Cablegate: Venezuela: Bp and Statoil Insights Into the Carabobo Bid

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E.O. 12958: DECL: 2020/02/24
TAGS: EPET EINV ENRG ECON VE
SUBJECT: Venezuela: BP and Statoil Insights into the Carabobo Bid
Round and Production Updates

REF: 10 CARACAS 9; 10 CARACAS 11; 10 CARACAS 137; 10 CARACAS 147
10 CARACAS 193

CLASSIFIED BY: Darnall Steuart, Economic Counselor, DOS, Econ;
REASON: 1.4(B), (D)

1. (C) SUMMARY: The lack of infrastructure development in the area
of the Faja heavy oil belt projected for development under the
Carabobo bid round projects as well as PDVSA's failure to clarify
the bidding terms and conditions contributed to BP and Statoil
decisions not to submit bids for one of projects. Statoil remains
committed to securing a long-term project in the Junin region of
the Orinoco heavy oil belt; its heavy oil upgrader has been out of
service since late 2009. BP believes Petromonagas and other oil
fields may eventually be shut-in because of the current electricity
crisis. Both companies report that PDVSA CVP (the PDVSA division
that manages all mixed company enterprises) has become more willing
to discuss the mixed company model with its private sector partners
and has asked for procurement assistance from its international oil
company (IOC) partners. END SUMMARY.

2. (C) CARABOBO BID ROUND: On February 5, EconCoun and Petroleum
AttachC) (PetAtt) met with BP President for Venezuela and Colombia
Joe Perez (protect throughout). (Note: Perez discovered
immediately following this meeting that he would be transferred to
Alaska after 13 years in Venezuela. End Note) PetAtt met
separately with Statoil Venezuela President Anders Hatteland and
Vice President for Business Development Arnfinn Jenset on February
22. Perez maintained that BP had been prepared to submit a
Carabobo bid up until two days before the January 28 deadline.
Until January 26, BP continued to seek last minute clarification
and changes to certain terms and conditions, such as the shadow tax
rate and the requirement to pay the windfall profit tax on oil
production to the GBRV in the form of royalty payments. BP also
evaluated the difference in risk between greenfield project
development in Venezuela's Faja region versus new project
development in Iraq where the infrastructure has already been
built. Hatteland stated that Statoil's opportunities in Iraq were
not a factor in its decision not to bid on Carabobo. He expressed
disappointment and surprise that Chevron and Repsol-led consortia
submitted Carabobo bids, believing that a universal failure to bid
would have forced the Ministry of Energy and Petroleum (MENPET) to
revise the terms and conditions. He was specifically upset with
the Chevron bid more than that of Repsol, as he believed it
appeared to provide a degree of credibility to the GBRV that is not
warranted. According to Hatteland, Statoil decided "some time ago"
that it would not submit a bid, primarily due to the windfall
profit tax law. He stated that CNPC and Total had also decided
"well ahead of the deadline" not to bid on a Carabobo project. He
claimed that a revision of the windfall profit tax would have
yielded terms and conditions acceptable for Statoil. Hatteland
expressed doubt that the Repsol-led consortium has the technical
expertise and experience to execute a greenfield Carabobo project.

3. (C) PDVSA SHOWS NEW INTEREST IN DISCUSSING THE MIXED COMPANY
MODEL: Perez also reported that, on February 11, the Venezuelan
Association of Hydrocarbon Producers (AVHI by its Spanish acronyms)
would host a seminar on the mixed company model for PDVSA Vice
President Eulogio Del Pino and other PDVSA CVP board members.
Perez stated that Del Pino's approach to the mixed company partners
had changed over the last couple of months and he requested that
AVHI host a seminar for "decision makers" to review the execution
of the mixed company model. Perez underlined that, in the past,
Del Pino has refused to meet with the IOCs as a group to discuss
this important topic. AVHI participants included Chevron Latin
America Business Unit president and current AVHI president Wes

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Lohec, Perez in his capacity as AVHI vice president for heavy oil,
AVHI vice president for natural gas and Repsol Venezuela Director
Ramiro PC!ez, and Statoil's Hatteland in his capacity as AVHI vice
president for light oil as well as AVHI Executive Director Luis
Xavier Grisanti. Hatteland noted that this was the first time Del
Pino had agreed to meet collectively with the IOCs since the 2007
migration of the strategic associations to PDVSA-led mixed
companies. He indicated that the meeting itself was a good sign
and that Del Pino had expressed interest in "fixing the model."
[NOTE: Hatteland left the meeting an hour early and has not seen
the minutes to confirm what, if any, action items were agreed upon.
END NOTE]

4. (C) PDVSA'S REQUESTS FOR PROCUREMENT HELP: Perez explained that
PDVSA CVP's new attitude towards its minority partners included
requests for procurement assistance. He gave as an example the
lack of drill pipe availability in Venezuela. Rather than work
through PDVSA's procurement division, PDVSA CVP asked BP to procure
this basic industry input through its international supply chain.
Perez stated that BP is reviewing whether it can legally provide
this service under Venezuela's various public bid and contracts
laws. This arrangement would allow PDVSA to avoid lengthy
procurement timelines and processes, including the foreign exchange
bottleneck. Perez noted that he believed that PDVSA had requested
Chevron to provide procurement assistance three to four months ago
when it initiated a maintenance turn-around (a temporary shutdown)
of the PDVSA-Chevron joint venture PetroPiar heavy oil upgrader.
In order to return the upgrader to operational status and not face
a lengthy shutdown, PDVSA needed to secure parts and material from
international markets. Hatteland confirmed that Statoil has agreed
to provide procurement assistance to PDVSA and commented that PDVSA
is in serious trouble if it cannot buy basic petroleum sector
supplies.

5. (C) PRODUCTION CHALLENGES: Perez provided several examples of
the on-going challenges confronted in the Venezuelan petroleum
industry. He noted that PDVSA recently had removed gas compressor
units from the PDVSA-BP mixed company-operated Boqueron oil field
for use elsewhere in Eastern Venezuela, thus limiting the amount of
natural gas that could be reinjected into the oil field. In
October 2009, a BP proposal to install a 100 MW electricity
generating plant, a $150 million investment, to service
Petromonagas' Jose upgrader and its related oil fields was rejected
by the PDVSA members of the Petromonagas board of directors.
[NOTE: Venezuela is in the midst of an electricity crisis and many
of its oil fields rely on the national electricity grid. See
reftels. END NOTE] The PDVSA board members told BP that some oil
fields would be shut-in as a result of the electricity crisis and
thus, the timing of this proposal did not make sense. [NOTE: As a
result of OPEC quota reductions, the Petromonagas project was
shut-in for the first half of 2009. See reftel. END NOTE] More
generally, Perez observed that with a 16% natural declination rate
in the Faja, PDVSA required a permanent drilling program just to
maintain production levels. He indicated that in the Petromonagas
field, in a prime location in the Faja, that would equate to
completing 18 new wells per year while Petrocedeno (a PDVSA mixed
company with Statoil and Total), would require 80 new wells per
year. Perez avoided speculating on how much crude oil Venezuela
might produce at the end of 2010. He noted however, that current
Faja productions costs, from well bore to tanker, amount to
$4/barrel, suggesting that PDVSA's problems are a result of
mismanagement and not a lack of oil revenues.

6. (C) Hatteland confirmed that PDVSA recently broke off

CARACAS 00000225 003 OF 003

negotiations for the formation of a mixed company to produce crude
petroleum in the Junin 10 block of the Orinoco heavy oil belt. He
stated that Statoil is committed to a long-term project in Junin,
but not at any price or under any conditions and shared that a
bonus payment was only one of the unresolved issues that led to the
impasse. Statoil believes that PDVSA is stretched thin with the
negotiations to form the Carabobo mixed companies and with
negotiations with the Chinese and the Russian consortium for other
Junin block projects, but that the Venezuelan oil company will
re-engage with Statoil. Hatteland confirmed that the upgrader for
Statoil and Total's existing Faja mixed company, Petrocedeno,
located in the Jose petroleum condominium, had been out of service
due to maintenance issues since October 31, 2009 and that it was
just now being brought back on-line. He noted however, that the
upgrader would not produce any "quality product for at least a
year." PDVSA had agreed to several management and operations
changes (NFI) proposed by Statoil and Total that Hatteland believes
will help the mixed company recover.

7. (C) COMMENT: Venezuela's economy and government spending depend
on oil revenues. As the electricity crisis develops, any reduction
in the production of crude petroleum will reduce government
revenues. Perez' accounts of events such as the cannibalizing of
gas compressors from installations for use elsewhere and
procurement problems, all indicate PDVSA will find it difficult to
maintain current production levels. The additional texture
provided by BP and Statoil concerning the Carabobo bid round
underscores how the IOCs approach the Venezuelan situation
differently, while all are trying to manage the same types of
political risk. CVP's changed attitude towards its minority
partners is a good sign, albeit late, but one that suggests PDVSA's
problems are significant. END COMMENT.
DUDDY

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