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 -------------- SCOPE OF THE DECREE -------------- ¶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 (SBU) The decree, which is still unpublished, goes on to state that the Venezuela Petroleum Corporation (CVP),the PDVSA affiliate that deals with foreign oil companies, or another PDVSA affiliate, would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. -------------- TIMING -------------- ¶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". -------------- WHAT DOES THIS ALL MEAN? -------------- 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