Identifier
Created
Classification
Origin
10CARACAS11
2010-01-06 19:50:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

Carabobo Bid Round Update & Venezuela's New Petroleum

Tags:  EPET EINV ENRG ECON VE 
pdf how-to read a cable
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DE RUEHCV #0011/01 0061950
ZNY CCCCC ZZH
R 061950Z JAN 10 ZFF3
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 0233
INFO OPEC COLLECTIVE
WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000011 

SIPDIS
ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MKACZMAREK
COMMERCE FOR 4332/MAC/WH/JLAO
NSC FOR DRESTREPO AND LROSSELLO
OPIC FOR BSIMONEN-MORENO
AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA
AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC
AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE

E.O. 12958: DECL: 2020/01/06
TAGS: EPET EINV ENRG ECON VE
SUBJECT: Carabobo Bid Round Update & Venezuela's New Petroleum
Strategy

REF: 05 CARACAS 2596; CARACAS 149; CARACAS 495; CARACAS 1236
CARACAS 1240; CARACAS 1326; CARACAS 1333; CARACAS 1352; CARACAS 1465

CLASSIFIED BY: Darnall Steuart, Economic Counselor, DOS, Econ;
REASON: 1.4(B),(D)

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000011

SIPDIS
ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MKACZMAREK
COMMERCE FOR 4332/MAC/WH/JLAO
NSC FOR DRESTREPO AND LROSSELLO
OPIC FOR BSIMONEN-MORENO
AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA
AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC
AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE

E.O. 12958: DECL: 2020/01/06
TAGS: EPET EINV ENRG ECON VE
SUBJECT: Carabobo Bid Round Update & Venezuela's New Petroleum
Strategy

REF: 05 CARACAS 2596; CARACAS 149; CARACAS 495; CARACAS 1236
CARACAS 1240; CARACAS 1326; CARACAS 1333; CARACAS 1352; CARACAS 1465

CLASSIFIED BY: Darnall Steuart, Economic Counselor, DOS, Econ;
REASON: 1.4(B),(D)


1. (C) SUMMARY: The final terms and conditions for the Carabobo
extra heavy oil bid round were issued at the end of November.
While they do not contain all of the changes hoped for by potential
bidders, there were enough alterations to make it possible that
international oil companies may submit bids before the end of
January 2010. This bid round underlines the extent to which
Venezuela has changed its strategic plan for the development of its
oil resources, putting an emphasis on the development of the
Orinoco heavy oil belt and on new joint ventures with international
and national oil companies. While the plans are aggressive and may
or may not meet with success, the shift away from developing its
resources on its own and once again towards greater reliance on
external partners is significant. END SUMMARY.



Carabobo Update




2. (C) The Ministry of Energy and Petroleum (MENPET) released the
final terms and conditions (T&C) for the Carabobo bid round on
November 30, 2009. First launched in October 2008, the process to
bid out the Carabobo blocks in Venezuela's Orinoco extra heavy oil
belt (the Faja) continues to move along, with bids now due at the
end of January. MENPET expects to announce winners in March. A
well placed industry insider was given access to the 300 page
confidential terms and conditions document and provided a brief
analysis of the major points. Most importantly, he believed the
latest T&C showed marked improvements that investors will find
increase their ability to submit bids.

* The Carabobo T&C provide for a reduction in the extraction
tax and royalty (to 20%) if the project does not achieve a
pre-determined target return on investment.

* The document includes a reference to the Special Advantage
Tax (or Shadow Tax) which confirms that the tax shall be reduced so
as not to cancel out any reduction in royalty and extraction tax.
[NOTE: The "shadow tax" guarantees to the state a minimum of 50 per
cent of all petroleum rent through royalty and taxes and was
introduced into the mixed company contracts in 2007. END NOTE]

* The T&C do not include a target internal rate of return
(IRR),but our sources believes MENPET is using an IRR of 10% for
its internal calculations.

* The final T&C also restructured the bonus to be offered by
the winning bidders, stating that the minimum $1 billion bonus (or
$500 million bonus depending on which project bid on) will be paid
in six installments.




3. (C) Our source described several challenges that remain in the
private sector's decision-making process, most of which relate to
the experiences of the last couple of years of those companies that
have worked with PDVSA as minority partners in either the joint
venture (the former Strategic Associations) or mixed company
frameworks (the former Operating Service Agreements). The T&C
expressly forbid the conditioning of bids (one strategy discussed

CARACAS 00000011 002 OF 003


by the oil companies to account for many of the gray areas that
remain in the T&C). For some companies, PDVSA has yet to pay
dividends for 2008 mixed company operations. The international
companies also see the dire operational state of the country's
heavy crude upgraders (which some of them built) that were
nationalized in mid-2007. With three of the four upgraders
currently shut down, and too many safety and maintenance problems
to mention, the prospect that PDVSA would operate a greenfield
project in the same manner it is operating the four current
upgraders is a clear deterrent. Bidders that currently operate in
mixed companies note that their presence has, at times, been barely
tolerated by PDVSA, whose unilateral application of conditions not
considered in the original mixed company agreements has created
increased risk and prolonged negotiations on any new projects.
Finally, there is President Chavez, whose stated intention to
transform Venezuela into a socialist country has raised questions
about whether the Venezuelan state will ultimately abide by any
agreement it signs.




4. (SBU) Concurrent with the Carabobo bid round, the GBRV is also
pressing forward to award blocks in the Junin region of the Faja.
Through a non-competitive process it is negotiating bilateral
agreements with China, Russia, and Vietnam, and with France's Total
and Spain's Repsol, amongst others. In late December, PDVSA
announced an exploration and certification agreement with China's
CNPC for the Faja's Boyaca 3 block. With few exceptions, PDVSA is
focused on generating new production from the Faja and not from
other existing fields.



Venezuela's heavy oil strategy




5. (SBU) These developments in the Faja underline Venezuela's
intent to pin its oil production future largely on the development
of its extra heavy crude resources. The World Heavy Oil Congress
(November 3-5) provided Minister of Energy and Petroleum Rafael
Ramirez with a platform from which to share the GBRV's updated
vision of project development in the Orinoco heavy oil belt.
Ramirez also revealed that PDVSA's new business plan for 2010-2021
contemplates increasing crude oil production by 3.653 million
barrels per day (MBD). Assuming PDVSA's success, production could
grow from PDVSA's current stated production level of 3.209 MBD in
2010 to 6.862 MBD in 2021. [NOTE: International secondary sources
peg Venezuelan production at 2.3 MBD. END NOTE.] PDVSA's
2005-2010 "Siembra Petrolera" (Sowing Petroleum) plan envisioned
the majority of new production to come from PDVSA-only activity in
traditional fields, but the new plan appears to rely on private
sector participation to increment production through the joint
venture model. It forecasts that new Faja projects will contribute
2.791 MBD to the goal, or 76% of new production.




6. (SBU) In terms of investment, the 2010-2021 plan details the
highest levels of investment ever seen in the Venezuelan oil
sector. According to Ramirez, from 2005 to 2009 PDVSA invested
$51.3 billion. Total planned investment for the 2010-2015 period
is $224.4 billion, almost half of which will be divided equally
between natural gas and extra heavy oil development. Average
capital expenditures under this plan appear to reach $45 billion
annually. [NOTE: Venezuela's 2009 export revenue from petroleum
sales is projected at $57 billion. END NOTE]




7. (SBU) According to MENPET, Faja production is expected to grow

CARACAS 00000011 003 OF 003


by 3.6 MBD by 2021; 2.8 MBD of that from greenfield developments
(1.2 MBD from Carabobo and 1.6 MBD from Junin). PDVSA expects this
development to cost $118.6 billion. Additionally, Ramirez
presented six new upgraders for extra heavy crude to be developed
before 2020 and two new refineries (a 400,000 b/d refinery in
Cabruta to be built in two phases and a 300,000 b/d refinery to be
constructed in the Jose condominium targeted to begin operations in
2019). Ramirez mentioned that Faja development will include the
drilling of 10,570 wells, the construction of 2,002 km of oil
pipelines, storage infrastructure (28 tanks of 750,000 BBL and 5
tanks of 500,000 BBL),a liquids terminal in Araya and a solids
terminal in Punta Cuchillo (located near Ciudad Guayana). All of
this is in addition to already announced plans for the construction
of two LNG trains and several petrochemical plants.




8. (C) While PDVSA's plans are grand, it is worthwhile to note that
the four original "Strategic Association" projects to process
Venezuela's extra heavy crude were under development for
approximately eight years. The development of these projects was
handled by some of the largest and most experienced international
oil and engineering companies. No one expects PDVSA-managed
projects in the Faja to be able to match or exceed the record of
the international companies, especially as these will be greenfield
projects dependent on the GBRV to deliver infrastructure such as
workers homes, roads, electrical supplies, water and sewage, etc.
However, President Chavez has stated that he expects the first cold
crude production to be realized from Carabobo by 2011, even though
first production from the more advanced Junin project with the
Russian consortium is not expected prior to 2016.




9. (C) Comment: The GBRV's strategy shift might be an admission
that it has made little progress in identifying new production
opportunities and has been unable to develop reserves under its own
efforts due to PDVSA's inability to execute new production projects
on its own, financial and/or human resource restrictions, or a
strategic reorientation of efforts towards heavy crude. PDVSA
needs foreign investment and expertise to develop the Faja, but
raised the ante on foreign partners by ruling out conditional bids
in Carabobo, making it more difficult for them to make a case for
billions of dollars of new investment here (including financing
PDVSA's share, with little to no operational role in the mixed
companies, limited access to international arbitration, and no real
control over governability of the mixed companies). Questions
abound about how the country will provide sufficient human
resources, sufficient natural gas for required secondary recovery,
sufficient diluents, sufficient capital, sufficient governability,
sufficient contract sanctity, etc. for so many projects at once.
That said, international oil company sources acknowledge that there
is zero below ground risk in considering the Faja projects, only
above ground, political risk. Given the GBRV's reoriented strategy
that relies heavily on joint ventures in the Faja, qualified
investors will likely submit bids, assuming that PDVSA will have to
mend its ways and work integrally and intelligently in order to get
any new extra heavy crude projects built. END COMMENT.
DUDDY