VENEZUELA: A SHORT PRIMER ON OIL SECTOR CORRUPTION

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001431 SIPDIS NSC FOR TSHANNON AND CBARTON ENERGY FOR DPUMPHREY AND ALOCKWOOD TOKYO FOR SFLATT E.O. 12958: DECL: 05/02/2015 TAGS: EPET VE SUBJECT: VENEZUELA: A SHORT PRIMER ON OIL SECTOR CORRUPTION Classified By: ECONOMIC COUNSELOR RICHARD SANDERS, FOR REASONS 1.4 (d) -------------- SUMMARY -------------- ¶1. (C) Several different corruption scandals are brewing in Venezuela's oil sector. In PDVSA's western operational area, the scandals range from allegations about garden variety contracting corruption to questions about the procedures following in the hiring of thousands of employees who were hired through privately owned personnel services ("body shops"). Energy Minister/PDVSA President Rafael Ramirez__ has himself told the press that investigations into corruption in western Venezuela are likely to spread to other PDVSA operations. Allegations have also re-surfaced relating to the operations of PDVSA's trading department which has reportedly been using intermediaries to place oil exports. Finally, allegations relating to CITGO have, according to one Caracas source, led the PDVSA Board to consider the buy back of all CITGO bonds to avoid future SEC reporting requirements. These allegations provided a backdrop in the week of May 2 to rumors that Venezuela's oil production had fallen. Chavez and other senior GOV officials publicly blamed the alleged production shortfall and other problems in PDVSA on CIA penetration. In these circumstances, it is unlikely the GOV will actually investigate a number of these issues. In fact, the GOV is most likely to take steps such as the reported proposal to re-purchase CITGO debt out of fear that the U.S. Government will start to turn over rocks. End Summary. -------------- WESTERN VENEZUELA -------------- ¶2. (U) About 40 people were fired in PDVSA's western division early this year (a number of whom have been re-hired). These firings were reportedly linked to such activities on the employees' part as graft in the award of contracts. However, in a press interview on April 24, Energy Minister/PDVSA President Rafael Ramirez__ said that PDVSA would investigate corruption charges against dozens of other managers of the company's operations in the west of the country. Ramirez__ also said the investigation of corruption could spread to the eastern operational division and other PDVSA-controlled activities. ¶3. (C) Joe Wright, the head of ChevronTexaco's operations in Western Venezuela, informed econoff May 3 that faced with hiring difficulties in 2003, PDVSA had turned to privately owned personnel services known as "body shops" to staff its operations. Saying that ChevronTexaco itself has used such operations, Wright noted that they do the work of culling through applications and provide administrative support for the employees they locate. Most of the PDVSA employees thus located would have been technicians or clerks. The rumor in the west, said Wright, is that there was "graft and corruption" on the part of the companies involved in providing the employees to PDVSA and that PDVSA managers were involved. Many of the contracts expired at the end of April. Thus the rumor of massive firings of employees contracted through this mechanism that emerged in major Venezuelan newspapers at the beginning of May. -------------- TRADING FOLLIES -------------- ¶4. (U) On April 11 and 12, Miami's "Nuevo Herald" published two stories describing the "consulting fees" that intermediaries are receiving for placing oil exports. These articles followed reporting in Caracas daily "Tal Cual" in March which described at length the failure of PDVSA's trading department, under the leadership of President Chavez,s cousin Asdrubal Chavez, to control corrupt trades. Allegations about corruption associated with PDVSA's trading department have been rife since the handling of the gasoline sales during the December 2002-February 2003 strike. -------------- CITGO -------------- ¶5. (C) Allegations have also surfaced about the management of CITGO. In 2004, Luis Marin, a hero of Chavez's revolution after he assumed control of PDVSA's eastern operations during the strike, was appointed as the President of CITGO. Marin organized the move of CITGO's headquarters from Tulsa to Houston. This move has provided the backdrop to numerous allegations, including that Marin headed a group that purchased the location of CITGO's future Houston offices and then leased the space back to the company at an inflated rate. Other allegations have ranged from the misuse of company aircraft to a $30,000 CITGO donation to an exclusive Houston private school attended by a company Director. Although Marin was once believed to be bound for an OPEC job, he has been fired and is under investigation ) if only by some members of the National Assembly. In his effort to save his job (and, perhaps, CITGO as a Venezuelan-owned entity), Marin told the press that CITGO had in fact been a very good business for Venezuela because the company had spent as much as $200 million in 2004 on purchases of PDVSA crude that were priced over market prices. ¶6. (C) Representatives of the Venezuelan National Assembly traveled to Houston in March to gather information on the situation in CITGO. A Caracas source who recently met with one of the deputies who visited Houston told econoff May 2 that the deputy had been surprised by the number of new allegations he had received via anonymous letters delivered to his hotel room. In response to a question about the status of the National Assembly inquiry, our source responded that it has been stalled by members of Chavez's Fifth Republic Movement (MVR). He added that he had been informed that a proposal had been submitted for the consideration of the PDVSA Board the week of April 25 to buy back all CITGO bonds so that CITGO would not be faced with future reporting requirements to the SEC. The PDVSA Board, he said, was &running scared.8 -------------- ITS ALL THE CIA'S FAULT -------------- ¶7. (C) These allegations provided a backdrop in the week of May 2 to rumors that Venezuela's oil production had fallen. Despite the fact that President Chavez said publicly for the first time that western Venezuelan production is 100,000 b/d below what it "should be," by week's end Rafael Ramirez__ had said once again that Venezuela's production is 3.3 million b/d. Chavez and other senior GOV officials publicly blamed the alleged production shortfall and other problems in PDVSA on CIA penetration. Sources who have recently visited PDVSA installations report the increased presence of the National Guard as well as prominantly placed posters warning about the CIA and saboteurs. -------------- COMMENT -------------- ¶8. (C) Although allegations of corruption in PDVSA's operations have been a staple of the Caracas rumor mill for the past two years, the seriousness of the current allegations is notable. It is also notable that so many different issues have popped into the public view. The public comments about Venezuela's production levels have also served to increase the profile of the various corruption charges. At the end of the day, however, it is unlikely that the GOV will actually investigate a number of these issues. In fact, the GOV is most likely to take steps such as the reported proposal to re-purchase CITGO debt out of fear that the U.S. Government will start to turn over rocks. Brownfield