VENEZUELAN OIL PRODUCTION: THE EMPEROR IS LOSING

C O N F I D E N T I A L CARACAS 001546

SIPDIS


NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
TOKYO FOR SFLATT

E.O. 12958: DECL: 05/16/2015
TAGS: EPET VE
SUBJECT: VENEZUELAN OIL PRODUCTION: THE EMPEROR IS LOSING
HIS CLOTHES

Classified By: Acting Economic Counselor Darnall Steuart; for reasons 1
.4 (b) and (d)

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SUMMARY
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1. (C) The decline in Venezuelan oil production, long
predicted by industry observers, has become public as
apparent corruption and diversion of funds and alleged
sabotage at state oil company PDVSA became the center of
debate in early May. According to a local international oil
services company, Venezuela's oil production peaked at about
2.7 million barrels of daily oil production in early 2005
after the standstill of the strike in 2002-2003. A local
university think tank estimates that national production
(including the relatively well run eastern production area)
is continuing to decline and could reach as low as 2-2.2
million b/d by the end of 2005. End Summary.

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BACKGROUND
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2. (C) In January 2004, we reported in reftel,"while some
believe that Venezuela's 2004 production can be expected to
remain roughly in the 2.5-2.6 million b/d range where it is
generally believed to be at the current time, there are
others who believe that, in the absence of significant
investment either on the part of PDVSA itself or the
international oil companies, Venezuelan production could drop
to as little as 2.0-2.2 million b/d by the end of 2004." It
now appears that Venezuelan production may have peaked in
early 2005 and that the long predicted decline has become
more public.

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GOV STILL ON MESSAGE
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3. (C) Despite President Chavez's May 3 acknowledgement of a
100,000 production shortfall in the west, some days later
Minister of Energy and Petroleum/PDVSA President Rafael
Ramirez___ reiterated the claim that Venezuela is producing 3.3
million b/d. In remarks to the press, Ramirez___ asserted that
the Venezuelan oil industry is under attack by a
disinformation campaign that seeks to portray an industry in
chaos. For months Ramirez___ and other senior GOV officials
have cited a total production number ranging anywhere between
3.0-3.3 million b/d and reiterated that PDVSA will increase
production to 3.4 million b/d by the end of 2005 in
compliance with its 2004-2009 business plan. Private
industry observers have been skeptical about a 3 million b/d
total for Venezuelan production.

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PRODUCTION INCREASED
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4. (C) A senior manager of Schlumberger, a leading
international oil services company, informed econoff in March
that his company believed that Venezuela's oil production had
grown by eight percent since July 2004. At that time,
Schlumberger's internal production estimates (broken down
between PDVSA and the international oil companies (IOCs) were
as follows:

PDVSA IOCs Total
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000 b/d

Eastern Venezuela 845 305 1150
Western Venezuela 650 215 865
Barinas 90 0 90

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1585 520 2105

To this total, Schlumberger added an estimated 593,000 b/d of
production from the four facilities that upgrade the
extra-heavy crude of Venezuela's Orinoco heavy oil belt, for
a total of approximately 2.7 million b/d.


5. (C) According to Schlumberger, by the end of November 2004
production grew by 90,000 b/d because of increased field
production associated with the Hamaca project, the fourth and
last of the exra-heavy oil Strategic Associations whose
upgrader came on line in September. By January 2005,
Schlumberger believes that production had grown another
70,000 b/d. The company attributed 10,000 b/d of that
increase to added production from Barinas; another 15,000 b/d
to increased production from the Ceuta-Tomoporo fields south
of Lake Maracaibo in western Venezuela; and the rest from
small incremental gains, primarily by the IOCs. The primary
discrepancy between the official statistic of 3.0-3.3 million
b/d and private sector estimates of 2.5-2.7 million b/d such
as Schlumberger's lies in western Venezuela where, until
Chavez's May 3 statement, the GOV had consistently claimed
that production had returned to pre-strike levels (1.2
million b/d) in 2003.

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TROUBLED WESTERN VENEZUELA
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6. (C) Anecdotal information from western Venezuela, however,
has painted a very different picture. Econoff has
periodically discussed operations in the west with
representatives of two units of the Wood Group, a British
services company that has a major presence there. Wood Group
units are involved in two activites that provide direct
evidence of the health of PDVSA production activities: one
unit installs and services the gas turbines needed to provide
gas lift for oil production while another major unit provides
integrated services to process and inject water produced with
the oil. Under this contract, the Wood Group unit SIMCO is
in charge of the requirements of water injection in Lake
Maracaibo in the Lagomar, Lagotreco, Lagocinco, Lagomedio and
the South Center Lake areas. SIMCO manages two onshore
treatment plants at Punta de Palmas and Bachaquero as well as
some 129 structures in the lake.


7. (C) Wood Group senior managers have consistently mirrored
Schlumberger's estimate, saying that western production
remained stagnant at around 850,000 b/d. They also noted,
however, that PDVSA is in "absolute chaos." This reflects,
they said, not just the extreme politicization of the west
after the strike but also the fact that Felix Rodriguez
continued to run the western operations out of Caracas. A
Chavez stalwart, Rodriguez was named to manage PDVSA's
western production area after the December 2002-February 2003
strike. In early 2004, he was named as Vice President for
Exploration and Production where he took a hard line with
respect to minimizing the prospective IOC role in Venezuela.
According to Wood Group and other observers, Rodriguez
continued, in all but name, to run PDVSA's operations in the
west. Rodriguez was named President of CITGO in the year-end
PDVSA board changes. He is rumored to have had a financial
interest in at least one of the companies that was supplying
contract personnel to PDVSA in the west.


8. (C) A corruption scandal hit the west in February 2005 and
a number of managers were fired. Wood group sources note
that a number of the managers have been cleared and
reinstated but the incident caused panic and managers were
afraid to make decisions. Wood Group Vice President Neil
Harvey told econoff that a PDVSA team from western Venezuela
had admitted to a Wood Group team that there are &dreadful
problems8 in western Venezuelan operations, including a lack


of management expertise, technical capabilities etc. The
PDVSA team asked the Wood Group if it would be able to assist
in the development of a mobile gas compression center. After
that meeting, however, PDVSA said the project would have to
go to a public bid. Harvey described the situation as "an
ever spiraling circle of doom."


9. (C) Harvey also informed econoff in early April that
SIMCO, which operates a water treatment plant in Bachaquero,
had been discussing with PDVSA the operation of its own water
plants in the area. Harvey said PDVSA had been unable to get
the plants to work. And while SIMCO,s plant could handle
300,000 b/d of water, its injection pipeline could only
handle 150,000 b/d. Harvey said that PDVSA's water
production had grown to such a degree that PDVSA was sending
the untreated water (i.e., water with hydrocarbon impurities)
straight into the lake in what Harvey described as a
&river8 running parallel to the SIMCO plant. While this
was evidence of yet another environmental disaster for Lake
Maracaibo, it could also be evidence that PDVSA's oil
production is declining.

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DOOM STRIKES?
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10. (C) On May 18, economist Orlando Ochoa provided econoff
the most recent findings by a group from the Center for the
Development of Oil Technology associated with Caracas' Simon
Bolivar University. This group believes that PDVSA's own
production in western Venezuela may have dropped to as low as
330,000 b/d. They assert that western production dropped 10
percent between March and April. If true, this would yield a
total production number for the region of about 600,000 b/d.
Most seriously, the Center believes that national production
(including the relatively well run eastern production area)
is continuing to decline and could reach as low as 2-2.2
million b/d by the end of 2005. As proof of these
assertions, said Ochoa, the Center pointed to the national
oil to water production ratio which they put at 4 barrels of
water to one barrel of oil. The ratio is actually 6 to 1 in
the west and 1 1/2 barrels to one barrel of oil in the east.


11. (C) Ochoa noted that industry observers believe PDVSA is
struggling to increase production in eastern Venezuela at the
risk of damaging the reservoirs. In fact, a U.S. executive
whose company provides critical gas compression and injection
services in eastern Venezuela, told econoff a week ago that
he had been forbidden by PDVSA to take one of his plants down
for scheduled servicing. He also recounted that he had been
told that even the office staff in PDVSA's Maturin operations
have been ordered to work from 6:00 am to 6:00 pm until oil
production is increased.

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COMMENT
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12. (C) In an unusual move, President Chavez and others in
the government complained publicly that there had been
sabotage - USG supported - of PDVSA production in western
Venezuela. The GOV also ordered military units (including
reservists) to guard PDVSA facilities. At the same time,
others in the MVR surfaced complaints about corruption in
PDVSA - unusual given the MVR's interest in portraying PDVSA
as an effective engine of the revolution.


13. (C) In January 2004, we commented that PDVSA might yet be
able to arrest Venezuela's production decline if it moved
ahead quickly with substantial investment in maintenance of
existing projects and development of new ones. The
continuing chaos in the company, however, has prevented PDVSA
from moving ahead with the investment necessary to forestall
the hard fact that Venezuela's production will decline by 20


to 25 percent on an annual basis. Figures such as the Simon
Bolivar group and former PDVSA President Luis Giusti have
recently said that PDVSA must immediately invest anywhere
from $7 to $10 billion to turn this situation around. A
number of our contacts believe that company managers are
incapable of making the necessary investment decisions and
that PDVSA may well have reached a point where it is
impossible to invest fast enough to arrest the decline.
Perhaps because of this, the GOV's response has been to
pressure the IOCs that operate in Venezuela for changes in
their fiscal regimes.
Brownfield


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2005CARACA01546 - CONFIDENTIAL