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