VZCZCXRO2639
PP RUEHRG
DE RUEHSO #0464/01 1231404
ZNR UUUUU ZZH
P 031404Z MAY 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 4964
INFO RUEHAC/AMEMBASSY ASUNCION 2535
RUEHBO/AMEMBASSY BOGOTA 1352
RUEHBR/AMEMBASSY BRASILIA 6107
RUEHBU/AMEMBASSY BUENOS AIRES 2193
RUEHDR/AMEMBASSY DAR ES SALAAM 0020
RUEHLE/AMEMBASSY LUXEMBOURG 0009
RUEHMN/AMEMBASSY MONTEVIDEO 1944
RUEHSG/AMEMBASSY SANTIAGO 1684
RUEHRG/AMCONSUL RECIFE 2885
RUEHRI/AMCONSUL RIO DE JANEIRO 7050
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEGDOE/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/USDOC WASHDC 2399

UNCLAS SECTION 01 OF 03 SAO PAULO 000464 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR SUE CRONIN 
DOE FOR SLADISLAW 
TREASURY FOR OASIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EINV ECON PGOV PREL BL BR
SUBJECT: MULTINATIONAL'S CONCERNS ABOUT BOLIVIAN GAS 
NATIONALIZATION 
 
REF: A. 05 SAO PAULO 735 
     ¶B. 05 SAO PAULO 789 
     ¶C. SAO PAULO 152 
     ¶D. BRASILIA 754 
 
¶1. (SBU) Summary: The Sao Paulo-based head of British Gas 
(BG) for South America expressed grave concerns about the May 
1 Bolivian Government decree nationalizing natural gas 
production.  Brazil's Petrobras was hit the worst of all the 
multinational companies, losing much of its revenue stream in 
Bolivia's largest gas fields and losing control of its two 
refineries.  Waddell predicted a muted international reaction 
as companies await further definition of the decree's vague 
provisions.  Should foreign companies leave or be expelled, 
Bolivia has the capacity to continue current production by 
coercing Bolivian hydrocarbons industry workers to stay on 
and importing Venezuelan industry executives.  Bolivia will 
likely continue sending natural gas to Brazil, which has 
recently tested provisions to reduce gas consumption if need 
be.  Production in Brazil's Santos Basin, which has the 
potential to replace Bolivian gas, will not start production 
until 2009 at the earliest. End Summary. 
 
Evo's Masterful Maneuver 
------------------------ 
 
¶2. (SBU) During a May 2 conversation, BG Executive Vice 
President for South America Rick Waddell told Econ/Pol Chief 
that Bolivian President Evo Morales had been very politically 
astute in how he issued the May 1 (May Day) decree 
"nationalizing" hydrocarbons production, raising taxes to 82 
percent in Bolivia's two mega fields (run by Petrobras, 
Repsol, and Total), and regaining state control of 
capitalized companies (including the Transredes pipeline 
company operated by US company Prisma, and the two EBR 
refineries run by Petrobras) with no mention of compensation. 
 Waddell noted that Evo had originally wanted to issue the 
decree mid-April (during Holy Week) but had delayed after 
Petrobras complained about the lack of consultation.  The 
Bolivian Government sent senior hydrocarbons officials 
(including Minister Solis) two times to Brasilia for talks, 
which went badly since the Bolivians simply told the 
Brazilians they had to be willing to work in Bolivia as mere 
service providers.  Nonetheless, Waddell continued that 
Petrobras and the other hydrocarbons companies could not 
believe the Bolivian Government would actually do what 
Morales said he would do (and in the process turning its back 
on future investment from Brazil), a complacency encouraged 
by conciliatory public statements by the Bolivians through 
last week.  According to Waddell, the decree, which was 
harsher than expected, was driven by ideology and meant to 
help Morales consolidate himself in power by coming two 
months before elections for Bolivia's constituent assembly, 
which Morales hopes will rewrite the country's constitution a 
la Chavez in Venezuela. 
 
Big Blow to Brazil 
------------------ 
 
¶3. (SBU) Waddell characterized the decree as a slap in the 
face of Brazil, one of the countries that has been most 
supportive of the new Morales administration.  The fact that 
the Brazilian Government recalled both Foreign Minister 
Amorim and Petrobras President Gabrielli from abroad shortly 
after the decree's issuance is indicative of how concerned 
the Brazilians are.  One potential carrot in the decree that 
the Bolivians will likely use on Petrobras is the offer to 
"audit" companies in the megafields on a case-by-case basis 
and offer some rebate of the huge 82 percent tax bill. 
Waddell noted that the decree leaves many questions 
 
SAO PAULO 00000464  002 OF 003 
 
 
unanswered on procedures and definitions, including what will 
happen with Petrobras' refineries. 
 
Muted International Reaction 
---------------------------- 
 
¶4. (SBU) Waddell predicted little concrete reaction by the 
international community to the nationalization decree.  As 
previously reported, the multinationals had all sent "trigger 
letters," which allege non-compliance of contracts by the 
Bolivian Government and enable any of the companies to start 
international arbitration cases against Bolivia.  (Note:  Our 
understanding is that Petrobras never sent a trigger letter. 
End Note).  He doubted any of the companies would begin 
arbitration yet, preferring to see how events unfold.  This 
lack of action, in turn, emboldens Morales, who thinks he can 
emulate what Chavez did to the companies in Venezuela.  The 
difference, asserted Waddell, is that the companies in 
Venezuela had already invested tens of billions of dollars 
there and could not afford to walk away.  Bolivia, on the 
other hand, is at the beginning of its investment cycle (now 
frozen), and the multinationals could afford to walk away if 
need be.  For example, Bolivia provides just two percent of 
BG's world production, and their total investment there is 
about ten percent of BG's annual profit; a hit, but not 
fatal. 
 
With Venezuelan Help, Bolivia Can Maintain Production 
--------------------------------------------- -------- 
 
¶5. (SBU)  Waddell believes that even if the multinational 
companies leave Bolivia or are kicked out, the Bolivians will 
be able to keep up current production, though not do any new 
investment.  While YPFB, the Bolivian state hydrocarbons 
company, does not have enough qualified technicians to keep 
things running, enough Bolivian workers could easily be found 
at the multinationals.  In BG's case, there are only three 
foreign executives in the country, with the rest being 
Bolivian nationals.  The Bolivians could be coerced into 
staying on once the "imperialists" were gone and work for 
YPFB, or they would be unemployed, or even jailed as 
"traitors."  Executives from Venezuelan state hydrocarbons 
company PDVSA could replace the expelled foreign executives. 
Waddell recounted BG's recent experience, when YPFB wanted to 
check out a BG field ostensibly to inquire about bottled 
natural gas.  In reality, the visit was to check on the whole 
operation, with only two YPFB employees showing up along with 
a dozen PDVSA employees wearing their company work clothes. 
The PDVSA workers insulted the BG Bolivians, telling them 
they will soon have to wear a Venezuelan flag over the 
Bolivian flag on their work clothes. 
 
Unlikely to Hurt Brazil's Gas Supply 
------------------------------------ 
 
¶6. (SBU)  While difficult to predict the decree's impact on 
Brazil's natural gas supply, especially given the Morales 
administration's unpredictability, Waddell doubted that 
Bolivia would try to cut off or reduce the supply of gas to 
Brazil.  Bolivia needs the revenue from Brazilian sales too 
much, as well as the petroleum for the domestic market that 
can only be produced in conjunction with natural gas. 
Waddell also doubted the Bolivians would unilaterally try to 
raise the price of gas to Brazil given that the contract 
regulating the price was signed under New York law and would 
generate the same problems of reduced revenue if the 
Bolivians tried to reduce or cut off Brazil's gas supply. 
Waddell used Brazil's recent actions after the gas supply 
from Bolivia was reduced from a landslide-damaged pipeline as 
an example of what Brazil could do to mitigate the effects of 
 
SAO PAULO 00000464  003 OF 003 
 
 
reduced supply.  The current pipeline has a capacity of 30 
million cubic meters (mm3) per day, and Brazil was taking 26 
mm3 before the accident in March dropped the flow to 21 mm3. 
To make up for the missing 5 mm3, the Brazilians decreased 
thermo-electric electricity generation using gas and switched 
the power used to run two major Petrobras refineries in 
Brazil.  This resulted in enough energy savings to allow 
other industries to continue to use gas during this period. 
Although it will take another 30-60 days to finish repairs to 
the pipeline in Bolivia, most of the missing gas has already 
been made up through bypasses.  If further gas use reduction 
is needed, Brazil can raise taxes on natural gas use in 
vehicles and lower taxes on gasoline use. 
 
¶7. (SBU) Regarding the potential gas reserves in Brazil's 
Santos Basin, Waddell noted that the Brazilian Government 
publicly states that production will begin by 2008, a ploy 
used to pressure Bolivia.  The industry (including candid 
Petrobras officials), however, knows that production cannot 
begin until 2009 at the earliest.  The Basin can eventually 
produce 30 mm3, enough to replace the Bolivian gas supply, 
and perhaps even more as exploration continues (the 
exploration-to-production phase takes 3-5 years).  Waddell 
also discussed how Bolivia could increase production to 
maximize the 30 mm3 capacity of the pipeline, should Brazil 
need more gas before Santos is on-line.  Even in the poor 
current investment climate in Bolivia, companies could be 
willing to invest more money in Bolivia to bring fields 
relatively easily and cheaply into production.  However, no 
one is willing to invest in new production development or 
build new pipelines. 
 
Bolivia's Lost Opportunities with Other Neighbors 
--------------------------------------------- ---- 
 
¶8. (SBU) Bolivia is currently selling 4-6 mm3 to Argentina on 
interruptible contracts, which Argentina would like to make 
permanent and increase in volume.  While this could be a 
windfall for Bolivia, Waddell does not foresee needed 
investment materializing to take advantage of this demand. 
Chile, which would normally be a good customer for Bolivian 
gas were it not for political problems, will import more 
expensive liquefied natural gas (LNG) via a BG 
regassification plant. 
 
¶9. (U) This cable was coordinated with Embassies Brasilia and 
La Paz. 
MCMULLEN