US embassy cable - 04DJIBOUTI111

C O N F I D E N T I A L SECTION 01 OF 03 DJIBOUTI 000111 
 
SIPDIS 
 
DEPT FOR OES ATTN: FERNANDO ECHAVARRIA; DEPT ALSO 
FOR JEFFREY HAENI; 
DEPT PASS TO USAID FOR GORDON WEYNAND; DOE FOR 
FRANCIS HODSOLL 
 
E.O. 12958: DECL: 01/26/2014 
TAGS: ECON, EFIN, ENRG, SENV, TRGY, EINV, DJ 
SUBJECT: THE IMPACTS OF AFRICAN RIFT VALLEY GEOTHERMAL 
DEVELOPMENT FACILITY ON THE ENERGY MARKET IN DJIBOUTI. 
 
REF: SECSTATE 347715 
 
CLASSIFIED BY: Tim Smith, Charge' AE Djibouti, Reason 
1.5 (B) 
 
1. (U) SUMMARY: The involvement of the African Rift 
Geothermal Development Facility (ARGeo) has the potential 
to bring an end to the stalemate in the negotiations 
between the Government of Djibouti (GODJ) and the private 
American company Geothermal Development Associates (GDA). 
The proposed GDA project at Lake Assal has been in the 
negotiation phase since 1999. 
 
POST'S RESPONSE TO QUESTIONS IN SECSTATE 347715 
--------------------------------------------- -- 
2. (U) A. International aid for geothermal infrastructure 
development in the region is a priority need.  Geothermal 
development, which is extremely capital intensive, is not 
possible without international aid because the Rift Valley 
countries are among the poorest in the world.  This 
assistance to the region would promote coordination, 
stability and collaboration between the countries in 
the region. 
 
3. (C) B. There are no overt barriers which would affect 
the development of geothermal energy.  Djibouti's purported 
advantages for potential investors, including an open trade 
policy, a stable currency, substantial tax breaks, and 
other incentives are less substantial than they may first 
appear.  In practice, the attractiveness of Djibouti for 
foreign investors is greatly marred by the necessity for 
under the table dealings, the fact that virtually all 
economic activity is controlled by government owned 
monopolies, and frequent problems with a corrupt judiciary. 
However, because the high cost of energy exacerbates the 
poverty in Djibouti, there is strong political will to 
develop a cheaper source of energy, including geothermal 
reserves. 
 
4. (U) C. The Ministry of Energy, which has overall 
responsibility for geothermal development projects, has 
repeatedly requested USG technical assistance.  USAID 
technical assistance that clearly identified the potential 
geothermal resources available in Djibouti might assist 
post in supporting its MPP goal of economic development. 
Energy costs are one of the greatest barriers to foreign 
direct investment in Djibouti.  To date, there have been 
only partially funded feasibility studies done by the 
United States Trade and Development Agency (USTDA). 
U.S. Embassy Djibouti does not have any existing resources 
earmarked for geothermal projects. 
 
GOVERNMENT OF DJIBOUTI PERSPECTIVES 
----------------------------------- 
5. (U) In order to more clearly explain the situation 
surrounding the negotiations on the proposed GDA geothermal 
project, below are summaries of the views expressed in 
recent meetings with key government officials involved in 
the project.  These meetings were an effort to gather 
information and brief the new Political/Economic Officer 
on the history and current position of the geothermal 
project in Djibouti. 
 
6. (SBU) MEETING WITH HOUSSEIN RAYELEH, MINISTRY OF 
ENVIRONMENT: TUESDAY, JANUARY 13, 2004. 
Discussed the local dynamics of the geothermal project with 
GDA and the ARGeo conference.  Rayeleh said that the 
Ministry of Environment was doing the planning for the 
ARGeo meetings at the beginning of March because the 
Ministry of Energy did not have the manpower.  Rayeleh 
mentioned that the sentiment in the government was 
favorable to geothermal possibilities, but that there were 
certain officials (namely the director of Electricite de 
Djibouti-EDD, the government run electricity monopoly) 
who were stalling the project because they want to keep 
control of the power and keep the prices high. 
 
7. (SBU) MEETING WITH SECRETAIRE GENERALE ABDI FARAH CHIDEH 
AT MINISTRY OF ENERGY: WEDNESDAY, JANUARY 14, 2004. 
Discussed the GDA project and why it had stalled.  Chideh's 
opinion was that there were several problems with the 
project and that GDA was poorly organized.  First, the 
resources had not been confirmed and there was more research 
needed.  Second, the fact that GDA wanted a signed agreement 
for the exploration and exploitation without proper 
confirmation of the resources was unreasonable.  Third, 
that to request a Purchase Power Agreement (PPA) without 
confirmation of resources, how could GDA know how much it 
would cost for the production per kW.  Fourth, that GDA 
needs to explain more clearly how they will finance the 
project.  Chideh mentioned that GODJ did not have full faith 
that GDA could complete the project because it does not have 
the resources to finance the project itself.  In response to 
the statement, that once the agreements were signed GDA 
would be able to raise the capital necessary, Chideh said 
that all the Ministry asked was that GDA followed the proper 
"internationally recognized methods" for conducting a 
project. Chideh did not elaborate what he meant by this. 
 
8. (SBU) MEETING WITH DIRECTOR GENERAL DJAMA ABDI GUELLEH AT 
ELECTRICITE DE DJIBOUTI (EDD): THURSDAY, JANUARY 15, 2004. 
Guelleh, an engineer by trade, detailed the technical 
problems that have been found in the exploration process 
and why GODJ wanted to do more research on the resources. 
The majority of the discussion was centered around the price 
that GDA wants in the PPA ($0.12 per kW).  He brought up the 
point that GDA sells electricity to power companies in 
Nevada at five cents and those power companies in turn 
sell it at seven cents per kW.  He said that 12 cents was 
too high.  He pointed out that the diesel fuel purchased 
for EDD's electricity production was nine cents per kW. 
He calculated this figure by saying at the commercial price 
of 28 cents per kW, the cost of diesel, including the 33 
percent tax rate on all purchased materials, made up 40 
percent of the total price.  He said that if GDA agreed to 
sell the electricity to EDD at seven cents, he would sign 
tomorrow.  Guelleh seemed to doubt that GDA had completed 
enough research to start production and stated that only 
five million dollars would be needed for the government 
to explore the resources sufficiently.  Guelleh also 
expressed concern over GDA asking the GODJ to sign a 
guarantee for the project and that if GDA failed, Djibouti 
would have to pay.  Econ/Commercial Assistant, Abdi 
Mahamoud Abdi, said that this was apparently an issue 
last year and had been resolved because funding had been 
found from other sources.  To this, Guelleh responded that 
if that was the case and GDA would agree to seven cents, 
the project should go ahead. 
 
9. (SBU) MEETING WITH DIRECTOR GENERAL DR. JALLUDIN MOHAMED 
AT CENTRE D'ETUDES ET DE RECHERCHES DE DJIBOUTI (CERD): 
WEDNESDAY, JANUARY 21, 2004. 
Dr. Mohamed detailed the research and exploration process 
of geothermal energy in Djibouti since before the country's 
independence.  Included in his history of the exploration 
were the reasons each project attempt had been abandoned. 
The most common reason given was lack of funding or interest 
from international investors. He said that the deeper 
reserve at Lake Assal, which has the best energy potential, 
was abandoned because the water had such a high salt content 
that scaling and corrosion were an obstacle that could not 
be overcome due to the sheer cost of the potential solution. 
Dr. Mohamed explained that the second reserve at Lake Assal 
has not been tested for how much potential energy it could 
produce, but that the problem of scaling and corrosion 
would not be a factor.  In answer to the question of why 
there were such differing answers as to the reason the 
project had stalled from the other key players in the 
geothermal project, Dr. Mohamed replied that his opinion 
was that it was not a matter of ulterior motives, but more 
a matter of confusion.  Dr. Mohamed explained that Djibouti 
has not had any experience with private investment 
negotiations and that much confusion has been caused by a 
lack of knowledge of the process.  His opinion was that 
the negotiations needed to be brought to the table for a 
fresh start and that with the aid of the ARGeo project 
expertise, the different concerns would be easily 
alleviated. 
COMMENT 
------- 
10. (SBU) Post feels that the information gathered in the 
above meetings does not fully explain the stalemate in the 
geothermal project.  Background information on the 
Secretary General of the Ministry of Energy and the 
 
SIPDIS 
Director of EDD lead post to believe that their intentions 
are not devoid of self-interest and the reasons for the 
delays may go beyond the concerns they expressed.  EDD's 
Djama Guelleh received $2 million in emergency Economic 
Support Funds (ESF) to pay back oil fees in April of 2003. 
Guelleh is the cousin of the President of Djibouti, speaks 
impeccable English, and due to his influence is probably 
the center of both the problem and resolution. 
 
11. (SBU) Post lacks the necessary technical expertise to 
evaluate figures given us by the various government 
officials.  Post is also lacking the GDA point of view 
and their expertise in the geothermal field. In order to 
find the truth of the matter, the two halves of the story 
are needed.  The outside influence and expertise provided 
by ARGeo may be the best hope for forward movement on 
this project, as it may clearly delineate the obstacles 
in place.  END COMMENT. 
SMITH