EXXONMOBIL: OUT BY JULY 1?

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000504

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: EXXONMOBIL: OUT BY JULY 1?


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


1. (C) SUMMARY: ExxonMobil (XM) appears to be edging closer
to going to arbitration with the BRV over the migration of
the Cerro Negro strategic association. However, it still
holds out hope that it will be able to sell its stake in the
association. XM does not expect to be in Venezuela by July
1, 2007. The company has formed transition committees for
each of the major operations areas and has presented PDVSA
with a master plan for the transition. In addition, it has
formed a new subsidiary and will transfer its employees and
operations to it before the May 1 deadline. END SUMMARY

--------------
XM'S CURRENT OPTIONS
--------------

2. (C) Petroleum Attache (Petatt) met with senior XM
executives on March 6 to discuss the current state of
negotiations between the BRV and XM for the migration of the
Cerro Negro strategic association to a PDVSA-controlled joint
venture. The executives stated XM has four basic options: go
to arbitration (presumably through ICSID); sell its stake to
PDVSA; sell its stake to a third party; or migrate.
According to the executives, arbitration looks like the most
likely outcome at the present time. They stated the chances
of XM migrating were close to zero. The executives stated XM
is still waiting to start meaningful negotiations with BRV
and PDVSA officials.


3. (C) The executives noted that a sale to PDVSA or a third
party would be the optimal solution. XM is continuing to
raise the issue with PDVSA. A sale to PDVSA would not
necessarily involve cash. The executives stated PDVSA has
expressed an interest in selling Citgo refineries in the
United States, including the Lake Chalmette refinery. XM is
a partner with PDVSA in the Lake Chalmette refinery. XM is
interested in pursuing a swap with PDVSA of its stake in the
upgrader for one or more refineries. A swap would also have
the benefit of avoiding PDVSA's insistence that it will only
compensate oil companies for their stakes in the strategic
associations based on book value. PDVSA's refineries' book
value, as in the case of the strategic association upgraders,
is far lower than their actual market value due to
depreciation and age. As a result, it would be relatively
easy to carry out a swap using the book values of the
upgrader and one or more refineries.


4. (C) XM is also ready to sell to an interested third
party. The company has prepared a data room and can
advertise the upgrader in a matter of minutes to over 5,000
companies via Schlumberger's electronic network. XM
executives in the past have stated they are willing to sell
to Chinese, Indian, or Russian oil companies. (COMMENT: It
is our understanding that the Russian oil company Lukoil has
made it clear that it is not interested in investing in the
Faja. Contacts have stated the Russians are very frustrated
with the BRV and PDVSA. ConocoPhillips, the operator of the
Petrozuata and Hamaca strategic associations, has a 20% stake
in Lukoil. END COMMENT)

--------------
THE ROAD TO MAY 1
--------------

5. (C) XM has made it clear that it will cede operational
control of Cerro Negro to PDVSA on May 1. XM executives
stated they believe XM will be completely out of Venezuela by
July 1. In order to facilitate an orderly transition, XM has
formed transition committees with the relevant PDVSA
counterparts for major operational areas such as information
technology and human resources. XM has also submitted a
master plan for the transition of operational control to

CARACAS 00000504 002 OF 002


PDVSA. Although the oil nationalization decree called for
the formation of a transition committee that would attend
Cerro Negro board meetings by March 5, an XM executive told
Petatt on March 6 that the committee has not been formed yet.


6. (C) XM has also formed a new subsidiary that will assume
responsibility for staff and operations from OCN, the XM
subsidiary that was the operator of Cerro Negro. OCN will
still retain its rights to arbitration. XM executives
stressed that they will completely give up operational
control on May 1 in accordance with the oil nationalization
decree. XM does not want to find itself operating Cerro
Negro after May 1. The last thing XM wants is to lose
operational control but continue carrying out operations
under PDVSA control. Such a situation would subject XM to
potential liability if any sort of mishap occurred.
(COMMENT: XM's concerns strike us as quite reasonable.
During the operating service agreement migration, oil
companies continued running fields in a state of legal limbo.
At one point, the joint ventures did not exist and the BRV
had stated that the service agreements were invalid. When
asked about insurance, companies admitted that they were not
sure what there potential liability was or the status of
their insurance policies. END COMMENT).

--------------
THE OTHERS
--------------

7. (C) When asked if the other international oil companies
would migrate under the BRV's terms, an XM executive replied
he believed four of the other five companies (Chevron, BP,
Total, and Statoil) would migrate at the end of the day. He
said it was possible that ConocoPhillips would hold firm.

BROWNFIELD