SERVICE COMPANIES FACE USG IRANIAN AND CUBAN

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001948 SIPDIS SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JCARDENAS AND JSHRIER TREASURY FOR OFAC STATE FOR EB/ESC/ESP E.O. 12958: DECL: 01/12/2017 TAGS: EPET ENRG EINV ECON PREL KFPC ETTC CU IR VE SUBJECT: SERVICE COMPANIES FACE USG IRANIAN AND CUBAN SANCTIONS ISSUES REF: A. DUDDY-MCCARTHY E-MAIL 10/1/07 ¶B. CARACAS 102 ¶C. CARACAS 526 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: Baker Hughes (BH) has three contracts with PDVSA in various stages of execution that they believe appear to violate USG Iranian and Cuban sanctions legislation. According to BH, other U.S. service companies have similar contracts that raise the same issues. BH will meet with PDVSA officials on October 4 to inform that BH cannot continue to be a party to the contracts if information from its activities is supplied to Iranian and Cuban state oil companies. BH is very concerned that its actions will lead to the loss of its business in Venezuela. It is also concerned that the BRV, particularly President Chavez, will publicize the problem and use it for propaganda purposes. END SUMMARY -------------- PDVSA CONTRACTS AND SANCTIONS LEGISLATION -------------- ¶2. (C) BH Latin America Vice President for Sales Edgar Pelaez (strictly protect throughout) met with Petroleum Attache (Petatt) on October 1 to discuss his company's concerns over PDVSA contracts that appear to violate USG Iranian and Cuban sanctions legislation (Reftel A). Pelaez stated BH has three contracts with PDVSA in the Faja region in various stages of execution that are cause for concern. ¶3. (C) The first contract covers the entire Faja region, the second contract covers Block 1 of the Boyaca sector of the Faja, and the third Block 7 of the Ayacucho sector. Of the three contracts, only the Ayacucho sector contract is being executed. Of the remaining two contracts, one is awaiting signature and the other is being drawn up following its awarding to BH. ¶4. (C) Cupet, the Cuban state oil company, is currently carrying out certification studies for reserves in the Boyaca block and Petropars, the Iranian state oil company, is carrying out the same studies in the Ayacucho block. Neither Cupet nor Petropars has any rights to develop the blocks in question. They merely have contracts to carry out the certification studies. ¶5. (C) Pelaez stated that Petropars employees contacted BH directly in September with questions regarding BH data from the Ayacucho block. When BH contacted Pedro Leon, the PDVSA manager in charge of the certification program regarding Petropars, he told BH that Petropars had no business contacting BH and stressed that BH's contract was with PDVSA. Following the inquiry from the Iranians, BH stopped supplying data to PDVSA and began an internal review of the contracts and U.S. sanctions legislation. BH compliance personnel determined that BH could not supply information to PDVSA under the contract if it believed PDVSA would pass the information to Petropars or Cupet. Pelaez added that BH internal policies prohibit its employees from working on projects that involve Iran. -------------- BH MEETINGS WITH USG OFFICIALS -------------- ¶6. (C) According to Pelaez, BH personnel met with officials from the State Department and OFAC the week of September 23. Both the State officials and OFAC reportedly told BH that the contracts violated sanctions legislation. When BH officials CARACAS 00001948 002 OF 002 queried State officials if they should try to approach the BRV via Ambassador Bernardo Alvarez in order to soften any negative consequences, they were told that it was not a good idea to do so. (COMMENT: Post has been unable to determine which State and OFAC officials met with BH. END COMMENT) ¶7. (C) Pelaez stated BH executives would be discussing their options on October 2 and 3. He stated he would meet with Leon on October 4 and inform him that BH would be unable to execute the contracts in their current state. He also stated BH was considering an approach to PDVSA Vice President for Exploration and Production Luis Vierma. He added that he would be meeting with a PDVSA director on October 2 in order to see if there was any way BH could reduce collateral damage from its decision. -------------- -------------- POSSIBLE INVOLVEMENT OF OTHER U.S. SERVICE COMPANIES -------------- -------------- ¶8. (C) Pelaez stated several U.S. service companies have similar contracts in the Faja region. He asked if Petatt knew if the companies were structured in such a way that sanctions legislation did not apply to them. Petatt replied that he did not know. ¶9. (C) Pelaez said BH compliance personnel met with their counterparts from some of the other service companies in Houston to discuss the situation and discovered that they were unaware of the situation. He speculated that local service company representatives had not kept their respective headquarters informed on the issue. He then complained that a PDVSA official had told BH employees that he did not understand why BH had a problem with the situation since he had recently been in Houston and none of the other U.S. service companies appeared to have any problems. -------------- COMMENT -------------- ¶10. (C) As reported in Reftels B and C, this is not the first time that sanctions issues have arisen in the petroleum sector. Based on the previous incidents and BH's comments, it appears that the BRV and PDVSA are not aware of the mandate U.S. companies have under the sanctions legislation or the penalties for violating the laws. We also share BH's concern that President Chavez may use the issue in order to score political points. The issue strikes us as one that fits perfectly with Chavez' frequent rants that the Empire no longer dictates Venezuelan foreign or energy policies. DUDDY