US embassy cable - 05CARACAS162

C O N F I D E N T I A L  CARACAS 000162 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
 
E.O. 12958: DECL: 01/18/2015 
TAGS: ENRG, PGOV, VE 
SUBJECT: VENEZUELA:  CONOCOPHILLIPS - BACK IN THE GAME? 
 
 
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) 
and (d) 
 
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SUMMMARY 
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1.  (C) On January 12, a report hit the international news 
wires that ConocoPhillips, the single largest foreign 
investor in Venezuela, would pull out following the breakdown 
in its negotiations with the GOV on the development of the 
Corocoro offshore oil field.  By week's end, ConocoPhillips 
and the GOV had resumed negotiations - but only after the 
company CEO had agreed to waive any rights to litigate on the 
issue of the royalty increase previously levied on the 
Orinoco extra heavy crude projects by the GOV.  (Of the other 
two major U.S. oil companies in Venezuela, ExxonMobil and 
ChevronTexaco, the former is going to litigate against the 
royalties increase, while the latter is going along with it.) 
 However, it remains unclear if ConocoPhillips will be able 
to bring the Corocoro project to fruition.  End summary. 
 
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PRESS REPORTS CONOCOPHILLIPS TO PULL OUT 
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2. (U) On January 12, a report hit the international news 
wires that ConocoPhillips would be leaving Venezuela 
following the breakdown in its negotiations with the GOV on 
the development of the Corocoro oil field.  These stories 
drew on public comments made by Energy Minister Rafael 
Ramirez_ on January 11 in which he said that ConocoPhillips 
would not begin drilling in Corocoro anytime soon because of 
problems with the Company's proposed investment plan.  The 
wire stories also drew on a January 11 report by 
"Descifrado," a Venezuelan web-based newsletter, which 
alleged that ConocoPhillips had been ordered to leave due to 
President Chavez's anger over public comments made by a 
senior company executive. 
 
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BACKGROUND 
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3. (C) The Corocoro field is located in the shallow waters of 
the Gulf of Paria near Trinidad.  It is one of the few early 
hopes for an increase in Venezuelan oil production.  The 
field was discovered as the result of a profit-sharing 
agreement inked with then-Conoco in 1996.  ConocoPhillips 
declared commerciality on the field in 2002 and the Ministry 
of Energy and Mines approved its development plan in 2003. 
Despite this, contentious negotiations with the GOV over 
meeting national content requirements for goods and services 
related to the field's development have delayed the project. 
ConocoPhillips executives informed emboffs in 2004 that 
changing GOV national content requirements would add 
significantly to the cost of the project.  The plan called 
for field production of 70,000 b/d to start in 2006. 
ConocoPhillips executives confirmed to econoff in late 2004 
that delays in the development of the project would likely 
push first production back to 2007. 
 
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CONOCOPHILLIPS SCRAMBLES 
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4. (C) Early on January 12, econoff contacted ConocoPhillips 
de Venezuela President John Hennon for a readout on the press 
reports.  Hennon reported that he had last met with PDVSA 
officials on December 17 and that he believed at that time 
that there had been agreement on the last outstanding element 
of the investment plan.  However, when this agreement was 
subsequently taken before the PDVSA Board, said Hennon, it 
was vetoed by Energy Minister/PDVSA President Ramirez_ and 
Exploration and Production Vice President Felix Rodriguez. 
Hennon said that Ramirez_ and Rodriguez were reportedly very 
angry that ConocoPhillips had sent a letter to PDVSA 
reserving its rights to take legal action with respect to the 
royalty increase on the Orinoco extra heavy crude projects. 
(Note:  ConocoPhillips has multi-billion dollar investments 
in two of the four extra heavy crude projects, i.e., 
Petrozuata and Hamaca.  The Hamaca project came on line in 
 
October and thus never had the benefits of the low 1.0 pct 
royalty enjoyed by the other three projects.)  Hennon was 
concerned because he had received a call from an "aide to the 
Minister" the night before who said that President Chavez had 
directed that the GOV break relations with ConocoPhillips and 
that the company should leave Venezuela. 
 
5. (C) Late in the day on January 12, Hennon informed econoff 
that ConocoPhillips Chairman Mulva had flown to Washington 
for a meeting with Venezuelan Ambassador Bernardo Alvarez. 
Alvarez, said Hennon, had told Mulva that there would be no 
further dialogue with ConocoPhillips unless the company 
rescinded the notice it had given PDVSA reserving its rights 
to litigate on the royalty issue.  Mulva elected to waive any 
rights going forward and on that basis Alvarez said the door 
was now open again for dialogue.  On January 13, Hennon 
confirmed that a senior corporate executive had talked with 
Vice Minister Vierma and that negotiations had resumed. 
 
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COMMENT 
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6. (C) Ultimately, much of the trade press has cast this 
episode as an investment dispute, claiming that when 
ConocoPhillips sought to defer part of the investment it had 
agreed to in 2003, the GOV reacted because it wants the cash. 
 While there may be an element of truth there, we believe 
that is only part of the story.  Hennon told us that the GOV 
had had the investment numbers since September and that they 
had not become a significant problem until the royalty issue 
blew up.  So it may indeed be the case that senior GOV 
officials - and particularly President Chavez - did react 
with anger to certain comments made to the press about the 
royalty issue by a senior ConocoPhillips executive 
reiterating that the hike had violated the firm's contractual 
rights.  By now waiving them, ConocoPhillips has put itself 
in line with the position of ChevronTexaco, which had never 
asserted them.  Exxonmobil, however, appears to be ready to 
try to take the GOV to international arbitration over the 
issue, septel.)  However, it is possible that ConocoPhillips' 
retreat, made late in the day, may not be sufficient to allow 
it to bring the Corocoro project to fruition. 
McFarland 
 
 
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      2005CARACA00162 - CONFIDENTIAL