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
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