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)

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SUMMMARY
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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.

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EXXONMOBIL TO REACT
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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.

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TIMING
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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.

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LOCAL IMPACT
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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.


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"THREATS" FROM THE VENEZUELAN EMBASSY
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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.

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COMMENT
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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


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2005CARACA00163 - CONFIDENTIAL