Identifier
Created
Classification
Origin
07CARACAS2128
2007-11-05 16:53:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

PETROCEDINO'S COMPLICATED BIRTH

Tags:  EPET ENRG EINV ECON ELAB VE 
pdf how-to read a cable
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RR RUEHDE
DE RUEHCV #2128/01 3091653
ZNY CCCCC ZZH
R 051653Z NOV 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 0038
INFO RUEHHH/OPEC COLLECTIVE
RUEHAC/AMEMBASSY ASUNCION 0892
RUEHBO/AMEMBASSY BOGOTA 7566
RUEHBR/AMEMBASSY BRASILIA 6003
RUEHBU/AMEMBASSY BUENOS AIRES 1691
RUEHLP/AMEMBASSY LA PAZ 2605
RUEHPE/AMEMBASSY LIMA 0880
RUEHSP/AMEMBASSY PORT OF SPAIN 3505
RUEHQT/AMEMBASSY QUITO 2694
RUEHSG/AMEMBASSY SANTIAGO 4015
RUEHDG/AMEMBASSY SANTO DOMINGO 0520
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHAAA/WHITEHOUSE WASHDC
RHEBAAA/DEPT OF ENERGY
RUCNDT/USMISSION USUN NEW YORK 0942
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 03 CARACAS 002128 

SIPDIS

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JCARDENAS AND JSHRIER

E.O. 12958: DECL: 10/02/2017
TAGS: EPET ENRG EINV ECON ELAB VE
SUBJECT: PETROCEDINO'S COMPLICATED BIRTH

REF: A. CARACAS 1822

B. CARACAS 1655

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 03 CARACAS 002128

SIPDIS

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JCARDENAS AND JSHRIER

E.O. 12958: DECL: 10/02/2017
TAGS: EPET ENRG EINV ECON ELAB VE
SUBJECT: PETROCEDINO'S COMPLICATED BIRTH

REF: A. CARACAS 1822

B. CARACAS 1655

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: The creation of Petrocedino, the joint
venture formed from the former Sincor strategic association,
poses a variety of challenges for its private sector
participants. The new company will extract and upgrade
extra-heavy crude oil in the Faja region. Venezuelan state
oil company PDVSA will hold a 60% stake, French oil company
Total a 30.323% stake, and Norwegian oil company Statoil a
9.677% stake in the company. On the plus side, the joint
venture's president is competent and private sector partners
control key operational posts. The joint venture has begun
offering employment packages to its employees that are
substantially below the Sincor compensation packages. Labor
continues to disrupt operations and human resources has
become politicized. END SUMMARY

--------------
THE BIRTH OF PETROCEDINO
--------------

2. (SBU) The Official Gazette published the agreement that
forms Petrocedino, the joint venture created from the former
Sincor strategic association, on October 29. Under the terms
of the agreement, PDVSA will hold a 60% stake, Total a
30.323% stake, and Statoil a 9.677% stake in the company.
The company is legally entitled to carry out exploration,
extraction, transport, and storage of crude oil as well as
refining/upgrading activities in a 399.25 square kilometer
block. (COMMENT: As noted in Reftel A, the size of
Petrocedino's block is larger than the original Sincor block
despite repeated BRV statements that block sizes would be
reduced. END COMMENT). The joint venture is also empowered
to enter into contracts for petroleum services but is barred
from assigning the operator function to another entity.


3. (SBU) Under the terms of the contract, Petrocedino has
the right to market its upgraded crude oil and products at

international market prices to non-related parties. However,
it must sell all crude oil that it produces above its current
upgrading capacity to PDVSA as well as all other natural
hydrocarbons that it extracts and does not utilize in its
operations with the exception of crude oil upgraded in third
party facilities or crude used for royalty payments.
Petrocedino is authorized to receive payment for crude and
products in U.S. dollars and to hold bank accounts outside of
Venezuela that can be utilized for operations.


4. (SBU) Petrocedino is subject to a royalty rate of 30% and
an income tax rate of 50%. In addition, it must pay a
science tax and devote 1% of pre-tax profits to a social
development program. The joint venture is also subject to an
extraordinary tax that is equal to the difference between
half the value of the crude oil extracted before upgrading
and other natural hydrocarbons extracted from the block and
the sum of payment for royalties, the extraction tax, income
taxes, the science tax, social spending, and any other tax
based on income.

--------------
STATOIL'S TAKE ON THE NEW JOINT VENTURE
--------------

5. (C) Petrocedino/Sincor Deputy General Manager Jane Nagy
(strictly protect throughout) told Petroleum Attache (Petatt)
on November 1 that there are real problems in getting the
Petrocedino joint venture off the ground but that the
contract was not one of them. She indicated that Statoil is
pleased with the contract, particularly the provisions
dealing with marketing and governance (Reftel A). In

CARACAS 00002128 002 OF 003


addition, Statoil was able to place its personnel in the key
positions of marketing, finance, information technology, and
contracting/procurement. Nagy stated Total, on the other
hand, was angry that Statoil was able to secure so many key
positions despite the fact that it has the smallest equity
stake in Petrocedino. Nagy attributed Statoil's success in
part to its excellent working relationship with CVP president
Eulogio Del Pino. Nagy later stated that PDVSA controls the
auditing department and noted that PDVSA officials had little
idea of what an audit entails.


6. (C) Nagy stated Statoil is also pleased with Petrocedino
president Manuel Alvarez, a PDVSA secondee. She noted
Alvarez was competent and fully understood what it takes to
run Petrocedino. Nevertheless, she expressed concern that
Alvarez would not hold his post for long due to poor health,
family problems, and PDVSA's tendency to constantly shift
senior managers from one post to another. Nagy explained
that Alvarez has had a stroke and his son has cancer.

--------------
LABOR CONTINUES TO BE A MAJOR HEADACHE
--------------


7. (C) Despite the generally favorable terms of the
contract, Petrocedino faces a number of operating challenges,
primarily in the area of human resources. The joint venture
recently began offering employees their new employment
package, which contains a significantly lower salary than the
Sincor package. Nagy stated the package is not as bad as
some employees claim since roughly 20% of the salary was
shifted to benefits. She admitted that some employees,
however, would face a significant cut in salary. To date,
Petrocedino has only offered the new package to 29 employees.
Nagy stated rumors are circulating that 200 employees quit
the former Ameriven strategic association after receiving
their new employment packages. (NOTE: PDVSA (30%),
ConocoPhillips (40%),and Chevron (30%) were originally the
shareholders in the Ameriven strategic association.
Following the departure of ConocoPhillips, PDVSA assumed its
equity stake and the strategic association became the
Petropiar joint venture. The agreement forming Petropiar
appeared in the same Official Gazette as the Petrocedino
agreement. END NOTE)


8. (C) Nagy also complained that labor unions continue to
cause problems at Petrocedino. As noted in Reftel B, union
members had blocked the road to the upgrader 33 days between
January and August. When asked if protests were continuing,
Nagy replied that between August and November the protesters
had blocked the road an additional 10 to 15 days.


9. (C) Nagy also stated that Petrocedino officials had
difficulty disciplining employees due to the politicized
nature of the human resources department, which is run by a
PDVSA secondee, as well as the power of the labor unions.
She stated Petrocedino officials were pushing PDVSA to remove
the current human resources director because he has been
basing employment decisions on his personal vendettas against
various employees as well as his political beliefs. She
added that Petrocedino had already replaced one human
resources director because he was driving out employees on
the basis of their political beliefs. Nagy claimed that CVP
president Del Pino understood that Petrocedino could not
afford to fire large numbers of employees for political
reasons but added that that message had not reached
Petrocedino human resources officials. She expressed concern
that Petrocedino would not be able to maintain production
levels.


10. (C) Nagy stated labor unions continue to hold massive

CARACAS 00002128 003 OF 003


amounts of power at Petrocedino. She stated some employees
regularly carry firearms and only retain their jobs due to
union connections. In a recent case, a female cleaner
threatened a Petrocedino employee and then sent union thugs
to threaten him. When Nagy complained to the human resources
department, they failed to respond. She later saw a memo
from the head of human resources stating that no disciplinary
action would be taken because the cleaner was "one of our
people."


11. (C) Nagy stated safety is her primary concern and that
she would not hesitate to halt operations if she felt they
could not be carried out safely. She added that PDVSA
officials have parroted her language on safety but it remains
to be seen if they would actually halt operations if their
superiors told them to continue operations at all costs.
Nagy also complained that Statoil officials were pressuring
her to continue maintaining Statoil's high safety standards
within Petrocedino but were oblivious to the politicized
operating environment within the joint venture.

--------------
CONCERNS OVER MAINTENANCE SHUTDOWN
--------------

12. (C) Nagy stated she still has serious concerns over the
major maintenance shutdown scheduled for February (Reftel B).
Although the shutdown will occur in only three months time,
PDVSA has not been able to provide details on its ability to
provide Mesa 30 crude to blend with the extra heavy crude
that Petrocedino produces. If PDVSA is unable to provide the
lighter crude for blending purposes, Petrocedino would have
to halt extraction operations since it cannot market the
extra heavy crude by itself. Nagy stated Petrocedino would
need 55,000 barrels of Mesa 30 per day in order to continue
production.

--------------
COMMENT
--------------

13. (C) Nagy's comments regarding Petrocedino's operations
and structure and the text of the contract are in line with
previous reporting in Reftels A and B. We were surprised,
however, by her comments regarding the continuing power of
labor unions in the Faja. A number of Embassy sources have
told us that the BRV has completely broken the power of the
unions. When Petatt noted the widespread perception that the
recently signed collective bargaining agreement failed to
deliver significant benefits to organized labor, Nagy replied
that this was due to the fact that the BRV had bought off
labor leaders and was not a true indication of the strength
of the leaders.



DUDDY