SCHLUMBERGER: PDVSA IMPROVING

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000491 SIPDIS SENSITIVE SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JSHRIER E.O. 12958: DECL: 04/07/2018 TAGS: EPET ENRG EINV ECON VE SUBJECT: SCHLUMBERGER: PDVSA IMPROVING REF: CARACAS 108 Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4 (D) ¶1. (C) SUMMARY: The operating environment for service companies has improved significantly over the past four to six months. PDVSA is apparently serious about increasing production and has shown a new willingness to approach the private sector for help. PDVSA has begun to pay service companies in a more timely manner and is working to eliminate its backlog of overdue payments. Schlumberger expects PDVSA to begin pushing more joint ventures with service companies. Schlumberger is optimistic about the development of abandoned fields and wells in Venezuela and views it as a major opportunity for growth. PDVSA has extended a tender for 89 drilling rigs and is eager to enter into management contracts for drilling operations. END SUMMARY -------------- THINGS ARE GETTING BETTER -------------- ¶2. (C) Petroleum Attache (Petatt) met with Schlumberger Venezuela president Ivan Betancourt on April 7 to discuss recent trends in the petroleum sector. Betancourt began the meeting by noting that the operating environment has improved significantly for service companies over the past four to six months (Reftel). He based his relatively optimistic views on three recent trends. First, PDVSA has shown that it is quite serious about increasing production levels. Betancourt stated activity levels have increased between 20 to 30 percent during the first quarter of 2008. A good example of PDVSA's new-found sense of urgency can be seen in its approach to signing new contracts. In the past, service companies had to wait until the PDVSA board met in order to get all of the necessary signatures for contract. Board meetings were frequently canceled or key members sometimes did not show up at the meetings. PDVSA officials now walk the contracts to each board member or senior executive's office for signature in order not to waste time. ¶3. (C) Betancourt stated the new commitment to do whatever it takes to increase production is being driven by 10 to 15 mid-level to senior PDVSA managers. He described the managers as technicians with strong backgrounds in the oil sector. Betancourt admitted that the managers have their work cut out for them since lower level managers in many cases do not feel any sense of urgency in improving production. As an example, PDVSA recently conducted a team building exercise with all of its contractors in eastern Venezuela to improve communications and operating efficiency. Betancourt stated Monagas in eastern Venezuela is suffering from problems with its facilities. He opined that production problems in Monagas would come from bottlenecks in facilities rather than a decrease in field production. Although the problem is well-known, lower level PDVSA officials have been loath to do anything to actually resolve the problem. ¶4. (C) Betancourt also bases his relative optimism in a change in attitude among senior PDVSA executives. The senior executives are far more willing to request help from the private sector than they were six months ago. A prime example of this is recent statements by senior PDVSA executives on the development of off-shore fields. The executives have freely admitted that PDVSA does not have the capabilities necessary to develop the fields and have publicly stated they need the private sector's help to bring the fields into production. ¶5. (C) Finally, Betancourt stated Schlumberger has seen a CARACAS 00000491 002 OF 003 significant decline in its waiting period for payment from PDVSA. Schlumberger executives told Petatt in December that their waiting period for payment was over 100 days. (NOTE: Betancourt clearly indicated that the waiting period for payments has significantly decreased but did not elaborate. END NOTE) Betancourt said PDVSA has made a major effort in the first quarter of 2008 to clear out its backlog of overdue bills. According to Betancourt, small service companies have received priority in terms of receiving their past due payments. He added that PDVSA's goal is to pay off all of its past due bills by the end of 2008. He later admitted that Schlumberger has its doubts as to whether PDVSA will meet its goal due to the November 2008 elections. Schlumberger believes the BRV will begin siphoning funding from PDVSA in September in order to help the campaigns of official candidates. As a result, Schlumberger believes payments to service companies will dry up in the fourth quarter of 2008. -------------- JOINT VENTURES -------------- ¶6. (C) PDVSA Services and China National Petroleum Corporation Service and Engineering LTD signed an agreement on April 4 creating a joint venture service company. The joint venture's goal is to have a 30 percent share of the oil services market in five years. When Petatt asked Betancourt about the new joint venture, he replied that Schlumberger believes PDVSA Services will seek to enter into more joint ventures with service companies. He noted PDVSA Services is expected to sign joint venture agreements with Indian service companies in the near future. However, Schlumberger does not believe that PDVSA can force service companies to conduct all of their business via PDVSA-controlled service companies. Betancourt explained the Venezuelan market is too large and PDVSA does not have enough resources to participate in a large number of joint venture service companies. ¶7. (C) Betancourt noted Schlumberger has publicly stated it does not have any problems working in a joint venture. Schlumberger is open to working in joint ventures that are designed to develop a particular type of technology. However, it does make a strong distinction between the transfer of knowledge and technology transfers to joint ventures. If a joint venture wishes to license or purchase a patent (technology transfer),Schlumberger is willing to discuss the issue. However, it is not willing to give up technological know-how for free or in an ad-hoc manner. Betancourt noted Schlumberger's greatest assets are its people and technology and it insists on maintaining control of both. -------------- ABANDONED FIELDS OFFER MAJOR OPPORTUNITIES -------------- ¶8. (C) Betancourt stated Schlumberger views the development of abandoned fields and wells as a major business opportunity. According to Betancourt, there are currently 47,000 abandoned wells in Venezuela. PDVSA abandoned a significant number of the wells well before it needed to do so. In addition, Schlumberger has seen a number of wells in Venezuela with negative reserves. In other words, the wells have continued producing beyond the amount of reserves that they were originally thought to have. Betancourt attributed the phenomenon to poor information. He stated that better information and newer technologies should give Venezuela significant production levels from the abandoned wells. ¶9. (C) Betancourt said PDVSA signed contracts with Schlumberger, Baker Hughes, and Halliburton to develop 1,000 CARACAS 00000491 003 OF 003 abandoned wells. In addition to developing the wells, the companies were tasked with producing a program to increase production at abandoned wells without using drilling rigs. Betancourt stated the goal was originally to produce 500 barrels of oil per day per well. He said the companies were able to produce twice that amount. He noted that if the companies had the same level of success with only 10 percent of the abandoned wells in Venezuela, it would mean a considerable increase in total production. -------------- RIGS -------------- ¶10. (C) PDVSA has recently extended a tender for 89 drilling rigs. Betancourt stated he was not sure if the tender had generated significant interest among major drilling rig companies. He noted that there are currently 120 drilling rigs operating in Venezuela. Of this number, 40 belong to PDVSA. 17 of the rigs are operating in Lake Maracaibo. ¶11. (C) Betancourt stated PDVSA is eager to enter into management contracts for the 17 rigs in Maracaibo. He claimed the PDVSA-Chinese joint venture's true purpose is to provide PDVSA with drilling rig management services. Betancourt compared PDVSA to Mexican state oil company Pemex and said both companies are eager to sign management contracts for drilling rigs since they are unable to handle the logistics and administrative aspects of rig management. (COMMENT: It would be ironic if PDVSA is seeking to enter into management contracts for the rigs on Lake Maracaibo. PDVSA "nationalized" the rigs last year to great fanfare by revoking all of the management contracts associated with them. END COMMENT) DUDDY