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Cablegate: Nicaragua: Exxon Reaches Agreement with Government

VZCZCXYZ0000
RR RUEHWEB

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

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