EXXONMOBIL FEELING THE HEAT

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 003829

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD

E.O. 12958: DECL: 11/25/2015
TAGS: EPET ENRG EINV VE
SUBJECT: EXXONMOBIL FEELING THE HEAT

REF: A. CARACAS 03758

B. BROWNFIELD E-MAIL 12/20

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


1. (C) SUMMARY: ExxonMobil Venezuela (XM) President Tim Cutt
(strictly protect) told the Ambassador on December 20 that
his company is under increasing pressure from the GOV to sign
a transitory agreement by December 31. The GOV has publicly
stated that it will seize fields if the operators do not sign
the transition agreements by the end of the year. Although
the GOV has stated there would be repercussions if XM did not
sign, it is not clear what they will be. Cutt said it was
extremely unlikely XM would sign by the deadline. END SUMMARY

--------------
AND THEN THERE WAS ONE
--------------

2. (C) As expected (see Reftel A),the Italian oil company
ENI, Total, Chevron and Sansom, signed transition agreements
on December 19 to migrate their Operating Service Agreements
(OSA) to joint venture companies. Under the joint venture
structure, state-owned oil company PDVSA will exercise
majority control. As a result, transition agreements now
cover 31 of the 32 OSAs with over 97 percent of the OSA
production. The only OSA that is not covered is Quiamare-La
Ceiba (QLC),a small field in which Repsol holds 75 percent
and Ampolex Venezuela holds 25 percent. Ampolex Venezuela is
an XM subsidiary that was originally a Mobil asset. Repsol
is the field's operator.


3. (C) XM Venezuela President Tim Cutt called the Ambassador
from the United States on December 20 to discuss the state of
play on GOV attempts to pressure XM into signing a transition
agreement. Energy Minister and PDVSA President Ramirez in
press statements on December 19 stated Repsol is ready to
sign the agreement but XM is refusing to do so. He also said
that if XM does not sign, there would be larger repercussions
for its operations in Venezuela.

--------------
XM OPTIONS
--------------

4. (C) Cutts described QLC as a small field with declining
production. (NOTE: XM Venezuela's Government Relations
Manager Carlos Rodriguez told Petroleum Attach (Petatt) he
believes production is currently around 12,000 barrels per
day. END NOTE) Cutts told the Ambassador that it is unlikely
that a joint venture with PDVSA would give XM enough time to
recover its investment before the field plays out. As a
result, XM was almost certainly not going to sign a
transition agreement for QLC.


5. (C) Cutts told the Ambassador that XM was negotiating to
sell their QLC share to Repsol. He stressed that the
information was business confidential. He stated XM wanted
its actual capital investment costs in QLC rather than a
return on its investment. Repsol is interested in buying out
XM but is not willing to take a loss. Negotiations are
on-going and it is not clear if an agreement will be reached
before the December 31 deadline. Since it is extremely
unlikely that XM would sign a transition agreement by the
deadline, XM is reserving their right to international
arbitration. Cutts said he was expecting an interesting day
on January 2.

--------------
POSSIBLE REPERCUSSIONS
--------------

6. (C) The Ambassador asked if the failure to sign had had
any impact on XM's other operations in Venezuela. Cutts
replied that so far there have been none. He stated he spoke
with Energy Vice Minister Bernard Mommer last week after
Mommer announced that XM's contractual royalty rate was no
longer valid as of March 15, 2006. When Cutts asked what the
new royalty rate would be, Mommer replied 16.67 percent. In
addition, Mommer said he was open to XM paying the new rate
through payment in kind (increasing production to pay the
royalty). Cutts said it was a better signal than XM expected
but it is not clear if the option is still open in light of
QLC.


7. (C) Cutts stated the big question was whether the GOV
would go after XM's Cerro Negro strategic association in
response to its refusal to sign a transition agreement.
(NOTE: XM has a 41.67 percent stake in Cerro Negro. Its
partners are PDVSA (41.67 percent) and BP (16.67 percent).
Cerro Negro's average production in November of extra heavy
crude was 119,335 barrels per day with an average syn crude
production level of 111,613 barrels of 15.5 API oil. END
NOTE) When the Ambassador asked if this would be a breach of
contract, Cutts replied that opinions among attorneys
differed. PDVSA could make a case that the contract permits
them to replace XM as the operating partner after two years.
The contract also gives XM veto power over who PDVSA picks to
replace them. Cutts said it was basically a legal issue.

8. (C) Cutts also said PDVSA might pressure XM to close down
its exploratory drilling at the La Ceiba field if they wanted
to do mischief. XM has two exploratory wells in production
at La Ceiba and they are currently producing income for PDVSA
at absolutely no cost. XM believes the La Ceiba contract
permits them to continue production and drilling. However,
La Ceiba may offer PDVSA another way to punish XM.

--------------
XM PUBLIC RELATIONS STRATEGY
--------------


9. (C) Cutts promised to give the Embassy a heads up before
making any announcements. He also said XM did not plan on
making any announcements unless they sold their QLC share to
Repsol. He added that XM would respond to any PDVSA
announcements. He ended the conversation by emphasizing that
XM was reserving its right to arbitration and building a case.


10. (C) Cutts remarks on XM's PR strategy appear to have been
overtaken by events. Globovision, Venezuela's version of
CNN, posted a story on its website the evening of December 20
stating that XM was claiming they were being pressured by the
GOV to sign the transition agreement. Rodriguez told Petatt
that XM immediately contacted Globovision and asked them to
remove or modify the story. Globovision complied but the
Venezuelan print media picked up the story and placed it in
their December 21 papers. Rodriguez told Petatt that he
would contact XM headquarters and request a written statement
denying the stories. He stated the story appears to have
originated with a French press agency.
BROWNFIELD