PDVSA: NEW LIFE IN THE EMBERS?

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001622

SIPDIS

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JCARDENAS AND JSHRIER

E.O. 12958: DECL: 01/12/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: PDVSA: NEW LIFE IN THE EMBERS?


Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: The president of the Petroleum Chamber of
Venezuela believes significant new investments will occur in
the Faja in the near future beginning with de-bottlenecking
projects in the existing upgraders. Leading candidates for
new projects in the Faja are Petrobras, Shell, and the
Chinese. Progress is being made in the deep conversion
project at the Puerto La Cruz refinery. As a result of the
current fiscal regime, many smaller projects are no longer
commercially viable. If the BRV applies the same fiscal
regime to gas projects as it does oil projects, it will
effectively kill the gas sector. END SUMMARY

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WHERE IS THE LIGHTER FLUID?
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2. (C) Petroleum Attache (Petatt) met with Antonio
Vincentelli, the president of the Petroleum Chamber of
Venezuela, on August 14 to discuss current trends in the
hydrocarbon sector. Vincentelli is also a director of
Inelectra, the largest Venezuelan construction and
engineering firm. Vincentelli began the meeting by noting
that Petroleum Chamber members were facing a mixed picture in
terms of the operating environment. On the positive side,
PDVSA appears to be granting more contracts recently.


3. (C) Vincentelli also stated he was optimistic about the
development of the Faja. He stated once the BRV and PDVSA
have finished with the migration of the strategic
associations to PDVSA-controlled joint ventures, they will
begin pushing new projects in the Faja. Vincentelli believes
the first projects to see the light of day will be a series
of debottlenecking projects at the four Faja upgraders.
(NOTE: Debottlenecking refers to the removal of impediments
in the production process that limits or impedes production.
END NOTE) He said Inelectra had received a major contract
for a debottlenecking project at the Cerro Negro upgrader but
the project was put on hold when it appeared the BRV was
going to force the strategic associations to migrate to joint
ventures.


4. (C) Once the debottlenecking projects are out of the way,
Vincentelli believes the BRV will strike agreements with
Total and Chevron for two major new projects. He stated
Total in conjunction with Statoil will be given permission
for the Sincor II project, which utilizes Sincor's existing
infrastructure. He believes Chevron will receive permission
for a new project with Repsol or to expand the existing
Ameriven project. Both Chevron and Total have been lobbying
for the respective projects for a number of years and have
drawn up detailed plans for the projects. Vincentelli
claimed the companies would be interested provided the BRV
and PDVSA could offer them good terms on governability. He
added the companies would also have to believe that the
operating environment in Venezuela has stabilized. He stated
he believes a significant number of oil companies would
participate in an auction of Faja blocks if the BRV organized
one in a year or two.


5. (C) When asked about other candidates, Vincentelli opined
that most of the companies currently carrying out
certification studies in the Faja did not have the three
necessary assets for a major Faja project: market, finance,
and technology (including human capital). In Vincentelli's
opinion, Petrobras, Shell, and the Chinese all have the
requisite assets for the job. He noted the crude from
Petrobras' certification block would be relatively easy to
produce and the block could utilize existing infrastructure.
Shell specializes in extra heavy crude technology and has
been quietly angling for a Faja block for several years.

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Vincentelli said he was very impressed with the way that
Shell has been working its way back into the BRV's good
graces. Shell has significantly reduced its profile in
Venezuela and changed its strategy from one of confrontation
to one that focuses on its technology.


6. (C) According to Vincentelli, the Chinese can offer
Venezuela a market for Faja production as well as deep
pockets. The Chinese do not have the necessary technology
but are willing to enter into the necessary licensing
agreements to secure it. Vincentelli stated he attended a
CNPC presentation to PDVSA in which the Chinese candidly
stated they had a number of licenses from Western service
companies. In addition, the Chinese have no reservations
about partnering with other companies in order to get the job
accomplished. Vincentelli noted the Chinese have partnered
with the Indians in Colombia.

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REFINERIES
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7. (C) Vincentelli also stated the deep conversion project
at the Puerto La Cruz refinery was progressing. He also
stated the plans for the new refineries were also being drawn
up in a timely manner. (NOTE: Deep conversion is the
refining process used to transform extra-heavy crudes into
lighter, less viscous oils. END NOTE)


8. (C) Vincentelli opined that President Chavez' policy of
promising refineries to multiple countries was quite
intelligent. Although it was impossible to build all of the
proposed refineries, the promise of a refinery was a powerful
incentive for countries to try and stay on Chavez' good side.

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GAS
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9. (C) Vincentelli's primary concern was the BRV statements
that it will amend the Gas Law and apply the oil sector's
regulatory and fiscal regime to the gas sector. He stated
the major projects in the Faja could support the current
hydrocarbon law's heavy fiscal burden. However, as a result
of the current fiscal regime, many smaller oil projects are
no longer commercially viable. Vincentelli said the
application of the oil sector's fiscal regime to the gas
sector would effectively kill all of the current gas
projects. Without an increase in gas production, PDVSA could
not carry out its refinery projects or increase the recovery
rate in the Faja. Vincentelli claimed PDVSA and Energy
Ministry officials were aware of the fact that Venezuela must
increase its gas production. However, when pressed, he
admitted he was still concerned that the BRV would implement
gas reforms that would effectively shut down the sector.

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COMMENT
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10. (C) It is still too soon to say if the BRV has turned a
corner and adopted a more pragmatic hydrocarbons policy.
Service company representatives have told us that contracts
are beginning to be awarded and that they have seen an
up-tick in business. However, service contracts are usually
awarded this time of year so it is not clear that we have
seen a change in the way PDVSA conducts business. We agree
with Vincentelli that the oil companies are still lusting
after Faja blocks. Memories are quite short in the oil
sector and, as Chevron's Ali Moshiri is fond of noting, the
Faja and the Canadian oil sands represent the sector's
future. The question, at this point, is whether the BRV will
assuage the oil companies' fears over governability and
stability sufficiently to entice them into making major

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investments in Venezuela.

FRENCH