VZCZCXYZ0057
PP RUEHWEB

DE RUEHLP #1198/01 1251205
ZNR UUUUU ZZH
P 051205Z MAY 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 9092
INFO RUEHAC/AMEMBASSY ASUNCION 5815
RUEHBO/AMEMBASSY BOGOTA 3112
RUEHBR/AMEMBASSY BRASILIA 6974
RUEHBU/AMEMBASSY BUENOS AIRES 4220
RUEHCV/AMEMBASSY CARACAS 1513
RUEHPE/AMEMBASSY LIMA 1490
RUEHMD/AMEMBASSY MADRID 3101
RUEHMN/AMEMBASSY MONTEVIDEO 3759
RUEHFR/AMEMBASSY PARIS 0081
RUEHQT/AMEMBASSY QUITO 4153
RUEHSG/AMEMBASSY SANTIAGO 8699
RUEHBS/USEU BRUSSELS
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 001198 
 
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 BL
SUBJECT: NATIONALIZATION: COMPANY PERSPECTIVES 
 
REF: A. LA PAZ 1157 
 
     ¶B. LA PAZ 1159 
 
¶1. (SBU) Summary: While foreign investors were not surprised 
by most of the terms of the GOB's May 1 nationalization 
decree (ref A), they were nonetheless taken aback that their 
long-dreaded expectations appeared to have become reality. 
So far most companies have reacted in measured fashion, and 
reportedly plan to continue negotiating with the government. 
The Hydrocarbons Chamber President speculated that no company 
would proceed to arbitration in the short term. 
U.S.-invested companies, particularly Chaco and Transredes, 
are worried about the GOB's plan to gain ownership control 
over their operations.  Brazil has publicly expressed its 
concern about ensuring domestic gas supply and protecting 
investor rights, which are threatened by the GOB's plan to 
nationalize Brazilian-owned refineries, increase taxes 
attributable to Petrobras, and raise gas prices. 
Brazilian-owned Petrobras, which previously took a 
conciliatory tone with the GOB, ratcheted up its response on 
May 3, threatening to halt all investment and to initiate 
arbitration.  The Brazilian, Argentine and Venezuelan 
presidents are meeting with President Morales today (May 4) 
to discuss the decree.  Spain has also publicly expressed its 
discontent over the decree and reportedly plans to send a 
delegation to Bolivia.  End summary. 
 
Waiting for the Smoke to Clear 
------------------------------ 
¶2. (SBU) Foreign investors had no reason to be surprised by 
most of the terms of the GOB's May 1 decree "nationalizing" 
the country's hydrocarbons resources, but that didn't stop 
them from feeling shock that long-dreaded expectations 
appeared to have become a reality.  So far, most companies 
have taken a measured public response, as though waiting for 
the smoke to clear.  An advisor to Repsol told us that, apart 
from the temporary 32% tax increase on operators in 
mega-fields, it remained unclear what the decree had 
concretely changed.  He said the decree had been mostly 
political, and intended to shore up the government's base as 
the Constituent Assembly campaign got underway (ref B).  At 
the same time, the decree had also conveyed the government's 
hard-line starting position on negotiating new contracts, for 
which it allowed six months, and that the results of those 
negotations were what mattered most. 
 
Hydrocarbons Chamber: Companies will Negotiate 
--------------------------------------------- - 
¶3.  (SBU) Bolivian Hydrocarbons Chamber President, Enrique 
Menacho, told us the Chamber issued a cautious press 
statement in response to the decree expressing concern that 
the GOB had unilaterally and negatively altered the 
conditions under which companies must operate and 
counterproductively impacted legal security and investment 
promotion, but that the Chamber would try to promote a 
productive dialogue between the companies and the GOB. 
Menacho told us that his impression from a May 2 meeting the 
Chamber had held with company representatives was that the 
companies would continue to seek negotiations with the 
government and refrain from initiating arbitration -- which 
he described as a last resort -- at least in the short term. 
He added that the GOB and Venezuelan auditors (ref A) were 
investigating the companies in order to pressure and weaken 
them in the run up to negotiations with the government.  He 
stated that the GOB's 32 percent increased taxation of fields 
producing more than 100 million cubic feet per day could 
cause a production decrease. 
 
U.S. Company Perspectives: Chaco, Transredes, GTB, Vintage 
--------------------------------------------- ------------- 
¶4.  (SBU) U.S. companies have invested roughly USD 800 
 
E 
million in Bolivia's hydrocarbons sector.  Of these, the two 
companies that invested in enterprises that had been owned by 
the state before being "capitalized" -- Pan-American and 
Prisma -- would likely be most impacted by the decree.  Chaco 
(Pan-American) executive, Jana Drakic, told us on May 2 that 
the company was particularly concerned about the GOB's plan 
to acquire 50 percent plus one of its shares.  She said the 
GOB had not discussed acquiring the shares with Chaco, and 
that it was unclear whether the GOB intended to purchase or 
expropriate them.  She explained that the pension funds held 
approximately 49 percent of the company's shares, and that 
after confiscating those from the Bolivian public, the GOB 
would need to obtain an additional 1 percent plus one share 
from U.S. and Argentine private investors to gain majority 
control.  Drakic added that roughly 80 percent of pension 
payments directed to elderly Bolivian retirees currently came 
from Chaco, Repsol Andina, and Transredes, the three 
capitalized hydrocarbons companies, and said she did not know 
how the GOB would continue to make these payments after these 
pension fund shares had been confiscated and transferred to 
YPFB (the state oil company).  Drakic said that news reports 
of military occupation were exaggerated, and that less than 
20 (compared with 56 reported in the news) installations had 
a military presence. 
 
¶5. (SBU) Transredes (Prisma, pipeline operator) executive, 
Maria Claudia Dabdoub, told us the company would continue 
negotiating with the GOB, but (echoing her Chaco counterpart) 
did not know how the GOB would seek to acquire majority 
ownership of the company.  Dabdoub explained that only 34 
percent of Transredes was held by Bolivian pension funds, 
while 16 percent was held by private individuals, 25 percent 
by Shell, and 25 percent by Prisma.  Thus, after the GOB 
confiscated the pension fund shares, it would still need to 
obtain 16 percent plus one.  Dabdoub doubted that Prisma or 
Shell would be willing to sell these shares.  She added that 
YPFB staff had told her that Transredes' foreign executives 
would be replaced by Bolivians after the take-over.  She 
noted that the military occupation had created an unpleasant 
working environment, in which all staff were searched 
entering and exiting the offices to ensure that they were not 
removing documents. 
 
¶6. (SBU) GTB (U.S.-invested pipeline operator that is 51 
percent owned by Transredes) President Ed Miller said that 
the GOB had neither met with them nor provided them with a 
model contract.  He said that the GOB's potential plan to 
expropriate shares, name board presidents, and take control 
of corporations was contrary to Bolivian law.  He expressed 
his concern that the Transredes Board could be infiltrated by 
YPFB members, which might then attempt to take over seats on 
the GTB board, on which 2 of 5 positions are held by 
Transredes.  He was also concerned about the GOB audits being 
conducted in part by Venezuelans.  He claimed that such 
audits would be used to "find irregularities, which could be 
found at any company, and blow them out of proportion" in 
order to gain negotiating leverage.  He heard that up to 50 
Venezuelan auditors had been contracted by the GOB at a rate 
of USD 2 million to inspect the hydrocarbons companies. 
Dabdoub confirmed that Venezuelan auditors had been in 
Bolivia for more than one week. 
 
¶7. (SBU) Vintage Petroleum (Occidental), a relatively small 
producer, told us that the decree would have a minimal impact 
on its operations, in comparison with the already enacted May 
2005 Hydrocarbons Law.  As a producer with small fields, the 
law provides for a lower than average tax rate, even though 
the relevant regulations have not yet been promulgated. 
Moreover, he said, Vintage was not a capitalized company, and 
thus not subject to direct GOB control.  He was nonetheless 
concerned about the requirement to sign a new "service" 
contract and to give up ownership rights to its production 
and control over commercialization decisions. 
 
Brazilian, Spanish, and Argentine Actions 
----------------------------------------- 
¶8. (SBU) The Brazilian Ambassador told Ambassador Greenlee on 
May 2 that Brazil was not surprised by the terms of the GOB's 
decree, including its plan to nationalize the Petrobras-owned 
refineries, but by its timing, as it had interrupted ongoing 
talks with Brazil and burst the illusion of progress during 
those talks.  He said that the GOB had previously stated that 
it intended to pay for the refineries, possibly through 
future concessions to Petrobras, but that it was currently 
unclear whether or not compensation would be provided, and if 
so, how much or how.  If Petrobras received adequate 
compensation, he said, it would prefer that the Bolivian 
government take over 100 percent of the refineries instead of 
51 percent.  He expressed concern about the unilateral nature 
of Bolivian policy, the unreasonable tax increase applied to 
Petrobras, and the decree's provision that gas prices would 
be established by YPFB, which implied that mutual consent -- 
as required by the GSA contract between YPFB and Brazil -- 
would play no role.  He was also worried about the 
requirement to sign service contracts, which Petrobras had 
already declared it would not do, but acknowledged that 
Petrobras' real bottom line was not clear.  The Brazilian 
Ambassador gave the Ambassador a copy of an official 
statement issued on May 2 after the emergency meeting between 
President Lula, several ministers, and the President of 
Petrobras (ref A).  The statement recognized Bolivia's 
sovereignty and right to manage its own resources and 
emphasized maintaining a steady gas supply to (dependent) 
Brazil, but also noted that private investor rights should be 
respected.  The Brazilian Ambassador told us that these 
issues would be discussed further in a May 4 meeting between 
Brazilian President Lula, Argentine President Kirchner, 
Venezuelan President Chavez, and President Morales. 
 
¶9. (SBU) According to press reports, Petrobras ratcheted up 
its response on May 3, threatening to halt all investment and 
bring the GOB to court.  Petrobras executive, Arturo Castanos 
told us on May 4 that the company has not yet filed a trigger 
letter to begin the arbitration process, but is considering 
doing so. 
 
¶10. (SBU) According to news reports, Spain has expressed 
discontent with the decree and plans to send a delegation to 
Bolivia to discuss the issue.  Hydrocarbons Chamber President 
Menacho told us that Spain is providing considerable support 
to Repsol in its negotiations with the GOB.  Repsol 
executive, Miguel Cirbien, told us the company was worried 
about the 32 percent tax increase imposed on large producers 
as well as the GOB's plan to take over its Bolivian 
operation.  He said Petrobras was the only company producing 
more than 100 million cubic feet per day in the two fields to 
which the 32 percent tax applies, thus Petrobras was the only 
company that would have to pay the additional tax.  Other 
industry representatives believe that the tax would apply not 
only to Petrobras, but also to Repsol and Total.  Cirbien 
acknowledged that Repsol had recouped its initial investment, 
but argued that the company continued to make additional 
investments since that time.  Cirbien said Repsol would 
continue trying to work with the GOB to clarify what it 
"really wants." 
 
¶11. (SBU) Comment: Ultimate company decisions to continue 
playing the GOB's game, pull out, or seek arbitration will 
depend on the GOB's flexibility in negotiating tax rates, its 
ability and willingness to pay for company shares, and its 
definition of "service" provider.  Company executives are 
hoping that President Lula pressures Morales into softening 
his tone and demands in today's (May 4) meeting.  Petrobras' 
hardening tone has reassured other companies, which intend to 
ride on Bolivia's largest gas producer's coattails as much as 
possible.  End comment. 
GREENLEE