US embassy cable - 05CARACAS3000

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 003000 
 
SIPDIS 
 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: DECL: 10/05/2015 
TAGS: EPET, EINV, ENRG, VE 
SUBJECT: THE TRANSITION TO JOINT VENTURES: BAD TO WORSE 
 
REF: CARACAS 02387 
 
Classified By: Economic Counselor Andrew Bowen for Reason 1.4 (D) 
 
------- 
SUMMARY 
------- 
1.  (C) SUMMARY: Energy Minister Rafael Ramirez raised the 
pressure last week on foreign oil companies holding Operating 
Service Agreements (OSAs) to migrate their contracts to joint 
ventures under the 2001 Hydrocarbons Law when he publicly 
threatened to take over OSA fields if the companies did not 
migrate their contracts to joint ventures by the end of the 
year.  Petrobras promptly signed a transition agreement, and 
we fully expect additional companies to follow suit over the 
next two weeks.  It is not clear what form the various 
transition agreements and the resulting joint venture 
contracts will take.  It is also not clear what the GOV plans 
to do if joint venture contracts are not signed by the end of 
the year or if oil companies invoke their rights to 
international arbitration.  END SUMMARY 
 
---------------------------------- 
MERRY CHRISTMAS AND HAPPY NEW YEAR 
---------------------------------- 
2.  (C) Energy Minister Ramirez substantially raised the 
pressure on foreign oil companies with OSAs on September 26 
when he publicly threatened to take over fields operated 
under OSAs if companies failed to migrate their contracts to 
joint ventures controlled by PDVSA by the end of the year. 
Ramirez also stated PDVSA must have at a minimum a 60 percent 
and at a maximum 80 percent stake in the new joint venture 
companies.  On September 29, President Chavez and Petrobras 
President Jose Eduardo announced that Petrobras would sign a 
transition agreement to migrate its OSAs to joint venture 
companies.  They also announced a joint venture to build a 
refinery in Pernambuco, Brazil, an agreement to  develop four 
gas blocks in the Mariscal Sucre offshore project, an 
agreement for PDVSA to supply Petrobras with geological data 
for the quantification of reserves of a block in the Faja as 
well as joint exploration of the block, and information on 
four mature fields.  A prominent energy attorney 
sarcastically told Petroleum Attache (PetAtt) that the 
decision to sign the transitory agreement made sense for 
Petrobras since they "received half the country" in exchange. 
 
3.  (C) As reported in Reftel A, four international operators 
(Harvest, Repsol, Hocoil, and Teikoku) and four local firms 
(Inemaca, Open, Suelopetrol, and Vincclair) signed transition 
agreements on August 4.  A prominent local analyst, as well 
as an energy attorney at Macleod Dixon, (strictly protect) 
told PetAtt that additional companies will be signing 
transition agreements over the next two weeks.  The analyst 
and attorney were not at liberty to reveal the firms' 
identities, but we were told that no U.S. companies were in 
the group.  The analyst and attorney differed on the number 
of firms and fields that were involved. 
 
4.  (C) It is also not clear what form the various transition 
agreements and the resulting joint venture contracts will 
take.  We were led to believe that the initial round of 
transition agreements that the eight firms signed were 
identical.  The Macleod Dixon attorney told PetAtt that the 
agreements were different.  In addition, partners at the law 
firm of Squire, Sanders & Dempsey (strictly protect) told 
PetAtt the oil companies have been divided into three basic 
groups: international oil companies (IOCs), national oil 
companies (NOCs), and local companies.  The Squire Sanders 
attorneys said local companies would be given special 
treatment.  The Macleod Dixon attorney also stated local 
companies would be given some sort of reward for signing the 
transition agreements.  According to the Squire Sanders 
attorneys, the IOCs would face the harshest terms during 
negotiations.  The Squire Sanders attorneys said the GOV 
originally stated the joint venture contracts would be 
standard for all of the companies.  However, it appears the 
GOV has changed its mind and is now accepting proposals for 
language in the transition agreements and joint venture 
contracts.  (NOTE:  Squire Sanders recently merged with Miami 
firm Steel Hector & Davis.  Steel Hector represented PDVSA 
for a number of years and Squire Sanders continues to 
represent them.  The firm received a waiver from PDVSA that 
allows them to represent oil companies in the transition 
agreement and joint venture negotiations.  END NOTE) 
 
5.  (C) Both the Squire Sanders attorneys and the local 
analyst told PetAtt the GOV has said it will create 
Operational Transitional Committees composed of PDVSA and GOV 
officials that will be in charge of shepharding the 
transition from OSAs to joint ventures.  It appears the 
transitional teams will be showing up at companies' offices 
within the next few weeks.  No one seems to know what powers 
the committees will have.  Given the fact that no one has 
signed a joint venture contract, it is not clear what 
"transition" the committees will be shepherding. 
 
------------------ 
COALS AND SWITCHES 
------------------ 
6.  (C) Apart from PDVSA officials, we have yet to find 
anyone in the industry that believes the GOV and the oil 
companies will be able to reach an agreement on the myriad of 
legal and operational issues that the migration from OSAs to 
joint venture companies raise by year end.  According to IOC 
documents that were supplied to PetAtt, major negotiation 
issues include operational issues such as employees and 
termination payments as well as labor unions; lack of 
definition regarding minority shareholder rights, 
commercialization, and property value assement; and any 
potential incentives for companies to migrate such as longer 
term contracts, payments in kind, and new additional areas if 
development plans show poor economies at the end of the joint 
venture contract. 
 
7. (C) Some companies apparently were holding out hope that 
signing a transition agreement would give them extra time to 
negotiate the joint venture contracts.  A Petrobras executive 
told PetAtt on September 27 that his company believed that to 
be true.  We do not believe this is a reasonable hope.  PDVSA 
Vice President Luis Vierma told the Economic Counselor and 
PetAtt on September 28 that all of the OSAs must migrate to 
joint ventures by the end of the year.  Signing a transition 
agreement will not give companies additional time for 
negotiation.  Squire Sanders attorneys confirmed that senior 
PDVSA officials have told them the same thing. 
 
8. (C) The obvious question is what happens when December 31 
arrives and a company has not signed a contract to migrate 
its OSA to a joint venture.  The general opinion among 
private sector players is that companies that have signed a 
transition agreement will be treated better than those who 
have not signed.  However, no one knows what types of 
sanctions will be applied to either group.  The Macleod Dixon 
attorney believes that one or more companies will not sign 
either document and will elect to take the GOV to 
arbitration.  The attorney was not sure what would happen if 
a company elected to pursue arbitration. 
 
9. (C) Failure to sign a joint venture agreement by year end 
also raises a number of operational issues.  If the OSAs do 
not migrate by year end, who will be operating the fields on 
January 1?  The local analyst hypothesized that PDVSA may 
create some sort of transitional mixed companies to carry out 
operations until the permanent joint venture is formed.  The 
analyst believes the Operational Transitional Committees may 
have a some sort of governing role in the transitional joint 
venture.  The Macleod Dixon attorney also thought this may be 
a possibility and stated the GOV would have to come up with 
some sort of transitional mechanism.  The attorney raised 
another possibility: the GOV may let the oil companies 
continue operating the fields but refuse to pay them.  By 
witholding payment, the GOV could "bleed" the companies into 
submission.  The attorney pointed out the GOV has repeatedly 
said there will be no funds for the OSAs in the 2006 PDVSA 
budget. 
 
--------------------------------------------- - 
CONCLUSION: WHERE IS RUDOLPH WHEN YOU NEED HIM 
--------------------------------------------- - 
 
10.  (C) The rumor mill is presently operating full blast in 
the oil sector.  Between Ramirez's September 26 comments and 
the fact the oil companies will be receiving tax bills based 
on GOV audits in the next few weeks, the only thing that is 
certain is more uncertainty between now and year end.  Post 
will continue to monitor the situation. 
Brownfield