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

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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

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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.

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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.

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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%

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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.

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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

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stated Chevron had bid on BORCO but the final sales price was
well beyond what Chevron was willing to pay.

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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