Cablegate: Petroleum Sector Update
VZCZCXRO3919
RR RUEHDU RUEHGI RUEHJO RUEHMR RUEHRN
DE RUEHKI #1364/01 2411213
ZNR UUUUU ZZH
R 291213Z AUG 06
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 4690
INFO RUEHXR/RWANDA COLLECTIVE
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE
RHEBAAA/DEPT OF ENERGY WASHDC
UNCLAS SECTION 01 OF 04 KINSHASA 001364
SIPDIS
SENSITIVE
SIPDIS
DEPT PASS TO USTR (WJACKSON), OPIC (JEDWARDS)
E.O. 12958: N/A
TAGS: EPET ENRG ETRD EINV ECON CG
SUBJECT: PETROLEUM SECTOR UPDATE
REF: KAMPALA 981
1. (SBU) Summary. While DRC's petroleum production has
stagnated, international interest in exploring the DRC's
potential reserves has expanded. French company Perenco
currently operates the only two producing concessions,
although the GDRC recently granted three new concessions for
exploration. The Coastal Basin, Central Basin and the Rift
in eastern Congo are the three potential reserve areas,
although very little geological data exists for the latter
two. While the GDRC welcomes investment, its lack of data,
infrastructure, transparency, and knowledgeable government
officials hinder development in this potentially lucrative
sector. End summary.
Current production
------------------
2. (SBU) The DRC's crude oil production, which consists of
one offshore and one onshore concession, averaged about
25,000 barrels of semi-heavy crude per day in 2005, totaling
just over 9.2 million barrels for the year. According to the
Congolese Central Bank, the DRC's 2005 crude oil export
revenue was USD 452.7 million, representing about 22 percent
of total export revenue. (Comment: The DRC's official
statistics are of questionable reliability and should only
serve as general benchmarks. End comment.)
3. (SBU) The French company Perenco operates both
concessions. Chevron-Texaco has a 17 percent interest in the
offshore concession as the result of its 2005 Unocal
acquisition; a Japanese company, Teikoku, owns 32 percent,
and Cohydro (the DRC's petroleum holding company and retail
parastatal) 20 percent. Exploration rights run through 2034.
Chevron's DRC representative says this operation produces
about 14,000 barrels per day, although it produced about
22,000 barrels per day before Perenco's purchase of the
concession from Total in 2000. Production has decreased
because Perenco has not invested in exploration and equipment
modernization and because the global production surge has
tripled the cost of oil rigs. However, Perenco's DRC
director says the company is in the process of cleaning and
modernizing the wells. The GDRC receives about sixty percent
of net offshore petroleum revenues, payable upon each
petroleum sale. Chevron receives 17 percent of the oil
produced, which it sells primarily through its U.S.-based
trading company. The U.S. imported USD 118 million worth of
petroleum from the DRC in 2005.
4. (SBU) Perenco currently produces 9,000 to 10,000 barrels
per day on its 200 to 250 square mile onshore block. Cohydro,
the DRC's petroleum parastatal, has a 15 percent joint
venture interest. Perenco pays the GDRC 12.5 percent in
royalties (payable directly to the DRC's income tax agency)
and about 40 percent of net revenues, payable to the DRC's
Administrative fee collection agency. The exploration rights
run through 2029.
Possible production areas
-------------------------
5. (SBU) The DRC has three actual and/or potential production
areas: the Coastal Basin, the Central Basin and the Eastern
border region (Graben Albertine). Joseph Pili-pili, the
Ministry of Energy's Director of Petroleum Projects, says
that all onshore areas combined may contain an estimated 500
million barrels, although this can be no more than a rough
(and optimistic) guess. Only the coastal basin is currently
being exploited or explored. The 391 square mile offshore
portion, Perenco's concession, includes all of the DRC's
territorial waters. The onshore area, including Perenco's
concession, is an estimated 3700 square miles and is part of
the generally peaceful Bas-Congo province, adjacent to
Angola's Cabinda region.
6. (SBU) A Polish-owned company, King and King, had five-year
onshore exploration rights that expired in late 2005. The
reversion of King and King's rights prompted the
then-outgoing Minister of Energy to split the area into five
blocks and to launch a round of negotiations for them, even
though EconOff was told that King and King is in litigation
with the GDRC over this reversion. The Minister of Energy
KINSHASA 00001364 002 OF 004
granted three blocks to a company called Surestream, (a
company that Perenco's director said is likely to resell its
rights), and one to London-based Soco, a portion of which is
Senegalese-owned. Toronto Stock Exchange-listed EnerGulf
obtained a 260 square mile block that its CEO estimates has
90 million barrels of recoverable reserves. Surestream has
received presidential approval, but EnerGulf and Soco have
not, although EnerGulf's Board Chairman told EconOffs that
his company already paid the USD 500,000 signing bonus. The
World Bank's (WB) Resident Representative, Jean-Michel Happi,
said the IMF and WB asked the GDRC to refrain from signing
contracts in the natural resource sector during the IMF's
Staff-Monitored Program, which will run at least through
December 2006.
7. (SBU) Prospects for Coastal Basin exploration may increase
if the GDRC is able to reach agreement with the Government of
Angola over the proposed Joint Development Zone (JDZ).
Pili-pili said that in 2003 the GDRC and GOA signed a
memorandum of understanding on the JDZ. Although the GOA's
Council of Ministers approved a final document, the GDRC has
not yet done so. Chevron's representative says the current
draft would entitle the GDRC to half of all petroleum revenue
Congolese entities discover within the zone, while the GOA
would receive all proceeds on petroleum that Angolan entities
discover. Part of the delay is undoubtedly due to a
difference in interpretation of the draft accord. According
to the Chevron representative, the Angolans view the
agreement as merely giving the DRC exploration rights and
access to commercial sea lanes, while the GDRC views the
agreement as impacting unclear maritime boundaries. Another
obstacle is an internal GDRC dispute; while the respective
Energy vice-ministers negotiated the agreement, the DRC's
Ministry of Foreign Affairs now wants to take over
negotiations. (Note: Vice President Bemba's MLC controls the
Ministry of Foreign Affairs in the transitional government,
while the PPRD, the party with which President Kabila is
affiliated, controls the Ministry of Energy. End note.)
8. (SBU) The Central Basin stretches across the provinces of
Mbandanka, Bandundu and Equateur. Pili-pili optimistically
asserts that this basin includes the two Kasai provinces and
Maniema province, and that it totals 500,000 square miles.
He also said reserves have recently been discovered in the
Republic of Congo (ROC) near the DRC's border, indicating a
strong possibility of petroleum reserves on the DRC's side,
and that the GDRC has an agreement with the ROC to share data
that comes from sample wells in either country's border
region.
9. (SBU) The Graben Albertine area of eastern Congo runs
along the Ugandan border in North Kivu province and in Ituri
District, consists of five blocks, includes Lakes Albert and
Edward, and covers 31,000 square miles, according to
Pili-pili. This region is virtually unexplored, and its
potential unknown, despite interest over the years from
various petroleum companies including Amoco, Exxon, and most
recently, U.K.-based Tullow Oil. Pili-pili said that the
GDRC launched a tender offer in 2004, and that two Chinese
companies, two Angolan companies and one South African
company made offers but that none ultimately obtained
concession rights. Although there are no plans yet to launch
a new tender offer, the GDRC is negotiating with the Canadian
company Heritage, which is also exploring on the Ugandan side
of the border (reftel).
10. (SBU) Particular interest focuses on potential reserves
under Lake Albert, divided by the DRC-Ugandan border.
According to Jean-Pierre Bemba's Chief of Staff, the GDRC and
GOU have an agreement to share geological data, but there is
no evidence this is occurring. The GOU has also reportedly
tried unsuccessfully to convince the GDRC to have seismic
tests conducted in Lake Albert. In addition to Heritage,
Australian petroleum firm Hardman Resources is exploring on
the Ugandan side of the lake. (Comment: Such exploration
raises potentially sticky border issues. End comment.) The
Ministry of Energy would like to reach an agreement with
Heritage so that it can have data for both sides of the
border, and in turn, possibly mitigate a cross-border
resource-sharing dispute.
Obstacles to investing
KINSHASA 00001364 003 OF 004
----------------------
11. (SBU) Corruption and a lack of infrastructure, data, and
government officials with substantive expertise are all
obstacles to investment. The Hydrocarbon Code and the 2002
Investment Code are supposed to govern petroleum investment,
and there is a separate document outlining steps for
obtaining exploration and exploitation rights. However,
EconOff's and EconCouns' observations indicate that the GDRC
only loosely follows its own stated procedures and that the
concession-granting process is far from transparent.
12. (SBU) Further, the GDRC often fails to respect legal
requirements to retrocede tax revenues back to the provincial
or local levels. Residents of Moanda, the Bas-Congo town
near which Perenco is based, blame Perenco for the resulting
lack of social and infrastructure development, erroneously
believing that Perenco does not pay royalties and taxes due
to the GDRC. Indeed, the separatist group Bunda dia Kongo
has organized river and road blockades to impede Perenco's
operations.
13. (SBU) The GDRC has little reliable geological data,
partly because Cohydro does not use its revenue to improve
its geological database. (Note: Similarly, one oil company
manager said Cohydro is a bloated parastatal that fails to
use its revenue from Perenco - about USD 4.5 million per
month - to develop the company. End note.) Bemba's Chief of
Staff, a former petroleum sector executive, agrees that the
GDRC desperately needs a good databank. Houston-based Fusion
Petroleum Technologies entered into an agreement in 2005 with
Cohydro to conduct an assessment of potential DRC reserves.
According to Pili-pili, the survey will cost Fusion USD 5 to
10 million, which it will recoup by selling the data to oil
exploration companies.
14. (SBU) The GDRC also has little petroleum sector
expertise, which one petroleum sector manager called a "big
mistake," contrasting the GDRC with the Angolan government's
substantial expertise. Part of the reason for this dearth of
a knowledge base is that the Belgians, more interested in the
DRC's mining sector, did not promote petroleum sector
training and education among the Congolese. Another petroleum
sector contact said that the Belgians only drilled a few
sample wells, and oil was not discovered in the DRC until
1969.
15. (U) Further, the DRC lacks a developed infrastructure
able to support substantial exploration and, more
importantly, exploitation. Road and rail transport, water and
electricity are the key underdeveloped sectors, and reliable
telecommunications are also unavailable in many parts of the
country. Poor infrastructure has the greatest impact on
Central Basin exploration because much of that area is in the
country's interior, some of which is essentially inaccessible
equatorial forest. Conversely, the other two regions at least
have access to transport via the Atlantic Ocean on one side
and Ugandan, Rwandan and Tanzanian road and rail systems in
the East. Only two pipelines, both from Matadi to Kinshasa,
exist, although the GDRC has a preliminary plan to develop a
pipeline network to support future Central Basin production.
16. (U) Although the WB and other multilateral and bilateral
donors are pouring millions of dollars into various
infrastructure projects throughout the DRC, Post is not aware
of any efforts particularly targeting development of the
petroleum sector. (Note: Pili-pili told EconOff that the WB
funded petroleum research in the late 1980s, but that civil
unrest in the DRC and discoveries in the former Soviet Union
turned interested companies such as Exxon and Amoco away from
exploration in the Congo. End note.)
Refining capacity
-----------------
17. (U) The DRC has one petroleum refinery, SOCIR, but it
currently functions only as a storage facility, with Swiss
and French managers. The facility was built in 1967 to
refine light crude from the Middle East, with a 750,000
barrels per day capacity. It ceased operations in the late
90s.
KINSHASA 00001364 004 OF 004
Consumption and import
----------------------
18. (U) Chevron's representative told EconOff that the DRC
market consumes about 60-70 percent light crude, and 30-40
percent heavy fuel. The DRC parastatal SEP-Congo imports
petroleum for the western Congo (reftel B); various South
African sources supply Katanga province; and Ugandan,
Rwandan, Burundian and Kenyan sources supply eastern Congo.
An inter-ministerial commission sets the price of petroleum
products, although outside of Kinshasa and Bas-Congo high
transportation expenses cause shortages that frequently force
dealers to sell above the GDRC's fixed price.
COMMENT
-------
18. (SBU) With the high price of petroleum and increasing
stability in the DRC, many exploration companies, including
at least two large American entities, are examining
possibilities here and all along the west coast of Africa.
Until recently, beyond Perenco's concessions only small,
little-known companies have ventured into the sector, while
larger corporations have perhaps wisely been taking a more
cautious approach. End comment.
MEECE