WORKING FOR THE MAN IN MARACAIBO

C O N F I D E N T I A L CARACAS 003558 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: WORKING FOR THE MAN IN MARACAIBO REF: A. CARACAS 02825 ¶B. CARACAS 03529 ¶C. CARACAS 3402 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: International oil company (IOC) executives paint a uniformly dismal picture of life as a partner with PDVSA in western Venezuela. Production at joint venture fields appears to be falling as costs escalate rapidly, private companies refuse to invest due to a lack of reimbursements, and PDVSA administrative abilities stagnate. BRV officials violated strategic association contracts by insisting on production cuts to meet OPEC cuts. Production levels should decrease significantly during 2007 if the BRV and PDVSA continue on their pesent course. END SUMMARY -------------- LIFE IN THE NEW JOINT VENTURES -------------- ¶2. (C) As reported in Reftel A, production in fields that are being run by joint ventures in which PDVSA holds a majority stake has declined since the joint ventures were constituted in April. A December 2-5 visit by Petroleum Attache (Petatt) to Maracaibo produced ample evidence that this trend will continue. According to Joe Wright (strictly protect throughout),Chevron's General Manager in PetroBoscan, the joint venture operating the Boscan asphalt field, production has declined from 114,000 barrels per day in April to a present level of around 105,000 barrels. Wright stated that the field's cost of production has skyrocketed from 2 USD per barrel to 3.70 USD per barrel during the same period. ¶3. (C) The decline in production and increased production costs stem from a dramatic increase in the number of employees at PetroBoscan as well as inefficient administrative processes. Wright stated that PDVSA fired 75 employees after the PetroBoscan joint venture was formed. (NOTE: PDVSA, as majority partner, controls hiring decisions at PetroBoscan, as it does in all of the joint ventures. END NOTE) PetroBoscan then went on a hiring frenzy. Contractors, such as janitors, were placed on the company's books and a significant number of relatives of PDVSA personnel were hired despite the fact that they were unqualified. Administrative procedures have also begun taking up more time. Wright said a committee used to spend 45 minutes each Friday examining contracts. It now spends one to two days each week on contractual matters. When asked why, Wright replied that social requirements in contracts have greatly complicated matters. He believes that recent changes in the public bidding law will only make matters worse. Wright said he managed to avoid the law's provisions by extending existing contracts' terms following the conversion to the joint venture. However, he has reached the point where it is not possible to extend the contracts' terms. As a result, he believes that he will be forced to devote significant periods of time to negotiating new contracts over the next year. Wright also complained that the SISDEM contracting system, whereby PetroBoscan must draw contractors from a pool administered by the BRV, has significantly slowed operations. He claimed that jobs that used to take days now take months. ¶4. (C) As PDVSA passes more costs on to the joint ventures, its private sector partners have started anticipating potential costs and taken steps to avoid them. For example, Wright stated that PDVSA is encouraging all of the joint ventures in the Maracaibo area to place their offices under one roof. Concerned that PDVSA would build an extravagant office building and then stick its private sector partners with 40 percent of the tab, Wright rented Chevron's Boscan office complex to PDVSA and PetroBoscan and plans to move Chevron's offices to a downtown Maracaibo office. ¶5. (C) Wright stated that Chevron has not been reimbursed for capital expenditures in the Boscan field. He confirmed that Chevron's management has decided to no longer fund PetroBoscan's investment budget (Reftel B). He also stated although Chevron was seconding employees to the joint venture and paying the difference between their Chevron and PetroBoscan salaries, this situation was only temporary. He summarized his situation by stating "I used to run an oil company. Now I am a bill collector." Wright, who also sits on the board of the Hamaca strategic association in eastern Venezuela, stated Chevron would not front PDVSA investment funds if Hamaca was converted to a joint venture. ¶6. (C) Giancarlo Ariza (strictly protect throughout), General Manager of Hocol, a small producer, echoed many of Wright's comments in a meeting with Petatt on December 5. Hocol still does not have a conversion agreement with PDVSA and the BRV. It has received no reimbursement payments for capital expenditures on the joint venture field it operates. Hocol has also not be reimbursed for three months' expenses on the field that it returned to PDVSA in July. As a result, Hocol's owners in Paris have stated that the company will not make any additional investments in the field. The implementation of the company's drilling/workover plan has been moved from November to February. Ariza stated the company will continue pushing back the implementation date as long as it is not paid. In addition, Hocol will not make any investments in the gas sector due to the current investment atmosphere in Venezuela. Hocol purchased a data pack for the Delta Caribe gas round but did not place a bid. ¶7. (C) COMMENT: To the extent PDVSA fails to reimburse its private sector partners in the joint ventures for capital expenditures, the partners are effectively providing PDVSA with interest free loans. PDVSA is selling the oil that is being produced by the joint ventures but not contributing its share of the investment or reimbursing its partners in a timely manner. PDVSA will not be paying interest on the sums being advanced by its partners at the same time it can earn interest on the proceeds from the joint ventures' oil. It is not clear what prices PDVSA is receiving for the joint venture's production. Wright stated PDVSA has the option of paying Chevron using Chevron's pricing formula or the actual price it received. He stated it appears PDVSA is more than willing to use Chevron's pricing formula. END COMMENT -------------- OPEC CUTS -------------- ¶8. (C) IOCs' concerns over the operating environment in Venezuela appear justified, given recent Ministry of Energy attitudes on OPEC production cuts. According to Wright, the Hamaca strategic association's contract states that production cuts to meet OPEC quotas must be based on forecast production and must be spread equally among all companies. Hamaca's cuts were not based on forecasts and PDVSA has not cut production at any of its fields. When Chevron objected to making cuts at Hamaca, Energy Vice Minister Mommer responded in a cavalier manner that the 2001 Hydrocarbon Law overrode the Hamaca contract. -------------- COMMENT -------------- ¶9. (C) We fully expect overall production in Venezuela to continue falling during 2007. It is not clear when PDVSA intends to reimburse its private sector partners in the joint ventures and we do not believe any of the private sector companies will invest significant sums in their respective fields until they are reimbursed. We also do not believe that PDVSA will improve its administrative processes anytime in the near future. The question at this point is how the migration of the strategic associations will proceed. Assuming that the migration of the strategic associations mirrors that of the former operating service agreement fields, the end result will be that over 40 percent of Venezuelan production will slowly gradually decline in efficiency over the coming year. This process could accelerate dramatically if the BRV forces service companies to migrate to joint venture companies (Reftel C). WHITAKER