BP: TRYING TO KEEP A STIFF UPPER LIP

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000528 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: BP: TRYING TO KEEP A STIFF UPPER LIP REF: A. 2006 CARACAS 910 ¶B. CARACAS 504 ¶C. CARACAS 472 ¶D. CARACAS 426 Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: The USD 250 million in crude that BP and Total received for the Jusepin field was based on capital recovery rather than book or market value. The deadline for negotiations on the strategic associations appears to be June 26 instead of May 1. BP is concerned about support services for Cerro Negro if ExxonMobil (XM) pulls out of Venezuela. It is also worried about PDVSA paying its joint venture partners. BP believes that all of the international oil companies (IOC) in the strategic associations, with the exception of XM, will migrate in the end. -------------- TERMS OF THE JUSEPIN DEAL -------------- ¶2. (C) Petroleum Attache (Petatt) met with BP Venezuela President Joe Perez (stricty protect throughout) on March 8 to discuss the ecent Jusepin settlement as well as the state ofthe strategic association migration negotiations. Perez began the conversation by discussing Totaland BP's March 5 expropriation settlement with PDSA for the Jusepin oil field. ¶3. (C) PDVSA too control of the Jusepin field on April 1 when it operator, Total, failed to sign a memorandum ofunderstanding that converted the operating serviceagreement (OSA) to a PDVSA-controlled joint ventue (Reftel A). Total had a 55% stake in the OSA nd BP had the remaining 45%. Total and Amoco siged a 20 year OSA with PDVSA for Jusepin in Novemer 1993. The field came on stream in April 1997with an initial flow rate of 10,000 barrels per day Jusepin had a daily production rate of 27,733 arrels of 35 API per day in January 2006. The feld had a production potential of 39,000 barrelsper day at that time. ¶4. (C) Perez stated Tota and BP received USD 250 million in crude as compnsation for the expropriation. He stated the amunt reimbursed the companies for the capital they njected into the project and was not based on bok or market value. He said Jusepin was one of th most profitable of the former OSA fields and tha both companies had recouped their investments qickly. As a result, the amount they received frm PDVSA was quite small. Perez complained that th companies were being penalized for being efficint. -------------- THESTRATEGIC ASSOCIATION NEGOTIATIONS -------------- ¶5. (C) Perez stated BPis carefully watching its Cerro Negro partner XMs negotiating position. Perez said he personally admired the tough stance that XM is taking with th BRV. He opined that XM's presentation of a detiled and workable transition plan has scared PDVA (Reftel B). As reported in Reftel C, Statoil lso believes that XM's recent moves have frighteed PDVSA management. According to Perez, XM has clearly told PDVSA that if the transition on May 1 does not work, it will be PDVSA's fault and not XM's. CVP President and PDVSA director Eulogio Del Pino is particularly concerned since he is in charge of the transition. (NOTE: XM has a 41.67% stake in the Cerro Negro strategic association with PDVSA holding 41.67% and BP 16.67%. END NOTE). ¶6. (C) Perez opined that a pullout by XM could be beneficial for BP. If XM pulls out, there will be no need to reduce BP's 16.67% stake in Cerro Negro. According to Perez, PDVSA has repeatedly stated that it only wants a 60% stake in each CARACAS 00000528 002 OF 003 of new joint ventures that result from the conversion of the strategic associations. Perez believed that PDVSA realizes that it cannot handle a greater ownership stake. He stated President Chavez originally wanted complete control of the strategic associations but BRV and PDVSA officials convinced him that it was not realistic due to PDVSA's operational constraints. Perez did not speculate on what would happen to the remaining 23.33% stake in Cerro Negro if PDVSA took a 60% stake and XM pulled out. ¶7. (C) Perez stated senior BRV and PDVSA officials, including Energy Minister Rafael Ramirez, met with Total after the signing ceremony for the Jusepin deal. According to Total, the officials reviewed the terms of the nationalization decree (Reftel D). They told Total that PDVSA would assume operational control on May 1 but that none of the companies would be required to sign any type of document until June 26, the deadline the decree set for negotiations. Perez believed the companies would have an additional two months to negotiate if they were close to an agreement on June 26. -------------- CERRO NEGRO -------------- ¶8. (C) When Petatt asked what would happen at Cerro Negro if XM pulled out, Perez said his greatest concern was support operations. Under the current operational arrangement at Cerro Negro, an XM subsidiary, Operadora Cerro Negro (OCN), operates the upgrader. XM Venezuela, however, provides all of the support services such as the payment of contractors and information technology. If XM pulls out, PDVSA will have to assume all of the support burden. Given PDVSA's poor track record with the former OSAs, Perez was concerned that two or three months after XM's withdrawal, support services would crumble. He was particularly concerned that contractors would not be paid in a timely manner. He ruefully noted that PDVSA owes BP over USD 257 million in payments for BP's two joint ventures in former OSA fields. ¶9. (C) When asked about operations, Perez replied that he was not concerned in the short run since the vast majority of OCN's employees will migrate to the new joint venture. He expressed concern that the employees may leave if they are not treated well. He opined that Cerro Negro's future performance depended on whether the OCN employees stayed on after the migration. He also noted that there was a very noticeable difference between XM and PDVSA employees during their meeting on March 5. The XM employees were mainly 28 to 35 years of age and came to the meeting well-armed with statistics and documents. The PDVSA managers, on the other hand, were older and wore ill-fitting suits. In addition, most of the PDVSA managers had been involved in the OSA migrations and had delivered less than stellar performances. ¶10. (C) On the subject of intellectual property, Perez stated he was not concerned. Most of Cerro Negro's information technology was off of the shelf. PDVSA will have to purchase the packages but it can easily do so. In addition, Perez stated PDVSA had a very good IT staff so the migration should not cause any problems with the upgrader's computer systems. -------------- HANGING TOGETHER OR HANGING APART? -------------- ¶11. (C) When asked about the individual companies' negotiating positions, Perez stated Total has made it very clear that it does not want to repeat what it went through with Jusepin. As a result, it has adopted relatively easy terms. Perez believed that Total may be the first company to reach agreement with PDVSA and that PDVSA would then try to used that agreement as a template for the rest of the CARACAS 00000528 003 OF 003 companies. He stated Total had been the driving force behind the six companies meeting to compare notes on the migration negotiations. However, it has since lost enthusiasm for the meetings. ¶12. (C) Perez noted Chevron only attended one of the meetings. He said Chevron does not appear to be talking to any of the other companies, including ConocoPhillips (CP). Chevron and CP are partners in the Hamaca strategic association. ¶13. (C) Perez said he was surprised that CP has taken such a strong position in the negotiations. He believes they were being even tougher than XM. He attributed this to the fact that CP, due to recent acquisitions in Canada, is no longer interested in acquiring more extra heavy crude reserves. On the other hand, the rest of the companies in the Faja still have a strong appetite for extra heavy crude. Perez believed CP would eventually fold in the end because its investments in Venezuela represented 10% of the company. BROWNFIELD