AMBASSADOR VISITS MAJOR U.S. OIL SECTOR INVESTMENT

C O N F I D E N T I A L CARACAS 000869 SIPDIS NSC FOR CBARTON ENERGY FOR DPUMPHREY AND ALOCKWOOD TOKYO FOR SFLATT E.O. 12958: DECL: 03/20/2015 TAGS: EPET VE SUBJECT: AMBASSADOR VISITS MAJOR U.S. OIL SECTOR INVESTMENT Classified By: Economic Counselor Richrd Sanders; for reasons 1.4 (b) a nd (d) -------------- SUMMARY -------------- ¶1. (C) During a March 8-9 visit to Anzoategui state, the Ambassador visited the Hamaca heavy oil processing facility, a key element of the approximately $7 billion in U.S. investment in the Jose industrial complex, and received briefings by project partners ConocoPhillips and ChevronTexaco on this and other of their on-going projects in Venezuela. ConocoPhillips informed the Ambassador confidentially that the first oil from Corocoro, its SIPDIS off-shore field now in development, is not likely until 2008 (two years later than planned) because of difficulties the company has had in winning approval of its development plan (finally approved March 3). ChevronTexaco reported that it had begun drilling a first well in Block 3 of the off-shore Deltana Platform natural gas project. In their discussions with the Ambassador, company managers underlined that the political situation continues to impact adversely on the operating environment for the industry in Venezuela. End Summary. -------------- HAMACA PROJECT -------------- ¶2. (SBU) The Ambassador first toured the Hamaca facility, located in the Jose industrial complex. ConocoPhilillips is the majority shareholder in this project while ChevronTexaco and Venezuelan state oil company PDVSA each have 30 percent. Construction of the Hamaca upgrader was completed in August 2004 and the upgrader started operations in September. Until that time, field production, which began in late 2001, was blended and exported. With the completion of the upgrader, the facility is designed to convert the extremely heavy 8 degree API crude of Venezuela,s Orinoco heavy oil belt into a lighter 26 degree API synthetic crude. (Note: One project manager acknowledged in an aside to econoff, that in view of current oil prices, Hamaca is maximizing production with some sacrifice of API quality. He underlined that the upgrader can meet the specified 26 degree API synthetic crude but that it has actually been producing a 24.8-24.9 degree crude which, while slightly heavier, is finding a ready market in today's tight supply environment. Hamaca will, he said, have to cut through-put at some point to demonstrate to the lenders that the facility can meet its specified technical requirements.) ¶3. (SBU) General Manager Roy Lyons explained to the Ambassador that the upgrader, which he described as a "fit for purpose refinery," is now processing 248,000 b/d or some 190,000 b/d of crude and 58,000 b/d of the naptha diluent needed to carry the heavy crude through the pipeline from the field. Lyons and his team said the ramp-up of the upgrader had gone smoothly, indeed so smoothly that a process that had been expected to take 120 days had taken only 90 days. -------------- -------------- OPERATIONAL DIFFICULTIES CAUSED BY EXTERNAL VARIABLES -------------- -------------- ¶4. (SBU) Lyons confirmed that the facility has experienced some difficulties since the upgrader came on-line. The upgrader was shut down completely on December 23 following the failure of one of the turbines at the Guri dam, the giant state-owned facility which produces approximately 75 percent of Venezuela's electricity. It took three weeks to recover from that incident. In addition, Lyons acknowledged that the supply of natural gas from PDVSA has been less than perfect. While the gas shortages have been random, one complete gas curtailment resulted in two weeks of reduced upgrader operations. -------------- COROCORO PROJECT -------------- ¶5. (C) ConocoPhillips de Venezuela Vice President Bud Chamberlain subsequently briefed the Ambassador on the status of the Corocoro project, detailing the company,s efforts to secure approval of its development plan. The Corocoro field, located in the shallow waters of the Gulf of Paria, was discovered by ConocoPhillips in 1999. According to Chamberlain, an original development plan was approved by PDVSA in April 2003. In mid-2003, the first project contracts were bid and the bids received were higher than anticipated. In light of this, PDVSA instructed the company to return to its development plan to try to lower costs (and to increase national content). An addendum to its development plan was submitted in June 2004. In December 2004, the PDVSA board rejected the addendum, not because of its contents according to Chamberlain, but because of the royalty provisions included in the original contract, i.e., a sliding royalty tied to the project's internal rate of return. The confrontation with PDVSA culminated with the February 11 meeting between President Chavez and ConocoPhillips CEO Mulva. Chamberlain acknowledged that the company had agreed to a 16.67 percent royalty for "all Corocoro oil development." He also informed the Ambassador that the approval for the new development plan had finally been granted by the PDVSA board on March 3. ¶5. (C) Phase I development of the project includes a barge-based production facility with a mooring dock and bridge system. The project will also include an export pipeline to a floating storage and off-loading vessel. Chamberlain said the construction of this vessel in South Korea is almost finished. Due to the difficulties in winning approval of the project development plan, not only will the vessel have to be moored for some time, said Chamberlain, but first output for the project (originally planned for 2006) is now not expected until 2008. -------------- DELTANA PLATFORM -------------- ¶6. (C) ChevronTexaco Vice President David Nelson then updated the Ambassador on the status of the Deltana Platform natural gas project, located off-shore of eastern Venezuela near Trinidad. Since the August 2004 beginning of its drilling program, ChevronTexaco has drilled three wells in Block 2 as well as a fourth well in what is believed to be the Trinidadian portion of the field. The company began drilling a fifth well in Block 3 that day, March 8. (Note: the license for Block 3, awarded to ChevronTexaco on August 6, 2004, stipulates that the company must drill one exploration well and shoot additional 3D seismic.) Nelson confirmed that the company has made a "world class" find in Block 2 of "perfect gas," and has now started to consider how best to develop the find. -------------- WORK ENVIRONMENT -------------- ¶7. (C) In his briefings and in a subsequent dinner with oil industry managers, the Ambassador questioned his interlocutors about the current operational effectiveness of their PDVSA partner. The oil industry managers said PDVSA no longer has the quantity or quality of personnel necessary to be an effective partner. One manager said bluntly that personnel from CVP, the PDVSA affiliate that manages the relationship with international oil companies, are incapable of putting together the simplest presentation and that such shortcomings are reflected in other technical personnel as well. It has become more difficult to get approval for project decisions, they said, because PDVSA personnel are seeking political cover. The political situation continues to impact on the operating environment for the industry in Venezuela, such as a recent declaration by PDVSA that workers who had participated in the December 2002-February 2003 strike are now unacceptable on PDVSA projects, even as contractors. -------------- COMMENT -------------- ¶8. (C) While Hamaca project partners ConocoPhillips and ChevronTexaco are happy that the facility has become operational so quickly, it was obvious that they are facing significant operational difficulties in advancing their new projects. The tenor of the discussion about the future of the international oil companies in Venezuela was notably more pessimistic than it is sometimes in our discussions with the most senior company managers in Caracas. Brownfield NNNN 2005CARACA00869 - CONFIDENTIAL