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