VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #1107/01 1112024
ZNR UUUUU ZZH
P 212024Z APR 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 8959
INFO RUEHAC/AMEMBASSY ASUNCION 5787
RUEHBO/AMEMBASSY BOGOTA 3077
RUEHBR/AMEMBASSY BRASILIA 6940
RUEHBU/AMEMBASSY BUENOS AIRES 4183
RUEHCV/AMEMBASSY CARACAS 1483
RUEHPE/AMEMBASSY LIMA 1447
RUEHMN/AMEMBASSY MONTEVIDEO 3736
RUEHQT/AMEMBASSY QUITO 4125
RUEHSG/AMEMBASSY SANTIAGO 8668
RUEHRI/AMCONSUL RIO DE JANEIRO 0856
RUEHSO/AMCONSUL SAO PAULO 1993
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 001107 
 
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 PREL BL
SUBJECT: PETROBRAS-BOLIVIAN GOVERNMENT RELATIONS 
INCREASINGLY TENSE 
 
REF: A. LA PAZ 968 
 
     ¶B. BRASILIA 754 
     ¶C. LA PAZ 869 
 
¶1. (SBU) Summary: Petrobras representatives told Econoffs 
that in several difficult meetings with the GOB, the 
Brazilian energy giant vowed not to invest another cent in 
Bolivia until key issues were resolved.  In those meetings, 
GOB officials reportedly displayed a confounding ignorance of 
the hydrocarbons sector, and even "offered" to take control 
of Petrobras' refineries -- for free.  The GOB's intention to 
increase the sale price of gas to Brazil and to nationalize 
the hydrocarbons sector has prompted Brazil to investigate 
alternatives to Bolivian gas, including by building 
regasification plants.  Perhaps due to Petrobras' tough line, 
the GOB has yet to issue its long-awaited nationalization 
decree.  Problems in the hydrocarbons area suggest a possible 
early souring of relations between Brazil and the Morales 
government.  End summary. 
 
Meetings Accomplished Little 
---------------------------- 
¶2. (SBU) In an April 19 meeting with Econoffs, Petrobras 
Director of Institutional Relations Dr. Arturo Castanos said 
that meetings between Petrobras and Bolivian government 
officials in both Bolivia and Brazil during the past week had 
gone poorly -- and that tensions between the GOB and 
Petrobras, which first surfaced in early March (ref A), 
continue to grow.  Castanos lamented that GOB officials, 
including Hydrocarbons Minister Soliz Rada and YPFB (Bolivian 
state oil company) official Morales Olivera, lacked a basic 
understanding of the economic realities of the sector.  He 
speculated that Bolivia was following Venezuela's example, 
and that Bolivia believed it would be able to twist the 
companies' arms. The problem, Castanos said, was that GOB 
officials failed to realize Bolivia was not in Venezuela's 
league with respect to markets and production quantities. 
 
¶3.  (SBU) Brazilian Embassy contacts confirmed that the 
meeting between Petrobras, the Brazilian Energy Minister, and 
the GOB in Rio de Janeiro had been a disaster.  They told us 
that Bolivian Hydrocarbons Minister Soliz Rada, realizing 
that no agreement would be reached, had declared at the end, 
"We'll have to get our Presidents to work this out." 
According to Brazilian Embassy contacts, Bolivia's gas 
negotiations with Argentina are not going well either. 
 
Refineries for Free: Such a Deal! 
--------------------------------- 
¶4. (SBU) As an illustration of the GOB's ignorance, Castanos 
explained that YPFB officials, led by Morales Olivera (whom 
Castanos described as the "spokesman" of Venezuela), made a 
"generous" offer for the Bolivian refineries owned by 
Petrobras.  Morales, with a straight face, told Petrobras 
that the GOB did not want to nationalize the refineries, did 
not want to pay anything for them, yet wanted to gain control 
of 50% plus one vote.  Although the GOB would have control, 
Petrobras would continue operating and investing in the 
refineries until such time as the GOB told Petrobras to 
leave.  Naturally, Petrobras rejected this proposal outright, 
Castanos said. 
 
Brazil Investigating Other Options 
---------------------------------- 
¶5. (SBU) In response to continued confusion in Bolivia, 
Brazil is investigating alternatives to Bolivian gas (ref B). 
 This includes the construction of two roughly $350 million 
regasification plants that would enable Brazil to import 
liquefied natural gas from other countries at approximately 
the same cost as Bolivian gas.  If Bolivia were to insist on 
a significant gas price increase, Brazil may be pushed to 
 
pursue this option.  Castanos noted that, contrary to 
Bolivian press reports, price changes were not discussed 
during any of the past week's meetings.  Brazilian Embassy 
contact, Alfredo Camargo, added that judging from the press 
reports the GOB had grossly unrealistic expectations.  He 
said that Brazil might agree to a price increase of 50 to 70 
cents per MCF, but that more would be impossible. 
 
¶6.  (SBU) Moreover, the Brazilian government's acceptance of 
a price increase would likely be conditioned on eliminating 
the price formula in the Gas Supply Agreement between the two 
nations (which is supposed to remain in effect until 2019.) 
Camargo explained that under the contract formula, the price 
would probably increase by 50 or more cents anyway before the 
end of 2006 due to oil price increases.  The Brazilian and 
Bolivian governments could both save face, he suggested, by 
agreeing to an increase now and scrapping the formula. 
Camargo acknowledged that this decision might be difficult 
for the Brazilian government because of October presidential 
elections, a reluctance to appear to be giving in to Bolivian 
pressure, and resistance from Petrobras. 
 
Supreme Decree Still Pending 
---------------------------- 
¶7. (SBU) Following Petrobras' meetings with the GOB, the 
GOB's promised mid-April "nationalization" decree was not 
issued (ref c).  Castanos told us that Petrobras had not seen 
a copy of the decree, but speculated that it was being 
revised again ("for the 15th time") in response to Petrobras' 
refusal to accept the GOB's plan to turn the company into a 
service provider, charge it a 50% direct tax in addition to 
general taxes and a surtax, and grant YPFB control over its 
operations.  The GOB told Petrobras that after the decree was 
issued, there would be a six-month transition period before 
the terms of the decree would be implemented and during which 
details would be negotiated.  Petrobras vowed to invest not 
one cent until those issues were resolved, Castanos 
emphasized. 
 
Comment: 
-------- 
¶8. (SBU) Castanos claimed that the GOB was not concerned 
about offending Bolivia's current hydrocarbons investors 
because it believed that PDVSA (Venezuela's state oil 
company) would step in and "save" Bolivia if the other 
companies fled.  However, the delay in issuing the 
nationalization decree suggests GOB interest in making the 
decree palatable for the companies and for Brazil.  Whether 
intentionally or not, GOB actions have begun to alienate 
Bolivia's large and influential neighbor, and could 
foreshadow an unexpected early souring in one of Bolivia's 
most important bilateral relationships.  End comment. 
GREENLEE