ID:242671
    Date:2010-01-06 19:35:00
    Origin:10CARACAS9
    Source:Embassy Caracas
    Classification:CONFIDENTIAL
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    Destination:VZCZCXRO1950
RR RUEHAO RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS
RUEHTM
DE RUEHCV #0009/01 0061935
ZNY CCCCC ZZH
R 061935Z JAN 10 ZFF3
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 0229
INFO OPEC COLLECTIVE
WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
    
C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000009 
 
SIPDIS 
ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR MKACZMAREK 
COMMERCE FOR 4332/MAC/WH/JLAO 
NSC FOR DRESTREPO AND LROSSELLO 
OPIC FOR BSIMONEN-MORENO 
AMEMBASSY BRIDGETOWN PASS TO AMEMBASSY GRENADA 
AMEMBASSY OTTAWA PASS TO AMCONSUL QUEBEC 
AMEMBASSY BRASILIA PASS TO AMCONSUL RECIFE 
 
E.O. 12958: DECL: 2020/01/06 
TAGS: EPET, EINV, ENRG, ECON, VE 
SUBJECT: VENEZUELA: OIL SECTOR STATUS AND FORECAST 
 
CLASSIFIED BY: Darnall Steuart, Economic Counselor, DOS, Econ; 
REASON: 1.4(B), (D) 
 
1. (C) SUMMARY: 2009 has been turbulent for Venezuela's national 
oil company PDVSA.  It continues to maintain debt to service 
companies in excess of $8 billion and issued over $6 billion in new 
bonds in 2009.  Contrary to publically stated plans to invest $17 
billion for the year, it invested less than $5 billion in the first 
half of 2009.  With OPEC pegging Venezuela's current production at 
2.35 million barrels per day (mbd), down 5.5% from 2008, plus a 
lack of investment, drilling, and maintenance activity, it is hard 
to envision a scenario where Venezuela maintains or increases crude 
oil production in 2010.  It appears increasingly likely that the 
impact of service company nationalizations, maintenance failures, 
decreased activity levels, and on-going labor problems will result 
in further crude oil production erosion.  END SUMMARY. 
 
 
 
Production Estimates 
 
2. (C) OPEC's December 2009 "Monthly Oil Market Report" listed 
Venezuela's 2008 production average at 2.487 mbd.  Notwithstanding 
official GBRV and PDVSA production statistics claiming over 3 mbd 
of crude oil production, in the run up to its December 2009 
meeting, OPEC estimated Venezuela's 2009 production at 2.35 mbd, or 
a decrease of 137,000 b/d or roughly 5.5%.  In the absence of 
investment, Venezuela's natural crude production declination rate 
averages 20%.  Thus, we assess that PDVSA, through 2009 investments 
and new production, possibly offset 15% of Venezuela's natural 
production losses.  However, the effects of the May 2009 service 
sector nationalizations and low investment levels are still 
unfolding and could become more apparent in 2010.  Assuming PDVSA 
looses 6% of its production in 2010, Venezuela's crude oil 
production could drop to 2.144 mbd by the end of 2010.  According 
to DOE/EIA statistics, Venezuelan production surpassed this level 
in 1990.  New production from the Faja, the focus of PDVSA's 
efforts, is not expected to reach the market for several years. 
 
 
 
3. (C) If Venezuela were to fully implement OPEC's December 2008 
production allocation cuts of 340,000 b/d, it would produce only 
2.01 mbd.  During 2009, PDVSA said publicly that it had taken 
OPEC-related production cuts ranging from 186,000 b/d to 364,000 
b/d.  International oil company representatives have confirmed over 
the last year that at a minimum, PDVSA ordered 120,000 b/d restored 
out of the 189,000 b/d it said it had cut in January 2009.  While 
PDVSA might substitute this restored production with cuts from its 
own fields (those it operates 100%, without international 
partners), no one believes this to be the case.  [NOTE: Per 
reftels, Petromonagas' 90,000 b/d cut came back on line in July 
(BP) while PetroBoscan's 30,000 b/d cut was restored in April 
(Chevron).  END NOTE.] 
 
 
 
XXXXXXXXXXXXX 
 
4. XXXXXXXXXXXXX
 
 
 
5. (C) Wood Group, Exterran, Tidewater, and Williams officials 
confirmed to EmbOffs that their legal cases seeking international 
arbitration are prepared and ready to be filed by counsel.  They 
continue, however, to seek to negotiate compensation for their 
nationalized assets in the hopes of not shutting themselves out of 
future operations in Venezuela.  According to industry sources, as 
of year's end, PDVSA has not compensated any of the 76 oil sector 
service companies nationalized in May 2009 and none are now engaged 
in active negotiation on a compensation package with PDVSA. 
 
 
 
Production Problems 
 
6. XXXXXXXXXXXXX 
 
 
 
Activity Levels 
 
7. (C) PDVSA's 2009 budget reflected $17.091 billion in planned 
investment, but according to a report covering the first six months 
of 2009, it spent $4.895 billion.  Assuming it maintained that 
level of investment in the second half of 2009, final investment 
figures will not exceed $10 billion, over $7 billion short of its 
planned investment level.  [NOTE: As the service company 
expropriations occurred in the first half of 2009, most service 
companies did not aggressively adopt a 'go slow' approach to 
working with PDVSA until the first half of the year was nearly 
over.  It would be optimistic to assume that PDVSA maintained this 
level of investment as evidenced by a lack of solicitation requests 
in the second half of the year.  END NOTE.]  PDVSA reported 2008 
exploration and production investment of $15.314 billion. 
Preliminary 2010 budget figures reflect planned investment of 
$23.151 billion. 
 
 
 
8. (C) By all accounts, however, PDVSA activity levels are down. 
According to XXXXXXXXXXXXX, there has been no increase in 
activity levels in the last half of the year.  He claimed 2009 had 
the lowest activity levels he had seen in the last 25 years.  XXXXXXXXXXXXX 
noted that since PDVSA has to follow the Public Law on Bidding and 
 
CARACAS 00000009  003 OF 004 
 
 
Contracting, any increase in activity levels in the oil fields 
would need to be prefaced by an increase in solicitations issued by 
PDVSA and new contracts awarded, none of which has happened. 
 
 
 
9. (C) PDVSA claims there are nearly 150 active drilling rigs in 
Venezuela, while XXXXXXXXXXXXX and OPEC believe 
the number is below 60.  OPEC's December 2009 "Monthly Oil Market 
Report" (MOMR) indicated that Venezuela had 55 drilling rigs in 
2004, 68 in 2005, 81 in 2006, 76 in 2007, 80 in 2008, and 55 in 
2009.  XXXXXXXXXXXXX noted that XXXXXXXXXXXXX rig count reports only 
"active" rigs, which means normal drilling activities (not 
maintenance rigs or work over operations).  He agreed with PDVSA's 
statement that there are 149 rigs in Venezuela - 116 drill rigs and 
33 work over rigs.  However, 25% of the rigs located in Venezuela 
were disassembled ("stacked"), 40% were not working due to a lack 
of payments or contractual issues with the service company, leaving 
35% involved in normal drilling activities. 
 
 
 
10. XXXXXXXXXXXXX 
 
 
 
11. (C) COMMENT: Post maintains its assessment that Venezuela's 
decreasing production will eventually force the GBRV to make hard 
economic choices.  A decade of lost investment and production has 
put a premium on developing new fields.  A handful of new and 
highly publicized international arbitration cases may be filed 
against the GBRV in 2010, which may further polarize the 
environment for investment in the sector.  If the peaking of oil 
prices and their subsequent crash in 2008 set the stage for the 
events of 2009, 2009 provided a clear indication as to the future 
direction of PDVSA under current leadership.  Planned municipal and 
National Assembly elections in 2010 are sure to divert attention 
from oil production to campaigning as senior PDVSA and Energy 
Ministry representatives' responsibilities are shifted to 
politicking.  President Chavez will react when he can no longer 
ignore the problems in the oil sector and work to shift blame away 
from his leadership (perhaps calling into question Rafael Ramirez's 
political future). 
 
 
 
12. (C) The danger of a Venezuelan economic model predicated on 
ever-rising oil prices is clear:  should oil prices stabilize or 
fall (as they have), at some point, the BRV would be forced to stop 
the growth in imports and government spending, and the economy 
would begin to contract further.  As Post has consistently 
suggested, this economic model is unsustainable absent high oil 
prices and could lead to an economic crisis such as a significant 
devaluation and/or recession in a timeframe largely driven by oil 
prices.  Venezuela is already in recession with current estimates 
predicting continued recession or anemic growth in 2010.  END 
COMMENT. 
 
 
 
13. (SBU) For more background on topics mentioned above, please see 
 
CARACAS 00000009  004 OF 004 
 
 
the following cables: 
 
Production and OPEC cuts - Caracas 106, Caracas 369, Caracas 1055, 
Caracas 1056, Caracas 1057, Caracas 1130; 
 
Payments to service companies - Caracas 136, Caracas 214, Caracas 
239, Caracas 288, Caracas 362, Caracas 428, Caracas 440, Caracas 
541, Caracas 545, Caracas 548, Caracas 827, Caracas 854, Caracas 
1129; 
 
PDVSA's financial situation - Caracas 1246, Caracas 748, Caracas 
564, Caracas 282, 2008 Caracas 276, 2007 Caracas 2346; 
 
Faja development - Caracas 149, Caracas 495, Caracas 1236, Caracas 
1240, Caracas 1326, Caracas 1333, Caracas 1352, Caracas 1465; 
 
Nationalizations inside and outside the oil sector - 2007 Caracas 
1281, 2007 Caracas 2013, 2008 Caracas 1690, Caracas 581, Caracas 
592, Caracas 644, Caracas 707, Caracas 725, Caracas 817, Caracas 
891, Caracas 1116, Caracas 1338; 
 
Natural Gas projects - Caracas 828, Caracas 853, Caracas 1017, 
Caracas 1208, Caracas 1361, Caracas 1383; 
 
Oil shifting to Asia - Caracas 104; 
 
Domestic gasoline subsidy - Caracas 354; 
 
Petrochemicals - Caracas 1131; 
 
Mission creep in PDVSA - 2008 CARACAS 473. 
DUDDY