US embassy cable - 04CARACAS2739

C O N F I D E N T I A L  CARACAS 002739 
 
SIPDIS 
 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
 
E.O. 12958: DECL: 08/12/2014 
TAGS: EPET, VE 
SUBJECT: VENEZUELA:  EXTRA HEAVY CRUDE-BEST CHANCE FOR 
IMMEDIATE GROWTH 
 
REF: CARACAS 2594 
 
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) 
and (d) 
 
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SUMMARY 
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1. (C)  The prospects for additional Venezuelan oil 
production in the short term come from the four projects that 
produce synthetic crude from Venezuela's abundant resources 
of extra heavy crude.  We calculate that Venezuela's syncrude 
production could increase to as much as 634,000 b/d by the 
end of 2004.  Interest in new projects is building and some 
local industry observers believe we may see up to $10-12 
billion in new projects signed in Venezuela in the next year, 
primarily representing new investments in extra heavy crude 
extraction.  International oil companies are exploring new 
economic models to accommodate the higher royalty rate 
demanded by the GOV.  End Summary. 
 
2. (U) The most important developments affecting Venezuelan 
production levels in the short term are likely to occur in 
the four "Strategic Association" projects that convert the 
extra heavy crude of Venezuela's Orinoco heavy oil belt to 
lighter, sweeter synthetic crude, or syncrude.  In 2003, we 
calculate that these projects produced about 415,000 b/d of 
syncrude. 
 
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HAMACA 
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3. (C) As reported reftel, the upgrader of the Hamaca project 
(ChevronTexaco/ConocoPhillips/PDVSA), the fourth and last of 
the Strategic Associations is due to come on line in 
September.  ChevronTexaco President for Latin America 
Upstream Ali Moshiri confirmed to econoff August 16 that the 
mechanical completion of the facility occurred on August 12. 
He also said there will be crude moving through the upgrader 
on September 1.  While it will take some time for the 
facility to reach full production levels, by the end of 2004 
the Hamaca project should increase its current field 
production of extra heavy crude from 120,000 b/d to 190,000 
b/d for a syncrude yield of 180,000 b/d. 
 
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CERRO NEGRO 
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4. (C) ExxonMobil de Venezuela President Mark Ward informed 
econoff in a July 22 conversation that he was hopeful that 
ExxonMobil would soon receive approval from the GOV to 
proceed with debottlenecking the Cerro Negro 
(ExxonMobil/PDVSA) project upgrader.  This process, if 
started in early 2005 as Ward hopes, would yield a 20 percent 
increase in the through-put of the upgrader by the first 
quarter of 2006.  Currently, the Cerro Negro field produces 
120,000 b/d of extra heavy crude for 110,000 b/d of syncrude, 
so the debottlenecking would allow an increase of field 
production to approximately 145,000 b/d for a yield of 
132,000 b/d of syncrude. 
 
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PETROZUATA 
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5. (C) In addition, ConocoPhillips announced to the press 
early this month that Petrozuata (ConocoPhillips/PDVSA) had 
processed nearly 150,000 b/d of extra heavy crude into 
approximately 140,000 b/d of syncrude in July.  "The new 
level was achieved through operational and technological 
improvements which gave the Petrozuata upgrader a new 
sustainable plateau of 140,000 b/d," said the statement. 
ExxonMobil's Mark Ward, however, asserted to econoff that 
Petrozuata had "pulled a fast one," and expanded its 
production capacity without GOV approval.  According to Ward, 
Petrozuata's production level should nominally be at 130,000 
but is actually at 160,000 b/d. 
 
 
6. (C) Ward told econoff that Petrozuata is now arguing with 
the GOV over the royalty rate to be paid on the additional 
extra heavy crude that would support the project's expanded 
production capacity.  (Note:  The royalty for the Petrozuata 
project - as with all the Strategic Associations - is 
currently one percent.  This royalty holiday lasts for nine 
years or until the project has re-couped some multiple of its 
investment.  The GOV is now pushing for at least a 20 percent 
royalty for any additional production from these projects. 
End Note)  While ConocoPhillips has not confirmed Ward's 
comments, careful comments by a ConocoPhillips Government 
Relations officer in an August 12 conversation with econoff 
might seem to confirm his allegations.  She said the 
Petrozuata upgrader had produced 150,000 b/d of syncrude in 
July but that this had simply been "a one-off," to test the 
maximum through-put of the facility.  She added that 
Petrozuata's planned syncrude production level is still 
124,000 b/d and that PDVSA is keeping them to that plan. 
This could indicate, however, that Petrozuata could 
ultimately increase its sustained production to 
140,000-150,000 b/d of syncrude. 
 
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SINCOR 
------ 
 
7. (C) Finally, Sincor, the Total/Statoil/PDVSA project, will 
shut in production in October for 48 days to conduct a major 
turnaround.  The planned overhaul will reportedly increase 
the current 180,000 b/d syncrude capacity of the upgrader by 
14,000 b/d.  Thus, according to our calculations, Venezuela's 
syncrude capacity could grow to some 634,000 b/d by the end 
of 2004 with the possibility of a further small increase in 
early 2006 by ExxonMobil's Cerro Negro. 
 
8. (SBU) In an interesting side note, a senior Schlumberger 
executive commented to econoff on August 12 that the first of 
the Strategic Association projects is now starting to fight 
decline in field production.  He agreed that the fields are 
experiencing gas problems earlier than had been expected and 
added that one field has now started to have a problem with 
water encroachment, that will over time, he asserted, affect 
them all. 
 
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MORE EXTRA HEAVY CRUDE PRODUCTION 
--------------------------------- 
 
9. (C) As reported reftel, there has also been at least one 
proposal to the GOV for additional field production of extra 
heavy crude.  ChevronTexaco Vice President for Latin American 
Upstream Ali Moshiri told econoff August 6 that he had 
proposed to the GOV that the Hamaca project expand its field 
production to provide PDVSA with an additional 100,000 b/d of 
extra heavy crude.  In a subsequent converation on August 16, 
Moshiri said the GOV has "philosophically" accepted the 
proposal but that an agreement must still be structured.  He 
said there has been no decision about whether the additional 
crude would be sold as part of the Hamaca project or 
separately.  He confirmed it would likely be sold by PDVSA as 
Merey (a medium crude oil blend).  When econoff asked Moshiri 
if the other three Strategic Association projects might make 
similar proposals to the GOV, he responded that, to his 
knowledge, only the Hamaca field has the extra capacity to 
produce over upgrader capacity. 
 
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MORE SYNCRUDE PROJECTS ON THE WAY? 
---------------------------------- 
 
10. (C) While the companies in the existing projects are 
engaged in discussions with the GOV on debottlenecking or 
otherwise expanding their syncrude production, proposals for 
bigger projects that would take the syncrude farther up the 
value chain to finished products have been made to the GOV. 
ChevronTexaco's Ali Moshiri announced August 6 that the 
company had made a $6 billion proposal to the GOV for a new 
project.  According to his announcement, the project would 
include exploration and production, a new pipeline and an 
upgrader to produce 200,000-400,000 b/d of high-quality 
syncrude and products. Shell de Venezuela President Moreno 
 
 
has now stated publicly that his company has also proposed a 
similar project to produce syncrude and products.  The Vice 
Minister of Energy for Hydrocarbons acknowledged to econoff 
that Total has made a similar proposal. 
 
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NEW ECONOMIC MODEL? 
------------------- 
 
11. (C) In an August 19 conversation with Moshiri, he 
confirmed that the ChevronTexaco proposal envisions multiple 
companies along the project value chain.  Under this model, 
PDVSA would hold 51 percent of the upstream portion of the 
project while ChevronTexaco would control the downstream 
assets.  Moshiri clearly believes that the economics of such 
a structure could work despite the 2001 Hydrocarbons Law 
requirement that PDVSA have 51 percent or more ownership in 
any upstream development.  Moshiri dismissed any concern 
about whether PDVSA could finance its 51 percent.  Moshiri 
added that ChevronTexaco's project proposal includes the use 
of its steam flood technology for enhanced crude recovery. 
(Note:  The four Strategic Association projects currently 
recover 7-10 percent of the extra heavy crude.  While Moshiri 
first said he did not know what the recovery rate might 
increase to with the use of the ChevronTexaco technology, he 
then said perhaps 40-50 percent.  Increasing the extra heavy 
crude recovery rate is an important goal for the GOV.) 
 
12. (C) Finally, econoff raised with Moshiri the possibility 
of a new licensing round for blocks in the Orinoco heavy oil 
belt.  Moshiri responded that these projects are too big and 
complicated to auction and that he would urge the GOV not to 
do so.  Instead, he anticipated that the GOV would proceed 
with a selective process to drive the projects towards the 
majors in partnership with PDVSA and certain Venezuelan 
companies. 
 
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COMMENT 
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13. (C) With the August 15 referendum having settled 
Venezuela's future for at least the next two years (they 
hope), ChevronTexaco's Moshiri and other oil industry 
representatives want to get down to business with the GOV. 
Some local industry observers believe we may see up to $10-12 
billion in new projects signed in Venezuela in the next year, 
primarily representing new investments in extra heavy crude 
projects. 
McFarland 
 
 
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      2004CARACA02739 - CONFIDENTIAL