BRV CONTINUES PRESSURING OIL COMPANIES

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000066

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: BRV CONTINUES PRESSURING OIL COMPANIES

REF: A. 2006 CARACAS 03529

B. 2006 CARACAS 03558

C. CARACAS 59

D. CARACAS 38

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


1. (C) SUMMARY: The BRV ordered strategic associations to
cut production in order to meet OPEC cuts. The order
violates the associations' contracts. Continued rhetoric
about nationalization raises questions about the development
of the Faja. END SUMMARY.

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ADDING INSULT TO INJURY
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2. (C) ConocoPhillips and ExxonMobil executives told
Petroleum Attache (Petatt) that they received via fax a
letter from the Energy Ministry dated January 8 instructing
them to cut production at their respective strategic
associations in order to meet OPEC cuts. (NOTE: Conoco
operates the Petrozuata and Hamaca strategic associations.
Exxon operates the Cerro Negro association. Chevron is
partners with Conoco in Hamaca. END NOTE) The associations
were required to cut production in November but raised
production to normal levels in December (Reftel A). The
current cuts are based on September 2006 production levels.
It appears the cuts are over 17 percent of production levels.


3. (C) The production cuts are a clear violation of the
strategic associations' contracts. As reported in Reftel B,
the Hamaca contract states that production cuts to meet OPEC
quotas must be based on forecast production and must be
spread equally among all companies. As was the case in
November, PDVSA does not appear to be cutting production at
all. A Conoco executive told Petatt on January 9 that the
Petrozuata contract clearly states the association is not
subject to production cuts to meet OPEC quotas.

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FUTURE INVESTMENT IN THE FAJA
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4. (C) The Conoco executive stated he no longer believes
that oil companies have any incentive in investing in new
extra heavy crude oil projects in the Faja region. According
to the executive, the current royalty and tax structure
render any new projects unprofitable. In addition, the
executive stated the geological makeup of the Faja is such
that the four existing associations are producing oil from
the region's optimal areas. Any new projects will face
reservoirs that do not have the same favorable geological
characteristics. As a result, they will require significant
amounts of additional investment in order to reach equivalent
levels of production. The executive opined that he does not
believe the BRV is aware of this.


5. (C) COMMENT: Given President Chavez's vague threat on
January 8 that he will nationalize the current strategic
associations (Reftel C) as well as additional, widely
reported comments by Finance Minister Rodrigo Cabezas on
January 11, we find it difficult to believe that
international or national oil companies will be willing to
invest in new Faja projects this year. The current legal and
operating environment simply does not favor investing in new
projects, despite the relatively high price of oil. (NOTE:
Cabezas stated the BRV could nationalize the strategic
associations if migration negotiations failed. END NOTE)
Although Chavez and other senior BRV officials have
repeatedly hinted that national oil companies will be offered
lucrative Faja deals in the near future, the recent decision
to halt the production of Orimulsion despite CNPC's

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significant investment in the project clearly shows that
national oil companies are subject to the BRV's vagaries just
as much as anyone else (Reftel D).

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