Viewing cable 04CARACAS2740

04CARACAS27402004-08-30 14:43:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Caracas
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L  CARACAS 002740 
E.O. 12958: DECL: 08/19/2014 
Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (b) 
and (d) 
¶1. (C) With the August 12 signing of the Preliminary 
Development Agreement (PDA) for a giant petrochemical 
project, ExxonMobil finally looks to have overcome the 
disappointment of being shut out of the Mariscal Sucre 
natural gas project in 2002.  Econoff met July 22 with 
ExxonMobil de Venezuela President Mark Ward to review the 
status of company projects.  Cerro Negro, the company's 
flagship extra heavy crude project, is operating well and 
Ward hopes shortly to receive approval to move ahead with 
debottlenecking the project upgrader.  ExxonMobil will begin 
a long-term production test in September on wells in the La 
Ceiba field while it has also submitted a joint development 
proposal to PDVSA outlining how the field could be developed 
in concert with PDVSA's Ceuta-Tomoporo field.  Ward 
emphasized that ExxonMobil is interested in Venezuela over 
the long term, and particularly in big projects that would 
play to ExxonMobil's strengths.  End Summary. 
¶2. (SBU)  On August 12, ExxonMobil de Venezuela President 
Mark Ward signed the PDA for a $3 billion petrochemical 
project that has been under discussion with the GOV for nine 
years.  In a July 22 meeting, Ward anticipated that the 
Preliminary Development Agreement (PDA) would soon be signed. 
 He added that a meeting might be arranged between President 
Chavez and ExxonMobil Chairman Lee Raymond in early October 
to discuss further that project.  Ward also briefed econoff 
on the status of other ExxonMobil projects in Venezuela which 
range from the 25 percent share the company has in the 16,000 
b/d Quiamare-La Ceiba field (operated by Repsol) to the 
multi-billion dollar Cerro Negro project. 
¶3. (SBU) Ward reported that ExxonMobil is pleased with the 
operation of its flagship Venezuelan project, Cerro Negro, 
which currently upgrades 120,000 b/d of extra heavy crude 
into 110,000 b/d of syncrude.  (Note:  Cerro Negro is one of 
the four so-called "Strategic Associations" in which various 
international oil companies partner with PDVSA to exploit the 
extra heavy crude of Venezuela's Orinoco heavy oil belt.) 
Ward is hopeful ExxonMobil will receive approval "within 
weeks" from the GOV to proceed with debottlenecking the 
project upgrader to increase its capacity by 20 percent to 
some 145,000 b/d of extra heavy crude. 
¶4. (C) While Ward underlined that the existing Cerro Negro 
contract covers debottlenecking and that he nominally only 
needs construction permits from the Ministry, he acknowledged 
an on-going discussion with the GOV about royalty payments on 
any additional barrels resulting from the debottlenecking. 
(NOTE:  The royalty for the Cerro Negro project - as with all 
the Strategic Associations - is currently one percent.  This 
was agreed by the GOV (pre-Chavez) as an incentive for 
development of these multi-billion dollar projects.  The 
royalty holiday lasts for nine years or until the project has 
re-couped three times its investment level, whichever comes 
first.)  Ward said the GOV is pressing for a 20 percent 
royalty rate for the additional barrels (the 2001 
Hydrocarbons Law allows a 20 percent royalty for extra heavy 
crude vice 30 percent for other grades).  He said ExxonMobil 
would not agree because of the precedent it might set for the 
eventual royalty for the project's base production which 
ExxonMobil believes should revert to the 16.67 percent 
royalty in place at the time the original contract was signed. 
¶5. (C) Turning to the issue of field operation, Ward said 
associated gas production has built up faster than had been 
anticipated.  This has, he said, affected all the Orinoco 
heavy oil belt projects and now necessitates that Cerro Negro 
undertake additional investment in separation and compression 
equipment and a pipeline.  Cerro Negro is currently 
delivering 20 million cubic feet per day (mcfd) to gas to 
PDVSA but Ward anticipated that this would increase to 100 
mcfd within two years.  He added that ExxonMobil is currently 
recovering its costs from the gas sales, which is "the most 
that can be expected with a monopoly buyer." 
¶6. (C) Ward anticipates that both the gas handling and 
debottlenecking projects will cost $150 million apiece.  He 
hopes to start the gas project at the end of 2004 and the 
debottlenecking in early 2005.  If so, the new production 
would come on-line in the first quarter of 2006.  Ward also 
informed econoff there will be a 30-day shutdown for 
maintenance of the Cerro Negro upgrader in mid-2005.  Field 
production will also be shut-in for 12 days; the other 18 
days of production will be sold to PDVSA as heavy oil. 
¶7. (C) Finally, Ward acknowledged that ExxonMobil has begun 
consideration of a Cerro Negro II which could be supported by 
the existing concession area.  The question, he said, is what 
level of upgrading would be demanded by the GOV and whether 
it would be commercially viable.  (Note:  Cerro Negro 
produces a 16 degree API syncrude, the lowest of the four 
projects.)  Although ExxonMobil has agreed to study the 
possibility of applying enhanced oil recovery techniques, 
Ward said bluntly that it makes little sense for Venezuela - 
with 300 million barrels of recoverable reserves of extra 
heavy crude ) "to spend even one dollar more than it needs 
to increase recovery rates."  (Comment:  Ward's skepticism 
about the economics of increasing the oil recovery rate for a 
second phase of the Cerro Negro project is directly opposed 
to the current energy policy of the GOV which is pressing for 
an increase in the current 7-10 percent recovery rates of the 
extra heavy crude projects.) 
¶8. (C) In September, ExxonMobil will begin a long-term 
production test on wells in the La Ceiba field south of Lake 
Maracaibo.  The La Ceiba project is a risk/profit sharing 
agreement inked in 1996 by Mobil.  Ward estimates that it is 
a 180 million barrel field ("not a company maker.") 
ExxonMobil has drilled five wells in La Ceiba and will test 
two that are currently producing a total of 10,000 b/d.  The 
oil will be moved by pipeline to a PDVSA facility in Barua. 
While Ward was hopeful that the test would generate 
sufficient data to allow the company to decide whether to 
move ahead with field development, he was clearly skeptical. 
If not, ExxonMobil would be required to drill at least one 
additional well and continue testing in order to satisfy its 
exploration requirement.  Ward said he is concerned about 
water in the reservoir.  Ward also told econoff that 
ExxonMobil has provided PDVSA with a joint development 
proposal outlining how La Ceiba could be developed with 
PDVSA's nearby Ceuta-Tomoporo field. 
¶9. (C) In a quick overview of other possible business 
opportunities, Ward noted that ExxonMobil would still be 
interested in participating in the development of Blocks 2, 3 
or 4 of the Deltana Platform offshore natural gas project. 
ExxonMobil plans to buy the data packages for whatever blocks 
the GOV bids in the Gulf of Venezuela and off Falcon state. 
Ward said this would be a natural extension of ExxonMobil's 
"play" in Colombia. 
¶10. (C) With respect to downstream business, Ward said the 
company is holding its own in the lubricants business.  In 
terms of the local gasoline market, however, he acknowledged 
that ExxonMobil is incurring significant losses because of 
the controlled prices.  Ward said bluntly that ExxonMobil 
will not be willing to ride out a losing business forever and 
that the Venezuelan fuels market is simply not sustainable 
for foreign companies. 
¶12. (C)  Ward emphasized that ExxonMobil is interested in 
operating in Venezuela over the long term, and particularly 
in big projects that play to the company's strengths.  With 
the successful August 12 signing of the Preliminary 
Development Agreement (PDA) for its planned multi-billion 
dollar petrochemical project (reftel), ExxonMobil finally 
looks to have found such a project in Venezuela and overcome 
the disappointment of being shut out of the Mariscal Sucre 
natural gas project in 2002.  Like its rivals such as 
ChevronTexaco and Shell, ExxonMobil has not been deterred by 
the ongoing political noise from considering large 
investments in Venezuela.  Unlike its rivals and true to its 
corporate philosophy, however, ExxonMobil has taken a lower 
profile and more measured pace. 
      2004CARACA02740 - CONFIDENTIAL