BITS AND PIECES FROM THE HYDROCARBON SECTOR

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 002825

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 09/14/2016
TAGS: ECON ENRG EPET EINV VE
SUBJECT: BITS AND PIECES FROM THE HYDROCARBON SECTOR

REF: A. CARACAS 02268


B. CARACAS 00910

Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4
(D)


1. (C) SUMMARY: PDVSA's books continue to be in complete
disarray due to problems with tax authorities and the state
petrochemical company. The BRV is pressing PDVSA to act as a
central bank. PDVSA's recent shabby treatment of the Japan
Bank for International Cooperation (JBIC) has come back to
haunt it. Production at the former Operating Service
Agreement (OSA) fields continues to drop. Operators of the
fields are still in a state of legal limbo. END SUMMARY

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PDVSA'S BOOKS ARE IN DISARRAY
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2. (C) A senior executive at the Venezuelan Association of
the Chemical and Petrochemical Industry (ASOQUIM) told
Petroleum Attache (Petatt) on September 12 that PDVSA's books
are in complete disarray, due in part to conflicts with
Pequiven, the state petrochemical company and SENIAT, the BRV
tax authority. According to the executive, Pequiven has not
paid PDVSA for any of the gas that it has used this year.
The executive added that PDVSA and Pequiven have not reached
agreement on a pricing formula for the gas. The executive
did not give an estimate on how much Pequiven owed PDVSA but
implied that it was a significant sum. (COMMENT: Pequiven
was a subsidiary of PDVSA until March 2006 when it became an
independent entity. The executive stated the split was the
result in part of animosity between Energy Minister and PDVSA
President Rafael Ramirez and Pequiven President Saul
Ameliach. If true, this will only serve to further cloud
pricing negotiations between PDVSA and Pequiven. END COMMENT)


3. (C) The executive also stated that PDVSA is currently
battling SENIAT over its ability to deduct expenses from
social development programs. SENIAT has clearly stated that
PDVSA cannot deduct the expenses. According to the PDVSA
website, its social development budget for 2005 was 3.86
billion USD. It is not clear if this figure covers PDVSA
affiliates, which also have significant social development
budgets. For example, the press reported this week that
Intevep, PDVSA's research and development affiliate, will
invest roughly 112.7 million USD in social development
projects during the period of 2006-2012. Ironically, PDVSA
has repeatedly told private sector companies that they cannot
deduct social development program expenses.

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PDVSA AS MONETARY POLICY INSTRUMENT
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4. (C) The financial press also reported this week that
PDVSA would issue 3.5 billion USD worth of dollar denominated
bonds. The bonds would be placed in the local market and
priced in Bolivars. The placement would be used to soak up
excess liquidity in the Venezuelan economy. Economic
specialist contacted a senior PDVSA finance official on
September 13 and was told that PDVSA has not made any
decisions regarding the bond issue. The official admitted
that PDVSA was under intense pressure from the BRV to come up
with ways to reduce liquidity and inflationary pressures in
the economy. Septel on inflation will deal in detail with
the BRV's attempts to use PDVSA as an adjunct of the central
bank. (COMMENT: It is not clear what PDVSA would do with the
Bolivar proceeds from a bond issuance. END COMMENT)

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WHAT COMES AROUND, GOES AROUND

CARACAS 00002825 002 OF 003


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5. (C) As reported in Reftel A, PDVSA recently scuttled a
major gas project when it rejected JBIC financing at the last
minute in March. The decision embarrassed JBIC and caused
problems for it in the Japanese Diet. An American service
company executive told Petatt on September 12 that PDVSA has
now gone back and requested that JBIC provide financing for
the project. The source of the executive's information was a
Mitsui executive. Mitsui is a partner in the gas project.


6. (C) Although JBIC agreed to provide the financing, it
will take a pound of flesh for PDVSA's boorish behavior in
March. The parties are still negotiating the details of the
agreement but JBIC is now insisting on a higher interest
rate, a strengthened arbitration clause, and collateral in
the form of oil rather than PDVSA assets. It appears that
PDVSA is willing to accept the more stringent conditions.
Ironically, one of the reasons the PDVSA board rejected the
original agreement was that the interest rate was too high.

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PRODUCTION IN THE FORMER OSA FIELDS
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7. (C) According to minutes from the private sector oil
companies' August 2006 Monthly Exploration Luncheon,
production at the former OSA fields was 361,113 barrels per
day in June, down 1.94 percent from May. The figures
apparently do not reflect production from the two former OSA
fields, Dacion and Jusepin, that PDVSA assumed control of in
March (Reftel B). (COMMENT: Dacion's daily production in June
2005 was over 63,000 barrels per day. Jusepin's was over
27,000 barrels per day in January 2006. We have not seen any
reliable data on the fields since PDVSA took control of them.
END COMMENT)


8. (C) The decline in production in the OSA fields stems in
large part from continued legal uncertainties regarding the
new joint ventures that control the fields. According to the
luncheon notes, four companies (Inemaka, Hocol, Tekoku, and
Vinccler) have not signed conversion agreements with PDVSA
and the BRV. The remaining companies that have signed the
agreements are still waiting for President Chavez to sign the
transfer decrees to create the joint ventures. As a result,
none of the joint venture agreements have been registered
with the proper authorities.


9. (C) The former OSA operators are still operating the
fields but are only making minimal investments in them in
order to maintain production since they have no formal
guarantee that they will be reimbursed for capital
investments. The operators also do not have any idea of what
form the reimbursement process will take. Most of the
operators have been reimbursed for significant portions of
their 2006 operating expenses. However, none of the
operators have been reimbursed for capital investments made
in the first three quarters of 2006.


10. (C) In addition, a prominent energy attorney told Petatt
on September 14 that the hydrocarbon purchasing agreements
that govern the terms of sale from the joint venture
companies to PDVSA have still not been signed. As a result,
the operators have not received compensation for the oil that
they have sent PDVSA since April 1. The terms of the
hydrocarbon purchasing agreements are retroactive to April 1.


11. (C) COMMENT: According to the luncheon minutes, decision
making power still lies with the former operators until the
joint ventures are registered and legally exist. However, we
have heard that this may not be the case in all of the former
OSA fields. The joint ventures' board of directors have been

CARACAS 00002825 003 OF 003


nominated and are in place. However, they do not have any
legal authority until the joint ventures exist. At the
moment, all of the private sector companies are operating in
a state of legal limbo. The former OSAs do not exist and
there is no legal structure that has replaced them. It is
not clear, for example, who would be responsible if a
significant accident occurred at one of the fields. END
COMMENT






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