EXXONMOBIL: STAYING THE COURSE IN VENEZUELA

C O N F I D E N T I A L CARACAS 002740

SIPDIS


NSC FOR TSHANNON AND CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD

E.O. 12958: DECL: 08/19/2014
TAGS: EPET ENRG VE
SUBJECT: EXXONMOBIL: STAYING THE COURSE IN VENEZUELA

REF: CARACAS 2570

Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b)
and (d)

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SUMMARY
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1. (C) With the August 12 signing of the Preliminary
Development Agreement (PDA) for a giant petrochemical
project, ExxonMobil finally looks to have overcome the
disappointment of being shut out of the Mariscal Sucre
natural gas project in 2002. Econoff met July 22 with
ExxonMobil de Venezuela President Mark Ward to review the
status of company projects. Cerro Negro, the company's
flagship extra heavy crude project, is operating well and
Ward hopes shortly to receive approval to move ahead with
debottlenecking the project upgrader. ExxonMobil will begin
a long-term production test in September on wells in the La
Ceiba field while it has also submitted a joint development
proposal to PDVSA outlining how the field could be developed
in concert with PDVSA's Ceuta-Tomoporo field. Ward
emphasized that ExxonMobil is interested in Venezuela over
the long term, and particularly in big projects that would
play to ExxonMobil's strengths. End Summary.


2. (SBU) On August 12, ExxonMobil de Venezuela President
Mark Ward signed the PDA for a $3 billion petrochemical
project that has been under discussion with the GOV for nine
years. In a July 22 meeting, Ward anticipated that the
Preliminary Development Agreement (PDA) would soon be signed.
He added that a meeting might be arranged between President
Chavez and ExxonMobil Chairman Lee Raymond in early October
to discuss further that project. Ward also briefed econoff
on the status of other ExxonMobil projects in Venezuela which
range from the 25 percent share the company has in the 16,000
b/d Quiamare-La Ceiba field (operated by Repsol) to the
multi-billion dollar Cerro Negro project.

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CERRO NEGRO
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3. (SBU) Ward reported that ExxonMobil is pleased with the
operation of its flagship Venezuelan project, Cerro Negro,
which currently upgrades 120,000 b/d of extra heavy crude
into 110,000 b/d of syncrude. (Note: Cerro Negro is one of
the four so-called "Strategic Associations" in which various
international oil companies partner with PDVSA to exploit the
extra heavy crude of Venezuela's Orinoco heavy oil belt.)
Ward is hopeful ExxonMobil will receive approval "within
weeks" from the GOV to proceed with debottlenecking the
project upgrader to increase its capacity by 20 percent to
some 145,000 b/d of extra heavy crude.


4. (C) While Ward underlined that the existing Cerro Negro
contract covers debottlenecking and that he nominally only
needs construction permits from the Ministry, he acknowledged
an on-going discussion with the GOV about royalty payments on
any additional barrels resulting from the debottlenecking.
(NOTE: The royalty for the Cerro Negro project - as with all
the Strategic Associations - is currently one percent. This
was agreed by the GOV (pre-Chavez) as an incentive for
development of these multi-billion dollar projects. The
royalty holiday lasts for nine years or until the project has
re-couped three times its investment level, whichever comes
first.) Ward said the GOV is pressing for a 20 percent
royalty rate for the additional barrels (the 2001
Hydrocarbons Law allows a 20 percent royalty for extra heavy
crude vice 30 percent for other grades). He said ExxonMobil
would not agree because of the precedent it might set for the
eventual royalty for the project's base production which
ExxonMobil believes should revert to the 16.67 percent
royalty in place at the time the original contract was signed.


5. (C) Turning to the issue of field operation, Ward said
associated gas production has built up faster than had been
anticipated. This has, he said, affected all the Orinoco
heavy oil belt projects and now necessitates that Cerro Negro
undertake additional investment in separation and compression
equipment and a pipeline. Cerro Negro is currently


delivering 20 million cubic feet per day (mcfd) to gas to
PDVSA but Ward anticipated that this would increase to 100
mcfd within two years. He added that ExxonMobil is currently
recovering its costs from the gas sales, which is "the most
that can be expected with a monopoly buyer."


6. (C) Ward anticipates that both the gas handling and
debottlenecking projects will cost $150 million apiece. He
hopes to start the gas project at the end of 2004 and the
debottlenecking in early 2005. If so, the new production
would come on-line in the first quarter of 2006. Ward also
informed econoff there will be a 30-day shutdown for
maintenance of the Cerro Negro upgrader in mid-2005. Field
production will also be shut-in for 12 days; the other 18
days of production will be sold to PDVSA as heavy oil.


7. (C) Finally, Ward acknowledged that ExxonMobil has begun
consideration of a Cerro Negro II which could be supported by
the existing concession area. The question, he said, is what
level of upgrading would be demanded by the GOV and whether
it would be commercially viable. (Note: Cerro Negro
produces a 16 degree API syncrude, the lowest of the four
projects.) Although ExxonMobil has agreed to study the
possibility of applying enhanced oil recovery techniques,
Ward said bluntly that it makes little sense for Venezuela -
with 300 million barrels of recoverable reserves of extra
heavy crude ) "to spend even one dollar more than it needs
to increase recovery rates." (Comment: Ward's skepticism
about the economics of increasing the oil recovery rate for a
second phase of the Cerro Negro project is directly opposed
to the current energy policy of the GOV which is pressing for
an increase in the current 7-10 percent recovery rates of the
extra heavy crude projects.)

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LA CEIBA
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8. (C) In September, ExxonMobil will begin a long-term
production test on wells in the La Ceiba field south of Lake
Maracaibo. The La Ceiba project is a risk/profit sharing
agreement inked in 1996 by Mobil. Ward estimates that it is
a 180 million barrel field ("not a company maker.")
ExxonMobil has drilled five wells in La Ceiba and will test
two that are currently producing a total of 10,000 b/d. The
oil will be moved by pipeline to a PDVSA facility in Barua.
While Ward was hopeful that the test would generate
sufficient data to allow the company to decide whether to
move ahead with field development, he was clearly skeptical.
If not, ExxonMobil would be required to drill at least one
additional well and continue testing in order to satisfy its
exploration requirement. Ward said he is concerned about
water in the reservoir. Ward also told econoff that
ExxonMobil has provided PDVSA with a joint development
proposal outlining how La Ceiba could be developed with
PDVSA's nearby Ceuta-Tomoporo field.

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OTHER BUSINESS
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9. (C) In a quick overview of other possible business
opportunities, Ward noted that ExxonMobil would still be
interested in participating in the development of Blocks 2, 3
or 4 of the Deltana Platform offshore natural gas project.
ExxonMobil plans to buy the data packages for whatever blocks
the GOV bids in the Gulf of Venezuela and off Falcon state.
Ward said this would be a natural extension of ExxonMobil's
"play" in Colombia.


10. (C) With respect to downstream business, Ward said the
company is holding its own in the lubricants business. In
terms of the local gasoline market, however, he acknowledged
that ExxonMobil is incurring significant losses because of
the controlled prices. Ward said bluntly that ExxonMobil
will not be willing to ride out a losing business forever and
that the Venezuelan fuels market is simply not sustainable
for foreign companies.

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COMMENT
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12. (C) Ward emphasized that ExxonMobil is interested in
operating in Venezuela over the long term, and particularly
in big projects that play to the company's strengths. With
the successful August 12 signing of the Preliminary
Development Agreement (PDA) for its planned multi-billion
dollar petrochemical project (reftel),ExxonMobil finally
looks to have found such a project in Venezuela and overcome
the disappointment of being shut out of the Mariscal Sucre
natural gas project in 2002. Like its rivals such as
ChevronTexaco and Shell, ExxonMobil has not been deterred by
the ongoing political noise from considering large
investments in Venezuela. Unlike its rivals and true to its
corporate philosophy, however, ExxonMobil has taken a lower
profile and more measured pace.
McFarland


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2004CARACA02740 - CONFIDENTIAL