EXXONMOBIL READY TO TAKE ON THE GOV OVER ROYALTY

C O N F I D E N T I A L CARACAS 000163 SIPDIS NSC FOR CBARTON ENERGY FOR DPUMPHREY AND ALOCKWOOD E.O. 12958: DECL: 01/18/2015 TAGS: ENRG PGOV VE SUBJECT: EXXONMOBIL READY TO TAKE ON THE GOV OVER ROYALTY ISSUE REF: 2004 CARACAS 3738 AND PREVIOUS Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) and (d) -------------- SUMMMARY -------------- ¶1. (C) ExxonMobil informed the Embassy January 12 that it intends to take legal action in response to the GOV's unilateral decision to increase the royalty payments levied on the Orinoco extra heavy oil projects. (Note: Exxonmobil and other international oil companies had embarked on these technically challenging multi-billion dollar investments in the 1990's, and received a highly concessionary 1.0 pct royalty rate for a 10 year period. On October 10 President Chavez announced that the GOV was raising the rate to 16.67 pct. End note.) The company believes Venezuela's investment law provides a vehicle it can use to get to international arbitration. ExxonMobil de Venezuela President Mark Ward underlined that ExxonMobil has made this decision in full knowledge that there will be a significant impact on its base business in Venezuela and that two planned projects will probably be scrapped. ExxonMobil has, said Ward, already received a message from "senior officials" at the Venezuelan Embassy in Washington that any such decision would be seen not just as a business decision but as a direct attack on the sovereignty of Venezuela. End Summary. -------------- EXXONMOBIL TO REACT -------------- ¶2. (C) On January 12, ExxonMobil de Venezuela President Mark Ward informed econoff that the company has decided to move ahead with some legal action in response to the unilateral GOV decision to increase the royalty payments levied on the extra heavy oil projects. According to its legal analysis, there is wording in Venezuela's investment law that will give it an avenue to avoid the Venezuelan courts and get to international arbitration. -------------- TIMING -------------- ¶3. (C) In the three months since President Chavez's October 10 announcement, said Ward, he has been unable to meet with Energy Minister Rafael Ramirez. The GOV also cancelled Appointments made with Vice Minister Luis Vierma. In these circumstances, he said, senior ExxonMobil management is "ready to go." Ward will attempt once again to meet with senior GOV officials, including Foreign Minister Ali Rodriguez, over the next few weeks. If that attempt fails, he said, he expects the company to take some action in the first part of February. -------------- LOCAL IMPACT -------------- ¶4. (C) Ward underlined that ExxonMobil has made this decision in full knowledge that there will be a significant impact on its base business in Venezuela, the Cerro Negro extra heavy crude project. The GOV controls project inputs such as electricity, the export terminal, and all issuance of permits, said Ward, and will doubtless use them as pressure points. He also anticipates additional pressures on the regulatory front, such as visits by the Labor and Environmental Ministries. With respect to the planned "olefins" project, a proposed petrochemical plant to create feedstock for the Latin American plastics industry on which Exxonmobil has been working with PDVSA, Ward said there is a high probability that ExxonMobil will be replaced by Brazil, India or Russia. He added that the GOV will probably also levy onerous terms on the La Ceiba project, its mid-sized oil field exploration/development to be structured as a profit-sharing arrangement with PDVSA, which is now finishing successful well tests. Thus he expects that the company will be unable to make a deal. -------------- "THREATS" FROM THE VENEZUELAN EMBASSY -------------- ¶5. (C) Ward added that ExxonMobil believes that some word of its intentions have leaked to the Venezuelan Embassy in Washington, perhaps through a Washington D.C. law firm that did some of the legal leg work. As a result, "senior (Venezuelan) Embassy officials" have already called contacts in ExxonMobil to make what Ward characterized as "thinly veiled threats." According to Ward, the "Embassy officials" passed the word that any legal action by ExxonMobil would be seen not just as a business issue, but as a direct attack on the sovereignty of Venezuela. -------------- COMMENT -------------- ¶6. (C) ExxonMobil's exposure in Venezuela, while large, is not on the scale of that of ConocoPhillips or ChevronTexaco. (We understand that ConocoPhilips is prepared to waive its legal rights regarding the heavy crude projects as part of its efforts to salvage the deal to develop the Corocoro offshore oil field (septel). ChevronTexaco, which has big plans in Venezuela, notably the Deltana Platform natural gas project, from the beginning chose not to fight with the GOV over the royalty hike, viewing it as the inevitable consequence of the GOV's desire to share more in the run-up in oil prices. But while Exxonmobil may be less exposed here, the company has been pressing ahead for close to ten years to get the multi-billion dollar olefins project off the ground and finally signed a Preliminary Development Agreement with the GOV in August 2004. Ward has told us repeatedly that Exxonmobil, presumably looking at potential risks around the world, "takes sanctity of contract very seriously." If ExxonMobil does take some legal action on the royalty issue, we believe that any attempts to expand its business with Venezuela will be dead. McFarland NNNN 2005CARACA00163 - CONFIDENTIAL