US embassy cable - 05CARACAS163

C O N F I D E N T I A L  CARACAS 000163 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
 
E.O. 12958: DECL: 01/18/2015 
TAGS: ENRG, PGOV, VE 
SUBJECT: EXXONMOBIL READY TO TAKE ON THE GOV OVER ROYALTY 
ISSUE 
 
REF: 2004 CARACAS 3738 AND PREVIOUS 
 
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) 
and (d) 
 
------- 
SUMMMARY 
-------- 
 
1. (C) ExxonMobil informed the Embassy January 12 that it 
intends to take legal action in response to the GOV's 
unilateral decision to increase the royalty payments levied 
on the Orinoco extra heavy oil projects.  (Note:  Exxonmobil 
and other international oil companies had embarked on these 
technically challenging multi-billion dollar investments in 
the 1990's, and received a highly concessionary 1.0 pct 
royalty rate for a 10 year period.  On October 10 President 
Chavez announced that the GOV was raising the rate to 16.67 
pct.  End note.)  The company believes Venezuela's investment 
law provides a vehicle it can use to get to international 
arbitration.  ExxonMobil de Venezuela President Mark Ward 
underlined that ExxonMobil has made this decision in full 
knowledge that there will be a significant impact on its base 
business in Venezuela and that two planned projects will 
probably be scrapped.  ExxonMobil has, said Ward, already 
received a message from "senior officials" at the Venezuelan 
Embassy in Washington that any such decision would be seen 
not just as a business decision but as a direct attack on the 
sovereignty of Venezuela.  End Summary. 
 
------------------- 
EXXONMOBIL TO REACT 
------------------- 
 
2. (C) On January 12, ExxonMobil de Venezuela President Mark 
Ward informed econoff that the company has decided to move 
ahead with some legal action in response to the unilateral 
GOV decision to increase the royalty payments levied on the 
extra heavy oil projects.  According to its legal analysis, 
there is wording in Venezuela's investment law that will give 
it an avenue to avoid the Venezuelan courts and get to 
international arbitration. 
 
------ 
TIMING 
------ 
 
3. (C) In the three months since President Chavez's October 
10 announcement, said Ward, he has been unable to meet with 
Energy Minister Rafael Ramirez.  The GOV also cancelled 
Appointments made with Vice Minister Luis Vierma.  In these 
circumstances, he said, senior ExxonMobil management is 
"ready to go."  Ward will attempt once again to meet with 
senior GOV officials, including Foreign Minister Ali 
Rodriguez, over the next few weeks.  If that attempt fails, 
he said, he expects the company to take some action in the 
first part of February. 
 
------------ 
LOCAL IMPACT 
------------ 
 
4. (C) Ward underlined that ExxonMobil has made this decision 
in full knowledge that there will be a significant impact on 
its base business in Venezuela, the Cerro Negro extra heavy 
crude project.  The GOV controls project inputs such as 
electricity, the export terminal, and all issuance of 
permits, said Ward, and will doubtless use them as pressure 
points.   He also anticipates additional pressures on the 
regulatory front, such as visits by the Labor and 
Environmental Ministries.  With respect to the planned 
"olefins" project, a proposed petrochemical plant to create 
feedstock for the Latin American plastics industry on which 
Exxonmobil has been working with PDVSA, Ward said there is a 
high probability that ExxonMobil will be replaced by Brazil, 
India or Russia.  He added that the GOV will probably also 
levy onerous terms on the La Ceiba project, its mid-sized oil 
field exploration/development to be structured as a 
profit-sharing arrangement with PDVSA, which is now finishing 
successful well tests.  Thus he expects that the company will 
be unable to make a deal. 
 
 
------------------------------------- 
"THREATS" FROM THE VENEZUELAN EMBASSY 
------------------------------------- 
 
5. (C) Ward added that ExxonMobil believes that some word of 
its intentions have leaked to the Venezuelan Embassy in 
Washington, perhaps through a Washington D.C. law firm that 
did some of the legal leg work.  As a result, "senior 
(Venezuelan) Embassy officials" have already called contacts 
in ExxonMobil to make what Ward characterized as "thinly 
veiled threats."  According to Ward, the "Embassy officials" 
passed the word that any legal action by ExxonMobil would be 
seen not just as a business issue, but as a direct attack on 
the sovereignty of Venezuela. 
 
------- 
COMMENT 
------- 
 
6. (C) ExxonMobil's exposure in Venezuela, while large, is 
not on the scale of that of ConocoPhillips or ChevronTexaco. 
(We understand that ConocoPhilips is prepared to waive its 
legal rights regarding the heavy crude projects as part of 
its efforts to salvage the deal to develop the Corocoro 
offshore oil field (septel).  ChevronTexaco, which has big 
plans in Venezuela, notably the Deltana Platform natural gas 
project,  from the beginning chose not to fight with the GOV 
over the royalty hike, viewing it as the inevitable 
consequence of the GOV's desire to share more in the run-up 
in oil prices.  But while Exxonmobil may be less exposed 
here, the company has been pressing ahead for close to ten 
years to get the multi-billion dollar olefins project off the 
ground and finally signed a Preliminary Development Agreement 
with the GOV in August 2004.  Ward has told us repeatedly 
that Exxonmobil, presumably looking at potential risks around 
the world, "takes sanctity of contract very seriously."  If 
ExxonMobil does take some legal action on the royalty issue, 
we believe that any attempts to expand its business with 
Venezuela will be dead. 
McFarland 
 
 
NNNN 
      2005CARACA00163 - CONFIDENTIAL