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)

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SUMMARY
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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.

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WESTERN VENEZUELA
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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.

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TRADING FOLLIES
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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.

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CITGO
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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

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ITS ALL THE CIA'S FAULT
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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.
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COMMENT
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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