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Cablegate: Nicaragua: Government Returns Exxon Fuel Depot

VZCZCXYZ0000
OO RUEHWEB

DE RUEHMU #2116/01 2570114
ZNY CCCCC ZZH
O 140114Z SEP 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1279
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1178
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L MANAGUA 002116

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: DECL: 09/12/2017
TAGS: EINV EPET ETRD NU
SUBJECT: NICARAGUA: GOVERNMENT RETURNS EXXON FUEL DEPOT

REF: A. MANAGUA 2055
B. MANAGUA 2016
C. MANAGUA 1952

Classified By: Classified By: A/DCM Jerome Oetgen, Reason: E.O. 12958 1
.4 (b) and (d)

1. (C) Summary. Exxon representatives informed the Embassy
that Esso/Nicaragua's Corinto I fuel depot was returned to
Esso/Nicaragua during the afternoon of September 13. This
triggered the signing of a memorandum of intent between the
government and Esso/Nicaragua, stating Esso's willingness to
negotiate the use of Corinto I for the handling of imported
Venezuelan gasoline and diesel. Exxon also promises to
consider purchasing Venezuelan crude oil for its Managua
refinery through Petronic, Nicaragua's state-owned petroleum
importing and distribution company. In recent days, the
government has reiterated a series of complaints against
Esso/Nicaragua for nonpayment of taxes and environmental
crimes. None seem valid, but this will likely not stop
politicized courts or Ortega-controlled tax institutions from
ruling otherwise, should the government want to reassert
pressure against Esso in future. End Summary.

2. (C) Esso/Nicaragua Country Manager Joaquim de Magalhaes
told Econoff that the return of Corinto I fuel depot to Esso
took place during the afternoon of September 13. De
Magalhaes described the transfer as "uneventful." Judge
Socorro Toruno appeared at the site around 1:00 p.m. to
deliver the order reassigning control of the plant to
Esso/Nicaragua. This triggered the signing of the agreed
upon memorandum of intent between the government and
Esso/Nicaragua regarding future cooperation in the import of
Venezuelan petroleum products.

3. (C) In the end, the government agreed to Exxon's demand to
return Corinto I and requirements to manage potential safety
issues caused by state-owned Petronic modifications to
Esso/Nicaragua's storage tanks. Exxon's inspection Corinto I
storage tanks is still ongoing at the drafting of this cable.
However, De Magalhaes told Econoff that so far there are no
surprises; he is still waiting for the final report.

4. (C) The memorandum of intent addresses Esso/Nicaragua's
willingness to negotiate the use of Corinto I (either through
contract, lease, or sale) to receive imported Venezuelan
gasoline and diesel. Total capacity of the seven tanks in
question is 22,000 barrels. This falls far short of a normal
shipment of between 80,000 and 120,000 barrels, but is what
Petronic lacks at the Port Corinto to do the job. Esso's
eighth tank in Corinto I holds 30,000 barrels, but actively
used. Esso's second facility, Corinto II, handles the
balance and the bulk of Esso's storage needs at the Port of
Corinto.

5. (C) Esso/Nicaragua also promises to consider purchasing
Venezuelan crude oil through Petronic for its Managua
refinery. The refinery processes around 21,000 barrels per
day. we believe that the proceeds of these purchases will be
subject to Venezuela's commitments to ALBA, i.e., 25% of the
revenues routed to an ALBA development bank and 25% routed to
an ALBA fund. We note that the annual oil import bill for
Nicaragua is around $600 million. The Nicaraguan government
wants to source at least 50% of this from Venezuela in a form
subject to ALBA commitments.

6. (C) The government has given no indication that it is
backing away from a series of claims against Esso/Nicaragua
involving tax evasion and environmental crimes. In fact, the
government has recently reiterated these claims. None seem
valid, but this fact will likely not stop politicized courts
or Ortega-controlled tax institutions from ruling otherwise,
should the government want to reassert pressure on Esso in
future. The memorandum of intent includes the notion that
the government will sit down with Esso to work through these
issues.

7. (C) Esso/Nicaragua has provided us with the following
breakdown of government claims against the company, including
charges of environmental crimes and negligence, as of
September 7, 2007.

Tax Assessment Arising from a Fiscal Audit of 2003-2006
--------------------------------------------- ----------

8. (C) Esso/Nicaragua received a request from Nicaraguan tax
authorities to conduct a tax assessment during the period
2003-2006. The scope of the assessment, which is still in
progress, includes the corporate income tax, value added tax,
energy consumption tax, and withholding taxes. The
government later expanded the period of the assessment to
1996)2007, despite the fact that there is four-year statute
of limitations on tax violations. Esso will cooperate with
the government's request for information, but is opposing the
expansion of the assessment period.

Customs Duties $6 Million
-------------------------

9. (C) Nicaraguan Customs claims that Esso/Nicaragua's
refinery owes $6 million in unpaid duties related to crude
oil imports. Esso opposes the claim because petroleum is
exempt by law from import duties. Esso argues that importing
the oil in question before filing for a tax exemption amounts
to administrative problem requiring an administrative
solution. This was the claim that started the attachment
order on Corinto I.

Tax Notice Claiming $6 Million Payment
--------------------------------------

10. (C) The first part of this notice is the government's
claim that Esso/Nicaragua failed to pay $2 million in income
tax during the period 2003-2006. To make this claim, the
government ignores the 25% tax rate that the government
granted to Esso/Nicaragua under the terms of Esso's
investment contract. Instead, the government argues that
today's 30% tax rate should apply, though it was instituted
after the government signed the contract with Esso. Esso
argues that its investment contract is still valid under
Nicaragua's foreign investment law and that the 25% rate
still applies. Esso has letters from tax authorities
acknowledging this point.

11. (C) The second part of this claim adds $4 million in
unpaid energy consumption taxes (IEC) for the period
1995)2007. Here, the government challenges a credits taken
for value added taxes in IEC returns. Esso/Nicaragua plans
to appeal on the grounds that it has obtained government
approval to take these credits. Esso argues that the logic
of the IEC regime was to incorporate various taxes into a
single tax on petroleum products.

Tax Notice Claiming $40 Million in Unpaid Taxes
--------------------------------------------- --

12. (C) This claim centers upon Esso/Nicaragua's supposed
failure to pay $5 million in withholding taxes during the
period 1993-2007. Another $35 million is assessed on owed
interest. Esso claims that it properly paid this tax. Tax
authorities are still reviewing Esso's documentation to this
effect.

Tax Notice Claiming Unpaid Municipal Taxes of $5 Million
--------------------------------------------- -----------

13. (C) In a long standing dispute, municipal authorities
charge that Esso/Nicaragua, Shell, Texaco, and Petronic
should pay a municipal business license fee assessed as a 2%
tax on sales. The companies lost their appeal, but
petitioned the Supreme Court, where a final decision is
pending. The companies are braced for defeat, but argue that
the law states that the sale of petroleum products is exempt
from all municipal taxes. Esso's share is $5 million.

Environmental Crime ) Puerto Sandino
------------------------------------

14. (C) The government has charged two Esso/Nicaragua
executives with criminal negligence for the (severe) weather
related spill of oil residue during contracted fuel tank
cleaning in October 2006. Esso has fully cooperated with
authorities in cleaning up the spill and monitoring clean up
activities. The area has been thoroughly cleaned and
certified by the responsible environmental agency. No major
or irreversible damage has occurred. The six months
limitation for a speedy trial has lapsed, but since December
2006 the two Esso executives are prevented from departing the
country.

Environmental Negligence ) Oil Pipeline
---------------------------------------

15. (C) Vandals cut the oil pipeline leading from the Port of
Sandino to Esso/Nicaragua's refinery in Managua. Esso
promptly notified authorities, filed a police report, and
began clean-up of the area. Nonetheless, the Municipality of
Managua fined Esso, and the Ministry of the Environment and
Natural Resources is initiating an administrative charge
against Esso.
TRIVELLI

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