MIXED BAG FOR SERVICE COMPANIES

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 003559

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: MIXED BAG FOR SERVICE COMPANIES

REF: CARACAS 03402

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


1. (C) SUMMARY: Service company representatives in western
Venezuela present a mixed picture when it comes to dealing
with PDVSA. Companies that provide services report payment
problems and administrative arrangements straight from the
pages of Kafka. However, equipment companies frequently
benefit from PDVSA managers' lack of sophistication. PDVSA
also appears to be somewhat lax in forcing some service
companies to meet new social development obligations. END
SUMMARY

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STRAIGHT OUT OF KAFKA
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2. (C) Petroleum Attache (Petatt) met with senior executives
from Wood Group's gas turbine unit, Simco (a consortium that
provides water treatment services in which Wood Group holds a
50 percent stake),and Baker Oil Tools on December 4-5 to
discuss the operational environment in western Venezuela.
Based on the conversations, it appears that service providers
face a myriad of administrative and payment problems, but
equipment providers are benefiting from PDVSA managers'
relative incompetence and inexperience.


3. (C) The Simco executive complained the consortium had
not been paid for months. When he presented a bill to PDVSA,
he was told that only entities registered as companies that
promote social production companies (REPS) could receive
payments. When he went to register Simco as a REPS, he was
told that consortiums could not register as REPS, only
companies could do so. The executive stated that one of the
consortium members was close to PDVSA management and he was
hoping that the matter would be resolved in the near future.


4. (C) The executive also complained that earlier PDVSA
officials told him that they were deducting an amount equal
to five percent of his contract's gross revenues for social
development purposes. When the executive pointed out that
his contract was signed in 1997 and should be exempt from the
new requirements, the PDVSA officials told him that it did
not matter. PDVSA relented when the executive told them that
the consortium could no longer provide it with services due
to the fact that the contract was no longer profitable with
the new social development deductions. The executive also
stated the consortium has had multiple problems with tax
authorities.


5. (C) An additional source of frustration is a lack of
competence among PDVSA managers. The number of wells that
Simco is servicing has dropped dramatically due to lack of
maintenance. The executive stated that wells have detailed,
comprehensive maintenance records up until 2003. After that
date, maintenance records are practically nonexistent As
wells clog up due to a lack of maintenance, PDVSA officials
simply close them rather than attempting to maintain them.


6. (C) PDVSA's lack of competence extends to the utilization
of assets. Simco supplied a series of platforms to PDVSA
under the BOOT system (Build, Own, Operate, Transfer). Under
the contract, Simco operates the platform for sixteen years
and then transfers ownership to PDVSA. According to the
executive, one of the platforms is currently idle. The
executive stated he has repeatedly urged PDVSA to move the
platform and utilize it in another area. Despite the fact
that they are spending significant sums for the platform,
PDVSA officials are unwilling to move it. The executive
opined that PDVSA no longer has qualified staff to carry out
the necessary engineering studies to reposition the platform.

CARACAS 00003559 002 OF 003



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PLEASE TAKE MY MONEY
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7. (C) Service companies that provide equipment, on the
other hand, appear to be benefiting from PDVSA management's
lack of expertise as well as the need to maintain production.
A Wood Group gas turbine executive said PDVSA managers'
demand for gas turbines appears to be inelastic. Their basic
attitude is "Just tell me how much it costs". In one case, a
PDVSA manager forgot to consider installation costs when
ordering the equipment. When the Wood executive asked about
installation, the manager told him that Wood Group should
install the equipment and send PDVSA the bill. The manager
made no effort to negotiate the price for installation. The
Wood Group executive also stated PDVSA frequently requests
consulting services for the gas turbines due to a lack of
operating expertise.


8. (C) Perhaps the most egregious example of PDVSA naivete
according to the Wood Group executive was the recent purchase
of engine covers. The Wood Group executive asked a PDVSA
manager if he needed covers for two engines. The manager
replied he did not since he had just ordered the covers from
Italy. The Wood Group executive described the covers as
simple metalworking jobs. Without thinking, the executive
asked the PDVSA official what in the world he was thinking
and then realized that he may have pushed the official too
hard. The PDVSA official replied that he ordered the covers
from Italy since the motors were originally from Italy. The
Wood Group executive quickly agreed that it was a good idea
in order to maintain a good working relationship.


9. (C) Although Baker Oil Tools has not had quite the same
experience as the Wood Group executive, a senior Baker
executive told Petatt that his company recently had some
payment problems with PDVSA production in Maracaibo. When
the Baker executive threatened to cancel the contract, the
production manager begged him to reconsider and promised to
do everything in his power to resolve the situation. The
Baker Oil Tools executive was shocked, since the standard
PDVSA response in the past has been to dare the company to
stop supplying it.

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TRENDS
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10. (C) Both the Wood Group gas turbine executive and the
Baker Oil Tool executives stated they have seen changes in
customers' behavior recently. The Baker executives stated
they have not seen a sharp increase in equipment orders from
PDVSA despite its claims that it is embarking on a major
investment drive in western Venezuela. However, the
executives stated PDVSA is purchasing electric submersible
pumps for Lake Maracaibo as it replaces existing units. The
executives attributed this to the gas shortage in western
Venezuela. They also noted that there has been a noticeable
slowdown in operations by Repsol and Petrobras. According to
one of the executives, Repsol is no longer focused on gas
projects but rather electricity generation. The executive
also stated Baker Oil Tools has seen very little activity on
the major gas projects in Venezuela. Finally, the executives
noted their direct competitors have begun importing certain
types of oil tools into Venezuela since it is cheaper than
producing them locally.


11. (C) The Wood Group executive stated none of his customers
from outside Venezuela, including companies operating in
Trinidad and Tobago, are sending their motors to the
Maracaibo complex for reworking or overhaul. They now prefer
to send the units to Houston. The executive was not clear on

CARACAS 00003559 003 OF 003


why this was happening but stated it was good for Wood Group
due to Venezuela's artificially high, fixed exchange rate.

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DON'T DO AS I SAY OR DO
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12. (C) Despite PDVSA's frequent posturing on social
development, the Baker Oil Tool executives stated they have
seen very little actual movement. When Baker Hughes
attempted to set up a cooperative to provide down hole
services, PDVSA quickly squashed the move due to concerns
over liability. In addition, Baker Oil Tools has only seen
two contracts that contain language requiring a one to three
percent social contribution. The executive stated PDVSA to
date has not attempted to charge it the social contribution.


13. (C) The Baker executives also stated they recently
backed out of a bid due to liability concerns over the social
development project that was attached to the bid. The
project was a water delivery system for a village and
included the construction of a water tank. Both Weatherford
and Smith also dropped out of the bid due to liability
concerns. Local Venezuelan companies, however, did not drop
out.

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COMMENT
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14. (C) It appears at this point that service companies are
taking a "wait and see" attitude toward Venezuela. None of
them is sure how seriously to take the BRV's proposal to
migrate some or all service companies to joint ventures
(Reftel). In addition, rumors have recently surfaced that
PDVSA will undergo a thorough housecleaning. Hugo Hernandez
Rafalli, a former PDVSA director with close ties to senior
BRV and PDVSA officials, told Petatt on December 4 that there
will be a major shakeup at the Ministry of Energy and PDVSA
in February. He also thought that President Chavez was
serious about rooting out corruption. In addition, one of
the Baker Oil Tools executives claimed former PDVSA employees
who lost their jobs during the strike were going to receive
settlements for lost wages and pension contributions as well
as offers to rejoin PDVSA. The executive viewed the rumor as
credible since he believes PDVSA management is well aware of
the company's many operational and administrative
shortcomings. We do not expect any major changes in the
service companies' operations until they have a clearer
picture of the Venezuelan investment climate.

WHITAKER