US embassy cable - 05CARACAS2667

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 002667 
 
SIPDIS 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: DECL: 08/11/2015 
TAGS: EPET, EINV, CH, VE 
SUBJECT: CNPC EXECUTIVE'S THOUGHTS ON VENEZUELA 
 
REF: CARACAS 02387 
 
Classified By: Economic Counselor Andrew Bowen for Reason 1.4 (D) 
 
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SUMMARY 
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1.  (C) Gong Xun Lu, China National Petroleum Corporation 
(CNPC) America's President and General Manager of Sorifules 
Sonoven visited the Embassy on September 1 for a visa 
interview and a courtesy call with the Ambassador.  During 
the wait for his visa interview, Lu told the Petroleum 
Attache (Petatt) that he expects the Orimulsion project, a 
joint venture between CNPC and PDVSA, to be on line by the 
end of the year or February 2006.  He complained about the 
quality of the Venezuelan labor force.  In addition, he 
listed a number of concerns regarding the migration of the 
Operating Service Agreements to joint venture companies.  The 
Ambassador probed Lu during the courtesy call about possible 
joint action between our respective embassies and companies 
on energy issues.  Lu responded enthusiastically that there 
were a number of shared concerns and promised to raise the 
issue of cooperation with the Chinese ambassador.  He also 
said CNPC would engage its U.S. counterparts.  END SUMMARY 
 
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ORIMULSION 
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2.  (C) Lu began his conversation with Petatt by explaining 
that he wears two hats.  As CNPC America's President, he 
supervises CNPC operations throughout the Americas.  (NOTE: 
Lu had requested an expedited visa appointment because he has 
to travel to Florida to sign settlement papers in a suit 
between Citibank and CNPC this month.  END NOTE)  In 
addition, he is the General Manager of Sorifules Sonoven, a 
joint venture with PDVSA for the production of Orimulsion, an 
emulsion containing 70 percent bitumen and 30 percent water 
that is used primarily as a fuel for power plants.  Lu 
complained about the Orimulsion project.  He said he is 
constantly asked to sign off on every little detail in the 
project.  He said the project would not be completed until 
the end of the year or February 2006. 
 
3. (C) He blamed the delay on the poor quality of the 
Venezuelan work force.  He claimed the workers only worked 
five hours a day since they spent two hours being transported 
to and from the site and one hour for lunch.  He said the 
project suffered a month long strike at one point.  In order 
to speed production, Lu tried introducing a night shift as is 
commonly done in China.  However, the experiment was a 
disaster.  Quality was poor and he quickly gave up on the 
idea.  He also complained that new Venezuelan labor laws 
pushed worker costs up by 70 percent but did not elaborate. 
As a result, the project will cost 400 million USD.  Lu 
claimed the same project in China would have cost 200 million 
USD. 
 
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JOINT VENTURE COMPANIES 
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4.  (C) As reported in Reftel, eight foreign companies, 
including CNPC, signed transitory agreements to migrate their 
operating service contracts to joint venture companies in 
which PDVSA has a majority stake.  Lu stated he does not 
believe the migration will take place by year end as the GOV 
has announced.  He speculated the GOV will actually try to 
finish the migration talks by November due to the upcoming 
congressional elections.  However, when asked, he admitted 
that it would be impossible to finish the talks by the end of 
the year, much less November. 
 
5.  (C) Lu repeatedly told Petoff that CNPC did not have any 
problem signing the transitory agreement and that it was used 
to working under a joint venture structure.  He said the 
company fully realized that joint ventures were less 
efficient and drove up project prices.  He said if CNPC could 
operate with joint ventures in Sudan and Kazakhstan it could 
do the same in Venezuela.  When Petoff noted there were a 
number of troubling issues that still needed to be dealt with 
prior to the migration, Lu quickly agreed and listed several 
in quick succession. 
6.  (C) According to Lu, one of the biggest problems with a 
migration to a joint venture company is that that new entity 
will be a state company.  As a result, its budget will be 
subject to approval by the National Assembly.  Lu also noted 
it was not clear how the new foreign currency law would 
affect the joint ventures.  It is possible that shareholders 
in the company would be paid in bolivars rather than dollars. 
 In addition, it was not clear to him if the company would 
have to turn over its dollar revenues to the central bank. 
Lu also said valuing the OSA's assets would be a major 
challenge.  Finally, he thought IOCs would never accept the 
GOV's proposed language barring international arbitration. 
Lu said it was clear that any company that challenged the GOV 
in Venezuelan courts would lose no matter how meritorious 
their claim. 
 
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WORKING TOGETHER 
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7.  (C) Following his visa interview, Lu paid a courtesy call 
on the Ambassador.  During the brief conversation, the 
Ambassador probed Lu about possible cooperation between the 
United States and China on areas of mutual interest in the 
field of energy in Venezuela.  Lu responded enthusiastically 
that there were a number of shared concerns and quickly ran 
through the list of concerns he shared with Petoff.  He 
repeatedly said U.S. and Chinese oil companies have many of 
the same concerns vis a vis the GOV.  He stated he had a 
close relationship with the Chinese ambassador to Venezuela, 
Yigie Ju, and promised to raise the issue of cooperation with 
the U.S. with Ju when he meets with him next week.  He also 
said CNPC would begin to engage its U.S. counterparts as 
well.  (COMMENT: Lu seemed to genuinely welcome the idea of 
possible cooperation between the U.S. and China on energy 
issues in China.  When Petoff sounded him out on meeting his 
counterpart in the Chinese embassy, Lu quickly offered to 
help set up a meeting.  END COMMENT.) 
 
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BIO NOTES 
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8.  (C)  Lu is 48 years old and is married with one son.  His 
wife and son stayed with him for two months this summer in 
Caracas but recently returned to Beijing.  In 1982 Lu worked 
for Exxon for one year in Houston in the Far Eastern 
division.  The work assignment contained a heavy training 
component.  He also worked previously in Sudan.  He speaks 
English well but with a heavy Chinese accent.  He has 
travelled to the U.S. repeatedly but usually visits either 
Houston or Los Angeles.  He is looking forward to visiting 
New York for the first time in the next few weeks. 
Personally, Lu is very outgoing, pleasant, and polite.  To 
sum up, he is the type of person that you would love to have 
as a neighbor. 
Brownfield