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 -------------- PDVSA'S BOOKS ARE IN DISARRAY -------------- ¶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. -------------- PDVSA AS MONETARY POLICY INSTRUMENT -------------- ¶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) -------------- WHAT COMES AROUND, GOES AROUND CARACAS 00002825 002 OF 003 -------------- ¶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. -------------- PRODUCTION IN THE FORMER OSA FIELDS -------------- ¶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 WHITAKER