VENEZUELA: PDVSA FALLS FURTHER DOWN THE RABBIT HOLE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000288 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE COMMERCE FOR 4431/MAC/WH/JLAO E.O. 12958: DECL: 01/29/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: PDVSA FALLS FURTHER DOWN THE RABBIT HOLE REF: (A) 08 CARACAS 1757 (B) CARACAS 136 (C) CARACAS 239 (D) 08 CARACAS 1711 Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Even though Energy Minister Ramirez announced March 2 that PDVSA would begin paying service companies and that it would not cancel any contracts, several major service companies have neither received payments nor notification from PDVSA of pending payments. International service companies, including a U.S. firm with OPIC financing, are struggling with how long or whether they can continue to support local operations absent payment. National Guard units were deployed to some service companies to ensure that they do not cease operations. Venezuelan courts have reportedly rejected any claims in the petroleum sector that involve PDVSA, leaving no legal recourse for companies and workers alike. END SUMMARY. PAYMENTS COMING(BUT NOT SOON ENOUGH? -------------- ¶2. (C) During a radio interview on March 2, Energy Minister Ramirez claimed that PDVSA had begun the process to pay 6,000 contractors and service companies and that it would not cancel any contracts. He claimed that PDVSA had begun a process to revise costs with service companies and contractors to take into account the drop in world oil prices. Ramirez maintained that, based on PDVSA's savings from high oil prices, the company,s $125 billion investment and development plans for 2009-2013 could be sustained. Post has heard anecdotal stories that PDVSA has made some minimal payments to local service companies with the goal of maintaining operations. LAKE MARACAIBO OPERATORS STRUGGLING -------------- ¶3. (C) The press has been full of stories about unrest on the part of the launch companies, barge terminals, and oil field services companies that contribute to the operation of Lake Maracaibo,s complex oil production infrastructure. Several companies have contacted Post. Launch operator Tidewater Country Manager Mikael Jakob (strictly protect throughout) told PetAtt on March 3 that Tidewater has not received a formal PDVSA offer to pay 60% of its outstanding invoices in exchange for reducing its invoices by 40%. Nevertheless, PDVSA has been making direct salary payments to Tidewater's crews (which will offset part of its $30 million outstanding debt to Tidewater). (NOTE: Tidewater is the largest launch operator (and the only international firm) on Lake Maracaibo with nine boats and an additional four boats in PetroSucre.) ¶4. (C) Domestic operator COAPetrol's Bryan Stanley (strictly protect throughout) informed EconCoun on March 2, that his company last received payment from PDVSA in August 2008. (NOTE: COAPetrol operates four drill rigs and barges on Lake Maracaibo.) PDVSA offered to make minimum salary payments to COAPetrol to keep the rigs operational. In the face of growing debt and no payments from PDVSA, Stanley offered to work with his local bank to place a lien against COAPetrol to satisfy an outstanding loan of 4.5 million Bolivars (over $2 million at the official exchange rate). The bank rejected the idea and told Stanley that liens against firms in the petroleum industry are being rejected by Venezuelan courts (the bank reportedly had already failed to secure a lien against another petroleum company debtor). The courts also seem to be rejecting claims that relate to services provided to PDVSA. Stanley reported that his union employees sought to file a court claim for non-payment of salaries, but were rejected for the same reason. Stanley asserted that he and others are positioning themselves "like capitalist Cubans in CARACAS 00000288 002 OF 003 the early 1960s -- establishing evidence that the assets we own are ours (currently) and then take off en-masse to Miami to wait for a new age in which we might be able to return to re-claim our property." PDVSA IN DEFAULT WITH SIMCO/WOOD GROUP -------------- ¶5. (C) According to Neil Harvie, President Latin America and Caribbean for Wood Group (strictly protect throughout),PDVSA has not responded to the December 1, 2008 ninety-day letter of default (Reftel A and B) for the SIMCO project. PDVSA currently owes over $130 million. Dave Beacham (strictly protect throughout),a Wood Group expatriate operating as SIMCO's General Manager, told post that Venezuela National Guardsmen have been stationed at all SIMCO facilities since the week of February 28. They will not allow SIMCO managers into their onshore plants, are making it very difficult to move materials in or out of SIMCO facilities, and claim to be protecting PDVSA's interests. Since September 2008, Wood Group has supported local operations with external funding to meet payroll, but is about to terminate any further cash injections. SIMCO was preparing to begin lay-offs as early as March 2. According to Harvie, without the Wood Group,s external support, the Venezuelan office is "getting boxed into a decision path that no one will like." (NOTE: SIMCO provides critical water injection services to PDVSA in Lake Maracaibo. Approximately 400,000 b/d of the estimated 700-800,000 b/d of production in Western Venezuela is dependent on SIMCO operations. Wood Group owns 49.5% of the shares, Exterran (U.S.) 35.5%, and two Venezuelan companies, Camsa and Vepica, each have 10%. END NOTE.) PDVSA DEBT TO WILLIAMS TO AFFECT OPIC LOAN -------------- ¶6. (C) Tim Penton, Williams Vice President (strictly protect throughout) shared with EconCoun that the lack of payment and lack of PDVSA action to resolve outstanding debt issues are a growing issue with Williams' lenders (Reftel B). Penton met with OPIC officials in Washington, DC the week of February 23 and committed to provide OPIC with a plan detailing a way forward if Williams declares PDVSA in default on its contracts and loans A PDVSA contact informed Williams March 2 that a partial payment would be made this week. (NOTE: OPIC provided 70% financing or $140 million for the El Furrial project for the construction, operation, and maintenance of an eight-train gas compression facility in the Santa Barabara field of Eastern Venezuela in 2002.) HALLIBURTON CONSIDERING CUTTING OFF LIFE SUPPORT -------------- --- ¶7. (C) Penton also provided EconCoun with a copy of an e-mail from a Halliburton contact who indicated that Halliburton is debating how long to continue support to local operations (and speculates that the prospects for continued support are diminishing). Several unrelated sources have told PetAtt that PDVSA owes Halliburton $250 million. The Halliburton source confirmed that PDVSA's offer of "60%" was a rumor that no one officially from PDVSA had put into writing (NOTE: this is a reference to PDVSA's rumored payment offer to service companies who reduce PDVSA's outstanding debt by forty percent. Reftel C. END NOTE). The source also noted that he believed that PDVSA is seeking to make 40-50% of payments in the form of Venezuelan debt bonds. ¶8. (C) CONCLUSION: The PDVSA payments issue seems to be coming to a head with international service companies increasingly unwilling to draw on offshore accounts to maintain their Venezuelan operations. PDVSA will likely make minimal payments to service companies while applying pressure on them to reduce rates and fees. The placement of National Guard units at petroleum facilities is consistent with the CARACAS 00000288 003 OF 003 tough stance the BRV is taking in other sectors such as the food sector and may signal that the BRV will move to nationalize operations such as the SIMCO project. The refusal of Venezuelan courts to take cases against PDVSA will further erode any remaining faith in the sanctity of contracts by the private sector. GENNATIEMPO