SENATOR COLEMAN MEETS WITH ENERGY COMPANIES IN

C O N F I D E N T I A L CARACAS 001029

SIPDIS


NSC FOR CBARTON
HQ USSOUTHCOM FOR POLAD
ENERGY FOR DPUMPHREY AND ALOCKWOOD

E.O. 12958: DECL: 03/30/2015
TAGS: ENRG EPET PREL VE
SUBJECT: SENATOR COLEMAN MEETS WITH ENERGY COMPANIES IN
VENEZUELA

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

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SUMMARY
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1. (C) During his visit to Venezuela, Senator Norm Coleman
held two meetings with leading energy companies. In the
first, a meeting with several members of the Venezuelan
Hydrocarbons Association (AVHI) hosted by ChevronTexaco
President Ali Moshiri, the Senator was given a mixed but
somewhat favorable picture of a challenging environment for
the operators, but one in which they continued to be
profitable and in which ChevronTexaco, in particular, was
still investing heavily. In a subsequent one-on-one meeting
with Mark Ward, President of ExxonMobil de Venezuela, Senator
Coleman was given a less sanguine appraisal of a situation in
which the sanctity of contracts was eroding and in which
terms were increasingly dictated by rather than negotiated
with the government of Venezuela. End Summary.

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Oil Industry Roundtable
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2. (C) Senator Coleman attended a breakfast hosted by
ChevronTexaco President for Latin America Upstream Ali
Moshiri. The attendees included Luis Grisanti, the Executive
President of the Venezuelan Hydrocarbons Association
(AVHI-Asociacion Venezolana de los Hidrocarburos-the
association that represents the international operators),as
well as representatives of U.S. energy companies including
Harvest International, Fluor, and Williams.


3. (C) Moshiri informed Senator Coleman that his company is
the second largest operator in Venezuela after PDVSA.
ChevronTexaco's Chairman had visited Venezuela March 29 to
sign an agreement with Repsol to partner in a proposed $6
billion investment in heavy oil. ChevronTexaco also plans to
invest a further $2.5 billion in development of the Deltana
Platform off-shore natural gas project. ChevronTexaco is,
said Moshiri, planning a long-term position in Venezuela. In
contrast, Tim Penton, Country Manager for Williams which
operates world-class gas injection facilities in east
Venezuela and formerly operated the Jose petroleum terminal,
said it would be a "career ending move" if he were to go to
his board to propose a large new investment in Venezuela
because his board now views Venezuela as a high risk location.


4. (C) Senator Coleman noted that FM Rodriguez had assured
him that Venezuela planned to increase production to 5
million barrels per day in order to accommodate long-term
U.S. demand as well as that of other clients. Moshiri
responded that the era of building and maintaining spare
national production capacity to serve consumers is over.
Instead, supply and demand will be more closely aligned. The
operators who wish to expand their operations in Venezuela
will be forced to grapple with issues important to the GOV,
such as community development and the GOV's desire to create
Venezuelan operators.


5. (C) Turning to a discussion of the agreements that the GOV
has signed in recent months with "favored states," Moshiri
said that there is a natural linkage between Venezuela and
Brazil. Other countries, such as China, have been identified
by the GOV as strategic partners because the GOV believes
they will not interfere in Venezuela's internal politics.
China particularly, said Moshiri, can be a tough competitor
in this environment because Chinese companies do not need to
consider the internal rate of return of a project but rather
focus on being the lowest priced bidder regardless of
profitability. Moshiri said, however, that he believes
Venezuela's relations with the U.S. in the energy sector will
continue to be strong because of historic ties, Venezuela's
large resource base, and because the U.S. will pay market
prices.


6. (C) Given the current bilateral relationship, asked
Senator Coleman, what gives U.S. companies an edge? The
Williams and Fluor representatives responded that U.S.


technology, reliability and efficiency have allowed them to
compete. They underlined, however, that these factors are
now being discounted by the GOV. They urged that the USG
seek to engage the GOV, pointing to interlocutors such as
Foreign Minister Rodriguez as willing listeners.


7. (C) Grisanti acknowledged that the international operators
and others have concerns in Venezuela over issues such as the
rule of law. He pointed to the issue of the unilateral
royalty increase mandated by the GOV on certain projects as
well as the GOV decision to cap the 2005 capital expenditure
budgets for certain projects. The best approach is, he said,
dialogue and engagement. The GOV is now discussing the
budget cuts with individual companies, said Grisanti, which
are still concerned but moving forward.


8. (C) Moshiri underlined once again that ChevronTexaco looks
at Venezuela from a long-term perspective. Taxes on the
industry have risen in Argentina from 16.7 percent to almost
60 percent, he said, without much comment. It is more
difficult to do business, he said, in Colombia and other
countries where ChevronTexaco operates. In these
circumstances, said Moshiri, ChevronTexaco assesses risk in
Venezuela differently than others do.

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Tete a Tete With ExxonMobil
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9. (C) ExxonMobil requested its own meeting with Senator
Coleman to convey its perspective of the situation in
Venezuela which differs substantially from that of
ChevronTexaco. (Note: ExxonMobil's flagship investment in
Venezuela is Cerro Negro, one of four projects developed to
handle the heavy oil of Venezuela's Orinoco heavy oil belt.
At the time these projects were developed in the 1990's, they
were given contractual royalty relief (one percent for nine
years or until the company had earned three times the level
of its investment). On October 10, 2004, President Chavez
announced the unilateral decision of the GOV to eliminate
that royalty relief. Since then, the GOV has also eliminated
the contractual royalty relief granted to another ExxonMobil
investment ) La Ceiba, an exploration project dated from

1996. End Note.)


10. (C) ExxonMobil de Venezuela President Mark Ward told
Senator Coleman that ExxonMobil has $1.5 billion invested in
Cerro Negro and anticipates that the investment will grow to
$2.2-2.3 billion over the 35 year life of the contract. The
synthetic crude produced by Cerro Negro is exported to a
dedicated refinery in the United States. Ward underlined
that his company believes that the arguments cited by the GOV
for its unilateral elimination of the royalty relief,
(windfall profits due to high oil prices, etc.) were
accommodated by the original contract. The Cerro Negro
investment would have been recouped faster because of high
oil prices and the royalty relief would have lasted for only
six to seven years instead of the original nine. In light of
this unwillingness to address the issue within the framework
of the existing agreement, ExxonMobil had signaled to the GOV
that it would be willing to seek international arbitration.



11. (C) Senator Coleman questioned how, if other
international oil companies affected by the GOV decision had
decided not to protest, ExxonMobil could so expose itself by
making such a decision. Ward responded that ExxonMobil
perhaps had a "different perspective" on contract sanctity
than other companies. For ExxonMobil, he said, the sanctity
of contracts is paramount. He noted that the original
contract contained a process for modifying it that the GOV
could have followed. Unilateral contract changes without
compensation, he said, are very troubling.


12. (C) Senator Coleman responded that the mixed messages
being sent by different companies create difficulties. Ward
acknowledged this and said his company does not want to take
the issue to arbitration. After months of requesting
meetings with the GOV, he said, the company had recently had
a first meeting and a dialogue had finally started.



13. (C) With respect to the issue of the difference in
company approaches, Ward said he believed other companies had
been "blackmailed" with the possibility of access to other
opportunities in Venezuela. Their resource base in Venezuela
is, he said, more important for certain other companies than
it is for ExxonMobil. That being said, ExxonMobil is still
willing to increase its investment in Venezuela. The risk,
however, is higher and would have to be balanced with a
commensurate fiscal package.


14. (U) This cable has not been reviewed by Senator Coleman
or his staff.
Brownfield


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2005CARACA01029 - CONFIDENTIAL