MITSUBISHI HOPES TO CLOSE MAJOR REFINERY DEAL BY

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 002000 SIPDIS SENSITIVE SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JCARDENAS AND JSHRIER E.O. 12958: DECL: 10/11/2017 TAGS: EPET ENRG EINV ECON JA CH VE SUBJECT: MITSUBISHI HOPES TO CLOSE MAJOR REFINERY DEAL BY YEAR END REF: A. CARACAS 511 ¶B. CARACAS 448 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: The Mitsubishi trading company hopes to complete a USD 3 billion financing deal for a deep conversion project at the Puerto La Cruz refinery by year-end. The Itochu trading company is working on a similar deal for the El Palito refinery. JBIC's participation in the projects and its growing exposure to Venezuela appear to be driven by the GOJ's desire to diversify Japan's sources of crude oil. Mitsubishi continues seeking fuel oil to ship to China but has been unable to secure it due to tight supply conditions. END SUMMARY -------------- MAJOR DEAL MAY BE CLOSE TO FRUITION -------------- ¶2. (C) Petroleum Attache met with Masashi Yoshihara, president of Mitsubishi Venezuela, and Yasuyuki Ozaki, director of project development (strictly protect both throughout),on October 10 to discuss Mitsubishi's current projects in Venezuela. Ozaki stated Mitsubishi and PDVSA hoped to sign a USD 3 billion dollar financing deal tied to the deep conversion project at the Puerto La Cruz refinery. (NOTE: Deep conversion is the refining process required to turn extra heavy crudes into lighter, less viscous oils. Details on the deep conversion project are discussed in Reftel A. END NOTE.) Ozaki indicated that although PDVSA was keen to close the deal the parties would have a difficult time completing it by year-end. As reported in Reftel A, Yoshihara told Petatt in March that the deal was for USD 1.795 billion and that Mitsubishi hoped to conclude negotiations in one to two years. Neither executive explained why the loan amount had jumped from USD 1.795 to USD 3 billion. ¶3. (C) According to Yoshihara and Ozaki, Mitsubishi was merely going to arrange for the financing of the deep conversion project but would not participate in the actual engineering or construction work. Ozaki stated the deep conversion project made sense commercially given the nature of Venezuela's reserves. He added that Mitsubishi also had a high opinion of the various contractors involved in the project. ¶4. (C) According to Ozaki, the greatest risk for the project �00A;was PDVSA's insistence on using its own HDHPLUS technology. HDHPLUS, a deep conversion technology developed by a PDVSA subsidiary, has never been used on a commercial scale and it is not clear that the technology will be commercially viable. In order to mitigate the risk, Mitsubishi will contract directly with PDVSA and repayment of the loan will not be contingent on proceeds from the project. Yoshihara stated Mitsubishi will be repaid in crude and products rather than cash. Ozaki also indicated that Mitsubishi will only retain a small portion of the loan after the deal is finalized. -------------- JBIC INCREASES ITS VENEZUELAN EXPOSURE -------------- ¶5. (C) Yoshihara and Ozaki stated the Japan Bank for International Cooperation (JBIC) is enthusiastically participating in the project, just as it did in the USD 3.5 billion dollar loan facilities agreement that PDVSA signed CARACAS 00002000 002 OF 002 with Mitsui and Marubeni in February (Reftel B). Yoshihara also stated that the Itochu trading company is putting together a USD 3 billion deep conversion financing deal for the El Palito refinery in which JBIC is participating. He implied that the Itochu deal was similar in structure to Mitsubishi's. ¶6. (C) Both Yoshihara and Ozaki expressed surprise at JBIC's willingness to increase its exposure to Venezuela. Yoshihara noted that if the Mitsubishi and Itochu deals come to fruition this year JBIC will have exposure to USD 9.5 billion worth of financing to PDVSA in a year's time. He opined that JBIC's willingness to increase its exposure stemmed from the Japanese government's desire to diversify Japan's crude supplies. All three financing deals involve repayment via crude oil and products or off-take contracts for crude and products (Reftel B). -------------- OIL SALES TO CHINA -------------- ¶7. (C) As reported in Reftel A, Mitsubishi has acted as an agent for PDVSA oil sales to China and other parts of Asia in the past and hoped to expand sales. When asked about the sales to China, Yoshihara replied that Mitsubishi has been unable to get fuel oil in Venezuela due to the Mitsui/Marubeni deal. Under the terms of their agreement with PDVSA, they receive 20,000 to 30,000 barrels of crude oil and products per day (Reftel B). As a result, Mitsubishi has been unable to obtain fuel oil for China on the terms that it would like. Yoshihara stated he thought Mitsubishi would receive fuel oil once it completed the Puerto La Cruz refinery deal since it would be "on the same level as Mitsui and Marubeni". --- GAS --- ¶8. (C) When asked if Mitsubishi was still selling gas pipe to PDVSA, Yoshihara replied that it was but that sales had slowed considerably. He added that Mitsubishi was still interested in pursuing a LNG project in Venezuela but PDVSA has not shown any interest in discussing LNG projects with them. DUDDY