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

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LIFE IN THE NEW JOINT VENTURES
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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

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OPEC CUTS
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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.

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COMMENT
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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