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RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000912 
 
SIPDIS 
 
ENERGY FOR CDAY AND ALOCKWOOD 
NSC FOR JSHRIER 
 
E.O. 12958: DECL: 06/27/2018 
TAGS: EPET ENRG EINV ECON VE
SUBJECT: PDVSA'S MARKETING MESS 
 
REF: A. CARACAS 378 
     ¶B. CARACAS 660 
     ¶C. CARACAS 598 
     ¶D. CARACAS 565 
 
Classified By: Economic Counselor Darnall Steuart for Reason 1.4 (D) 
 
¶1. (C) SUMMARY: PDVSA is not shipping asphalt and other 
products to the U.S., a violation of a supply contract with 
Nustar Refining.  PDVSA has been having problems placing its 
Monagas 18 crude due to its composition.  PDVSA is still 
facing a myriad of problems at its refineries and continues 
to try and increase its crude production.  Rumors abound that 
PDVSA will be buying controlling stakes in major Venezuelan 
service companies. 
 
-------------------------------- 
STILL NO ASPHALT FOR U.S. MARKET 
-------------------------------- 
¶2.  (C) Economic Counselor and Petroleum Attache met with a 
shipping executive and a marketing executive from the private 
sector on June 27 to discuss the current state of PDVSA's 
operations.  The shipping executive began the meeting by 
stating that PDVSA is not honoring a contract to supply 
Nustar Refining with products (asphalt and roofer's flux). 
Nustar purchased Citgo's asphalt refineries in Paulsboro, NJ 
and Savannah, GA in late 2007.  As part of the sale, Energy 
Vice Minister Bernard Mommer negotiated two sales contracts, 
one for crude and a second for products.  (NOTE: Both 
executives stated there are allegations of corruption 
surrounding the contracts due to the nature of the product 
contract terms.  END NOTE).  The shipping executive explained 
that the two asphalt refineries were unable to meet the east 
coast market's demand for asphalt and Citgo imported about 
40% of its asphalt and roofer's flux from Venezuela to meet 
its customers' needs.  As a result, Nustar wanted a products 
contract on top of a contract to provide feedstock to the two 
refineries at the time of purchase. 
 
¶3.  (C) PDVSA has declined to honor the products contract on 
the grounds that the contract was made with the Energy 
Ministry rather than with PDVSA directly.  Since PDVSA is not 
a party to the contract, it is claiming that it is not 
legally binding on PDVSA.  The shipping executive stated his 
company spent USD 700,000 positioning a vessel to begin 
deliveries to Nustar under PDVSA's May shipping schedule only 
to be told that PDVSA would not be honoring the supply 
contract.  The executives also noted that PDVSA's refusal to 
honor the supply contract is consistent with President 
Chavez' January announcement banning Venezuelan asphalt 
exports to the U.S. (Reftel A). 
 
¶4.  (C) The shipping executive noted PDVSA is continuing to 
honor the crude supply contracts with Nustar.  According to 
both executives, PDVSA is shipping Boscan and Bachillero 
crudes from Lake Maracaibo to Nustar. 
 
¶5.  (C)  When asked about asphalt production, the executives 
replied that the domestic market is currently taking about 
4,000 barrels of production per day.  The rest of the 
production is currently being sent to Costa Rica.  The 
shipping executive stated Venezuela is claiming that the 
shipments are part of Petrocaribe despite the fact that Costa 
Rica is not a party to Petrocaribe. 
 
----------------------------------- 
MONAGAS 18: NOT A MARKETING PANACEA 
----------------------------------- 
¶6.  (C) As reported in Reftel B, PDVSA raised the API of the 
Petromonagas upgrader's syncrude from 16 to 18 API as a 
 
CARACAS 00000912  002 OF 003 
 
 
result of ExxonMobil's refusal to accept Petromonagas' 
syncrude at its Chalmette refinery.  When asked about the 
change, the marketing executive stated ExxonMobil's decision 
created serious hardships for PDVSA. Since very few 
refineries are geared to take the 16 API crude, PDVSA quickly 
found itself with a rapidly increasing supply of the 
syncrude.  PDVSA initially stored the crude in the Caribbean 
and then used three small tankers to lighter the crude to a 
VLCC for shipment to China.  Although PDVSA thought that 
increasing the API of the crude to 18 would significantly 
increase its marketability, the shipping executive stated 
that refineries are loath to accept the new crude due to its 
composition. 
 
-------------------------- 
REFINERIES STILL A PROBLEM 
-------------------------- 
¶7.  (C) According to the executives, PDVSA refineries 
continue to suffer from a myriad of problems.  In addition to 
problems with gasoline production outlined in Reftel A, the 
refineries have had problems with their electricity supplies. 
 The nationwide blackout in April (Reftel C) halted 
production at the Bajo Grande refinery.  According to the 
marketing executive, the refinery is still off-line.  In 
addition, the giant Cardon and Amuay refineries in the 
Paraguana peninsula have also suffered from problems with 
their supply of electricity.  Production at Cardon was 
seriously affected when a back-up power system failed to come 
on line during another power outage. 
 
¶8.  (C) Production problems at PDVSA and Citgo refineries 
have resulted in a decision to  market only the refineries' 
actual production rather than going to the market to meet 
shortcomings in supply contracts.  The marketing executive 
stated PDVSA is currently sending four monthly shipments of 
gasoline to the U.S. market, down from six shipments.  In 
addition, aviation fuel production has declined. 
 
----------------- 
SERVICE COMPANIES 
----------------- 
¶9.  (C) When asked about PDVSA's decision to create service 
joint ventures (Reftel D), the marketing executive surprised 
Econoffs by stating PDVSA planned to create the joint 
ventures by purchasing controlling stakes in major local 
service companies Inelectra, Technoconsult, and Otepi.  The 
executive stated the BRV originally wanted a 60% stake in 
each company.  However, it later decided to seek a 100% stake 
in Inelectra due to its prominence in the local market. 
 
¶10. (C) The marketing executive stated Otepi has declined to 
sell out to the BRV but that the other companies are eager to 
do so.  Both executives believe the BRV is willing to pay 
prices that are well above market for the shares.  They 
opined that government officials would receive kickbacks in 
order to turn a blind eye to the inflated valuations.  Given 
the lucrative price for their shares as well as guaranteed 
market share for the resulting joint venture in which they 
would still participate, the local service company owners 
have every reason to sell out to the BRV.  Their employees, 
however, are already looking for new jobs because they assume 
a government takeover would be accompanied by the firing of 
politically suspect employees. 
 
---------------- 
CRUDE PRODUCTION 
---------------- 
¶11.  (C) Both executives were relatively optimistic regarding 
overall crude production.  Although neither of them thought 
Venezuela would significantly increase production in the near 
 
CARACAS 00000912  003 OF 003 
 
 
term, the marketing executive stated PDVSA is gradually 
turning production over to private sector partners.  For 
instance, CNPC's service company affiliate has been given 
operational control of significant fields.  In addition, 
international service company Schlumberger has been quietly 
working to increase its presence in Venezuela and gain 
integrated service contracts that would allow it to control 
operations in major fields.  The marketing executive was 
confident that Schlumberger's efforts would bear fruit in the 
near to medium term. 
 
 
 
DUDDY