US embassy cable - 05CARACAS1459

C O N F I D E N T I A L  CARACAS 001459 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
TOKYO FOR SFLATT 
 
E.O. 12958: DECL: 05/09/2015 
TAGS: EPET, VE 
SUBJECT: EXXONMOBIL SAYS PRESS REPORTS OF SETTLEMENT WITH 
THE GOV ARE UNTRUE 
 
REF: CARACAS 805 
 
Classified By: A/DCM Richard Sanders; for reasons 1.4 (b) and (d) 
 
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SUMMARY 
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1. (C) ExxonMobil denies recent press reports that the 
company has reached a settlement with the GOV over the 
increase of the royalty payments levied on its Cerro Negro 
project. ExxonMobil de Venezuela President Mark Ward said its 
discussions with the GOV are "at a complete standstill" and 
that the senior management of his company will hold a review 
of ExxonMobil's program in Venezuela in early June.  Ward 
also informed econoff that he anticipates the GOV will look 
for a way to force ExxonMobil to back out of its proposed 
multi-billion dollar petrochemical investment rather than to 
pull the plug itself. 
End Summary. 
 
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BACKGROUND 
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2. (U) An energy industry trade publication, "Energy News 
Today," reported May 2 that ExxonMobil had completed its 
negotiations with the GOV over its unilateral decision to 
increase the royalty levied on the production of extra heavy 
oil.  According to this report, ExxonMobil had agreed that 
its Cerro Negro project would pay the higher royalties, 
"while Venezuela will allow the U.S. oil giant to exploit 
Orinoco reserves longer than previously expected."  That 
report was followed on May 9 by an article in Venezuela's "El 
Nacional" that asserts, "the most recent agreement of the 
Government to get a majority of shares without contributing a 
majority percentage was with ExxonMobil, in the Cerro Negro 
project....  Exxon agreed to pay a higher royalty, but 
insisted on being the project operator.  It also asked for 
the extension of the contract, a kind of Cerro Negro 2. 
While the Goverment insisted on being the majority 
shareholder, it could not pay with cash but would pay with 
reserves." 
 
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EXXONMOBIL SAYS IT AIN'T SO 
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3. (C) Econoff met with ExxonMobil de Venezuela President 
Mark Ward May 10 to discuss these reports.  According to 
Ward, ExxonMobil has made no deals on the heavy oil royalties 
and its discussions with the GOV are "at a complete 
standstill."  He added that the senior management of his 
company will hold a review of ExxonMobil's program in 
Venezuela in early June.  Ward underlined that the company 
will notify the USG in advance of any action it may take. 
Ward also informed econoff that the company had contacted 
John Wright, the author of the "Energy News Today" piece, to 
rebut the story.  When asked about his source, Wright said he 
had received the information from within PDVSA.  Ward 
believes the GOV is trying to manipulate the company, perhaps 
hoping it will make some intemperate rebuttal that can be 
used against it. 
 
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PETROCHEMICAL PROJECT STATUS 
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4. (C) Ward briefly touched on the status of ExxonMobil's 
proposed petrochemical project.  (Note:  Under significant 
pressure from the GOV, ExxonMobil signed the Preliminary 
Development Agreement for this project on August 12, 2004, 
immediately before the presidential referendum.)  Ward said 
the technical work on the project is moving ahead well 
because most of it is being done in Houston.  The 
negotiations on the project agreements are also moving ahead 
slowly, said Ward.  He added, however, that the company is 
not being given access to key Venezuelan decisionmakers.  A 
bureaucratic mess within the GOV, said Ward, is being 
 
compounded with a "political mess," i.e., the on-going 
conflict between Pequiven (formerly PDVSA's chemical 
affiliate that is now uner the auspices of the Ministry of 
Basic Industres) and PDVSA Gas.  To this must be added the 
GO's current disposition towards ExxonMobil.  Ward 
anticipates that the GOV will look for a way to force 
ExxonMobil to back out of the project rather than to pull the 
plug itself.  He would not comment in response to a question 
about whether the GOV would then seek to bring Petrobras or 
some other favored company into the project. 
 
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COMMENT 
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5. (C)  Referring to a recently published comment by 
ExxonMobil CEO Lee Raymond that one needed "to be patient 
with Venezuela," Ward said that the delay in company action 
had nothing to do with being patient.  In the current 
environment, if ExxonMobil does seek to take the GOV to 
arbitration, it is likely to provoke GOV retaliation. 
McFarland 
 
 
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      2005CARACA01459 - CONFIDENTIAL