CHINA NATIONAL PETROLEUM CORPORATION STILL

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000423

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: CHINA NATIONAL PETROLEUM CORPORATION STILL
FRUSTRATED

REF: A. 2007 CARACAS 700

B. 2007 CARACAS 38

C. 2007 CARACAS 1197

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


1. (C) SUMMARY: China National Petroleum Corporation (CNPC)
is slowly moving forward with its three joint ventures in
Venezuela but continues to be frustrated by PDVSA and the
BRV's administrative problems. The Sinovensa joint venture
has more than doubled production. The Petrozumano joint
venture only exists on paper. (CNPC did not disucss
conditions at its third joint venture.) PDVSA has not
offered CNPC a service contract at any of its joint ventures.
CNPC views ENI and Statoil as the big winners in the
migration process. END SUMMARY

--------------
SINOVENSA: MIXED REVIEWS
--------------

2. (C) Petroleum Attache (Petatt) met with CNPC Vice
President Jinling Zhang (strictly protect throughout) on
March 25 to discuss CNPC's views on the current operating
environment in Venezuela. Zhang began the conversation by
briefly reviewing the operational status of two of CNPC's
joint ventures in Venezuela. She noted that the BRV and CNPC
signed an agreement for the conversion of the Sinovensa
project to a PDVSA-controlled joint venture in November 2007.
Under the terms of the agreement, Sinovensa's block size was
increased by 35 square kilometers. The increase in acreage
was the only compensation CNPC received for the forced
conversion. The increase in acreage is in line with a
previous agreement between PDVSA and CNPC that stated
Sinovensa's block would be expanded once the parties dispute
over the cessation of Orimulsion production was settled
(Reftel A). (NOTE: As reported in Reftel B, Sinovensa
originally produced Orimulsion, an emulsion composed of 70
percent bitumen or extra heavy oil and 30 percent water mixed
with chemicals. The BRV gave Sinovensa until December 31,
2006 to cease production of Orimulsion. CNPC treated the
order as an expropriation. END NOTE)


3. (C) The agreement creating the new Sinovensa joint
venture stated the BRV had until the end of January 2008 to
carry out all of the legal requirements for the formation of
the new company. If it did not provide all of the necessary
approvals, then the agreement was null and void and CNPC was
free to pursue compensation for its lost equity. Zhang
stated her superiors contacted her on January 8 and assigned
her the task of pushing the BRV to secure the necessary
approvals. When she contact Energy Vice Minister Bernard
Mommer, she was told that all of the documentation was still
in the Energy Ministry and that the National Assembly had not
begun the approval process. Zhang stated she spent most of
January pressuring the BRV to secure all of the necessary
approvals and that it finally finished the last step in
creating the company on February 1.


4. (C) Zhang said it was not clear if the new company would
continue using the name Sinovensa since it "had a history".
She stated production at Sinovensa has increased from
approximately 25,000 barrels per day to 50 to 60,000 barrels
per day. Zhang stated that production had fallen to 25,000
barrels in part because of pipeline restrictions. Due a
production decline at Bitor, the PDVSA affiliate that used to
produce Orimulsion, Sinovensa can now utilize more of the
pipeline.

CARACAS 00000423 002 OF 002




5. (C) Sinovensa's original business plan called for
production to increase to over 100,000 barrels per day. The
new business plan calls for production of over 300,000
barrels per day. Zhang was highly skeptical that Sinovensa
would be able to reach the new production target. According
to Zhang, Sinovensa's field production, which is extra heavy
crude, is mixed with Mesa 30. The Sinovensa joint venture is
compensated on the basis of its extra heavy crude production
as well as a service fee it receives for mixing its
production with Mesa 30. When Petatt expressed doubts about
Sinovensa's ability to find enough light crude for its
ambitious production goals, Zhang stated it was PDVSA's
problem. Under the terms of the contract, PDVSA is
responsible for finding light crude for mixing purposes.

--------------
PETROZUMANO: LEGAL LIMBO
--------------

6. (C) As reported in Reftel C, the National Assembly's
Energy and Mines Commission announced on May 30, 2007 that it
approved a joint venture between PDVSA and CNPC named
Petrozumano to develop the Zumano oil field in eastern
Venezuela. When Petatt asked about Petrozumano, Zhang
replied that the joint venture was not operating. According
to Zhang, PDVSA still operates the field. Zhang noted that
the Zumano field was part of PDVSA East and, for all intents
and purposes, continues to be. She stated her superiors have
told her to go to the field and see why the joint venture is
not operating as a separate entity.

--------------
CNPC IS NOT PART OF NEW TREND IN OPERATIONS
--------------

7. (C) A prominent energy attorney told Petatt on March 24
that PDVSA has signed service agreements with its private
sector partners at some joint ventures. Under the terms of
the agreements, the private sector companies operate the
joint venture's fields. The attorney stated the private
sector companies are charging international rates per man
hour and making handsome profits on the deals. When Petatt
asked if PDVSA had approached CNPC with a similar deal, Zhang
replied in the negative. She stated she had not heard of the
new arrangements and was keenly interested. She said CNPC
thought that it was only a matter of time before PDVSA turned
over control of the joint ventures' operations to its
partners.

--------------
EUROPEANS ARE THE BIG WINNERS
--------------

8. (C) Zhang concluded the meeting by opining that ENI and
Statoil appeared to be the big winners in the migration
process. She noted both Statoil and ENI received cash as
well as certification rights to a block in the Faja. She
implied that both companies would be awarded blocks in the
Faja. Zhang added she did not understand why ENI and Statoil
received generous compensation for their lost equity while at
the same time the BRV is only offering book value to
ExxonMobil and ConocoPhillips for their expropriated assets.
At an earlier point in the conversation, Zhang made it clear
that she did not believe CNPC had received much in the way of
compensation for its lost equity in Sinovensa. As reported
in Reftel C, CNPC does not view Petrozumano as compensation
for its losses.
DUDDY