BRV RAISES STAKES IN THE FAJA

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000083 SIPDIS SIPDIS ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD NSC FOR DTOMLINSON E.O. 12958: DECL: 01/16/2017 TAGS: EPET ENRG EINV ECON VE SUBJECT: BRV RAISES STAKES IN THE FAJA Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) ¶1. (C) SUMMARY: Energy Minister Rafael Ramirez announced at a press conference on January 15 that the BRV would enact a law that "nationalized" the four strategic associations in the Faja. Ramirez's comments appeared to confuse the concepts of "control" and "nationalization" to take advantage of the current political climate and increase the negotiating pressure on the IOCs. He stated he could not provide any details of the "nationalization" at present. International oil companies (IOC) stated they believed the BRV's position has not changed and that it is still seeking a 51% stake in the associations rather than full nationalization. Ramirez also stated that Venezuela was seeking an extraordinary OPEC meeting to establish additional production cuts. END SUMMARY -------------- TO NATIONALIZE OR NOT TO NATIONALIZE -------------- ¶2. (U) Energy Minister Rafael Ramirez announced on January 15 at his first press conference of the new year that Venezuela would "nationalize" the four extra heavy crude strategic associations. The four associations are: Sincor (Total 47%, PDVSA 38%, and Statoil 15%),Petrozuata (ConocoPhillips 50.1%, PDVSA 49.9%),Ameriven (ConocoPhillips 40%, Chevron 30%, and PDVSA 30%) and Cerro Negro (ExxonMobil 41.67%, PDVSA 41.67%, and BP 16.67%) Ramirez stated the BRV was preparing the implementing legislation and that he could not provide any details on the process or timing of the nationalization. He indicated the measure will be promulgated directly by the executive under the upcoming enabling act. Ramirez's announcement came on the heels of Venezuelan Petroleum Corporation (CVP) President Eulogio Del Pino's January 13 statement that CVP was ready to "assume control of the strategic associations". CVP is the PDVSA affiliate that handles relations with private sector companies. ¶3. (C) According to Ramirez, the BRV decided to nationalize the associations because negotiations with the IOCs had failed, despite the fact that the BRV had given an "ample compass for the negotiation process". As a result, Ramirez stated the "measure should not come as a surprise to anyone". He emphasized that negotiations are no longer possible. Ramirez stated the measure would not apply to oil service companies. (COMMENT: The BRV's rationale for the nationalization law is ironic given the fact that IOC contacts have complained for months to Petroleum Attache (Petatt) that they have been unable to secure meetings with senior BRV officials to discuss the migration terms. Although the companies did not want to make life easier for the BRV by offering them suggestions for the negotiations, they were eager to continue negotiations. END COMMENT) -------------- WHAT DOES THIS REALLY MEAN? -------------- ¶4. (C) Although Ramirez's announcement appears to be clear on its face, a cursory examination of it reveals that it is as clear as mud. Ramirez appears to have confused the concept of "control" with "nationalization". Ramirez stated that the implementing legislation would establish the terms and conditions so that the associations would meet the terms of the Organic Hydrocarbon Law (OHL). In addition, PDVSA's website states that the measure will assure that "the Venezuelan state by means of PDVSA will assume majority control of these associations in the entire value chain". Finally, Ramirez invited each of the six IOCs in the associations to meet separately with the BRV to see that their future role is in their respective associations. If the BRV was going to nationalize all four of the CARACAS 00000083 002 OF 003 associations, the terms of the OHL would be irrelevant; PDVSA would not have majority control but total control; and there would be no future role for any of the IOCs in the associations. ¶5. (C) A senior Chevron executive told PetAtt on January 15 that he was not sure what to believe. He likened the BRV's actions to a series of individuals writing a single page of a book's chapter and then trying to put all of the pages together in a coherent manner. The Chevron executive agreed with our tentative conclusion that the BRV is confusing control with nationalization and is using the term "nationalization" because it sounds better politically in the current climate. ¶6. (C) The executive opined that firms such as Lukoil, Petrobras, and the Iranian national oil company must be confused about all of the talk of nationalization after they had just been invited to invest in Venezuela. The executive also theorized that the BRV is being advised by a U.S. law firm and that the measure represents an effort to force the IOCs to the negotiating table. He claimed he had seen similar tactics employed in Ecuador and that they were the result of advice from U.S. firms. (COMMENT: A partner at a well-known law firm in Caracas told Petatt on January 12 that the BRV's law firms of choice are New York's Curtis, Mallet-Prevost, Colt & Mosle and Washington's Hogan & Hartson. A Curtis partner advised Energy Vice Minister Bernard Mommer during the negotiations on the migration of the operating service agreements to PDVSA controlled joint ventures. Contacts have stated that the partner is currently involved in the strategic association migration. Hogan & Hartson represented state petrochemical company Pequiven in negotiations arising from the expropriation of Tyco's assets in Venezuela. END COMMENT) ¶6. (C) The executive said he had told Chevron's senior management that the next three to four months would be a transition period and that they should not overreact. He said he gave the same advice to an unnamed competitor that called him. An Exxon executive told Petatt on January 15 that he personally believes that the BRV still wants 51% of the associations and operational control rather than 100% of the associations. -------------- OPEC CUTS -------------- ¶7. (C) Ramirez also stated in the press conference that Venezuela was seeking an extraordinary OPEC meeting to establish additional production cuts. He emphasized that Venezuela would strictly control production cuts in order to meet OPEC quotas. He announced that total monthly cuts for the four strategic associations were 1.1 million barrels for Cerro Negro, 800,000 barrels for Ameriven, 700,000 barrels for Petrozuata, and 700,000 barrels for Sincor. (NOTE: Average syncrude production figures for the four associations in August 2006 were 108,652 barrels per day for Cerro Negro; 173,000 barrels per day for Ameriven; 115,600 barrels per day for Petrozuata; and 125,200 barrels per day for Sincor. END NOTE) -------------- COMMENT -------------- ¶8. (C) At this point, we agree with IOC executives that the BRV still seeks control of the associations rather than 100 percent ownership. We also believe the IOCs still have some room for negotiation, despite Ramirez's statements to the contrary, based on his remark about negotiating their future roles in the associations and PDVSA's limitations. PDVSA CARACAS 00000083 003 OF 003 simply does not have the necessary personnel, expertise, or technology to run the associations' upgraders. As a result, the BRV needs the IOCs to play an operational role in the associations. In our opinion, the key issue still remains adequate compensation for lost value. If the BRV does not compensate the companies in an adequate manner, some of them may refuse to cooperate. If that occurs, things could become very unpleasant, very quickly. BROWNFIELD