PDVSA'S TERMINAL WOES

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001849 SIPDIS NOFORN SIPDIS ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD NSC FOR DTOMLINSON E.O. 12958: DECL: 11/25/2015 TAGS: EPET ENRG EINV VE SUBJECT: PDVSA'S TERMINAL WOES REF: A. CARACAS 01238 ¶B. 2005 CARACAS 03560 ¶C. CARACAS 01712 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: According to a PDVSA sub-contractor, PDVSA terminals suffer from poor recordkeeping, staffing problems, and inadequate equipment. As a result, PDVSA has incurred millions of dollars in demurrage (payments for the delay in loading a vessel). PDVSA's books do not reflect many of these losses due to the fact that the claims are still unresolved. PDVSA appears to be taking some tentative steps to deal with the problems. END SUMMARY -------------- TERMINAL WOES -------------- ¶2. (C) An EU citizen who is currently providing consultation services to PDVSA, met with the Legal Attache and Petroleum Attache on June 20 and supplied information on the current state of PDVSA's terminal operations. PDVSA is offering the consultant a contract to conduct a review of various aspects of Citgo's operations. (NOTE: Citgo is PDVSA's wholly-owned U.S. subsidiary. END NOTE) ¶3. (C) According to the consultant, PDVSA's terminal operations were a shambles. There is no common set of procedures to govern operations between terminals and refineries. In addition, terminals did not have a comprehensive file system for shipments. Client and product files were mixed up and files did not contain checklists or any system of organization. The consultant recommended a series of steps to organize the files and stated his company could organize the files for PDVSA. However, he stated PDVSA has not approached his company to carry out the recommendations. ¶4. (C) The consultant also found that terminal employees take lunch at the same time. As a result, ship captains can not find anyone to provide them with information during lunchtime. The terminals also do not have staff on hand during the weekends. The consultant was told at one terminal that an employee was available via cell phone during the weekends in case of emergencies. When the consultant called the cell phone number during a weekend, no one answered. ¶5. (C) The consultant also found problems with the inspection system for tankers. The inspectors, along with loadmasters, certify cargo. PDVSA was using the same inspectors without any rotation system. As a result of the consultant's recommendations, PDVSA now uses five to seven different companies. The consultant claimed corruption among the inspectors was endemic. Inspectors and captains collude to underestimate cargoes by two to three thousand barrels and then pocket the profit from the difference. -------------- DEMURRAGE -------------- ¶6. (C) Demurrage, payments made for delays in loading a vessel, are a daily occurrence for PDVSA. A shipping contact told us that ships are given a three to seven day window for loading. The captain advises the terminal on his estimated time of arrival when the ship is 72, 48, and 24 hours from arrival. Upon arrival, the captain must provide notice to the authorities, who have a six hour window to load the cargo. If authorities cannot load the vessel within the window, they must pay substantial penalties. ¶7. (C) According to the consultant, PDVSA's demurrage runs in the millions. Loadmasters do not have information on CARACAS 00001849 002 OF 003 individual vessels. PDVSA admitted to the consultant that it needed to hire two analysts who specialized in handling demurrage issues but stated it would take eight months to hire them due to administrative problems within PDVSA. -------------- HIDDEN LOSSES -------------- ¶8. (C) As part of the consultation, the consultant reviewed PDVSA's books for 2004 and 2005. He claimed that 72 million USD in losses were not reflected in the 2004 financial statements. Given the context of the conversation, the claims appear to arise from a variety of shipping issues. According to the consultant the losses are not listed on the books because they are "unfinished claims". He stated all of the claims from 2005 are still under negotiation. He also claimed that PDVSA takes up to two years to pay on claims. The only exception appears to be claims paid to shipping brokers. The consultant said PDVSA understands that the brokers will not procure additional shipping for PDVSA if they are not paid promptly. -------------- RECOMMENDATIONS -------------- ¶9. (C) The consultant claimed he presented the results of his review directly to the PDVSA board of directors. When asked what he recommended, he laughed and stated it would take all afternoon to list them. When pressed, he stated the most important recommendation was an increase in storage tanks at terminals. He stated PDVSA needed to build five to six storage tanks at every terminal. He opined that he could not see how PDVSA could refine substantial amounts of Ecuadorian crude, given its lack of storage facilities. PDVSA also needs to build pipelines to the terminals with larger diameter pipe than they are currently using. In addition, it need to update its pumps. The consultant noted PDVSA would have to install new pumps if it went with larger diameter pipe and that both improvements would cut down on demurrage. He also recommended that the terminals issue daily reports. ¶10. (C) A number of the consultant's recommendations appear to have centered on safety issues. At one terminal an electrical line ran 20 meters away from the terminal's storage tanks. The consultant strongly recommended that the line be moved and the terminal complied. In another terminal, corrosive naphtha was being run through the same line as gasoline and A-1 jet fuel. Although the terminal workers claimed the line was being cleaned properly, the consultant did not believe them. He recommended that the terminal use dedicated pipelines for each type of product. ¶11. (C) When asked how much it would cost to implement all of his proposals, the consultant admitted that he did not know. He did state that PDVSA was implementing some of his proposals, particularly the ones that related to safety issues. He also implied that his report made a very strong impression on the PDVSA board. -------------- COMMENT -------------- ¶12. (C) The consultant's comments are in line with what we have heard in the past about PDVSA's operational and administrative shortcomings (Reftel A and B). In addition, as we have noted before, it is difficult to see how PDVSA will successfully meet its Petrocaribe commitments of creating a shipping network and increasing member's storage, refining, and distribution capacities given the problems that plague its own terminals (Reftel C). The consultant's statements regarding the 2004 claims also highlight the CARACAS 00001849 003 OF 003 complete lack of transparency regarding PDVSA's financial condition. We have seen evidence that PDVSA is working to overcome some of its problems. The fact that PDVSA has brought in consultants indicates that it realizes it needs outside help to overcome its myriad of administrative and operational problems. We also view its recent attempts to increase the number of rigs it operates as a sign that it realizes it must take steps to increase production. However, the pace of change, at least from our perspective, appears to be slow. It will be interesting to see in the coming months if the consultant's recommendations result in increased efficiency at PDVSA's terminals or are merely filed away in PDVSA's labyrinth of files. WHITAKER