Identifier
Created
Classification
Origin
09CARACAS428
2009-04-02 17:55:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

VENEZUELA: OIL PRODUCTION IN THE WEST: A MIXED BAG

Tags:  EPET EINV ENRG ECON VE 
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VZCZCXRO8057
RR RUEHDE RUEHDH
DE RUEHCV #0428/01 0921755
ZNY CCCCC ZZH
R 021755Z APR 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 2855
INFO RUEHHH/OPEC COLLECTIVE
RUEHAC/AMEMBASSY ASUNCION 0980
RUEHBO/AMEMBASSY BOGOTA 7965
RUEHBR/AMEMBASSY BRASILIA 6121
RUEHLP/AMEMBASSY LA PAZ 2872
RUEHPE/AMEMBASSY LIMA 1154
RUEHSP/AMEMBASSY PORT OF SPAIN 3683
RUEHQT/AMEMBASSY QUITO 2968
RUEHSG/AMEMBASSY SANTIAGO 4099
RUEHDG/AMEMBASSY SANTO DOMINGO 0627
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 04 CARACAS 000428 

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: 04/02/2019
TAGS: EPET EINV ENRG ECON VE
SUBJECT: VENEZUELA: OIL PRODUCTION IN THE WEST: A MIXED BAG

REF: A. (A) CARACAS 369

B. (B) CARACAS 288

C. (C) CARACAS 239

D. (D) CARACAS 136

E. (E) 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 04 CARACAS 000428

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: 04/02/2019
TAGS: EPET EINV ENRG ECON VE
SUBJECT: VENEZUELA: OIL PRODUCTION IN THE WEST: A MIXED BAG

REF: A. (A) CARACAS 369

B. (B) CARACAS 288

C. (C) CARACAS 239

D. (D) CARACAS 136

E. (E) CARACAS 106

Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b)
and (d).


1. (C) SUMMARY: Petroleum AttachQ (PetAtt) conducted site
visits in Zulia March 23-26. Companies corroborated reftel
reporting and provided additional perspective on the
complexity of problems encountered daily in the oil sector.
Chevron's production is near capacity in the West; it is
taking a pro-active approach to managing PDVSA's plans to
consolidate numerous joint ventures on Lake Maracaibo. PDVSA
has not responded to the SIMCO project's default notice; nor
has it responded to Wood Group's request for contract
closeout talks. PDVSA has issued incomplete payments to some
service companies, but there seems to be no logical pattern
to what it is paying. Pushed to an extreme, companies are
taking different approaches to manage risk, reduce operating
expenses, and position themselves for future legal recourse.
PetAtt met with representatives from Tidewater, Superior
Energy Services, Wood Group, Chevron, Baker Hughes,
COAPetrol, the Maracaibo Chamber of Commerce, and several
small Venezuelan service companies. END SUMMARY.

Chevron in the West --- The Good News
--------------


2. (C) Chevron's General Manager in Western Venezuela, Ray
Keeley (strictly protect throughout),confirmed that its
PetroBoscan joint venture (JV) with PDVSA represents key
swing production in Venezuela. As other PDVSA fields have
not able to meet production quotas, PDVSA has ordered
production at PetroBoscan to return to full capacity (110,000
b/d) (Note: PDVSA cut PetroBoscan production to 30,000 b/d in
response to the December 2008 OPEC quota cuts, REF A & E).
According to Keeley, prior to the formation of the JV,
Chevron's overhead costs for operation of the Boscan field
were $3.50/barrel. Overhead costs under the JV have bloomed

to $6/barrel. In addition, the JV's field production costs
are roughly $1/barrel. Thus, the current Boscan production
cost is $7/barrel and, according to Chevron, Boscan crude
sells for approximately $16 below WTI). Chevron is quietly
trying to help PDVSA market Boscan and hopes it will agree to
a supply contract with Chevron's refinery in Pascagoula,
Mississippi. In the last couple of months, Pascagoula has
taken two small tankers of Boscan and successfully processed
the heavy crude, proving that the refinery could handle the
dirty Venezuelan product. Inexplicably, according to
Chevron, Halliburton in March 2009, decided not to renew its
mud contract with PetroBoscan. While Chevron claims to have
good relations with its PDVSA JV partners, it is struggling
to get information on a $28 million retirement benefits
payment that appeared as a new charge in PetroBoscan's
January operating expense report.


3. (C) Keeley provided an overview of PDVSA's plans for
consolidation of the joint ventures in the West. He
maintained that PetroBoscan will remain independent due to
its size, but other operations, such as Chevron's
Petroindependiente JV (PDVSA 74.8%, Chevron 25.5% -
previously LL-652) on the Lake face consolidation. Chevron
has a pro-active strategy to try to shape the consolidation.
Rather than diluting its ownership share with other JVs on
Lake Maracaibo, Chevron is making a business case to PDVSA to
expand Petroindependiente and capture greater economies of
scale by adding PDVSA-operated fields that are geographically

CARACAS 00000428 002 OF 004


contiguous to Petroindependiente rather than consolidate it
with JVs that are not geographically contiguous. The other
JVs that face consolidation include:
- Petrowarao: PDVSA 60%, Perenco 40%
- Lagopetrol: PDVSA 69%, Hocol 26.35%, Echopeck 3.1%,
CdI 1.55%
- Petrosiven: PDVSA 75%, CNPC 25%


SIMCO and PDVSA Default --- The Bad News
--------------


4. (C) Dave Beacham (strictly protect throughout),Wood Group
expat and General Manager of SIMCO, told PetAtt that Wood
Group has decided to hand over SIMCO operations to PDVSA as
the national oil company has not responded to SIMCO's letter
of default (REF B & D). (NOTE: SIMCO operates 18 platforms,
150 wells, 2 treatment plans and its secondary recovery
operations account for 50% of the production coming from Lake
Maracaibo.) Beacham provided an interim transfer agreement
to PDVSA, but has yet to receive a response. Wood Group
hopes to have final contract closeout by June or July 2009.
The British company operates six other companies in Venezuela
and several of them will close operations as a result of this
contract termination. Wood Group's Gas Turbine Group, for
example, maintains 45 obsolete turbines in the SIMCO fields.
It manufactures all the spare parts locally (the company that
originally produced the turbines was sold several years ago
and is currently owned by Siemens, which does not provide
service/maintenance for that product line).

Payments to Service Companies
--------------


5. (C) Service companies continue to report sporadic, random,
and insufficient payments from PDVSA for outstanding
receivables (Reftels B, C, & D). According to Baker Oil
Tools Executive Director, Mauricio Moreno Caijao (strictly
protect throughout),Baker Hughes is owed $150 million in
Venezuela and last received a payment ($3 million) from PDVSA
in January/February (PDVSA owes them $56 million,
international oil companies and joint ventures owe $40
million, and Baker Hughes has $30 million in "accrued
revenue, not invoiced" or payments for services to PDVSA
provided without a contract). Moreno explained that both
IOCs and JVs are unable to pay as they have not been paid by
PDVSA. According to Mikael Jakob (strictly protect
throughout),Country Representative for Tidewater, the week
of March 16, the U.S.-owned firm received a payment
equivalent to one per cent of outstanding receivables from
PDVSA. Superior Energy Service Executive Director Mac McVay
(strictly protect throughout) told PetAtt that PDVSA paid
Superior $1 million (mix of Bolivars and USD) in December
2008 and owes the U.S. company $20 million ($9 million in USD
and $11 million in Bs). PDVSA told Superior to expect a $10
million (in Bs) payment on March 19 but was only paid 850,000
Bs (roughly $395,350) on March 21. Finally, COAPetrol's
Bryan Stanley (strictly protect throughout) claimed that
PDVSA owes his company 45 million Bs (roughly $22 million).
COAPetrol, which has 100,000 Bs in its bank accounts but has
$200 million in assets, had a 10 million Bs credit line from
a local bank that has been suspended since October 2007.
Without explanation, the bank partially re-instated the
credit line (2 million Bs) the week of March 23, effectively
enabling the company to operate an additional five weeks.

PDVSA Problems
--------------


6. (C) Service companies recounted numerous tales of problems

CARACAS 00000428 003 OF 004


within PDVSA that they claim contribute to the Venezuelan
national oil company's on-going management and performance
problems. Superior's McVay recounted an internal PDVSA
problem that has complicated a pipe tender. Apparently,
PDVSA E&P requested procurement of a certain size pipe (an
obsolete standard product still in local use). PDVSA's
contracts department decided it could not issue a tender for
an obsolete product and unilaterally changed the technical
specifications. The two PDVSA organizations have not been
able to resolve the difference, resulting in a nine-month
bottleneck in project execution and $5 million in unpaid
invoices.


7. (C) Beacham claimed that PDVSA's Caracas Corporate Legal
Office in 2004 directed PDVSA West to pay SIMCO several
million dollars in outstanding receivables. An attorney in
PDVSA West recently told Beacham that the division is under
no obligation to follow direction from corporate headquarters
in these types of matters and that they would not pay the
outstanding claim.

Strategies
--------------


8. (C) Faced with the challenges of maintaining operations in
Western Venezuela, companies have become creative in managing
risk, reducing operating expenses and ensuring legal recourse
if their assets are expropriated. In March, Tidewater's U.S.
parent organization sold the shares of the Venezuelan
operation to a subsidiary in Barbados; assured by corporate
lawyers that the Venezuelan-Barbadian BIT would provide
greater legal protection for their investment (the BIT
includes international arbitration). In addition, in order
to put operational pressure on PDVSA, since the beginning of
March Tidewater has stopped providing crew change boats and
is forcing PDVSA to use its own resources to rotate crews off
rigs in the Lake.


9. (C) Baker Hughes is reorganizing its distinct companies in
Venezuela into a single operating entity and estimates its
current client base accounts for 1.7 million b/d in
production (NOTE: International observers put Venezuelan
production around 2.2 million b/d). Moreno characterized
Baker Hughes as having one of the largest sunk investments
(plants) of any service company operating in Venezuela. The
company also accepted Venezuelan arbitration in its most
recent contracts with PDVSA. Baker Hughes expects the
reorganization will allow it to reduce its workforce by ten
percent.


10. (C) The ENSCO 68 drilling rig under contract to Chevron,
Repsol, and Teikoku for offshore drilling in Urdaneta was
reflagged from the U.S. to Liberia. Tidewater is considering
changing the flag on its two new service boats en route from
the U.S. to Venezuela for this same project.


11. (C) Rather than bring in offshore dollars (and exchanging
them in the swap market),Superior has offered CDs totaling
$500,000 (the legal limit in Venezuela) as collateral in the
U.S. against a local loan in Bolivars (and is paying local
interest rates approximating 25% on the loan).

Comment
--------------


12. (C) Field visits corroborate what we are hearing in
Caracas -- PDVSA is making sporadic payments to service
companies, has increased production from fields that it
publically cut to achieve OPEC quota reductions, and is
working on a consolidation of joint ventures. Businesses are

CARACAS 00000428 004 OF 004


using every trick in the book to reduce risk and legal
exposure, cut costs, and maintain operations. However,
Venezuela's oil resources continue to promise long-term gain
if companies can survive what many hope is short-term pain.
There is a significant gap, however, between operator
Chevron's continued optimism and service company Wood Group's
experience with the SIMCO project.


CAULFIELD