US embassy cable - 05CARACAS805

C O N F I D E N T I A L  CARACAS 000805 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
TOKYO FOR SFLATT 
 
E.O. 12958: DECL: 03/15/2015 
TAGS: EPET, VE 
SUBJECT: EXXONMOBIL MEETS WITH THE GOV 
 
REF: CARACAS 163 (NOTAL) 
 
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) 
and (d) 
 
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SUMMARY 
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1.  (C) ExxonMobil representatives met with Vice Minister of 
Energy and Petroleum Bernard Mommer on March 15 in what they 
termed a "cordial" meeting.  This was the first meeting the 
company had won in its attempt to engage the GOV on its 
unilateral decision to increase the royalty levied on the 
four projects that upgrade the extra heavy oil of Venezuela's 
Orinoco heavy oil belt.  ExxonMobil also received official 
notification in early March that the GOV had unilaterally 
raised a similar concessionary royalty rate on its La Ceiba 
project to 16.67 percent.  ExxonMobil believes it will have a 
second meeting with the GOV the first week in April.  A 
company manager stated his belief that ExxonMobil will have 
to &think outside the box8 in order to identify a 
resolution that will allow the GOV to save face and claim 
victory in front of the other investors in similar projects. 
End Summary. 
 
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EXXONMOBIL MEETS WITH VICE MINISTER 
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2. (C) ExxonMobil de Venezuela President Mark Ward met on 
March 15 with Energy and Petroleum Vice Minister Bernard 
Mommer.  The purpose of the meeting was to discuss the 
unilateral decision taken by the GOV to increase the royalty 
on ExxonMobil's Cerro Negro project to 16.67 percent.  (Note: 
 ExxonMobil and other international oil companies embarked on 
what were then technically challenging multi-billion dollar 
investments in the 1990's.  The projects received a 1 percent 
royalty rate for a nine year period.  On October 10, 
President Chavez announced a GOV decision to increase the 
royalty to 16.67 percent.  End Note.)  Ward was accompanied 
by Caracas Government Affairs Manager Carlos Rodriguez who 
contacted econoff on March 16 with the report that Ward had 
characterized it as a "cordial" meeting.  Mommer had, said 
Rodriguez, explained at length Venezuela's alleged right to 
make such a sovereign decision.  He had urged ExxonMobil not 
to consider the arbitration route, and made a reference to 
the impact such a decision would have on ExxonMobil's other 
operations and opportunities in Venezuela. 
 
3. (C) Rodriguez said Ward had underlined to Mommer that 
ExxonMobil has been an excellent business partner for the 
Chavez Government, noting that the company had been the first 
private sector company to ship a cargo out of Puerto La 
Cruz's Guaraguao terminal following the 2002-2003 oil strike, 
and had also signed the Preliminary Development Agreement for 
its proposed multi-billion dollar petrochemical project just 
two days before the August 2004 presidential referendum. 
 
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AFTER MORE BAD NEWS 
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4. (C) Rodriguez informed econoff the week of March 7 that 
ExxonMobil had also received notice from the Ministry that 
the royalty on its La Ceiba project would be increased to 
16.67 percent.  The La Ceiba block is located in Trujillo 
state and was acquired by Mobil in the so-called "Exploration 
Round" in January 1996.  The project is currently a joint 
venture with Petro-Canada.  The partners drilled five wells 
in La Ceiba between 1997-2001 and, in order to aid their 
decision on whether they will move ahead on project 
development, performed a long-term production test on two 
wells in late 2004. 
 
5. (C) The only exploration round project that has already 
declared commerciality is the Corocoro field, ConocoPhillips' 
discovery in the Gulf of Paria West block.  In conjunction 
with President Chavez's February 11 meeting with 
ConocoPhillips CEO Mulva, the company agreed to change the 
 
 
royalty structure from a sliding royalty tied to the 
project's internal rate of return to a flat 16.67 percent 
royalty.  With this agreement in hand, the Ministry moved 
quickly to mandate a similar change for La Ceiba.  This 
decision will undoubtedly have an impact on ExxonMobil's 
planning with respect to any attempt to move ahead with the 
La Ceiba project.  The two royalty issues, i.e., Cerro Negro 
and La Ceiba, will, said Rodriguez on March 16, be handled by 
the company as a package. 
 
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NEXT STEPS 
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6. (C) According to Rodriguez, the two parties will meet 
again the first week in April.  He added that it was obvious 
to him that the word "compensation" must be removed from 
ExxonMobil's lexicon to be replaced perhaps by "business 
opportunities."  ExxonMobil will, he believes, have  to 
"think outside the box" in order to identify a resolution 
that will allow the GOV to save face and claim victory in 
front of the other investors in similar projects. 
 
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COMMENT 
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7. (C) In a February 28 meeting with the Ambassador to 
discuss the status of his attempts to meet with the GOV, Mark 
Ward said ExxonMobil was preparing to register its request 
for international arbitration as early as the first week of 
April.  That target date will now slip.  While ExxonMobil 
would undoubtedly prefer a negotiated settlement with the 
GOV, we do not believe the company will allow itself to be 
strung along at length.  We also assume that the GOV would 
prefer to avoid potentially long-term litigation, but the 
designation of an appropriate "business opportunity" for 
ExxonMobil - perhaps preferential access to an off-shore gas 
block - might not be in line with President Chavez's recent 
preference for potential business deals with state oil 
companies from such partners as China, Russia, India, and 
Iran. 
Brownfield 
 
 
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      2005CARACA00805 - CONFIDENTIAL