Identifier
Created
Classification
Origin
07CARACAS359
2007-02-16 21:29:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

SHELL'S OIL SECTOR OUTLOOK: WAIT AND SEE

Tags:  EPET ENRG EINV ECON VE 
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RUMIAAA/HQ USSOUTHCOM MIAMI FL
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C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000359 

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 01/12/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: SHELL'S OIL SECTOR OUTLOOK: WAIT AND SEE

REF: A. CARACAS 157


B. CARACAS 83

C. CARACAS 302

D. CARACAS 321

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 000359

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 01/12/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: SHELL'S OIL SECTOR OUTLOOK: WAIT AND SEE

REF: A. CARACAS 157


B. CARACAS 83

C. CARACAS 302

D. CARACAS 321

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


1. (C) SUMMARY: Shell has been monitoring the strategic
association migration negotiations closely and will base
future investment decisions on their outcomes. It believes
the strategic association partners' decision not to engage
the BRV and offer opening negotiating positions was a grave
error. ExxonMobil and ConocoPhillips have taken hard lines
in their negotiations. Both Shell and Chevron believe the
EDC and CANTV deals are positive developments. Chevron
believes the deals have created a high appetite for
liquidation among oil companies. Shell is still awaiting
payment from its joint venture. Shell joint venture
secondees are requesting reassignment. END SUMMARY

--------------
WAITING WITH BATED BREATH
--------------


2. (C) Petroleum Attache (Petatt) met with Shell Venezuela
President Sean Rooney (strictly protect throughout) on
February 16 to discuss recent events in Venezuela. Rooney
stated he is closely following the strategic association
negotiations (Reftel A) since their outcomes will have a
significant effect on Shell's future investment decisions in
Venezuela. He said Shell management is considering a major
extra heavy crude oil project in the Faja. Rooney said he
would be unable to convince Shell management to invest in a
Faja project if several of the companies ended up in
arbitration with the BRV. However, later in the
conversation, he indicated that a voluntary departure by some
of the oil companies would not have a negative impact on
Shell's investment plans if the companies received reasonable
compensation for their assets. (NOTE: The four strategic
associations are: Sincor (Total 47%, PDVSA 38%, and Statoil
15%),Petrozuata (ConocoPhillips 50.1%, PDVSA 49.9%),Hamaca
(ConocoPhillips 40%, PDVSA 30%, Chevron 30%),and Cerro Negro
(ExxonMobil 41.67%, PDVSA 41.67%, and BP 16.67%). END NOTE.)



3. (C) Rooney opined that the strategic association partners
committed a grave mistake when they refused to approach the
BRV with preliminary negotiating positions. He stated it was
clear that the BRV and PDVSA were incapable of presenting
opening positions and that the companies should have taken
advantage of this. For instance, the oil companies could
have garnered BRV goodwill by offering to use their close
ties to commercial and investment banks in order to help the
BRV renegotiate the assocations' financing arrangments as
part of the migration process. As a result of the companies'
failure to act, the migration negotiations never progressed.
When President Chavez asked senior BRV officials why
agreements had not been reached by the December 31 deadline,
they naturally blamed the oil companies. This resulted in
President Chavez imposing a May 31 deadline for the
completion of the migration of the four associations to PDVSA
controlled joint ventures as well as BRV statements that it
would nationalize the associations (Reftel B). Rooney says
he has no doubt that the BRV is serious about the May 1
deadline.


4. (C) According to Rooney, ExxonMobil and ConocoPhillips
have taken the hardest lines with the BRV. He then added
that BP Venezuela President Joe Perez (strictly protect)
recently told him that ExxonMobil has complete control of
Cerro Negro operations and an abrupt departure on their part
would be an operational disaster. Rooney opined that Shell

CARACAS 00000359 002 OF 003


could take over Cerro Negro operations if there was a proper
handover. However, it would not have any interest in doing
so if ExxonMobil ended up in arbitration with the BRV and
PDVSA. He indicated that BP had the technical capacity to
take over operations but was not sure if they would be
interested in doing so. He stated he did not believe that
Petrobras or PDVSA had the capacity to operate Cerro Negro.


5. (C) Rooney stated he believes the recent CANTV and EDC
deals (Reftels C & D) were "positive developments" that would
reduce tensions in the strategic association negotiations.
He added that he is preparing a document for Shell management
that shows that the BRV is willing to compensate companies
for investments that it has nationalized. It appears that
Rooney's view is held by other companies as well. Chevron
Latin America President Ali Moshiri told Petatt on February
15 that he told Energy Minister Ramirez that the EDC and
CANTV deals had created a situation where the oil companies
had a "high appetite for liquidation". Moshiri said both AES
and Verizon had received much better deals than he originally
thought they would. Moshiri claimed he told Ramirez that the
BRV's actions in both cases had opened the door for
liquidation and that Chevron expected a fair deal for the oil
sector along the same lines. Moshiri believed a significant
number of the six oil companies would accept a BRV offer for
their interests if they could get a fair market price.

--------------
JOINT VENTURES
--------------


6. (C) When asked about Shell's joint venture with PDVSA in
the former operating service agreement fields, Rooney stated
that he has received operational and production information
on a daily basis. He said PDVSA has allowed Shell to
maintain operational control but that it has been testing
Shell recently. According to Rooney, PDVSA has tried to
bypass Shell technical personnel in the last few weeks. He
admitted that it still was not clear if PDVSA would allow
Shell to maintain operational control.


7. (C) Rooney stated employee morale in the joint venture is
still an issue. Shell employees are not treated with
respect. He said there were three groups of Shell employees
in the joint venture: those who migrated to the joint venture
and are joint venture employees, Shell employees who refused
to migrate, and Shell employees that were seconded to the
joint venture. Shell is trying to find positions within the
group for employees that refused to migrate. Rooney said
that seconded employees have recently begun to insist that
Shell transfer them out of Venezuela. The seconded employees
frequently state that Venezuela is becoming like Cuba. The
employees fear that the BRV is going to enact laws that will
forbid them from leaving the country within the next two
years and want to depart while they still can.


8. (C) Rooney said that Shell's biggest problem is its
failure to receive payment as a joint venture partner. He
stated PDVSA is marketing the joint venture's production but
that it has failed to pay Shell its share. The joint venture
itself is an independent entity and Shell is not providing it
with capex or opex. According to Rooney, the joint venture
has been breaking even.

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


9. (C) Rooney, who has spent more than two years in
Venezuela, is no babe in the woods. He clearly understands
the current trends in Venezuela and expects Chavez' economic

CARACAS 00000359 003 OF 003


policies to bring nothing but ruin. He stated he was seated
next to the new French ambassador's wife at a recent dinner
and listened to her try and find positive notes in the BRV's
social programs. After listening for some time, Rooney told
her that he thought the same way two years ago and looked
forward to speaking to her after she had been in Venezuela
two years. Rooney then humorously related his wife's
reaction after spending hours trying to find sugar in the
grocery stores without success. We find it somewhat ironic
that Rooney, despite his negative views on BRV policy, is
still actively competing for Shell investment funds for a
major extra heavy crude oil project in the Faja.

BROWNFIELD