SHELL'S VIEWS ON OSA MIGRATION AND TAXES

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 003552

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD

E.O. 12958: DECL: 08/11/2015
TAGS: EPET EINV ENRG VE
SUBJECT: SHELL'S VIEWS ON OSA MIGRATION AND TAXES

REF: A. CARACAS 03000


B. CARACAS 02506

C. CARACAS 01496

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: Shell Venezuela President Sean Rooney
(strictly protect) stated during a November 23 meeting with
Petroleum Attach (Petatt) that he fully expects the GOV to
follow through on threats to take over fields operated by
foreign companies under operating service agreements (OSA) if
the companies fail to sign a transition agreement to migrate
their contracts to joint ventures by the end of the year.
Rooney believes the GOV's extension until March 31 to migrate
contracts to joint ventures will only apply to companies that
sign transition agreements. He also believes all the
companies holding out will cave and sign some sort of
transition agreement before the end of the year. Rooney says
he told Vice Minister Bernard Mommer the migration would
create unstable arrangements that would not last. He also
cautioned that the way the GOV was handling the migration
would put a damper on future investment. Shell thought that
it had reached an agreement with the GOV regarding its tax
bill for USD 130 million but still faces an injunction on its
accounts receivable. END SUMMARY

-------------- --
TRANSITION TO JOINT VENTURES: PRISONERS DILEMMA
-------------- --


2. (C) As reported in Reftel A, Energy Minister Rafael
Ramirez announced on September 26 that the GOV would take
over fields operated under OSAs if companies failed to
migrate their contracts to joint ventures controlled by PDVSA
by the end of the year. The GOV recently sent companies
letters stating that it would give them until March 31 to
migrate their OSAs to joint ventures. Since the GOV did not
make an official public statement, it was not clear if this
extension applied to all companies or just companies that had
signed the transition agreements. Shell Venezuela President
Sean Rooney (strictly protect) told Petatt he fully expects
the GOV to follow through on threats to take over fields
operated by foreign companies under operating service
agreements (OSA) if the companies fail to sign a transition
agreement to migrate their contracts to joint ventures by the
end of the year. Rooney believes the GOV's extension to
migrate contracts to March 31 will only apply to companies
that sign transition agreements. (NOTE: A Shell attorney
told our economic specialist later in the day that the letter
clearly stated companies would have to sign a transition
agreement in order to receive the extension. END NOTE)
According to Rooney, the five major international oil
companies (IOCs) that have not signed transition agreements
(Shell, Chevron, ExxonMobil, BP, and Total) have stayed in
close touch with each other on the issue. However, he
believes all of the companies holding out "will fold" and
sign some sort of transition agreement before the end of the
year.


3. (C) Rooney told Petatt Shell's basic philosophy is
preserve its presence in Venezuela so that it will be in a
position to take advantage of any positive changes in GOV
hydrocarbon policy. Although Rooney did not speculate on
when or if the Chavez administration or a future
administration would adopt a more positive attitude toward
IOCs, he made it clear that Shell wanted to be ready to take
advantage of any changes in policy. When Petatt noted
Shell's position appeared to basically be the same as all of
the other IOCs, Rooney speculated that ExxonMobil was the
only possible candidate to take the GOV to arbitration. When
Petatt opined that any IOC that took the GOV to arbitration
would be forced out of the Venezuelan market, Rooney agreed.
He also noted that once the market became more accommodating
for IOCs, any IOC that took the GOV to arbitration would have
to start from "zero" or a "negative number" since the company
would have to reestablish its reputation in the market.
Rooney said he did not believe ExxonMobil would take the GOV
to arbitration over the OSAs since it only has a minority
stake in a small field. COMMENT: In a meeting with
ExxonMobil's Government Relations Manager Carlos Rodriguez
earlier in the day, Rodriguez told Petatt ExxonMobil was
still waiting for a "triggering event" for arbitration.
Rodriguez said ExxonMobil did not know what the event would
be but it "would know it when it saw it". END COMMENT


4. (C) Rooney stated he told Vice Minister Bernard Mommer,
who is handling the transition negotiations for the GOV, that
the GOV's handling of the migration to date could cause it
long-term problems. He also told Mommer the resulting joint
venture companies would be just as "unstable" as the entities
that emerged from the opening of the Venezuelan petroleum
sector and that the GOV is jeopardizing future investment in
the sector by IOCs. Rooney noted his company has little
choice but to go along with the GOV's strong arm tactics if
it is to preserve its significant investments in Venezuela.
However, the GOV's actions to date on the migration issue
will make it very difficult for Rooney or any other IOC
executive to go to his board of directors and propose major
new investments in Venezuela. (NOTE: Rooney did not tell
Petoff what Mommer's reaction was. END NOTE).

--------------
WHAT HAPPENS TO THE OSA EMPLOYEES?
--------------

5. (C) Rumors have been swirling about the fate of IOC
employees who will be assigned to the new joint venture
companies after the migration. According to one rumor, PDVSA
is trying to insert language into the joint venture
agreements that give it the right to reassign joint venture
employees to PDVSA operations. Another rumor is that PDVSA
will fire all joint venture employees who signed the petition
during the recall referendum.


6. (C) When Petatt raised the rumors with Rooney, he stated
both rumors were false as far as he knew. He stated Shell is
negotiating language with the GOV that would allow joint
venture employees to be transferred to either of the joint
venture partners in order to further their professional
development. The transfers would be strictly voluntary. He
also stated senior PDVSA officials have told him that
employees who signed the petition during the referendum would
not be fired. However, ex-PDVSA employees who participated
in the 2002-3 strike would not be allowed to work in the
joint venture companies.

--------------
TAXES: WHAT CONSTITUTES A DEAL?
--------------

7. (C) As reported in Reftels B & C, Shell received a tax
bill for USD 130 million. In addition, the GOV has attached
an equivalent amount of Shell's accounts receivable on the
grounds that Shell was a "grave risk". According to Rooney,
Shell and SENIAT, the Venezuelan tax authority, reached
agreement on the tax bill almost two months ago. SENIAT said
it would finalize the agreement within two weeks but has
failed to give Shell any type of official notification
regarding the settlement. Although SENIAT has repeatedly
told Shell that the settlement is acceptable, it has not
acted to lift the injunction. Since Shell has not been paid
for months, it has had to take out loans from other members
of the Shell operating group to cover operating expenses.
Rooney said the Dutch ambassador was going to accompany him
to a meeting with SENIAT Superintendent Jose Vielma Mora to
see if SENIAT would lift the injunction.
Whitaker