VENEZUELA: U.S. COMPANY EXTERRAN ASSETS SEIZED

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000725 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE NSC FOR RKING COMMERCE FOR 4332/MAC/WH/JLAO TREASURY FOR RJARPE HQ SOUTHCOM ALSO FOR POLAD E.O. 12958: DECL: 06/08/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: U.S. COMPANY EXTERRAN ASSETS SEIZED Classified By: Economic Counselor Darnall Steuart, for reasons 1.4(b) a nd (d). ¶1. (C) SUMMARY: PDVSA has now seized additional U.S. company assets under the auspices of the May 7 Organic Law permitting the expropriation of companies involved in the oil services industry. Exterran (formerly Hanover Compression Corporation and Universal Compression Holdings) confirmed June 8 that PDVSA has seized company assets in Venezuela, including gas compression units and electrical generators. According to a company executive, Exterran's assets in Venezuela are held by a Spanish holding company, giving it the option of resorting to international arbitration under Spain's Bilateral Investment Treaty with Venezuela. Representatives of international oil companies (IOC's) involved in joint venture operations with PDVSA have expressed grave concerns about the impact of these seizures on their oil production operations. End Summary. -------------- EXTERRAN ASSETS SEIZED -------------- ¶2. (C) On June 2, Exterran filed a Form 8-K with the U.S. Securities and Exchange Commission stating, "In May 2009, three joint ventures in which we have minority interests were named by MENPET (Petroleum Ministry) in those resolutions and their assets were seized. As of June 2, 2009, our wholly owned operations have not yet been named in MENPET resolutions. However, on June 2, 2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela." By e-mail June 8, Rob Price, Exterran Vice President for Latin America North (protect), confirmed to EconCouns that PDVSA had seized all Exterran assets in Venezuela. (NOTE: Exterran had minority interests in the Wood Group's Simco and Williams' Wilpro operations in western and eastern Venezuela respectively. END NOTE) Price added that Exterran believed the GBRV would issue on June 8 a resolution officially naming Exterran as a company whose assets would be seized, however no resolution has yet been published in Venezuela's Official Gazette, its U.S. Federal Register equivalent. Finally, Price informed EconCouns that Exterran's assets in Venezuela are held by a Spanish holding company, giving Exterran the option of resorting to international arbitration under Spain's Bilateral Investment Treaty with Venezuela. ¶3. (C) Exterran Vice President Price informed EconCouns June 2 that PDVSA currently owes the company over $120 million. Another Exterran executive informed PetAttache June 2 that company representatives had met with PDVSA officials on May 28 who challenged them regarding Exterran's "lack of performance" and threatened to expropriate Exterran assets. The Exterran representatives reportedly focused on the capital intensive nature of their business and explained that the company could not keep pumping money into its assets if PDVSA was not going to pay its bills. According to Price, Exterran told PDVSA that the equipment needs approximately $150 million in investment. Exterran told PDVSA that it could either pay Exterran the monies it was owed and Exterran would invest in the maintenance of the equipment or PDVSA could expropriate the equipment and do it themselves. PDVSA asked the Exterran representatives what it could do to keep Exterran operating and the company responded with a proposal that PDVSA stay current at $10 million in monthly costs and pay an additional $10 million a month on the arrears for a total payment of $20 million a month. This proposal was put into writing and delivered to PDVSA on May 29. ¶4. (C) Price informed EconCouns June 2 that 25 units out of a CARACAS 00000725 002 OF 002 national total of 210 were shutdown due to maintenance problems. He speculated that this number would increase to 50 within the next two weeks. Price said flatly that PDVSA is not capable of taking over operation of the Exterran assets in Venezuela. ¶5. (C) Petroleum Attache (PetAtt) and visiting Washington energy analyst discussed the situation with two IOC's currently operating in Venezuela under joint ventures with PDVSA. Senior executives of both companies were concerned about the impact of the Exterran seizures on their own operations. In both cases, Exterran owned and operated power generation equipment which is critical to continued oil production. In one case, the joint venture has already moved to absorb the Exterran technical personnel. However, the representatives of both IOC's expressed extreme concern about future maintenance and technical support of the generation equipment upon which their operations rely. -------------- OTHER NEWS ABOUT SEIZED ASSETS -------------- ¶6. (C) In other news about assets seized as a result of the May 7 law, Price noted that Exterran had heard that one of eight turbines at the Wilpro PIGAP II facilities was already out of service. In a televized June 7 ceremony, PDVSA President Rafael Ramirez announced that some of the 660 vessels seized from oil service companies which previously offered services in Lake Maracaibo, are being used to distribute food across the Lake. He added that others will be used to provide passenger transport services. -------------- COMMENT -------------- ¶7. (C) The units seized from Exterran compress gas for injection or generate electricity required in the oil fields. Venezuela is unlikely to have the necessary spare parts or qualified technicians to maintain equipment whose maintenance standards are already low because of PDVSA's failure to pay for its upkeep. Any shut down of this equipment is likely to have an immediate impact on Venezuela's oil production. CAULFIELD