four FSM states.  Replacing 42 
years of Mobil Oil Micronesia service, FSMPC will acquire and 
operate fuel storage and wholesale distribution facilities in 
Yap, Chuuk, Kosrae and Pohnpei States.  During the past year, 
Mobil-Guam has worked fitfully with the FSM national and state 
governments to try to finalize asset sales and supply 
agreements.  Mobil President and Guam Country Director Kamal 
Singh (Fijian national) described negotiations as the toughest 
wrangling he has ever experienced in an 18-year career with 
Mobil in the Asia and Pacific region. 
 
¶3.  (SBU)  Without notification to the public, a transfer of 
state assets to PetroCorp began in Yap last month.  Chuuk then 
supposedly turned over its assets to FSMPC on July 11.  A Mobil 
media release in Guam on June 28 anticipated that "a full 
transition of Mobil's assets and operations in FSM to the FSMPC 
will be completed by the end of July 2008." 
 
¶4.  (SBU)  In the absence of public information, speculation on 
the Internet chat site Micronesian Seminar has run rife.  For 
example, one anonymous commentator wrote: "China and FSM can 
co-finance gigantic fuel storage tanks in the FSM to assist 
refueling of China's submarine fleet program.  With larger bulk 
fuel purchase, the price of fuel will drop in the FSM.  FSM's 
economy can skyrocket within a short duration, probably as fast 
as China's rate of economic growth."  Other commentaries 
lambaste the silence of the FSM National Government on the 
current transactions and cast doubt on the dependability and 
credibility of PetroCorp.  The ability to leverage purchasing 
power from the higher economy of scale derived from national 
versus state purchases is likely to be undercut by the rising 
cost of petroleum products, according to industry experts, 
possibly exacting a political price for the FSM National 
Government. 
 
DEALS FRAUGHT WITH DELAYS - CHINA OFFERS ATTRACTIVE TERMS 
 
¶5.  (C)  Since the establishing legislation passed in September 
2007, an anticipated USD 9.74 million loan from the Bank of Guam 
to acquire fuel storage and delivery assets was delayed pending 
a decision in Pohnpei State about whether to join FSMPC.  As a 
newly elected government in Pohnpei took its time to assess 
alternative supply options, Mobil threatened to withdraw from 
the deal.  Pohnpei only consented to come on board in March 2008 
after President Mori, under intense pressure from Mobil, agreed 
to sign an indemnification agreement for Pohnpei State 
operations.  In turn, the FSM National Government received a 
back-to-back indemnification from FSMPC, even though the 
Corporation still lacks insurance coverage.  When Ambassador 
Hughes asked Pohnpei Governor John Ehsa how the FSM National 
Government could conceivably cover fuel eventualities in his 
state, the Governor responded, "That's President Mori's 
problem."  According to Singh, the indemnification agreements 
are "pure paper." 
 
 
KOLONIA 00000103  002 OF 002 
 
 
¶6.  (C) With Pohnpei on board, the FSM National Government 
announced that the Bank of Guam would finance the purchase of 
Mobil assets and FSMPC would commence operations in May. 
However, FSMPC continues to lack a Chief Executive Officer, 
technical managers and staff.  In the absence of FSMPC managers, 
negotiations continued under the direction of PetroCorp's 
Interim Task Force Chief, Secretary of Resources and Development 
Peter Christian. 
 
¶7.  (S) Singh has shared his understanding that Christian made 
secret trips to Beijing to secure a loan offer of USD 20 million 
at a rate of 2 per cent interest.  Singh promised to deliver a 
copy of the draft Chinese loan proposal to Ambassador during his 
next trip to Kolonia.  When Secretary Christian urged Mobil to 
accept payment through Chinese financing, Singh said he refused, 
fearing unreliability.  Instead, Mobil insisted upon and helped 
finalize the USD 9.74 million loan from the Bank of Guam.  As 
fuel storage assets are transferred, Mobil-Guam has begun to 
receive payment directly from the Bank of Guam. 
 
FRAGILE FINANCING PORTENDS PETRO-CORP DIFFICULTIES 
 
¶8.  (S) Owing to low revenue generation in the FSM, along with 
soaring costs of petroleum, foods and basic products in this 
remote island nation, Singh speculated that Secretary Christian 
would be tempted to again travel alone to Beijing to seek 
Chinese financing, either to help defray the cost of fuel 
supplies or to cover interest payments to the Bank of Guam, 
which has pegged its loan to FSMPC at 7.5 percent.  (Christian 
alleged to Ambassador that he had succeeded in securing an 
earlier offer of a 6.5 percent interest rate.)  Terms of 
establishment of the FSMPC, which is a quasi-governmental 
corporation, circumvent essential FSM Congressional oversight, 
according to Singh. 
 
¶9.  (SBU)  In its efforts to ensure "a seamless changeover" and 
"product supply continuity," Mobil-Guam's media release states 
that Mobil remains committed to an ongoing, phased transfer of 
assets in a nation that it has supplied since 1966.  Mobil will 
remain the sole supplier of FSM fuel for the next five years, 
including the sale of gasoline, diesel and jet fuel at market 
rates, which FSMPC will distribute to the four states.  However, 
Mobil does not disembark tankers from Singapore to the FSM until 
pre-payment is received.  During the first year of transition, 
Mobil employees in the FSM, including experienced technicians, 
have supposedly agreed to remain in place at their current 
salary rates.  A petroleum expert from the Pacific Island Forum, 
who has contributed constant advice, maintains that FSMPC can 
succeed, particularly if the corporation puts out a tender for 
future maintenance and delivery services.  In the long run, 
Pacific island nations may be able to negotiate a competitive 
bulk price, he said.  Continental Airlines' regional operational 
manager commented that Continental will continue to load jet 
fuel under the FSM's new arrangement, so long as scrupulous 
quality assurance checks meet security standards at the time of 
tanking any of its flights.  Otherwise, Continental will be 
compelled to cancel operations. 
 
¶10.  (S)  Comment:  Timing of such a complex transition to a 
national fuel corporation is clearly complicated by soaring oil 
costs.  At the same time, tensions among the four FSM states and 
the national government are also running high owing in part to 
inefficiencies in implementation of declining Compact assistance 
and perceived favoritism toward President Mori's home state of 
Chuuk.  If FSMPC appears to favor any one of the four states in 
the supply of oil inconsistent with state payments, dissension 
will deepen.  Political pitfalls for Secretary Christian 
(Pohnpei State) are clear if his hand is revealed in possible 
covert loans.  In the meantime, many of the fuel tanks in the 
FSM are deteriorating and they require costly repairs; Mobil was 
 reluctant to invest in their overhaul owing to the paucity of 
market profit from the FSM.  Beijing has supposedly expressed 
interest in building all new storage facilities.  To maintain 
quality assurance standards and purchase sufficient fuel to 
avoid blackouts, the FSM will require additional sources of 
financing.  Some observers believe Secretary Christian, who may 
harbor Presidential ambition, will take credit for launching 
PetroCorp, and then blame a collapse on FSMPC Board members. 
Former FSM Vice President Redley Killion is already a member of 
the board, a contender for Governor of Chuuk and a possible 
target of blame by Christian. 
 
  HUGHES 
HUGHES