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