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

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BE CAREFUL WHAT YOU WISH FOR, YOU MAY GET IT
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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
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.

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LABOR ISSUES
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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.

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COMMENT
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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