US embassy cable - 05CARACAS1906

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001906 
 
SIPDIS 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
 
E.O. 12958: DECL: 06/20/2015 
TAGS: EPET, VE 
SUBJECT: UPDATE ON OPERATING SERVICE AGREEMENT PAYMENTS 
 
REF: CARACAS 1721 
 
Classified By: EconCouns Richard Sanders; for reasons 1.4 (b) and (d) 
 
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SUMMARY 
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1. (C) The Corporacion Venezolana de Petroleo (CVP, the 
affiliate of state oil corporation PDVSA that handles the 
relationship with international oil companies) has signalled 
that it will "soon" pay the Operational Service Agreement 
(OSA) companies for their first quarter or April monthly 
payments.  CVP will reportedly only pay 66.67 percent of the 
normal per barrel fee.  CVP has also signalled that it will 
only pay 50 percent of the monies owed in dollars and the 
rest in bolivars.  The limited payment marks continued 
pressure for these companies to convert their service 
contracts to joint ventures/mixed companies under the 2001 
Hydrocarbons Law.  End Summary. 
 
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REDUCED PAYMENTS "SOON" 
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2. (C) Companies that produce oil for Petroleos de Venezuela 
(PDVSA) under Operating Service Agreements (OSAs) have yet to 
be paid for their first quarter or April monthly payments 
(some companies receive their "service" fee on a quarterly 
basis and others on a monthly basis).  According to Harvest 
Vinccler Country Manager Jean-Michel Bonnet, the Corporacion 
Venezolana de Petroleo (PDVSA affiliate that handles the 
relationship with international oil companies) informed AVHI 
(the association representing international oil companies) on 
June 17 and again on June 20 that it would make payments 
"very soon."  Bonnet informed econoff June 23 that his 
company had been told "unofficially" by Banco Mercantil, the 
commercial banks with which it does business in Venezuela, 
that it had been informed that the CVP would make a 15 
billion bolivar payment to Harvest.  Bonnet noted that he did 
not understand what such a payment would cover. 
 
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AND PARTLY IN LOCAL CURRENCY 
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3. (C) CVP also informed AVHI that it will pay only 50 
percent of the monies owed in dollars and the rest in 
bolivars.  CVP's payments will reportedly only cover the 
amount stipulated in its proposed Transition Agreement 
("Convenio Transitorio"), which has, we believe, now been 
delivered to all OSA companies (see reftel).  According to 
this document, CVP will pay only 66.67 percent of the normal 
per barrel fee.  Havest Vinccler's Bonnet informed econoff 
June 23 that, in the case of his company, the normal per 
barrel fee would be calculated on the basis of 48 percent of 
the per barrel cost of a marker crude, West Texas 
Intermediate (WTI).  According to the new CVP formula, said 
Bonnet, Harvest calculates that its fee will drop to 39 
percent of WTI or a further 20 percent loss for the company 
that is already having its production capped by PDVSA. 
 
4. (C) With respect to the bolivar payments, Bonnet believes 
the OSA companies will be asked to detail to the CVP how they 
use the bolivars.  Bonnet believes that if the CVP is 
satisfied that all possible payments have been made in 
bolivars, Harvest would then be allowed to change the 
remaining bolivars into dollars through the official foreign 
exchange control system.  (Note:  This process of 
demonstration and justification will doubtless levy heavy new 
documentation requirements.) 
 
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SIGNATURE OF THE TRANSITION AGREEMENT 
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5. (C)  Bonnet informed econoff June 23 that, to his 
knowledge, no company has yet signed the Transition 
Agreement, under which the companies would commit to moving 
to a joint venture/mixed company with PDVSA.  (Note: 
According to the CVP draft, they would also acknowledge that 
their service contracts are illegal.  If they sign the 
document as it now stands, the companies would also sign away 
their rights to international arbitration.  End note.)  An 
ExxonMobil employee who represented his company at the AVHI 
annual meeting on June 20 informed econoff June 22 that all 
the companies at that meeting had said they would not sign 
the agreement without significant changes.  He noted that he 
had been particularly surprised by the hard positions taken 
by several Venezuelan companies that had recently joined AVHI. 
 
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COMMENT 
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6. (C) As we noted in reftel, we believe it is likely that 
the delay in paying the OSAs is linked to President Chavez's 
May 15 announcement that PDVSA would no longer pay foreign 
oil company expenses in dollars.  Once Chavez made such a 
statement, CVP has doubtless been working with the Central 
Bank to devise a new policy and may well be close to 
unveiling it publicly. 
7. (C) With respect to the signature of the Transition 
Agreement, industry sources in Caracas continue to believe 
that the companies most likely to break from the pack to sign 
the document would be China's CNPC, Brazil's Petrobras, or 
Spain's Repsol.  As state oil companies from Chavez's 
preferred partner countries, their governments may well 
calcualate that they would make enough from a sweetheart deal 
in another sector to offset losses in the oil sector.  The 
GOV's/PDVSA's insistance that companies make the transition 
to risker, less profitable joint ventures remains absolute. 
Brownfield