VENEZUELA: AMERICAN OIL AND SERVICE COMPANIES

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000854 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE COMMERCE FOR 4332/MAC/WH/JLAO NSC FOR RKING E.O. 12958: DECL: 07/07/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: AMERICAN OIL AND SERVICE COMPANIES ENGAGE AMBASSADOR REF: CARACAS 827 Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d). ¶1. (C) Summary: Executives representing U.S. companies involved in Venezuela's oil sector briefed the Ambassador on the status of the industry, highlighting problems all face in securing payments from PDVSA; difficulties maintaining positive relationships with PDVSA, the Ministry for Energy and Petroleum (MENPET),and the GBRV in general; and the challenge of working in this environment. They extrapolated their experiences to all oil companies, including the politically expedient national oil companies, such as CNPC and PetroPars. All agreed that current working conditions in Venezuela, including the recent round of service company expropriations, would have a short to medium term impact on Venezuelan crude production. They also agreed that aside from current challenges, their long-term goal is to find a way to stay in Venezuela as the potential of its reserves outweighs short-term challenges. END SUMMARY. ¶2. (C) Ambassador hosted a July 6 luncheon with Carlos Blohm (Vice President) and Carlos Tejera (Executive Director) of the Venezuela ) American Chamber of Commerce (VenAmCham); Ron Lubojacky (Chevron General Manager for Eastern Venezuela); Mauricio di Girolamo (Harvest Vinccler Vice President); Juan Castenada (Halliburton Venezuela President); Jose Aparcedo (Exterran Venezuela President); and Mikael Jacob (Tidewater Venezuela Country Representative) (strictly protect all throughout). Exterran and Tidewater's assets were expropriated under the May 7 oil services sector law. Harvest Vinccler's only investment is in a mixed company, PetroDelta, which operates in Eastern Venezuela. Halliburton is the largest U.S. services company in Venezuela (see reftel). Challenge of Expropriations -------------- ¶3. (C) Carlos Tejera pointed out constitutional difficulties arising from the GBRV's oil service sector expropriations in May and June. He noted that in apparent contravention of the Venezuelan constitution and standing laws, the May 7 oil service sector law allows MENPET (1) to expropriate companies and assume control over operations prior to providing fair market compensation, (2) to pay for expropriated assets with instruments other than cash (e.g., PDVSA bonds/debt issuance),and (3) to pay book value rather than fair market value for seized assets. Finally, Tejera added that the May 7 law appears to be vague enough to be applicable to sectors other than hydrocarbons. Others, however, noted that the constitutionality of the law is irrelevant in the current Venezuelan legal environment. In fact, Halliburton,s Castenada added that he no longer believes Halliburton is too large for PDVSA to seize, but rather that some elements of its operations in Venezuela are now vulnerable. PDVSA ) Conflicting Agendas within Management Structure -------------- -------------- ¶4. (C) Executives agreed that one of the problems with PDVSA is that even though the operational staff understands both the private sector and PDVSA's needs, it has no power to effect change. Technical personnel attempt to raise issues to PDVSA middle management, but middle management is unable to resolve the conflict between technical needs and the politicized mandates it receives from senior levels. Thus, PDVSA's senior levels may or may not understand the problems companies are facing, but this is not material as the GBRV's political agenda supersedes all other interests. Tejera CARACAS 00000854 002 OF 003 pointed out that the GBRV governs with a top-down political agenda rather than from the bottom-up. He also reminded lunch participants that the current regime ran the risk in the 2002/2003 strike of allowing PDVSA to "burn to the ground" and more importantly, was willing to let it do so. Jose Aparcedo, stated and all agreed, that it is unclear who in PDVSA is a decision maker. There was disagreement for example, whether PDVSA Vice President Eulogio del Pino is a decision maker or simply an "executioner" or implementer. Impact on Production -------------- ¶5. (C) In response to the Ambassador's question on the impact of recent GBRV, MENPET, and PDVSA actions on production, interlocutors agreed that crude oil production would decrease. Carlos Blohm shared that SIMCO General Manager Dave Beacham, told him at the U.S. Embassy's July 4 Celebration, that there is a direct link between PDVSA's inability to maintain water injection platforms formerly operated by SIMCO and crude production on Lake Maracaibo. Juan Castenada added that PDVSA has allowed all coiled tubing contracts on Lake Maracaibo to expire, a function critical to basic oil well maintenance. Failure to maintain the wells will result in lost wells and decreased production. He added that PDVSA could try to re-open lost wells sometime in the future, but it will be costly, will take time, and will require oil service company assistance. Finally, Castenada noted that, according to Halliburton's own internal drill rig count, there are only 67 drill rigs on station in Venezuela (as compared to around 100 last year). Of those rigs, only 41 are actively drilling and of those 41, only 30 are operating efficiently. Castenada compared this level of activity to that in Ecuador. According to industry experts this level of drill rig activity is insufficient to maintain current production levels and indicates that new production possibilities are severely limited. He predicted that PDVSA production would decrease within the next six months because of the May and June expropriations. ¶6. (C) The business representatives agreed that no one knows the real level of Venezuelan crude production but that it is not over 3 million barrels/day as claimed by the GBRV. PDVSA claims that it implemented fully the September 2008 and December 2009 OPEC quota cuts of over 300,000 barrels/day, but industry participants have confirmed that PDVSA has quietly re-activated production from fields where production was curtailed. (NOTE: It is unclear what Venezuelan production statistics include. Some production figures include natural gas liquids and condensates (which are not included in OPEC production estimates). PDVSA claims synthetic crude produced in the Faja is not included in OPEC figures, which runs counter to OPEC's statements. Thus, there is consensus that Venezuela is not producing more than 3 million barrels/day (even when aggregating all liquids), but no agreement on the real level of production. END NOTE.) What Message Should the Ambassador Deliver to the GBRV? -------------- -------------- ¶7. (C) The Ambassador asked if an opportunity should present itself under ideal circumstance, and if it were possible to deliver a message to the GBRV, from the point of view of the companies, what elements would a message include. The business representatives reached no consensus on a message to the GBRV. Tidewater Country Representative Mikael Jacob offered a two-part suggestion. First, tell the GBRV to pay its debt to the service companies. Second, return the expropriated assets to service companies and they will go back to work. Harvest,s Mauricio di Girolamo suggested a message summarizing the complexity of the industry and noting CARACAS 00000854 003 OF 003 the diversity of industry actor interests coupled with need for PDVSA to consider the ramifications and impacts that blanket actions have on all parties. He stated that a message from the USG underlining a long-term vision for Venezuela, the opportunity to manage the relationship anew with the return of the bilateral Ambassadors to post, and the need to remove business from political considerations would be helpful. Chevron,s Ron Lubojacky added that PDVSA and MENPET need to understand that they are sending all the wrong messages to the private sector at a time when the GBRV is clearly trying to court new investment in the Carabobo heavy oil bid round. Tejera stated that the USG should not adopt a narrow strategy of defending particular companies in particular cases, because the GBRV cares little for the private sector. Rather, the USG should point out that the GBRV's actions have consequences and that its actions run counter to its stated goals. The representatives disagreed whether U.S. firms were specifically targeted, but agreed that other foreign oil companies (including politically expedient national oil companies, such as CNPC and PetroPars) confronted similar challenges. They also agreed that all companies in the sector are facing payments problems with PDVSA. ¶8. (C) COMMENT. This was the first opportunity U.S. oil production and services companies have had to discuss the current situation since the Ambassador returned to post. They used this meeting to underscore the on-going difficulties of doing business in Venezuela and their long-term commitment to finding a business model that will permit them to stay to support Venezuela's exploitation of its abundant oil reserves. The companies understand that they need to align their economic interests with the stated political goals of the Chavez administration in order to survive here in the long-term. That said they hope the USG can convey to the GBRV that its actions will likely erode production levels and not just affect private sector profits. The GBRV's actions demonstrate its belief that the business community will continue to work in Venezuela under nearly any condition. The question remains how long companies will continue operating in this environment given on-going difficulties, all in the hope of future profits. END COMMENT. DUDDY