CHEVRON, EXXON, AND CNPC COMMENT ON RECENT EVENTS

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 001314 SIPDIS SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR DTOMLINSON AND JSHRIER E.O. 12958: DECL: 01/12/2017 TAGS: EPET ENRG EINV ECON VE SUBJECT: CHEVRON, EXXON, AND CNPC COMMENT ON RECENT EVENTS REF: A. CARACAS 1281 ¶B. 2005 CARACAS 2944 ¶C. CARACAS 1197 ¶D. CARACAS 526 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: Chevron claims the final deal to migrate the Hamaca strategic association to a joint venture was a good one from its perspective. The project's area was not reduced and Chevron personnel will occupy key posts in the new joint venture. In addition, all investment decisions require 100% board approval and a 25 year business plan is in place. Chevron is concerned that a vacuum in the Venezuelan hydrocarbon sector will be filled by Russian and Chinese companies. ExxonMobil (XM) will have all of its staff out of Venezuela by September. CNPC confirmed that it did not reach a deal with the BRV over migrating Sinovensa to a new joint venture. -------------- CHEVRON: VENEZUELA TOO IMPORTANT TO ABANDON -------------- ¶2. (C) Chevron Latin America president Ali Moshiri (strictly protect throughout) met with the Ambassador on June 28 at Moshiri's request to discuss the terms of the migration of the Hamaca strategic association to a PDVSA-controlled joint venture (Reftel A). Moshiri began the meeting by stating Chevron decided to stay because "it didn't want to lose barrels." When asked by the Ambassador how the departure of XM and ConocoPhillips (CP) would affect Chevron, Moshiri replied that Chevron was concerned that the Russians, Chinese, and Iranians would fill the vacuum created by their departure. He noted the strategic association upgraders were complicated but that the state oil companies could run them, albeit in an inefficient manner. He added Chevron was not going to let a place with so much oil exist without a U.S. flagged oil company. Moshiri noted later in the conversation that Chevron's 30% equity stake in the new joint venture was a "lot of profit." He also pointed out that 125 to 130,000 barrel a day production was hard to come by anywhere else in the world. ¶3. (C) Moshiri said the BRV has been consistent throughout the migration process. It did not want to have three U.S. oil companies in Venezuela, only one. He stated the real issue in the migration process was ownership of equity rather than supply. The issue for Chevron was security of access to resources. (COMMENT: To his credit, Moshiri told us in 2005 that he believed the BRV only wanted one or two American oil companies in Venezuela (Reftel B). We noted at the time that Moshiri was positioning Chevron to be one of the remaining companies. Former PDVSA board member Jose Toro Hardy agreed with Moshiri's analysis at the time. END COMMENT) -------------- CHEVRON'S TERMS -------------- ¶4. (C) Moshiri claimed Chevron received "fantastic" terms for the migration of the Hamaca strategic association to a PDVSA-controlled joint venture. He claimed the area for the joint venture was the same. He said Chevron had the right to blend crude and that the marketing of the crude was "under control." He added Chevron just kept what it had and "could have had more". ¶5. (C) When the Ambassador queried him about the joint venture's governance structure, Moshiri replied that all of CARACAS 00001314 002 OF 004 the jobs in the new joint venture were allocated. The joint venture's general manager of operations will be a Chevron employee and he "will run the show." He noted Chevron built the Hamaca upgrader and that it would run things but could not say so openly. Moshiri also made a point of stating a Chevron employee would handle the joint venture's finances as is the case in the Petroboscan joint venture. He later added that Chevron made sure the deal included a transportation agreement that would allow Chevron to know where the crude was being marketed. ¶6. (C) When asked about the governance structure and future investment in the joint venture, Moshiri said all investment decisions would require 100% board approval. He also stated Chevron clearly told the BRV that if its share in the joint venture fell below a certain level of equity, it would leave. In addition, a 25 year business plan is in place. Moshiri claimed the joint venture could not deviate from the business plan. According to Moshiri, the plan calls for a flat rate of recovery. When asked about BRV claims that recovery rates at the four Faja projects would be increased to 20%, Moshiri replied that the Hamaca business plan does not call for steam injection or an increased recovery rate. He also claimed the BRV was not looking over Chevron's shoulder due to the fact that it had a full plate and was unsophisticated. He claimed President Chavez thought the entire migration process was completed on May 1 when PDVSA took over operational control of the strategic associations. He said that as long as Chevron kept its equity, it would have no reason to leave Venezuela. -------------- CHEVRON'S VIEWS ON THE FUTURE -------------- ¶7. (C) The Ambassador then asked Moshiri for his views on the medium to long-term viability of PDVSA. Moshiri replied that there were two basic parts to PDVSA: the first carries out PDVSA's operations and the second handles relations with the private sector via joint ventures. Moshiri stated PDVSA's operating entity, headed by PDVSA vice president Luis Vierma, was collapsing. Moshiri noted that Chevron was better off after the migration of its Boscan field to a joint venture because under the operating service agreement Chevron had to deal with the operating wing of PDVSA since it was basically a contractor. After the Hamaca migration, Chevron will only deal with CVP, the PDVSA entity that deals with international and state owned oil companies that invest in Venezuela. ¶8. (C) Despite his belief that PDVSA's own operations will eventually collapse, Moshiri said he does not believe the joint ventures would fail. He said there would be five major joint ventures in Venezuela: the four created from the strategic associations and Petroboscan. Since the joint ventures are equity companies, the partners would not have to invest anything in them. The joint ventures would sell oil and pay dividends to the partners. The partners would not have to put in more capital and if the joint ventures had a shortfall, they would have to take out loans. Moshiri also pointed out that Chevron's stake in the joint ventures was relatively small. ¶9. (C) Moshiri stated the next step in the formation of the joint ventures was approval by the National Assembly. He thought approval would come between July 26 and August 26. Following approval by the National Assembly, a presidential decree will be issued. Moshiri thought it would take an additional two months for the decree. CARACAS 00001314 003 OF 004 ¶10. (C) Moshiri stated he believes production in the Faja over the next two years will not decrease significantly in quantity but perhaps in quality. He thought production would decrease by 10% in volume terms due to inefficiency but by 25% in terms of value. For example, he stated Hamaca currently produces 26 API oil but that its API could fall to 22 if it did not reprocess crude but merely sold it on the open market. He said the upgraders could become blending facilities in the future. ¶11. (C) Moshiri ended the meeting by expressing concern once again about the vacuum caused by the departure of XM and CP. PDVSA currently has a 100% stake in Petrozuata, a 72% stake in Cerro Negro, and a 70% stake in Hamaca. It has publicly stated all along that it only wanted a 60% stake in the joint ventures. PDVSA does not have the human capital and technology needed for the projects. As a result, it may look for new investors in the upgraders. Moshiri stated Chevron may increase its equity stake in the Faja if it appeared that a state oil company was going to take a stake. Chevron does not want to be in the position of dealing with two governments, the BRV and the government of the state oil company. Moshiri noted Chevron would be at a disadvantage to a state oil company since the company's government could package oil investment with other types of economic and political deals. Moshiri also stated it was possible that smaller U.S. players may take stakes in the upgraders. ¶12. (C) COMMENT: We are not as concerned about state oil companies filling the vacuum left by CP and XM as Moshiri is. As noted in Reftel C, the Chinese have not been particularly keen about increasing their investment in Venezuela. As discussed in paragraph 14, CNPC failed to sign a conversion agreement. We have also seen little sign of any significant investment on the part of the Russians or Iranians. Finally, we find it hard to believe that any oil company would take a stake in Cerro Negro, Petrozuata, or Hamaca if those assets were subject to arbitration claims by XM or CP. However, we continue to have concerns that PDVSA may attempt to run Cuban crude through one or more of the refineries (Reftel D). END COMMENT. -------------- XM: ADIOS -------------- ¶13. (C) Petroleum Attache (Petatt) met with XM executives on June 29 to discuss XM's schedule for withdrawal. The executives stated XM's technical service agreement would end on June 30. The 20 XM staff members working in Cerro Negro under the agreement have for all intents and purposes already been withdrawn. An operations executive stated calls from PDVSA requesting assistance declined dramatically after June ¶26. However, he said he received a call the evening of June 28 requesting assistance with batching. According to the executives, current production at Cerro Negro is roughly 80,000 barrels per day with a syncrude production of approximately 60,000. Production levels are low due to on-going repairs in the upgrader's cracker drums. The repairs were supposed to have been carried out during the upgrader's scheduled maintenance but were not carried out in time. ¶14. (C) XM will have all of its personnel out of Venezuela by September 1. XM Venezuela president Tim Cutt departed Caracas the morning of June 29. There are currently 8 expat employees, 48 Venezuelan employees scheduled for placement worldwide, and 24 Venezuelan employees that will be released. By the end of July, the numbers will be 2 expats, 20 CARACAS 00001314 004 OF 004 Venezuelans awaiting reassignment, and 19 that will be released. The numbers will fall to 1 expat, 2 employees awaiting reassignment, and 16 awaiting termination by the end of August. Employees in Venezuela will not be involved in compensation negotiations but will merely focus on winding up XM operations. -------------- CHINESE MYSTERIES -------------- ¶15. (C) As reported in Reftel A, due to Energy Minister Ramirez' convoluted statement, it was not clear if CNPC had reached an agreement with the BRV regarding the migration of Sinovensa, its former Orimulsion investment, to a joint venture. CNPC vice president Jinling Zhang told Petatt on June 27 that CNPC had signed a memorandum of understanding with PDVSA stating that the parties would continue negotiating on the migration. Zhang ended the conversation by stating "If we don't like it (PDVSA's offer),then we will refuse it". (COMMENT: The BRV, to a certain extent, has been hoisted on its own petard. After spending enormous amounts of time and effort advertising the fact that it was seeking a special relationship with China and viewed a partnership with China as a valuable hedge against the United States, it would be highly embarrassing for the BRV if a Chinese state oil company publicly exited Venezuela. We believe this point has not been lost on CNPC. END COMMENT) ¶16. (C) As noted in Reftel A, industry insiders were somewhat confused by the nature of Sinopec's investment in Venezuela. According to a report authored by local analysts, Sinopec will be investing in the Posa field, which was part of Golfo de Paria Oeste. The BRV apparently split the Posa field off from Golfo de Paria Oeste and the field is now know by its own name. It is still not clear what decision OPIC Karimun, a Taiwanese company, took regarding migration. The company held a 6.5% stake in Golfo de Paria Oeste with CP and Eni and a 7.5% stake with them in the Golfo de Paria Este field. BROWNFIELD