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DE RUEHCV #2450/01 2291836
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FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 5884
INFO RUEHBO/AMEMBASSY BOGOTA 6913
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RUEHZP/AMEMBASSY PANAMA 1093
RUEHQT/AMEMBASSY QUITO 2365
RUEHSG/AMEMBASSY SANTIAGO 3719
RUEHGL/AMCONSUL GUAYAQUIL 0604
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE
RHEBAAA/DEPT OF ENERGY
RUEATRS/DEPT OF TREASURY

UNCLAS CARACAS 002450 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR L/CID/JNICOL AND EB/IFD/OIA/NHATCHER 
 
E.O. 12958: N/A 
TAGS: EINV KIDE OPIC PGOV
SUBJECT: 2006 SECTION 527 REPORT ON INVESTMENT DISPUTES IN 
VENEZUELA 
 
REF: STATE 60294 
 
(1.) The following is the 2006 Section 527 report on 
investment disputes in Venezuela.  Two claims from the 2005 
report have been resolved.  Claimant identities are listed 
separately per reftel instructions. 
 
(2.)  (SBU) RESOLVED CLAIM: 
 
a. Claimant A (Resolved) 
 
b. 2003 
 
c. Case History:  In 2001, Claimant A, an international 
consortium with a 55 percent US share, entered into a 
ten-year contract to operate a key petroleum export terminal 
for Venezuela's state-owned oil company, Petroleos de 
Venezuela (PDVSA).  On December 6, 2002, as a result of 
Venezuela's petroleum strike, Claimant A declared its 
inability to implement the contract due to force majeure. 
Claimant A's employees continued to perform the necessary 
maintenance so that the terminal could be brought back into 
operation quickly once the conditions that necessitated the 
terminal to be shutdown were resolved.  The terminal, 
however, was seized by the BRV on December 15 and Claimant 
A's employees were forbidden access.  Claimant A stated the 
case has been successfully resolved through consensus 
involving both parties.  No significant details on the 
arrangement reached are available as the claimant signed a 
confidentiality agreement with the state-owned oil company 
 
SIPDIS 
Petroleos de Venezuela (PDVSA). 
 
a. Claimant B: 
 
b. 2002 
 
c. Case History:  In 1993, Claimant B entered into a 
long-term relationship with Venezuela's state-owned oil 
company Petroleos de Venezuela (PDVSA) and with 
PDVSA-affiliate CITGO, in which:  (1) Claimant B agreed to 
invest over $1.1 billion to upgrade its refinery to process 
Venezuelan extra-heavy crude, (2) CITGO agreed to contribute 
to the upgrading and purchase the bulk of the refined 
products, and (3) PDVSA committed to supply 230,000 
barrels/day for 25 years.  Two contracts, one signed under 
Venezuelan law and one signed under US law, established this 
relationship.  Claimant B asserts that between April 1998 and 
September 2000, PDVSA, citing BRV commitment to OPEC quota 
cuts, wrongfully declared force majeure and reduced its 
deliveries by as much as 100,000 barrels/day.  This force 
majeure was lifted in October 2000, but in January 2002 PDVSA 
once again informed Claimant B that deliveries would be cut 
because of OPEC quota cuts.  Claimant B attempted to resolve 
the dispute but ultimately filed suit against PDVSA on 
February 1, 2002 before the United States District Court for 
the Southern District of New York, seeking damages and 
specific compliance.  On May 31, 2002, PDVSA filed a motion 
to dismiss Claimant B's suit arguing protection under the 
"Act of State doctrine." 
 
The claimant's attorney reported that the United States 
District Court for the Southern District of New York urged 
the parties to reach an agreement on the case.  The parties 
dismissed the suit from the court with Venezuela agreeing to 
negotiate the sale of its share in the refinery.  On August 
15 2006, Venezuela's Minister of Energy and Mines announced 
an agreement for the Claimant to buy Venezuela's 41.25 
percent ownership participation in the disputed investment. 
Previously, the Venezuelan party stated it would not object 
to the sale to the Claimant if the Claimant matched best 
offer received from third parties.   According to the 
Claimant, the claimant will purchase the Venezuelan party's 
share for approximately USD 2.1 billion.  The main cause of 
this dispute, an oil supply agreement which remained valid 
for 17 years, was terminated and replaced with a 5 year 
agreement with no legal assurance of renewal.  On August 16, 
2006, the Claimant confirmed the agreement. 
 
 
(3.)  (SBU) UNRESOLVED CLAIMS: 
 
a. Claimant C: 
 
b. 2003 
 
c. Case History:  Since 1982, Claimant C, an international 
consortium of investors with a majority US share, has 
invested approximately $60 million in developing a diamond 
concession in Venezuela's Bolivar state.  After extensive 
exploration and evaluation of the asset, Claimant C planned 
to begin mine development in 2003-2004.  However, in 
September 2003, the Venezuelan Ministry of Energy and Mines 
withdrew part of Claimant C's concession, alleging 
non-payment of taxes and failure to comply with other 
obligations.  Claimant C disputes these allegations.  The 
Embassy and U.S. congressional representatives have raised 
the case with the senior BRV offices.  Thus far, there has 
been no return of the concession and four additional 
concessions previously granted to this claimant were 
withdrawn in the first quarter of 2005.  Claimant C sought a 
protective measure before Venezuela's Supreme Court for the 
withdrawal of the concessions.  The request has been 
acknowledged and accepted by the tribunal but there have been 
no significant developments.   Claimaint C reported that it 
is confident that if a decision is reached objectively, the 
company will receive an affirmative finding.  The mining 
reform bill currently under discussion in the National 
Assembly, which calls for the formation of mixed companies in 
the mining sector, is viewed as a positive development by 
Claimant C. 
 
 
a. Claimant D: 
 
b. 1994 
 
c. Case History: Claimant D, an airline, accrued $23 million 
in foreign exchange losses due to actions taken by the 
Central Bank of Venezuela (BCV) before and after a 
devaluation of the currency in 1995.  BCV imposed currency 
controls in 1994, which compelled Claimant D to purchase all 
dollars through the Central Bank.  The official exchange rate 
at that time was 290 bolivars to one dollar. Additionally, a 
1994 presidential decree obligated the Claimant D to sell all 
airline tickets in Venezuela in bolivars, at the official 
rate.  In early 1995, BCV stopped exchanging bolivars for 
dollars for several months immediately prior to a significant 
devaluation of the currency from 290 to 470 bolivars/$1.  The 
claimant maintains that the devaluation resulted in a $23 
million loss to the amount held in escrow.  The claimant 
brought suit against the BRV in July 1996, but the Supreme 
Court of Venezuela dismissed the suit in May 1998.  Claimant 
D resubmitted the case in 1999, and a chamber of the Court 
made a decision against it in March 2003 and additionally 
assessed Claimant D for court costs and all legal fees. 
Claimant D appealed this ruling in 2004. 
 
Claimant D reported it continues to appeal the excessive 
court costs and legal fees associated with the ruling by the 
Supreme Court, but does not contest the Court's ruling.  No 
major developments can be reported. 
 
 
a. Claimant E: 
 
b. 2001 
 
¶C.  Case History:  In 1996, Claimant E and Venezuela's 
state-owned oil company, Petroleos de Venezuela (PDVSA), 
entered into a joint venture agreement.  In 2002, after 
several disagreements between the two parties, Claimant E and 
PDVSA started negotiations to dissolve the joint venture and 
to transfer Claimant E's shares to PDVSA.  This situation was 
exacerbated by the December 2002-February 2003 general 
strike, during which the joint venture company ceased to 
provide services to PDVSA.  In September 2003, Claimant E 
 
filed a claim under OPIC political risk insurance, stating 
its investment had been expropriated.  On February 24, 2004, 
OPIC made a final determination in support of this claim and 
made a final payment to the insured on May 12, 2004. The 
claimant's lawyer reported that OPIC has not pursued the 
claim in Venezuelan court. 
 
 
a. Claimants F1, F2, F3: 
 
b. 2004 
 
c. Case History:  In October 2004, the BRV announced a 
decision to increase royalty payments by the four extra-heavy 
crude oil projects in Venezuela.  Effective immediately, 
royalties were raised from 1 percent to 16.67 percent. 
Claimants F1, F2, and F3 have stakes in three of the four 
projects affected by this decision.  These projects were 
negotiated in the mid-1990's, and as an incentive for the 
investment and risk of the projects, the BRV agreed to take a 
1 percent royalty until the individual projects had recouped 
some multiple of their investment or until nine years had 
passed, whichever came first.  The decision by the BRV 
appears to violate this agreement.  Of the three claimants, 
only Claimant F1 continues to reserve its right to 
arbitration.  Current moves by the Venezuelan government to 
increase its participation and gain a controlling position in 
the extra-heavy crude ventures complicate any arbitration 
filings on the royalty increase. 
 
a. Claimants G1, G2, G3, G4, G5: 
 
b. 2005 
 
¶C. Case History:  Since late 2004, the BRV has taken a number 
of steps to force the oil companies holding Operating Service 
Agreement (OSA) contracts negotiated under a previous 
government in the mid-1990's to convert their assets into 
minority stakes in joint ventures with Venezuela's state oil 
company PDVSA under the 2001 Hydrocarbons law.  These steps 
have included limiting capital expenditure budgets and 
refusal to approve drilling permits.  The national tax 
authority SENIAT has also claimed retroactively that OSA 
companies are production companies rather than service 
companies and were subject to 50 percent tax rates for 
2002-2004 and 66.67 percent for 2001 rather than the 34 
percent business tax rate that had been agreed. Claimants G1, 
G3, G4, and G5 signed transitory agreements to migrate from 
OSAs to joint venture companies.  However, the claimants G1, 
G4, and G5 have not yet signed their mixed company agreements 
setting up the new joint ventures and currently operate in a 
state of legal limbo. Claimant G2 sold its stake in the OSA 
to avoid the consequences of the forced migration.  G3 has 
signed their joint venture agreement and is in the process of 
migrating its assets to the new joint venture. 
 
 
¶4.  (SBU) CLAIMANT ID LIST 
 
Claimant A: Sociedad Williams Enbridge Y Compania (SWEC). 
The SWEC consortium includes the Tulsa-based Williams Company 
(45 percent share); Enbridge Inc., a Canadian firm with a 45 
percent share; and the U.S.-based Northville Industries Inc. 
with a 10 percent share. 
Claimant B: Lyondell Chemical Company 
Claimant C: Guaniamo Mining Company 
Claimant D: American Airlines 
Claimant E: Science Applications International Corporation 
(SAIC) and joint venture company INTESA 
Claimant F1: ExxonMobil 
Claimant F2: ConocoPhillips 
Claimant F3: ChevronTexaco 
Claimant G1: Harvest Resources 
Claimant G2: ExxonMobil 
Claimant G3: ChevronTexaco 
Claimant G4: Andarko Petroleum 
Claimant G5: Williams 
WHITAKER