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.

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CHEVRON: VENEZUELA TOO IMPORTANT TO ABANDON
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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)

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CHEVRON'S TERMS
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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

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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.

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CHEVRON'S VIEWS ON THE FUTURE
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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.

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XM: ADIOS
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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

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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.

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CHINESE MYSTERIES
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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