Identifier
Created
Classification
Origin
05CARACAS162
2005-01-19 13:09:00
CONFIDENTIAL
Embassy Caracas
Cable title:
VENEZUELA: CONOCOPHILLIPS - BACK IN THE GAME?
This record is a partial extract of the original cable. The full text of the original cable is not available. 191309Z Jan 05
C O N F I D E N T I A L CARACAS 000162
SIPDIS
NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
E.O. 12958: DECL: 01/18/2015
TAGS: ENRG PGOV VE
SUBJECT: VENEZUELA: CONOCOPHILLIPS - BACK IN THE GAME?
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b)
and (d)
-------
SUMMMARY
--------
C O N F I D E N T I A L CARACAS 000162
SIPDIS
NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
E.O. 12958: DECL: 01/18/2015
TAGS: ENRG PGOV VE
SUBJECT: VENEZUELA: CONOCOPHILLIPS - BACK IN THE GAME?
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b)
and (d)
--------------
SUMMMARY
--------------
1. (C) On January 12, a report hit the international news
wires that ConocoPhillips, the single largest foreign
investor in Venezuela, would pull out following the breakdown
in its negotiations with the GOV on the development of the
Corocoro offshore oil field. By week's end, ConocoPhillips
and the GOV had resumed negotiations - but only after the
company CEO had agreed to waive any rights to litigate on the
issue of the royalty increase previously levied on the
Orinoco extra heavy crude projects by the GOV. (Of the other
two major U.S. oil companies in Venezuela, ExxonMobil and
ChevronTexaco, the former is going to litigate against the
royalties increase, while the latter is going along with it.)
However, it remains unclear if ConocoPhillips will be able
to bring the Corocoro project to fruition. End summary.
--------------
PRESS REPORTS CONOCOPHILLIPS TO PULL OUT
--------------
2. (U) On January 12, a report hit the international news
wires that ConocoPhillips would be leaving Venezuela
following the breakdown in its negotiations with the GOV on
the development of the Corocoro oil field. These stories
drew on public comments made by Energy Minister Rafael
Ramirez_ on January 11 in which he said that ConocoPhillips
would not begin drilling in Corocoro anytime soon because of
problems with the Company's proposed investment plan. The
wire stories also drew on a January 11 report by
"Descifrado," a Venezuelan web-based newsletter, which
alleged that ConocoPhillips had been ordered to leave due to
President Chavez's anger over public comments made by a
senior company executive.
--------------
BACKGROUND
--------------
3. (C) The Corocoro field is located in the shallow waters of
the Gulf of Paria near Trinidad. It is one of the few early
hopes for an increase in Venezuelan oil production. The
field was discovered as the result of a profit-sharing
agreement inked with then-Conoco in 1996. ConocoPhillips
declared commerciality on the field in 2002 and the Ministry
of Energy and Mines approved its development plan in 2003.
Despite this, contentious negotiations with the GOV over
meeting national content requirements for goods and services
related to the field's development have delayed the project.
ConocoPhillips executives informed emboffs in 2004 that
changing GOV national content requirements would add
significantly to the cost of the project. The plan called
for field production of 70,000 b/d to start in 2006.
ConocoPhillips executives confirmed to econoff in late 2004
that delays in the development of the project would likely
push first production back to 2007.
--------------
CONOCOPHILLIPS SCRAMBLES
--------------
4. (C) Early on January 12, econoff contacted ConocoPhillips
de Venezuela President John Hennon for a readout on the press
reports. Hennon reported that he had last met with PDVSA
officials on December 17 and that he believed at that time
that there had been agreement on the last outstanding element
of the investment plan. However, when this agreement was
subsequently taken before the PDVSA Board, said Hennon, it
was vetoed by Energy Minister/PDVSA President Ramirez_ and
Exploration and Production Vice President Felix Rodriguez.
Hennon said that Ramirez_ and Rodriguez were reportedly very
angry that ConocoPhillips had sent a letter to PDVSA
reserving its rights to take legal action with respect to the
royalty increase on the Orinoco extra heavy crude projects.
(Note: ConocoPhillips has multi-billion dollar investments
in two of the four extra heavy crude projects, i.e.,
Petrozuata and Hamaca. The Hamaca project came on line in
October and thus never had the benefits of the low 1.0 pct
royalty enjoyed by the other three projects.) Hennon was
concerned because he had received a call from an "aide to the
Minister" the night before who said that President Chavez had
directed that the GOV break relations with ConocoPhillips and
that the company should leave Venezuela.
5. (C) Late in the day on January 12, Hennon informed econoff
that ConocoPhillips Chairman Mulva had flown to Washington
for a meeting with Venezuelan Ambassador Bernardo Alvarez.
Alvarez, said Hennon, had told Mulva that there would be no
further dialogue with ConocoPhillips unless the company
rescinded the notice it had given PDVSA reserving its rights
to litigate on the royalty issue. Mulva elected to waive any
rights going forward and on that basis Alvarez said the door
was now open again for dialogue. On January 13, Hennon
confirmed that a senior corporate executive had talked with
Vice Minister Vierma and that negotiations had resumed.
--------------
COMMENT
--------------
6. (C) Ultimately, much of the trade press has cast this
episode as an investment dispute, claiming that when
ConocoPhillips sought to defer part of the investment it had
agreed to in 2003, the GOV reacted because it wants the cash.
While there may be an element of truth there, we believe
that is only part of the story. Hennon told us that the GOV
had had the investment numbers since September and that they
had not become a significant problem until the royalty issue
blew up. So it may indeed be the case that senior GOV
officials - and particularly President Chavez - did react
with anger to certain comments made to the press about the
royalty issue by a senior ConocoPhillips executive
reiterating that the hike had violated the firm's contractual
rights. By now waiving them, ConocoPhillips has put itself
in line with the position of ChevronTexaco, which had never
asserted them. Exxonmobil, however, appears to be ready to
try to take the GOV to international arbitration over the
issue, septel.) However, it is possible that ConocoPhillips'
retreat, made late in the day, may not be sufficient to allow
it to bring the Corocoro project to fruition.
McFarland
NNNN
2005CARACA00162 - CONFIDENTIAL
SIPDIS
NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
E.O. 12958: DECL: 01/18/2015
TAGS: ENRG PGOV VE
SUBJECT: VENEZUELA: CONOCOPHILLIPS - BACK IN THE GAME?
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b)
and (d)
--------------
SUMMMARY
--------------
1. (C) On January 12, a report hit the international news
wires that ConocoPhillips, the single largest foreign
investor in Venezuela, would pull out following the breakdown
in its negotiations with the GOV on the development of the
Corocoro offshore oil field. By week's end, ConocoPhillips
and the GOV had resumed negotiations - but only after the
company CEO had agreed to waive any rights to litigate on the
issue of the royalty increase previously levied on the
Orinoco extra heavy crude projects by the GOV. (Of the other
two major U.S. oil companies in Venezuela, ExxonMobil and
ChevronTexaco, the former is going to litigate against the
royalties increase, while the latter is going along with it.)
However, it remains unclear if ConocoPhillips will be able
to bring the Corocoro project to fruition. End summary.
--------------
PRESS REPORTS CONOCOPHILLIPS TO PULL OUT
--------------
2. (U) On January 12, a report hit the international news
wires that ConocoPhillips would be leaving Venezuela
following the breakdown in its negotiations with the GOV on
the development of the Corocoro oil field. These stories
drew on public comments made by Energy Minister Rafael
Ramirez_ on January 11 in which he said that ConocoPhillips
would not begin drilling in Corocoro anytime soon because of
problems with the Company's proposed investment plan. The
wire stories also drew on a January 11 report by
"Descifrado," a Venezuelan web-based newsletter, which
alleged that ConocoPhillips had been ordered to leave due to
President Chavez's anger over public comments made by a
senior company executive.
--------------
BACKGROUND
--------------
3. (C) The Corocoro field is located in the shallow waters of
the Gulf of Paria near Trinidad. It is one of the few early
hopes for an increase in Venezuelan oil production. The
field was discovered as the result of a profit-sharing
agreement inked with then-Conoco in 1996. ConocoPhillips
declared commerciality on the field in 2002 and the Ministry
of Energy and Mines approved its development plan in 2003.
Despite this, contentious negotiations with the GOV over
meeting national content requirements for goods and services
related to the field's development have delayed the project.
ConocoPhillips executives informed emboffs in 2004 that
changing GOV national content requirements would add
significantly to the cost of the project. The plan called
for field production of 70,000 b/d to start in 2006.
ConocoPhillips executives confirmed to econoff in late 2004
that delays in the development of the project would likely
push first production back to 2007.
--------------
CONOCOPHILLIPS SCRAMBLES
--------------
4. (C) Early on January 12, econoff contacted ConocoPhillips
de Venezuela President John Hennon for a readout on the press
reports. Hennon reported that he had last met with PDVSA
officials on December 17 and that he believed at that time
that there had been agreement on the last outstanding element
of the investment plan. However, when this agreement was
subsequently taken before the PDVSA Board, said Hennon, it
was vetoed by Energy Minister/PDVSA President Ramirez_ and
Exploration and Production Vice President Felix Rodriguez.
Hennon said that Ramirez_ and Rodriguez were reportedly very
angry that ConocoPhillips had sent a letter to PDVSA
reserving its rights to take legal action with respect to the
royalty increase on the Orinoco extra heavy crude projects.
(Note: ConocoPhillips has multi-billion dollar investments
in two of the four extra heavy crude projects, i.e.,
Petrozuata and Hamaca. The Hamaca project came on line in
October and thus never had the benefits of the low 1.0 pct
royalty enjoyed by the other three projects.) Hennon was
concerned because he had received a call from an "aide to the
Minister" the night before who said that President Chavez had
directed that the GOV break relations with ConocoPhillips and
that the company should leave Venezuela.
5. (C) Late in the day on January 12, Hennon informed econoff
that ConocoPhillips Chairman Mulva had flown to Washington
for a meeting with Venezuelan Ambassador Bernardo Alvarez.
Alvarez, said Hennon, had told Mulva that there would be no
further dialogue with ConocoPhillips unless the company
rescinded the notice it had given PDVSA reserving its rights
to litigate on the royalty issue. Mulva elected to waive any
rights going forward and on that basis Alvarez said the door
was now open again for dialogue. On January 13, Hennon
confirmed that a senior corporate executive had talked with
Vice Minister Vierma and that negotiations had resumed.
--------------
COMMENT
--------------
6. (C) Ultimately, much of the trade press has cast this
episode as an investment dispute, claiming that when
ConocoPhillips sought to defer part of the investment it had
agreed to in 2003, the GOV reacted because it wants the cash.
While there may be an element of truth there, we believe
that is only part of the story. Hennon told us that the GOV
had had the investment numbers since September and that they
had not become a significant problem until the royalty issue
blew up. So it may indeed be the case that senior GOV
officials - and particularly President Chavez - did react
with anger to certain comments made to the press about the
royalty issue by a senior ConocoPhillips executive
reiterating that the hike had violated the firm's contractual
rights. By now waiving them, ConocoPhillips has put itself
in line with the position of ChevronTexaco, which had never
asserted them. Exxonmobil, however, appears to be ready to
try to take the GOV to international arbitration over the
issue, septel.) However, it is possible that ConocoPhillips'
retreat, made late in the day, may not be sufficient to allow
it to bring the Corocoro project to fruition.
McFarland
NNNN
2005CARACA00162 - CONFIDENTIAL