Identifier
Created
Classification
Origin
07CARACAS1808
2007-09-12 15:22:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

AMBASSADOR MEETS WITH CONOCOPHILLIPS

Tags:  EPET ENRG EINV ECON VE 
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ZNY CCCCC ZZH
R 121522Z SEP 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9699
INFO RUEHHH/OPEC COLLECTIVE
RUEHAC/AMEMBASSY ASUNCION 0874
RUEHBO/AMEMBASSY BOGOTA 7501
RUEHBR/AMEMBASSY BRASILIA 5982
RUEHBU/AMEMBASSY BUENOS AIRES 1670
RUEHLP/AMEMBASSY LA PAZ 2580
RUEHPE/AMEMBASSY LIMA 0857
RUEHSP/AMEMBASSY PORT OF SPAIN 3481
RUEHQT/AMEMBASSY QUITO 2672
RUEHSG/AMEMBASSY SANTIAGO 3996
RUEHDG/AMEMBASSY SANTO DOMINGO 0502
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHAAA/WHITEHOUSE WASHDC
RHEBAAA/DEPT OF ENERGY
RUCNDT/USMISSION USUN NEW YORK 0917
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001808 

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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)

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001808

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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