CHEVRON'S CRYSTAL BALL

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 003311

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 10/27/2016
TAGS: ECON ENRG EPET EINV VE
SUBJECT: CHEVRON'S CRYSTAL BALL

REF: A. CARACAS 03131


B. CARACAS 03224

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: Econ Counselor and Petroleum Attache (Petatt)
met with Chevron Latin America President Ali Moshiri
(strictly protect throughout) on October 31 to discuss a
variety of issues in the hydrocarbon sector. Moshiri
believes the BRV will face serious problems in 2008 as a
result of a decline in oil prices, lack of investment in
production, and its irresponsible fiscal policies. He noted
the BRV has shown some flexibility regarding the migration of
the strategic associations to joint ventures in which PDVSA
holds a majority stake. Chevron is not going to cut
production in Venezuela despite a BRV request to do so to
meet announced OPEC production cuts. Moshiri also stated
Chevron was not assisting with the construction of the CIGMA
natural gas complex. The Delta Caribe gas round was
postponed because the BRV did not receive any bids. END
SUMMARY

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CHEVRON'S CRYSTAL BALL
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2. (C) Moshiri stated Chevron believes the BRV will face
serious economic problems in 2008 as a result of a decline in
oil prices, a lack of investment by PDVSA in production, and
the BRV's irresponsible fiscal policies. Although Moshiri
characterized the situation as a "collapse", his later
comments backed off of that characterization.


3. (C) Chevron believes that WTI will be trading in the 45 to
50 USD range in 2008 as a result of increases in production
capacity worldwide. Although Moshiri was careful to note
that prices could rise rapidly, he believes that any
significant price movements upward will be in the form of
spikes rather than trends. Since the Venezuelan oil basket
usually trades 12 to 14 USD below the price of WTI, a
downward trend in oil prices will place significant fiscal
pressure on the BRV. The BRV has not only increased its
spending dramatically but it has focused its spending on
consumption rather than investment. As a result, it will
have very little to show for its increased expenditures.


4. (C) In addition, the conversion of the former operating
service agreement fields to joint ventures in which PDVSA
holds a majority stake has placed a significant strain on
PDVSA's budget. Under the operating service agreements,
PDVSA could finance its obligations at LIBOR plus 3 percent
over a period of 10 years. Under the new joint ventures,
PDVSA, as the majority shareholder, must come up with 50 plus
percent of investments immediately. Moshiri said Chevron was
paying 100 percent of the investments in the PetroBoscan
joint venture and that PDVSA then reimbursed Chevron. He
stated he believed the day was approaching when PDVSA will no
longer be able to write a multi-million dollar check to
reimburse Chevron.


5. (C) In the past, Venezuela has compensated for declining
oil prices by raising production and cheating on its OPEC
quota. However, due to a lack of investment, PDVSA no longer
has excess capacity that it can utilize in order to cheat.
Lack of investment is not the only factor that has hampered
production. PDVSA simply does not have enough qualified
personnel for its own operations and the new joint ventures.
Moshiri stated PDVSA has tried to get Chevron to second more
employees to PetroBoscan but Chevron has stated it simply
does not have enough personnel to do so. PDVSA's personnel
problems are further exacerbated by an exodus of expats.

CARACAS 00003311 002 OF 003


According to Moshiri, a significant number of expats have
left Venezuela due to poor working conditions as well as a
general unease regarding the political situation. Moshiri
claimed PDVSA managers have made it a point to make life
difficult for expats, particularly Americans. He said he has
had a difficult time getting Chevron expat employees to work
on joint projects with PDVSA staff. As a result of the
shortage of technicians and engineers worldwide, both the
expats and Chevron know that they can easily find employment
with another company in another part of the world. (COMMENT:
PDVSA officials appear to believe that Venezuela's
substantial reserves gives them carte blanche to treat
private sector companies in a heavy-handed manner without any
negative consequences. International oil companies are not
the only companies to suffer from this attitude. Executives
from project service companies Foster Wheeler and Fluor told
Petatt in meetings on November 2 and 3 that PDVSA officials
do not realize that it is currently a "contractor's market".
The executives stated they believe service companies that
carry out major construction projects have begun to put
Venezuelan projects at the bottom of the stack due to
operational difficulties in Venezuela as well as the plethora
of attractive alternative projects worldwide. END COMMENT)


6. (C) Moshiri also stated that production is not the only
part of the hydrocarbon sector that is causing Venezuela
problems. He added the state petrochemical company Pequiven
has only 25 percent of its operations on-stream. In his
opinion, the sector would be qualified as "dead" if it were
operating at 75 percent. He also noted that refining
operations are only on-stream 87 to 88 percent of the time.


7. (C) Moshiri believes that President Chavez may have some
inkling of Venezuela's impending economic difficulties. He
noted Chavez appears to be far less trusting of his
subordinates and questions the information that they give
him. During the groundbreaking ceremony for the CIGMA
natural gas project, Chavez repeatedly asked when the project
would be completed.

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STRATEGIC ASSOCIATION MIGRATION
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8. (C) Moshiri was upbeat about the migration of the
strategic associations to joint ventures in which PDVSA held
a majority interest(Reftels A and B). At one point in the
meeting, he hinted that the BRV may abandon the migration
project altogether. He stated that Energy Minister Ramirez
told him PDVSA was abandoning its proposal to split the
upstream and downstream operations of the associations. He
attributed the shift to a realization on the part of PDVSA
and the Energy Ministry that a split would have a significant
negative effect on operations. (NOTE: Thore Kristiansen
(strictly protect),President of Statoil Venezuela, told
Petatt on October 30 that Statoil was not happy with the
proposal to split upstream and downstream operations for
operational reasons but that it could live with it. He
stated Statoil had similar arrangements in other parts of the
world. END NOTE)


9. (C) Moshiri said he is also trying to educate PDVSA and
the Ministry on the serious financial consequences of a
migration. According to Moshiri, a migration would produce a
default and attendant penalties. Since the creditors have
access to PDVSA's escrow accounts, they will not have any
trouble collecting on the outstanding loan balances as well
as the penalties. (COMMENT: As we noted in Reftel A, there
are indications that lenders will not be as harsh on the BRV
and PDVSA in the event of a migration as Moshiri believes.
END COMMENT)

CARACAS 00003311 003 OF 003



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OPEC CUTS
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10. (C) Moshiri stated Chevron received a letter from the BRV
requesting that it cut production by 17,000 barrels per day
in order to meet Venezuela's announced OPEC cuts (Reftel B).
He said Chevron had no intention of cutting production and
noted the Hamaca strategic association is not producing at
full capacity. He also added that Venezuela is not producing
near its OPEC quota and that the rest of the OPEC members
know it. Moshiri did not seem at all concerned about
negative repercussions stemming from Chevron's decision not
to cut production. (NOTE: Venezuela's current OPEC quota is
3.085 million barrels per day. Private analysts believe that
current Venezuelan production hovers between 2.4 to 2.6
million barrels per day. END NOTE)


11. (C)COMMENT: Production cuts by PDVSA may be having
negative repercussions in the rest of the hydrocarbon sector.
Since a significant portion of Venezuela's gas is associated
gas, a decrease in oil production also means a decrease in
gas production. A Fluor executive told Petatt on November 3
that PDVSA production cuts have caused problems with the gas
supply to the El Tablazo petrochemical complex. END COMMENT.

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GAS PROJECTS
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12. (C) When queried about recent press reports that Chevron
was going to take an active role in the construction of the
CIGMA gas project, Moshiri stated Chevron was not interested.
He implied the BRV was pushing Chevron to take an active
role but that Chevron was holding it at arm's length.


13. (C) Moshiri also said Chevron decided not to place a bid
during the recent Delta Caribe gas auction. He stated the
BRV decided to cancel the auction because it did not have any
bidders. He blamed the lack of bidders on greedy Energy
Ministry officials.

BROWNFIELD