OIL NATIONALIZATION DECREE RAISES QUESTIONS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000411

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 02/27/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: OIL NATIONALIZATION DECREE RAISES QUESTIONS

REF: CARACAS 38

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


1. (C) SUMMARY: President Chavez stated on February 26 that
the oil nationalization decree required the four strategic
associations, the three profit sharing agreements, the
Chinese Orimulsion company Orifuels Sinoven S.A. and any
other companies "that carry out commercial activities in the
Faja region" to convert to PDVSA controlled joint ventures.
PDVSA will hold at least a 60 percent stake in the joint
ventures. Chavez stated the companies had four months after
the publication of the decree in the Official Gazette to
reach agreement on terms. The National Assembly will have an
additional two months to approve the resulting agreements.
Chavez stated the BRV will still take control of the fields
on May 1. END SUMMARY

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SCOPE OF THE DECREE
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2. (SBU) President Chavez stated during his February 26 "Alo
Presidente" broadcast that the nationalization decree would
require the four strategic associations, 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%) to convert to joint ventures. The
decree also covers the three profit sharing agreements
fields: Golfo de Paria West (ConocoPhillips 32.5%, PDVSA 35%,
ENI 26%, OPIC 6.5%),Golfo de Paria East (ConocoPhillips
37.5%, ENI 30%, Ineparia 25%, and OPIC 7.5%) and La Ceiba
(ExxonMobil 50% and Petrocanada 50%) as well as the
"companies or consortia that were constituted to execute" the
projects. In addition, Chavez stated the Chinese Orimulsion
company Orifules Sinoven (Reftel A) would also migrate to a
joint venture. Finally, Chavez stated that affiliates of the
previously mentioned companies or other companies that
"carried out commercial activities in the Faja Petrolifera
del Orinoco and in all the production chain would be
transferred to joint ventures."


3. (SBU) The decree, which is still unpublished, goes on to
state that the Venezuela Petroleum Corporation (CVP),the
PDVSA affiliate that deals with foreign oil companies, or
another PDVSA affiliate, would control at least 60% of the
shares of the new joint ventures. Chavez made a point of
stressing that the 60% figure was the minimum acceptable
figure for the BRV.

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TIMING
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4. (SBU) Chavez then stated that the private sector companies
would have four months from the publication of the decree in
the Official Gazette to reach agreement on the terms for
their participation in the new joint ventures. The National
Assembly would then have an additional two months to
authorize the joint ventures under the terms of the Organic
Hydrocarbon Law (OHL).


5. (SBU) While this timeline suggests the joint ventures
might be delayed until August 1, Chavez stressed that he has
given instructions that the BRV occupy the fields on May 1.
He also stated that transition committees were being formed
so that "the national flag can be raised in an effective
manner at all of the fields on May 1".

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WHAT DOES THIS ALL MEAN?
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CARACAS 00000411 002 OF 002



6. (C) On the positive side, the decree does clarify three
issues. First, it is now clear that all of the remaining oil
fields that are not operating under the joint venture
structures spelled out in the OHL will be migrated at the
same time. There were rumors that the BRV would not attempt
to deal with the profit sharing agreements until the
strategic association migrations were completed. Second, the
decree clearly states that the BRV, via PDVSA, will hold at
least a 60% stake in the new joint ventures. Some companies
had held out hope that the BRV would settle for a 51% stake,
as set out in the OHL. Lastly, President Chavez reiterated
that PDVSA and BRV personnel will take control of the fields
on May 1. In our minds, this clearly means that the BRV will
take physical control of the fields rather than just symbolic
control.


7. (C) Unfortunately, the decree does not answer the myriad
of operational and financial questions that the migrations
entail. It does not deal with the issues of compensation or
governance. In addition, there are no details on how the
transitions will be carried out. Finally, the decree does
not state with any specificity what will happen on May 1.


8. (C) ExxonMobil executives recently asked Energy Vice
Minister Bernard Mommer about the nature of the May 1
deadline. Mommer responded that the deadline was a political
date and not an economic or commercial one. He added that a
memorandum of understanding could be signed on May 1 and then
be presented to the National Assembly for approval on August

1. However, he stressed that PDVSA would take over
operational control on May 1. When asked for a definition of
control, CVP President Eulogio Del Pino stated PDVSA would
hire all of the association employees on May 1 and control
operations. Mommer stated that if ExxonMobil was negotiating
for the sale of its assets with the BRV or a third party in
good faith on May 1, the BRV could give it an extension on
time. Although some press articles have characterized the
four month negotiating period in the decree as a time
extension beyond the May 1 deadline, we view it as merely
formalizing Mommer's statement regarding negotiations for the
sale of assets rather than the migration negotiations
themselves.
BROWNFIELD