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