PDVSA PRESIDENT RODRIGUEZ COUNSELS PRAGMATISM

C O N F I D E N T I A L CARACAS 001241 SIPDIS NSC FOR TSHANNON AND CBARTON ENERGY FOR DPUMPHREY AND ALOCKWOOD E.O. 12958: DECL: 04/05/2014 TAGS: EPET PREL VE SUBJECT: PDVSA PRESIDENT RODRIGUEZ COUNSELS PRAGMATISM Classified By: DCM Stephen McFarland; for reasons 1.4 (b) and (d) -------------- SUMMARY -------------- ¶1. (C) In an April 2 meeting with the Ambassador, Petroleos de Venezuela (PDVSA) President Ali Rodriguez counseled a "dose of pragmatism" for U.S. relations with Venezuela. He defended the recent OPEC decision to reduce production but said Venezuela would be able to supply gasoline to the U.S. this summer. He confirmed that Venezuela will swap gas oil and fuel oil for Argentine agricultural products, and disputed press reports that PDVSA may dismiss employees who signed the petitions for a presidential recall referendum. End Summary. ¶2. (C) On April 2, the Ambassador met Ali Rodriguez, the President of Venezuela's state-owned oil concern PDVSA, to discuss issues relating to energy policy and U.S. bilateral relations with Venezuela. The meeting was held at the DCM's residence as Rodriguez had said he did not want to receive the Ambassador at PDVSA or wish to be seen at the Embassy or the Residence. The DCM and Petroleum Attache also participated. -------------- OPEC QUOTA CUT -------------- ¶3. (C) Rodriguez defended the recent OPEC output cut, saying OPEC Ministers had simply ratified the decision taken at the last OPEC meeting. Rodriguez said global crude oil production and demand are balanced but, if anything, supply exceeds demand. In fact, Rodriguez added, he expects that demand and prices will drop in the second quarter. In response to a question about how Venezuela will take a cut in its quota, Rodriguez laughed and said that Venezuela is usually accused of quota busting. In the current situation, with production, he said, exceeding the number quoted by more non-PDVSA sources (i.e., more than 2.5 million b/d), Venezuela will not face these accusations. Rodriguez added that PDVSA itself will take the necessary production cuts although this will, of course, take time to implement. He deflected a question about the possibility of foreign producers sharing in the burden of quota-related production cuts, by saying this would be difficult to implement because of the different contractual terms applying to the foreign operated fields. (Note: Rodriguez's comment that PDVSA itself will take the OPEC quota cut is notable. If Venezuela's production exceeded the 2.7 million b/d OPEC quota level, PDVSA would be likely to request that the foreign operators take cuts. Foreign operators operate fields acquired in three investment rounds in the 1990's. The so-called "Third Round" contracts have terms that obligate them to take OPEC quota cuts. These terms were last applied in early 2002. In August 2002, PDVSA requested companies to increase production to the maximum which, at that time, was believed to be an indication that PDVSA was having problems maintaining its own production. End Note.) -------------- REFINERIES AND GASOLINE -------------- ¶4. (C) The Ambassador then asked Rodriguez about gasoline exports to the U.S. this summer. Rodriguez maintained that Venezuela's refineries will export finished gasoline ) not blending components ) to the United States. He added that PDVSA's senior management will participate in two meetings in April to discuss the company's business plans. An April 14-16 meeting will include a detailed study of the U.S. refinery sector and the gasoline market and a discussion of the investments needed to improve PDVSA's refinery capacity at home and abroad. Rodriguez repeated that PDVSA will invest $5 billion in 2004, although 80 percent of this will be targeted at exploration and production. -------------- OIL FOR FOOD SWAP WITH ARGENTINA -------------- ¶5. (C) The DCM also questioned Rodriguez about his recent trip to the Southern Cone in which he signed an agreement to swap oil for food with Argentina. Rodriguez confirmed that Venezuela plans to ship gas oil and fuel oil to Argentina for use in the power sector that has been badly hit by a lack of investment. He added that an Argentine team would visit Venezuela on April 5 to confirm the details of the swap in which, starting as early as May, Venezuela would receive seeds and other agricultural products in addition to meat. -------------- NO FIRINGS IN PDVSA -------------- ¶6. (C) The Ambassador raised local press reports that have held that as many as 7,000 PDVSA employees who signed the petitions for a presidential recall referendum might lose their jobs. Rodriguez dismissed these reports and said that only about 900 PDVSA employees had signed. He refuted claims that employees would be terminated due to their signatures and said, "people are leaving for normal reasons." He added, however, that he believes there are still instances of "sabotage" within the company. He related a story about a worker in Zulia who had changed welding materials without telling anyone. The result, he said, could have been a grave accident. "For me," Rodriguez said, "this is sabotage." In other comments about PDVSA staffing, Rodriguez said the appointment of the latest PDVSA Board had given him a bigger team and taken some of the pressure off him. Asked about the possible move of CITGO's corporate offices to Houston, he responded that that would depend on whatever enticements are offered by the state of Texas. He noted the logic of CITGO's being located in the capital of the U.S. petroleum industry. -------------- DYNAMICS OF THE BILATERAL RELATIONSHIP -------------- ¶7. (C) Turning to a discussion of the bilateral political relationship, the Ambassador noted recent verbal attacks against president Bush, the Secretary and the National Security Advisor by President Chavez as well as threats to suspend oil shipments to the U.S. Rodriguez responded that Chavez's comments had been intended for a domestic audience. The Ambassador questioned this, stating that Chavez had repeated his allegations against the U.S. to the Caracas diplomatic corps, whom he had summoned for that purpose. Rodriguez then pointed to a meeting between A/S Noriega and Diosdado Cabello in which they had agreed to avoid public comments. After that agreement, said Rodriguez, the GOV had been surprised by comments made by the USG. The Ambassador responded that the USG had also been surprised when National Assembly member Nicolas Maduro had made groundless allegations against the U.S. within days of that agreement. ¶8. (C) Noting that Venezuela supplies about 15 percent of U.S. oil import, Rodriguez counseled a &dose of pragmatism8 in U.S. relations with Venezuela. The Ambassador responded that Washington avoided responding to Venezuelan provocations and has tried to lower tensions. Rodriguez then pointed to the events of April and December 2002, saying that these events and the reaction to them in Washington, had had a profound effect on this government. In recent meetings in Washington, he said, he had felt that he had had a positive dialogue with the Department of Energy while in meetings with the Department of State the tone of that dialogue had changed. ¶9. (C) The Ambassador said Washington is concerned about events in Venezuela. In a democracy, he said, elections can serve as an escape valve. Rodriguez responded that the Venezuelan opposition doesn,t have a policy but an obsession, i.e., getting rid of Chavez. Other than this obsession, it has nothing - no oil policy, no poverty program, etc. - and thus there is no dialogue. Venezuela has many problems and the two sides should be attacking them together. Rodriguez said Venezuela needed to develop new models for its economic, political and social life and get rid of institutions that are worth nothing. Efforts such as diversifying the economy would, however, take time. Rodriguez added that he saw the need to develop a "culture of work" in Venezuela to replace a culture that expects handouts of oil wealth from the state. The Ambassador noted his concern that the GOV has become more authoritarian. Government functions, such as the granting of contracts and documents such as passports, are no longer transparent. Rodriguez responded that only selected people had previously had access to the state. He acknowledged the need for a new ethic but said, "even in the U.S. you can have an Enron." He also acknowledged, however, that the government has made some mistakes and is in too much of a hurry; he observed that the GOV was making some of the same mistakes the guerrillas (of which he was a member) had made in the 1960's and 1970's. -------------- COMMENT -------------- ¶10. (C) This meeting may have been an attempt to convince the USG that it should take a more pragmatic approach to the Chavez government despite the aggressive and insulting tone of the dialogue -- at least on the energy front. Despite Rodriguez's claims to the contrary, we are skeptical that Venezuela will have to cut production in order to maintain its 2.7 million b/d quota. We are also doubtful about Venezuela's ability to export finished gasoline products to the United States. SHAPIRO