U.S. INDEPENDENT OIL COMPANY IN FIGHT FOR SURVIVAL

UNCLAS SECTION 01 OF 02 CARACAS 001808

SIPDIS

SENSITIVE

NSC FOR TSHANNON AND CBARTON
ENERGY FOR ALOCKWOOD AND DPUMPHREY

E.O. 12958: N/A
TAGS: EINV EPET VE
SUBJECT: U.S. INDEPENDENT OIL COMPANY IN FIGHT FOR SURVIVAL

REF: CARACAS 1721


1. (U) The following message is Sensitive but Unclassified.
It contains company confidential information and should be
handled accordingly.

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SUMMARY
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2. (SBU) A senior executive of U.S. independent Harvest
Natural Resources, Inc. says his company is in a fight for
its survival. Harvest, the holder of an 80 percent share of
an Operating Service Agreement (OSA) contract signed in the
first round of Venezuela's 1990's oil sector liberalization,
has lost 50 percent of the value of its stock since December
2004 when the GOV started its active campaign to force
migration of the OSA contracts to mixed companies/joint
ventures under the terms of the 2001 Hydrocarbons Law. While
Harvest continues its efforts to negotiate with the GOV, the
company is also preparing, if necessary, to file an
application for international arbitration with ICSID and will
look for USG support for its claim. End summary.


3. (U) On June 9 econoff met with James Edmiston, Executive
Vice President and Chief Operating Officer of Harvest Natural
Resources, Inc. Harvest (formerly Benton Oil and Gas) has an
80 percent share of Harvest Vinccler, a company that operates
three small oil fields in southern Monagas state under an
Operating Service Agreement (OSA) contract signed in the
First Round of Venezuela's 1990's oil sector liberalization
(the "apertura").

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BACKGROUND
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4. (SBU) Since late 2004, the GOV has taken a number of steps
to force the oil companies holding OSA contracts signed in
three bid rounds in the 1990's into negotiations to convert
their assets to mixed companies/joint ventures (with majority
GOV ownership) under the terms of the 2001 Hydrocarbons Law.
The first step in this process was a late 2004 decision by
the GOV to limit the capital expenditure budgets of many of
the OSA companies as well as to refuse to approve drilling
permits. Harvest ) 100 percent of whose income is generated
by its Venezuelan assets - was particularly affected by these
moves. Harvest's production has also been curtailed by PDVSA
at levels below its current production capacity and more than
10,000 b/d below its proposed 2005 Work Plan. As a publicly
traded U.S. company, Harvest has made several public
announcements about its situation, i.e, such as that it had
been forced to release two drilling rigs because of its
failure to receive the necessary permits, which has angered
GOV officials. According to Edmiston, Harvest has lost 50
percent of the value of its stock since December 2004.

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GOV VALUATION METHODOLOGY
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5. (SBU) As reported reftel, the GOV has recently taken
additional steps to force the companies into negotiations,
the first step of which is the valuation of the existing
contract assets. Edmiston informed econoff bluntly that the
value of Harvest's OSA contract is "dying on the vine."
Edmiston met June 8 with an official of the Corporacion
Venezolana de Petroleo (CVP, the PDVSA affiliate that manages
relations with international oil companies) and, based on
that conversation, told econoff it was clear the GOV plans to
value the contract based on the result of the confiscatory
policies imposed in past months, i.e., such as applying a 50
percent vice 34 percent income tax rate to decrease the value
of the future income stream, etc. Edmiston noted that 100
percent of the free cash flow of the business so far has gone
to the GOV.


6. (SBU) If the GOV does adapt such tactics, said Edmiston,
the two parties will never come to an agreement. He,
therefore, proposed to the CVP that the two partners "act
like partners" in looking at a number of fallow oil fields
near Harvest's current operations. Edmiston proposed that
Harvest would incorporate them into a new business plan with
a development plan that would meet GOV objectives. If that
presented a compelling business opportunity said Edmiston,
the two parties could then discuss the migration of the
original OSA contract. Such an approach, Edmiston argued to
the CVP, would not require either party to prejudice his
position. Harvest also made this proposal in its response to
a PDVSA letter dated June 2 which delivered the GOV's
proposed "Transition Agreement" (see reftel).

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READY TO TAKE LEGAL ACTION
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7. (SBU) While Harvest continues its efforts to negotiate
with the GOV, the company is also preparing, if necessary, to
take legal action. Early in 2005, Harvest changed the legal
home of the Harvest Vinccler holding company to Curacao so
that the company could avail itself of the European Union's
bilateral investment treaty with Venezuela in the event it
needed to take legal action. Edmiston informed econoff that
the company is preparing to file an application for
international arbitration with the International Center for
Settlement of Investment Disputes (ICSID). (Note: Harvest
would be looking to take advantage not only of the EU's BIT
with Venezuela but possibly also provisions in the company's
OSA contract.) Edmiston asked econoff if the USG would be
prepared to support him and said that company representatives
would soon be calling on Washington officials.

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COMMENT
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8. (SBU) It is particularly ironic that Harvest has been a
first target of the GOV as Harvest tried to be the first
company to negotiate an agreement under the Hydrocarbons Law.
On October 17, 2003, Harvest Vinccler signed a Memorandum of
Understanding with PDVSA to study
the feasibility of developing two fields located close to its
current operations. The company anticipated that negotiation
of an agreement on those fields would have been accompanied
by re-negotiation of the original OSA. Since then, Harvest
has made a number of other proposals to the GOV, none of
which have gone anywhere. Whatever the merits of its legal
case, we expect the GOV will look for further ways to punish
Harvest if it seeks arbitration.
Brownfield