US embassy cable - 05CARACAS869

C O N F I D E N T I A L  CARACAS 000869 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
TOKYO FOR SFLATT 
 
E.O. 12958: DECL: 03/20/2015 
TAGS: EPET, VE 
SUBJECT: AMBASSADOR VISITS MAJOR U.S. OIL SECTOR INVESTMENT 
 
Classified By: Economic Counselor Richrd Sanders; for reasons 1.4 (b) a 
nd (d) 
 
------ 
SUMMARY 
------- 
 
1. (C) During a March 8-9 visit to Anzoategui state, the 
Ambassador visited the Hamaca heavy oil processing facility, 
a key element of the approximately $7 billion in U.S. 
investment in the Jose industrial complex, and received 
briefings by project partners ConocoPhillips and 
ChevronTexaco on this and other of their on-going projects in 
Venezuela.  ConocoPhillips informed the Ambassador 
confidentially that the first oil from Corocoro, its 
 
SIPDIS 
off-shore field now in development, is not likely until 2008 
(two years later than planned) because of difficulties the 
company has had in winning approval of its development plan 
(finally approved March 3).  ChevronTexaco reported that it 
had begun drilling a first well in Block 3 of the off-shore 
Deltana Platform natural gas project.  In their discussions 
with the Ambassador, company managers underlined that the 
political situation continues to impact adversely on the 
operating environment for the industry in Venezuela.  End 
Summary. 
 
-------------- 
HAMACA PROJECT 
-------------- 
 
2. (SBU) The Ambassador first toured the Hamaca facility, 
located in the Jose industrial complex.  ConocoPhilillips is 
the majority shareholder in this project while ChevronTexaco 
and Venezuelan state oil company PDVSA each have 30 percent. 
Construction of the Hamaca upgrader was completed in August 
2004 and the upgrader started operations in September.  Until 
that time, field production, which began in late 2001, was 
blended and exported.  With the completion of the upgrader, 
the facility is designed to convert the extremely heavy 8 
degree API crude of Venezuela,s Orinoco heavy oil belt into 
a lighter 26 degree API synthetic crude.  (Note:  One project 
manager acknowledged in an aside to econoff, that in view of 
current oil prices, Hamaca is maximizing production with some 
sacrifice of API quality.  He underlined that the upgrader 
can meet the specified 26 degree API synthetic crude but that 
it has actually been producing a 24.8-24.9 degree crude 
which, while slightly heavier, is finding a ready market in 
today's tight supply environment.  Hamaca will, he said, have 
to cut through-put at some point to demonstrate to the 
lenders that the facility can meet its specified technical 
requirements.) 
 
3. (SBU) General Manager Roy Lyons explained to the 
Ambassador that the upgrader, which he described as a "fit 
for purpose refinery," is now processing 248,000 b/d or some 
190,000 b/d of crude and 58,000 b/d of the naptha diluent 
needed to carry the heavy crude through the pipeline from the 
field.  Lyons and his team said the ramp-up of the upgrader 
had gone smoothly, indeed so smoothly that a process that had 
been expected to take 120 days had taken only 90 days. 
 
--------------------------------------------- -------- 
OPERATIONAL DIFFICULTIES CAUSED BY EXTERNAL VARIABLES 
--------------------------------------------- -------- 
 
4. (SBU) Lyons confirmed that the facility has experienced 
some difficulties since the upgrader came on-line.  The 
upgrader was shut down completely on December 23 following 
the failure of one of the turbines at the Guri dam, the giant 
state-owned facility which produces approximately 75 percent 
of Venezuela's electricity.  It took three weeks to recover 
from that incident.  In addition, Lyons acknowledged that the 
supply of natural gas from PDVSA has been less than perfect. 
While the gas shortages have been random, one complete gas 
curtailment resulted in two weeks of reduced upgrader 
operations. 
 
---------------- 
COROCORO PROJECT 
---------------- 
 
 
5. (C) ConocoPhillips de Venezuela Vice President Bud 
Chamberlain subsequently briefed the Ambassador on the status 
of the Corocoro project, detailing the company,s efforts to 
secure approval of its development plan.  The Corocoro field, 
located in the shallow waters of the Gulf of Paria, was 
discovered by ConocoPhillips in 1999.  According to 
Chamberlain, an original development plan was approved by 
PDVSA in April 2003.  In mid-2003, the first project 
contracts were bid and the bids received were higher than 
anticipated.  In light of this, PDVSA instructed the company 
to return to its development plan to try to lower costs (and 
to increase national content).  An addendum to its 
development plan was submitted in June 2004.  In December 
2004, the PDVSA board rejected the addendum, not because of 
its contents according to Chamberlain, but because of the 
royalty provisions included in the original contract, i.e., a 
sliding royalty tied to the project's internal rate of 
return.  The confrontation with PDVSA culminated with the 
February 11 meeting between President Chavez and 
ConocoPhillips CEO Mulva.  Chamberlain acknowledged that the 
company had agreed to a 16.67 percent royalty for "all 
Corocoro oil development."  He also informed the Ambassador 
that the approval for the new development plan had finally 
been granted by the PDVSA board on March 3. 
 
5. (C) Phase I development of the project includes a 
barge-based production facility with a mooring dock and 
bridge system.  The project will also include an export 
pipeline to a floating storage and off-loading vessel. 
Chamberlain said the construction of this vessel in South 
Korea is almost finished.  Due to the difficulties in winning 
approval of the project development plan, not only will the 
vessel have to be moored for some time, said Chamberlain, but 
first output for the project (originally planned for 2006) is 
now not expected until 2008. 
 
---------------- 
DELTANA PLATFORM 
---------------- 
 
6. (C) ChevronTexaco Vice President David Nelson then updated 
the Ambassador on the status of the Deltana Platform natural 
gas project, located off-shore of eastern Venezuela near 
Trinidad.  Since the August 2004 beginning of its drilling 
program, ChevronTexaco has drilled three wells in Block 2 as 
well as a fourth well in what is believed to be the 
Trinidadian portion of the field.  The company began drilling 
a fifth well in Block 3 that day, March 8.  (Note: the 
license for Block 3, awarded to ChevronTexaco on August 6, 
2004, stipulates that the company must drill one exploration 
well and shoot additional 3D seismic.)  Nelson confirmed that 
the company has made a "world class" find in Block 2 of 
"perfect gas," and has now started to consider how best to 
develop the find. 
 
---------------- 
WORK ENVIRONMENT 
---------------- 
 
7. (C) In his briefings and in a subsequent dinner with oil 
industry managers, the Ambassador questioned his 
interlocutors about the current operational effectiveness of 
their PDVSA partner.  The oil industry managers said PDVSA no 
longer has the quantity or quality of personnel necessary to 
be an effective partner.  One manager said bluntly that 
personnel from CVP, the PDVSA affiliate that manages the 
relationship with international oil companies, are incapable 
of putting together the simplest presentation and that such 
shortcomings are reflected in other technical personnel as 
well.  It has become more difficult to get approval for 
project decisions, they said, because PDVSA personnel are 
seeking political cover.  The political situation continues 
to impact on the operating environment for the industry in 
Venezuela, such as a recent declaration by PDVSA that workers 
who had participated in the December 2002-February 2003 
strike are now unacceptable on PDVSA projects, even as 
contractors. 
 
------- 
COMMENT 
------- 
 
8. (C) While Hamaca project partners ConocoPhillips and 
ChevronTexaco are happy that the facility has become 
operational so quickly, it was obvious that they are facing 
significant operational difficulties in advancing their new 
projects.  The tenor of the discussion about the future of 
the international oil companies in Venezuela was notably more 
pessimistic than it is sometimes in our discussions with the 
most senior company managers in Caracas. 
Brownfield 
 
 
NNNN 
      2005CARACA00869 - CONFIDENTIAL