UPDATE ON CONOCOPHILLIPS NEGOTIATIONS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000708 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JSHRIER E.O. 12958: DECL: 05/23/2018 TAGS: EPET ENRG EINV ECON VE SUBJECT: UPDATE ON CONOCOPHILLIPS NEGOTIATIONS REF: A. CARACAS 487 ¶B. 2006 CARACAS 2431 ¶C. CARACAS 648 ¶D. 2007 CARACAS 659 Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4 (D) ¶1. (C) SUMMARY: ConocoPhillips (CP) continues to be optimistic on the state of negotiations on compensation for its expropriated assets in Venezuela. CP executives presented senior BRV and Citgo officials with CP's valuations of three Citgo refineries. In the event of an asset swap, CP hopes to secure long term supply contracts for the refineries. The Venezuelan side also expressed interest in supply contracts. Energy Minister Ramirez is focused on reaching a deal with CP because it has a larger and more complicated claim than ExxonMobil (XM). Ramirez views the XM claim as being relatively simple and fairly easy to resolve. END SUMMARY -------------- CP RELATIVELY OPTIMISTIC -------------- ¶2. (C) CP Latin America President Roy Lyons (strictly protect throughout) briefed the Ambassador on May 22 on the state of compensation negotiations with the BRV. Lyons began by stating CP executives met for three hours with Energy Vice Minister Bernard Mommer, CVP President Eulogio Del Pino, Citgo Chairman and CEO Alejandro Granado, and Citgo board member Juan Carlos Boue on May 20 to discuss the valuation of three Citgo refineries. As reported in Reftel A, CP wishes to be compensated with assets rather than cash. CP officials welcomed the presence of Boue since they believe both Boue and Mommer have a better grasp of the compensation numbers and economics than Del Pino, who has been designated the lead negotiator. ¶3. (C) Lyons stated CP presented a range of values for the Corpus Christi, Lake Charles, and Lemont refineries. The valuations did not take into account various risk factors such as a cutoff in Venezuelan crude supplies but rather focused on straight economics. CP was concerned that BRV officials would expect premiums for all three refineries based on the sale of the Lyondell refinery in 2006 (Reftel B). CP executives went to great lengths to explain that the Lyondell sale occurred at the peak of the market for refineries and that market conditions had significantly changed. Lyons stated Venezuela may seek a third party evaluation of the assets at some point in the negotiations. ¶4. (C) Lyons later indicated that a compensation package would include the Sweeny Refinery in Old Ocean, Texas. CP has a 50% stake in Merey Sweeny, a limited partnership that owns a 65,000 barrel per day delayed coker and related facilities located at the Sweeny Refinery. PDVSA holds the remaining 50% in the partnership. Lyons stated CP sees a great deal of value arising between synergies between the Sweeny facility and the Lake Charles Refinery in terms of feedstocks and turnarounds. ¶5. (C) Lyons noted CP and the BRV had halted discussions on the valuation of CP's former upstream assets in January due to the wide differences in their valuations. He added that higher oil prices had increased the value of the expropriated assets (Reftel A). In addition, Lyons confirmed that CP's Venezuelan operations were covered by the Dutch bilateral investment treaty. As reported in Reftel C, the treaty requires just compensation for expropriated assets based on market value. CARACAS 00000708 002 OF 002 -------------- WHAT ABOUT EXXON? -------------- ¶6. (C) When the Ambassador asked if CP believed XM's compensation negotiations as a possible obstacle to reaching a deal, Lyons replied no. He stated CP does not view XM as competition in the compensation negotiations. CP believes the BRV will use the Chalmette refinery in Louisiana to compensate XM. -------------- SUPPLY CONTRACTS -------------- ¶7. (C) Lyons said CP was interested in supply contracts for two of the refineries as part of a compensation package. He added that the Venezuelans stated they wanted to include supply contracts in any compensation deal. (NOTE: As reported in Reftel B, the Lyondell sale included a five year supply contract. END NOTE). He explained that Corpus Christi and Lake Charles were currently processing Venezuelan crude. CP envisions initially a three to five year supply contract. The company is confident that it will take Venezuela five to six years to find alternative markets for its crude. ¶8. (C) However, CP is making contingency plans in case Venezuela should cut supplies to the United States. According to Lyons, the Corpus Christi refinery would actually be better off running Brazilian crude. In addition, CP will build a pipeline to supply the U.S. market with Canadian crude. Lyons noted the Lemont refinery is already processing Canadian crude. -------------- BRV PLAYERS ARE MOTIVATED THIS TIME -------------- ¶9. (C) According to Lyons, part of CP's optimism that a deal will be made stems from the statements and actions of the Venezuelan negotiators. Lyons noted Energy Vice Minister Mommer had not attended any negotiating sessions for the past six months. However, both Mommer and Boue flew in from Europe to attend the latest meeting. Mommer told CP that he will not be allowed to retire until he has negotiated compensation deals with CP and XM. According to Mommer, the BRV did not believe that CP and XM would react as they did to the nationalization of their assets. Since Mommer is the intellectual father of the nationalizations, the BRV will not allow him to retire until he has completely resolved both companies' compensation claims. ¶10. (C) Mommer also told CP executives that Energy Minister and PDVSA president Rafael Ramirez is particularly interested in resolving CP's claims because they are much larger and more complicated than XM's. Ramirez believes that XM will be satisfied with an asset swap involving the Chalmette refinery. (COMMENT: We do not believe that Ramirez' optimism is justified. XM officials told us in 2007 (Reftel D) that the Chalmette refinery was not sufficient compensation for their expropriated assets. END COMMENT) Mommer stated Ramirez told him that he wanted to resolve both the CP and XM cases before he left office. Lyons added that Ramirez is not planning on leaving office anytime soon. DUDDY