Venezuela: PDVSA Experiencing Quality Control Problems

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001567

SIPDIS
ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MKACZMAREK
COMMERCE FOR 4332/MAC/WH/JLAO
NSC FOR DRESTREPO AND LROSSELLO
AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA
AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC
AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE

E.O. 12958: DECL: 2019/12/17
TAGS: EPET EINV ENRG ECON CH VE
SUBJECT: Venezuela: PDVSA Experiencing Quality Control Problems

CLASSIFIED BY: Darnall Steuart, Economic Counselor, DOS, Econ;
REASON: 1.4(B),(D)


1. (C) SUMMARY: PDVSA is experiencing quality control problems with
refined product and upgraded crude oil and is bearing significant
costs due to these problems. The Venezuelan national oil company
has prioritized the supply of gasoline and other petroleum products
to its domestic market over its international clients. One PDVSA
executive estimated that exports to China of fuel oil average
330,000 barrels/day and 132,000 barrels/day of crude petroleum. He
also claimed that some 70% of its current 100,000 workforce are not
involved in PDVSA's core petroleum business. END SUMMARY.



Problems with Crude Oil and Petroleum Product Quality

-------------- --------------
--------------


2. (C) According to PDVSA Quality and Technology Manager, Onesimo
Dezzeo (protect throughout),PDVSA is experiencing quality control
problems with refined product and upgraded crude oil that it did
not experience five years ago. During a meeting with Petroleum
AttachC) (PetAtt) on December 15, Dezzeo stated that his office
receives on average three quality control complaints per week when
PDVSA crude and petroleum product shipments arrive at foreign ports
of destination and do not comply with contracted purchase
specifications. He contrasted the foreign quality claims against
quality problems discovered during loading of tankers in Venezuela,
claiming that PDVSA discoveries of product quality problems are
magnitudes greater.




3. (C) According to Dezzeo, in order to resolve a quality control
complaint from a foreign client, PDVSA often has to offer a
sizeable discount on a future sale of crude or petroleum product to
the foreign client. The cost to a foreign customer of handling the
low quality Venezuelan shipments is significant. Dezzeo claimed
that it is more cost effective for PDVSA to correct the problems in
Venezuelan ports before the tanker is loaded, accepting the
demurrage costs of having the tanker idly waiting. Dezzeo
characterized these hidden costs as greatly affecting PDVSA's
bottom line. He added that he believed that PDVSA is importing
gasoline components from U.S. suppliers as well as from Brazil's
Petrobras.




4. (C) Dezzeo shared that PDVSA has prioritized shipments and
transfers of crude and product domestically over the loading and
export of crude and product to international customers, often
paying high demurrage charges for tankers forced to wait outside
the ports. Dezzeo maintained that keeping the domestic Venezuelan
market supplied with gasoline has increased the already substantial
level of tanker traffic along Venezuela's coast due to the
significant problems with PDVSA's refinery network. He noted that
PDVSA's lack of financial resources and investment has prevented
PDVSA from building a domestic pipeline network between the
refineries, ports, and domestic distribution centers.




5. (C) Dezzeo is the manager of a seven-person office within
PDVSA's Commerce and Supply Directorate. He reports to the
Executive Director of Commerce and Supply, who in turn reports to
Vice President of Commerce, Supply, and Trade Fernando Valero.
Valero is one of three vice presidents who report to PDVSA
Executive Vice President of Refining, Trading, and Supply Asdrubal
Chavez.



Production and Export Estimates

CARACAS 00001567 002 OF 002


--------------


6. (C) Dezzeo, who claims to have access to all of PDVSA's export
and production figures due to his position and function, estimated
current PDVSA crude oil production at 2.3 million barrels per day.
[NOTE: Press reports from December 15, reported that OPEC's current
estimate of Venezuelan production is 2.3 million barrels per day.
END NOTE.] Dezzeo stated that on average PDVSA sends five very
large cargo carriers (VLCC) or ten million barrels of fuel oil from
its Curacao refinery each month to China. [NOTE: PetAtt estimates
that 10 million barrels/month roughly equals 330,000 b/d.
International press reports on December 17 citing Chinese Customs
data for August through October 2009 indicate China imported only
68,000 barrels/day of heating oil from Venezuela over that time
period. END NOTE.] Furthermore, each month PDVSA exports on
average two VLCCs or four million barrels of crude oil from Puerta
La Cruz to China. [NOTE: PetAtt estimates that 4 million
barrels/month roughly equates to 132,000 b/d. END NOTE.] He added
that PDVSA is not exporting much petroleum to PetroCaribe member
states (no more than 150,000 barrels/day) and that the largest
recipients are Nicaragua and the Dominican Republic. Finally, he
said that PDVSA's exports to Europe are minimal and that it rarely
sends a cargo to India.



PDVSA Workforce

--------------


7. (C) Commenting on Minster Ramirez's comments that PDVSA's total
workforce today is approximately 100,000 people, Dezzeo claimed
that only 30,000 are actually working in the traditional PDVSA
areas of petroleum exploration, production, and refineries. [NOTE:
In 2003, President Chavez ended a PDVSA workers strike by firing
20,000 workers of PDVSA's total employment of 40,000. Prior to the
strike, Chavez had complained that PDVSA's employment was too high.
END NOTE.] He claimed that PDVSA's expansion into other sectors,
including downstream transportation and sales, and the GBRV
missiones (e.g. the state-owned chain of discount food stores,
Mercal and PDVal),etc., accounts for the other 70,000 workers.



BIO

--------------


8. (C) Dezzeo worked for PDVSA's R&D arm, Intevep, for twelve years
before taking up his current position in 2002 (during the strike).
He is married with three children, one a high school student in
Caracas. His other two children are students at Brigham Young
University and live in Provo, UT. He claimed to be friends with
PDVSA Executive Vice President, Asdrubal Chavez, with whom he
attended university.




9. (C) COMMENT: The impact of the deterioration on PDVSA's
refineries on its quality control operations and the added costs of
correcting shipments that are outside of contracted specification
ranges or of making foreign customers whole could represent a
significant risk for the national oil company. The relatively
modest level of crude and fuel oil sales to China and Petrocaribe
members underlines the continued importance of the U.S. as
Venezuela's primary petroleum export market. The export figures to
China are consistent with President Chavez's stated goal of seeking
to develop alternative markets for Venezuelan petroleum products.
END COMMENT.
DUDDY