FURTHER DETAILS ON THE FAJA MIGRATION

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001393 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: FURTHER DETAILS ON THE FAJA MIGRATION REF: A. CARACAS 1280 ¶B. CARACAS 1314 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: PDVSA has done a better than expected job running the Cerro Negro upgrader. However, it has requested BP supply additional personnel. BP is happy with the governance terms it received. The remaining international oil companies (IOCs) may still have the right to go to arbitration under bilateral investment treaties (BIT) or even under national law. The terms IOCs negotiated for the migration to joint ventures may be moot given the recent creation of the new state planning commission, which merely formalizes the fact that contract sanctity in Venezuela is a farce. END SUMMARY -------------- BP'S TAKE ON THE MIGRATION -------------- ¶2. (C) Petroleum Attache (Petatt) met with BP Venezuela president Joe Perez (strictly protect throughout) on July 9 to discuss the terms of the new Cerro Negro joint venture. Perez stated BP was happy with the terms of the migration. As a result of ExxonMobil's (XM) departure, BP's equity in Cerro Negro was not diluted. In addition, BP believes that the governance terms it received were as good as or better than the previous terms. Perez indicated that PDVSA would not be able to use capital calls to reduce BP's equity position. In a separate meeting on July 9, a prominent attorney at a local law firm who specializes in energy law told Petatt super majorities were required for board approval for increases in capital as well as approval for the annual work program. Perez said BP was also pleased that it was able to preserve the current marketing structure during the transition period. ¶3. (C) Perez stated BP has been pleasantly surprised so far by PDVSA's handling of operations at Cerro Negro. Although there have been a number of minor accidents, Perez said there have been fewer operational inefficiencies than he expected. PDVSA has asked BP to supply additional personnel to Cerro Negro. BP is considering the request but Perez stated it would need to have additional equity in the project in order to justify an increase in personnel. Perez stated production has decreased at Cerro Negro. He attributed the decline to the fact that XM ceased well maintenance in November. ¶4. (C) When asked about next steps in the migration, Perez replied that BP expects all of the outstanding migration issues to be resolved by October or November. He also stated that BP will begin looking at new projects in the Faja and the gas sector once the remaining migration issues have been resolved. He went on to predict that 800 to 1,000 workers would leave Petrozuata, Hamaca, and Sincor once PDVSA introduces PDVSA-style compensation packages. He noted Sincor may be particularly hard hit due to the fact that Total has traditionally offered very generous compensation packages. ¶5. (C) Perez said it was his understanding that President Chavez wanted to resolve the issue of compensation for lost value with XM, ConocoPhillips, Total, and Statoil by July 26, rather than the August 26 deadline. The attorney did not offer a timeline for compensation negotiations but stated it was clear that any compensation would not be in the form of cash. -------------- ARBITRATION -------------- CARACAS 00001393 002 OF 003 ¶6. (C) Under the terms of the migration, the remaining IOCs supposedly gave up their rights to arbitration. However, the attorney stated her firm believes that IOCs operating in Venezuela via subsidiaries incorporated in countries with BITs with Venezuela still have a right to arbitration. In addition, the attorney stated companies that do not have the benefit of a BIT still have a strong case that they have the right to go to arbitration under the terms of the 1999 Constitution and the national investment law. The attorney stated her firm in conjunction with the international firm Freshfields has done extensive research on the issue and both firms are confident of their interpretation given a number of decisions at the International Centre for Settlement of Investment Dispute (ICSID). ¶7. (C) The attorney ruefully noted that she and her colleagues spent countless hours negotiating arbitration clauses in the former operating service agreements and the strategic associations only to see their clients refuse to use them. The IOCs have to date attempted to avoid arbitration because of the lengthiness of the proceedings as well as the perception that a company that takes the BRV to arbitration will not be able to actively operate in the Venezuelan market even if there is a change of government. -------------- DO THE TERMS REALLY MATTER? -------------- ¶8. (C) As reported in Reftel A, the BRV formed a central planning commission on June 23 that is tasked, among other things, with "controlling and coordinating" the ministries and state enterprises so that they act in conformity with the commission's master plans for the Venezuelan economy. The attorney stated the joint ventures that will be formed as a result of the migration of the strategic associations clearly fall within the scope of the commission's jurisdiction since PDVSA has a controlling interest. The decree creating the commission also creates a sub-commission that covers the petroleum, gas, and petrochemical sectors. The sub-commission is charged with the "organization, monitoring, and control of the economic activities of the public administration organs and entities and the relation of these organs and entities with the private sector...". ¶9. (C) Article 4 of the decree states an entity's "instrument of creation" will not shield it from the commission's jurisdiction. The article goes on to state that an entity's legal status is not an obstacle to the implementation of the decree. ¶10. (C) As reported in Reftel B, Chevron Latin America president Ali Moshiri stated Chevron received "fantastic" terms for the migration of the Hamaca strategic association to a PDVSA-controlled joint venture. Moshiri based his views in part on the fact that the joint venture's business plan was in place and that the joint venture could not deviate from it. Based on our reading of the decree as well as our discussion with the attorney, it appears to us that the BRV, via the central planning commission, can change any of the underlying terms of the joint ventures at any time. When Petatt raised the issue with Perez, Perez did not disagree with this assessment but merely noted governments are changing operating terms and conditions for IOCs around the world. He went on to note that it is quite possible that other governments will try to copy the BRV's recent actions. -------------- COMMENT -------------- ¶11. (C) The creation of the new central planning commission merely formalizes the fact that contract sanctity in CARACAS 00001393 003 OF 003 Venezuela is a farce. Under the terms of the decree, the BRV will have carte blanche to change the terms of hydrocarbon investments whenever it wishes to do so. It remains to be seen whether the commission will exercise its new powers. The fact that BP is seriously considering new projects in Venezuela indicates that at least some companies are willing to consider additional investments no matter what the country risk. We note, however, that any new projects would take years to reach fruition. It is possible that BP and other IOCs are merely trying to keep a foot in the door and have no intention of proceeding past the planning stages of a project until the legal and operational environment improves. FRENCH