VENEZUELA: PDVSA CHEATING ON OPEC CUTS AT EXPENSE

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000369 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE COMMERCE FOR 4431/MAC/WH/JLAO NSC FOR RKING E.O. 12958: DECL: 01/29/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: PDVSA CHEATING ON OPEC CUTS AT EXPENSE OF FUTURE PRODUCTION REF: A. (A) 08 CARACAS 001774 ¶B. (B) CARACAS 106 Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: A Senior Chevron official confirmed that he believes PDVSA is cheating on its OPEC-mandated quota cuts to take advantage of greater demand for heavy crude. He also confirmed that PDVSA issued an informal rig stoppage order and instructed its joint venture partners to cease capital and operational expenses while maintaining their labor forces. Chevron's interest in the current Carabobo Round continues, but is predicated on PDVSA altering the terms and conditions to make the projects financially viable. END SUMMARY ¶2. (C) On March 18, Econ Counselor and Petroleum AttachQ (PetAtt) met with Managing Director of Chevron's Latin America business unit Wes Lohec (strictly protect throughout). Lohec shared that per PDVSA instructions, PetroBoscan was producing over 100,000 b/d and was nearly at full capacity. In January, PDVSA ordered PetroBoscan to reduce production to 30,000 b/d in response to the September and December 2008 OPEC quota cuts. Since then, PDVSA has ordered PetroBoscan to increase its production incrementally as other sources of production have faltered. By increasing PetroBoscan production, PDVSA apparently was profiting from increased market demand for heavy crude. (Note: Per Lohec, production of the less profitable heavy crude would normally be the first crude oil product cut from a country's inventory, maintaining production of lighter and more profitable crudes. Lohec asserted that Venezuela has benefited from both increased refinery demand for heavy crude as well as decreased production of Mexican Maya.) ¶3. (C) Lohec also confirmed an informal PDVSA order (received by e-mail) to the joint ventures to halt rig activity, reduce all capital and operating expenditures, and maintain employment. Of the two drill rigs and six work-over rigs normally working in the PetroBoscan field, only two of the work-over rigs are now operating. Lohec hypothesized that PDVSA is in "budget control mode" seeking to maximize production while eliminating costs, thereby maximizing current cash flow. He noted that this strategy is viable in the short term, but at the cost of pain in 2010 and beyond as Venezuela's production suffers due to the rig-intensive nature of Venezuela's fields. Lohec thought that PDVSA might have stopped rig activity in its own fields, as well. ¶4. (C) In discussing Chevron's continued interest in the upcoming Carabobo heavy oil bid round, Lohec maintained that the bid round would move forward but would be delayed for several months. He opined that if PDVSA continues with its current finance and recovery demands it will be nearly impossible for any company to structure a profitable tender. He believes PDVSA will need to change the terms and conditions before the project becomes viable. Lohec noted that Chevron has been successful in winning PDVSAQ,s agreement to such changes in the past. Commenting on the recently announced Junin 6 deal between a Russian consortium and PDVSA, Lohec observed that the consortium members do not have significant foreign experience. He noted that PDVSA is difficult to deal with, the Russians are typically stubborn, and that this project will likely just "bounce along." ¶5. (C) COMMENT: Faced with low global oil prices and a fiscal crisis, Venezuela is likely cheating on its OPEC quota reductions. It is also cutting operational and capital CARACAS 00000369 002 OF 002 expenses at the expense of future production. The economic challenges are well-known, but the degree to which the GBRV is willing to risk future oil production in order to increase its current cash flow highlights an increasing level of desperation. By maximizing current production at the expense of future productivity, Venezuela is betting that oil prices will recover by 2010 allowing them to maintain or increase cash flow even though production may drop due to deferred maintenance. CAULFIELD