Identifier
Created
Classification
Origin
04CARACAS546
2004-02-13 20:21:00
CONFIDENTIAL
Embassy Caracas
Cable title:
GROWING PRESSURE FOR RENEGOTIATION OF OIL SERVICE
how-toThis record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L CARACAS 000546
SIPDIS
NSC FOR TSHANNON AND CBARTON
ENERGY FOR D. PUMPHREY AND A. LOCKWOOD
E.O. 12958: DECL: 01/29/2014
TAGS: EPET ECON VE
SUBJECT: GROWING PRESSURE FOR RENEGOTIATION OF OIL SERVICE
CONTRACTS?
Classified By: AMB. CHARLES S. SHAPIRO; REASONS 1.4 (B) and (D)
------
SUMMARY
-------
C O N F I D E N T I A L CARACAS 000546
SIPDIS
NSC FOR TSHANNON AND CBARTON
ENERGY FOR D. PUMPHREY AND A. LOCKWOOD
E.O. 12958: DECL: 01/29/2014
TAGS: EPET ECON VE
SUBJECT: GROWING PRESSURE FOR RENEGOTIATION OF OIL SERVICE
CONTRACTS?
Classified By: AMB. CHARLES S. SHAPIRO; REASONS 1.4 (B) and (D)
--------------
SUMMARY
--------------
1. (C) There are signs that the GOV has started playing
hardball in its efforts to force the oil companies that
signed operating service agreements in the 1990's to convert
these contracts into the majority GOV-owned joint ventures
mandated under the 2001 Hydrocarbons Law. Public claims by
the Minister of Energy and Mines that two companies have
already signed agreements have been disputed but Harvest
International, a U.S. independent, is currently evaluating
two oil and gas fields located close to its existing fields
and hopes to negotiate the first such agreement.
ChevronTexaco, with the largest exposure of any U.S. company,
is dismissive of any efforts by the GOV to bring pressure in
this area but others confirm that in addition to the "carrot"
of potential access to new fields for those companies that
review their contracts, PDVSA has used the "stick" of
refusing to approve capital expenditures proposed by some
operators in their 2004 budgets and setting production
constraints for 2004. For the Chavez government, a win on
forcing companies to migrate into relationships under the
2001 Hydrocarbons Law may be more important than a "few"
incremental barrels from the operating agreements. That
said, we do not at this time expect the pressure to reach the
point where the GOV would outright violate existing
agreements although it could certainly make it more difficult
for the companies to do business. End Summary.
-------------- ---
GOV GETS SERIOUS ABOUT PUSHING HYDROCARBONS LAW?
-------------- ---
2. (C) On January 12, Minister of Energy and Mines Rafael
Ramirez_ said publicly that international operators in
Venezuela will not be able to increase production without
transferring their operating agreements to joint ventures
under the terms of the 2001 Hydrocarbons Law. The Minister's
comments have been followed by reports that PDVSA is not only
refusing to approve capital expenditures proposed by the
operators in their 2004 budgets but is setting production
constraints for 2004. The GOV is also still refusing to
authorize the 2003 transfer of British Petroleum's (BP)
operating agreements for the DZO and Boqueron fields to
French independent Perenco and is reportedly arguing that
while the contracts with BP were grandfathered under the 2001
law, this would not apply if the contracts were transferred
to Perenco. These events have sparked concern that the GOV
has started playing hardball in its efforts to force the
companies that signed operating service agreements in the
1990's to convert these contracts into the majority GOV-owned
joint ventures mandated under the 2001 law.
--------------
BACKGROUND
--------------
2. (U) In the 1990's, PDVSA planned an ambitious expansion
program to capture a greater share of global energy markets.
An economically viable way to achieve this goal was for PDVSA
to enter into operating contracts for the reactivation of
marginal oil fields with foreign investors who had the
much-needed capital. The result was 33 "Operating
Agreements," granted in three investment "rounds." The
foreign investors signed 20-year contracts to develop these
fields at the investors' own expense.
3. (U) Under these contracts, the foreign investors receive a
fee per barrel produced from PDVSA. Against this revenue,
the investors may deduct the operating expenses (i.e, the
"operating fee") incurred during the year. A "capital fee,"
to allow the recovery of capital expenditures incurred by the
foreign investor on behalf of PDVSA, is also recoverable over
ten years according to a complicated formula. The contracts
typically provide for a maximum total fee that may be charged
by the investor and recovered during any given year. Any
fees allowable for the year, but not recovered because of the
imposition of the maximum total fee, are carried forward to
the next year and subject to applicable interest and
inflation rate adjustments until the costs are recovered by
the investor. PDVSA pays royalties on the oil while the
investor pays a 34 percent income tax.
4. (SBU) The Chavez government, however, has rolled back the
expansionary policy of the 1990's and made clear it
particularly dislikes the operating agreement contracts.
This distaste was codified in the 2001 Hydrocarbons Law that
stipulated that future private sector investment in the
Venezuelan oil sector must be through joint venture
agreements in which the GOV will take a minimum 51 percent
stake. The law also increased most royalty payments from
16.67 percent to 30 percent and changed other aspects of the
tax structure. Finally, the joint venture will not be able
to commercialize the oil it produces, which must instead be
sold through PDVSA or some other state entity. Although the
joint venture model would potentially give a company an
equity stake in the oil it produces that it does not have
under the current service agreement model, the companies
claim that the economics simply do not support investment in
projects under the 2001 law. There have, to date, been no
investments under the law and the GOV continues to complain
about the administrative costs of managing the contracts and
that the oil produced under the operating agreement contracts
is "high cost" oil.
--------------
VINCCLER & TEIKOKU DISPUTE MINISTER,S REMARKS
--------------
5. (C) In his January 12 remarks, according to press reports,
Ramirez_ went on to add that two companies, Japan's Teikoku
and Vinccler, a majority Venezuelan-owned company with a U.S.
component, had already negotiated conversion of their
operating agreements to joint venture agreements with PDVSA.
In subsequent conversations with econoff, executives with
Vinccler and Teikoku confirmed on-going discussions with the
GOV concerning new gas (not oil) opportunities in their
fields but denied that any contracts have been signed.
Vinccler Technical Manager Emilio Sanchez_ said the Ministry
had proposed to the company in July 2003 that its current
operating agreement for the Round II Falcon East block be
converted into a gas license for the entire area of the
block. Noting that the field produces less than 1,000 b/d,
Sanchez_ said Vinccler is most interesting in expanding its
business into the production of associated gas and,
eventually, the development of off-shore gas. In these
circumstances, work is ongoing on an agreement to modify the
operating contract into an agreement for associated gas and
liquids, under which Vinccler will be paid a flat fee for the
liquids. Sanchez_ flatly denied, however, that Vinccler would
agree to the 51-49 percent structure mandated by the
Hydrocarbons Law.
6. (C) Matsuro Manabe, President of Teikoku Oil de Venezuela,
confirmed to econoff on January 23 that Teikoku's current
interests in Venezuela are also focused on gas opportunities.
Teikoku currently has two operating agreements: the East
Guarico field acquired in the first round and the second
round Sanvi-Guere field. Production from the two fields
totals about 6,000 b/d. Manabe explained that the company is
already producing associated gas from the East Guarico field
and that seismic data by PDVSA/Teikoku on an adjacent area
north of the field shows great potential for further gas
development.
--------------
A U.S. COMPANY HOPES TO BE THE FIRST
--------------
7. (SBU) A U.S. independent, Harvest International, does hope
to be the first to negotiate a contract under the terms of
the Hydrocarbons Law. Harvest has an 80 percent share in
Benton-Vinccler, that has operated three small oil fields in
southern Monagas state since signature of a first round
operating service agreement in 1992. In November, Harvest
announced that it had signed an agreement with PDVSA to
undertake a six-month evaluation of two oil and gas fields
(Temblador and El Salto) located close to its existing
fields. Any agreement on the two new fields is likely to be
accompanied by re-negotiation of the original operating
services agreement.
8. (C) In a November conversation with econoff, Harvest CFO
Steve Tholen said that Benton-Vinccler has one of the most
profitable operating service contracts in Venezuela. Thus,
it would be a public relations victory for PDVSA and the
Ministry if they were able to announce that Harvest had
agreed its operations could be profitable under the
provisions of the 2001 law. The most complex part of the
negotiation will cover the corporate structure. Tholen
emphasized that Harvest would insist on a structure that
would allow the joint venture to focus on project economics
and would allow Harvest to both book the reserves and have
operating control (i.e., of such issues as the accounting
rules). According to Tholen, Harvest envisions a structure
where a majority government-owned joint venture company would
in turn contract actual field operations to a company in
which Harvest would hold the majority share. Benton-Vinccler
employee John Paul McKee told econoff January 28 that the
transfer of data from PDVSA needed for evaluation of the two
fields has gone more slowly than anticipated but that the
review is on-going.
-------------- ---
LAWYERS AGREE THAT RE-NEGOTIATION WOULD BE TOUGH
-------------- ---
9. (C) Econoff discussed the complexities of re-negotiating
the operating agreement contracts with several local
attorneys whose practices focus on energy law. They all
agreed that it would be particularly difficult to quantify
the sunk costs not yet re-paid under the capital fee. Steel
Hector & Davis attorney Alfredo Anzola, however, confirmed
February 9 that his firm has been contracted to draft a model
joint venture agreement to guide CVP in its discussions with
companies. Anzola added that CVP is "under a lot of pressure
to advance this as quickly as possible" and said the model
agreement would be provided to CVP that day. Anzola
specifically informed econoff that the CVP had said "no" to
what he called "sham structures" that would allow the private
investor to control the joint venture operations.
--------------
CHEVRONTEXACO NOT CONCERNED...
--------------
10. (C) Econoff discussed the issue with ChevronTexaco de
Venezuela President Ali Moshiri who confirmed that he has
been asked informally if ChevronTexaco would be willing to
convert its contracts. (Note: With substantial investment
in the Round Two Boscan field, and the LL-652 field acquired
in Round Three, ChevronTexaco could have more to lose than
any other U.S. company from any push by the GOV to force the
migration of the operating agreement contracts. End Note.)
Moshiri said bluntly that he believes Ramirez_ was simply
trying to make political points in his remarks of January 12.
He added that he believes neither PDVSA nor the Ministry
have legal staffs capable of handling such negotiations.
(Note: Steel Hector & David attorney Anzola confirmed that
the legal staff at CVP are all new hires; he does not know
yet whether CVP will contract out the negotiating process.)
When econoff informed Moshiri that the CVP has contracted
with outside legal counsel to draft a model joint venture
agreement, Moshiri emphasized that the important issue will
not be the terms and conditions of any agreement but the
economics of the deal. Saying "if we get equity barrels, the
deal may not be bad," Moshiri said he would be interested to
see what kind of offers would be made. He emphasized,
however, that ChevronTexaco will not accept a deal that
prejudices the economics of its operations.
--------------
BUT OTHERS ARE SOMEWHAT MORE SO
--------------
11. (C) Moshiri was also dismissive of reports that PDVSA is
not only refusing to approve capital expenditures proposed by
the operators in their 2004 budgets but is also setting
production constraints for 2004. Moshiri said "they,re
telling us to produce." In subsequent conversations,
however, ExxonMobil President Mark Ward and Williams General
Manager Tim Penton confirmed these reports of problems with
approvals of capital expenditures to econoff. (Note:
ExxonMobil and Williams have non-operational shares in the
second round Quiamare-La Ceiba and third round La Concepcion
fields respectively.) Petrobras, which operates the La
Concepcion field, reported in the January producers luncheon
that PDVSA had approved its 2004 budget with severe cuts in
capital and expenses as well as setting production limits
below its current production level.
--------------
COMMENT
--------------
12. (C) There might seem to be a discrepancy between the
GOV's need for every barrel it can lay its hands on versus a
strategy in which it would take possible production cuts in
order to force the producers to accept contract negotiations
under the 2001 law. We believe, however, that for senior
officials of the Chavez government a win on the 2001
Hydrocarbons Law may be more important than a "few"
incremental barrels from the operating agreements. PDVSA
may, indeed, be losing money on some of these contracts. We
do not at this time expect the pressure to reach the point
where the GOV would outright violate the existing agreements.
That said, however, the GOV could definitely make life more
difficult for the companies.
13. (C) Companies other than Harvest are sure to bite if the
carrot, perhaps in the form of payment of monies owed by
PDVSA on their existing investments or new fields, is big
enough. Steel Hector & David attorney Anzola believes Shell
is likely to be the first company approached with the model
draft, followed by Repsol.
SHAPIRO
NNNN
2004CARACA00546 - CONFIDENTIAL
SIPDIS
NSC FOR TSHANNON AND CBARTON
ENERGY FOR D. PUMPHREY AND A. LOCKWOOD
E.O. 12958: DECL: 01/29/2014
TAGS: EPET ECON VE
SUBJECT: GROWING PRESSURE FOR RENEGOTIATION OF OIL SERVICE
CONTRACTS?
Classified By: AMB. CHARLES S. SHAPIRO; REASONS 1.4 (B) and (D)
--------------
SUMMARY
--------------
1. (C) There are signs that the GOV has started playing
hardball in its efforts to force the oil companies that
signed operating service agreements in the 1990's to convert
these contracts into the majority GOV-owned joint ventures
mandated under the 2001 Hydrocarbons Law. Public claims by
the Minister of Energy and Mines that two companies have
already signed agreements have been disputed but Harvest
International, a U.S. independent, is currently evaluating
two oil and gas fields located close to its existing fields
and hopes to negotiate the first such agreement.
ChevronTexaco, with the largest exposure of any U.S. company,
is dismissive of any efforts by the GOV to bring pressure in
this area but others confirm that in addition to the "carrot"
of potential access to new fields for those companies that
review their contracts, PDVSA has used the "stick" of
refusing to approve capital expenditures proposed by some
operators in their 2004 budgets and setting production
constraints for 2004. For the Chavez government, a win on
forcing companies to migrate into relationships under the
2001 Hydrocarbons Law may be more important than a "few"
incremental barrels from the operating agreements. That
said, we do not at this time expect the pressure to reach the
point where the GOV would outright violate existing
agreements although it could certainly make it more difficult
for the companies to do business. End Summary.
-------------- ---
GOV GETS SERIOUS ABOUT PUSHING HYDROCARBONS LAW?
-------------- ---
2. (C) On January 12, Minister of Energy and Mines Rafael
Ramirez_ said publicly that international operators in
Venezuela will not be able to increase production without
transferring their operating agreements to joint ventures
under the terms of the 2001 Hydrocarbons Law. The Minister's
comments have been followed by reports that PDVSA is not only
refusing to approve capital expenditures proposed by the
operators in their 2004 budgets but is setting production
constraints for 2004. The GOV is also still refusing to
authorize the 2003 transfer of British Petroleum's (BP)
operating agreements for the DZO and Boqueron fields to
French independent Perenco and is reportedly arguing that
while the contracts with BP were grandfathered under the 2001
law, this would not apply if the contracts were transferred
to Perenco. These events have sparked concern that the GOV
has started playing hardball in its efforts to force the
companies that signed operating service agreements in the
1990's to convert these contracts into the majority GOV-owned
joint ventures mandated under the 2001 law.
--------------
BACKGROUND
--------------
2. (U) In the 1990's, PDVSA planned an ambitious expansion
program to capture a greater share of global energy markets.
An economically viable way to achieve this goal was for PDVSA
to enter into operating contracts for the reactivation of
marginal oil fields with foreign investors who had the
much-needed capital. The result was 33 "Operating
Agreements," granted in three investment "rounds." The
foreign investors signed 20-year contracts to develop these
fields at the investors' own expense.
3. (U) Under these contracts, the foreign investors receive a
fee per barrel produced from PDVSA. Against this revenue,
the investors may deduct the operating expenses (i.e, the
"operating fee") incurred during the year. A "capital fee,"
to allow the recovery of capital expenditures incurred by the
foreign investor on behalf of PDVSA, is also recoverable over
ten years according to a complicated formula. The contracts
typically provide for a maximum total fee that may be charged
by the investor and recovered during any given year. Any
fees allowable for the year, but not recovered because of the
imposition of the maximum total fee, are carried forward to
the next year and subject to applicable interest and
inflation rate adjustments until the costs are recovered by
the investor. PDVSA pays royalties on the oil while the
investor pays a 34 percent income tax.
4. (SBU) The Chavez government, however, has rolled back the
expansionary policy of the 1990's and made clear it
particularly dislikes the operating agreement contracts.
This distaste was codified in the 2001 Hydrocarbons Law that
stipulated that future private sector investment in the
Venezuelan oil sector must be through joint venture
agreements in which the GOV will take a minimum 51 percent
stake. The law also increased most royalty payments from
16.67 percent to 30 percent and changed other aspects of the
tax structure. Finally, the joint venture will not be able
to commercialize the oil it produces, which must instead be
sold through PDVSA or some other state entity. Although the
joint venture model would potentially give a company an
equity stake in the oil it produces that it does not have
under the current service agreement model, the companies
claim that the economics simply do not support investment in
projects under the 2001 law. There have, to date, been no
investments under the law and the GOV continues to complain
about the administrative costs of managing the contracts and
that the oil produced under the operating agreement contracts
is "high cost" oil.
--------------
VINCCLER & TEIKOKU DISPUTE MINISTER,S REMARKS
--------------
5. (C) In his January 12 remarks, according to press reports,
Ramirez_ went on to add that two companies, Japan's Teikoku
and Vinccler, a majority Venezuelan-owned company with a U.S.
component, had already negotiated conversion of their
operating agreements to joint venture agreements with PDVSA.
In subsequent conversations with econoff, executives with
Vinccler and Teikoku confirmed on-going discussions with the
GOV concerning new gas (not oil) opportunities in their
fields but denied that any contracts have been signed.
Vinccler Technical Manager Emilio Sanchez_ said the Ministry
had proposed to the company in July 2003 that its current
operating agreement for the Round II Falcon East block be
converted into a gas license for the entire area of the
block. Noting that the field produces less than 1,000 b/d,
Sanchez_ said Vinccler is most interesting in expanding its
business into the production of associated gas and,
eventually, the development of off-shore gas. In these
circumstances, work is ongoing on an agreement to modify the
operating contract into an agreement for associated gas and
liquids, under which Vinccler will be paid a flat fee for the
liquids. Sanchez_ flatly denied, however, that Vinccler would
agree to the 51-49 percent structure mandated by the
Hydrocarbons Law.
6. (C) Matsuro Manabe, President of Teikoku Oil de Venezuela,
confirmed to econoff on January 23 that Teikoku's current
interests in Venezuela are also focused on gas opportunities.
Teikoku currently has two operating agreements: the East
Guarico field acquired in the first round and the second
round Sanvi-Guere field. Production from the two fields
totals about 6,000 b/d. Manabe explained that the company is
already producing associated gas from the East Guarico field
and that seismic data by PDVSA/Teikoku on an adjacent area
north of the field shows great potential for further gas
development.
--------------
A U.S. COMPANY HOPES TO BE THE FIRST
--------------
7. (SBU) A U.S. independent, Harvest International, does hope
to be the first to negotiate a contract under the terms of
the Hydrocarbons Law. Harvest has an 80 percent share in
Benton-Vinccler, that has operated three small oil fields in
southern Monagas state since signature of a first round
operating service agreement in 1992. In November, Harvest
announced that it had signed an agreement with PDVSA to
undertake a six-month evaluation of two oil and gas fields
(Temblador and El Salto) located close to its existing
fields. Any agreement on the two new fields is likely to be
accompanied by re-negotiation of the original operating
services agreement.
8. (C) In a November conversation with econoff, Harvest CFO
Steve Tholen said that Benton-Vinccler has one of the most
profitable operating service contracts in Venezuela. Thus,
it would be a public relations victory for PDVSA and the
Ministry if they were able to announce that Harvest had
agreed its operations could be profitable under the
provisions of the 2001 law. The most complex part of the
negotiation will cover the corporate structure. Tholen
emphasized that Harvest would insist on a structure that
would allow the joint venture to focus on project economics
and would allow Harvest to both book the reserves and have
operating control (i.e., of such issues as the accounting
rules). According to Tholen, Harvest envisions a structure
where a majority government-owned joint venture company would
in turn contract actual field operations to a company in
which Harvest would hold the majority share. Benton-Vinccler
employee John Paul McKee told econoff January 28 that the
transfer of data from PDVSA needed for evaluation of the two
fields has gone more slowly than anticipated but that the
review is on-going.
-------------- ---
LAWYERS AGREE THAT RE-NEGOTIATION WOULD BE TOUGH
-------------- ---
9. (C) Econoff discussed the complexities of re-negotiating
the operating agreement contracts with several local
attorneys whose practices focus on energy law. They all
agreed that it would be particularly difficult to quantify
the sunk costs not yet re-paid under the capital fee. Steel
Hector & Davis attorney Alfredo Anzola, however, confirmed
February 9 that his firm has been contracted to draft a model
joint venture agreement to guide CVP in its discussions with
companies. Anzola added that CVP is "under a lot of pressure
to advance this as quickly as possible" and said the model
agreement would be provided to CVP that day. Anzola
specifically informed econoff that the CVP had said "no" to
what he called "sham structures" that would allow the private
investor to control the joint venture operations.
--------------
CHEVRONTEXACO NOT CONCERNED...
--------------
10. (C) Econoff discussed the issue with ChevronTexaco de
Venezuela President Ali Moshiri who confirmed that he has
been asked informally if ChevronTexaco would be willing to
convert its contracts. (Note: With substantial investment
in the Round Two Boscan field, and the LL-652 field acquired
in Round Three, ChevronTexaco could have more to lose than
any other U.S. company from any push by the GOV to force the
migration of the operating agreement contracts. End Note.)
Moshiri said bluntly that he believes Ramirez_ was simply
trying to make political points in his remarks of January 12.
He added that he believes neither PDVSA nor the Ministry
have legal staffs capable of handling such negotiations.
(Note: Steel Hector & David attorney Anzola confirmed that
the legal staff at CVP are all new hires; he does not know
yet whether CVP will contract out the negotiating process.)
When econoff informed Moshiri that the CVP has contracted
with outside legal counsel to draft a model joint venture
agreement, Moshiri emphasized that the important issue will
not be the terms and conditions of any agreement but the
economics of the deal. Saying "if we get equity barrels, the
deal may not be bad," Moshiri said he would be interested to
see what kind of offers would be made. He emphasized,
however, that ChevronTexaco will not accept a deal that
prejudices the economics of its operations.
--------------
BUT OTHERS ARE SOMEWHAT MORE SO
--------------
11. (C) Moshiri was also dismissive of reports that PDVSA is
not only refusing to approve capital expenditures proposed by
the operators in their 2004 budgets but is also setting
production constraints for 2004. Moshiri said "they,re
telling us to produce." In subsequent conversations,
however, ExxonMobil President Mark Ward and Williams General
Manager Tim Penton confirmed these reports of problems with
approvals of capital expenditures to econoff. (Note:
ExxonMobil and Williams have non-operational shares in the
second round Quiamare-La Ceiba and third round La Concepcion
fields respectively.) Petrobras, which operates the La
Concepcion field, reported in the January producers luncheon
that PDVSA had approved its 2004 budget with severe cuts in
capital and expenses as well as setting production limits
below its current production level.
--------------
COMMENT
--------------
12. (C) There might seem to be a discrepancy between the
GOV's need for every barrel it can lay its hands on versus a
strategy in which it would take possible production cuts in
order to force the producers to accept contract negotiations
under the 2001 law. We believe, however, that for senior
officials of the Chavez government a win on the 2001
Hydrocarbons Law may be more important than a "few"
incremental barrels from the operating agreements. PDVSA
may, indeed, be losing money on some of these contracts. We
do not at this time expect the pressure to reach the point
where the GOV would outright violate the existing agreements.
That said, however, the GOV could definitely make life more
difficult for the companies.
13. (C) Companies other than Harvest are sure to bite if the
carrot, perhaps in the form of payment of monies owed by
PDVSA on their existing investments or new fields, is big
enough. Steel Hector & David attorney Anzola believes Shell
is likely to be the first company approached with the model
draft, followed by Repsol.
SHAPIRO
NNNN
2004CARACA00546 - CONFIDENTIAL