C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001765

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: BP: STABILITY BEGINS TO EMERGE FROM CHAOS

REF: A. CARACAS 1281

B. CARACAS 1655

C. CARACAS 1157

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


1. (C) SUMMARY: Cerro Negro's acreage has been reduced from
290 square kilometers to 210 and BP paid the BRV 50 million
USD in notes as part of the reduction. Cerro Negro
operations are running in a surprisingly smooth manner and
PDVSA is not moving senior managers around as much as it did
before. BP is interested in growing in Venezuela but is
waiting for the BRV and ExxonMobil to resolve their
differences over Cerro Negro. END SUMMARY

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DETAILS ON THE MIGRATION
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2. (C) Petroleum Attache (Petatt) met with BP Venezuela
President Joe Perez (strictly protect throughout) to discuss
the current operations at the former Cerro Negro strategic
association as well as BP's future plans in Venezuela.
(NOTE: ExxonMobil, prior to the loss of its investment, held
a 41.67% stake in Cerro Negro. PDVSA, which also held a
41.67% stake, took control of ExxonMobil's stake. BP
retained a 16.67% stake after ExxonMobil's departure. END
NOTE) Perez confirmed that Cerro Negro's block was reduced
from 290 square kilometers to 210 (Reftel A). He stated BP
did not believe the reduction was relevant in operational
terms since the original block was so large that it could not
be developed in 30 years.


3. (C) Perez added that BP ended up paying the BRV 50
million USD in order to keep the block at 210 square
kilometers. However, he stated the payment was insignificant
since the BRV allowed BP to use the notes that it received
when its former operating service agreement field was
converted to a PDVSA-controlled joint venture. Perez
referred to the notes as "chimbo notes" (a slang term for
something that is worthless) and stated BP valued them as
zero on its books. However, the use of the notes had tax
consequences and BP ended paying a relatively minor amount of
money to meet

the tax obligations arising from the use of the
notes.


4. (C) When Petatt asked if other companies were forced to
reduce their blocks, Perez replied in the affirmative.
However, as noted in Reftel B, both Statoil and Chevron have
stated that the blocks in their respective strategic
associations were not reduced. (NOTE: Energy Minister Rafael
Ramirez stated in a news conference on August 29 that blocks
would be reduced by 40%. END NOTE)

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OPERATIONS
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5. (C) Perez stated he was "astounded" by PDVSA's ability
to increase and maintain production levels at Cerro Negro.
He mentioned that he should not have been surprised because
most of Cerro Negro's lower level employees who handled
day-to-day operations remained. Perez stated most of the
employees that left were senior technicians who handled big
picture issues. He opined that the issue going forward would
be whether PDVSA had enough qualified staff to handle
complicated planning issues. In other words, the question is
whether PDVSA can continue to maintain production going
forward since most of the planners were no longer at Cerro
Negro. Perez added that BP was interested in hiring former
Cerro Negro employees but ExxonMobil had already picked up
all of the qualified ex-employees. Perez summed up the

CARACAS 00001765 002 OF 002


situation by stating ExxonMobil "had taken all of the meat
and left the bone." (NOTE: As noted in Reftel C, ExxonMobil
stated they believed PDVSA could run Cerro Negro for six
months before they started having problems. END NOTE)


6. (C) Perez said a senior PDVSA official told him that
PDVSA has replaced 50% of the employees that had left Cerro
Negro. He said he believed the official but noted that this
was only possible if PDVSA was willing to hire people that
had signed the recall referendum. He added that it was clear
that ex-PDVSA employees that participated in the strike were
still being blacklisted. Perez noted there is a website that
permits people to withdraw their signatures on the recall
referendum by claiming that they were duped into signing or
did not understand what they had signed. The website permits
people to print up certificates stating they had withdrawn
their signature.


7. (C) When Petatt noted that service companies were still
being told that they could not hire people who had signed the
referendum, Perez stated PDVSA was willing to make exceptions
based on need. He stated PDVSA desperately needs qualified
employees and technology for the Faja upgraders. PDVSA has
continued pressing BP to supply personnel and technology.
However, BP has made it clear that it will not supply
personnel since it only received 20,000 barrels per day from
Cerro Negro. BP is willing to negotiate an agreement to
supply technology but Perez complained that PDVSA has been
loath to pay 100% for the technology. In other words, PDVSA
wanted a discount on the technology.


8. (C) When asked if he thought PDVSA would bring in another
partner for Cerro Negro, Perez replied that he did not think
so. He added that BP also had an informal right of first
refusal in such cases. Perez stated that he believes Shell
is the only company that has both the personnel and
technology to mount a project in the Faja. He added that
Shell has a Faja proposal in front of the BRV.

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STABILITY TO CHAOS
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9. (C) Perez stated PDVSA has not been moving senior
officials around as much as it used to do so. He complained
that BP used to train PDVSA managers only to see them be
reassigned as soon as they developed a fair degree of
competence.


10. (C) Perez noted BP wants to grow its operations in
Venezuela and has sent a clear message to that effect to the
BRV. However, BP has also told the BRV and its former Cerro
Negro partner ExxonMobil that it will not expand its
operations in Venezuela until both parties resolve their
dispute over the expropriation of Exxon's assets in Venezuela
(Reftel A). (COMMENT: BP's position makes a great deal of
sense. ExxonMobil has made it clear to competitors that it
will take legal action if they attempt to invest in Cerro
Negro prior to a settlement of its claims with PDVSA. In
addition, BP is partners with Exxon in other ventures around
the world. It makes little sense for it to sour these
relationships. END COMMENT).


DUDDY