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### Viewing cable 10CARACAS193, Chevron "Wins" A Carabobo Project

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
10CARACAS193 | 2010-02-12 21:09 | 2011-01-27 21:09 | CONFIDENTIAL | Embassy Caracas

`

    VZCZCXRO3009
    RR RUEHAO RUEHNG RUEHRS
    DE RUEHCV #0193/01 0432114
    ZNY CCCCC ZZH
    R 122114Z FEB 10
    FM AMEMBASSY CARACAS
    TO RUEHC/SECSTATE WASHDC 0471
    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 000193

    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: 2020/02/12
    TAGS: EPET EINV ENRG ECON VE
    SUBJECT: Chevron "Wins" A Carabobo Project

    REF: 10 CARACAS 11

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

    ¶1. (C) SUMMARY:  Chevron and Repsol-led consortia won the rights to
    negotiate mixed company deals with the Ministry of Energy and
    Petroleum (MENPET) in the Carabobo bid round.  In its first major
    heavy oil bid round since President Chavez assumed power in 1999,
    the Bolivarian Republic of Venezuela (GBRV) offered three Carabobo
    projects and received bids on two.  While not signing any
    agreements, the winning international consortia may now move ahead
    to negotiate more favorable contract terms before signature of a
    joint venture contract and the initial bonus payment.  Chevron said
    that first oil might come on line in 2014 but could well be
    delayed.  The Ambassador was not invited to the Carabobo ceremony
    to accompany his colleagues representing the governments of the
    other international oil companies that bid.  Nevertheless, at the
    ceremony, Chavez said he wants dialogue with the U.S.  END SUMMARY.

    Carabobo Winners Announced

    ¶2. (C) PROJECT 3: The February 10 ceremonial event to announce the
    winners in the Carabobo bid round started several hours late and
    was televised in a mandatory national cadena (broadcast).  The
    Chevron-led consortia, including Japan's Mitsubishi, Inpex, and
    Venezuela's Suelopetrol, won project 3, which includes blocks C5,
    C2 South, and C3 North.  Chevron's share in the ultimate joint
    venture will be 34%, the Japanese participants will have 5%, and
    Suelopetrol will have a 1% share.  [NOTE: Chevron's Latin America
    Business Unit President Wes Lohec (protect) told the Ambassador on
    February 12 that Japan's JOGMC has an option to back into a share
    of the Japanese 5%.  The Japanese participation in the consortium
    is particularly important, as it will open the door to possible
    JBIC financing for PDVSA's portion of the project costs.  END NOTE]
    Minister Ramirez stated that the mixed company (60% PDVSA, 40%
    Chevron consortia) should eventually produce between 400,000 and
    480,000 barrels of crude petroleum per day.  When half of the
    production is run through an upgrader and mixed with the other half
    of production, the mixed company will ultimately take 400,000
    barrels of 22-degree API crude to the market.  Ramirez stated that
    the Chevron consortium offered a bonus of $500 million, a billion
    dollars of financing for PDVSA's portion of the project, and an
    upgrader to be constructed in Soldedad.  Lohec informed the
    Ambassador on February 12 that cold crude oil production could
    begin as soon as four years from the date a mixed company is formed
    and that MENPET had committed to provide 300 million barrels of
    blending stock for the first seven years of the project or until an
    upgrader is constructed.  Lohec added that he doubted whether PDVSA
    would achieve any new petroleum production from any of the various
    heavy oil projects it has initiated with national oil companies
    before 2014.

    ¶3. (U) PROJECT 1: Ramirez also announced that the consortium led by
    Spain's Repsol, including India's ONGC, Videsh Limited, Oil Indian
    Corporation, the Indian Oil Corporation, and Malaysia's Petronas,
    won Carabobo's project 1.  This includes the blocks C1 North, and
    C1 Central.  According to Ramirez, Repsol's consortium offered a
    bonus of $1.050 billion, $1.0 billion in financing for PDVSA's
    portion of the project, and an upgrader in Soledad.  Ramirez stated
    that this mixed company would also produce up to 480,000
    barrels/day of upgraded petroleum at 22 degrees API.  Repsol's
    proposal included plans to send some of the upgraded petroleum to a
    refinery in Bilbao, Spain and "other plants in other countries."
    Ramirez stated that the mixed company agreements now to be
    negotiated with the two consortia would be sent to the Venezuelan
    National Assembly for approval on March 25.

    CARACAS 00000193  002 OF 003

    ¶4. (U) PROJECT 2: According to Ramirez, the GBRV did not receive
    any offers on project 2 and that it would be up to President Chavez
    whether Venezuela would develop it on its own or put it back out to
    bid in the future.

    ¶5. (C) BONUS?: Chevron's consortium offered the minimum bonus for
    project 3 (the other two projects had a minimum bonus of $1
    billion).  Repsol's consortium offered $50 million more than the
    minimum bonus payment.  Given that project 3 (Chevron) contained
    three blocks and project 1 (Repsol) contained two blocks, the
    consortia respectively offered $167 million/block and $500
    million/block.  By contrast, in the bilateral deals announced by
    the GBRV for heavy oil projects in the Junin area of the Orinoco
    heavy oil belt, the press has reported that Italy's Eni offered a
    $646 million bonus for Junin 5, PetroVietnam offered a bonus
    between $500 and $600 million, and the Russian oil consortium
    (Rosneft, Lukoil, Gazprom, TNK-BP, and Surgutneftegaz) offered $1
    billion for Junin 6.  Embassy contacts reiterate that, regardless
    of the GBRV announcements, no company has yet made a bonus payment
    to the GBRV.  The Carabobo terms require the first installment of
    the bonus payment 14 days after the mixed company documents are
    approved by the international consortia's boards of directors and
    by the Venezuelan National Assembly.  Thus, the GBRV will not
    receive any bonus funds from the Repsol or Chevron-led consortia
    until the mixed companies have been negotiated and approved.

    ¶6. (C) Mixed Company Formation: On February 11, Chevron President
    for Africa and Latin America Ali Moshiri clarified for the
    Ambassador that the winning consortia had not won blocks or
    projects, but rather the right to negotiate an agreement to form
    mixed companies to produce crude oil.  He described the February 10
    ceremony presided over by President Chavez as a "symbolic event"
    and said that meeting the March 25 deadline for submission of the
    mixed company agreement to the National Assembly would be "magic."
    He noted that on Chevron's part, any agreement would have to be
    approved by its Executive Committee and Board of Directors.  Given
    that its Board of Directors meets monthly, it would be unrealistic
    for Chevron to approve a mixed company deal before March 25.  Many
    unresolved issues remain to be negotiated, including royalty and
    tax rates, windfall profits taxes, shadow tax payments, etc. (see
    Reftel).  The GBRV wants the upgraders constructed in Soledad, but
    Moshiri said that the geographic location of Soledad makes the
    economics of the upgrader untenable.  He noted that he has talked
    to Chavez privately about this issue.

    ¶7. (C) To Bid or Not to Bid:  Lohec described Chevron's basic
    calculus on whether or not to bid on Carabobo as an assessment of
    the likelihood of success in future negotiations with the GBRV.
    Chevron believes "it has a strong hand to play to get to where we
    need to be," said Lohec, a decision that other companies could not
    make.  He added that Chevron is confident it will successfully
    negotiate favorable terms for the formation of a mixed company with
    PDVSA.  Lohec added that MENPET has already agreed to allow the new
    mixed company to lift crude petroleum shipments as dividend
    payments (a scheme Chevron has developed over the past year in its
    mixed company operating PetroBoscan).  He noted that due to the
    phased payment plan for the bonuses, Chevron will only pay MENPET
    $100 million upon signing the documents to form a mixed company and
    that the other four installment payments are linked to project
    milestones, effectively limiting risk exposure.  Lohec underlined
    that the GBRV needs Chevron's expertise because it "is headed down
    a path that is disastrous for them."  In the end, the Venezuelans
    need to produce oil to generate revenue.  Finally, Lohec noted that

    CARACAS 00000193  003 OF 003

    new projects in Iraq likely played into BP and Shell's calculus not
    to bid in Venezuela.  Since Chevron does not have any projects in
    Iraq and is "already big in Venezuela," it decided to continue
    forward here.  Separately, Lohec told Petroleum AttachC) that BP and
    Shell might decide to shut down operations in Venezuela - that it
    all depends on whether limited operations here are profitable or
    not and how long a timeline they are working with, noting that
    Shell usually works with a 20-year timeframe.  Lohec added as an
    aside that Chevron continues negotiations to convert an exploration
    and certification project in the Ayacucho 8 block of the Faja into
    a production expansion adjacent to its current PetroPiar mixed
    company.  [NOTE: Ayacucho 8 does not appear on recent PDVSA maps.
    END NOTE]

    ¶8. (C) Chevron's View on U.S.-Venezuelan Bilateral Relations:
    Moshiri expressed surprise that the Ambassador did not receive an
    invitation to the Carabobo announcement ceremony.  [NOTE:
    Ambassadors or other diplomats from the home countries of the other
    winning oil companies attended the event.  END NOTE] In his opening
    remarks in the televised portion of the event, President Chavez
    stated his desire to establish a dialogue with the U.S.
    administration.  On the margins of the event, he noted to Moshiri
    his desire to see the Houston Astros play in Texas, but added that
    political realities make a visit to the U.S. impossible.  [NOTE: In
    response, Moshiri offered a courtesy invitation for Chavez to visit
    Chevron in Houston.  END NOTE]  Moshiri told the Ambassador that
    Chevron would press the GBRV to extend an invitation to the
    Ambassador to attend any future signing ceremony for the mixed
    company deal.  He also said he would raise the GBRV's failure to
    invite the Ambassador to the Carabobo ceremony the next time he
    spoke with Ambassador Alvarez.  Moshiri noted, however, that he
    believes that Alvarez now has less access to Chavez.  Finally,
    Moshiri said that Alvarez had made it clear that all decisions
    regarding the bilateral relationship with the U.S. are elevated to
    Chavez.  The Ambassador underlined to Moshiri that the USG has made
    every effort to re-establish a dialogue with the GBRV.  In fact, he
    said, the Embassy had been waiting for months for a response from
    the GBRV to Diplomatic Notes responding to GBRV interest in a
    dialogue on energy issues as well as the invitation from Energy
    Secretary Chu to attend the April Energy and Climate Ministerial of
    the Americas.  Moshiri commented that Energy Minister Ramirez would
    not take the risk of responding to these initiatives without a
    decision from Chavez.

    ¶9. (C) Comment: The GBRV and media portrayals of the Carabobo
    ceremony are misleading as no deals were signed.  With the leverage
    the international companies now have in negotiations with the GBRV,
    we would not expect to see any deals signed by late March as the
    companies will take the time they need to secure favorable terms.
    A potential new Chevron deal would solidify its position as the
    GBRV's largest and most important international partner.  Repsol
    has been a relatively minor partner with PDVSA and the Indian
    companies are not currently involved in any projects in Venezuela.
    Their lack of experience raises questions about the potential
    success and ability to move project 1 forward.  In the event that
    new mixed companies are formed, it will be the first time the
    Chavez administration and its Energy Ministry and PDVSA have
    developed, executed, and operated a production project of this
    magnitude.  Many here are skeptical about their ability to do so.
    In the past, Venezuela allowed the major international oil
    companies to engineer, build, and operate the projects.  Since
    nationalization of the sector in 2007, PDVSA has failed to maintain
    and or expand production.  END COMMENT.
    DUDDY

`