HARVEST FINALLY BEGINS TO REAP WHAT IT HAS SOWN

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000921

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JSHRIER

E.O. 12958: DECL: 07/02/2018
TAGS: EPET ENRG EINV ECON VE
SUBJECT: HARVEST FINALLY BEGINS TO REAP WHAT IT HAS SOWN

REF: A. CARACAS 108

B. CARACAS 610

C. CARACAS 565

D. CARACAS 491

E. CARACAS 912

Classified By: Economic Counselor Darnall Steuart for Reason 1.4 (D)


1. (C) SUMMARY: After spending months in legal limbo, U.S.
oil company Harvest has received all of its dividends through
2007 from its joint venture company Petrodelta. Harvest's
drilling program has been highly successful and it has worked
out a system whereby Petrodelta can secure material and
services directly rather than via PDVSA's procurement
affiliate. A Harvest subsidiary is considering whether it
should form a joint venture services company with PDVSA.
According to PDVSA Services officials, Schlumberger is on the
verge of forming a joint venture services company with PDVSA
for four basic well services. Rumor has it that leading
domestic engineering company Inelectra has agreed to be
purchased by the BRV. We remain concerned about the
formation of joint venture service companies because of a
lack of transparency as well as uncertainties arising from an
apparant willingness to guarantee market share to the new
joint ventures. In addition, it is not clear if the new
joint ventures will utilize up-to-date technology. END
SUMMARY

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THE SUN BEGINS TO SHINE FOR HARVEST
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2. (C) Econ Counselor and Petroleum Attache (Petatt) met
with Harvest Vinccler Vice President and General Manager
Mauricio di Girolamo (strictly protect throughout) on July 1
to discuss Harvest's current operating environment. di
Girolamo began the meeting by stating that Harvest recently
received 73 million USD in dividends from its joint venture
Petrodelta. The payment covered the period from April 2006
to December 2007. The dividend payment has been a source of
tension between PDVSA and Harvest for some time. di Girolamo
previously told Petatt that Harvest President James Edmiston
had a stormy meeting with CVP President Eulogio Del Pino in
January 2008 over the payment of dividends and the
reimbursement of operating expenditures. NOTE: CVP is the
PDVSA affiliate tasked with dealing with private sector oil
companies. END NOTE). At the time, PDVSA promised to pay
Harvest its dividends by mid-February.


3. (C) di Girolamo said PDVSA has also stated it is open to
paying dividends on a quarterly basis rather than at the end
of the fiscal year. The dividends would be based on monthly
invoices. Once the joint venture's books were closed at the
end of year, adjustments would be made to compensate for over
or under-payment.


4. (C) As reported in Reftel B, Harvest fought an energetic
campaign to amend the terms of the new windfall profits tax.
di Girolamo admitted that the campaign was a failure. Due to
the opaque nature of the tax, the joint ventures took a wide
variety of approaches for accounting for the tax in the
second half of April and May. PDVSA is currently working on
a standard method of accounting for the tax so that reporting
will be uniform in June. In a partial victory for the
private sector, di Girolamo stated PDVSA has accepted the
argument that production for the purpose of royalties is not
subject to the tax.

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DRILLING CAMPAIGN BEGINS TO TAKE OFF
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5. (C) Additional good news for Harvest has come in the form

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of two highly successful new wells. Despite the fact that
the success is the result of Harvest's expertise, the company
has gone to great lengths to give credit to its PDVSA
partners in Petrodelta. di Girolamo stated PDVSA is
continuing to press all of the joint ventures for increased
production (Reftel A). As a result of its recent successes,
relations with PDVSA have improved recently.


6. (C) Until recently, a major impediment to Petrodelta's
drilling program was an inability to procure key materials.
During the January meeting with Del Pino, Harvest officials
complained that they could not maintain the drilling program
due to the fact that the PDVSA procurement affiliate was
unable to provide material in a timely manner. Del Pino was
enraged at the procurement officials and berated them in
front of the Harvest executives.


7. (C) di Girolamo stated Harvest overcame the problem by
handling procurement directly through Petrodelta. Despite
the requirement that a PDVSA affiliate must handle all joint
venture procurement, Harvest secured a deal whereby urgent
requests can be handled by Petrodelta. In order to avoid
damaging its relationship with PDVSA, Harvest dutifully runs
all procurement requests by the PDVSA affiliate. When the
affiliate states that it cannot handle a particular request
in a timely manner, Harvest in the form of Petrodelta tells
the affiliate that it will take care of the matter itself.
When asked how Petrodelta pays for its materials and services
given the fact that PDVSA promptly removes all cash from the
joint ventures, di Girolamo replied that Petrodelta makes a
cash call on CVP for the necessary funds. He added that CVP
has promptly met the cash calls each time they have been made.


8. (C) Although this informal system is a vast improvement
over the previous one, di Girolamo complained that endless
delays are still his biggest headache. He noted that he no
longer gives the Harvest board of directors timelines for
major projects since there is no way to reasonably estimate
when decisions will be made and implemented.

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SERVICE COMPANY JOINT VENTURES
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9. (C) As reported in Reftel C, PDVSA plans to create new
joint venture companies for the petroleum services sector.
When asked about the new joint ventures, di Girolamo stated
Harvest is interested in participating. He stated a Harvest
affiliate, Fusion Geophysics, was responsible in large part
for the success of Petrodelta's two new wells. The fact was
not lost on PDVSA officials and they approached Harvest about
using Fusion for PDVSA projects. Unfortunately, due to the
byzantine nature of the PDVSA contracting system, the
registration process for Fusion was extremely onerous.
Harvest managed to get around the problem by making its
Venezuelan partner Vinccler an agent for Fusion. As a
result, Fusion can piggyback on Vinccler's status as a PDVSA
contractor.


10. (C) PDVSA officials then asked if Fusion would be
interested in forming a joint venture company with PDVSA to
provide geophysical services. Harvest responded positively
and di Girolamo met recently with PDVSA Services officials to
discuss the creation of the joint venture. During the
meeting, the PDVSA Service officials stated PDVSA is well
aware of the fact that it cannot form joint ventures for the
entire spectrum of petroleum services and materials.
However, it is interested in forming them in key areas.


11. (C) The officials then surprised di Girolamo by claiming
that PDVSA is on the verge of forming a joint venture company
with Schlumberger to provide four basic well services. The

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officials did not specify which services were covered.
Schlumberger has told us in the past that it is willing to
consider a joint venture but that it will not give up
proprietary technology for free or in an ad-hoc manner
(Reftel D). Other companies have expressed similar concerns.
di Girolamo stated Harvest would be willing to license
Fusion's technology but it has no interest in giving
technology to the joint venture.


12. (C) A Halliburton executive told Economic Counselor and
Petatt on July 1 that he did not believe that his company
would be interested in contributing technology to a joint
venture. He stated one option would be to provide technology
that was close to being out-of-date and then charging the
joint venture fees for servicing the technology.


13. (C) When asked about recent rumors that the BRV planned
on purchasing major Venezuelan engineering companies (Reftel
E),di Girolamo replied he had heard that Inelectra had
agreed to be purchased by the BRV. He was not sure if the
BRV was purchasing 60 or 100% of the company's shares. When
Econ Counselor asked if Inelectra employees would be fired
for holding unacceptable views, di Girolamo said he asked
PDVSA officials the same question. They replied that
Inelectra employees would not be vetted for their political
views. di Girolamo opined that it made no sense to fire
employees for their political beliefs since almost all of an
engineering company's value is its human capital.

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COMMENT
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14. (C) We remain concerned over the formation of joint
venture companies in the services area. Since PDVSA controls
the entire market either directly or via a majority stake in
the various joint ventures, guaranteeing the new service
joint ventures a 30% stake in individual markets raises
numerous questions regarding transparency and corruption. In
addition, given the various comments of service company
representatives, it does not sound as if the service joint
ventures will employ the latest in technology. Even if they
did, different field conditions often require different
technologies for the same processes. We can easily see PDVSA
trying to force operations managers to employ a joint
venture's technology despite the fact that it is
inappropriate for conditions.
DUDDY