VZCZCXYZ0005
PP RUEHWEB

DE RUEHLP #0968/01 0971330
ZNR UUUUU ZZH
P 071330Z APR 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 8799
INFO RUEHAC/AMEMBASSY ASUNCION 5758
RUEHBO/AMEMBASSY BOGOTA 3041
RUEHBR/AMEMBASSY BRASILIA 6908
RUEHBU/AMEMBASSY BUENOS AIRES 4147
RUEHCV/AMEMBASSY CARACAS 1455
RUEHPE/AMEMBASSY LIMA 1407
RUEHMN/AMEMBASSY MONTEVIDEO 3714
RUEHQT/AMEMBASSY QUITO 4098
RUEHSG/AMEMBASSY SANTIAGO 8636
RUEHRI/AMCONSUL RIO DE JANEIRO 0853
RUEHSO/AMCONSUL SAO PAULO 1990
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 000968 
 
SIPDIS 
 
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 PUSHES BACK 
 
REF: A. A) LA PAZ 251 
 
     ¶B. B) LA PAZ 890 
     ¶C. C) LA PAZ 869 
 
¶1. (SBU) Summary: Despite industry fears that Brazilian-owned 
Petrobras, a leader in Bolivia's hydrocarbons industry, would 
work out a sweetheart deal with the GOB, the relationships 
between Bolivia and both Brazil and Petrobas have gone 
steadily downhill during the past month.  Petrobras has not 
signed a memorandum of understanding with the GOB as planned 
(ref A), and will determine its next steps based on the 
nationalization decree that the GOB has pledged to announce 
in mid-April.  Bolivia and Brazil will hold gas price 
negotiations in mid-April, as required by the existing 
contract.  According to a Petrobras contact, Bolivia will 
likely be disappointed in the outcome, due to its unrealistic 
ideas of gas reference prices.  Petrobras and U.S. firm 
Vintage both expressed to us in recent meetings that they are 
not "service companies" and do not intend to migrate to 
"service contracts", but will fight back if the GOB insists 
on this model.  Both companies relayed their concern about 
Venezuelan and PDVSA influence on the GOB and its drafting of 
the nationalization decree and model contracts.  End summary. 
 
 
The GOB-Hydrocarbons Company Honeymoon is Over 
--------------------------------------------- - 
¶2. (SBU) In an April 4 meeting, Dr. Arturo Castanos, 
Petrobras' Director of Institutional Relations, explained to 
Econoffs that the relationship between the GOB and the 
Brazilian hydrocarbons giant Petrobras (Bolivia's largest 
operator) had taken a turn for the worse since the beginning 
of March.  At the end of January, the new MAS administration 
held courtesy calls with Petrobras executives and agreed to 
sign a memorandum of understanding (MOU), outlining a 
negotiation strategy (ref A).  Most industry representatives 
expected that Petrobras and the GOB would work out a deal to 
the detriment of other industry players.  Petrobras sent a 
draft MOU to the GOB in February, but received no response. 
According to Castanos, the GOB expressed interest during 
February in gaining control of Petrobras' refineries, but 
"did not want to pay anything" for them.  Thus, no MOU was 
signed and contact between the GOB and Petrobras ended in 
late February. 
 
¶3. (SBU) During March, the GOB became more aggressive in its 
behavior towards both Brazil and Petrobras, with Hydrocarbons 
Minister Soliz Rada railing against "Brazilian imperialism" 
in the press and badly treating a Brazilian state governor 
from Matto Grosso do Sul in a recent meeting.  Castanos 
claimed that the GOB had begun looking for points on which to 
attack Petrobras, as it had already done with Repsol (the 
Spanish/Argentine hydrocarbons company that is the second 
largest operator in Bolivia) (ref B).  Petrobras has 
responded to the GOB's antagonistic tone by issuing press 
statements threatening to further freeze investments due to 
the GOB's unilateral interruption of negotiations and lack of 
communication.  (Note: Although Petrobras may freeze 
additional investments, the sum is not as significant as 
recent press articles have stated.  Castanos explained in an 
earlier meeting that Petrobras never intended to invest USD 5 
billion in Bolivia as the press previously quoted.  He said 
that the largest project under consideration is a USD 1.3 
billion petrochemical project that would be financed by 
Braskem, Repsol, Petrobras, and others.  End note.)  In a 
further expression of discontent, which Castanos described as 
a deliberate slight encouraged by Petrobras, Brazilian 
President Lula refused to meet with Bolivian President Evo 
Morales during the April 3rd Inter-american Development Bank 
meeting in Belo Horizonte, Brazil. 
 
Petrobras' Next Steps 
--------------------- 
 
¶4. (SBU)  The next steps for Petrobras are unclear, but 
depend on the terms of the nationalization decree that the 
GOB has pledged to emit in mid-April (ref C).  Vice President 
Garcia Linera stated on television that nationalization would 
consist of seven "pillars": recouping state control over 
hydrocarbons at the wellhead, state control over distribution 
and commercialization, gaining majority shareholder status in 
the capitalized 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. 
 
¶5. (SBU) Castanos stated that the control over 
commercialization and the GOB's intention of relegating the 
hydrocarbons companies to "service providers" are the most 
objectionable parts of the plan.  He stated unequivocally 
that Petrobras is not interested in being a service provider, 
which would mean having to take whatever price the GOB was 
willing to pay for its services.  He added that Petrobras, 
backed by Brazil, would consider one of the following options 
if the GOB insisted on its "seven-pillar plan":  1) Petrobras 
and/or Brazil would do nothing for political reasons (the 
most unlikely option); 2) Brazil would stop buying Bolivian 
gas -- this is a double-edged sword because Brazil relies on 
Bolivian gas for four percent of its energy needs, and 
Bolivia relies on Brazil for its market without which Bolivia 
would not be able to produce enough gas from which to extract 
the liquids that it uses domestically; 3) Brazil would 
continue to import Bolivian gas but not pay for it, perhaps 
setting up an indemnity fund to compensate Petrobras for its 
investment losses; or 4) Petrobras would negotiate with the 
GOB for the next three years's gas supply, giving Brazil 
enough time to find substitutes for Bolivian gas. 
 
Bolivia's Pipe Dreams About Gas Prices 
-------------------------------------- 
¶6. (SBU) Castanos told us that Brazil and Bolivia will hold 
gas price negotiations in mid-April, as required by the 
existing contract between the two nations.  He claimed that 
the price paid by Brazil for Bolivian gas could only be 
increased if the Brazilian government were willing to 
subsidize gas for domestic consumers, who would not tolerate 
a significant price increase.  Brazil, however, was in the 
process of decreasing energy subsidies and was unlikely to 
implement new ones, Castanos said.  Election year politics in 
Brazil, he argued, would not support any financial 
concessions to the Bolivians.  He lamented that Bolivian 
Hydrocarbons Minister Soliz Rada did not understand that gas 
was not a commodity and that higher U.S. and Chilean gas 
prices could not be used as references for Bolivian gas.  He 
added that Bolivia has not submitted a proposal on price 
changes to Brazil, but has "negotiated" (as it has done in 
many other sectors) by issuing statements in the press. 
 
Vintage Echoes Petrobras Complaints 
----------------------------------- 
¶7. (SBU) Jorge Martignoni, the President of Vintage Petroleum 
(owned by the U.S. company Occidental Petroleum), echoed 
Petrobras' concerns on April 4, telling the Ambassador and 
Econoffs that Vintage was not a service company, but an oil 
company.  He noted that French-owned Total, one of the 
largest operators and reserve owners in Bolivia, had 
expressed the same sentiment to the GOB recently.  He stated 
that Vintage, which is a relatively small player in Bolivia, 
is placing its hopes on Petrobras' ability to push back the 
GOB's unreasonable demands and establish a better investment 
climate for the sector.  Martignoni stated that the GOB 
wanted to have more control over the private companies and 
was therefore planning to station YPFB (Bolivian state oil 
company) staff inside each company to monitor activities. 
Under the GOB's plan, YPFB would also have the authority to 
divvy up market share among the companies, deciding which 
companies would have the right to meet domestic and 
international demands.  Vintage was particularly concerned by 
the GOB's plan, as recently explained to him by two 
Hydrocarbons Vice Ministers, to conduct audits of each 
company and charge each one differential tax rates depending 
on whether or not they had recouped their investments. 
 
Still Waiting for Tax Breaks 
---------------------------- 
¶8. (SBU) The GOB had previously promised Vintage to implement 
special tax incentives for producers with small fields as 
provided for in the May 2005 Hydrocarbons Law, but has not 
yet done so.  After his meeting with the Vice Ministers, 
Martignoni became concerned that "special taxes" may mean the 
regular 50% rate set in the May law, while companies with 
"mega-fields" may be forced to pay taxes up to 60%. 
Martignoni complained that the GOB is creating conspiracy 
theories about the companies, claiming that they inflate 
their costs and do not pay enough taxes on their earnings. 
Martignoni said that if the GOB insisted on the companies 
signing "service contracts" and implemented the "seven 
pillars", Vintage, backed by U.S. giant Occidental Petroleum, 
would fight back.  Occidental recently won an arbitration 
case in Ecuador, he explained, and would not balk at pursuing 
arbitration against Bolivia.  If the situation deteriorated 
significantly, Vintage might pull out of the country, 
Martignoni said. 
 
Venezuelan Woes 
--------------- 
¶9. (SBU) Both Petrobras and Vintage executives expressed 
concern that PDVSA (Venezuelan state-owned oil company) staff 
are working at YPFB, and they have direct access to the 
presidential palace.  Castanos claimed there are Venezuelans 
running things behind the scenes at the palace and that the 
nationalization decree is being drafted by them. 
 
¶10. (SBU) Comment:  During the first two months of the new 
administration, both the GOB and the hydrocarbons companies 
have behaved in a cordial fashion, exchanging statements 
about cooperation and "nationalization" without 
expropriation.  However, the wolves are beginning to shed 
their sheep's clothing as the conversations move from 
generalities to details.  A clash could be on the horizon as 
both sides harden their lines.  End comment. 
GREENLEE