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Cablegate: 2006 Section 527 Report On Investment Disputes In

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ZNR UUUUU ZZH
R 171836Z AUG 06 ZDK
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 5884
INFO RUEHBO/AMEMBASSY BOGOTA 6913
RUEHLP/AMEMBASSY LA PAZ AUG LIMA 0525
RUEHZP/AMEMBASSY PANAMA 1093
RUEHQT/AMEMBASSY QUITO 2365
RUEHSG/AMEMBASSY SANTIAGO 3719
RUEHGL/AMCONSUL GUAYAQUIL 0604
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE
RHEBAAA/DEPT OF ENERGY
RUEATRS/DEPT OF TREASURY

UNCLAS CARACAS 002450

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR L/CID/JNICOL AND EB/IFD/OIA/NHATCHER

E.O. 12958: N/A
TAGS: EINV KIDE OPIC PGOV
SUBJECT: 2006 SECTION 527 REPORT ON INVESTMENT DISPUTES IN
VENEZUELA

REF: STATE 60294

(1.) The following is the 2006 Section 527 report on
investment disputes in Venezuela. Two claims from the 2005
report have been resolved. Claimant identities are listed
separately per reftel instructions.

(2.) (SBU) RESOLVED CLAIM:

a. Claimant A (Resolved)

b. 2003

c. Case History: In 2001, Claimant A, an international
consortium with a 55 percent US share, entered into a
ten-year contract to operate a key petroleum export terminal
for Venezuela's state-owned oil company, Petroleos de
Venezuela (PDVSA). On December 6, 2002, as a result of
Venezuela's petroleum strike, Claimant A declared its
inability to implement the contract due to force majeure.
Claimant A's employees continued to perform the necessary
maintenance so that the terminal could be brought back into
operation quickly once the conditions that necessitated the
terminal to be shutdown were resolved. The terminal,
however, was seized by the BRV on December 15 and Claimant
A's employees were forbidden access. Claimant A stated the
case has been successfully resolved through consensus
involving both parties. No significant details on the
arrangement reached are available as the claimant signed a
confidentiality agreement with the state-owned oil company

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SIPDIS
Petroleos de Venezuela (PDVSA).

a. Claimant B:

b. 2002

c. Case History: In 1993, Claimant B entered into a
long-term relationship with Venezuela's state-owned oil
company Petroleos de Venezuela (PDVSA) and with
PDVSA-affiliate CITGO, in which: (1) Claimant B agreed to
invest over $1.1 billion to upgrade its refinery to process
Venezuelan extra-heavy crude, (2) CITGO agreed to contribute
to the upgrading and purchase the bulk of the refined
products, and (3) PDVSA committed to supply 230,000
barrels/day for 25 years. Two contracts, one signed under
Venezuelan law and one signed under US law, established this
relationship. Claimant B asserts that between April 1998 and
September 2000, PDVSA, citing BRV commitment to OPEC quota
cuts, wrongfully declared force majeure and reduced its
deliveries by as much as 100,000 barrels/day. This force
majeure was lifted in October 2000, but in January 2002 PDVSA
once again informed Claimant B that deliveries would be cut
because of OPEC quota cuts. Claimant B attempted to resolve
the dispute but ultimately filed suit against PDVSA on
February 1, 2002 before the United States District Court for
the Southern District of New York, seeking damages and
specific compliance. On May 31, 2002, PDVSA filed a motion
to dismiss Claimant B's suit arguing protection under the
"Act of State doctrine."

The claimant's attorney reported that the United States
District Court for the Southern District of New York urged
the parties to reach an agreement on the case. The parties
dismissed the suit from the court with Venezuela agreeing to
negotiate the sale of its share in the refinery. On August
15 2006, Venezuela's Minister of Energy and Mines announced
an agreement for the Claimant to buy Venezuela's 41.25
percent ownership participation in the disputed investment.
Previously, the Venezuelan party stated it would not object
to the sale to the Claimant if the Claimant matched best
offer received from third parties. According to the
Claimant, the claimant will purchase the Venezuelan party's
share for approximately USD 2.1 billion. The main cause of
this dispute, an oil supply agreement which remained valid
for 17 years, was terminated and replaced with a 5 year
agreement with no legal assurance of renewal. On August 16,
2006, the Claimant confirmed the agreement.


(3.) (SBU) UNRESOLVED CLAIMS:

a. Claimant C:

b. 2003

c. Case History: Since 1982, Claimant C, an international
consortium of investors with a majority US share, has
invested approximately $60 million in developing a diamond
concession in Venezuela's Bolivar state. After extensive
exploration and evaluation of the asset, Claimant C planned
to begin mine development in 2003-2004. However, in
September 2003, the Venezuelan Ministry of Energy and Mines
withdrew part of Claimant C's concession, alleging
non-payment of taxes and failure to comply with other
obligations. Claimant C disputes these allegations. The
Embassy and U.S. congressional representatives have raised
the case with the senior BRV offices. Thus far, there has
been no return of the concession and four additional
concessions previously granted to this claimant were
withdrawn in the first quarter of 2005. Claimant C sought a
protective measure before Venezuela's Supreme Court for the
withdrawal of the concessions. The request has been
acknowledged and accepted by the tribunal but there have been
no significant developments. Claimaint C reported that it
is confident that if a decision is reached objectively, the
company will receive an affirmative finding. The mining
reform bill currently under discussion in the National
Assembly, which calls for the formation of mixed companies in
the mining sector, is viewed as a positive development by
Claimant C.


a. Claimant D:

b. 1994

c. Case History: Claimant D, an airline, accrued $23 million
in foreign exchange losses due to actions taken by the
Central Bank of Venezuela (BCV) before and after a
devaluation of the currency in 1995. BCV imposed currency
controls in 1994, which compelled Claimant D to purchase all
dollars through the Central Bank. The official exchange rate
at that time was 290 bolivars to one dollar. Additionally, a
1994 presidential decree obligated the Claimant D to sell all
airline tickets in Venezuela in bolivars, at the official
rate. In early 1995, BCV stopped exchanging bolivars for
dollars for several months immediately prior to a significant
devaluation of the currency from 290 to 470 bolivars/$1. The
claimant maintains that the devaluation resulted in a $23
million loss to the amount held in escrow. The claimant
brought suit against the BRV in July 1996, but the Supreme
Court of Venezuela dismissed the suit in May 1998. Claimant
D resubmitted the case in 1999, and a chamber of the Court
made a decision against it in March 2003 and additionally
assessed Claimant D for court costs and all legal fees.
Claimant D appealed this ruling in 2004.

Claimant D reported it continues to appeal the excessive
court costs and legal fees associated with the ruling by the
Supreme Court, but does not contest the Court's ruling. No
major developments can be reported.


a. Claimant E:

b. 2001

C. Case History: In 1996, Claimant E and Venezuela's
state-owned oil company, Petroleos de Venezuela (PDVSA),
entered into a joint venture agreement. In 2002, after
several disagreements between the two parties, Claimant E and
PDVSA started negotiations to dissolve the joint venture and
to transfer Claimant E's shares to PDVSA. This situation was
exacerbated by the December 2002-February 2003 general
strike, during which the joint venture company ceased to
provide services to PDVSA. In September 2003, Claimant E

filed a claim under OPIC political risk insurance, stating
its investment had been expropriated. On February 24, 2004,
OPIC made a final determination in support of this claim and
made a final payment to the insured on May 12, 2004. The
claimant's lawyer reported that OPIC has not pursued the
claim in Venezuelan court.


a. Claimants F1, F2, F3:

b. 2004

c. Case History: In October 2004, the BRV announced a
decision to increase royalty payments by the four extra-heavy
crude oil projects in Venezuela. Effective immediately,
royalties were raised from 1 percent to 16.67 percent.
Claimants F1, F2, and F3 have stakes in three of the four
projects affected by this decision. These projects were
negotiated in the mid-1990's, and as an incentive for the
investment and risk of the projects, the BRV agreed to take a
1 percent royalty until the individual projects had recouped
some multiple of their investment or until nine years had
passed, whichever came first. The decision by the BRV
appears to violate this agreement. Of the three claimants,
only Claimant F1 continues to reserve its right to
arbitration. Current moves by the Venezuelan government to
increase its participation and gain a controlling position in
the extra-heavy crude ventures complicate any arbitration
filings on the royalty increase.

a. Claimants G1, G2, G3, G4, G5:

b. 2005

C. Case History: Since late 2004, the BRV has taken a number
of steps to force the oil companies holding Operating Service
Agreement (OSA) contracts negotiated under a previous
government in the mid-1990's to convert their assets into
minority stakes in joint ventures with Venezuela's state oil
company PDVSA under the 2001 Hydrocarbons law. These steps
have included limiting capital expenditure budgets and
refusal to approve drilling permits. The national tax
authority SENIAT has also claimed retroactively that OSA
companies are production companies rather than service
companies and were subject to 50 percent tax rates for
2002-2004 and 66.67 percent for 2001 rather than the 34
percent business tax rate that had been agreed. Claimants G1,
G3, G4, and G5 signed transitory agreements to migrate from
OSAs to joint venture companies. However, the claimants G1,
G4, and G5 have not yet signed their mixed company agreements
setting up the new joint ventures and currently operate in a
state of legal limbo. Claimant G2 sold its stake in the OSA
to avoid the consequences of the forced migration. G3 has
signed their joint venture agreement and is in the process of
migrating its assets to the new joint venture.


4. (SBU) CLAIMANT ID LIST

Claimant A: Sociedad Williams Enbridge Y Compania (SWEC).
The SWEC consortium includes the Tulsa-based Williams Company
(45 percent share); Enbridge Inc., a Canadian firm with a 45
percent share; and the U.S.-based Northville Industries Inc.
with a 10 percent share.
Claimant B: Lyondell Chemical Company
Claimant C: Guaniamo Mining Company
Claimant D: American Airlines
Claimant E: Science Applications International Corporation
(SAIC) and joint venture company INTESA
Claimant F1: ExxonMobil
Claimant F2: ConocoPhillips
Claimant F3: ChevronTexaco
Claimant G1: Harvest Resources
Claimant G2: ExxonMobil
Claimant G3: ChevronTexaco
Claimant G4: Andarko Petroleum
Claimant G5: Williams
WHITAKER

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