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RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 001094 
 
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: EPET ENRG EINV ECON PGOV CH BR BO
SUBJECT: PETROBRAS' CAREFUL STEPS 
 
REFS: A) BRASILIA 1017 
 
      B) BRASILIA 1029 
      C) LA PAZ 1407 
 
¶1. (SBU) Summary:  In a May 26 meeting Petrobras Director of 
International Affairs Nestor Cervero told the Charge, CG and econoff 
that three issues occupy most of the discussion in ongoing 
negotiations with Bolivia -- the degree to which the Bolivian 
government will increase well-head taxes, how the Bolivian 
government intends to pay for the 50 percent plus one share stake 
that YPFB wants in Petrobras' Bolivian operations, and Bolivia's 
"unacceptable" proposal for a unilateral price increase.  Cervero 
said the company hopes to reach a negotiated agreement within the 
6-month time period allotted by the Bolivian authorities (i.e., by 
mid-November).  Petrobras is forging ahead with plans to: a) build 
two re-gasification plants to allow Liquid Natural Gas (LNG) 
imports, and b) speed development of its own offshore gas resources. 
 These efforts to increase Brazilian access to alternative sources 
of gas, Cervero declared, mean that whatever the outcome of the 
negotiations with Bolivia, that country will not be able to increase 
the amount of gas it exports to Brazil.  In Ecuador, Petrobras has 
no intention of taking over Occidental Petroleum's assets, Cervero 
said, despite media reports claiming the company was interested.  To 
do so would be bad business, he commented.  On the R&D side, 
Petrobras has successfully tested a soybean oil and diesel fuel mix 
that it intends to use at all of its refineries.  With deals moving 
forward in Asia, Latin America and Africa, Petrobras would like to 
further develop the biofuel technology industry.  End Summary. 
 
BOLIVIA 
------- 
 
¶2. (SBU) Bolivian President Evo Morales has a problem, Cervero told 
Charge, Consul General, and Econoff.  He needs USD one billion by 
year end for "budget support," without which, Morales could be 
forced out of office before the end of his term, as have so many 
Bolivian presidents before him.  Clearly, said Cervero, Morales 
hopes to raise 500 million from oil and gas company taxation and 
another 500 million from natural gas price increases.  Knowing this, 
Petrobras does not take the increased taxes and proposed price hike 
personally, only the dramatic manner in which these demands were 
made.  Having Bolivian military on the property with guns etc. is 
more than a bit uncomfortable, Cervero said. 
 
¶3. (SBU) Cervero opined that while Petrobras was on weaker ground in 
fighting the 64 percent tax increase (from 50 to 82 percent at the 
well head), the company could and would refuse the unilateral price 
increase.  When pressed, Cervero admitted that the company could 
still operate at the 82 percent tax rate.  The Bolivian government 
has access to our pricing formula, so they did not pull the 82 
percent figure out of thin air, he admitted. 
 
¶4. (SBU) The non-starter for Petrobras was Bolivia unilaterally 
dictating a gas price increase of US$2 to the current price of US$3 
per million British Thermal Units, or BTUs.  Cervero stated that the 
price increase would have to be negotiated carefully, based on the 
guidelines laid out in the existing contract.  His assessment was in 
line with what Banco Pactual Energy analyst Pedro Batista told 
econoffs in a prior May 22 meeting.  Pactual predicts that the 
parties will settle on a price increase more along the lines of 
70-75 cents instead of two dollars. (NOTE: Recent press reports 
state that the Bolivian government has proposed a much higher price, 
circa US$3.40). 
 
¶5. (SBU) Ultimately the negotiation between Petrobras (i.e. not the 
Brazilian government) and Bolivia will need to continue for the two 
to come to some sort of agreement.  Cervero could not specify what 
that agreement would entail but noted that the parties are still 
 
BRASILIA 00001094  002 OF 003 
 
 
negotiating and will work hard to meet the mid-November deadline set 
by the Bolivian government.  Cervero made clear that Petrobras is 
concerned about how Bolivia will compensate the company for the 
Yacimientos Petroliferos Fiscales Bolivianos (YPFB)'s desired 50 
percent plus one share controlling stake in company operations in 
Bolivia. Petrobras is also concerned that Bolivia has not been 
paying its contractual obligations, i.e., the diesel fuel that 
Petrobras supplies to the country.  (Note:  May 31 press reports 
quoted YPFB spokesmen as calling the shortage of diesel in Bolivia 
an "act of sabotage" by Petrobras.  For its part, in a June 1 press 
release Petrobras Bolivia stated it had halted imports because the 
Bolivian government had failed to pay the subsidy designed to keep 
Bolivian diesel prices below market prices.) 
 
¶6. (SBU) When pressed about next steps in regarding the company's 
Bolivian assets, Cervero responded that Petrobras would invest no 
more money in Bolivia above minimum maintenance requirements and 
therefore would not expand the pipeline.  Instead, the company will 
move forward on its two proposed LNG regasification sites in Rio de 
Janeiro and Ceara states. Petrobras' hope is to eventually replace 
Bolivian natural gas, but Cervero admitted that it will take some 
doing. 
 
ECUADOR 
------- 
 
¶7. (SBU) On the subject of Ecuador, Charge reiterated USG position 
on the expulsion of Occidental Petrobleum and advised that other 
companies' involvement in the dispute would be unhelpful (ref b). 
Cervero responded that Petrobras will not take over Occidental 
Petroleum's recently nationalized assets.  To do so, according to 
Cervero, would be bad business for Petrobras -- which has partnered 
with Occidental on a project in the U.S. Previously, Petrobras had 
faced the same sort of choice in the Sudan and had also declined to 
participate, citing a similar partnership arrangement.  However, 
Cervero noted that the company fully intends to continue the other 
projects it has with the Ecuadorians. 
 
VENEZUELA 
--------- 
 
¶8. (SBU) Cervero believes that Venezuelan President Chavez's 
proposal several months ago to purchase 36 petroleum platforms from 
Brazil is now off the table. Chavez has apparently decided that 
spending his petro-capital on China and Argentina would have a 
better political pay off than Brazil, Cervero continued.  However, 
the USD 2.5 billion Petrobras/PDVSA refinery deal is still slated to 
be finished in 2011.  Cervero further noted that Chavez also seems 
to be moving towards usurping Petrobras' place in Bolivia, as in 
meetings with Bolivian officials, members of the Venezuelan 
Petroleum parastatal, PDVSA, are often present, giving the Bolivians 
advice.  As for the proposed 8000 km gas pipeline connecting Brazil, 
Venezuela, Argentina and possibly Bolivia, Cervero demurred, stating 
only that Petrobras is participating in the feasibility study. 
 
RENEWABLES 
---------- 
 
¶9. (SBU) Petrobras is a leader in renewable energy technology, said 
Cervero.  The company supports the initial phases of production of 
sugar cane-based ethanol in Venezuela, Argentina, Colombia, of 
cassava-based ethanol in Nigeria, and is negotiating agreements to 
develop cane-based production in Angola and South Africa.  The 
choice of Africa is obvious to Petrobras as that continent possesses 
large tracts of land that can be put to use above subsistence level 
agriculture.  Cervero highlighted the possibilities for renewable 
technologies to help turn around developing economies, in particular 
in places like Haiti.  He said that Petrobras' agreement with Japan 
 
BRASILIA 00001094  003 OF 003 
 
 
is an export only deal, unlike the rest of its contracts in the 
renewables area.  Cervero also noted that Petrobras had developed a 
new approach to biodiesel production whereby soybean oil is blended 
into diesel as part of the petroleum refining process, resulting in 
a biodiesel comprised of 18 percent of soybean oil.  This biodiesel 
would reduce sulfur emissions and provide soy producers with an 
alternative to the Chinese export market. The company recently 
tested the 18 percent solution in three refineries and plans to 
extend its use to all Petrobras facilities. 
 
COMMENT 
------- 
 
¶10. (SBU) With Lula's Vienna conversation with Morales apparently 
having helped tone down, at least temporarily, Morales' and the 
Bolivian government's rhetoric on Petrobras (ref B), the action will 
shift more and more to the ongoing negations between Petrobras and 
Bolivia.  As a publicly traded company, Petrobras has legal 
obligations to protect its shareholders and will be required 
forcefully to defend its interests, despite Lula's conciliatory 
public comments.  The negotiations over the price of the gas, in 
particular, are shaping up to be contentious.  On a parallel track, 
Cervero's comments confirm the view that, having been burnt, 
Petrobras and Brazil will systematically reduce their dependence on 
Bolivian gas over the next few years and will not undertake new 
investments in the country.  From the Brazilian perspective, 
whatever the outcome of the negotiations, Bolivia's actions mean 
Brazil will refrain from investments designed to increase gas 
imports from Bolivia.  What had been an energy relationship with 
potential for growth seems to have become stagnant, at best. 
 
CHICOLA