TAIWAN TRIES TO RETAIN FOOTHOLD IN VENEZUELAN OIL

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001678

SIPDIS

SIPDIS

DOE FOR INTERNATIONAL/C.DAY; A. LOCKWOOD
NSC FOR JOSE CARDENAS

E.O. 12958: DECL: 07/26/2012
TAGS: EPET ENRG ECON PREL VE TW
SUBJECT: TAIWAN TRIES TO RETAIN FOOTHOLD IN VENEZUELAN OIL
VENTURE

REF: A. CARACAS 1281

B. CARACAS 1314

Classified By: Economic Section Chief Hanscom Smith for reasons 1.4 B/D


1. (SBU) SUMMARY. As world oil prices reach US$77.00 per
barrel, the highest in 11 months, state-owned Chinese
Petroleum Corp. (CPC) is caught in a quandary. The
Venezuelan National Petroleum Corp (VNPC) intends to buy back
oil exploration rights at cost from all entities with less
than 10 percent investment in Venezuelan oil ventures. CPC
has invested in oil ventures in the U.S.,Indonesia, Libya,
Chad, Australia, Venezuela and Ecuador. CPC's overall
exploration budget is expected to triple from NT$ 3 billion
(US $91 million) in 2007 to NT$ 10 billion (US $300 million)
by 2010. CPC, through its subsidiary Overseas Petroleum
Investment Corp. (OPIC),has a 6.5 percent interest in the
Gulf of Paria West and a 7.5 percent interest in the Gulf of
Paria East regions of Venezuela, where light crude has been
found. OPIC has a joint oil exploration project with the
Venezuelan National Petroleum Corporation (VNPC) and wants to
continue developing its concession together with its partner,
U.S.-based Conoco/Phillips. In view of the Venezuelan
government's decision to nationalize its oil resources,
however, CPC is considering seeking a legal solution. To
hedge political risks, future CPC investment will likely
center around the Gulf of Mexico and Texas. END SUMMARY


2. (C) On July 19, CPC exploration manager Hsu Yeong-yaw
complained to us about the Chavez government's new policies
aimed at nationalizing the petroleum industry. For example,
landing visas for Taiwan nationals, which were routinely
issued in the past, have now been cancelled. Now, if CPC
wants to send technicians to Venezuela, it must first obtain
a visa in a third country, which increases the difficulties
of doing business. He said CPC's original contract (together
with Conoco/Phillips),was a profit-sharing agreement which
allowed Taiwan financial management of the project. The
Venezuelan side recently changed the contract to a
limited-mixed contract, increasing its share from 35 percent
to 60 percent. OPIC currently holds a 35 percent stake in
the Corocoro (Paria West) region and nothing in Paria East.
By raising VNPC's stake to 60 percent, OPIC's share will be
non-existent in Paria East. CPC has invested US $78 million
in the Paria West and East blocks and the Venezuelans are
only willing to compensate the loss at book value. Taiwan
will merely be a shareholder, with no say over how its
investment will be managed. In order to retain oil
exploration rights, Taiwan has asked for a meeting with the
VNPC in Houston to join negotiations now underway with
ExxonMobil and Conoco/Phillips, both of whom have rejected
VNPC's buyback program (Reftels).


3. (C) Hsu said the Gulf of Paria oil is a light crude (low
sulfur) of 25-40 grade which is easier to refine than that
found in Ecuador, where CPC has also drilled wells and is
pumping oil. The Gulf of Paria West concession is producing
120,000 barrels/day with a capacity of 450 million barrels,
while Gulf of Paria East is still being surveyed.
Conoco/Phillips has already sought legal means to resolve the
conflict, and CPC is considering whether or not to seek a
legal solution. Hsu said CPC is able to draw 1,000 barrels a
day out of a total 30,000 barrels from its concession, so its
share from the oil field is very small. However, Gulf of
Paria East offers great potential, which in Hsu's view Taiwan
will not be able to exploit given the current policy. Hsu
also believes that under the new regulatory regime, foreign
companies will lose their control over oil operations, but
will still be required to provide technical support. Without
the technical expertise, Hsu doubts that Venezuela can
operate its oil fields for more than two years before it runs
into difficulties.


4. (C) CPC officials are aware that nationalization of oil
resources is a growing international trend and their overseas
ventures are increasingly at risk. Hsu cited the example of
Sakhalin, where the oil majors have been driven out by the
Russian government. In Ecuador, CPC has seen its profit
margins reduced as the Ecuadorian government also embarks on
a policy of limiting foreign companies' control of oil

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resources. In this atmosphere of uncertainty, Hsu said
CPC's future strategy will primarily center on Texas and the
Gulf of Mexico, where investment is protected by law.
YOUNG