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Cablegate: Nicaragua: Government Still Controls Exxon Fuel

VZCZCXYZ0000
OO RUEHWEB

DE RUEHMU #2016/01 2430006
ZNY CCCCC ZZH
O 310006Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1145
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1158
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002016

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: 08/29/2017
TAGS: EINV EPET ETRD NU
SUBJECT: NICARAGUA: GOVERNMENT STILL CONTROLS EXXON FUEL
DEPOT

REF: A. MANAGUA 1952
B. MANAGUA 1789
C. MANAGUA 640
D. MANAGUA 788

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

1. (C) Summary: Ten days after the government seized one of
Esso/Nicaragua's fuel depots at the Port of Corinto, it
refuses to return the facility to Esso without preconditions.
The government wants Esso to honor third party contracts
involving the use of the depot; for safety and liability
reasons, this is a non starter for Exxon. The implementation
of a "peace plan" remains on the table, waiting for Energy
Minister Rappaccioli to return from Brazil. Theoretically,
Exxon is willing to purchase fuel from Petronic, the
state-owned holding company, but will only negotiate a deal
after the depot is returned. In return, Exxon wants
government harassment, in the form of tax liens and
accusations of nonpayment, to stop. While the stalemate
continues, Petronic controls Esso's facility. Petronic has
already offloaded fuel from one Venezuelan vessel and is
preparing to do the same with another. We believe that the
government's driving motivation for its treatment of Esso is
an overwhelming desire to siphon ALBA funding from the sale
of Venezuelan petroleum to Nicaragua to fund inter alia the
creation of 17,000 citizens' councils. End Summary.

2. (C) As reported in Ref A, the Government of Nicaragua
seized one of Esso/Nicaragua's fuel storage facilities at the
Port of Corinto on August 17. The pretext for the seizure
was a lien for the nonpayment of taxes, placed on the
property by the Director General of Customs Roberto Zepeda.
Zepeda charged that Exxon had failed to pay the value added
tax on imported petroleum product.

3. (C) The issue first surfaced more than a year ago when the
government noticed that Exxon had not filed the proper
paperwork for an exemption from the value added tax.
Industry insiders tell us that this is fairly common, as
ships frequently arrive and are offloaded before all the
paperwork is finished. Instead of seeking an administrative
solution to an administrative problem, the government
parlayed a paperwork glitch into something much grander to
suit its purposes. Customs insists that Esso/Nicaragua owed
as much as $3 million in unpaid value added tax.

4. (C) What makes the claim verifiably specious is that
Nicaraguan law clearly exempts petroleum products from most
normal taxes, including the value added tax. For this
reason, no mechanism exists for Exxon to collect value added
taxes along the supply chain. Instead, the industry
essentially operates under its own tax regime, centered on
the energy consumption tax. As the major supplier of refined
products to Nicaragua, Exxon helps collect this tax from
other fuel distributors on behalf of the government.

"We Pay Our Taxes"
------------------

5. (C) At no time has Exxon accepted publicly or privately
that the government's charges of tax evasion are correct.
Exxon spokesmen Alfredo Fernandez-Sivori and Milton Chavez
have publicly stated Esso/Nicaragua has always paid its taxes
and is a good corporate citizen, investing in Nicaragua to
reliably and safely supply fuel to the country and importing
technology. Indeed, as a high profile foreign investor and a
major taxpayer, Esso/Nicaragua has long come under regular
scrutiny by local tax authorities. Former Director General
for Taxation Roger Arteaga was quoted in the press as having
said that, in his experience, Esso/Nicaragua was meticulous
about paying its taxes.

"I'd Like a Fuel Depot, Judge"
------------------------------

6. (C) As the demandeur, Director General for Customs Zepeda
has the right to go to a judge in a district where an
Esso/Nicaragua asset resides and demand that a tax lien be
placed on it. Zepeda chose an out-of-commission Esso fuel
depot called Corinto I.

7. (C) Nicaraguan law clearly states that custody of a

property subject to a lien "will be awarded to the owner of
the property," but this did not stop the Sandinista (FSLN)
judge from Chinandega, Judge Socorro Toruno, from enlisting
the assistance of armed local police to forcefully remove
Esso/Nicaragua personnel from Corinto I and awarding custody
of the depot to Zepeda. The mission all took place with
clockwork precision shortly after close of business on
Friday, August 17.

8. (C) Zepeda immediately used his ill-gotten authority to
request Petronic to prepare Esso's tanks to receive fuel from
a Venezuelan vessel that had arrived in port the day before.
The last Venezuelan vessel to call paid demurrage of
$400,000, and the GON appeared determined that such a delay
was not going to happen again.

Our Friends at Petronic
-----------------------

9. (C) Petronic is a state-owned holding company whose
primary responsibility is to oversee a long-term contract
with Glencore (Swiss) for the supply and distribution of
petroleum products. In April, two months after Evo Morales
nationalized Glencore's mining assets in Bolivia, the
Nicaraguan government tried to nullify its ten-year contract
with Glencore in its eighth year, arguing that the government
official who signed the contract was not authorized to do so.
This charge soon devolved into negotiations with Glencore,
the outcome of which is unclear. However, Glencore is now
onboard with the idea of receiving Venezuelan product through
Petronic.

10. (C) The local IMF Representative informs us that as a
result of IMF negotiations restricting rapid growth in
foreign debt, the Sandinista Government will no long siphon
funds from the purchase of Petroleos de Venezuela (PDVSA)
products through a discount financing scheme as reported in
Ref B. Rather, 25% of the proceeds of a sale to Petronic
will be deposited into a fund supporting a development bank
and 25% into an ALBA Fund. To make this work, real companies
with refining or distributive capacity like Exxon have to buy
the fuel from Petronic.

Chico and the Man
-----------------

11. (C) The President of Petronic is Francisco "Chico" Lopez,
who despite some reports that he has resigned, apparently
still functions as the Treasurer of the FSLN, whose
headquarters serve as President Ortega's official residence
and office. As an accounting master with nimble fingers
massaging the financial heart of the FSLN, Chico Lopez
appears to be just the guy Ortega wants to manage his ALBA
funds.

12. (C) We note that in a public scandal last April, Amcit
Armel Gonzalez implicated Chico Lopez and FSLN Director for
Organization Lenin Cerna in a $4.5 million extortion attempt
involving a tourism development in the Department of Tola
(Ref C). Although Gonzalez recorded the conversations on
audio tape verified by experts, Gonzalez has been accused of
creating false evidence.

Hard Day's Night
----------------

13. (C) With free run of Corinto I as provided by Judge
Toruno, Chico Lopez sprung into action. Within hours, local
contractors showed up to perform welding and other metal work
on Esso's tanks to prepare Corinto I to accept 18,000 barrels
of Venezuelan diesel, i.e., what remained of Venezuela's
120,000 barrel shipment. The contractors welded all night.
Reportedly, 40,000 barrels of diesel and 20,000 barrels of
gasoline were offloaded to a depot managed by Glencore, and
30,000 barrels of diesel were offloaded to a depot managed by
the Nicaraguan Port Authority.

14. (C) While contractors continued to weld, President Ortega
appointed Minister of Energy Emilio Rappaccioli to act as
point person for the government in talks with Exxon.
Business Federation (COSEP) President Erwin Kruger offered
his good offices to broker a deal, and helped Exxon reps to
initiate discussions with Rappaccioli on August 21. (Ref D).

"What Do You Really Want?"
--------------------------

15. (C) Exxon soon discovered that the issue was not unpaid
taxes. Rappaccioli freely admitted in private conversations
and then publicly to the press that the government launched
tax cases against Exxon to pressure the company into
accepting Venezuelan product ) a bit like the government had
pressured Glencore into accepting Venezuelan product last
April. Exxon rep Augustin Fuentes (protect) told us that
Rappaccioli also broached the possibility of organizing a
buyout of Exxon's refinery. While Rappaccioli had hinted at
this possibility before, Fuentes paid closer attention this
time.

16. (C) Talks with Rappaccioli continued through the week
while other parts of the government tried to apply increasing
pressure on Exxon. At one point, the government filed twelve
claims of tax evasion within five hours. Exxon reps
calculated that the government's tax claims totaled $57
million, the approximate book value of Esso/Nicaragua's
refinery located near Managua.

Misdirection
------------

17. (C) One of these claims of tax evasion involved the
supposed nonpayment of corporate income tax over ten years.
Director General of Taxation Walter Porras publicly stated
that a company like Exxon should be paying the same income
tax that everyone else pays. Under its investment agreement
with the government, however, Exxon pays 25%. The general
corporate tax rate has since been raised to 30%, but the law
allows agreed rates to remain valid. At another point,
Attorney General Estrada questioned whether an investment
agreement signed by Arnoldo Aleman's famously corrupt
Director General for Taxation Byron Jerez should be honored.
Exxon reps inform us Jerez did not sign the agreement, which
dates back to Violeta Chamorro's government, not Aleman's.

All The News That Is Fit To Print
---------------------------------

18. (C) Throughout, headlines raged and talk shows chatted
storms. Minister of Finance Alberto Guevara, Director
General of Taxes Walter Porras, and an assortment of
Sandinista party hacks and diputados continued to rant that
Exxon owed taxes -- all kinds of taxes. Managua Mayor
Marenco claimed that the city's gasoline stations owed
Managua $90 million for unpaid municipal business licenses
over the last 10 years -- the case just happens to be pending
a decision in the Supreme Court. But the propaganda effort
did not seem to carry much weight with the press. In front
page headlines, La Prensa called the seizure "blackmail" and
El Nuevo Diario questioned the ramifications of Exxon
delaying its next shipment of fuel. Through it all, Ortega
refused to comment much more than to say that that "the case
is in the courts." Exxon spokesmen kept repeating that the
assertion that Exxon had failed to pay its taxes was patently
false.

19. (C) At an August 23rd signing ceremony for a U.S. Trade
Development Agency grant to develop a modern ports law, the
Ambassador emphasized the importance of the rule of law, of
trade and investment to growth and development, and what the
United States is doing to help Nicaragua take advantage of
CAFTA. He also mentioned how the Exxon case was detracting
from the image that Nicaragua was a good place to invest. In
comments to the press after the event, the Ambassador
stressed the importance of the rule of law, respect for
private property, and the need for the government to return
Corinto I to Exxon. He continued to encourage both sides to
sit down to settle their differences. The Port Authority
held the signing ceremony at the hotel owned by Foreign
Minister Samuel Santos and Chief Economic Advisor Bayardo
Arce, neither of whom bothered to show. Santos was on the
agenda, but sent his Vice Minister for Development who
nervously mouthed a few words he had scribbled on a quarter
piece of paper.

The Peace Plan
--------------

20. (C) By August 25, it looked as if Rappaccioli and Exxon

had agreed to an orchestrated exchange of letters in a deal
that read like an Israeli-Palestinian peace plan. The basics
of the deal were pretty much the way Exxon had mapped it out
a week before.

21. (C) In the first phase, Exxon would regain control of
Corinto I as the result of the Director General of Taxation
Zepeda's request to Chinandega Judge Toruno to replace Zepeda
with Esso/Nicaragua's Corinto plant supervisor.

22. (C) In the second phase, Exxon would deliver a letter
stating its intention to sell/rent the seven small tanks
located in Corinto I, or to use them to receive Petronic
product. Exxon also would deliver a letter committing to the
purchase of 400,000 barrels of crude oil per month from
Petronic, about 60% of refinery needs. Presumably, Petronic
would source the oil from PDVSA at market prices and sell it
to Exxon. Exxon would transport the crude on its own ships,
something that Exxon had wanted to do all along because PDVSA
is unreliable. In return, the government would commit to
jointly reviewing all tax cases that it had thrown at
Esso/Nicaragua, with a view to resolving any legitimate
claims and dismissing the rest.

23. (C) In the third phase, negotiations on the commitments
that each side had stated in their letters would take place,
in parallel. Exxon's goal is to extract itself from the
government's onerous tax cases and restore a good operating
environment for its business. The government's goal is to
siphon off ALBA funds from the sale of Venezuelan petroleum.

The Conductor Taps His Baton, But No Orchestra
--------------------------------------------- -

24. (C) On August 27, Judge Toruno showed up at Corinto with
an order to reinstate Esso/Nicaragua as the custodian of
Corinto I. In a cooperative manner, Petronic and
Esso/Nicaragua inspected the depot to make sure that its
facilities had not been damaged, and to verify volumes of
Venezuelan fuel. Exxon reps told us that there had been a
few diesel spills. Before the transfer could proceed, Toruno
asserted that the reinstatement of Esso/Nicaragua as
custodian would be conditioned on Petronic's continued
control of the seven tanks filled with Venezuelan product.

25. (C) Exxon refused to allow its Esso/Nicaragua Corinto
supervisor to sign the order. The deal broke down.
Compounding the situation, Energy Minister Rappaccioli had
had flown to Brazil on August 26. He was therefore
unavailable to shepherd implementation of a deal he had
brokered, leaving Vice Minister Lorena Lanza behind to answer
the phone.

26. (C) On August 29, Judge Toruno unilaterally issued a
revised order transferring custodianship to Esso/Nicaragua,
but obligating Esso/Nicaragua to honor Petronic operations on
its property. Exxon again rejected the order and refused to
take control of Corinto I until all non-Esso personnel had
vacated the premises. Exxon also refused to take
responsibility for, or to honor, Petronic contracts that
involved Petronic's continued use of Corinto I. Exxon reps
explained that their refusal is a matter of law, safety, and
ultimately corporate liability. On August 30, Exxon
spokesman Milton Chavez stood up at a press conference in
front of a long list operational requirements that Exxon
follows for safety and liability reasons, and are presumably
ignored by the Petronic usurpers.

27. (C) Exxon continues to pursue a mutually acceptable
solution with the government while it explores legal
recourse. Exxon wants to replace the tax lien on Corinto I
with a bank guaranty; such a guaranty would remove any claim
that the government may have on Corinto I. On August 29,
Chavez and others met with Vice President Jaime Morales
Carazo, who in an impromptu press conference that followed,
offered some support, saying that he thought that the asset
should be returned to Esso.

Exxon's Immediate Concern
-------------------------

28. (C) Of immediate concern to Exxon has been the safety and
security of both its fuel depots at the port, Corinto I and
Corinto II. Former Esso/Nicaragua General Manager Augustin

Fuentes explains that these tanks have been in disuse, some
for considerable time, and are "not suitable for service" of
the kind that Petronic is using them. They require constant
vigilance, he said. Some of the tanks have been used
recently to store lubricants, but not fuel. One Corinto I
tank is larger, capable of storing 30,000 barrels of diesel,
and still in use. It was in fact full with Exxon product
when Petronic took management control of Corinto I.
Moreover, Esso/Nicaragua's fire fighting equipment for both
Corinto I and II is located in Corinto I. This has caused
Exxon to halt all operations at Corinto II for safety reasons.

At the Break of Dawn
--------------------

29. (C) In the early morning ours of August 30, another
Venezuelan vessel crept into the Port of Corinto with another
120,000 barrels of fuel. Petronic still controls Corinto I
and is again preparing to offload Venezuelan fuel.

Comment
-------

30. (C) We strongly suspect that the Sandinista rush to
received Venezuelan fuel is tied to FSLN financing needs,
inter alia, the creation of 17,000 peoples' councils, an
initiative recently launched by President Ortega. Each
Venezuelan ship offloded by Petronic translates directly into
$5 million for the GON, given current ALBA financing terms.
The level of interagency coordination demonstrated by the
government's assault on Exxon and pressure on Glencore
reflects direction from the highest levels of Government and
the FSLN, which, in this case, work out of the same office.
TRIVELLI

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