GUYANA PREPARES FOR FIRST PETROCARIBE OIL DELIVERY

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SIPDIS

**** C O R R E C T E D C O P Y ****

SIPDIS

SOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 01/06/2017
TAGS: EPET PREL ENRG PBTS XL VE GY
SUBJECT: GUYANA PREPARES FOR FIRST PETROCARIBE OIL DELIVERY

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Classified by Ambassador David M. Robinson. Reason: 1.4 b
and d.

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Summary:
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1. (U) Petrocaribe is making its formal debut in Guyana in
May amid unrealistic expectations. Optimistic Guyanese
government leaders are prepared to reap its promised benefits
but unprepared for the logistics and ramifications of doing
business under the untested program. GoG officials also
expect Venezuela to write off the 40 percent concessional
financing. Meanwhile, Venezuela,s President Chavez may be
paying a visit to Guyana in the near future and has invited
Guyana,s President Jagdeo to take part in an Energy Conference
in Caracas in April.

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A Deal Hard to Match and Too Good to Be True
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2. (U) Guyana Energy Agency (GEA) CEO Joseph O,Lall signed
the Petrocaribe bilateral contract January 23 in Caracas and
is preparing for Guyana,s first delivery of PetroCaribe
products in May. If it happens, the oil will come almost two
years after Prime Minister Samuel Hinds signed the
Petrocaribe energy cooperation agreement in September 2005.

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Hedging Bets
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3. (C) Guyana plans to purchase 5,200 barrels of refined oil
a day from Petrocaribe, roughly 50 percent of its
requirements. The range of refined products will include
diesel, gas, kerosene and fuel oil. O,Lall said he favored
importing all of Guyana,s fuel needs under the plan, but
Jagdeo and Prime Minister Hinds balked at the idea of putting
"all of their eggs in one basket." The prime minister told
the DCM that the government provided no advance notice to
Trinidad and Tobago before signing the pact, but noted that
Trinidad and Tobago is concerned about the new Petrocaribe
dynamic. In addition to diversifying Guyana,s oil sources,
O,Lall said that they wanted to maintain the country,s
business relationship with Trinidad and Tobago, and,
therefore, will split the country,s oil requirements between
the two. Rodney Gun-Munro, ESSO,s lead country manager for
Guyana and Suriname, underscored O,Lall,s concern, saying that
Trinidad and Tobago made it clear that if Guyana sources 100
percent of its oil needs via Petrocaribe, Trinidad and Tobago
may not come to the rescue if Guyana encounters fuel sourcing
issues in the future.

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Reliable Delivery -- Only Time Will Tell
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4. (SBU) The delivery mechanism under Petrocaribe raises
concerns for oil vendors: Under the plan, vendors in Guyana
-- Texaco, Sol, Esso and parastatal Guyoil -- will send
requirements and

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dates for pick up to GEA. GEA sends the order to PDVSA on
the 10th of the month. April 10 is the date first Petrocaribe
orders are due. The local companies will provide a three-day
window for pickup at PDVSA Curacao refinery. The
Guyana-based oil companies will pay GEA in local currency 30
days after the bill of lading is received.


5. (SBU) According to Gun-Munro, GEA did not solicit input
from local oil companies before embarking on the Petrocaribe
plan but companies were notified a week before press reports
on the signing of the bilateral contract. He says the
arrangement appears to be similar to how Guyana purchased
oil from 1984 - 2002. Overall, ESSO is concerned about
several issues: quality, delivery logistics and reliability.
At present, Gun-Munro says ESSO has a very reliable supply
contract in place with its affiliate Exxon-Mobil Trading,
which now delivers the oil to Guyana. It appears that
Venezuela will allow GEA to send a ship owned by a third
party to retrieve and deliver the oil for ESSO orders. ESSO
expects Exxon-Mobil Trading to continue to handle cargo
transmission for its oil. At present, title will transfer
to ESSO upon loading onto the vessel, but ESSO would like
title to remain with its affiliate until it receives the oil
at its facility. (Note: Usually Venezuela ships manage
Petrocaribe oil delivery, but its tankers are too large to
enter the shallow Demerara River where the oil companies,
storage facilities are situated.)

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Complicating Factors -- International Financing Institutions
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6. (C) Although uncertain of the specifics, both O,Lall and
the prime minister said Petrocaribe financing calls for a 60
percent cash payment with the remainder being secured with
a long-term, low-interest loan (2 percent interest or less
depending upon the price of oil). O,Lall says he fully
anticipates that Venezuela will write off the loan payment
at some point. Guyana is part of the Highly Indebted Poor
Countries (HIPC) initiative, and, according to O,Lall,
under International Monetary Fund (IMF) conditionality
rules, any loan agreement that Guyana takes out must have a
grant component that cannot be less than 35 percent. There
is also a ceiling stipulating how much Guyana can borrow,
and Guyana is close to that ceiling. If Guyana should lose
IMF conditionality, the country would essentially lose all
Western loan sources, including the World Bank, IMF and the
Interamerican Development Bank. (IMF ended its program in
Guyana in September 2006 but is considering starting a new
program.) According to the prime minister, before O,Lall
signed the agreement, Minister of Finance Ashni Singh
traveled to Venezuela separately to work out the financial
formula that would ensure IMF conditions were preserved.

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Border Disputes
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7. (SBU) The Guyana-Venezuelan political dynamic, which
includes border disputes and a history of broken oil trade
contracts, suggests that easy financing may come with its
own consequences. Venezuela has a long-standing border
dispute with Guyana, claiming territory up to the Essequibo
River. Entering into a highly subsidized oil contract could
complicate Guyana,s negotiating position, should the
dispute become active again. Prime Minister Samuel Hinds
recently told the DCM that there hadn,t been any progress
regarding the border dispute and added that when the
government previously approached Venezuela about the purchase
of oil, top-level Venezuelan leaders averred that
exporting oil to Guyana,s Region 1 (a part of the region
in dispute that is adjacent to Venezuela) would be
inconsistent with Venezuela,s claim. Hinds thinks it
will have to be resolved in a world court where he predicted
the 1899 Paris Tribunal decision would be validated. On
the other hand, O,Lall said he thought the border dispute
issue was on the back burner for Venezuela but then suggested
that Chavez is ready to sign an agreement stating the border
issue has been settled.

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Affordable Energy Holds the Key
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8. (C) O,Lall pointed out that providing affordable energy
is the key to addressing Guyana,s status as a poor country,
indicating a higher consumption of energy equals a higher
standard of living. Guyana has a multitude of renewable
energy sources, including wind, hydropower, solar, biomass,
and bagasse. O,Lall was frustrated at the lack of
commitment from government leaders regarding alternative
energy development in general. Specifically, in regard to
the Amalia Falls hydropower project, he commented that
the politicians "can,t see beyond their noses." He urged
U.S. Embassy assistance in encouraging Guyana leaders to
push alternative energy development.


9. (SBU) The prime minister told the DCM that costly, but
reliable, petroleum is Guyana,s best option for energy.
He believes hydropower is not sufficiently attractive at
this point, but conceded that as oil prices continue to rise,
it does become more feasible. There are other factors to
consider: With hydropower, for instance, there is the added
responsibility of ensuring that communities in the region
where hydropower is being developed -- primarily Amerindian
villages -- are not flooded. The prime minister also noted
that wind power is unpredictable at best.

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Comment: Short-sighted Solutions or Path to Further
Collaboration?
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10. (C) In the last 30 years, Guyana has bounced back and
forth between Venezuela and Trinidad and Tobago as its
primary source for oil imports. Since 2002, Trinidad and
Tobago has been supplying the majority of Guyana,s oil needs.
With oil prices skyrocketing in the last several years, the
Petrocaribe offer proved too good to pass up, and so after
watching and waiting as bilateral agreements with Jamaica,
Belize and Suriname fell into place, Guyana finalized its
own deal. But the end game may be to never pay back the 40
percent oil loan at all, as O,Lall revealed. In fact, the
GoG prides itself on getting others to relinquish its debt
obligations.


11. (C) (Comment continued): Meanwhile, according to press
reports, the U.S. Geological Survey estimates that there could
be as much as 15 billion barrels of oil resources in Guyana,s
offshore waters -- a resource that could transform Guyana in
unimaginable ways if its border dispute with Venezuela is
resolved. The Petrocaribe deal positions Venezuela to
collaborate with Guyana further in the exploration and
refining of those resources. President Chavez has invited
President Jagdeo to an Energy Conference scheduled to take
place in Venezuela in April. The two may have a lot to
discuss.


Robinson