BP: STABILITY BEGINS TO EMERGE FROM CHAOS

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 -------------- DETAILS ON THE MIGRATION -------------- ¶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 �00A;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) -------------- OPERATIONS -------------- ¶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. -------------- STABILITY TO CHAOS -------------- ¶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