VENEZUELAN OIL PRODUCTION: A LOOK AHEAD FOR 2004

C O N F I D E N T I A L CARACAS 000101

SIPDIS


NSC FOR TSHANNON
ENERGY FOR D.PUMPHREY AND A. LOCKWOOD

E.O. 12958: DECL: 01/07/2014
TAGS: EPET VE
SUBJECT: VENEZUELAN OIL PRODUCTION: A LOOK AHEAD FOR 2004


Classified By: Amb. Charles S. Shapiro; reasons 1.4 (b) and (d)

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SUMMARY
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1. (C) Despite a number of optimistic predictions that
Venezuelan oil production will increase by the end of 2004
(which seem largely to be attributable to the success of
Venezuelan lobbying efforts in the U.S.),our sources in
Venezuela are not as sanguine. While some believe that
Venezuela's 2004 production can be expected to remain roughly
in the 2.5-2.6 million b/d range where it is generally
believed to be at the current time, there are others who
believe that, in the absence of significant investment either
on the part of PDVSA itself or the international oil
companies, Venezuelan production could drop to as little as
2.0-2.2 million b/d by the end of 2004. PDVSA President Ali
Rodriguez announced January 5 that PDVSA will boost spending
in 2004 with investment of $6 billion out of a total budget
of $9.5 billion. If the budgeted money is actually spent,
PDVSA may yet be able to arrest the decline, although it
faces a tough job. End Summary.

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GOV STAYS ON MESSAGE
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2. (SBU) On January 7, PDVSA spokesmen informed visiting U.S.
Congressional staffers that daily production is 3.4 million
b/d including condensates, natural gas liquids, and the heavy
crude processed into Venezuela,s patented Orimulsion fuel.
Despite this posture on the part of the GOV as well as the
success of its lobbying efforts in the U.S. (we have seen at
least one New York bank analysis stating that production will
increase to 2.9 million b/d by the end of 2004),local
industry sources continue to be skeptical. With the
opposition's competing oil production report not yet out for
the month of December, the most recent hard numbers come from
the November report which maintains that production in the
eastern and western production areas was 1,750 million b/d
and 830,000 b/d respectively for a total of 2.58 million b/d.
(Note: these are numbers for crude production and do not
include condensates and the other products now included in
the GOV numbers. In the past, these were not customarily
included in Venezuela's production numbers. If PDVSA's
current methodology were used, the opposition estimate might
look more like 2.8 million b/d. End Note.) While production
in both areas appears to have stabilized, the report asserts
that PDVSA's own production (1.62 million b/d out of the 2.58
million; production by international operators would be
956,000 b/d) continues to drop slowly.

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HOW LOW WILL IT GO?
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3. (C) Some local sources, such as a consultant who works
closely with former PDVSA President Luis Giusti, believe that
Venezuela's 2004 production will remain roughly in the
2.5-2.6 million b/d range (without counting condensates,
etc.). They believe that modest production increases by the
four "Strategic Associations" (i.e., extra heavy crude
upgrading projects) as well as by international companies
working in Venezuela under operational agreements will serve
to make up for continuing losses in PDVSA's own production.


4. (C) ExxonMobil de Venezuela President Mark Ward, however,
argues that production will continue to decline. Ward, who
believes national production has already fallen to or below
2.5 million b/d, told econoff to remember the fundamentals of
reservoir decline in Venezuela, i.e., a 20-25 percent annual
decline rate that can only be overcome by continuous
investment in maintenance of existing projects and
development of new ones. With fields that are generally
believed to have been operated at the maximum rate in 2003,
Ward speculates that the 2004 decline rate may be worse than
normal. Ward adds that he sees no evidence of concerted
action by PDVSA to address the fundamental issues facing a
production operation, i.e., a lack of maintenance of both
reservoirs and support systems as well as the failure to do
enough workovers and drilling to support old or new
activities. Ward is also skeptical that production increases

by international operators will be sufficient to maintain
current production levels.

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SOME IOC'S CAN DO MORE
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5. (C) In a January 6 conversation, Joaquin Moreno, President
of Shell Venezuela, confirmed to econoff that Shell has
increased its production of valuable light crude from the
Urdaneta West field in western Venezuelan to 53,000 b/d.
Moreno added that PDVSA is anxious to receive as much oil as
Shell can produce and that he expects production from the
field to increase to as much as 60,000 b/d in 2004.
ChevronTexaco President Ali Moshiri then commented to econoff
that, with oil at $34/barrel, all the international oil
companies are anxious to produce as much as they can -- or as
much as PDVSA will allow or can accept. Moshiri, however,
pointed to another problem -- infrastructure. According to
Moshiri, ChevronTexaco's Boscan field in western Venezuela is
currently producing 115-118,000 b/d. If PDVSA were to ask
that Boscan production be increased to 130,000 b/d
ChevronTexaco could do it quickly, he added, but PDVSA would
be unable to lift the crude. Moshiri underlined that the
infrastructure must be there to handle the product, marketing
and transportation. He said that chaos still reigns in
PDVSA's crude trading and shipping functions and that the
current inefficient system can only handle a maximum of
2.5-2.6 million b/d.


6. (C) For his part, ExxonMobil's Ward acknowledged that
there will be "some small incremental increases from the
IOC's," but he does not believe that the increase will be
enough to offset the natural decline rate. Ward added that
the Hamaca project (ConocoPhillips/ChevronTexaco extra heavy
crude upgrading project; the fourth and last of the so-called
"Strategic Associations"),the only big project expected to
come on line in 2004, is already producing crude at or close
to what will be its base level of production. Further
expansion of this or other of the Strategic Association
projects will be impeded by the fact that they use shared
pipelines and, of course, by the fact that the GOV has not
moved ahead quickly with negotiations to allow expansion of
these projects. (Note: Vice Minister for Hydrocarbons Luis
Vierma informed econoff January 7 that PDVSA will meet with
Total the week of January 12 to discuss the expansion of the
Sincor project, the Total/Statoil Strategic Association.) No
other larger projects are due to be turned on until the
ExxonMobil La Ceiba field and the ConocoPhillips Corocoro
field start production in 2005 (these were both projects
originating in profit sharing deals inked in 1996).

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PDVSA,S PLANS
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7. (C) Long time observers of Venezuela's oil scene, such as
ExxonMobil's Mark Ward, say that Venezuela must invest in the
range of $3-4 billion a year in order to stay ahead of its
decline curve. Ward stated bluntly to econoff that PDVSA
would have to invest $8 billion in 2004 in order to recover
lost production. PDVSA has not made its 2003 spending
figures available yet, although the Finance Ministry has
reported that PDVSA's overall budget was cut by $2.6 billion
from its original $8 billion in 2003. PDVSA President Ali
Rodriguez announced January 5 that PDVSA will boost spending
in 2004. He said that PDVSA's total budget will be $9.5
billion (15.2 trillion bolivars) with investment comprising
$6 billion (9.64 trillion bolivars). However, in a January 7
meeting with U.S. Congressional staffers, Vice Minister
Vierma told econoff that PDVSA's investment budget in 2004
will be $5 billion.


8. (SBU) In an investment summary presented to U.S.
Congressional staffers on January 7, PDVSA claims it will
invest $35.4 billion during 2004-2009. According to the
presentation, about $13 billion will be invested in
production over the next five years. It also predicts that
production capacity will be 5.04 million b/d by 2009. (Note:
In November 2003, PDVSA announced that its 2004-2009
investment program envisioned investing $39 billion to raise
production capacity to 4.8 million b/d in 2009. An earlier
version contemplated an investment of $43 billion to yield a

production capacity of 5.0 million b/d. We are not sure how
an investment program that seems to have been cut by almost
$8 billion according to the January 7 presentation will yield
the same results. It is also worth remembering that, in 1998,
PDVSA was talking about achieving a 6 million b/d capacity by

2006. End Note)


9. (C) PDVSA has also announced that it will itself develop
the Ceuta-Tomoporo field, the crown jewel of possible new oil
projects that had multiple international oil companies lined
up to express their interest. The Ministry of Energy and
Mines had stated publicly in late 2003 that Tomoporo would be
spun off to a third party contractor in a bid process. The
Caracas rumor mill, however, holds that PDVSA President Ali
Rodriguez went directly to President Chavez to protest,
saying that the new PDVSA had to be able to show that it
could take on such a project. PDVSA has also stated publicly
that it will itself develop other major new projects. Where
the money will come from for development of these projects is
unclear.

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COMMENT
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10. (C) PDVSA may yet be able to arrest Venezuela's
production decline if it moves ahead quickly with substantial
investment in maintenance of existing projects and
development of new ones. ExxonMobil's Ward, however,
believes that PDVSA could reach a point where it would be
impossible to invest fast enough to arrest the decline and
save itself. The hard fact is that the 2002-2003 oil strikes
followed on two other events that boded ill for Venezuelan
oil production: 1) the end of an investment cycle by the
international oil companies that had seen some $20 billion in
investment since the early 1990's; and 2) the dimunition of
PDVSA's own investment since the beginning of the Chavez
government. And, of course, the investments by the
international oil companies ground to a halt because of the
changes in the regulatory environment fostered by the Chavez
government. No new projects have been developed since the
passage of the Hydrocarbons law in 2001 and this government's
antipathy towards allowing major new involvement by
international oil companies in the oil sector (as opposed to
off-shore gas projects) seems to continue as the recent
announcement about the Tomoporo field demonstrates. Even if
the political and regulatory environment were to improve
substantially in 2004, there would be a significant lead time
before this would be reflected in improved production numbers.
SHAPIRO


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