VZCZCXYZ0029
PP RUEHWEB

DE RUEHLP #0869/01 0881421
ZNR UUUUU ZZH
P 291421Z MAR 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 8647
INFO RUEHAC/AMEMBASSY ASUNCION 5731
RUEHBO/AMEMBASSY BOGOTA 3009
RUEHBR/AMEMBASSY BRASILIA 6881
RUEHBU/AMEMBASSY BUENOS AIRES 4118
RUEHCV/AMEMBASSY CARACAS 1431
RUEHPE/AMEMBASSY LIMA 1371
RUEHMN/AMEMBASSY MONTEVIDEO 3686
RUEHQT/AMEMBASSY QUITO 4073
RUEHSG/AMEMBASSY SANTIAGO 8605
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 000869 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EPET PGOV BL
SUBJECT: GOB PLANS TO NATIONALIZE HYDROCARBONS IN APRIL 
 
REF: LA PAZ 627 
 
¶1. (SBU) Summary: The GOB recently announced that it intends 
to nationalize the hydrocarbons sector in April and launch a 
revamped YPFB (state oil company) by July.  Hydrocarbons 
Minister Andres Soliz Rada confirmed these plans in a meeting 
with the Ambassador on March 28.  U.S.-owned hydrocarbons 
companies are concerned about the GOB's plans, its lack of 
transparency, and its use of "extra-legal" methods of 
intimidation to influence the negotiation process.  The 
companies, however, seem willing to negotiate new contracts, 
which could resemble oil company contracts in Venezuela, once 
the GOB clarifies the operating rules and if 
"nationalization" does not turn out to mean "expropriation." 
We heard nothing from Minister Soliz Rada to assure existing 
investors that their interests would be protected.  End 
summary. 
 
GOB to Nationalize Hydrocarbons in April 
---------------------------------------- 
¶2. (SBU) According to press reports, President Morales has 
pledged to nationalize the hydrocarbons sector and launch a 
revamped YPFB (state oil company) by July 2006.  In a meeting 
with the Ambassador on March 28, Hydrocarbons Minister Andres 
Soliz Rada stated that nationalization would likely be 
accomplished in April, prior to the YPFB launch, but took 
care to underline that President Morales would set the date. 
"Nationalization", he explained, means government 
participation, via YPFB, in all aspects of the productive 
chain as established in Bolivia's 2005 Hydrocarbons Law.  The 
GOB intends for YPFB to set prices and determine production 
volumes.  According to press reports, Vice President Alvaro 
Garcia Linera stated that nationalization would have seven 
characteristics:  recouping state control over hydrocarbons 
at the wellhead, state control over distribution and 
commercialization, gaining majority shareholder status in the 
companies, promoting natural gas industrialization, 
distributing natural gas to the population, sanctioning 
companies that do not comply with the rules, and guaranteeing 
legal security to foreign investors.  Soliz Rada stated that 
the transfer of gas ownership to the state would be 
accomplished through a supreme decree that would implement 
the provisions of the Hydrocarbons Law passed in May 2005, 
particularly Article 5 which recoups the Bolivian state's 
ownership of hydrocarbons at the wellhead. 
 
¶3. (SBU) Soliz Rada explained that after the issuance of the 
supreme decree, there would be a six-month negotiation period 
between the GOB and the companies during which new contracts 
would be agreed upon.  During this six-month period, the GOB 
would conduct audits of the companies to determine the 
companies' levels of investment and to reckon "who owes whom 
between the government and the companies" from the companies' 
period of "illegal operation" between the late nineties and 
now.  Soliz Rada claims the current contracts are 
unconstitutional because they were never approved by 
congress, but, pending their replacement, have de facto 
status allowing operations to continue.  Before the new 
contracts are signed, Soliz Rada said that each contract will 
have to be approved by congress.  Soliz Rada stated that this 
procedure would apply to all natural resource contracts. 
 
¶4. (SBU) Soliz Rada acknowledged that investment in the 
hydrocarbons sector had stalled, but stated that it was only 
a natural consequence for an industry "in a period of 
transition."  Responding to the Ambassador's probe, he said 
that the gas export project to the United States proposed by 
former President Gonzalo Sanchez de Lozada was not a good 
deal for Bolivia and was no longer needed.  The Minister 
claimed that Brazil and Argentina both wanted to greatly 
increase their purchases of Bolivian gas.  Because Chile was 
prepared to buy gas for USD 6 to 8 per MCF, he thought that 
regional gas prices would quickly rise allowing for upward 
adjustments in the prices paid by Brazil and Argentina for 
Bolivian gas.  When asked about the possible export of gas to 
Chile, Soliz Rada said that would be impossible, but that 
discussions were underway to build thermoelectric plants in 
Tarija which could export electricity to Chile. 
 
U.S. Companies Concerned 
------------------------ 
¶5. (SBU) Hydrocarbons companies are concerned for a variety 
of reasons.  In a March 16 meeting with Econoff, executives 
from Transredes, the Bolivian pipeline operator owned by the 
U.S. company Prisma, expressed their concern that the GOB had 
yet to issue transportation regulations required to implement 
the May 2005 Hydrocarbons Law with respect to pipeline 
operations.  Despite the delay and lack of assurances of its 
future operating environment, Transredes, under GOB pressure, 
has continued with the construction of an expanded pipeline 
(GAA) to bring fuel to the Altiplano.  This project to 
increase pipeline capacity is on schedule to be completed in 
July.  The GOB recently announced plans to construct an 
additional pipeline to bring gas to the Altiplano to meet 
growing demand.  Transredes would be willing to work with the 
GOB to build this pipeline if the GOB clearly laid out the 
rules of the game.  Minister Soliz Rada told the Ambassador 
on March 28 that the GOB is currently "analyzing" these 
regulations. 
 
¶6. (SBU) On March 20, Jana Drakic, the Vice President of 
Chaco, partially owned by U.S. firm Pan-American Energy, told 
us she was extremely concerned that the GOB is employing 
threats and "extra-legal" intimidation tactics to influence 
the companies in the negotiation process, as well as dividing 
the companies in order to conquer them.  The companies are 
particularly disturbed by government's heavy-handed and 
highly-politicized legal action against Repsol (septel). 
Chaco, one of the ten capitalized companies singled out for 
government take-over (reftel), is facing considerable GOB 
pressure to invest in additional liquid petroleum gas (LPG) 
production under the constant shadow of possible government 
intervention.  (Note:  Approximately 45% of the shares of the 
previously state-owned companies were allocated to the 
pension fund manager during capitalization (partial 
privatization).  End note.)  Chaco currently produces about 
35% of Bolivia's LPG.  Drakic explained that this production 
is subsidized by Chaco at USD 70/ton.  The GOB has promised 
to issue a decree that would make the LPG plants profitable, 
but has not yet done so. 
 
¶7. (SBU) Drakic said the GOB has not discussed its take-over 
plan with Chaco, but she had heard that YPFB had worked out a 
mechanism with the pension fund manager to transfer the 
shares held by the fund manager to YPFB.  The GOB has not yet 
provided the companies with model contracts to which to 
migrate.  Drakic continued, however, that PDVSA (Venezuela's 
state oil company) was advising YPFB on how to draft the 
contracts and gain ownership control over the capitalized 
companies; thus, she expected that one could look at company 
contracts in Venezuela to get an idea of what was coming. 
 
¶8. (SBU) Jorge Martignoni, President of Vintage Petroleum 
which is owned by U.S. company Occidental Petroleum, told us 
on March 20 that Vintage has only had one courtesy call 
meeting with new GOB representatives, i.e., Hydrocarbons 
Minister Soliz Rada and YPFB Director Jorge Alvarado, since 
the government transition.  He said the government promised 
to deliver regulations that would provide benefits to 
producers with small fields, for which Vintage would qualify, 
but has yet to promulgate such regulations or provide Vintage 
with any information about when it might do so.  Hydrocarbons 
Minister Soliz Rada told the Ambassador that producers with 
small fields will receive different treatment, including 
lower tax rates.  Both Chaco and Vintage expressed concern 
that Petrobras, which has discussed joint petrochemical and 
thermoelectric projects with the GOB, will get preferential 
treatment over other companies.  The President of Vintage 
stated that Vintage's future plans in Bolivia would depend on 
the GOB's actions, but if the company had a more certain 
environment here, it would likely expand its operations and 
look for additional markets, perhaps even Chile. 
 
¶9. (SBU) Comment: Tired of being in limbo, hydrocarbons 
companies welcome the expected release in April of the GOB's 
"nationalization" plan.  The companies appear willing to 
negotiate new contracts and work with YPFB in a cooperative 
manner as long as the GOB makes the rules of the game clear. 
However, we heard nothing from Minister Soliz Rada to assure 
existing investors that their interests would be protected. 
The GOB's interpretation of the Bolivian Constitution's 
requirement to have all natural resource contracts approved 
by Congress will likely impact businesses in several other 
sectors, including mining, where there is significant U.S. 
investment.  End comment. 
GREENLEE