VENEZUELA: MORE EVIDENCE OF CASH FLOW PROBLEMS

C O N F I D E N T I A L CARACAS 000541

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E.O. 12958: DECL: 04/29/2019
TAGS: EPET EINV ENRG ECON VE
SUBJECT: VENEZUELA: MORE EVIDENCE OF CASH FLOW PROBLEMS

REF: A. CARACAS 440

B. CARACAS 428

C. CARACAS 288

D. CARACAS 282

E. CARACAS 239

F. CARACAS 136

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


1. (C) SUMMARY: Faced with mounting receivables payable by
PDVSA and other government entities, the GBRV is turning to
alternative payment solutions to stay afloat during its cash
flow crisis, including proposing barter swaps of commodities
and the issuance of bonds. Halliburton confirmed receiving
less than 5% in arrears in 2009, a quantity that amounts to
PDVSA keeping it on 'life support.' U.S. drilling company,
ENSCO, has not been paid since September 2008 and PDVSA
continues operating its rig. The Camara Petrolera, the
organization that represents local petroleum service
companies, is split over the payments problem between
companies that favor negotiating a solution with PDVSA and
those that want to take action that is more aggressive. END
SUMMARY.

PDVSA's Arrears with Halliburton
--------------

2. (C) On April 23, EconCoun and PetAtt met with Martha
Sandia Saldiva, Halliburton's Global Account Manager with
PDVSA. Saldiva shared that Halliburton has received minimal
payments for the last eight months that barely approach 5% of
total outstanding receivables, which currently stand at $270
million. Halliburton has received two payments in 2009
(mixed USD and Bolivars),one on March 6 for a total of $9
million and one on April 3 for $10 million. Halliburton's
operations in Venezuela generate roughly $30 million in
receivables monthly, though, given the current situation, the
company has been reducing operations and laying off
employees. Halliburton is also carrying a $35 million debt
at 28% interest with Banco Provincial in Venezuela. Saldiva
estimates PDVSA's current monthly revenue is less than $1.5
billion and that it provided the GBRV with $14 billion in
November Q)December 2008 to support elections.

ENSCO Q) Another Type of Problem
--------------

3. (C) On April 27, PetAtt spoke with Hugh Q&BlueQ8 Gesch
(strictly protect throughout),ENSCOQ,s Venezuela rig
manager. He confirmed that ENSCO last received a partial
payment in September 2008. Its outstanding arrears are now
in the neighborhood of $50 million (when ENSCO suspended the
contract in January arrears stood at $32 million). PDVSA has
asked ENSCO to reduce its day rate by 30% retroactively.
ENSCO had a two-year Q&firm contractQ8 with three one-year
options to extend and a provision to adjust day rates every
six months based on prevailing market conditions. ENSCO
suspended the contract 6-8 months into the first year. ENSCO
has agreed to a rate reduction going forward but it has not
reached consensus with PDVSA on a specific percentage
reduction. PDVSA continues rig operations with ENSCO
providing food, insurance, and salary payments to the
national crew. The U.S. firm has stopped providing the rig
with spare parts, oil (mud),and other supplies. The company
maintains a presence on the rig, but has removed its
mechanics and engineers.


4. (C) During negotiations in January and February, PDVSA and
ENSCO reached agreement on a schedule. That agreement was
nullified when PDVSA turned payment issues over to the newly
formed PDVSA Services (PDVSA Servicios) following the

February 15 national referendum. ENSCO's first meeting with
PDVSA Servicios to discuss payments took place on April 11.

Possible PDVSA Bond Issuance
--------------

5. (C) EconCoun and Petroleum AttachQ met with Andres Duarte
(strictly protect throughout) on April 24. Duarte, the
former president of the Camara Petrolera, confirmed that on
April 14 PDVSA proposed to pay its outstanding
Bolivar-denominated debt to Camara members with
USD-denominated bonds. Specifically, PDVSA's bond payments
would be calculated at a rate of 2.3 Bs to the USD (the
official exchange rate is 2.15 Bs to the USD) and with the
provision that companies would have to hold the bonds for a
year before selling them in the market. He estimates that
PDVSA owes Camara members collectively a minimum of $300
million. On April 21, PDVSA replaced the offer of
USD-denominated bonds with one for Bs-denominated bonds.
According to Duarte, the Camara is "at a boiling point" and
is split between members who want to continue negotiating and
seek better terms and those who want to launch a more
adversarial campaign against PDVSA.


6. (C) Tracking with the Camara's negotiations with PDVSA for
payment in bonds, Saldiva stated PDVSA offered Halliburton
payment for Bs-denominated debt with USD-denominated
Venezuelan bonds (with a 50% reduction in the overall
Bs-receivables). Saldiva said that Halliburton's financial
problems in Venezuela are significant and that it faces
potential legal action from some of its providers over its
non-payment of invoices. On April 28, the press reported
that PDVSA plans to issue up to $3 billion in
dollar-denominated bonds to cover debt owed to service
companies.

Companies Turn to Barter with the GBRV for Payments
-------------- --------------

7. (C) As of early April, an Italian-owned company in which
Duarte has a minority share and that operates an offshore
coal transfer station in Lake Maracaibo was owed over $3
million from a "take or pay" contract with Carbones del
Guasare (CDG),a joint venture company. CDG operates the
Paso Diablo Mine in Lake Maracaibo and is composed of the
U.S. firm Peabody (25.5%),Anglo American (25.5%) and
state-owned Carbozulia (49%). (NOTE: President Chavez
transferred ownership in 2004 of Carbozulia from PDVSA to
Corpozulia the GBRV's development agency in Zulia.)
According to Duarte, recent coal production has fallen
precipitously from 400,000 tons/month with CDG claiming labor
and maintenance problems. CDG maintains that transfers of
funds to the central government have left it with no cash to
pay the outstanding $3 million. In order to settle the
pending balance, Duarte's company suggested payment in coal,
a proposal CDG accepted. Upon approaching a law firm to
propose the barter, the lawyers told Duarte that his company
is the third in the last month to propose such a payment
plan. Duarte recounted that Koch Industries, whose
subsidiaries have been involved in several joint ventures
with Pequiven, the Venezuelan national petrochemicals
company, is receiving payment in petroleum coke. Duarte also
believes that an Italian group in the oil sector has
negotiated payment in crude oil.


8. (C) Faced with growing financial and technical problems,
Duarte believes that PDVSA is seeking ways to outsource some
of its operations, including possibly having offered Shell an
opportunity to operate some of PDVSA's refineries (through a
joint venture). Furthermore, he added that Spanish
electrical firm, Iberdrola, which sells large turn-key
electrical projects, sent a team to Caracas a month ago to

negotiate with CADAFE (Venezuela's national electricity
utility) for maintenance and upgrades to Venezuela's Planta
Centro and Guarico electrical plants. The company was
offered payment in oil shipments, but has not received any
indication as to how much oil is being offered, at what price
it will be valued, and which product the GBRV is offering.


9. (C) COMMENT: The GBRV's cash flow problems extend beyond
PDVSA and its core petroleum business. Companies that are
playing by the rules (i.e., Halliburton) are receiving 'life
support' payments to maintain operations. ENSCO, which very
publicly broke with PDVSA while executing a drilling
contract, has yet to receive any payments. PDVSA's latest
strategy of offering bonds to settle its outstanding payments
problems provides further insight into the extent of its cash
flow problems. The GBRV's willingness to trade future crude
and coal production in exchange for services today
underscores the political trade-off of maintaining the GBRV's
social missions in the short term while waiting for commodity
prices to increase long term.

CAULFIELD