VZCZCXYZ0008
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DE RUEHCV #0136/01 0341243
ZNY CCCCC ZZH
R 031243Z FEB 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 2521
INFO RUEHBO/AMEMBASSY BOGOTA 7927
RUEHBR/AMEMBASSY BRASILIA 6093
RUEHLP/AMEMBASSY LA PAZ FEB LIMA 1127
RUEHSP/AMEMBASSY PORT OF SPAIN 3648
RUEHQT/AMEMBASSY QUITO 2941
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL

C O N F I D E N T I A L CARACAS 000136

SIPDIS

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

E.O. 12958: DECL: 01/29/2019
TAGS: EPET EINV VE
SUBJECT: VENEZUELA: SERVICE COMPANIES FEEL THE PINCH

REF: A. (A) 08 CARACAS 1757 B. (B) CARACAS 106

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

¶1. (C) SUMMARY: PDVSA,s cash shortage is exacting an increasingly heavy burden on oil services companies. As reported in the press, Ensco and Helmerich& Payne have already chosen to cease certain drilling operations. Ensco has allowed PDVSA to operate its rig while negotiating quietly for outstanding payments. None of the service companies appears to be spared, though the smaller companies are finding the financial pressure more threatening than the larger service companies. PDVSA is reportedly most concerned about maintaining oil sector employment prior to the February 15 constitutional referendum. A respected local consulting firm states that PDVSA,s unpaid debt to its contractors and suppliers could total close to $12.5 billion by the end of January. Faced with increased pressure from service companies announcing cessation of operations based on PDVSA,s outstanding debt, Oil and Energy Minister Rafael Ramirez announced February 1 that Venezuela would start paying off its accumulated debt on February 2 and would start re-negotiating service company contracts &to adjust for current market conditions.8 END SUMMARY.

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DRILLING RIGS OUT OF SERVICE
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¶2. (C) During recent meetings with petroleum industry and financial market experts, EconCon and Petroleum Attache (PetAtt) heard from all parties that oil sector service companies are facing severe financial difficulties due to PDVSA,s failure to make payments for the last three to five months. Following press reports the week of January 26 that PDVSA had seized an Ensco drilling rig, PetAtt contacted XXXXXXXXXXXX, who confirmed that Ensco had turned over operations of its ENSCO 69 drilling rig to PetroSucre as a result of PDVSA,s failure to pay any invoices from its current contract which commenced in August 2008. Additionally, PDVSA continues to have an outstanding balance on a prior contract, producing a total balance due of approximately $35.5 million. XXXXXXXXXXXX mentioned, however, thatEncso plans to bring its ENSCO 68 drilling rig under contract to Chevron into Venezuela from the Gulf of Mexico within the next two weeks. He is confident that the Chevron will pay its invoices. (NOTE: per Reftel B, Chevron is owed several hundred million dollars by PDVSA and production at PetroBoscan has been reduced due to OPEC-cuts. PetAtt confirmed with senior Chevron and Repsol officials that ENSCO 68 is under contract with them to drill in the Cardon 3 and 4 offshore gas blocks.) XXXXXXXXXXXX concluded by adding that Helmerich& Payne had announced on January 29 that two of its rigs had already ceased operations, another three would probably be taken out of service by the end of February, and the remaining 6 would be idled by the end of July if PDVSA did not pay off its $100 million debt.

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OTHER CRITICAL SERVICES AFFECTED
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¶3. (C) XXXXXXXXXXXX, confirmed on January 29 that PDVSA has not paid its SIMCO affiliate in over five months. (NOTE: SIMCO provides critical water injection services to PDVSA in Lake Maracaibo. XXXXXXXXXXXX underlined that approximately 400,000 b/d of the estimated 700-800,000 b/d of production in Western Venezuela is dependent on SIMCO operations. As reported Reftel A, SIMCO sent a letter of default to PDVSA on December 1 citing numerous contract provisions which the Venezuelans had violated. According to the terms of the contract, PDVSA has 90 days from the date of the default letter to respond although XXXXXXXXXXXX does not expect to receive a response; he anticipates that SIMCO will cease operations in mid-March if no payment is received. XXXXXXXXXXXX underlined his difficult position in Venezuela as the company has six other affiliates in Venezuela and is committed to the long-term here, but the current situation with SIMCO is untenable and leaves them few alternatives. He observed that if XXXXXXXXXXXX ceases operations they will provide PDVSA with counter-arguments that SIMCO has breached its contract and damaged the national patrimony, which will complicate the relationship. XXXXXXXXXXXX added that the company is planning to bring in offshore dollars to meet its financial commitments but that this cannot continue indefinitely with respect to SIMCO. He opined that it would be best for the company if PDVSA took over SIMCO operations.

¶4. (C) XXXXXXXXXXXX also informed Econoffs that PDVSA had convened a meeting on January 24 with other service contractors in Maracaibo, and particularly the companies that provide critical launch services. According to XXXXXXXXXXXX, PDVSA,s first questions were whether the service companies were going to cease operations or whether their workers were going to strike. While PDVSA offered to pay salaries if the companies provided an itemized staff and salary list (which most companies are loathe to do), PDVSA did not offer to pay other operational expenses. XXXXXXXXXXXX underlined that PDVSA appears very sensitive to any possible loss of employment during the run-up to the February 15 constitutional referendum. He also shared a rumor that President Chavez is interested in shutting down local service companies which might have been a source of funding to the opposition during the November 2008 elections. He added that, in the case of two privately-held Venezuelan service companies in Maracaibo which are owed a combination of $260 million, it is speculated that Chavez has a personal interest in taking them over.

¶5. (C) Following our discussions with the XXXXXXXXXXXX, EconCon reached out to XXXXXXXXXXXX which, through its XXXXXXXXXXXX subsidiary, provides equally critical gas injection services to PDVSA in eastern Venezuela. On January 30, XXXXXXXXXXXX informed us that PDVSA has informed XXXXXXXXXXXX that XXXXXXXXXXXX is a favored vendor due to the strategic nature of its services. As a result, XXXXXXXXXXXX is only missing payments since October (and a couple from September) for a total of $50 million; this will reach $70 million very soon. In discussions with other service companies, XXXXXXXXXXXX has learned that others have not been paid since June or July 2008. (NOTE: XXXXXXXXXXXX contacted EconCon on January 30 to report that XXXXXXXXXXXX had been approached by a &PDVSA consultant8 who offered to assist in getting payment. He subsequently sent another message saying that XXXXXXXXXXXX believes the approach was a scam.)

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SUBSTANTIAL DEBT
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¶6. (C) A respected local consulting firm states that PDVSA,s unpaid debt to its contractors and suppliers could total close to $12.5 billion by the end of January. XXXXXXXXXXXX stated that he believes that PDVSA,s outstanding debt to service company giants Schlumberger and Halliburton may top $1 billion. Another oil sector expert informed EconOffs that Schlumberger alone is owed $2 billion. When estimates of PDVSA,s debt to the service companies are combined with its debt to its joint venture partners which will come due in March, it is clear that PDVSA faces a serious problem. In this environment, there are numerous rumors that smaller oil field services companies are closing. XXXXXXXXXXXX, confirmed to Econoffs January 28 that two companies (one local and the other a subsidiary of a multinational) that have contracts with PDVSA had recently approached his firm requesting that BBO find buyers for their assets in Venezuela.

¶7. (U) Faced with increased pressure from service companies announcing cessation of operations based on PDVSA,s outstanding debt, Energy Minister Rafael Ramirez announced on February 1 that Venezuela would starting paying off its accumulated debt on February 2 and would start re-negotiating service company contracts &to adjust for current market conditions.8 PDVSA CFO EudomarioCarruyo told the press that PDVSA seeks to negotiate a 40 percent reduction in contract costs.

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COMMENT
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¶8. (C) PDVSA,s seizure of the Ensco drilling rig has served to bring its cash flow problems even more into the public eye as service companies are forced to decide publicly between creatively maintaining operations with no money and ceasing operations altogether. Given their size and importance in this market, however, the response of Schlumberger and Halliburton to their financial difficulties with PDVSA will be decisive in determining how this situation plays out. In any case, it is unlikely that PDVSA will act forcefully to resolve the situation until after February 15. In the meantime, PDVSA may issue some stopgap payments both to forestall other service companies from going public with their payments problems and from taking any actions which might affect oil sector employment. PDVSA,s use of payments as a club to force the service companies to renegotiate contracts might prove too heavy if they decide simply to cease operations.

CAULFIELD