US embassy cable - 05CARACAS1546

C O N F I D E N T I A L  CARACAS 001546 
 
SIPDIS 
 
 
NSC FOR CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
TOKYO FOR SFLATT 
 
E.O. 12958: DECL: 05/16/2015 
TAGS: EPET, VE 
SUBJECT: VENEZUELAN OIL PRODUCTION:  THE EMPEROR IS LOSING 
HIS CLOTHES 
 
Classified By: Acting Economic Counselor Darnall Steuart; for reasons 1 
.4 (b) and (d) 
 
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SUMMARY 
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1. (C)  The decline in Venezuelan oil production, long 
predicted by industry observers, has become public as 
apparent corruption and diversion of funds and alleged 
sabotage at state oil company PDVSA became the center of 
debate in early May.  According to a local international oil 
services company, Venezuela's oil production peaked at about 
2.7 million barrels of daily oil production in early 2005 
after the standstill of the strike in 2002-2003.  A local 
university think tank estimates that national production 
(including the relatively well run eastern production area) 
is continuing to decline and could reach as low as 2-2.2 
million b/d by the end of 2005.  End Summary. 
 
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BACKGROUND 
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2. (C) In January 2004, we reported in reftel,"while some 
believe that Venezuela's 2004 production can be expected to 
remain roughly in the 2.5-2.6 million b/d range where it is 
generally believed to be at the current time, there are 
others who believe that, in the absence of significant 
investment either on the part of PDVSA itself or the 
international oil companies, Venezuelan production could drop 
to as little as 2.0-2.2 million b/d by the end of 2004."  It 
now appears that Venezuelan production may have peaked in 
early 2005 and that the long predicted decline has become 
more public. 
 
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GOV STILL ON MESSAGE 
-------------------- 
 
3. (C) Despite President Chavez's May 3 acknowledgement of a 
100,000 production shortfall in the west, some days later 
Minister of Energy and Petroleum/PDVSA President Rafael 
Ramirez___ reiterated the claim that Venezuela is producing 3.3 
million b/d.  In remarks to the press, Ramirez___ asserted that 
the Venezuelan oil industry is under attack by a 
disinformation campaign that seeks to portray an industry in 
chaos.  For months Ramirez___ and other senior GOV officials 
have cited a total production number ranging anywhere between 
3.0-3.3 million b/d and reiterated that PDVSA will increase 
production to 3.4 million b/d by the end of 2005 in 
compliance with its 2004-2009 business plan.  Private 
industry observers have been skeptical about a 3 million b/d 
total for Venezuelan production. 
 
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PRODUCTION INCREASED 
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4. (C) A senior manager of Schlumberger, a leading 
international oil services company, informed econoff in March 
that his company believed that Venezuela's oil production had 
grown by eight percent since July 2004.  At that time, 
Schlumberger's internal production estimates (broken down 
between PDVSA and the international oil companies (IOCs) were 
as follows: 
 
                      PDVSA      IOCs      Total 
                      -----      ----      ----- 
                               000 b/d 
 
Eastern Venezuela      845        305       1150 
Western Venezuela      650        215        865 
Barinas                 90          0         90 
 
                      -----      ----       ----- 
                      1585        520       2105 
 
To this total, Schlumberger added an estimated 593,000 b/d of 
production from the four facilities that upgrade the 
extra-heavy crude of Venezuela's Orinoco heavy oil belt, for 
a total of approximately 2.7 million b/d. 
 
5. (C) According to Schlumberger, by the end of November 2004 
production grew by 90,000 b/d because of increased field 
production associated with the Hamaca project, the fourth and 
last of the exra-heavy oil Strategic Associations whose 
upgrader came on line in September.  By January 2005, 
Schlumberger believes that production had grown another 
70,000 b/d.  The company attributed 10,000 b/d of that 
increase to added production from Barinas; another 15,000 b/d 
to increased production from the Ceuta-Tomoporo fields south 
of Lake Maracaibo in western Venezuela; and the rest from 
small incremental gains, primarily by the IOCs.  The primary 
discrepancy between the official statistic of 3.0-3.3 million 
b/d and private sector estimates of 2.5-2.7 million b/d such 
as Schlumberger's lies in western Venezuela where, until 
Chavez's May 3 statement, the GOV had consistently claimed 
that production had returned to pre-strike levels (1.2 
million b/d) in 2003. 
 
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TROUBLED WESTERN VENEZUELA 
-------------------------- 
 
6. (C) Anecdotal information from western Venezuela, however, 
has painted a very different picture.  Econoff has 
periodically discussed operations in the west with 
representatives of two units of the Wood Group, a British 
services company that has a major presence there.  Wood Group 
units are involved in two activites that provide direct 
evidence of the health of PDVSA production activities:  one 
unit installs and services the gas turbines needed to provide 
gas lift for oil production while another major unit provides 
integrated services to process and inject water produced with 
the oil.  Under this contract, the Wood Group unit SIMCO is 
in charge of the requirements of water injection in Lake 
Maracaibo in the Lagomar, Lagotreco, Lagocinco, Lagomedio and 
the South Center Lake areas.  SIMCO manages two onshore 
treatment plants at Punta de Palmas and Bachaquero as well as 
some 129 structures in the lake. 
 
7. (C) Wood Group senior managers have consistently mirrored 
Schlumberger's estimate, saying that western production 
remained stagnant at around 850,000 b/d.  They also noted, 
however, that PDVSA is in "absolute chaos."  This reflects, 
they said, not just the extreme politicization of the west 
after the strike but also the fact that Felix Rodriguez 
continued to run the western operations out of Caracas.  A 
Chavez stalwart, Rodriguez was named to manage PDVSA's 
western production area after the December 2002-February 2003 
strike.  In early 2004, he was named as Vice President for 
Exploration and Production where he took a hard line with 
respect to minimizing the prospective IOC role in Venezuela. 
According to Wood Group and other observers, Rodriguez 
continued, in all but name, to run PDVSA's operations in the 
west.  Rodriguez was named President of CITGO in the year-end 
PDVSA board changes.  He is rumored to have had a financial 
interest in at least one of the companies that was supplying 
contract personnel to PDVSA in the west. 
 
8. (C) A corruption scandal hit the west in February 2005 and 
a number of managers were fired.  Wood group sources note 
that a number of the managers have been cleared and 
reinstated but the incident caused panic and managers were 
afraid to make decisions.   Wood Group Vice President Neil 
Harvey told econoff that a PDVSA team from western Venezuela 
had admitted to a Wood Group team that there are &dreadful 
problems8 in western Venezuelan operations, including a lack 
 
 
of management expertise, technical capabilities etc.  The 
PDVSA team asked the Wood Group if it would be able to assist 
in the development of a mobile gas compression center.  After 
that meeting, however, PDVSA said the project would have to 
go to a public bid.  Harvey described the situation as "an 
ever spiraling circle of doom." 
 
9. (C) Harvey also informed econoff in early April that 
SIMCO, which operates a water treatment plant in Bachaquero, 
had been discussing with PDVSA the operation of its own water 
plants in the area.  Harvey said PDVSA had been unable to get 
the plants to work.  And while SIMCO,s plant could handle 
300,000 b/d of water, its injection pipeline could only 
handle 150,000 b/d.  Harvey said that PDVSA's water 
production had grown to such a degree that PDVSA was sending 
the untreated water (i.e., water with hydrocarbon impurities) 
straight into the lake in what Harvey described as a 
&river8 running parallel to the SIMCO plant.  While this 
was evidence of yet another environmental disaster for Lake 
Maracaibo, it could also be evidence that PDVSA's oil 
production is declining. 
 
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DOOM STRIKES? 
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10. (C) On May 18, economist Orlando Ochoa provided econoff 
the most recent findings by a group from the Center for the 
Development of Oil Technology associated with Caracas' Simon 
Bolivar University.  This group believes that PDVSA's own 
production in western Venezuela may have dropped to as low as 
330,000 b/d.  They assert that western production dropped 10 
percent between March and April.  If true, this would yield a 
total production number for the region of about 600,000 b/d. 
Most seriously, the Center believes that national production 
(including the relatively well run eastern production area) 
is continuing to decline and could reach as low as 2-2.2 
million b/d by the end of 2005.  As proof of these 
assertions, said Ochoa, the Center pointed to the national 
oil to water production ratio which they put at 4 barrels of 
water to one barrel of oil.  The ratio is actually 6 to 1 in 
the west and 1 1/2 barrels to one barrel of oil in the east. 
 
11. (C) Ochoa noted that industry observers believe PDVSA is 
struggling to increase production in eastern Venezuela at the 
risk of damaging the reservoirs.  In fact, a U.S. executive 
whose company provides critical gas compression and injection 
services in eastern Venezuela, told econoff a week ago that 
he had been forbidden by PDVSA to take one of his plants down 
for scheduled servicing.  He also recounted that he had been 
told that even the office staff in PDVSA's Maturin operations 
have been ordered to work from 6:00 am to 6:00 pm until oil 
production is increased. 
 
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COMMENT 
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12. (C) In an unusual move, President Chavez and others in 
the government complained publicly that there had been 
sabotage - USG supported - of PDVSA production in western 
Venezuela.  The GOV also ordered military units (including 
reservists) to guard PDVSA facilities.  At the same time, 
others in the MVR surfaced complaints about corruption in 
PDVSA - unusual given the MVR's interest in portraying PDVSA 
as an effective engine of the revolution. 
 
13. (C) In January 2004, we commented that PDVSA might yet be 
able to arrest Venezuela's production decline if it moved 
ahead quickly with substantial investment in maintenance of 
existing projects and development of new ones.  The 
continuing chaos in the company, however, has prevented PDVSA 
from moving ahead with the investment necessary to forestall 
the hard fact that Venezuela's production will decline by 20 
 
 
to 25 percent on an annual basis.  Figures such as the Simon 
Bolivar group and former PDVSA President Luis Giusti have 
recently said that PDVSA must immediately invest anywhere 
from $7 to $10 billion to turn this situation around.  A 
number of our contacts believe that company managers are 
incapable of making the necessary investment decisions and 
that PDVSA may well have reached a point where it is 
impossible to invest fast enough to arrest the decline. 
Perhaps because of this, the GOV's response has been to 
pressure the IOCs that operate in Venezuela for changes in 
their fiscal regimes. 
Brownfield 
 
 
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      2005CARACA01546 - CONFIDENTIAL