FAJA NEGOTIATIONS: NO NEWS IS BAD NEWS

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001030 SIPDIS SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR DTOMLINSON AND JSHRIER E.O. 12958: DECL: 01/12/2017 TAGS: EPET ENRG EINV ECON ASEC VE SUBJECT: FAJA NEGOTIATIONS: NO NEWS IS BAD NEWS Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: The BRV and international oil companies (IOCs) have not started negotiations to migrate the four Faja strategic associations despite the rapidly approaching June 26 deadline. ExxonMobil (XM)(strictly protect throughout) will send the BRV and PDVSA a red-lined draft contract. However, the contract makes little sense without an underlying business plan. XM is still waiting for a confidentiality agreement. Total appears to have discussed SIPDIS some terms with the BRV but still has not entered into negotiations. Both XM and CP continue drawing down personnel. President Chavez singled out ConocoPhillips (strictly protect throughout) for a tongue-lashing during a nationally televised speech on May 24. END SUMMARY -------------- STILL NO NEGOTIATIONS -------------- ¶2. (C) XM executives told Petroleum Attache during a May 25 meeting that they still have not begun negotiations with the BRV over the migration of the Cerro Negro strategic association to a PDVSA-controlled joint venture. XM will present the BRV and PDVSA with a red-lined contract on May ¶28. However, the executives stated the proposed contract makes little sense without a business plan for the entity. XM executives hope to meet with BRV and PDVSA officials on June 8 to discuss the contract. The executives said XM is working closely with its partner BP on a business plan as well as the contract. XM did not work with BP during the transfer of operational control to PDVSA due to the fact that Cerro Negro was operated by an XM subsidiary. The executives also noted XM would not enter into negotiations with the BRV or PDVSA without a confidentiality agreement. ¶3. (C) According to the XM executives, the last significant contact XM had with the BRV or PDVSA was XM Chairman and CEO Rex Tillerson's May 16 meeting with Ambassador Bernardo Alvarez. During the meeting, Tillerson told Alvarez that XM must have a confidentiality agreement before it could begin negotiations on the remaining migration issues. In addition, he stated book value was not an acceptable basis for compensation for lost value. Finally, Tillerson said XM was looking for a win-win solution but warned that XM was willing to go to arbitration if it had to do so. The executives later mentioned that PDVSA's stake in the Chalmette refinery was mentioned as a possible component in a compensation package. They did not specify who raised the topic. ¶4. (C) When asked if other IOCs had entered into negotiations with the BRV, XM executives replied they did not believe any companies had entered into meaningful negotiations. They stated they met with Total executives on May 22 to discuss the general situation. The Total executives stated their company has also rejected book value as a basis for compensation for lost value. In addition, they told the XM executives they believe the Sincor strategic association will be hit with a large tax assessment in the near future. Seniat, the BRV tax authority, presented CP and Chevron earlier this month with tax bills for close to USD 550 million for back taxes for the Petrozuata and Hamaca strategic associations for the years 2003 to 2005. ¶5. (C) XM executives opined that the BRV will not negotiate with any of the IOCs until close to the June 26 deadline. One executive noted that even if the parties negotiated 24 hours a day, seven days a week there was no way they could deal with all of the issues in time. The executive believed the BRV would wait until the last minute and then present all of the companies with ultimatums. CARACAS 00001030 002 OF 003 -------------- THE EXODUS -------------- ¶6. (C) CP Latin America President Roy Lyons told Petatt in a May 23 e-mail that CP has booked flights for all CP expat employees and their dependents so that they depart Venezuela by CP's May 28 deadline. Lyons stated six Amcit CP employees will remain in Venezuela after that date. He added some dependents may return to Venezuela at a later date. Lyons thanked the consular section for expediting visa interviews for non-U.S. citizen CP employees. RSO has contacted CP security personnel and was advised that CP does not have any security concerns at present. The CP security manager was appreciative of the call as well as the support Post has provided CP. ¶7. (C) XM executives stated they plan on reassigning 94 Venezuelan employees to various postings in their worldwide system. 32 employees have already been reassigned and departed Venezuela. Of the 94 employees, 15 have already been reassigned to U.S. postings and an additional 19 are in the process of transferring to the U.S. Post has already expedited visa appointments for three of the 19 employees and has advised XM that it is willing to do whatever it can to facilitate the transfers for the additional 16 employees. -------------- ADDITIONAL PRESSURE ON CP -------------- ¶8. (C) President Chavez singled CP out for special attention during a nationally televised speech on May 24. In the course of the speech, he stated he had just met with Energy Minister Rafael Ramirez, who had recently returned from Pedernales. He stated the BRV had its eye on an American company ("una empresa gringa") that had refused to reach an agreement with the BRV. As a result,the BRV had told the company that if it did not abide by the "new law" (apparently the nationalization decree) it would have to leave Venezuela. Chavez claimed the company abandoned the fields in question. ¶9. (C) The only company that fits Chavez' description is CP. It refused to sign a memorandum of understanding to transfer operations at the Petrozuata and Hamaca strategic associations as well as the Corocoro profit sharing agreement. What is interesting about Chavez' comments is that he confused a number of basic concepts. None of the IOCs is operating in Pedernales, although Corocoro is relatively close to the town. In addition, he clearly confused operating service agreements with strategic associations, despite the fact that the opening of the Venezuelan hydrocarbon sector in the 1990s has been an obsession of his for years. Finally, if Chavez was talking about Corocoro, CP did not abandon the fields; it relinquished operational control to PDVSA as required by Venezuelan law. -------------- COMMENT -------------- ¶10. (C) We believe that XM is correct in its reading of the BRV's negotiating strategy. Chavez has repeatedly stated he believes oil prices will continue to rise ad infinitum and that the IOCs are willing to accept anything in order to have access to Venezuelan reserves. In addition, neither the BRV or PDVSA have enough personnel with the necessary commercial sophistication or technical expertise to deal with the myriad of complicated legal and financial questions that need to be dealt with before the June 26 deadline. Given its hubris and limitations, we believe the BRV will attempt to use the same "one size fits all" approach for each of the associations and present their proposal as a fait accompli. CARACAS 00001030 003 OF 003 BROWNFIELD