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Viewing cable 10CARACAS225, Venezuela: BP and Statoil Insights into the Carabobo Bid

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Reference ID Created Released Classification Origin
10CARACAS225 2010-02-24 21:09 2011-01-27 21:09 CONFIDENTIAL Embassy Caracas
VZCZCXRO2463
RR RUEHAO
DE RUEHCV #0225/01 0552115
ZNY CCCCC ZZH
R 242115Z FEB 10 ZFF3
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 0509
INFO OPEC COLLECTIVE
WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000225 
 
SIPDIS 
ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR MKACZMAREK 
COMMERCE FOR 4332/MAC/WH/JLAO 
NSC FOR DRESTREPO, RCRANDALL, AND LROSSELLO 
OPIC FOR BSIMONEN-MORENO 
AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE 
AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC 
AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA 
 
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 
 
CARACAS 00000225  002 OF 003 
 
 
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