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### Viewing cable 10CARACAS225, Venezuela: BP and Statoil Insights into the Carabobo Bid

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
10CARACAS225 | 2010-02-24 21:09 | 2011-01-27 21:09 | CONFIDENTIAL | Embassy Caracas

`

    VZCZCXRO2463
    RR RUEHAO
    DE RUEHCV #0225/01 0552115
    ZNY CCCCC ZZH
    R 242115Z FEB 10 ZFF3
    FM AMEMBASSY CARACAS
    TO RUEHC/SECSTATE WASHDC 0509
    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 000225

    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, RCRANDALL, AND LROSSELLO
    OPIC FOR BSIMONEN-MORENO
    AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE
    AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC
    AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA

    E.O. 12958: DECL: 2020/02/24
    TAGS: EPET EINV ENRG ECON VE
    SUBJECT: Venezuela: BP and Statoil Insights into the Carabobo Bid
    Round and Production Updates

    REF: 10 CARACAS 9; 10 CARACAS 11; 10 CARACAS 137; 10 CARACAS 147
    10 CARACAS 193

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

    ¶1. (C) SUMMARY: The lack of infrastructure development in the area
    of the Faja heavy oil belt projected for development under the
    Carabobo bid round projects as well as PDVSA's failure to clarify
    the bidding terms and conditions contributed to BP and Statoil
    decisions not to submit bids for one of projects.  Statoil remains
    committed to securing a long-term project in the Junin region of
    the Orinoco heavy oil belt; its heavy oil upgrader has been out of
    service since late 2009.  BP believes Petromonagas and other oil
    fields may eventually be shut-in because of the current electricity
    crisis.  Both companies report that PDVSA CVP (the PDVSA division
    that manages all mixed company enterprises) has become more willing
    to discuss the mixed company model with its private sector partners
    and has asked for procurement assistance from its international oil
    company (IOC) partners.  END SUMMARY.

    ¶2. (C) CARABOBO BID ROUND: On February 5, EconCoun and Petroleum
    AttachC) (PetAtt) met with BP President for Venezuela and Colombia
    Joe Perez (protect throughout).  (Note:  Perez discovered
    immediately following this meeting that he would be transferred to
    Alaska after 13 years in Venezuela.  End Note)  PetAtt met
    separately with Statoil Venezuela President Anders Hatteland and
    Vice President for Business Development Arnfinn Jenset on February
    ¶22.  Perez maintained that BP had been prepared to submit a
    Carabobo bid up until two days before the January 28 deadline.
    Until January 26, BP continued to seek last minute clarification
    and changes to certain terms and conditions, such as the shadow tax
    rate and the requirement to pay the windfall profit tax on oil
    production to the GBRV in the form of royalty payments.  BP also
    evaluated the difference in risk between greenfield project
    development in Venezuela's Faja region versus new project
    development in Iraq where the infrastructure has already been
    built.  Hatteland stated that Statoil's opportunities in Iraq were
    not a factor in its decision not to bid on Carabobo.  He expressed
    disappointment and surprise that Chevron and Repsol-led consortia
    submitted Carabobo bids, believing that a universal failure to bid
    would have forced the Ministry of Energy and Petroleum (MENPET) to
    revise the terms and conditions.  He was specifically upset with
    the Chevron bid more than that of Repsol, as he believed it
    appeared to provide a degree of credibility to the GBRV that is not
    warranted.  According to Hatteland, Statoil decided "some time ago"
    that it would not submit a bid, primarily due to the windfall
    profit tax law.  He stated that CNPC and Total had also decided
    "well ahead of the deadline" not to bid on a Carabobo project.  He
    claimed that a revision of the windfall profit tax would have
    yielded terms and conditions acceptable for Statoil.  Hatteland
    expressed doubt that the Repsol-led consortium has the technical
    expertise and experience to execute a greenfield Carabobo project.

    ¶3. (C) PDVSA SHOWS NEW INTEREST IN DISCUSSING THE MIXED COMPANY
    MODEL: Perez also reported that, on February 11, the Venezuelan
    Association of Hydrocarbon Producers (AVHI by its Spanish acronyms)
    would host a seminar on the mixed company model for PDVSA Vice
    President Eulogio Del Pino and other PDVSA CVP board members.
    Perez stated that Del Pino's approach to the mixed company partners
    had changed over the last couple of months and he requested that
    AVHI host a seminar for "decision makers" to review the execution
    of the mixed company model.  Perez underlined that, in the past,
    Del Pino has refused to meet with the IOCs as a group to discuss
    this important topic.  AVHI participants included Chevron Latin
    America Business Unit president and current AVHI president Wes

    CARACAS 00000225  002 OF 003

    Lohec, Perez in his capacity as AVHI vice president for heavy oil,
    AVHI vice president for natural gas and Repsol Venezuela Director
    Ramiro PC!ez, and Statoil's Hatteland in his capacity as AVHI vice
    president for light oil as well as AVHI Executive Director Luis
    Xavier Grisanti.  Hatteland noted that this was the first time Del
    Pino had agreed to meet collectively with the IOCs since the 2007
    migration of the strategic associations to PDVSA-led mixed
    companies.  He indicated that the meeting itself was a good sign
    and that Del Pino had expressed interest in "fixing the model."
    [NOTE: Hatteland left the meeting an hour early and has not seen
    the minutes to confirm what, if any, action items were agreed upon.
    END NOTE]

    ¶4. (C) PDVSA'S REQUESTS FOR PROCUREMENT HELP: Perez explained that
    PDVSA CVP's new attitude towards its minority partners included
    requests for procurement assistance.  He gave as an example the
    lack of drill pipe availability in Venezuela.  Rather than work
    through PDVSA's procurement division, PDVSA CVP asked BP to procure
    this basic industry input through its international supply chain.
    Perez stated that BP is reviewing whether it can legally provide
    this service under Venezuela's various public bid and contracts
    laws.  This arrangement would allow PDVSA to avoid lengthy
    procurement timelines and processes, including the foreign exchange
    bottleneck.  Perez noted that he believed that PDVSA had requested
    Chevron to provide procurement assistance three to four months ago
    when it initiated a maintenance turn-around (a temporary shutdown)
    of the PDVSA-Chevron joint venture PetroPiar heavy oil upgrader.
    In order to return the upgrader to operational status and not face
    a lengthy shutdown, PDVSA needed to secure parts and material from
    international markets.  Hatteland confirmed that Statoil has agreed
    to provide procurement assistance to PDVSA and commented that PDVSA
    is in serious trouble if it cannot buy basic petroleum sector
    supplies.

    ¶5. (C) PRODUCTION CHALLENGES: Perez provided several examples of
    the on-going challenges confronted in the Venezuelan petroleum
    industry.  He noted that PDVSA recently had removed gas compressor
    units from the PDVSA-BP mixed company-operated Boqueron oil field
    for use elsewhere in Eastern Venezuela, thus limiting the amount of
    natural gas that could be reinjected into the oil field.  In
    October 2009, a BP proposal to install a 100 MW electricity
    generating plant, a  $150 million investment, to service
    Petromonagas' Jose upgrader and its related oil fields was rejected
    by the PDVSA members of the Petromonagas board of directors.
    [NOTE: Venezuela is in the midst of an electricity crisis and many
    of its oil fields rely on the national electricity grid.  See
    reftels.  END NOTE]  The PDVSA board members told BP that some oil
    fields would be shut-in as a result of the electricity crisis and
    thus, the timing of this proposal did not make sense.  [NOTE: As a
    result of OPEC quota reductions, the Petromonagas project was
    shut-in for the first half of 2009.  See reftel.  END NOTE]  More
    generally, Perez observed that with a 16% natural declination rate
    in the Faja, PDVSA required a permanent drilling program just to
    maintain production levels.  He indicated that in the Petromonagas
    field, in a prime location in the Faja,  that would equate to
    completing 18 new wells per year while Petrocedeno (a PDVSA mixed
    company with Statoil and Total), would require 80 new wells per
    year.  Perez avoided speculating on how much crude oil Venezuela
    might produce at the end of 2010.  He noted however, that current
    Faja productions costs, from well bore to tanker, amount to
    $4/barrel, suggesting that PDVSA's problems are a result of
    mismanagement and not a lack of oil revenues.

    ¶6. (C) Hatteland confirmed that PDVSA recently broke off

    CARACAS 00000225  003 OF 003

    negotiations for the formation of a mixed company to produce crude
    petroleum in the Junin 10 block of the Orinoco heavy oil belt.  He
    stated that Statoil is committed to a long-term project in Junin,
    but not at any price or under any conditions and shared that a
    bonus payment was only one of the unresolved issues that led to the
    impasse.  Statoil believes that PDVSA is stretched thin with the
    negotiations to form the Carabobo mixed companies and with
    negotiations with the Chinese and the Russian consortium for other
    Junin block projects, but that the Venezuelan oil company will
    re-engage with Statoil.  Hatteland confirmed that the upgrader for
    Statoil and Total's existing Faja mixed company, Petrocedeno,
    located in the Jose petroleum condominium, had been out of service
    due to maintenance issues since October 31, 2009 and that it was
    just now being brought back on-line.  He noted however, that the
    upgrader would not produce any "quality product for at least a
    year."  PDVSA had agreed to several management and operations
    changes (NFI) proposed by Statoil and Total that Hatteland believes
    will help the mixed company recover.

    ¶7. (C) COMMENT: Venezuela's economy and government spending depend
    on oil revenues.  As the electricity crisis develops, any reduction
    in the production of crude petroleum will reduce government
    revenues.  Perez' accounts of events such as the cannibalizing of
    gas compressors from installations for use elsewhere and
    procurement problems, all indicate PDVSA will find it difficult to
    maintain current production levels.  The additional texture
    provided by BP and Statoil concerning the Carabobo bid round
    underscores how the IOCs approach the Venezuelan situation
    differently, while all are trying to manage the same types of
    political risk.  CVP's changed attitude towards its minority
    partners is a good sign, albeit late, but one that suggests PDVSA's
    problems are significant.  END COMMENT.
    DUDDY

`