STATOIL: MIXED VIEWS ON INVESTMENT CLIMATE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000264



SIPDIS



SENSITIVE

SIPDIS



ENERGY FOR CDAY AND ALOCKWOOD

NSC FOR JSHRIER



E.O. 12958: DECL: 01/28/2018

TAGS: EPET, ENRG, EINV, ECON, VE

SUBJECT: STATOIL: MIXED VIEWS ON INVESTMENT CLIMATE



REF: A. 2007 CARACAS 1822

B. CARACAS 108



Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4

(D)



1. (C) SUMMARY: Norway's StatoilHydro received a far more

lucrative compensation package for its lost equity in the

former Sincor strategic association than reported in the

press. The BRV and PDVSA have taken a number of steps to

increase oil companies' confidence in Venezuela's investment

climate. However, President Chavez' recent comments

regarding a windfall profits tax has erased many of the

positive gains. Statoil is expecting a relative smooth

maintenance shutdown for Petrocedeno's upgrader (the former

Sincor). It appears that the BRV will look for an outsider

to replace Vice Minister Bernard Mommer. END SUMMARY



-------------- --------------

MEDIA REPORTS ARE INCORRECT ON STATOIL's COMPENSATION

-------------- --------------

2. (C) Petroleum Attache (Petatt) met with Statoil Venezuela

President Thore Kristiansen (strictly protect throughout) on

February 26 to discuss Statoil's views on the current

investment climate. Petatt began the meeting by

congratulating Kristiansen on the recent signing of two

agreements to quantify the reserves of the block Junin 10 in

the Faja as well as carry out a development study for the

block and PDVSA's payment of compensation to Statoil for its

lost equity in the former Sincor strategic association. Dow

Jones Newswires reported on February 14 that Statoil received

USD 130 million in compensation for the 5.3% equity stake

that it lost when the Sincor strategic association was

forcibly converted into the Petrocedeno joint venture.



3. (C) Kristiansen stated Statoil was very pleased with the

compensation that it received for its lost equity and added

that it was significantly higher than "what the Wall Street

Journal reported". He reminded Petatt that he has repeatedly

stated that Statoil had received a good deal (Reftel A).

Although Kristiansen declined to provide details on the

compensation package, he noted that PDVSA had five months to

pay Statoil. Kristiansen has previously mentioned that the

compensation package involved a cash payment with an option

to be paid in crude oil (Reftel A). Kristiansen also added

the deal has caused some problems for Statoil's board.

Statoil has a policy of trying to be as transparent as

possible with its shareholders. Although the board is

convinced the deal is an excellent one for the company, it

did not believe that it could release details of it to the

shareholders due to BRV sensitivities.



-------------- --------------

BRV AND PDVSA SEND POSITIVE SIGNALS TO THE PRIVATE SECTOR

-------------- --------------

4. (C) When asked about Statoil's views on the investment

climate in Venezuela, Kristiansen stated they were generally

positive. He pointed to three pieces of evidence to justify

Statoil's optimism. First, Kristiansen stated PDVSA is quite

serious about raising production and understands that the

private sector will play a key role in raising overall

production (Reftel B). Kristiansen said he was actually

worried that PDVSA was too keen to raise crude production.

He expressed concern that PDVSA would try to raise production

levels so quickly that it ended up damaging reservoirs.

Kristiansen told the Ambassador during a courtesy call on

November 30 that PDVSA had approached both Total and Statoil

to increase production at Petrocedeno by 200,000 barrels per

day to 400,000 barrels.



CARACAS 00000264 002 OF 003







5. (C) Kristiansen added that PDVSA has stated that it will

begin assigning blocks in the Faja for development in the

next few weeks. He then noted that "a few weeks" in

Venezuela could actually end up being "a few months". During

his courtesy call on the Ambassador in November, Kristiansen

described the BRV as being "strongly" interested in expansion

in the Faja. At the time, he stated his belief that the

necessary resources and technology were available for

expansion. He repeated the statement to Petatt but noted the

number of private sector companies that could partner with

PDVSA was limited. (NOTE: During the November meeting,

Kristiansen said Sincor originally cost USD 4.2 billion to

construct and that to duplicate it in today's market would

cost USD 7 to 8 billion. The cost would climb to USD 10-11

billion if PDVSA insisted on a 20% recovery rate. He

estimated that it would take 6 to 10 years from the date the

partners received a license for the upgrader to enter into

production. END NOTE)



6. (C) Kristiansen stated Statoil is also optimistic due to

PDVSA's general approach to the Petrocedeno maintenance

shutdown. Petrocedeno's upgrader shut down at midnight on

February 25 for maintenance. The shutdown is scheduled to

last 45 days. Petrocedeno's fields will continue producing

extra heavy crude oil that will then be mixed with lighter

crudes for marketing. PDVSA will provide the lighter crudes.

Kristiansen stated PDVSA officials initially ignored

requests for information regarding the supply of light

crudes. However, this quickly changed and they are now

promising significantly more crude than Statoil originally

anticipated. Kristiansen did not provide details but said

Statoil believes Petrocedeno's field production will stay

above 100,000 barrels per day during the maintenance shutdown.



7. (C) The final piece of evidence that justifies Statoil's

optimism is the recent performance of senior PDVSA executives

at an extra heavy oil conference held in Maturin the week of

February 11. Unlike other conferences, all of the scheduled

PDVSA speakers showed up and gave presentations that actually

contained details. Kristiansen stated it was clear that

PDVSA's senior management is clearly wrestling with the best

way to develop the Faja. In addition, PDVSA speakers

consistently stressed the need for private sector

participation.



--------------

NOT ALL SWEETNESS AND LIGHT

--------------

8. (C) When Petatt opined that the BRV was sending mixed

signals and pointed to President Chavez' recent suggestion

for a windfall profits tax, Kristiansen agreed. (NOTE:

Chavez announced on February 17 that his administration was

considering the imposition of a windfall profits tax on the

oil industry. He did not provide details on the proposal.

END NOTE).



9. (C) Kristiansen described the proposal as ridiculous and

claimed the BRV's current take, based on PDVSA's equity stake

in the joint ventures and the current tax and royalty rates,

was 86.7%. As a result, Chavez had little justification for

his claim that the oil companies were earning excessive

profits. He said Chavez' comments were useful due to the

fact that he "let the cat out of the closet". Since Chavez

did not provide any specifics on his proposed tax, his

comments raised the level of risk for companies operating in

Venezuela. According to Kristiansen, Statoil will merely

require a higher rate of return on Venezuela projects due to

the increased risk of ambiguous fiscal terms.



CARACAS 00000264 003 OF 003







--------------

MOMMER'S REPLACEMENT

--------------

10. (C) Rumors have been swirling for months that Energy Vice

Minister Bernard Mommer will be retiring shortly. Several

Embassy contacts have speculated that Mommer's replacement

will be Dr. Ivan Orellana, the Energy Ministry's

International Affairs Director and Venezuela's OPEC governor.

Orellana has a reputation for being a radical Chavez

supporter.



11. (C) Kristiansen, who has an excellent working

relationship with Mommer due in part to the fact they are

both German speakers, told Petatt that he has raised the

rumors directly with Mommer. According to Kristiansen,

Mommer stated the BRV is looking for an outside candidate to

replace him rather than a current Energy Ministry or PDVSA

official. Mommer stated the ideal candidate would have

strong administrative skills and would solve problems for

Energy Minister Ramirez rather than create them. Kristiansen

said he firmly believes Mommer will continue to have a strong

policy role after his retirement.

DUDDY