US embassy cable - 04DJIBOUTI869

C O N F I D E N T I A L SECTION 01 OF 03 DJIBOUTI 000869 
 
SIPDIS 
 
STATE FOR AF, AF/E AND AF/EPS 
PARIS AND LONDON FOR AFRICA WATCHER 
 
E.O. 12958: DECL: 06/21/2014 
TAGS: ECON, ETRD, PREL, MARR, PGOV, DJ 
SUBJECT: EXXON-MOBIL ON PATH TO SHOWDOWN WITH DJIBOUTI 
GOVERNMENT ON OIL FACILITY CLOSURE 
 
REF: DJIBOUTI 877 
 
Classified By: AMBASSADOR MARGUERITA D. RAGSDALE. 
REASONS 1.4 (B) AND (D). 
 
1. (C) Summary:  Mobil is enroute to a likely showdown with 
the Government of Djibouti over compensation and other issues 
arising from Djibouti's announcement that Mobil must close, 
on environmental grounds, its existing oil storage and 
distribution facility at Djibouti port by May, 2005.  Mobil 
will not accept the Government's requirement that it move its 
operations at that time to new storage facilities at Doraleh 
port, now under construction, and says it will close down its 
Djibouti operations.  Mobil does not support the view that a 
sound customer base exists to justify the move.  It also 
states that the move would require Mobil to join forces with 
a prime competitor, Emirates National Oil Company (ENOC), 
which it is unwilling to do.  It also insists the U.S. 
military based in Djibouti has not helped Mobil by choosing 
to purchase its fuel needs from competing giant Total of 
France.  Mobil has expressed informal interest in offering 
for sale to the U.S. military its current office and 
warehouse space.  End Summary. 
 
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Getting to the Point 
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2. (C) Alain Adam, Director General of Mobil Oil Djibouti, 
met with Ambassador 6/22 following his return that morning 
from three days of talks with Mobil officials in Brussels. 
Adam and his colleagues had discussed the future of Mobil's 
petroleum operations in Djibouti following the government of 
Djibouti's May 10 letter to Mobil, Total and Shell advising 
the three companies that they would be obliged to close their 
oil terminal facilities at the existing port of Djibouti in 
May 2005.  (Ref B) The three companies were offered the 
chance to relocate their services to Doraleh port, now under 
construction, which would involve leasing tanks from port 
shareholder Emirates National Oil Company (ENOC), through its 
subsidiary Horizon Ltd. 
 
3. (C) Adam shared with Ambassador Mobil's official response 
to the May 10 letter, cleared by Mobil's lawyers in Brussels 
and Paris.  Addressed to the Minister of Transports, Elmi 
Obsieh Waiss, the letter made the following points: 
 
--  Closing Mobil's existing terminal would pose grave 
operational problems for Mobil and have adverse consequences 
for Mobil's continued international presence in Djibouti; 
 
-- The 12-month notice to Mobil for implementation of 
relocation is very short given the consequences that could 
accrue to Mobil, in social and financial terms; 
 
-- As requested during the meeting Mobil's representative had 
with the Minister of Energy on May 16, Mobil asks to be 
provided all necessary information, including alternatives, 
in order that it be able to evaluate the operational, legal, 
social and financial implications of a possible closing and 
transfer of its activities; 
 
-- The Exxon-Mobil group questions the reasons which led the 
Government of Djibouti to take its decision and is standing 
by to know the methods the Government will use to ensure full 
compensation to Mobil for any consequences resulting from 
closure of its facility. 
 
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Your Competitor Is Not Your Friend 
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4. (C) Adam told Ambassador that Mobil's competitor Shell 
(UK) had agreed to make the same points in a similar letter 
to the Minister.  (Comment: Contrary to Adam's understanding, 
Ambassador has learned that Shell may actually be leaning 
toward moving to Doraleh.  End comment)   Total would not 
agree to send such a letter, according to Adam, and has 
decided that France's interests in Djibouti would not lead it 
to take a position that might provoke a showdown with the 
Government.  It would re-locate to Doraleh. Commander of 
French Forces in Djibouti, General Gerard Pons, confirmed 
this separately to Ambassador during her weekly meeting with 
Pons. 
 
5. (C) Ambassador queried Adam about the position Mobil has 
decided to take. She advised that by casting its letter in 
the terms that it had, Mobil may have backed itself into a 
corner and created an obstacle to its current and future 
business prospects in Djibouti.  In addition, Djibouti may 
decide not to compensate Mobil or might prolong the issue of 
compensation on technical or environmental grounds. Timing, 
on the other hand, would be of the essence to Mobil, given 
the obligations it would need to settle with its employees 
before completing the shutdown of its operations. 
 
6. (C) Adam replied that Mobil would pursue the case legally 
if Djibouti were not clear on compensation.  He said Mobil is 
adamant that it (a) will not repeat not invest in Doraleh 
because there is not a sufficient customer base to justify an 
investment; and (b) it will not repeat not join with its 
competitor ENOC in any investment scheme.  He said 86 percent 
of Mobil's business in Djibouti is geared to the Ethiopian 
market.  As Ethiopia recently requested "buy-in" into the new 
port at Doraleh (see Ref A), this market share would end. 
Ambassador cautioned that Ethiopia has not moved beyond the 
discussion stage of this request. 
 
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Not Getting the Support 
Required to Stay Alive 
----------------------- 
 
7. (C) Adam also said ten percent of Mobil's business is from 
the Djiboutian government.  As the government is already 100 
million Djiboutian francs (USD 565,000) in arrears to Mobil, 
he had given an order to discontinue all oil supplies on 
credit to the Government effective from June 22nd until the 
arrears are paid. This, he claimed, would put Djibouti in a 
difficult situation in advance of June 27th national day 
celebrations here.  Adam said he expects Djibouti to pay the 
arrears soonest.  Adam continued that it does not help 
Mobil's position that "90 percent" of all business of the 
U.S. military based at Camp Lemonier, under administrative 
support of Brown and Root, is being given to France's Total. 
He said he did not trust Brown and Root's motives. (Comment: 
Ambassador has raised with responsible officials at the Camp, 
on two recent occasions, the issue of the Camp's purchase of 
fuel from Total vice Mobil, a U.S. company. On each occasion, 
the Camp said it had decided to vary its vendors "for force 
protection reasons."  In addition, she was told that Total 
had made certain adjustments more favorable to Camp 
servicing.  End comment.) 
 
8. (C) Adam stated to Ambassador that if the U.S. military 
could use Mobil's office and warehouse facilities at the 
port, Mobil would be interested in selling.  This might 
obviate an eventual showdown with the Government of Djibouti. 
 Adam estimated the value of the site at between USD 10-15 
million dollars.  Ambassador said she could not answer the 
question of U.S. military interest in, or need for, the site 
but would be pleased to pass on his informal offer.  She also 
asked for a site plan and would take a fuller tour at an 
early date.  Adam said Mobil would want to begin negotiations 
with a buyer as soon as possible, which might also include a 
severance package for its 44 employees. 
 
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Comment 
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9. (C) Comment:  Mobil's tank site at the port -- which it 
owns -- could be a potential gold mine.  Embassy has learned 
from another U.S. corporate source (strictly protect origin) 
that the Government of Djibouti is being advised of the huge 
potential value of the existing port site, in the heart of 
Djibouti City, for future development of a residential, 
commercial, or recreational complex.  If true, Mobil may find 
its request for "compensation" for its facilities swiftly 
honored by the Government. 
 
10. (C) Comment continued:  On sale of Mobil's existing 
facilities in anticipation of its departure, the informal 
offer to the U.S. military is an intriguing one.  We will 
pass this expression of interest on to NAVCENT. 
 
11. (C) As for Mobil's future here, this U.S. corporation 
appears to have decided that the existing, or potential 
investment climate in Djibouti would not support long-term 
feasible investment.  We are not sure this is a wise position 
to take at this time, given the new economic momentum in 
Djibouti.  Yet Djibouti lacks oil resources and could offer 
only services primarily as an oil products provider.  Mobil 
may have decided to cut its losses and invest in other 
potentially lucrative exploration markets coming on line 
elsewhere.  End comment. 
RAGSDALE