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Cablegate: Venezuela: Ambassador Views Economic Situation In

VZCZCXRO1314
RR RUEHDE RUEHDH
DE RUEHCV #1333/01 2882159
ZNY CCCCC ZZH
R 152159Z OCT 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 3833
INFO RUEHHH/OPEC COLLECTIVE
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHNSC/NSC WASHDC
RHEHAAA/WHITEHOUSE WASHDC
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL

Thursday, 15 October 2009, 21:59
C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001333
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 AND LROSSELLO
EO 12958 DECL: 10/15/2019
TAGS EPET, EINV, ENRG, ECON, VE
SUBJECT: VENEZUELA: AMBASSADOR VIEWS ECONOMIC SITUATION IN
ZULIA
REF: A. CARACAS 1130 B. CARACAS 1129 C. CARACAS 854
CARACAS 00001333 001.2 OF 003
Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d).
1. (C) SUMMARY: The Ambassador traveled to the State of Zulia October 4-7 and met with a range of political, private sector, and business leaders. This cable highlights the economic messages delivered to him by the business community. It reinforces reftels that point to decreased private sector investment in Venezuela, growing difficulties in doing business, the loss of a profit/production motive on the part of PDVSA (the government,s largest source of revenue), and the on-going negative impact of oil field services company expropriations. END SUMMARY.
The Petroleum Industry
----------------------
2. (C) The Ambassador met with Chevron and visited a manufacturing facility owned by leading U.S. oil field services company Baker Hughes. Their comments on a number of issues affecting the oil industry follow.
A. (C) PROFITS AND FINANCE: XXXXXXXXXXXX , ChevronXXXXXXXXXXXX told the Ambassador XXXXXXXXXXXX that the company’s two Maracaibo joint ventures (JV ) Petroboscan and Petroindependiente) with PDVSA are profitable ) especially since Chevron is not investing new funds. He confided that although the JVs owe over $100 million to various service companies, Chevron is withdrawing profits through a deal to take crude oil shipments from Petroboscan to its Pascagoula refinery in Alabama. In contrast to Chevron’s perspective, Baker HughesXXXXXXXXXXXX confided to the Ambassador that PDVSA continues to owe the company $100 million, even though it paid $70 million in early September (Ref B). Of $12 million in foreign exchange requests pending with CADIVI, Venezuela,s foreign currency control board, BHI has received approvals for only $700,000.
B. (C) OPERATIONS: XXXXXXXXXXXX confirmed that BHI’s strategy continues to be to minimize its exposure; it is not investing in Venezuela (Ref A). XXXXXXXXXXXX stated that XXXXXXXXXXXX had, in fact, received a congratulatory message from BHI corporate headquarters for not growing the business (and increasing its risk exposure). He explained how BHI has been able to maintain Maracaibo as a regional production center, in spite of the challenges created by the Government of the Bolivarian Republic of Venezuela,s (GBRV) economic policies and regulatory environment. As an example, XXXXXXXXXXXX said that BHI buys all of its steel from its Houston headquarters, but is not charged for it, effectively providing local operations with a subsidy to support operations.
In Chevron,s case, XXXXXXXXXXXX noted that PDVSA is pressuring the company to reduce the number of Chevron secondees assigned to the Petroboscan and PetroIndependiente JVs as each one of them costs five times the amount of a locally hired Venezuelan. He added that Petroboscan used to have five maintenance drill rigs operating, but today has only two ) effectively limiting its ability to maintain crude production levels. Additionally, Petroboscan only has one rig drilling new wells.
C. (C) OIL FIELD SERVICES: XXXXXXXXXXXX stated that the situation in regards to oil services in western Venezuela has changed significantly. Equipment conditions have deteriorated drastically since the May expropriations of nearly 80 service companies. XXXXXXXXXXXX recounted that two weeks before he had taken a barge out to supervise the repair of a couple of offshore wells; he was surprised at the terrible state of safety and maintenance issues on the now PDVSA-operated vessel. In addition, some well maintenance services are no longer available. He attributed this to an internal PDVSA
CARACAS 00001333 002.2 OF 003
dynamic (i.e., PDVSA Exploration and Production has contractually locked up any available service providers before PDVSA CVP ) the entity that manages the joint ventures )is able to secure services).
Baker Hughes, XXXXXXXXXXXX shared that doing business in Venezuela is increasingly difficult, noting that where there used to be seven steps required to export a container from Venezuela, there are now over thirty steps imposed by GBRV agencies. XXXXXXXXXXXX confirmed that BHI has removed higher-technology assets from Venezuela. As an example, BHI has exported seven high-technology pumps (leaving three in country), each valued at $500,000, from Venezuela. BHI also exported a coiled tubing unit from Venezuela.
D. (C) PRODUCTION: Reflecting on the January 2009 GBRV-ordered OPEC quota production cuts at Petroboscan, XXXXXXXXXXXX shared that the JV has lost upwards of 15,000 b/d of production since being ordered by PDVSA to re-activate the field to pre-cut production levels of 115,000 b/d. He stated that Chevron’s internal estimate for Venezuelan crude production is between 2.1 and 2.3 million b/d, with approximately 1.3 million b/d going to the U.S., 800,000 b/d consumed in Venezuela, and 300-400,000 b/d (of crude petroleum and refined product) exported to Cuba and Petrocaribe members. Responding to a question from the Ambassador about whether PDVSA is aware of the negative impact on production that expropriations and mismanagement missteps are bound to have, XXXXXXXXXXXX offered that crude oil production is no longer the standard by which PDVSA judges performance (Ref C).
3. (C) A tour of “Fire School de Venezuela,” a private academic institution (affiliated with the Texas A&M University System) that provides both municipal firefighters and oil company and oil service company personnel with firefighting and other emergency service training, provided the Ambassador with additional insight on PDVSA operations. XXXXXXXXXXXX told the Ambassador that PDVSA sends employees to the school for certification courses. However, both XXXXXXXXXXXX and XXXXXXXXXXXX
The Business Sector
-------------------
4. (C) Members of XXXXXXXXXXXX told the Ambassador that the private sector’s inability to repatriate dividends and increasing security concerns impede efforts to attract foreign direct investment. The board members added that it is difficult to maintain current investment as the rules of the game are constantly changing. They asked the Ambassador for help in developing programs based on best practices from U.S. cities that have overcome similar problems (such as crime), and specifically programs that involve local government partnership with the private sector and civil society. The Ambassador offered that there are many examples in U.S. cities, such as Boston, Washington, DC, New York, and Atlanta and that the Embassy would pursue with XXXXXXXXXXXX.
5.(C) The Ambassador also attended a dinner hosted by the Zulia chapter of the Venezuelan-American Chamber of Commerce. The Chamber participants echoed well-known concerns regarding the difficulties with the CADIVI foreign exchange controls and voiced caution regarding the use of the parallel permuta rate because they do not want to be seen as possibly operating on the margins of Venezuelan law. A XXXXXXXXXXXX manufacturer mentioned that he is no longer able to import material from Europe using CADIVI. He fears his production
CARACAS 00001333 003.2 OF 003
costs will significantly erode his company’s competitiveness if he imports the fabric using the permuta exchange market. XXXXXXXXXXXX claimed to know people who had been victims of extortion or kidnapping plots by Colombian guerrillas. 8. (C) COMMENT: This was the Ambassador’s first trip to Zulia since returning to Venezuela after being declared persona non grata in September 2008. The one-year gap in visits provided a dramatic snapshot of the deteriorating economic situation in Venezuela. The two perspectives on doing business in Venezuela presented by Chevron and BHI underline the private sector’s difficult situation -- faced with increased risk, companies are not investing in operations but are seeking ways to maintain a market presence given the tremendous opportunities that may yet exist in Venezuela,s oil sector. END COMMENT. DUDDY

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