EXXONMOBIL MEETS WITH THE GOV

C O N F I D E N T I A L CARACAS 000805

SIPDIS


NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
TOKYO FOR SFLATT

E.O. 12958: DECL: 03/15/2015
TAGS: EPET VE
SUBJECT: EXXONMOBIL MEETS WITH THE GOV

REF: CARACAS 163 (NOTAL)

Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b)
and (d)

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SUMMARY
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1. (C) ExxonMobil representatives met with Vice Minister of
Energy and Petroleum Bernard Mommer on March 15 in what they
termed a "cordial" meeting. This was the first meeting the
company had won in its attempt to engage the GOV on its
unilateral decision to increase the royalty levied on the
four projects that upgrade the extra heavy oil of Venezuela's
Orinoco heavy oil belt. ExxonMobil also received official
notification in early March that the GOV had unilaterally
raised a similar concessionary royalty rate on its La Ceiba
project to 16.67 percent. ExxonMobil believes it will have a
second meeting with the GOV the first week in April. A
company manager stated his belief that ExxonMobil will have
to &think outside the box8 in order to identify a
resolution that will allow the GOV to save face and claim
victory in front of the other investors in similar projects.
End Summary.

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EXXONMOBIL MEETS WITH VICE MINISTER
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2. (C) ExxonMobil de Venezuela President Mark Ward met on
March 15 with Energy and Petroleum Vice Minister Bernard
Mommer. The purpose of the meeting was to discuss the
unilateral decision taken by the GOV to increase the royalty
on ExxonMobil's Cerro Negro project to 16.67 percent. (Note:
ExxonMobil and other international oil companies embarked on
what were then technically challenging multi-billion dollar
investments in the 1990's. The projects received a 1 percent
royalty rate for a nine year period. On October 10,
President Chavez announced a GOV decision to increase the
royalty to 16.67 percent. End Note.) Ward was accompanied
by Caracas Government Affairs Manager Carlos Rodriguez who
contacted econoff on March 16 with the report that Ward had
characterized it as a "cordial" meeting. Mommer had, said
Rodriguez, explained at length Venezuela's alleged right to
make such a sovereign decision. He had urged ExxonMobil not
to consider the arbitration route, and made a reference to
the impact such a decision would have on ExxonMobil's other
operations and opportunities in Venezuela.


3. (C) Rodriguez said Ward had underlined to Mommer that
ExxonMobil has been an excellent business partner for the
Chavez Government, noting that the company had been the first
private sector company to ship a cargo out of Puerto La
Cruz's Guaraguao terminal following the 2002-2003 oil strike,
and had also signed the Preliminary Development Agreement for
its proposed multi-billion dollar petrochemical project just
two days before the August 2004 presidential referendum.

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AFTER MORE BAD NEWS
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4. (C) Rodriguez informed econoff the week of March 7 that
ExxonMobil had also received notice from the Ministry that
the royalty on its La Ceiba project would be increased to
16.67 percent. The La Ceiba block is located in Trujillo
state and was acquired by Mobil in the so-called "Exploration
Round" in January 1996. The project is currently a joint
venture with Petro-Canada. The partners drilled five wells
in La Ceiba between 1997-2001 and, in order to aid their
decision on whether they will move ahead on project
development, performed a long-term production test on two
wells in late 2004.


5. (C) The only exploration round project that has already
declared commerciality is the Corocoro field, ConocoPhillips'
discovery in the Gulf of Paria West block. In conjunction
with President Chavez's February 11 meeting with
ConocoPhillips CEO Mulva, the company agreed to change the


royalty structure from a sliding royalty tied to the
project's internal rate of return to a flat 16.67 percent
royalty. With this agreement in hand, the Ministry moved
quickly to mandate a similar change for La Ceiba. This
decision will undoubtedly have an impact on ExxonMobil's
planning with respect to any attempt to move ahead with the
La Ceiba project. The two royalty issues, i.e., Cerro Negro
and La Ceiba, will, said Rodriguez on March 16, be handled by
the company as a package.

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NEXT STEPS
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6. (C) According to Rodriguez, the two parties will meet
again the first week in April. He added that it was obvious
to him that the word "compensation" must be removed from
ExxonMobil's lexicon to be replaced perhaps by "business
opportunities." ExxonMobil will, he believes, have to
"think outside the box" in order to identify a resolution
that will allow the GOV to save face and claim victory in
front of the other investors in similar projects.

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COMMENT
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7. (C) In a February 28 meeting with the Ambassador to
discuss the status of his attempts to meet with the GOV, Mark
Ward said ExxonMobil was preparing to register its request
for international arbitration as early as the first week of
April. That target date will now slip. While ExxonMobil
would undoubtedly prefer a negotiated settlement with the
GOV, we do not believe the company will allow itself to be
strung along at length. We also assume that the GOV would
prefer to avoid potentially long-term litigation, but the
designation of an appropriate "business opportunity" for
ExxonMobil - perhaps preferential access to an off-shore gas
block - might not be in line with President Chavez's recent
preference for potential business deals with state oil
companies from such partners as China, Russia, India, and
Iran.
Brownfield


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2005CARACA00805 - CONFIDENTIAL