VENEZUELA: PDVSA SEIZES SERVICE COMPANIES

C O N F I D E N T I A L SECTION 01 OF 05 CARACAS 000581

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E.O. 12958: DECL: 05/08/2019
TAGS: EPET EINV ENRG ECON VE
SUBJECT: VENEZUELA: PDVSA SEIZES SERVICE COMPANIES

Classified By: A/Economic Counselor Richard T. Yoneoka,
for reasons 1.4 (b) and (d).


1. (C) Summary: On May 7, the National Assembly passed and
President Chavez promulgated a law permitting the
expropriation (partial or total) of companies involved in the
oil services industry. PDVSA officials accompanied by the
National Guard quickly began the transfer of assets and
operations from several international companies and many
Venezuela service companies. The subject companies have not
been informed of the GBRV's intentions nor of the extent of
the seizures. Petroleum industry companies have focused on
seeking legal advice and exploring options available to them.
The question at this point is how far service companies will
go to limit their exposure to Venezuela. It is hard to
imagine Venezuela stabilizing production, let alone
increasing it, if it does not have the support of the service
companies.


2. (C) The main purpose of the bill is to transfer to the
GBRV the assets owned and operated by service companies
involved with the primary activities (upstream and midstream)
governed by the Organic Hydrocarbons Law. The bill
specifically affects companies involved with the injection of
water, steam, or gas, the compression of gas as well as
services rendered for the performance of primary activities
on Lake Maracaibo. It provides for the "extinction" of
contracts executed in the past between PDVSA and private
companies. It stipulates that all contracts and activities
governed by the law would be subject to Venezuelan law and
subject to the exclusive jurisdiction of Venezuelan Courts.
END SUMMARY.

The Law Nationalizing Oil Services Companies
--------------

3. (C) The National Assembly on May 7 passed after second
discussion the Bill of the Organic Law that Reserves to the
State the Assets and Services related to Hydrocarbon Primary
Activities. President Chavez promulgated the bill the
evening of May 7. Legal experts in Caracas expect it will be
sent to the Official Gazzette for publication on May 8 (Note:
the following legal analysis is drawn from confidential
reports provided to Post by several local petroleum sector
law firms). Legal analysts highlight the main purpose of the
bill is to transfer to the GBRV the assets owned and operated
by private companies that until now have performed services
in connection with the primary activities (upstream and
midstream) governed by the Organic Hydrocarbons Law. The
bill specifically affects companies involved with the
injection of water, steam, or gas, the compression of gas as
well as services rendered for the performance of primary
activities on Lake Maracaibo.


4. (C) The law provides for the "extinction" of the contracts
executed in the past between PDVSA (or its affiliates) and
private companies for the rendering of services or the
operation of the assets subject to the reserve. It provides
that all events, activities, contracts governed by the law
would be subject to Venezuelan law and disputes arising there
from will be subject to the exclusive jurisdiction of
Venezuelan Courts. This will likely affect contractual
claims that the affected companies may have under their
respective contracts and the possibility to resort to
arbitration based on arbitration clauses included in such
contracts (but not investment arbitration claims filed under
Bilateral Investment Treaties (BITs) to which Venezuela is a
party).


5. (C) The law provides that the reserved assets may be
expropriated under very unfriendly conditions for

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international investors, including for instance, that
compensation will be based in the book value of the assets
and allows payments through securities or obligations issued
by public entities.


6. (C) Key provisions of the bill include:

- Article 1 justifies the reserve in the "strategic
character" of the assets and services it refers to, and
provides that the reserved activities can only be performed
directly by the Republic, by PDVSA (or its affiliates) or by
mixed companies under the control of PDVSA or its
affiliates. Thus, it is possible that the GBRV could
negotiate with the affected companies the formation of mixed
(joint venture) companies with majority GBRV participation in
a similar fashion to those created to replace the Operating
Agreements and the Association Agreements in the Faja heavy
crude region.

- Article 2 provides a general description of the assets and
services subject to the reserve. Specifically it mentions
the following:
- assets and services for the injection of water, steam
or gas, which increase the energy of the reserves and improve
the recovery factor;
- assets and services for the compression of gas; and
- assets and services related to the activities on Lake
Maracaibo.

Article 2 expressly includes boats for the transportation of
personnel, divers and maintenance; crane barges for the
transportation of materials, diesel, industrial water and
other inputs; flat barges, boyeras, cranes, cuttings barges,
pipeline and sub-aquatic cable laying or replacing barges;
ship maintenance in workshops, docks and any type of dykes.

- Article 3 provides that the Ministry of People's Power for
Energy and Petroleum (MENPET) will determine, through a
special resolution, the specific assets owned, and the
services rendered by, the companies and sectors covered by
the reserve to which Articles 1 and 2 refer. It is possible
that some, but not all, of the assets used for a specific
project will be covered by this reserve. This could create a
scenario for the companies affected where it would be
difficult or impossible to use the remaining assets for other
activities or either sell or lease the same to third parties.

- Article 3 provides that contracts will be "extinguished"
upon issuance by MENPET of the special resolutions that
identify the assets and services covered by the reserve.
This would affect the possibility of filing claims under such
contracts and invoking the arbitration clauses contained
therein.

- Article 4 provides that MENPET will take the measures
necessary to guarantee the continuity of the reserved
activities and that the affected companies will be required
to cooperate with the peaceful and orderly transfer of the
operations, facilities, documents, assets and equipment or be
subject to administrative or criminal penalties. Since there
is no deadline for the transfer of the assets to PDVSA, the
process could take several months, which would entail that
the affected companies would be required to fund the costs of
maintaining the continuity of operations until the transfer
to PDVSA is finally completed.

- Article 6 states that the National Executive may order the
full or partial expropriation of the shares or assets of the
companies that perform the services subject to the reserve.
In addition, the article expressly provides that loss of

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profits or indirect damages will not be subject to
compensation in the expropriation process. Furthermore, the
article provides that labor and environmental liabilities
will be discounted from the amount of the compensation to be
paid to the affected parties and that the time of possession
of the expropriated assets that may elapse prior to the
payment of compensation should be computed in order to
calculate such compensation.

- Article 10 provides that MENPET will determine which
employees of the affected companies will be transferred to
PDVSA. It also provides that the labor benefits of these
employees may be paid directly by PDVSA, deducting the
corresponding amounts from the compensation that may be paid
to the expropriated companies.

- Article 11 provides that the events, activities, and
contracts governed by the law will be governed by Venezuelan
law and that disputes arising there from will be resolved
exclusively by Venezuelan Courts. Depending on the case,
this provision may affect the opportunity for the affected
companies to have recourse to arbitration under the relevant
contracts with PDVSA but does not prejudice their right to
file for investment arbitration under a BIT before ICSID or
another international tribunal.

MENPET AND PDVSA ACTIVITY
--------------

Williams

7. (C) At midnight May 8, PDVSA officials (60 each at the El
Furrial and PIGAP II projects and 40 at the Accroven
facility),including PDVSA lawyers and a judge arrived at the
Wilpro (Wilpro is Williams' local operator) facilities to
take possession of the assets. Sometime after PDVSA's teams
began the transfer process at the Wilpro facilities, National
Guard units arrived. Williams' employees and officials
cooperated with PDVSA in the inspections, documenting the
state of the facilities and equipment, turned over operations
manuals, and responded to information requests during the
night. At 5:00 a.m. on May 8, the transfer was complete.
PDVSA officials failed to provide Williams with the required
MENPET resolution (Article 3) concerning the assets being
reserved to the state.

Lake Maracaibo

8. (C) According to Evanglos Alexandros Hadjis (strictly
protect throughout),the owner of two oil service related
vessels on Lake Maracaibo and the honorary Greek Consul in
Maracaibo (strictly protect throughout) PDVSA seized the
morning of May 8 Zulia Towing and Barge, Tricomar, Hermanos
Papagaiou, and Costa Bolivar. Each of these companies (some
foreign-owned by Italians whose legal residency in Venezuela
is unknown) was located at a shared dock facility on Lake
Maracaibo. Hadjis' two vessels are located at the same dock.
As his company does not provide direct services to PDVSA,
but sub-contracts to other service sector companies, PDVSA
officials told him his vessels were not being seized. U.S.
Consular Agent in Maracaibo informed PetAtt that in addition,
ZNP and Kraf assets had been seized.


9. (C) Tidewater Country Manager Mikael Jacob (strictly
protect throughout) told PetAtt that as of 11:00 a.m. May 8
there were two buses filled with PDVSA employees and National
Guard sitting outside Tidewater's base on Lake Maracaibo. It
appeared that they were waiting for orders to enter the base
and assume operations. He has not heard that TidewaterQ,s
boats in Petrosucre (eastern Venezuela) or those working on
the Chevron/Repsol/Teikoku offshore project (Cardon) are
threatened (and he doubts they will be taken). Jacob stated

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that neither MENPET nor PDVSA has been in contact with
Tidewater concerning the situation.

Wood Group

10. (C) Simco's General Manager Dave Beacham, a Wood Group
expatriate, (strictly protect throughout) told PetAtt that
since PDVSA assumed operational control of Simco assets on
March 4, six of the eighteen water injection platforms have
malfunctioned. Beacham has not agreed to repair the
platforms, as PDVSA has not responded to calls or
correspondence seeking clarification as to Simco's legal
standing. PDVSA, apparently, has not performed any
maintenance on the platforms since seizing them. According
to Beacham, many of the service companies working in the Lake
Maracaibo area have not been paid by PDVSA, including a local
medical clinic, which is owed in excess of $2.5 million. The
clinic is refusing PDVSA employees treatment unless they
pre-pay for services. Beacham stated that construction
services companies related to the oil industry are refusing
to enter new contracts with PDVSA unless they are pre-paid.

What Does it All Mean?
--------------

11. (C) The GBRV and PDVSA have for several years discussed
publicly their desire to move service companies into joint
ventures (JV) after having completed the migration of
international oil companies to the JV model. This law
provides MENPET and PDVSA with the authority to re-assert
their primacy in the services sector and would allow the
GBRV, from a position of strength, to offer affected
companies the opportunity to enter JVs. Outstanding arrears
would likely form part of PDVSA's capital contributions to
the new company. Service companies, such as Wood Group and
Williams that are directly involved in crude production
through their water and gas injection facilities would face
the same calculus addressed by the international oil
companies in 2007. At that point Exxon Mobil and Conoco
Phillips decided to exit the Venezuelan market, while others,
such as Chevron and Harvest decided to stay.


12. (C) Williams and Wood Group as the majority partners in
Wilpro and Simco respectively, have been good citizens in
Venezuela. Both cooperated with PDVSA and supported the GBRV
during and after the 2002 oil sector strike. They have
worked quietly, behind the scenes to maintain operations and
communications with PDVSA. Even though they are owed
significant amounts of money, they continued operations and
never threatened to stop performing on their contracts. Both
reluctantly moved to send PDVSA default letters after they
had exhausted all other recourses. Williams even worked
through an expropriation of an asset expropriated by the GBRV
in 2002, filed and won an international arbitration case, and
was compensated for the claim by the GBRV Q) the entire
episode was handled quietly and with great tact, with
Williams not exposing the GBRV to public embarrassment.


13. (C) It is not clear if senior GBRV and PDVSA officials
are aware of the price they will have to pay for alienating
the service companies with the actions of the last week.
Close personal relationships and past support for the GBRV do
not appear to matter. The question at this point is how far
service companies will go in limiting their exposure to
Venezuela. It is hard to imagine Venezuela stabilizing
production, let alone increasing it, if it does not have the
support of the service companies.


14. (SBU) Caracas 564 provides additional perspective on
PDVSA's financial situation and its relationship with service
companies up until this past week, as well as related
references.

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CAULFIELD