AMBASSADOR MEETS WITH CONOCOPHILLIPS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001808 SIPDIS SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JCARDENAS AND JSHRIER E.O. 12958: DECL: 09/12/2017 TAGS: EPET ENRG EINV ECON VE SUBJECT: AMBASSADOR MEETS WITH CONOCOPHILLIPS Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: ConocoPhillips (CP) and the BRV's positions on the valuation of CP's expropriated assets differ by a factor of six or seven to one. PDVSA continues to honor two long-term supply contracts that supply CP refineries in the U.S. CP believes an arbitration case would take five to seven years. CP has not set a deadline for the negotiations. CP also stated that it would probably be willing to return to Venezuela under the right conditions in the future. -------------- RATIONALE FOR CP'S DEPARTURE -------------- ¶2. (C) The Ambassador, accompanied by Econ Counselor and Petroleum Attache, met with CP Executive Vice President for Exploration and Production Randy Limbacher, CP President for Strategy, Integration and Specialty Businesses Greg Goff, and CP Venezuela President Roy Lyons (strictly protect all throughout) on September 11 to discuss the current state of negotiations between CP and the BRV on compensation for CP's expropriated assets. Limbacher began the meeting by laying out CP's rationale for refusing to migrate its investments to PDVSA-controlled joint ventures. ¶3. (C) Limbacher stated the primary reason CP refused to migrate was concern over governance issues. According to Limbacher, under the terms of the migration, CP would have invested 40% of the capital in the projects and received only 15% of the revenue streams. In addition, Energy Vice Minister Bernard Mommer told Limbacher that the BRV could increase its take in the projects if oil prices increased. CP was unwilling to invest significant amounts of capital in the projects given that they would have a limited say in how the projects were managed and little to no chance of benefiting from price increases. ¶4. (C) Limbacher stated CP management decided that it would not migrate its projects in April. All three CP executives agreed that CP's decision took the BRV by surprise. Limbacher noted that several senior members of the BRV, including Vice Minister Mommer, clearly believe that PDVSA cannot operate the Faja upgraders on their own. Limbacher stated PDVSA has tried to find partners to help it run the Petrozuata refinery but that potential partners are afraid to act due to legal risks arising from potential arbitration proceedings. -------------- CURRENT STATE OF NEGOTIATIONS -------------- ¶5. (C) Limbacher said the BRV has not been flexible in its negotiating position. Its basic position appears to be that it did not expropriate CP's assets but merely asserted its sovereignty over the oil sector. Given the fact that CP has earned substantial profits in Venezuela in the past, the BRV believes that it does not owe CP any compensation for its lost assets. CP's position is that its assets were expropriated and that the compensation negotiations are a commercial issue. The BRV, on the other hand, views the issue in terms of sovereignty and political principles. When the Ambassador asked if CP had made any concessions, Limbacher replied yes but that the BRV does not appear to have taken note of them. Lyons opined that in fact the BRV does not seem to view CP's concessions as concessions since it firmly believes it owes CP little or no compensation. ¶6. (C) Limbacher stated CP's and the BRV's valuation of the expropriated assets for terms of determining compensation differ by a factor of six or seven to one. He noted CP CARACAS 00001808 002 OF 002 believes that arbitration proceedings would last five to seven years and that it was unclear what type of compensation CP would eventually receive. In addition, collecting on the ruling could be a long, arduous process. ¶7. (C) Limbacher stated CP had two points going for it in the negotiations: its two long-term supply contracts and the fact that PDVSA needed assistance in order to run the upgraders. According to Goff, CP has a long term supply contract that ties the Petrozuata upgrader's production to a dedicated CP refinery in the U.S. In addition, CP has a second supply contract under which it refines a significant amount of crude over and above what its former projects produced. Limbacher noted both CP and Venezuela would be adversely affected if PDVSA voided the contracts. PDVSA would lose a substantial amount of money per barrel if it tried to sell the barrels on the open market due to the nature of the crude. CP would also lose since its refineries would not be able to process other types of crude as efficiently. However, Limbacher later implied that Venezuela needed the supply contract more than CP did. Goff noted PDVSA has been quite punctual and professional in following the terms of the contracts. In addition, it recently compensated CP for the use of some of its proprietary technology. ¶8. (C) Both Lyons and Goff opined that PDVSA needs assistance in running the Faja upgraders. Lyons noted that PDVSA has been unable to raise Petrozuata's production to its pre-OPEC cut level of 120,000 barrels per day. He stated production is currently around 108,000 barrels per day and there are indications that it may be dropping to 106,000 barrels per day. Lyons also pointed out that CP planned to begin production in the Corocoro field in July and that it estimated Corocoro's likely production at 30,000 barrels per day. In a recent Alo Presidente broadcast, a PDVSA official told President Chavez that production would not begin until January. ¶9. (C) When the Ambassador asked if CP had any sort of timeline or deadline for compensation negotiations, Limbacher replied in the negative. When asked if CP was willing to return to Venezuela, Limbacher replied yes, given the right conditions. He then noted that CP could return in the future as part of a settlement or an arbitration ruling if it could trust a future Venezuelan government and received the right governance terms. DUDDY