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

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PETROANDINA
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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

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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

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PETROSUR
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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

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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)

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CENTRAL AMERICA
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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

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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.

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COMMENT
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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