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

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PDVSA CONTRACTS AND SANCTIONS LEGISLATION
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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.

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BH MEETINGS WITH USG OFFICIALS
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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.

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POSSIBLE INVOLVEMENT OF OTHER U.S. SERVICE COMPANIES
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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.

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COMMENT
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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