UPDATE ON PETROAMERICA

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 001709 SIPDIS SIPDIS ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD NSC FOR DTOMLINSON E.O. 12958: DECL: 11/25/2015 TAGS: EPET ENRG EINV VE SUBJECT: UPDATE ON PETROAMERICA REF: A. 2005 CARACAS 03594 ¶B. CARACAS 264 ¶C. MONTEVIDEO 00259 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: Petroamerica, the Chavez administration's initiative for Latin American and Caribbean energy integration, is composed of three parts: Petrocaribe (Caribbean),Petroandina (Colombia, Bolivia, Ecuador, and Peru),and Petrosur (Brazil, Argentina, and Uruguay). In addition, the BRV has begun an outreach program to Central America. Septel will discuss the current state of Petrocaribe. The lines between the component parts of Petroamerica are quite blurry. Although the BRV has made a number bilateral agreements in order to advance Petroamerica, it does not appear to have executed many of them. As noted in Reftel A, we believe that many of the proposed projects will never make it out of the planning stage. END SUMMARY -------------- PETROANDINA -------------- ¶2. (U) On January 23, 2006 Venezuela and Bolivia signed two bilateral agreements with important energy components (Reftel B). Under the agreements, Venezuela agreed to supply up to 200,000 barrels per month of oil, refined products, and liquefied petroleum gases to Bolivia with generous financing terms. Venezuela will also provide 5,000 scholarships to Bolivian students. Based on President Chavez's remarks at the April 29, 2006 press conference for the signature of the ALBA (Bolivarian Alternative for the Americas) accords between Bolivia, Cuba, and Venezuela, a number of the scholarships will be aimed at students who will study petrochemicals. Chavez also stated at the same press conference that Venezuela will provide Bolivia with technical and legal assistance in the areas of energy and mining. Venezuela has also agreed to create a 100 million USD fund to finance "productive projects" and related infrastructure in Bolivia. It is not clear if any of these projects will be energy related. Based on Chavez's comments at the ALBA press conference the fund appears to be aimed at least in part at Bolivia's indigenous population. ¶3. (C) As reported in Reftel A, Colombia and Venezuela have agreed to construct a 215 kilometer gas pipeline from Campo Bellena in Colombia to Maracaibo, Venezuela. (NOTE: The western portion of Venezuela suffers from a severe gas deficit. END NOTE) There appears to be some tension between PDVSA employees and employees of the Colombian petroleum company Ecopetrol. An executive from an international oil company involved in the project told Petroleum Attache on June 9 that the PDVSA representatives have been acting in a very arrogant manner. Every time the Ecopetrol employees raise concerns about costs, the PDVSA representatives tell them not to worry because PDVSA will pay CARACAS 00001709 002 OF 004 them. (COMMENT: It is our understanding that PDVSA will be footing the entire bill for the project. We believe that the pipeline is commercially viable and will be completed. END COMMENT) ¶4. (U) On May 30, 2005 President Chavez and Ecuadoran President Palacio signed an energy cooperation agreement and a memorandum of understanding (MOU). Under the terms of the agreement, PDVSA will offer technical and legal assistance to Petroleos del Ecuador (Petroecuador) in a wide range of areas including the exploration and development of hydrocarbons. In addition, both parties will consider the formation of a joint venture to handle exploration, production, refining and commercialization projects. Under the MOU, both parties will seek to reach a deal on the processing of up to 100,000 barrels of Ecuadorian crude in Venezuelan refineries. Ecuador would ship crude to Venezuela and receive derivative products. The Venezuelan newspaper El Universal has reported on June 11 that officials from Petroecuador and PDVSA are currently meeting to finalize details on the refining agreement. According to El Universal, the goal is to start refining the Ecuadorian crude on July 1. The paper quoted Fernando Gonzalez, the Petroecuador president, as stating the refining deal will save Ecuador between 200 and 300 million dollars per year. (NOTE: In our opinion, El Universal has the best coverage of petroleum issues in Venezuela. END NOTE). ¶5. (C) COMMENT: As noted in Reftel A, the line between the various components of Petroamerica is blurred. For example, Bolivia is frequently mentioned in terms of Petrosur rather than Petroandina. The blurring of lines between the various components does not appear to be the recent of a subtle policy change but rather simple sloppiness. END COMMENT -------------- PETROSUR -------------- ¶6. (U) The crown jewel of President Chavez's Petrosur plans is the 8,000 kilometer gas pipeline (Gasur) from Venezuela to Argentina. Septel will provide details on Gasur. Brazil, Argentina, Bolivia, and Venezuela are scheduled to meet on July 7 to review project studies and preliminary work is reportedly scheduled to begin in August. ¶7. (C) Brazil and Venezuela signed a large number of energy-related MOUs in February 2005. Topics ranged from renewable fuel sources (ethanol and biodiesel to development projects in gas and extra heavy crude oil (the Mariscal Sucre gas field and the Orinoco). In addition, letters of intent were signed identifying business opportunities in the Gulf of Venezuela and Block 5 of the Plataforma Deltana gas field. Moreover, plans are underway to construct a USD 2.5 billion refinery in Pernambuco, Brazil (Reftel A). (COMMENT: Rumor has it that Petrobras, the Brazilian state oil company, has turned a jaundiced eye toward investing in Venezuela due to CARACAS 00001709 003 OF 004 the perception that Venezuela advised Bolivia during its nationalization of gas fields as well as the general lack of legal certainty in Venezuela. It is our understanding that the majority of Bolivian gas was exported to Brazil. We have been unable to confirm the rumors but will continue making inquiries. END COMMENT) ¶8. (U) In addition to the projects cited in Reftel A, Venezuela and Argentina have signed an MOU to develop a "hydrocarbons area" in Argentina. The MOU covers exploration, exploitation, refining and commercialization of crude oil and derivatives in Argentine territory. In addition, PDVSA and Argentine utility CAMMESA have signed a letter of intent for the supply of fuel from PDVSA to CAMMESA. Venezuela and Argentina also have a strategic alliance for the construction of Panamax tankers in the Argentina. ¶9. (U) Venezuela and Uruguay signed an energy cooperation convention in the fall of 2005. Under the agreement, which will last three years, both sides pledge to share a wide range of information and provide technical assistance to each other. The agreement also establishes a mixed commission that will look for areas for additional cooperation. PDVSA and state oil company ANCAP also signed a letter of intent whereby Venezuela would purchase Uruguay's production of ethanol. The two companies also signed a letter of intent covering the commercialization of cement and the transfer of technology. PDVSA also agreed to purchase half of a chain of Argentine gas stations owned by ANCAP (Reftel C). Finally, PDVSA has publicly tangled the prospect of an extra heavy crude oil block in the Faja in front of the GOU and ANCAP. (COMMENT: We have found no record of Paraguay officially signing on to Petrosur and it is not listed as a Petrosur member on the PDVSA website. However, President Chavez has publicly stated in the past that Paraguay would receive shipments of Venezuelan oil at preferential terms and that these shipments were part of Petrosur. END COMMENT) -------------- CENTRAL AMERICA -------------- ¶10. (C) On April 25, 2006 PDVSA signed an agreement with an association of 53 Sandinista mayors in Nicaragua to form a corporation that will supply 10 million barrels of oil per year directly to the represented municipalities. Under the agreement, the cities will purchase Venezuelan oil at market prices but will receive favorable financing along the lines of Petrocaribe. President Chavez stated in an April 29 press conference at the signing of the ALBA agreement in Havana that the deal covered 153 municipalities. (COMMENT: We are not sure if the agreement was expanded, there was a typo in the transcript, or the remark was the product of one too many espressos on the part of President Chavez. END COMMENT) ¶11. (U) PDVSA also signed an agreement with virtually the CARACAS 00001709 004 OF 004 same terms with 22 Salvadoran municipal leaders, all reportedly affiliated with the FMLN, to form a corporation that will supply the respective municipalities with 100,000 barrels per month. It is our understanding that PDVSA has proposed but not finalized a similar deal with a a group of Guatemalan mayors. -------------- COMMENT -------------- ¶12. (C) Despite the fact that Venezuela has signed an impressive number of agreements, MOUs, and letters of intent to advance its Petroamerica agenda, we believe many of the projects will never make it off of the drawing board (Reftel A). As Embassy Montevideo pointed out in Reftel C, Uruguay basically dumped a number of unprofitable businesses on Venezuela. As long as there is the prospect of dumping poor investments, receiving contracts, or receiving some sort of energy subsidy from the Chavez administration for paying lip service to Petroamerica, we suspect that countries will continue to sign phantom deals with the BRV. However, real projects that actually result in increased oil production or refining capacity appear to be few and far between. We have yet to find an industry expert who takes the Gasur project seriously. In addition, it is hard to believe that PDVSA and ANCAP will develop a multi-billion dollar extra-heavy crude project in the Faja. Even Petrobras, which is considered to be one of the most competent state oil companies, does not have experience in a Faja-style project. It is not clear to us what will happen once countries reach a point where Chavez actually expects them to follow through in the name of regional integration on commercially unsound and unrealistic projects such as Gasur. WHITAKER