VENEZUELA: CONOCOPHILLIPS NEGOTIATIONS STALL

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001246

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JSHRIER

E.O. 12958: DECL: 09/04/2018
TAGS: EPET ENRG EINV ECON VE
SUBJECT: VENEZUELA: CONOCOPHILLIPS NEGOTIATIONS STALL

REF: CARACAS 1100

Classified By: Economic Counselor Darnall Steuart for reason 1.4 (d)


1. (C) SUMMARY: ConocoPhillips Latin America President Roy
Lyons met with EconCouns September 5 to report that,
following a September 4 meeting with the Venezuelan
Government (BRV) negotiating team, negotiations on
compensation for its expropriated assets in Venezuela have
broken down and no future meeting dates have been set. The
Venezuelan negotiating team returned to their original
position that the BRV will only pay book value for the
assets. The first meeting of the ICSID arbitration tribunal
panel will take place on September 13 and Lyons believes his
company will submit its formal claim shortly thereafter. He
speculates that the BRV will now wait to see that claim.
Lyons believes Venezuela plans to file a motion questioning
ICSID jurisdiction and that it will take up to a year for the
panel to rule. This year delay would give the BRV time to
take CITGO to the market for a price quote. In closing,
Lyons noted that ConocoPhillips believes that CITGO continued
to operate its Lake Charles refinery through Hurricane
Gustav. End Summary.


2. (C) ConocoPhillips Latin American President Lyons met on
September 4 with PDVSA Vice President Eulogio Del Pino,
Venezuelan Representative to OPEC Bernard Mommer (previously
Energy Vice Minister),and CITGO board member Juan Carlos
Boue. The Venezuelan negotiating team informed him that
Venezuela will only pay book value for the expropriated
assets. Since the beginning of their negotiations, said
Lyons, the two sides had agreed on a number of items as the
basis for their discussions including use of the business
plans for the ConocoPhillips assets (production forecasts,
operating expenses, and capital investment). They had
discussed using third party oil price forecasts and an
average 8-9 percent discount factor which, according to
Lyons, is standard for international upstream projects.
Essentially, he said, through the negotiations the BRV had
moved away from their original position that they would only
pay book value and agreed to the use of a net present value
calculation for the market value of the assets as stipulated
in Venezuela's investment law and the Dutch Bilateral
Investment Treaty which covered ConocoPhillips' investments
in Venezuela. There was still a gap between the two sides
but ConocoPhillips hoped it could be surmounted by direct
negotiations between the company Chairman and Energy Minister
Ramirez. As noted reftel, the two sides had also discussed
doing a swap for CITGO assets in the United States which
Lyons explained were potentially of greater value to
ConocoPhillips than the BRV; Venezuela removed that
possibility in the August 4 negotiating meeting. In sum, the
BRV has now walked away from discussion of an asset swap and
also rejected a "net present value" calculation. Lyons said
ConocoPhillips was "disappointed but not surprised" by
Venezuela's posture in the September 4 meeting.

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ICSID ARBITRATION TO BEGIN
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3. (C) Lyons reported that the first meeting of the ICSID
arbitration tribunal panel will take place on September 13.
He believes his company will submit its formal claim shortly
thereafter, although this will ultimately be decided by his
Chairman. Lyons speculated that the BRV is now waiting to
see that claim. It would then have six months to respond to
the claim. In addition, Lyons believes Venezuela plans to
file a motion before the panel questioning ICSID
jurisdiction. According to Lyons, the original contracts for
the Petrozuata and Hamaca Strategic Associations included
clauses stipulating that, if the fiscal terms of the
contracts were changed by the BRV, PDVSA would cover the
losses of the investor up to a certain point. The maximum

CARACAS 00001246 002 OF 002


oil price named in the clause is much lower than current
world oil prices which would be cited by ConocoPhillips in
its claim to the ICSID panel. The heart of the BRV legal
strategy, according to Lyons, is its belief that ICSID's
jurisdiction will be thrown out. Lyons noted however, that
ConocoPhillips has filed its claims against the Government of
Venezuela and not PDVSA. The company has consulted with two
major international law firms which both confirmed their
belief that there was a greater than 95 percent possibility
that ConocoPhillips would prevail on this legal point. The
year delay before the likely panel ruling would, however,
give the BRV time to take CITGO to the market for a price
quote.

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LAKE CHARLES REFINERY OPERATED DURING GUSTAV?
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4. (C) In closing the meeting, Lyons noted that
ConocoPhillips believes CITGO continued to operate the Lake
Charles refinery during the recent passage of Hurricane
Gustav. For ConocoPhillips, he stressed, safety always come
first and any employee has the right to suspend operations if
s/he sees an unsafe operation. He noted that ConocoPhillips
had shutdown its own refinery operations and pulled out its
employees and that his company could not understand why any
CITGO employees had agreed to maintain operations.
DUDDY