PETROCARIBE UPDATE #21 - CHAVEZ MAY ALLOW PRIVATE

C O N F I D E N T I A L BRIDGETOWN 000877 SIPDIS SIPDIS WHA/EPSC FOR FAITH CORNEILLE EB/ESC FOR MATTHEW MCMANUS E.O. 12958: DECL: 05/18/2016 TAGS: EPET ENRG EINV PREL PGOV XL VE SUBJECT: PETROCARIBE UPDATE #21 - CHAVEZ MAY ALLOW PRIVATE COMPANIES INTO PETROCARIBE REF: A. BRIDGETOWN 788 ¶B. BRIDGETOWN 602 AND PREVIOUS ¶C. 05 BRIDGETOWN 2043 ¶D. 05 BRIDGETOWN 1911 Classified By: Econoff John Ashworth for reasons 1.4(b) and (d). ¶1. (C) Summary: The Executive Director of Simpson Oil Limited (SOL) believes that Venezuela may work through SOL to import and distribute PetroCaribe fuel in the Eastern Caribbean. Such a move would contradict PetroCaribe's design as a government-only oil agreement. SOL used its participation in the recently formed Organization of Eastern Caribbean States (OECS) Energy Task Force to encourage OECS member-states to utilize existing privately owned import, storage, and distribution infrastructure for PetroCaribe oil instead of building duplicate state-owned facilities. The Barbados-based SOL is "waiting on a final decision from Chavez" on its possible participation in PetroCaribe. Venezuela faces a tough decision in the Eastern Caribbean. Allowing private companies to take part in PetroCaribe violates the plan's principle of "direct trade" or state-to-state oil transfers, but keeping private companies out could delay the start of PetroCaribe shipments for years. End Summary. -------------- PetroCaribe Logistics -------------- ¶2. (C) In a May 17 conversation with Econoff, Stewart Gill, Executive Director of Barbados-based SOL, clarified the logistical plans for PetroCaribe made by the OECS (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines) Energy Task Force at its April meeting (Ref A). PetroCaribe oil bound for the Eastern Caribbean would be refined in Venezuela (not Curacao, as Post had previously assumed) and shipped on a large vessel to Antigua for storage and distribution to the other islands. The OECS and the Venezuelan state oil company (Petroleos de Venezuela/PDVSA) chose Antigua because it has excess storage capacity at a former refinery. St. Lucia, with a large Hess Oil transshipment facility in Cul de Sac Bay, could also become a PetroCaribe distribution hub. ¶3. (C) SOL and the OECS are "waiting on a final decision from Chavez" to activate the plan described above. Gill expressed confidence that the plan would be approved, but he did not know when. He noted that the only operational difference for SOL would be that the refined petroleum products offloaded into the company's storage tanks would come from Venezuela instead of Trinidad. SOL has lobbied OECS countries against erecting state-owned oil import and storage facilities that would duplicate existing privately owned structures. SOL has offered to import PetroCaribe oil using its current infrastructure as a way to keep down the cost to governments and speed up implementation of the energy deal. -------------- Background on SOL -------------- ¶4. (C) Barbadian businessman Kyffin Simpson created SOL (www.solpetroleum.com) when he purchased Shell's Caribbean downstream business in 2004. SOL uses the Shell brand under license at its service stations and sources its oil from Shell. SOL operates exclusively in the Caribbean and has facilities on each OECS island. The other major oil company in the OECS, ChevronTexaco, is diversified around the world, so it has much less to lose from PetroCaribe. Gill has privately expressed serious reservations about Venezuelan President Hugo Chavez's motives in the region. Publicly, however, he has sought a role for SOL within PetroCaribe for the sake of his company's survival. Gill is betting the Venezuelan energy scheme will implode in three or four years. SOL's strategy is to ride it out until then (Ref C). SOL, as a Caribbean company, has apparently had a much easier time working with the Venezuelans and the OECS than has the American ChevronTexaco. (Comment: ChevronTexaco is out of favor with many OECS countries, having both made a politically unsavvy decision to threaten a cut-off of Liquified Petroleum Gas (LPG) supplies to St. Vincent at the time of its December 2005 elections and pulled out of the Antiguan LPG market entirely. End Comment.) -------------- OECS Obstacles to Implementing PetroCaribe -------------- ¶5. (C) PetroCaribe supposedly will save money in two ways: cutting out private oil companies in favor of state-to-state oil transfers and providing concessionary financing. In practical terms, these imagined benefits are unlikely to accrue to the Eastern Caribbean microstates. The OECS countries run the gamut from tiny St. Kitts and Nevis (population 45,000) to small St. Lucia (population 165,000). With governments more municipal than national in character, these countries already struggle to uphold all the trappings of nationhood and survive as independent states. They have neither the resources nor the expertise to start and sustain state oil companies. Furthermore, their crushing debt loads, some of the highest in the world as a percentage of GDP (Ref D),leave them ill-suited to incurring any additional financial obligations. -------------- A New Public-Private Energy Deal? -------------- ¶6. (C) Private participation in PetroCaribe could help the recipient countries avoid becoming dependent on Venezuelan oil. With state-to-state transfers, Chavez can credibly threaten a cutoff in oil supplies to bring regional leaders to heel. With private companies involved, however, his threat would be empty. The private company importing oil would simply find another source of fuel. (Note: Gill explained that SOL could use its existing connections with Shell's trading company to quickly obtain petroleum on the open market in the event of a Venezuelan supply disruption. End Note.) State-run companies set up by PDVSA would not likely have the flexibility, expertise, and connections with the larger petroleum companies to quickly procure oil elsewhere. -------------- Comment -------------- ¶7. (C) PetroCaribe has thus far been a failure in the Eastern Caribbean. Despite all its promises, Venezuela has delivered just two shipments of Liquified Petroleum Gas (LPG) to St. Vincent and one oil storage tank to Dominica. Venezuela is in a bind: allowing private company participation would violate Chavez's illusion that state-to-state oil transfers would somehow reduce energy costs. Given the inherent resource constraints of the OECS microstates, insisting on the formation of state-run companies and construction of duplicate oil import and storage infrastructure on each tiny island could mean the Eastern Caribbean countries will not see PetroCaribe oil for years. PETERS