PETROCARIBE OIL SHIPMENTS TO BEGIN FALL 2008

UNCLAS SECTION 01 OF 03 PARAMARIBO 000312 SENSITIVE SIPDIS WHA/CAR FOR JROSHOLT INR FOR BCARHART WHA/EPSC EEB/ESC/IEC/ENR E.O. 12958: N/A TAGS: EPET ETRD PREL XM XL SUBJECT: PETROCARIBE OIL SHIPMENTS TO BEGIN FALL 2008 REF: A. CARACAS 976 ¶B. PARAMARIBO 18 ¶C. 05 PARAMARIBO 602 ¶1. (SBU) Summary. The governments of Suriname and Venezuela reached agreement on the structure of their PetroCaribe deal, which has been dubbed the "Suriname Model." Under this scheme, the Government of Suriname (GOS) will provide the Government of Venezuela (GOV) partial payment for the crude oil, refined oil, and liquefied petroleum gas (LPG),while the remainder of the payment will be made to a Trust Fund managed by the state-owned Venezuelan Development Bank (BANDES). Trust Fund profits and principal will be used to repay the GOV at a 1 percent interest rate over 23 years (after a two-year grace period),and the remaining profits will fund social and development projects in Suriname. The first shipment of PetroCaribe oil to Suriname is slated to arrive in late Fall 2008. The GOS is also pursuing other projects that were discussed as "outputs" during the July 2008 PetroCaribe Summit. Whether the GOS will be any more effective in programming Trust Fund projects than other donor aid projects remains to be seen. End Summary. -------------- The Suriname Model -------------- ¶2. (SBU) During a July 31 meeting with Armand Dongen, Manager of Corporate Planning at the parastatal Staatsolie Suriname Maatschappij (Staatsolie; the Suriname State Oil Company),Dongen shared with EconOff a detailed explanation of the agreed structure, the "Suriname Model," of the PetroCaribe Energy Cooperation Agreement between the governments of Suriname and Venezuela. Staatsolie holds responsibility for implementing this model on behalf of the Government of Suriname (GOS). ¶3. (SBU) PetroCaribe has an "attractive" financing scheme, according to Dongen, because oil purchases are "financed" for future payment. The GOS was, however, adamant that Suriname incur no debt to Venezuela while taking advantage of the financing scheme. Suriname will, like other PetroCaribe oil recipients, receive financing to include a 2-year grace period before the start of a 23-year repayment period at 1 percent interest. The percentage of each purchase that may be financed is the same as for other PetroCaribe countries, including adjustments made at the July 2008 5th PetroCaribe Summit (Reftel A). ¶4. (SBU) The GOS met its key objectives in negotiating the new "Suriname Model" with the GOV, Dongen continued. In order to incur no debt to the GOV, full payment will be made to the GOV upon delivery each time. What is different about the "Suriname Model" is that the payment will be divided into two portions - the payment due will be paid directly to the GOV, and the financed portion will be funneled into a Trust Fund managed by the Venezuelan Development Bank (BANDES). BANDES will invest the funds in low-risk stocks and bonds, earning a projected 7 percent interest. Trust Fund money will be used to repay the GOV for the financed portion at 1 percent interest after the two-year grace period, while the remaining profits will be used for a still-to-be-designated Surinamese financial institution for social and development projects. ¶5. (SBU) Dongen showed EconOff a PowerPoint slide of an "example case," which had been prepared for GOS use. In the flowchart scenario, if the GOS were to buy one barrel of oil at $50 from the GOV, Staatsolie would make full payment. Of this, $30 dollars would go to the GOV and $20 to the BANDES Trust Fund. Profits not needed to repay the financed principal or interest would become available to the Surinamese financial institution; for this scenario the profits were $8. The Surinamese financial institution would use $1 on social projects and $7 on development grants or loans. Dongen said the GOS is already looking into building low-income housing as one of the social projects in order to demonstrate the value of the Petrocaribe agreement to the Surinamese people. ¶6. (SBU) A second key component of the "Suriname Model" is Staatsolie's role in the PetroCaribe oil process. Rather than allowing GOV tankers to deliver oil to Suriname, Staatsolie will send its own tankers to Venezuela. Staatsolie already had this excess capacity, Dongen explained, so it will be optimizing the use of its tankers. PARAMARIBO 00000312 002 OF 003 The final agreement with the Venezuela state-owned oil company PDVSA is under preparation for signature, so PetroCaribe oil shipments will begin in the fourth quarter of ¶2008. Since Venezuelan oil is of lower quality than Surinamese oil, Staatsolie will then blend the two grades of oil before making the blended oil for sale on the local market at regular market prices. Dongen clarified that despite much press speculation, no PetroCaribe oil will be available to subsidize the fisheries sector nor the parastatal Surinam Airways. ¶7. (SBU) The "Suriname Model" covers crude oil, refined oil, and liquefied petroleum gas (LPG),but initial PetroCaribe shipments will be heavy fuel oil to replace some of what Suriname currently imports from Trinidad and Tobago. Importation of diesel and gasoline will be left for "next steps," although Dongen noted that Sol Suriname N.V. had already expressed interest. (Note: Established in 1966, the local office of the Sol Group acquired Shell and Esso assets in Suriname in February 2005 and November 2007, respectively.) With respect to frequency of shipments, Suriname will probably start with one or two tankers of oil per month (with each tanker having a capacity of 40,000 barrels). Eventually, Suriname could increase to the agreed bilateral maximum of 10,000 barrels per day. ¶8. (SBU) Dongen said he was very pleased with the "Suriname Model" because "some Caribbean islands" had agreed that their oil companies, which do not produce oil, would form joint ventures with Venezuela holding 51 percent of the shares. Under such an arrangement these Caribbean partners would no longer be in a position to determine what happens on their islands. The GOS, on the other hand, held a firm position in negotiations and refused all suggestions of joint ventures. -------------- -- Suriname Interest in PetroCaribe Summit Outputs -------------- -- ¶9. (SBU) On July 13, 2008, Dongen attended the 5th PetroCaribe Summit. He shared that while the original objectives of Petrocaribe were to 1) diversify energy resources, 2) secure energy supplies, and 3) lower costs, during the Summit, member states agreed to create technical groups as an expansion on the original objectives. These were added partially as a reaction to the increase in energy and food prices, and include: 1) petrochemicals, 2) renewable energy and energy conservation, 3) natural gas (including a proposed pipeline to Guyana and Suriname),4) repayment with goods and services, 5) a verification and auditing mechanism (for the Trust Fund in the "Suriname Model"),6) training and education, and 7) developing a fund management structure (based on the "Suriname Model.") ¶10. (SBU) Referring to many of the Summit's outputs (as described in Reftel A),Dongen made special note of the new AgroFunds scheme, explaining that the GOV would contribute $1.2 million whenever oil prices reach $100/barrel. He told EconOff that Suriname's Minister of Agriculture, Fisheries and Husbandry was in Honduras with other Ministers of Agriculture to begin planning for AgroFunds utilization. All Petrocaribe member states will be eligible to apply for these funds to stimulate agricultural projects. ¶11. (SBU) Dongen was especially enthusiastic about the new proposal for the oil sector. He said Chavez was "crazy" to do it, but said Chavez proposed sharing the Orinoco Basin (with 180 billion barrel reserves) with PetroCaribe countries. According to Dongen, Chavez said he would set aside the Boyaca 3 bloc (with proven reserves of 12 billion) for PetroCaribe countries to develop as a joint venture with the PDVSA. Dongen said he believed that, due to Staatsollie's experience in heavy oil, Suriname's state oil company would be well-positioned to start a joint venture and extract the oil. ¶12. (SBU) Comment. Although it appears the GOS has great interest in the Trust Fund concept, it remains to be seen if the GOS is in a position to use these funds productively. Members of the international community in Suriname often discuss the GOS inability to program existing donor funds or, for that matter, the longstanding Netherlands-provided Treaty Funds. Post remains skeptical that the GOS can move at a faster pace to apply Trust Fund profits to social and development projects. Despite its questionable practical utility in spurring Surinamese development and social PARAMARIBO 00000312 003 OF 003 projects, the PetroCaribe deal looks very good on paper. If nothing else, the GOV has likely scored a public relations victory with Suriname's man-on-the-street. End Comment. SCHREIBER HUGHES