CONOCOPHILLIPS HANGS TOUGH FOR NOW

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000721 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: CONOCOPHILLIPS HANGS TOUGH FOR NOW REF: A. CARACAS 00157 ¶B. CARACAS 426 ¶C. CARACAS 504 ¶D. CARACAS 659 Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4 (D) ¶1. (C) SUMMARY: ConocoPhillips (CP) Chairman and Chief Executive Officer Jim Mulva told Energy Minister Rafael Ramirez that CP will turn over operational control of the Petrozuata and Hamaca strategic associations as well as the Corocoro project in the Gulf of Paria on May 1. CP will not continue running operations but has offered to provide advice. CP will pull out all of its expats that have been seconded to the three projects as well as select Venezuelan employees. CP expect PDVSA to be able to maintain operations for several weeks or months. Assuming that CP follows through on its tough talk, the BRV and PDVSA may find that they have bitten off more than they can chew. END SUMMARY -------------- BE CAREFUL WHAT YOU WISH FOR, YOU MAY GET IT -------------- ¶2. (C) Petroleum Attache (Petatt) met with CP Latin America President Roy Lyons (strictly protect throughout) on April 11 to discuss CP Chairman and CEO Jim Mulva's meeting with Energy Minister and PDVSA President Rafael Ramirez the weekend of March 31. According to Lyons, Ramirez began the meeting by stating that the forced migration of the strategic associations and profit sharing agreements to PDVSA-controlled joint ventures did not constitute expropriations (Reftels A & B). He also stressed that the BRV wanted private sector companies to invest in the Venezuelan hydrocarbons sector. Mulva later stated in the meeting that CP expected fair compensation for the "expropriation" of value in its projects. He then used the term "expropriation" several times in the meeting to make his point. Mulva also stated CP was not a "political" company but that it expected its investments to be run in an efficient and transparent manner. ¶3. (C) Mulva stated that CP will cede operational control to PDVSA on May 1. As is the case with ExxonMobil (XM) (Reftel C),CP made it clear that it will not operate the projects if it does not have operational control. Lyons stated CP will withdraw 75 expat employees who were seconded to the three projects. He added that select Venezuelan employees will �0A;also be reassigned to CP projects in North America. He also said Mulva offered to leave CP employees in place to advise PDVSA employees until the June 26 deadline for conversion to the joint ventures. However, CP will only do so provided PDVSA signs a service agreement. Under the terms of the agreement, CP employees will not be allowed to make operational decisions. ¶4. (C) Lyons has told CP management that PDVSA will be able to maintain operations at the three CP projects for several weeks or months. He warned his superiors that once operations begin to run into problems, the BRV and PDVSA will try to blame CP for their difficulties. Lyons noted that the Petrozuata and Hamaca strategic associations employ industry-first technologies. CP is carrying out highly sophisticated drilling at Hamaca and Petrozuata's wells employ the largest pumps of their kind in the world. In addition, it is currently laying a underwater pipeline at Corocoro. Lyons stated CP will not complete the laying of the pipeline before May 1. ¶5. (C) COMMENT: XM executives have also expressed concerns that the BRV will blame them for operational shortcomings at CARACAS 00000721 002 OF 002 the Cerro Negro strategic association after May 1. In order to head off accusations from the BRV, XM submitted a master plan for the transition of operational control of Cerro Negro to PDVSA and formed transition committees for major operational areas (Reftel C). END COMMENT. -------------- LABOR ISSUES -------------- ¶6. (C) Under Venezuelan labor law, CP employees who will convert to joint venture employees must have one month to reach a decision on accepting employment with the joint ventures. XM executives stated that strategic association employees should have received employment offers and compensation packages by March 30 in order to comply with the law (Reftel D). When Petatt raised the issue with Lyons, he laughed and stated that none of the CP employees at the three projects have received offers or compensation packages. Based on the context of the conversation, it appears that CP's interpretation of Venezuelan labor law is the same as XM's. -------------- COMMENT -------------- ¶7. (C) The BRV and PDVSA may have bitten off more than they can chew. If CP follows through on its tough talk, PDVSA would find itself operating three strategic associations (Cerro Negro, Petrozuata, and Hamaca) as well as a major profit sharing agreement field (Corocoro) on May 1. At this point, it is not clear if CP has developed a transition plan to hand over operations to PDVSA. We find it hard to believe that CP would just walk away from three major projects. It is possible that CP may be trying to increase the pressure on the BRV and PDVSA in order to be in a better bargaining position after May 1. The BRV has stated that non-operational issues will be dealt with during the period between May 1 and June 26. Lyons believes that the BRV and PDVSA thought the strategic association migration would occur along the same lines as the operating service agreements (OSA) migration. During the OSA migration, PDVSA was able to obtain operational control but the private sector companies continued to actually carry out operations. This may not be the case with the strategic association migration. We agree with Lyons that the projects could continue to operate on their own, due to sheer momentum, for a period of time. It is hard to say how the BRV would react if the projects, particularly the strategic associations, began to develop serious operational problems. Given its current fiscal policies, the BRV cannot afford a serious decline in production in the Faja. If XM and CP actually cede all operational control to PDVSA on May 1, the BRV and PDVSA may find themselves paying a steep price for their insouciance towards the private sector. BROWNFIELD