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Viewing cable 06DAKAR1100, WHAT DID SENEGALESE DO BEFORE THEY HAD CANDLES?;

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Reference ID Created Released Classification Origin
06DAKAR1100 2006-05-10 08:01 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Dakar
VZCZCXRO9265
RR RUEHPA
DE RUEHDK #1100/01 1300801
ZNR UUUUU ZZH
R 100801Z MAY 06
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC 5062
INFO RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
RUEHZK/ECOWAS COLLECTIVE
UNCLAS SECTION 01 OF 04 DAKAR 001100 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EB/IFD/ODF, EB/ESC/IEC, AF/EPS AND AF/W 
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS 
USDOC FOR 4510/OA/PMICHELINI, AROBINSON-MORGAN/KBOYD 
USDOC FOR 3131/CS/ANESA/OIO/DHARRIS/GLITMAN/MSTAUNTON 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EPET SG
SUBJECT: WHAT DID SENEGALESE DO BEFORE THEY HAD CANDLES?; 
SENEGAL'S WORSENING ENERGY SITUATION 
 
 
1.  (U) SUMMARY: The latest political joke making the 
rounds in Dakar these days is: "What did Senegalese do 
before they had candles?  ...  They had electricity." 
Unfortunately, Senegal's chronic electricity shortages are 
no laughing matter and continue to have adverse economic, 
social and political repercussions.  Two important 
factors, which came to a head simultaneously to spur the 
crisis, were: a) the inability of the Government of 
Senegal (GOS) to pay subsidies on butane gas to the the 
Societe Africaine de Rafinage (SAR), the country's only 
oil refinery, which resulted in the recent shut down of 
its operations, and b) the failure of Senegal's national 
electricity company Senelec to honor it financial 
commitments to its two main suppliers: Shell, which 
provides 60 percent of its fuel needs, and Total. 
 
2.  (U) Because of its financial shakiness, SAR's Board of 
Directors recently refused to rubber stamp the refinery's 
long-standing practice of buying crude oil on debt. 
Shell, simultaneously cut off its fuel supply to Senelec 
and threatened to stop providing fuel on credit as Senelec 
had racked up a USD 10 million debt with Shell.  The 
actions taken by SAR's Board of Directors and Shell have 
had a ripple effect on Senegal's entire energy sector, 
most visibly causing electricity outages in businesses and 
households for several hours a day. 
 
3.  (U) Although quantitative estimates vary according to 
source, the situation is without doubt, causing a 
noticeable decrease in industrial output and commercial 
sales and will impede GDP growth.  As the 2007 
presidential and legislative elections loom, an economic 
slowdown could weaken the political resolve needed to push 
ahead with necessary economic reforms. 
 
4.  (U) Although the GOS has paid an announced USD 30 
million on its outstanding debt to SAR, which has enabled 
the refinery to resume the importation of crude oil, 
discussions are underway on the remaining outstanding 
debt, which is estimated to be approximately USD 130 
million.  With World Bank support, the GOS has hired an 
outside consultant to reconcile the discrepancies 
surrounding the financial dispute between the GOS and SAR, 
and assist the GOS with harmonizing the price structure 
within the petroleum industry.  However, given that SAR 
and the oil oligarchs (Total, Shell and Exxon/Mobil) 
control the petroleum scene in Senegal, the GOS, caught 
between a rock and a hard place with little wiggle room, 
is completely at the mercy of SAR and its shareholders -- 
Total, Shell and Exxon/Mobil.  END SUMMARY. 
 
POWER OUTAGES IN DAKAR AND OTHER CITIES 
--------------------------------------- 
5.  (U) Long power outages struck Senegal hard this last 
quarter, causing serious concern about potential economic 
and political shocks.  With outages extending 12 to 15 
hours in most areas of Dakar and in secondary cities, 
businesses and households alike have become more 
vociferous in their complaints.  Reports on the blackouts 
appear daily in the press.  Generators and candles have 
become two of the most sought after commodities, with 
cheap Chinese generators flooding the market.  Reportedly, 
one can buy a small generator for as little as USD 300 to 
operate a tailor shop.  Businesses that could tolerate 
short outages in the past must now either invest in their 
own power sources or shut their doors.  According to local 
reports, the outages have contributed to the closure of 
many small and medium-sized enterprises (SMEs) in the food 
processing, textile and tourism sectors.  Larger companies 
are reporting declines in output of upwards of 30 percent 
and have had to begin rolling brownouts at their 
manufacturing facilities to be able to continue to 
manufacture.  Senegalese garment manufacturer Indosen has 
released more then 1,000 permanent and temporary workers. 
 
DELINQUENT PAYMENTS: GOS, SENELEC, AND OIL RETAILERS 
--------------------------------------------- ------- 
6.  (U) The GOS and Senelec are embroiled in a number of 
financial disputes with the oil suppliers, which have 
resulted in seriously weakening Senegal's economic 
development.  The Government began subsidizing butane in 
1973 in response to a World Bank effort to fight 
desertification and deforestation.  While the GOS 
continues to subsidize the price of refined petroleum 
 
DAKAR 00001100  002 OF 004 
 
 
product and butane gas, the Government halted its subsidy 
payments to SAR approximately seven months ago.  The GOS 
claims that SAR and the distributors of butane gas have 
not provided them with invoices for payment.  The GOS has 
already paid SAR USD 30 million; SAR reports that the 
Government still owes USD 130 million, which includes 
interest.  Though the GOS challenges this figure, it has 
agreed to pay USD 79 million (CFA 42 billion) toward the 
debt.  Negotiations are in progress between the two 
parties as an independent Canadian firm assesses the 
dispute with supported from the World Bank.  Hired by the 
GOS, the Canadian firm has also been asked to audit the 
price structure of imported oil and to analyze the 
government's indebtedness to SAR.  Once the independent 
consultant has reviewed SAR's claim, the GOS has said that 
it stands ready to pay the entire USD 49 million still 
owed.  (COMMENT: Based on rough estimates, outstanding 
subsidies for butane gas alone are approximated at USD 50 
million of the GOS debt to SAR.  SAR's shareholders are: 
Total 54.4 percent, Shell 23.8 percent, Exxon/Mobil 11.8 
percent, and Petrosen 10 percent.  SAR has a nominal 
capacity to refine 17,000 barrels/day, or approximately 1 
million tons per year, and supplies the national market 
and in part, the petroleum needs of neighboring countries. 
END COMMENT.) 
 
7.  (U) The accumulation of the GOS' unpaid subsidies has 
weakened SAR's financial standing, forcing it to absorb a 
portion of the difference between buying petroleum at 
world market prices on the spot market, and selling gas 
and refined petroleum products to domestic customers at 
lower prices, fixed by the Government.  Industry sources 
estimate that SAR currently owes USD 160 million to the 
banking sector, which is separate from the government 
debt.  Rumors abound that SAR is trying to squeeze the GOS 
by artificially inflating the amount that the Government 
owes to cover SAR's debts to the banks.  Since the end of 
2005, SAR's Board of Directors has refused to rubber stamp 
SAR's long-term practice of buying crude oil on bank 
credit. 
 
8.  (U) Shell, on the other hand, which provides 60 
percent of Senelec's petroleum needs, cut off its fuel 
supply because of outstanding payments and has imposed an 
USD 11 million credit limit on Senelec.  Once this 
threshold is reached, Shell simply halts the supply of 
petroleum to Senelec.  Faced with this unprecedented 
dilemma, Senelec has turned unsuccessfully to SAR and 
Total to secure fuel on credit.  Senelec's total debt to 
Shell and Total amounts to estimated USD 50 million. 
Exxon/Mobil stopped supplying fuel to Senelec in 2005 due 
to similar issues related to non-payment. 
 
9.  (U) Senelec is the biggest consumer of petroleum 
products in Senegal, averaging 400,000 to 500,000 
tons/year.  SAR cannot supply more than 25 percent of 
Senelec's needs. 
 
GE/GTI DESERVES PART OF THE BLAME 
--------------------------------- 
10.  (SBU) Senelec's Director General Samuel Sarr has 
publicly accused GE/GTi, the U.S. independent power 
producer (IPP) of being partially responsible for the 
outages.  GE/GTi has attempted to refute Senelec's 
accusations, indicating that when operational, GTi 
supplies only 22 percent of Senelec's normal load.  (NOTE: 
GE/GTI halted production on December 26, 2005 and invoked 
the "force majeure" clause in the "Power Purchase 
Agreement" (PPA), due to a fire in its gas turbine, which 
severely damaged its operations with an estimated loss of 
USD 2 million.  GE/GTi has made insurance claims for the 
damaged equipment, and has faulted Senelec's earlier power 
outages and surges for the fire.  On May 2, 2006, GE/GTi 
resumed operation of its 35 MW gas turbine and its 15 MW 
steam turbine to add its full 50 MW to Senelec's grid. 
END NOTE.) 
 
11.  (U) In the meantime, one of Senelec's 30 MW plants at 
Cap de Biche has gone down.  While reasons for the 
shutdown are unknown, obsolete equipment is probably to 
blame, according to industry outsiders. 
 
OIL PRICE STRUCTURE ANOTHER SOURCE OF TENSION 
--------------------------------------------- 
 
DAKAR 00001100  003 OF 004 
 
 
12.  (U) Senegal's price structure of petroleum products 
is rigid.  It is composed of a number of price elements 
that can be divided into international and domestic.  The 
international element or Basic Fuel Price (BFP) is based 
on an import-parity principal, which is a fixed price and 
is a major source of contention between the GOS and the 
oil suppliers: Shell, Total and Exxon/Mobil.  The domestic 
elements, including port rights and a value-added tax 
(VAT), are harmonized community taxes set by the West 
African Monetary and Economic Union (WAEMU or UEMOA). 
Within the current price structure, a 53.30 percent tax on 
premium grade gasoline and a 38.8 percent tax on diesel 
are deposited directly into Senegal's national treasury. 
The price at the fuel pump reflects changes in world 
market prices or on the BFP, but Senegalese consumers have 
been relatively shielded by recent price hikes due to the 
GOS' subsidies on every liter of gas sold at the pump. 
When the GOS does not pay subsidies, the entire energy 
sector enters a state of disarray as demonstrated by 
recent developments.  As the price of crude oil has 
increased, the GOS is having to revise its price structure 
every four months and raise the price at the pumps. 
However, the distributors are not realizing any gains from 
the price hikes due to the BFP ceiling. 
 
13.  (U) While the GOS attempts to protect consumers at 
the pump, distributors claim that the current price 
structure is artificial and that it hampers the 
development of the retail petroleum sector.  Due to thin 
profit margins under the current price structure, 
distributors claim that they are not interested in 
investing in further capital improvements.  Nor are they 
inclined to bring in more product than absolutely 
necessary.  Whereas jet fuel and marine fuel are not 
regulated, companies like Exxon/Mobil claim to be focusing 
their attention to this "international trade" and not on 
stockpiling refined product for local consumption due to 
the BFP ceiling.  Senegal's six, networked storage 
facilities are owned by Total, Exxon/Mobil and Shell.  Oil 
suppliers, authorized since 1998 to import and stock 
refined petroleum, are technically required by the GOS to 
maintain a security stock of 35 days. (COMMENT: 
Exxon/Mobil sources find this proposition unrealistic, 
arguing that Senegal does not have a storage capacity to 
maintain a 35-day security stock.  END COMMENT.) 
 
14.  (U) The petroleum suppliers are calling for price 
liberalization to ameliorate the energy situation in 
Senegal and demand that the import-parity principal be 
aligned with the European/American oil commodity market 
price instead of that set by the Mediterranean oil 
commodity market, for which the ceiling is substantially 
lower than the market price set within the 
European/American oil commodity market.  According to 
Senegal's Ministry of Energy, the international oil 
suppliers (Shell, Total, and Exxon/Mobil) would gain an 
additional USD 15 million annually if the GOS were to 
switch to the European/American price standard. 
 
LIGHT AT THE END OF THE TUNNEL 
------------------------------ 
15.  (SBU) If the World Bank-financed Canadian auditor 
does not recommend aligning the import-parity price with 
the European and American market price, SAR and the main 
distributors (Total, Shell, and Exxon/Mobil) have 
threatened to cease their operations in Senegal.  GOS 
officials take the threat seriously, are in regular 
discussions with the petroleum suppliers to keep the lines 
of communication open, and hope to avert a complete 
shutdown.  The Canadian consultant is expected to complete 
his assessment by the end of May 2006. 
 
16.  (U) On April 23, 2006, the GOS and the oil suppliers 
reached a consensus and raised the fuel price at the pump 
by 3.6 percent, from CFA 602 to CFA 624 per liter (USD 1 = 
cfa 515) for premium grade gasoline.  For diesel product 
there was a 4.8 percent increase, from CFA 514 to CFA 539 
per liter.  Despite the increase in prices at the pump, 
petroleum suppliers will not see an increase in their 
coffers though. 
 
17.  (U) On a related note, the GOS through Petrosen is 
planning to purchase Exxon/Mobil's 11.8 percent share in 
SAR at a cost of USD 2.5 million.   Additionally, it is 
 
DAKAR 00001100  004 OF 004 
 
 
reported that the GOS is pressuring Total to sell 11.8 
percent of its shares to Petrosen to make the GOS the 
second largest shareholder in SAR after Total, thereby 
increasing the GOS' influence in the refining sector. 
Carmello Sagna, Director of National Committee of 
Hydrocarbons, criticized such a move on the grounds that 
GOS does not have enough financial muscle to contribute to 
the necessary overhaul and maintenance required of the 
refining sector.  He argues that the GOS should focus on 
building more storage facilities and on liberalizing the 
imports of refined petroleum products to local 
distributors such as Elton, Touba Gaz and others. 
 
COMMENT 
------- 
18.  (U) The significant deterioration of Senegal's energy 
sector over the last few years is negatively affecting its 
economy, which has been on a ascending path since 1994. 
Although quantitative estimates vary according to source, 
the power shortages without doubt, are causing business 
losses of output and sales, and will contribute to a 
slowdown in GDP growth. 
 
19.  (U) As the 2007 presidential/legislative elections 
approach, there is also the political impact to consider. 
Both the GOS and Senelec are under pressure to find a 
solution and are finally trying to schedule power outages 
to enable people to plan their activities around them. 
However, the situation will only be a short reprieve if 
the current price structure is not corrected.  Energy 
demand will continue to grow as the economy grows and as 
the Government expands electricity availability throughout 
the country.  If the Government fails to implement new 
sustainable, long-term energy policies in the near future, 
Senegal will plunge into another electricity crisis within 
the next year or two. 
 
20.  (SBU) Post will report septel on the impact of 
Senegal's energy crisis on the local business community 
and Senegal's GDP growth, as well as the impact on 
neighboring countries.  Post will also address Senegal's 
medium and longer-term proposals to address this crisis. 
In the short term, President Wade has reportedly sought a 
diplomatic solution by asking President Chirac to weigh in 
with French petroleum supplier Total, SAR's major 
shareholder, and Wade also found some relief when Morocco 
agreed to provide refined fuel to Senelec in April.  END 
COMMENT. 
 
JACKSON