US embassy cable - 05CARACAS3552

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 003552 
 
SIPDIS 
 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: DECL: 08/11/2015 
TAGS: EPET, EINV, ENRG, VE 
SUBJECT: SHELL'S VIEWS ON OSA MIGRATION AND TAXES 
 
REF: A. CARACAS 03000 
 
     B. CARACAS 02506 
     C. CARACAS 01496 
 
Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D) 
 
1. (C) SUMMARY:  Shell Venezuela President Sean Rooney 
(strictly protect) stated during a November 23 meeting with 
Petroleum Attach (Petatt) that he fully expects the GOV to 
follow through on threats to take over fields operated by 
foreign companies under operating service agreements (OSA) if 
the companies fail to sign a transition agreement to migrate 
their contracts to joint ventures by the end of the year. 
Rooney believes the GOV's extension until March 31 to migrate 
contracts to joint ventures will only apply to companies that 
sign transition agreements.  He also believes all the 
companies holding out will cave and sign some sort of 
transition agreement before the end of the year.  Rooney says 
he told Vice Minister Bernard Mommer the migration would 
create unstable arrangements that would not last.  He also 
cautioned that the way the GOV was handling the migration 
would put a damper on future investment.  Shell thought that 
it had reached an agreement with the GOV regarding its tax 
bill for USD 130 million but still faces an injunction on its 
accounts receivable.   END SUMMARY 
 
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TRANSITION TO JOINT VENTURES: PRISONERS DILEMMA 
--------------------------------------------- -- 
 
2.  (C) As reported in Reftel A, Energy Minister Rafael 
Ramirez announced on September 26 that the GOV would 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.  The GOV recently sent companies 
letters stating that it would give them until March 31 to 
migrate their OSAs to joint ventures.  Since the GOV did not 
make an official public statement, it was not clear if this 
extension applied to all companies or just companies that had 
signed the transition agreements.  Shell Venezuela President 
Sean Rooney (strictly protect) told Petatt he fully expects 
the GOV to follow through on threats to take over fields 
operated by foreign companies under operating service 
agreements (OSA) if the companies fail to sign a transition 
agreement to migrate their contracts to joint ventures by the 
end of the year.  Rooney believes the GOV's extension to 
migrate contracts to March 31 will only apply to companies 
that sign transition agreements.  (NOTE: A Shell attorney 
told our economic specialist later in the day that the letter 
clearly stated companies would have to sign a transition 
agreement in order to receive the extension.  END NOTE) 
According to Rooney, the five major international oil 
companies (IOCs) that have not signed transition agreements 
(Shell, Chevron, ExxonMobil, BP, and Total) have stayed in 
close touch with each other on the issue.  However, he 
believes all of the companies holding out "will fold" and 
sign some sort of transition agreement before the end of the 
year. 
 
3.  (C) Rooney told Petatt Shell's basic philosophy is 
preserve its presence in Venezuela so that it will be in a 
position to take advantage of any positive changes in GOV 
hydrocarbon policy.  Although Rooney did not speculate on 
when or if the Chavez administration or a future 
administration would adopt a more positive attitude toward 
IOCs, he made it clear that Shell wanted to be ready to take 
advantage of any changes in policy.  When Petatt noted 
Shell's position appeared to basically be the same as all of 
the other IOCs, Rooney speculated that ExxonMobil was the 
only possible candidate to take the GOV to arbitration.  When 
Petatt opined that any IOC that took the GOV to arbitration 
would be forced out of the Venezuelan market, Rooney agreed. 
He also noted that once the market became more accommodating 
for IOCs, any IOC that took the GOV to arbitration would have 
to start from "zero" or a "negative number" since the company 
would have to reestablish its reputation in the market. 
Rooney said he did not believe ExxonMobil would take the GOV 
to arbitration over the OSAs since it only has a minority 
stake in a small field.  COMMENT:  In a meeting with 
ExxonMobil's Government Relations Manager Carlos Rodriguez 
earlier in the day, Rodriguez told Petatt ExxonMobil was 
still waiting for a "triggering event" for arbitration. 
Rodriguez said ExxonMobil did not know what the event would 
be but it "would know it when it saw it".  END COMMENT 
 
4.  (C) Rooney stated he told Vice Minister Bernard Mommer, 
who is handling the transition negotiations for the GOV, that 
the GOV's handling of the migration to date could cause it 
long-term problems.  He also told Mommer the resulting joint 
venture companies would be just as "unstable" as the entities 
that emerged from the opening of the Venezuelan petroleum 
sector and that the GOV is jeopardizing future investment in 
the sector by IOCs.  Rooney noted his company has little 
choice but to go along with the GOV's strong arm tactics if 
it is to preserve its significant investments in Venezuela. 
However, the GOV's actions to date on the migration issue 
will make it very difficult for Rooney or any other IOC 
executive to go to his board of directors and propose major 
new investments in Venezuela.  (NOTE: Rooney did not tell 
Petoff what Mommer's reaction was.  END NOTE). 
 
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WHAT HAPPENS TO THE OSA EMPLOYEES? 
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5.  (C) Rumors have been swirling about the fate of IOC 
employees who will be assigned to the new joint venture 
companies after the migration.  According to one rumor, PDVSA 
is trying to insert language into the joint venture 
agreements that give it the right to reassign joint venture 
employees to PDVSA operations.  Another rumor is that PDVSA 
will fire all joint venture employees who signed the petition 
during the recall referendum. 
 
6.  (C) When Petatt raised the rumors with Rooney, he stated 
both rumors were false as far as he knew.  He stated Shell is 
negotiating language with the GOV that would allow joint 
venture employees to be transferred to either of the joint 
venture partners in order to further their professional 
development.  The transfers would be strictly voluntary.  He 
also stated senior PDVSA officials have told him that 
employees who signed the petition during the referendum would 
not be fired.  However, ex-PDVSA employees who participated 
in the 2002-3 strike would not be allowed to work in the 
joint venture companies. 
 
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TAXES: WHAT CONSTITUTES A DEAL? 
------------------------------- 
7.  (C) As reported in Reftels B & C, Shell received a tax 
bill for USD 130 million.  In addition, the GOV has attached 
an equivalent amount of Shell's accounts receivable on the 
grounds that Shell was a "grave risk".  According to Rooney, 
Shell and SENIAT, the Venezuelan tax authority, reached 
agreement on the tax bill almost two months ago.  SENIAT said 
it would finalize the agreement within two weeks but has 
failed to give Shell any type of official notification 
regarding the settlement.  Although SENIAT has repeatedly 
told Shell that the settlement is acceptable, it has not 
acted to lift the injunction.  Since Shell has not been paid 
for months, it has had to take out loans from other members 
of the Shell operating group to cover operating expenses. 
Rooney said the Dutch ambassador was going to accompany him 
to a meeting with SENIAT Superintendent Jose Vielma Mora to 
see if SENIAT would lift the injunction. 
Whitaker