Identifier
Created
Classification
Origin
09CARACAS369
2009-03-24 11:41:00
CONFIDENTIAL
Embassy Caracas
Cable title:
VENEZUELA: PDVSA CHEATING ON OPEC CUTS AT EXPENSE
how-toVZCZCXRO8063 RR RUEHDE RUEHDH DE RUEHCV #0369/01 0831141 ZNY CCCCC ZZH R 241141Z MAR 09 FM AMEMBASSY CARACAS TO RUEHC/SECSTATE WASHDC 2788 INFO RUEHHH/OPEC COLLECTIVE RUEHAC/AMEMBASSY ASUNCION 0978 RUEHBO/AMEMBASSY BOGOTA 7960 RUEHBR/AMEMBASSY BRASILIA 6119 RUEHLP/AMEMBASSY LA PAZ 2870 RUEHPE/AMEMBASSY LIMA 1152 RUEHSP/AMEMBASSY PORT OF SPAIN 3680 RUEHQT/AMEMBASSY QUITO 2966 RUEHSG/AMEMBASSY SANTIAGO 4097 RUEHDG/AMEMBASSY SANTO DOMINGO 0625 RHEHNSC/NSC WASHDC RHEHAAA/WHITEHOUSE WASHDC RHEBAAA/DEPT OF ENERGY RUCPDOC/DEPT OF COMMERCE RUEATRS/DEPT OF TREASURY RUMIAAA/HQ USSOUTHCOM MIAMI FL
C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000369
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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).
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
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