CHEVRON'S NEXT MOVES

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 002243 SIPDIS SENSITIVE SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JCARDENAS AND JSHRIER E.O. 12958: DECL: 10/02/2017 TAGS: EPET ENRG EINV ECON CH VE SUBJECT: CHEVRON'S NEXT MOVES REF: A. CARACAS 2128 ¶B. CARACAS 2013 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: The BRV has approached Chevron with a proposal to significantly increase production at the former Ameriven strategic association. Petrochina has also offered to partner with Chevron in a Faja project. Chevron is not in a hurry to make additional investments in Venezuela. Labor issues will continue to pose problems for oil companies, particularly a requirement to hire 10 Venezuelan workers for each expat. Chevron does not believe that changes in the constitution will necessarily derail future gas projects since it believes PDVSA is unable to bring the projects to fruition on its own. Chevron believes the sale of Citgo is imminent and that PDVSA will eventually cease being an integrated oil company and become a mere exporter. END SUMMARY -------------- MOVEMENT IN THE FAJA -------------- ¶2. (C) Petroleum Attache (Petatt) met with Chevron Latin America President Ali Moshiri (strictly protect throughout) on November 26 to discuss recent trends in the Venezuelan hydrocarbon sector. When asked about a series of muddled reports in the media that Total has been asked to expand the Petrocedino upgrader (the former Sincor strategic association in which PDVSA, Total, and Statoil held equity stakes) to increase syncrude production to 600,000 barrels per day, Moshiri responded that Chevron had received a similar proposal in writing from the BRV for Petropiar, the former Ameriven strategic association (PDVSA, ConocoPhillips, and Chevron). Moshiri did not provide any details on the proposed memorandum of understanding (MOU). ¶3. (C) Moshiri also stated Petrochina has approached Chevron with a proposal to partner on the development of a Faja block. Under the proposed MOU, PDVSA would hold a 60% stake in the joint venture and the Chinese and Chevron would hold 20% stakes respectively. (COMMENT: The BRV has not officially awarded a Faja block to the Chinese. CNPC, the Chinese national oil company, is currently carrying out certification studies in the Junin 4 block. It is our understanding that Petrochina is a subsidiary of CNPC. Petrochina's approach to Chevron may be an indication that a Faja block may be assigned to them in the near future. END COMMENT). ¶4. (C) According to Moshiri, the Chinese have been quite successful in completing deals at a senior level but have had a difficult time with the implementation of the agreements. The Chinese are eager to partner with Chevron in order to benefit from its technology. In addition, they believe Chevron will be able to move a major Faja project forward due to its superior working relationship with the BRV. Moshiri stated that when he congratulated the Chinese on the signing of an MOU for the delivery of 600,000 barrels per day, they replied that they were skeptical about the implementation of the deal. Moshiri stated the Chinese have stressed that they want as much of the production from the Faja block to go to China as possible. Unlike international oil companies, the Chinese are not concerned about booking reserves. According to Moshiri, the Chinese are only interested in securing supply contracts. ¶5. (C) Moshiri stated later in the conversation that the Chinese were in negotiations with the BRV to take a stake in the former Petrozuata strategic association. (NOTE: PDVSA CARACAS 00002243 002 OF 004 holds a 100% stake in the former association due to the departure of ConocoPhillips from Venezuela. END NOTE) Moshiri conjectured that the BRV may also be asking BP if it would be willing to participate in a major expansion of the former Cerro Negro strategic association. He opined that BP would be taking a major role in the Faja in the future. ¶6. (C) Moshiri stated Chevron is not interested in rushing into any major deals in Venezuela at this time. As a result, it is willing to take its time analyzing the two MOU proposals. Moshiri repeatedly implied that time was on Chevron's side due to Venezuela's declining production, BRV fiscal constraints, and PDVSA's technology needs. Moshiri opined that Total was also going to take its time about agreeing to a major expansion of Petrocedino, the former Sincor strategic association. -------------- LABOR ISSUES -------------- ¶7. (C) As noted in Reftel A, rumors have circulated that a large number of employees have left Petropiar after receiving their new compensation packages. When asked about the rumors, Moshiri deftly ducked the question but noted that large numbers of Venezuelan oil workers were leaving the country for a variety of reasons. He then stated that Chevron has hired joint venture employees who were fired for political reasons and then assigned them to their old positions in the joint venture as Chevron secondees. He said Chevron had recently done this with two employees. Moshiri stressed that Chevron had no intention of losing the services of skilled workers in the present operating environment. ¶8. (C) When asked about the proposed six hour workday, Moshiri stated the proposal if passed would significantly raise costs but that he thought it would be manageable. He stated a recent labor policy requiring companies to have 10 Venezuelan employees for every expat was a greater problem. According to Moshiri, the BRV has not pressed Chevron too closely on the policy but he believed that it was only a matter of time before it did so. Chevron has managed to partially assuage the BRV by hiring students to work in its office for five hours a day. The students learn English and Chevron has an opportunity to evaluate and hire the best of them. Moshiri stated that the policy is designed to provide work for unskilled labor. Since Chevron does not need unskilled labor, it may be forced to eventually hire people and then pay them not to work. Since the employees do not have the necessary skill sets, they would be a danger to themselves and others if they actually worked in a field or at the Petropiar upgrader. -------------- THE GAS SECTOR -------------- ¶9. (C) As noted in Reftel B, the proposed amendment to Article 302 of the constitution appears to render the current legal framework for gas void. When asked if the passage of the constitutional reforms would change Chevron's plans for investment in the gas sector, Moshiri replied no. He stated Chevron was fully prepared to accept an increased equity stake by PDVSA in gas investments since it would have a limited effect on Chevron's Plataforma Deltana project. Chevron has a 60% stake in Block 2 and ConocoPhillips (CP) has a 40% stake. Chevron fully expects CP to pull out of the project. As a result, if PDVSA takes a 60% stake, Chevron would only lose 20%. (NOTE: Moshiri did not mention Block 3 of Plataforma Deltana or Chevron's smaller investment in a block in the Rafael Urdaneta project. Chevron has a 100% CARACAS 00002243 003 OF 004 stake in Block 3 of Plataforma Deltana. END NOTE.) ¶10. (C) Moshiri stated Chevron has already sent a letter to the BRV declaring commerciality in its Plataforma Deltana blocks. When Petatt pressed Moshiri by noting that the application of the fiscal regime for oil investments to the gas sector would mean that future gas investments would no longer be commercially viable, Moshiri replied that he was not worried because "the ball was in PDVSA's court." By declaring commerciality, Chevron was complying with the terms of its agreement. It is now up to PDVSA to present Chevron with the terms for developing the blocks. If PDVSA has a 60% stake in the project, it will have to provide 60% of the capital. Moshiri said he was convinced that PDVSA was unable to provide the necessary funds for the investment. As a result, it will have to come up with terms that are acceptable to Chevron if the project is to proceed. Moshiri stated it may be two years before Chevron receives a response to the commerciality letter but appeared to be unconcerned about the delay. -------------- THE MOTHER OF ALL RUMMAGE SALES -------------- ¶11. (C) Moshiri told Petatt that senior officials have told him that the sale of Citgo is imminent. He did not specify who the officials were. When asked if he believed the sale was due to politics or PDVSA's cash flow problems, Moshiri did not respond directly. He later implied that the sale was due to the fact that PDVSA is suffering from cash flow problems as a result of transfers to BRV social programs. Moshiri believes PDVSA will eventually sell all of its downstream assets, including Citgo, and that it will transform itself into a crude oil exporter. The only exceptions would be the domestic refineries which service the Venezuelan market. ¶12. (C) Recent statements by Energy Minister Rafael Ramirez appear to support Moshiri's theory. Earlier this month, Ramirez publicly stated that PDVSA was in the process of "evaluating and optimizing" its overseas assets. Ramirez stated the ownership of unnamed overseas assets "did not make sense for Venezuela" and added that the assets compromised Venezuela's commercial policy. Ramirez added that the sale of Citgo's two U.S. asphalt refineries as well as a terminal in North Carolina were part of the evaluation process. Ramirez was quoted in the November 9th edition of the El Universal newspaper as stating that all proceeds from the sale of the two Citgo refineries would go to the Venezuelan state rather than to PDVSA. ¶13. (C) According to a November 13 Citgo press release, the successful completion of two supply contracts with PDVSA is a condition of closing for the sale of the asphalt refineries. Moshiri stated the sale of the refineries would not have any impact on Petroboscan, the PDVSA/Chevron joint venture that supplies the two refineries. When asked if Petrobocan asphalt was also going to Asia, Moshiri replied "All of it." (COMMENT: We are assuming that Moshiri is referring to all of the production above the amount needed for the supply contracts. END COMMENT). ¶14. (C) Moshiri also pointed to the recent sale of the PDVSA affiliate The Bahamas Oil Refining Company (BORCO) as evidence that PDVSA is getting out of the downstream business. BORCO is a former refinery that was converted into a storage terminal. The facility has a storage capacity of 20 million barrels. Industry press reported the week of November 19 that PDVSA sold BORCO for USD 1 billion. Moshiri CARACAS 00002243 004 OF 004 stated Chevron had bid on BORCO but the final sales price was well beyond what Chevron was willing to pay. -------------- COMMENT---YOU HAVE TO HAND IT TO THE CHINESE -------------- ¶15. (C) A Chinese partnership with Chevron makes a great deal of sense. First, partnering with Chevron in Venezuela gives CNPC valuable political cover as it seeks to increase its investments. Partnering with a U.S. firm makes it far more difficult for the USG to complain about Chinese investments in the Venezuelan hydrocarbon sector. Second, as is the case with everyone else, the Chinese have discovered that signing an MOU with the BRV does not translate into the implementation of projects. CNPC officials have repeatedly told Petatt they believe Chevron has a special relationship with the BRV. Moshiri himself implied during the meeting that he thought Chevron could help the Chinese get a Faja project off the ground. Finally, a partnership with Chevron would give the Chinese access to extra heavy oil technology that they do not have. Moshiri stated the Chinese have made it quite clear that they wish to learn as much about Chevron's technology as possible. ¶16. (C) From Chevron's viewpoint, a successful Venezuelan partnership with the Chinese could help Chevron with its investments in China. In addition, we note that a joint venture with the Chinese could also provide Chevron with some measure of political cover in Venezuela. Although the Chinese have suffered from many of the same problems as other oil companies in terms of administrative and tax problems, President Chavez has gone to great lengths to cultivate his relations with China and constantly refers to China as a key component in a multipolar world order. As a result, Chevron may believe it would be unlikely for the BRV to take drastic action against a joint venture with a Chinese partner. Moshiri noted that Chevron was well aware of the dangers of partnering with the Chinese. He joked that he would tell his headquarters that they should patent everything before they let the Chinese anywhere near it. DUDDY