PDVSA'S FOUNDATION CONTINUES TO ROT

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 002297 SIPDIS SIPDIS ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD NSC FOR DTOMLINSON E.O. 12958: DECL: 07/07/2016 TAGS: ECON ENRG EPET EINV VE SUBJECT: PDVSA'S FOUNDATION CONTINUES TO ROT REF: A. CARACAS 01238 ¶B. CARACAS 02227 ¶C. CARACAS 01712 ¶D. 2005 CARACAS 02596 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: Repairs at the Amuay refinery appear to be dragging as investigators look for evidence of sabotage. Crude destined originally for Amuay is being shipped to China. Production of roofing flux has stopped as a result of the fire, which could have a significant impact on the U.S. construction sector. At least one Petrocaribe shipment appears to have been a hoax. PDVSA appears to be quite serious about developing its own tanker fleet and turning Las Matanzas, Cuba into a major transshipment point for Venezuelan crude. END SUMMARY -------------- IMPACT OF THE AMUAY REFINERY FIRE -------------- ¶2. (C) Petroleum Attache (Petatt) and Economic Specialist met with a marketing executive and consultant on August 3 as a follow-up to a meeting in May (Reftel A). The executive and consultant began the meeting by raising the recent Amuay refinery fire (Reftel B). It is not clear when the necessary repairs to the refinery will be carried out. Special agents (described by the executive as "political police") have spent the last two weeks investigating the accident. The agents are looking for signs of sabotage. Repairs cannot begin until the investigation has been completed. The executive stated the agents look for sabotage any time there is a refining accident. Both the executive and consultant agreed that the fire was the result of a break in the line leading to crude distillation unit Number 5. The consultant stated the line should be checked every three months due to the highly corrosive nature of the crude. ¶3. (C) According to the consultant, Amuay's production has fallen from 520,000 barrels per day to 380,000 barrels per day. However, he did not believe that the refinery could sustain that level of production and believes that production will eventually fall to 340,000 barrels per day. The impact of the Amuay fire is further heightened by the fact that the El Palito refinery's cracker has been down since June, which has resulted in the loss of 80,000 barrels of gasoline production per day. (NOTE: A cracker is a piece of equipment that breaks large molecules into smaller ones of uneven sizes in the refining process. END NOTE) El Palito's topping unit is functioning and the refinery is carrying out VGO operations and producing fuel. (NOTE: VGO upgrading is the hydroconversion of vacuum gas oil to lighter products in the naptha, jet, and diesel boiling range. END NOTE.) As a result of the fall in Amuay's production, PDVSA is importing 40,000 barrels of components per day. PDVSA policy forbids the importation of gasoline under almost any circumstances due to political considerations. ¶4. (C) PDVSA is currently exporting 150,000 barrels of crude that normally goes to Amuay to China. Although it would make more sense commercially to sell the crude in the Gulf, PDVSA refuses to do so since it is trying to avoid an increase in its shipments to the U.S. market. ¶5. (C) As a result of the fire, Amuay has also completely eliminated its production of roofers flux, an asphalt product CARACAS 00002297 002 OF 004 that is used for roofing shingles and asphalt roofs. Production has gone from 30,000 barrels per day to nothing. Venezuela supplies more than 80 percent of the U.S. market for roofers flux. The executive stated that Owens Corning and other roofing products companies are worried about the sudden collapse in the supply of roofers flux and its impact on the construction sector. The consultant believes roofing products companies will look for a new supplier and that Venezuela may lose the market completely. He said other sources would supply lower quality flux at higher prices but companies may be willing to pay a premium for lower quality flux in order to guarantee a steady supply. -------------- PETROCARIBE GHOST SHIPMENTS -------------- ¶6. (C) As reported in Reftel C, Dominica supposedly received a shipment of 1,200 barrels of asphalt under Petrocaribe. In addition, Haiti is supposed to receive donations of 120 tons of asphalt each month for twelve months. According to the marketing executive, neither of these events has happened. ¶7. (C) The executive stated that the delivery of asphalt to Dominica was part of a normal commercial transaction. The asphalt tanker was not a PDVSA vessel and its cargo did not belong to PDVSA. Senior PDVSA executives posed for pictures in front of the vessel and PDVSA claimed on its website that the shipment was part of Petrocaribe when in fact it had nothing to do with Petrocaribe. The executive likened the whole sorry affair to someone parking his car in front of an elegant apartment building and claiming he lives there. ¶8. (C) The executive also stated that the donations to Haiti would not happen at least in the medium term. A private sector company delivered asphalt to Haiti three weeks ago and all of the storage tanks are full. According to the executive, Haiti could not accept asphalt donations even if it wanted to do so. The executive added that it would be almost impossible for PDVSA to donate asphalt to Haiti without using private sector infrastructure. He stated there are only two ways to deliver asphalt to Haiti. The first and easiest is to use Total's facilities to unload the cargo and then a Total pipeline to distribute the asphalt to storage facilities. The second option is to use Shell facilities to unload the cargo and then use trucks to deliver it to storage. ¶9. (C) The consultant stated that CARICOM countries have begun to lose faith in Petrocaribe and have asked the BRV to supply crude at subsidized prices to Trinidad and Tobago for refining. Trinidad and Tobago would then ship products to the rest of the Caribbean. -------------- REFINERY STUDIES -------------- ¶10. (C) Both the executive and consultant stated that a Canadian engineering company Lavalin is carrying out a series of refinery studies for PDVSA. The studies include improvements for a 36,000 barrel per day PETROJAM refinery in Kingston, Jamaica, the refurbishing of the Cienfuegos refinery in Cuba, and a proposed refinery in Panama. Lavalin is also carrying out studies for the three domestic refineries that are scheduled to be built as part of the Siembra Petrolera development plan (Reftel D): Cabruta (400,000 barrels per day),Batalla de San Ines (50,000 barrels per day),and Caripito (50,000 barrels per day). CARACAS 00002297 003 OF 004 (NOTE: We believe the executive and consultant were referring to Canadian engineering firm SNC-Lavalin. Basic information on the company can be found at www.snclavalin.com. END NOTE) ¶11. (C) The executive and consultant opined that Lavalin received the contracts because PDVSA did not want to deal with American companies. They stated the company has very close ties to IFP, the French Petroleum Institute and opined that IFP would increase its activities and influence in Venezuela as a result of its association with Lavalin. PDVSA announced on August 3 that it was sending four employees to the IFP for postgraduate studies. -------------- PDVSA'S TANKER FLEET -------------- ¶12. (C) The executive stated he believes PDVSA is quite serious about developing its own tanker fleet and that it will take possession of the first tanker in 2009. The consultant believes the tankers will be Venezuelan flagged and noted that Asdrubal Chavez, PDVSA's executive director for Commerce and Supply, stated the fleet was necessary for "security". When Petatt asked if this would require the creation of a Venezuelan merchant marine, the consultant stated it was entirely possible. He also noted it was possible that the tankers would be captained by Venezuelan naval officers. Both the executive and consultant stressed that the BRV and PDVSA wanted a tanker fleet that was completely loyal to the government. ¶13. (C) The consultant also opined that it was possible that some of the tankers would be crewed in part by Cubans. He noted that PDVSA and the Cubans had formed a shipping company as part of Petrocaribe and that the tanker fleet could be operated via the shipping company (See Reftel C). The executive noted that PDVSA is currently refurbishing the deep sea port in Las Matanzas, Cuba. Among the improvements to the ports is a tank farm. The consultant stated he believes PDVSA and BRV want to use Las Matanzas as a trans-shipment point. If PDVSA uses its own tankers and routes shipments through Las Matanzas, it will be able to hide the volume and destination of its exports. ¶14. (C) The executive noted he believes there are a number of people inside of PDVSA that would like to see the tanker fleet's deployment delayed as long as possible. PDVSA is currently utilizing the spot market on a regular basis. Each transaction on the spot market provides opportunities for "commissions" or, in other words, corruption. Once PDVSA has its own fleet of tankers, its reliance on the spot market will decrease. The executive admitted that he was not sure to the degree that PDVSA officials could slow down the tanker program in order to continue feeding at the spot market trough. -------------- COMMENT -------------- ¶15. (C) As in Reftel A, the meeting highlighted PDVSA's attempts to diversify away from the U.S. market as well as its continuing problems with generalized incompetence and corruption. The consultant said he was quite confident that PDVSA would continue to have accidents at its refineries. Although we fully expect PDVSA to continue developing a tanker fleet, it is not clear how efficient it will be given the poor state of PDVSA's administrative and maintenance CARACAS 00002297 004.2 OF 004 capabilities. In addition, it remains to be seen what role Cuba will play in Petrocaribe, President Chavez's grand vision for the Caribbean, once Fidel Castro has passed from the scene. BROWNFIELD