VZCZCXRO6878
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DE RUEHBR #0754/01 1081857
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P 181857Z APR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 5140
INFO RUEHRG/AMCONSUL RECIFE 4629
RUEHRI/AMCONSUL RIO DE JANEIRO 1903
RUEHSO/AMCONSUL SAO PAULO 6769
RUEHBU/AMEMBASSY BUENOS AIRES 3949
RUEHAC/AMEMBASSY ASUNCION 5366
RUEHMN/AMEMBASSY MONTEVIDEO 6186
RUEHSG/AMEMBASSY SANTIAGO 5445
RUEHPE/AMEMBASSY LIMA 2950
RUEHCV/AMEMBASSY CARACAS 3199
RUEHQT/AMEMBASSY QUITO 1785
RUEHLP/AMEMBASSY LA PAZ 4511
RUEHBO/AMEMBASSY BOGOTA 3698
RUEHBJ/AMEMBASSY BEIJING 0300
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000754 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR 
TREASURY FOR OASIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD 
DOE FOR SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON PGOV CH BR
SUBJECT: REINING IN PETROBRAS' PARADE 
 
REF: A) Brasilia 24, B) 05 Brasilia 1503 
 C) La Paz 968 
 
¶1. (SBU) Summary. Evo Morales' address at the opening ceremony of 
the Inter-American Development Bank (IDB) meeting in Belo Horizonte, 
along with the Bolivian IDB governor's speech, gave some discomfort 
to Petrobras' leadership, which is currently in the midst of 
increasingly tense contract negotiations with the Bolivian 
Government both over both the periodic review of gas prices and the 
Morales government's desire to nationalize the hydrocarbons 
industry.  An 800 meter pipeline break and reported delays in making 
repairs have exacerbated doubts about Bolivia's reliability as a gas 
supplier.  On the full array of Brazil-Bolivia issues, while 
Brazilian energy-sector leaders, from the Minister of Mines and 
Energy to parastatal Eletrobras, publicly have deferred to 
Petrobras, they have concerns about the net effect on short term 
energy prices and future demand.  The Brazilian Presidency is trying 
to distance itself from the increasingly tense negotiations, 
preferring a market solution.  However, recent events may require 
higher level intervention.  End Summary. 
 
¶2. (U) At the opening Ceremony of the Inter-American Development 
Bank meeting in Belo Horizonte, President of Bolivia Evo Morales 
told the audience that Bolivia is looking for partners, not bosses 
("patrones") or colonizers and that the plundering of his country's 
natural resources must stop.  The Bolivian IDB governor reiterated 
his President's words and added that it will be necessary to 
deconstruct the current neo-liberalist, colonialist structure 
currently in place in the country.  There already had been signals 
that negotiations between Petrobras and the government of Bolivia 
would be difficult, but Morales' strong rhetoric and ensuing 
negotiations with Petrobras, the week of April 7, have exacerbated 
Brazilian worries about reliability of their gas supply. 
 
¶3. (U) Petrobras investment in Bolivia represents two percent of the 
company's investments worldwide (ref A).  The gas from 
Bolivia-Brazil pipeline accounts for 43 percent of natural gas 
consumption in Brazil, according to Brazil's National Petroleum 
Agency.  Although Petrobras fully expects the amount of taxes it 
pays in Bolivia to increase, Gabrielli publicly reminded Morales 
during the IDB meetings that Bolivia has a great deal to lose should 
renegotiation of contracts go awry.  Gabrielli catalogued Bolivia's 
points of dependence:  gas exports to Brazil represent 66 percent of 
Bolivian exports, 33 percent of Bolivia's tax base, provide stable 
work for many Bolivians, and act as an anchor of international 
investment in the country.  According to the contract currently in 
effect between Petrobras and the Bolivian government, price 
adjustments are to occur every trimester with its basis calculation 
the prior six months' variation on a basket of oil derivatives 
(found in Platt's). 
 
COMPLICATIONS 
------------- 
 
¶4. (U) On March 31 heavy rain damaged 800 meters of the pipeline 
between the two countries and Bolivian protests  blocked repair 
crews from reaching their destinations, which reportedly has delayed 
the repair job and increased concerns in Brazil about Bolivia's 
reliability as a gas supplier.  The break resulted in an estimated 
2.5 million cubic meter per day reduction of gas supply and the full 
repair will likely take until the first week of May.  Brazilian 
Minister of Mines and Energy Silas Rondeau informed thermal electric 
power plants that they might have to live with up to a 72 percent 
reduction in supply while gas and cooking gas processing companies 
might have to cope with a 51 percent reduction.  The Minister did 
not contemplate any more problematic scenarios materializing - i.e., 
gas rationing at the extreme (a 10 million cubic meter per day drop 
in supply).  At this time, most of the hydroelectric water 
 
BRASILIA 00000754  002 OF 002 
 
 
reservoirs are at full capacity, so the effect on spot electricity 
prices is expected to be null.  However, many press reports say that 
the cost of processed gas will increase in May. 
 
¶5. (SBU) One of Petrobras' large gas customers, sister parastatal 
Eletrobras, is in the hot seat as it plans to increase electricity 
production capacity with natural gas. Currently natural gas 
generated electricity accounts for 19 percent of the electricity 
supply in Brazil.  Asked about the security of Bolivian gas supply 
in a post-Morales-speech presentation at the IDB meetings, 
Eletrobras President Aloisio Vasconcelos Novais publicly deferred to 
his colleagues at Petrobras as they sought to complete the necessary 
negotiations with the Bolivian government.  But in an off-the-record 
aside with select reporters and econoff on the margins of his 
presentation, he said Eletrobras' efforts to improve its performance 
depend upon completion of some Sarbanes-Oxley requirements and on 
the stable supply of gas, the majority of which comes from 
Petrobras. 
 
¶6. (SBU) For its part, Petrobras is hedging its bets.  Although in a 
recent conversation with Consulate Rio Econ/Pol assistant, company 
reps sought to downplay published reports that negotiations had 
soured, Petrobras Oil and Gas Chief Ildo Sauer recently announced to 
the press that the company was looking at the feasibility of 
purchasing liquefied natural gas (LNG) from countries such as 
Nigeria, Trinidad and Tobago, Egypt, and Russia.  Given the US$400 
million expense associated with constructing an LNG re-gasification 
plant - and Petrobras is considering the possibility of building two 
- it is not clear whether the Bolivians will consider this to be a 
serious threat.  On April 17, Petrobras also announced a US$239 
million deal with Chinese parastatal Sinopec Group to build a 
section of Petrobras' Southeast-Northeast Gas Pipeline 
Interconnection (GASENE) project, part of its efforts to improve 
efficiency in transporting gas within Brazil.  Meanwhile, senior 
Brazilian officials have been careful to allow Petrobras to take the 
lead in the negotiations.  Lula's foreign affairs advisor, Marco 
Aurelio Garcia, stated to the press that "if there has been a 
hardening of positions, it has not been from our side." 
 
COMMENT 
------- 
 
¶7. (SBU) The highest levels of the Brazilian government have 
attempted to keep a low profile in the debate, maintaining a 
delicate balance between President Lula's friendship with Morales, 
public scrutiny of its relationship with nominally privatized 
Petrobras and its determination to protect Brazilian interests.  The 
Brazilian government repeatedly has told us that while they are (or 
perhaps were) willing to put some financial incentives on the table 
- such as the mooted petrochemical complex on the Brazil/Bolivia 
border - that they would not accept outright nationalization of 
Petrobras assets.  And, while Brazil's leadership has consistently 
called for a negotiated solution to the impasse between Bolivia and 
Petrobras, it will become increasingly difficult for the Brazilian 
government to stay out of the fray.  In an election year, with other 
problems looming, this could get interesting for Lula.  End Comment. 
 
 
Chicola