UPDATE ON CONOCOPHILLIPS NEGOTIATIONS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001100 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JSHRIER E.O. 12958: DECL: 01/28/2018 TAGS: EPET ENRG EINV ECON VE SUBJECT: UPDATE ON CONOCOPHILLIPS NEGOTIATIONS REF: A. A. CARACAS 487 ¶B. B. CARACAS 708 Classified By: Economic Counselor Darnall C. Steuart for Reason 1.4 (D) ¶1. (C) SUMMARY: After an August 4 meeting with members of the BRV negotiating team, ConocoPhillips (CP) is less optimistic about the outcome of the compensation negotiations for its expropriated assets in Venezuela. Senior BRV officials indicated that, after review of CP's proposed valuation of three CITGO refineries that might be considered in an asset swap, the BRV would prefer to use an "auction" approach to establish the right asset value. CP thinks this essentially forecloses the possibility of a swap. Such an approach would, however, give the BRV political cover. CP executives believe the company is farther along on the road towards initiation of an arbitration case than ExxonMobil and that at least the first significant step in such a case would be likely before any swap could be negotiated. CP is concerned about its exposure to Venezuela because it continues to be a major importer of Venezuelan crude. The company is also concerned about possible changes in the BRV negotiating team. End summary. ¶2. (C) ConocoPhillips President for Strategy, Integration, and Specialty Businesses Greg Goff, Latin America President Roy Lyons, and John Barr, CP General Manager for Global Strategy Integration and Business Development, briefed the Ambassador August 4 on the current status of their compensation negotiations with the BRV. While the CP representatives had been guardedly optimistic in their April and May meetings with the Ambassador (see reftels),they were considerably less so following their August 4 meeting with members of the BRV negotiating team, former Vice Minister of Energy Bernard Mommer and CPV President Eulogio del Pino. ¶3. (C) According to Goff, the BRV representatives informed CP that, following their review of CP's valuation of the three CITGO refineries under consideration for an asset swap, the BRV wishes to go "to the market" in an "auction type approach" to prove it had received the right value for the CITGO assets. The BRV officials signaled that they wish to resolve the dispute without going to the National Assembly for approval but, in such a case, it would be a challenge to get the people to accept that the BRV had received the best �A;value for the CITGO assets in the absence of a public auction. Goff said he could not be certain whether this BRV attitude was real or merely a stalling tactic but suspects that a straight up swap of CP assets here for CITGO assets in the U.S. is now unlikely. ¶4. (C) Goff noted that CP's assessment of the value of the three CITGO refineries was based on extensive work by a team that was given full access to CITGO for ten weeks. He underlined that the assessed value was fair and comparable to what other such assets would trade for in the United States. In fact, said Lyons, CP's assessment was at the lower end of the range of what such assets might receive in the U.S. He added that he was not sure that the BRV had actually run its own numbers. The BRV's assessment of the value of CP's expropriated assets continues to be substantially different than that of CP and this is exacerbated by the fact that oil prices have more than doubled since the nationalization. Goff opined that the BRV would likely be willing to pay cash if CP accepted the BRV valuation, but this would significantly undervalue the asset. ¶5. (C) When the Ambassador pointed to widespread rumors that the BRV would welcome the return of CP to Venezuela, Goff smiled and said "it won't happen." He confirmed, however, that CP knew it would be welcomed back if they were willing CARACAS 00001100 002 OF 002 to accept the BRV's terms and conditions because CP had proven itself as a good operator with which to partner. -------------- ARBITRATION MOVES AHEAD -------------- ¶6. (C) Goff informed the Ambassador that ConocoPhillips now appears to be further along the path towards arbitration than ExxonMobil. He said it is unlikely that any asset swap negotiations would be completed before some key step is taken in the arbitration process and added that CP is concerned that the BRV is not prepared for the arbitration. -------------- CP CONCERNS -------------- ¶7. (C) Goff noted that CP's exposure to Venezuelan risk is higher because the company is still a major purchaser of crude for two refineries. He also noted CP's concerns about potential changes in the BRV negotiating team. While CP believes that Mommer is personally committed to resolving the dispute, they are less sure of the commitment of other BRV negotiators. Goff confirmed that newly named Vice Minister of Energy Ivan Orellana was not present in the meeting with CP and is not involved in the negotiations. When Goff asked about rumors that Eulogio del Pino had been appointed as the PDVSA Vice President, EconCouns noted that the Embassy believes del Pino has been named to that position. No public announcement has been made and it is still unknown whether del Pino would continue to serve concurrently as CVP President or be replaced. Goff also pointed to persistent rumors that Ramirez may be tapped to be Chavez' next Vice President. He thought a Ramirez departure from the energy portfolio could also slow or impede negotiations because of Ramirez' commitment to arriving at an agreement. DUDDY