VZCZCXYZ0007
RR RUEHWEB

DE RUEHCV #0106/01 0281318
ZNY CCCCC ZZH
R 281318Z JAN 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 2490
INFO RUEHBO/AMEMBASSY BOGOTA 7922
RUEHBR/AMEMBASSY BRASILIA 6090
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 1124
RUEHSP/AMEMBASSY PORT OF SPAIN 3644
RUEHQT/AMEMBASSY QUITO 2938
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUEATRS/DEPT OF TREASURY

C O N F I D E N T I A L CARACAS 000106

SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR RJARPE
COMMERCE FOR 4431/MAC/WH/JLAO

E.O. 12958: DECL: 01/26/2019
TAGS: EPET EINV VE

SUBJECT: VENEZUELA: OPEC CUTS TARGETED AT U.S.
REF: 08 CARACAS 01774

Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b)
and (d).

¶1. (C) SUMMARY: Senior BP and Chevron officials confirmed
that PDVSA is aggressively enforcing OPEC-mandated quota cuts
in the hope that the cuts will turn around the slump in oil
prices. So far, the cuts have been levied on joint ventures
based on the price per barrel received for the crude sales.
The most recent round of cuts reduced production by 189,000
b/d. BP confirmed that the Cerro Negro field is shut in and
does not know when it will be reopened (Note: Cerro Negro
supplies the Chalmette refinery in the U.S.). Both companies
continue to take the long view in Venezuela and hope to win a
concession in the current Carabobo Round, whose timeline,
they concur, will be delayed. Chevron acknowledged that it
had been approached at year end by PDVSA about the
possibility of handling Cuban crude and/or sulfur through
PetroPilar, the former Hamaca Strategic Association. END
SUMMARY

-------------------------
PDVSA ENFORCING OPEC CUTS
-------------------------

¶2. (U) According to a press release dated January 7, 2009
from the Venezuelan Ministry of Energy and Petroleum, the
following OPEC cuts have been enacted:
CUT (b/d) COMPANY PRODUCT PARTNER
DESTINATION

90,000 Petromonagas Monagas 18 BP
U.S.
18,000 Petrolera Sinovensa Merey 16 CNPC
China
13,000 Petrocedeno Zuata Sweet Total/Statoil
U.S.
30,000 Petroboscan Boscan Chevron
U.S.
10,000 Petroregional del Lago BCF 22 Shell
U.S.
6,000 Petroritupano Merey 16 Petrobras
U.S.
8,000 Petrolera Indo Venezolano Merey 16 ONGC
U.S.
5,000 Petroperija Lagotreco BP
Europe
9,000 Petroquirinquire Merey 16 Repsol
U.S.

According to a January 2009 OPEC report, Venezuela's
estimated production in December 2008 was 2,237,000 b/d. The
quota cut of 189,000 represents an eight per cent reduction
in Venezuelan production.

¶3. (C) During introductory meetings for newly arrived
Petroleum AttachQ (PetOff), EconCon and PetOff met with XXXXXXXXXXXX on January 22
and Managing XXXXXXXXXXXX on January 23. XXXXXXXXXXXX
confirmed that PDVSA had shut-in the field associated with
the PetroMonagas project (formerly the Cerro Negro Strategic
Association) on January 1 and had not indicated how long the
shut in would last (NOTE: According to XXXXXXXXXXXX, Cerro Negro was
producing 120,000 b/d.) PDVSA presented the closure as part
of OPECQ,s quota cuts for Venezuela and had also declared
force majeure regarding its supply contracts with the Sweeney
and Chalmette refineries in the United States. (NOTE: The
Chalmette refinery was originally a joint venture between
ExxonMobil and PDVSA which was designed to take the upgraded
Cerro Negro crude for further refining. PDVSA cut off
deliveries to Chalmette in early 2008 following legal actions
taken by ExxonMobil to freeze PDVSA assets in Europe. Other
industry sources tell us that following an unsuccessful
attempt to market the Cerro Negro crude as Q&Monagas 18,Q8
PDVSA resumed shipping to ExxonMobil in September 2008.)

¶4. (C) XXXXXXXXXXXX confided that BP was provided advance notice of
the shut-in but not the exact date the field would be closed.
The field was shut-in in a safe and efficient manner and
XXXXXXXXXXXX believes that they will be able to bring it back
on-line operationally without significant difficulty. He
did, however, express some concern that, depending on the
length of the shut-in, there could be questions about the
operation of down hole equipment and the overall effect on
the reservoir. BP estimates that they have to date recovered
2-2.5% of the Cerro Negro reserves.

¶5. (C) XXXXXXXXXXXX confirmed that PetroBoscan had also
taken a 30,000 b/d cut. This was the second round of cuts at
PetroBoscan. The September 2008 cuts at PetroBoscan reduced
production from 110,000 b/d to 60,000 b/d (Reftel) while this
cut would supposedly reduce production to 30,000 b/d. XXXXXXXXXXXX
added that PetroBoscan has two main flow stations and that
Chevron had believed that they would have to shut one down
due to the cuts, a major concern. However, PDVSA had since
requested that PetroBoscan increase production to 40,000 b/d
and the company has been able to keep both flow stations
operational (Note: This will help the field increase
production more rapidly in the future). XXXXXXXXXXXX noted that
production levels at PetroPilar (formerly the Hamaca
Strategic Association) continue at 135,000 b/d following
repairs to its upgrader sulfur units. While PetroPilar could
return to 170,000 b/d he indicated that PDVSA was holding
back the increase and was bringing in its own heavy Morichal
crude to be upgraded.

6.(C) XXXXXXXXXXXX agreed that PDVSA is taking steps
publicly to demonstrate its adherence to the ordered OPEC
quota cuts. XXXXXXXXXXXX commented that 80 percent of the cuts had
been levied on PDVSA,s joint ventures (which account for 25
percent of total Venezuelan production). XXXXXXXXXXXX observed that
PDVSAQ,s request that PetroBoscan increase production by
10,000 b/d indicates that they are closely following
production and are attempting to maintain current production
levels when other fields go off-line. It is unclear whether
the current cuts will continue on a quarterly basis or for
the entire year. While both XXXXXXXXXXXX agreed that the cuts have
been made based on the price per barrel received for the
crude sales, i.e., targeted on heavier crudes, XXXXXXXXXXXX
hypothesized that PDVSA is restricting output to the U.S.
market as it perceives this as having the most leverage on
global oil prices. PetroBoscan has a long term contract to
provide U.S. company NuStar Energy with 40,000 b/d.

¶7. (C) When asked about conflicting press reports about the
numbers of rigs operated at PetroBoscan, XXXXXXXXXXXX shared that
PDVSA is sensitive on the question of how many rigs are
operating from an employment perspective. Chevron currently
has two drilling rigs operating at PetroBoscan but three of
six work-over service rigs are shut down. XXXXXXXXXXXX expects that
one of the two drilling rigs will shut down in the next
couple of weeks if current conditions continue.

--------------------------------------------- -
A TALE OF TWO JOINT VENTURES AND ONE BID ROUND
--------------------------------------------- -

¶8. (C) XXXXXXXXXXXX stated that BP received $100 million in
dividends from PDVSA in 2008 (the last dividend received came
in October) and that BP is satisfied with the revenue flow.
Additionally, PDVSA has made good faith efforts in the
nationalization of BPQ,s downstream assets (130 service
stations). On the other hand XXXXXXXXXXXX noted that the service
companies are not faring well and that PDVSA is using
payments to the service companies as a Q&clubQ8 to ensure
cooperation as well as to force re-negotiation of service
contracts negotiated during the past two-three years. In
contrast, XXXXXXXXXXXX noted that dividend payments for PetroBoscan
are lagging by Q&a few hundred million dollars.Q8 Chevron
last received a dividend payment in the first half of 2008.
In comparison, however, they receive regular dividend
payments from PetroPilar.

¶9. (C) In discussing their companies, continued interest in
the upcoming Carabobo heavy oil bid round, XXXXXXXXXXXX and
XXXXXXXXXXXX agreed that the bid deadline is likely to slip, but the
process has been managed well to date. XXXXXXXXXXXX indicated that
the PDVSA directors managing the concession round are proving
to be resourceful and flexible and that XXXXXXXXXXXX is seeing greater
personnel stability at PDVSA which has made it easier to
build business relationships and improved communication. The
PDVSA directors have not, however, responded to some seven
hundred questions from industry on the Carabobo Round. Both
XXXXXXXXXXXX agreed that the answers to those questions included a
number of issues which would be critical to bid formulation.
XXXXXXXXXXXX indicated that given the current investment climate,
industry is looking for flexibility in the royalty law,
securing good cash flows upfront (to fund the upgrader), and
greater flexibility on dilutant sourcing, transportation, and
marketing. Reflecting back on the Cerro Negro shut-in, XXXXXXXXXXXX
and other oil sector experts opined that the OPEC-production
cuts (about 80 percent of which have been levied on joint
ventures with foreign partners) risk sending a negative
message to the same investors PDVSA is attempting to court in
the Carabobo Round.

------------------------
TRYING TO MOVE CUBAN OIL
------------------------

¶10. (C) When asked about recent rumors that PDVSA might seek
to upgrade heavy Cuban crude in one of the four former
Strategic Association upgraders, XXXXXXXXXXXX noted that PDVSA
approached Chevron in later November to early December 2008
to discuss upgrading Cuban crude at PetroPilar. After
refusing the request, the Venezuelan's asked whether they
would stockpile Cuban sulfur with PetroBoscan sulfur. While
Chevron has been adamant at refusing any and all Cuban
products, XXXXXXXXXXXX thought it was a situation that needed
monitoring (especially in the 100% PDVSA-owned blocks). At a
separate meeting of oil industry experts on January 27,
EmbOffs learned that PDVSA has appointed a refinery manager
responsible for coordination of all four of the upgraders.
While this enables PDVSA more efficiently to manage upgrader
operations, it might also provide an opportunity for PDVSA to
introduce Cuban products into the process.

-------
COMMENT
-------

¶11. (C) Faced with low global oil prices, Venezuela is
anxious to appear to be making its assigned OPEC production
cuts and may have targeted oil destined for the U.S as the
most expeditious way to bolster world prices. However,
Venezuela needs the Carabobo Round to be a success and is
unlikely to take further action to aggravate relations with
interested IOCs.
CAULFIELD