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Cablegate: Nicaragua: Government Seizes Exxon Fuel Storage

VZCZCXYZ0003
OO RUEHWEB

DE RUEHMU #1952/01 2330028
ZNY CCCCC ZZH
O 210028Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1061
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1145
RUEHSJ/AMEMBASSY SAN JOSE 5290
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 001952

SIPDIS

SIPDIS

DEPT FOR EEB/ESC, EEB/BTA, WHA/EPSC, WHA/CEN
SAN JOSE FOR CS/JMCCARTHY
DEPT PLEASE PASS TO USTR AND OPIC

E.O. 12958: DECL: 08/19/2017
TAGS: EINV ETRD EPET NU
SUBJECT: NICARAGUA: GOVERNMENT SEIZES EXXON FUEL STORAGE
FACILITY

Classified By: Ambassador Paul Trivelli, Reason: E.O. 12958 1.4(b) and
(d)

1. (C) Summary: After close of business on August 17, local
police showed up at Esso/Nicaragua's Corinto I fuel storage
facility located at the Port of Corinto and on a judge's
order seized the facility. Exxon officials believe that the
pretext for the seizure was a tax issue involving the
exemption of value added tax. It appears, however, that the
governmnet has not observed due process. Esso/Nicaragua has
not been party to an administrative proceeding, did not
receive a bill for back taxes, nor notified that its property
would be seized. Because of safety concerns and the fact
that the tanks are old and small, Corinto I is largely in
disuse -- but one tank located there is fairly large and
still in service, capable of holding 30,000 barrels of diesel
fuel. Equally important, Esso/Nicaragua cannot conduct
operations at Corinto II without the use of its fire fighting
equipment located at Corinto I. Without Corinto II, fuel
shortages in Nicaragua will develop in a matter of weeks. We
understand that the Port Authority (EPN) has been placed in
charge of Corinto I and that welding has been going on all
weekend. Petronic and its lessee Glencore have reportedly
been asked to facilitate the offloading of diesel from a
Venezuelan ship that arrived in Corinto on August 17. Please
see Action Requests for USTR and OPIC in paragraphs 6 and 9,
respectively. End Summary.

2. (C) After close of business on August 17, local police
showed up at Esso/Nicaragua's Corinto I fuel storage facility
located at the Port of Corinto and on a judge's order seized
the facility. Esso/Nicaragua received no document or
explanation for the action. Over the weekend, Exxon
dispatched its Public Affairs Manager for Central America and
the Caribbean to Nicaragua. He is seeking a meeting with
President Ortega and other in the Nicaraguan government. In
addition, Esso/Nicaragua has posted lawyers in Managua,
Corinto, and Chinandega to work the issue.

The Pretext
-----------

3. (C) Exxon officials believe that the pretext for the
seizure was a tax issue. About four months ago a customs
audit picked up on Esso/Nicaragua's failure to properly
document a tax exemption for a shipment of crude oil.
Industry insiders tell us that oil shipments often arrive
before all the paperwork is completed. In this case, a delay
in getting a bill of lading from the supplier caused a
subsequent delay in getting an exemption letter from the
Ministry of Finance, resulting in incomplete paperwork.
Normally, the paperwork trail can be repaired and a nominal
fine paid; life goes on. This time, Customs claimed that
Esso/Nicaragua owed $3 million in back value added taxes
(IVA). On this pretext, Exxon officials believe, the
government seized Esso's Corinto I fuel storage facility.

4. (C) Exxon officials point out that the law permits the
exemption of IVA on the import of petroleum, and that,
indeed, there is no mechanism for Esso/Nicaragua to recover
IVA from the end user. In July, Energy Minister Emilio
Rappaciolli penned a letter to Attorney General Hernan
Estrada fully explaining that under Nicaraguan law, no tax
was due on the import in question. In fact, more than one
piece of legislation designates petroluem product tax exempt.

The Seizure
-----------

5. (C) Exxon officials identified Managua judge Hector Pavone
as having issued the order to seize Corinto I, the older of
the two fuel storage facilities that Esso/Nicaragua maintains
at the Port of Corinto. Normally, the National Police would
have carried out the order, but in this case it was left to
the Municipal Police of Corinto. According to Exxon
officials, National Police Chief Granera was aware of the
act, but declined to take a position on the matter in a
telephone conversation with them. "La Prensa" reported this
morning that a Chinandega judge was also involved, and that
when questioned following a speech on August 18, President
Ortega answered that the case was in the courts, revealing
that he knew more than he was willing to say publicly. Exxon
officials believe that President Ortega approved the seizure,
which is why they want to talk to him.

Due Process
-----------

6. (C) Exxon officials complain that the government has not
observed due process. Esso/Nicaragua has not been party to
an administrative proceeding, received a bill for back taxes,
nor notified that its property would be seized. Further,
Exxon has not received any document notifying the company as
to why its property was seized. Indeed, Exxon reports that
the complaint and request for "presumptive siezure" was filed
by an individual unknown to them and with no prior legal
problems with the company. Exxon officials believe that the
lack of due process may be the basis for a complaint under
CAFTA. Action Request: Post requests USTR to undertake a
preliminary analysis, based on the facts presented in this
cable, to advise us whether there is reason to believe that
CAFTA could be invoked in this case.

Esso's Fuel Storage Facilities and Oil Imports
--------------------------------------------- -

7. (C) Corinto I is Esso's original storage facility at the
Port of Corinto. Because of safety concerns and the fact
that the tanks are old and small, the facility is largely in
disuse. However, one tank in Corinto I is fairly large and
still in service, capable of holding 30,000 barrels of
diesel. Corinto I also houses a fire fighting station that
serves both Corinto I and Corinto II. This fact is important
because Esso/Nicaragua cannot conduct operations at Corinto
II without the protection of its fire fighting station across
the street in Corinto I. In contrast, Corinto II has five
large tanks that can store around 100,000 barrels of diesel
and 50,000 barrels of gasoline (Note: Volumes need to be
verified.)

8. (C) Both Corinto I and II handle refined or partially
refined petroleum products. While Esso's refinery supplies
most of the country's liquid fuel needs, Nicaragua still
imports about 25% of its supply. If Corinto II falls out of
operation because of the lack of firefighting equipment or
any other reason, fuel shortages will follow in a matter of a
weeks. Esso/Nicaragua has already cancelled a vessel
scheduled to arrive on August 23. Exxon officials warn that
if Corinto II falls out of opertiona, gasoline shortages will
develop first wiht premium gasoline. As premium users buy
available regular gasoline, shortages of regular gasoline
will also occur. Exxon does not want to say this publicly,
however, for fear of creating consumer panic.

9. (C) All crude petroleum is piped into Esso's Managua
refinery via pipeline through Puerto Sandino, nearer Managua.
Esso/Nicaragua managers believe that the refinery,
pipelines, and storage facilities are covered by Esso's OPIC
political risk insurance policy for Nicaragua, but must
check. Action Request: Post requests OPIC's insurance
division to inform us about the extent of OPIC political risk
insurance coverage for Esso/Nicaragua.

Subsequent Government Action
----------------------------

10. (C) At first, the government's fuel distribution asset
holding company, Petronic, did not appear to be directly
involved, nor did Petronic's lessee Glencore. Now, post
understands that Petronic and Glencore have been asked to
facilitate the offload of diesel from a Venezuelan ship that
arrived in Corinto on August 17, but with no place to
offload. We understand that the Port Authority (EPN) has
been placed in charge of Corinto I and that welding has been
taking place there all weekend. Normally, government
permission for such work must be given in advance, along with
an environmental impact assessment. Unsure about the status
of the old tanks, Exxon officials are worried about safety.

11. (C) A few weeks ago, Ortega announced that Venezuela
would only export finished product to Nicaragua in the near
to medium-term. In the past several months, the government
has tried to convince Esso/Nicaragua to accept shipments of
Venezuelan finished product. Moveover, Exxon operates under
tight restrictions on the type of vessels it uses (e.g.,
doubled hulled ships -- as a consequence of the Exxon Valdez
incident) and on delivery times. When Venezuela missed its
delivery time a few months ago, Esso/Nicaragua was forced to


purchase elsewhere. The Venezuelan vessel showed up later
anyway, and reportedly wound up paying a demurrage of
$400,000. Exxon officials told us that it could conceivably
negotiate an arrangement with Venezuelan Oil Company PDVSA to
accept crude petroleum via Exxon vessels. Such an
arrangement would serve Exxon's interest in sticking to tight
logistical schedules and making maximum use of limited
storage facilities in Nicaragua.

Exxon Action
------------

12. (C) On August 20, Exxon officials briefed the Ambassador
on the state of play. They believe that the seizure is
unlawful and possibly a violation of CAFTA. The company
wants to meet with President Ortega, Vice President Morales,
and Energy Minister Emilio Rappaciolli to press for the retun
of the facility. In addition, Exxon's Washington office has
contacted Nicaraguan Ambassador to Washington Arturo Cruz.
The Embassy issued a statement indicating the seriousness
with which we view the seizure and the impact that this has
on the investment climate, as well as encouragement for a
quick resolution. The Ambassador has talked to both Minister
of Foreign Affairs Santos and Minister of Energy Rappaciolli,
expressing our deep concern. We continue to work the issue.
TRIVELLI

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