VZCZCXRO0966
RR RUEHDE
DE RUEHCV #1314/01 1831158
ZNY CCCCC ZZH
R 021158Z JUL 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9142
INFO RUEHHH/OPEC COLLECTIVE
RUEHAC/AMEMBASSY ASUNCION 0836
RUEHBJ/AMEMBASSY BEIJING 0340
RUEHBO/AMEMBASSY BOGOTA 7396
RUEHBR/AMEMBASSY BRASILIA 5946
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RUEHLP/AMEMBASSY LA PAZ 2539
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RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHAAA/WHITEHOUSE WASHDC
RHEBAAA/DEPT OF ENERGY
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RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 001314 
 
SIPDIS 
 
SIPDIS 
 
ENERGY FOR CDAY AND ALOCKWOOD 
NSC FOR DTOMLINSON AND JSHRIER 
 
E.O. 12958: DECL: 01/12/2017 
TAGS: EPET ENRG EINV ECON VE
SUBJECT: CHEVRON, EXXON, AND CNPC COMMENT ON RECENT EVENTS 
 
REF: A. CARACAS 1281 
 
     ¶B. 2005 CARACAS 2944 
     ¶C. CARACAS 1197 
     ¶D. CARACAS 526 
 
Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) 
 
¶1. (C) SUMMARY: Chevron claims the final deal to migrate the 
Hamaca strategic association to a joint venture was a good 
one from its perspective.  The project's area was not reduced 
and Chevron personnel will occupy key posts in the new joint 
venture.  In addition, all investment decisions require 100% 
board approval and a 25 year business plan is in place. 
Chevron is concerned that a vacuum in the Venezuelan 
hydrocarbon sector will be filled by Russian and Chinese 
companies.  ExxonMobil (XM) will have all of its staff out of 
Venezuela by September.  CNPC confirmed that it did not reach 
a deal with the BRV over migrating Sinovensa to a new joint 
venture. 
 
------------------------------------------- 
CHEVRON: VENEZUELA TOO IMPORTANT TO ABANDON 
------------------------------------------- 
¶2.  (C) Chevron Latin America president Ali Moshiri (strictly 
protect throughout) met with the Ambassador on June 28 at 
Moshiri's request to discuss the terms of the migration of 
the Hamaca strategic association to a PDVSA-controlled joint 
venture (Reftel A).  Moshiri began the meeting by stating 
Chevron decided to stay because "it didn't want to lose 
barrels."  When asked by the Ambassador how the departure of 
XM and ConocoPhillips (CP) would affect Chevron, Moshiri 
replied that Chevron was concerned that the Russians, 
Chinese, and Iranians would fill the vacuum created by their 
departure.  He noted the strategic association upgraders were 
complicated but that the state oil companies could run them, 
albeit in an inefficient manner.  He added Chevron was not 
going to let a place with so much oil exist without a U.S. 
flagged oil company.  Moshiri noted later in the conversation 
that Chevron's 30% equity stake in the new joint venture was 
a "lot of profit."  He also pointed out that 125 to 130,000 
barrel a day production was hard to come by anywhere else in 
the world. 
 
¶3.  (C) Moshiri said the BRV has been consistent throughout 
the migration process.  It did not want to have three U.S. 
oil companies in Venezuela, only one.  He stated the real 
issue in the migration process was ownership of equity rather 
than supply.  The issue for Chevron was security of access to 
resources.  (COMMENT:  To his credit, Moshiri told us in 2005 
that he believed the BRV only wanted one or two American oil 
companies in Venezuela (Reftel B).  We noted at the time that 
Moshiri was positioning Chevron to be one of the remaining 
companies.  Former PDVSA board member Jose Toro Hardy agreed 
with Moshiri's analysis at the time.  END COMMENT) 
 
--------------- 
CHEVRON'S TERMS 
--------------- 
 
¶4.  (C) Moshiri claimed Chevron received "fantastic" terms 
for the migration of the Hamaca strategic association to a 
PDVSA-controlled joint venture.  He claimed the area for the 
joint venture was the same.  He said Chevron had the right to 
blend crude and that the marketing of the crude was "under 
control."  He added Chevron just kept what it had and "could 
have had more". 
 
¶5.  (C) When the Ambassador queried him about the joint 
venture's governance structure, Moshiri replied that all of 
 
CARACAS 00001314  002 OF 004 
 
 
the jobs in the new joint venture were allocated.  The joint 
venture's general manager of operations will be a Chevron 
employee and he "will run the show."  He noted Chevron built 
the Hamaca upgrader and that it would run things but could 
not say so openly.  Moshiri also made a point of stating a 
Chevron employee would handle the joint venture's finances as 
is the case in the Petroboscan joint venture.  He later added 
that Chevron made sure the deal included a transportation 
agreement that would allow Chevron to know where the crude 
was being marketed. 
 
¶6.  (C) When asked about the governance structure and future 
investment in the joint venture, Moshiri said all investment 
decisions would require 100% board approval.  He also stated 
Chevron clearly told the BRV that if its share in the joint 
venture fell below a certain level of equity, it would leave. 
 In addition, a 25 year business plan is in place.  Moshiri 
claimed the joint venture could not deviate from the business 
plan.  According to Moshiri, the plan calls for a flat rate 
of recovery.  When asked about BRV claims that recovery rates 
at the four Faja projects would be increased to 20%, Moshiri 
replied that the Hamaca business plan does not call for steam 
injection or an increased recovery rate.  He also claimed the 
BRV was not looking over Chevron's shoulder due to the fact 
that it had a full plate and was unsophisticated.  He claimed 
President Chavez thought the entire migration process was 
completed on May 1 when PDVSA took over operational control 
of the strategic associations.  He said that as long as 
Chevron kept its equity, it would have no reason to leave 
Venezuela. 
 
----------------------------- 
CHEVRON'S VIEWS ON THE FUTURE 
----------------------------- 
 
¶7.  (C) The Ambassador then asked Moshiri for his views on 
the medium to long-term viability of PDVSA.  Moshiri replied 
that there were two basic parts to PDVSA: the first carries 
out PDVSA's operations and the second handles relations with 
the private sector via joint ventures.  Moshiri stated 
PDVSA's operating entity, headed by PDVSA vice president Luis 
Vierma, was collapsing.  Moshiri noted that Chevron was 
better off after the migration of its Boscan field to a joint 
venture because under the operating service agreement Chevron 
had to deal with the operating wing of PDVSA since it was 
basically a contractor.  After the Hamaca migration, Chevron 
will only deal with CVP, the PDVSA entity that deals with 
international and state owned oil companies that invest in 
Venezuela. 
 
¶8.  (C) Despite his belief that PDVSA's own operations will 
eventually collapse, Moshiri said he does not believe the 
joint ventures would fail.  He said there would be five major 
joint ventures in Venezuela: the four created from the 
strategic associations and Petroboscan.  Since the joint 
ventures are equity companies, the partners would not have to 
invest anything in them.  The joint ventures would sell oil 
and pay dividends to the partners.  The partners would not 
have to put in more capital and if the joint ventures had a 
shortfall, they would have to take out loans.  Moshiri also 
pointed out that Chevron's stake in the joint ventures was 
relatively small. 
 
¶9.  (C) Moshiri stated the next step in the formation of the 
joint ventures was approval by the National Assembly.  He 
thought approval would come between July 26 and August 26. 
Following approval by the National Assembly, a presidential 
decree will be issued.  Moshiri thought it would take an 
additional two months for the decree. 
 
CARACAS 00001314  003 OF 004 
 
 
 
¶10. (C) Moshiri stated he believes production in the Faja 
over the next two years will not decrease significantly in 
quantity but perhaps in quality.  He thought production would 
decrease by 10% in volume terms due to inefficiency but by 
25% in terms of value.  For example, he stated Hamaca 
currently produces 26 API oil but that its API could fall to 
22 if it did not reprocess crude but merely sold it on the 
open market.  He said the upgraders could become blending 
facilities in the future. 
 
¶11.  (C) Moshiri ended the meeting by expressing concern once 
again about the vacuum caused by the departure of XM and CP. 
PDVSA currently has a 100% stake in Petrozuata, a 72% stake 
in Cerro Negro, and a 70% stake in Hamaca.  It has publicly 
stated all along that it only wanted a 60% stake in the joint 
ventures.  PDVSA does not have the human capital and 
technology needed for the projects.  As a result, it may look 
for new investors in the upgraders.  Moshiri stated Chevron 
may increase its equity stake in the Faja if it appeared that 
a state oil company was going to take a stake.  Chevron does 
not want to be in the position of dealing with two 
governments, the BRV and the government of the state oil 
company.  Moshiri noted Chevron would be at a disadvantage to 
a state oil company since the company's government could 
package oil investment with other types of economic and 
political deals.  Moshiri also stated it was possible that 
smaller U.S. players may take stakes in the upgraders. 
 
¶12.  (C) COMMENT: We are not as concerned about state oil 
companies filling the vacuum left by CP and XM as Moshiri is. 
 As noted in Reftel C, the Chinese have not been particularly 
keen about increasing their investment in Venezuela.  As 
discussed in paragraph 14, CNPC failed to sign a conversion 
agreement.  We have also seen little sign of any significant 
investment on the part of the Russians or Iranians.  Finally, 
we find it hard to believe that any oil company would take a 
stake in Cerro Negro, Petrozuata, or Hamaca if those assets 
were subject to arbitration claims by XM or CP.  However, we 
continue to have concerns that PDVSA may attempt to run Cuban 
crude through one or more of the refineries (Reftel D).  END 
COMMENT. 
 
--------- 
XM: ADIOS 
--------- 
¶13.  (C) Petroleum Attache (Petatt) met with XM executives on 
June 29 to discuss XM's schedule for withdrawal.  The 
executives stated XM's technical service agreement would end 
on June 30.  The 20 XM staff members working in Cerro Negro 
under the agreement have for all intents and purposes already 
been withdrawn.  An operations executive stated calls from 
PDVSA requesting assistance declined dramatically after June 
¶26.  However, he said he received a call the evening of June 
28 requesting assistance with batching.  According to the 
executives, current production at Cerro Negro is roughly 
80,000 barrels per day with a syncrude production of 
approximately 60,000.  Production levels are low due to 
on-going repairs in the upgrader's cracker drums.  The 
repairs were supposed to have been carried out during the 
upgrader's scheduled maintenance but were not carried out in 
time. 
 
¶14.  (C) XM will have all of its personnel out of Venezuela 
by September 1.  XM Venezuela president Tim Cutt departed 
Caracas the morning of June 29.  There are currently 8 expat 
employees, 48 Venezuelan employees scheduled for placement 
worldwide, and 24 Venezuelan employees that will be released. 
 By the end of July, the numbers will be 2 expats, 20 
 
CARACAS 00001314  004 OF 004 
 
 
Venezuelans awaiting reassignment, and 19 that will be 
released.  The numbers will fall to 1 expat, 2 employees 
awaiting reassignment, and 16 awaiting termination by the end 
of August.  Employees in Venezuela will not be involved in 
compensation negotiations but will merely focus on winding up 
XM operations. 
 
----------------- 
CHINESE MYSTERIES 
----------------- 
¶15.  (C) As reported in Reftel A, due to Energy Minister 
Ramirez' convoluted statement, it was not clear if CNPC had 
reached an agreement with the BRV regarding the migration of 
Sinovensa, its former Orimulsion investment, to a joint 
venture.  CNPC vice president Jinling Zhang told Petatt on 
June 27 that CNPC had signed a memorandum of understanding 
with PDVSA stating that the parties would continue 
negotiating on the migration.  Zhang ended the conversation 
by stating "If we don't like it (PDVSA's offer), then we will 
refuse it".  (COMMENT: The BRV, to a certain extent, has been 
hoisted on its own petard.  After spending enormous amounts 
of time and effort advertising the fact that it was seeking a 
special relationship with China and viewed a partnership with 
China as a valuable hedge against the United States, it would 
be highly embarrassing for the BRV if a Chinese state oil 
company publicly exited Venezuela.  We believe this point has 
not been lost on CNPC.  END COMMENT) 
 
¶16.  (C) As noted in Reftel A, industry insiders were 
somewhat confused by the nature of Sinopec's investment in 
Venezuela.  According to a report authored by local analysts, 
Sinopec will be investing in the Posa field, which was part 
of Golfo de Paria Oeste.  The BRV apparently split the Posa 
field off from Golfo de Paria Oeste and the field is now know 
by its own name.  It is still not clear what decision OPIC 
Karimun, a Taiwanese company, took regarding migration.  The 
company held a 6.5% stake in Golfo de Paria Oeste with CP and 
Eni and a 7.5% stake with them in the Golfo de Paria Este 
field. 
 
 
BROWNFIELD