WOOD GROUP VICE PRESIDENT SAYS PDVSA "TECHNICALLY

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001757 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE NSC FOR JSHRIER COMMERCE FOR 4431/MAC/WH/JLAO E.O. 12958: DECL: 12/19/2018 TAGS: EPET EFIN VE SUBJECT: WOOD GROUP VICE PRESIDENT SAYS PDVSA "TECHNICALLY BANKRUPT" Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) Summary: According to a Wood Group executive, PDVSA is "technically bankrupt," owing up to USD 7 billion to its suppliers in Venezuela. The situation is particularly critical at smaller oilfield service companies, which are finding credit drying up as banks refuse to grant them new loans based on PDVSA's obligations. One of Wood Group's companies in Venezuela recently sent PDVSA a default notice for late payment, starting a paper trail as a precautionary measure in case the government decided to nationalize its operations. End summary. -------------- --- PDVSA Arrears Leave Service Companies Struggling -------------- --- ¶2. (C) Neil Harvie (strictly protect throughout),commercial vice president for the Americas for Wood Group, a major UK-based oilfield service company, told EconCouns December 19 that the financial situation at PDVSA was "absolutely critical." He estimated PDVSA was USD 1 billion in arrears to the four major oilfield service companies (Halliburton, Schlumberger, Baker-Hughes, and Wood Group) and up to USD 7 billion in arrears to its entire supply chain in Venezuela. Harvie characterized PDVSA as "technically bankrupt," noting there was a strong rumor PDVSA had taken back USD 2.3 billion it had transferred to the National Development Fund (Fonden). ¶3. (C) PDVSA's payment problems were placing smaller oilfield service companies in a particularly bad situation, Harvie noted, as local banks were refusing to grant them credit based on PDVSA's obligations. In contrast, the major companies were able to get credit, but only by putting up dollar assets as collateral. Harvie cited the Moscuela Group, a local holding company with an oilfield service business, as an example of the trouble smaller companies were having. According to Harvie, PDVSA owes the Moscuela Group 300 million bolivars (USD 140 million at the official exchange rate). Although the group's president, Antonio Moscuela, is on the board of directors of Banco Occidental de Descuento, one of Venezuela's larger banks, the Moscuela Group is struggling to find a line of credit to finance its operations. -------------- Wood Group Gives PDVSA Default Notice -------------- ¶4. (C) Turning to Wood Group's situation, Harvie said SIMCO, one of Wood Group's seven companies in Venezuela, sent PDVSA a written default notice December 1, citing a contractual break for late payment and notifying PDVSA that, per the contract, SIMCO could cease its operations in 90 days in the absence of payment. (Note: SIMCO's primary business is supplying water injection services for reservoirs in Lake Maracaibo. End note.) Because PDVSA was not paying, Harvie continued, SIMCO was unable to pay its contractors and was struggling to pay its employees, forcing Wood Group to bring dollars in via the parallel market in December. "PDVSA is drip-feeding us," Harvie said. He described paralysis at another of Wood Group's projects, a joint venture with contracts to lay three pipelines. Two of the pipelines were now canceled, he said, and the third was suspended indefinitely with the work halfway completed. ¶5. (C) Harvie said there was speculation that an additional reason for the arrears, in addition to shortage of cash at PDVSA, was to create a crisis at the private oilfield service companies and thus open the door for nationalization. He characterized Wood Group's strategy as seeking to reduce its exposure to Venezuela but keeping a foot in the door. Wood Group did not want its Venezuelan businesses to be nationalized or have to seek arbitration, he continued, but felt it important to "create the paper trail" for arbitration just in case. Should PDVSA take over SIMCO, it would have a contractual obligation to pay Wood Group for the four water injection platforms SIMCO owns at their unamortized cost, which Harvie estimated at USD 70 million. Harvie said he and CARACAS 00001757 002 OF 002 the British Ambassador had an appointment December 19 with the MFA's Vice-Minister for Europe to discuss Wood Group's situation, as they were unable to directly approach PDVSA vice president Eulogio del Pino. -------------- Comment -------------- ¶6. (C) Complaints about late payments by PDVSA to service companies are not new. If Harvie is correct, however, the situation has taken a drastic turn for the worst. We would not be surprised. Years of rising oil prices allowed PDVSA to mask increasing inefficiency and corruption. With oil prices down over 75 percent from their July 2008 high, we will soon find out what PDVSA's true capabilities and financial situation are. End comment. CAULFIELD