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FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6686
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 2891
RUEHRG/AMCONSUL RECIFE 5459
RUEHSO/AMCONSUL SAO PAULO 8062
RUEHBU/AMEMBASSY BUENOS AIRES 4274
RUEHSG/AMEMBASSY SANTIAGO 5786
RUEHAC/AMEMBASSY ASUNCION 5669
RUEHMN/AMEMBASSY MONTEVIDEO 6470
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001972 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USAID FOR LAC 
NSC FOR FEARS 
TREASURY FOR OASIA - J.HOEK AND TAX OFFICE - P.BROWN 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
DOE FOR S.LADISLAW 
 
E.O. 12958: N/A 
TAGS: EPET PGOV PREL EINV ECON BR
SUBJECT: BRAZIL RESPONDS TO BOLIVIA REFINERY SEIZURE 
 
REF: LA PAZ 2511 
 
¶1. (SBU) Summary:  Brazilian Minister of Energy Silas Rondeau told 
the press Thursday September 14 that the Bolivian effective seizure 
of Petrobras' refineries without compensation was "unacceptable" 
while President Lula rejected "unilateral" measures.  Stating that 
it needed time to study the Bolivian decree, the GoB postponed until 
the second week of October (after the first round of elections) a 
planned trip by Energy Minister Silas Rondeau, who was to lead a 
delegation for negotiations on the separate issue of gas prices. 
The Lula Administration appears to have again been blind-sided on 
hydrocarbons issues with Bolivia, as it was by Bolivian President 
Morales' May 1 nationalization decree.  While the Bolivian 
government reportedly suspended implementation of the measure on 
September 14, opposition presidential candidates nevertheless are 
spinning the incident as the logical consequence of Lula's "weak" 
response to the May 1 nationalization.  End Summary. 
 
¶2. (SBU) The Lula Administration again finds itself fighting a 
rearguard action over Bolivian government intervention in the assets 
of Petrobras, this time the effective seizure of the finances (via 
Bolivian Ministry of Hydrocarbons Resolution number 207/2006) of two 
Petrobras refineries.  According to local press accounts, the 
resolution, by giving Bolivian parastatal YPFB control of the sales 
of the refined product, hands YPFB financial control of the 
refineries and effectively reduces Petrobras to the role of service 
provider, operating the refinery.  Brazilian press accounts also 
complain loudly that there has not been any compensation paid 
Petrobras, stating that Bolivia is arguing that Petrobras has made 
"excess profits" which are to be deducted from any compensation for 
the refineries, resulting in no payment to Petrobras.  Clemente 
Baena Soares, the Foreign Ministry office director who covers 
Bolivia, noted to Emboff, however, that the issue of compensation 
was the subject of ongoing negotiations in one of three 
Brazil-Bolivia working groups.  It was as yet uncertain, he said, 
what effect this latest Bolivian action would have on those 
negotiations. 
 
¶3. (SBU) The Brazilian Ministry of Mines and Energy issued a terse 
statement, closely coordinated with the foreign ministry, stating 
that it would postpone until the second week of October (after the 
first round of the Brazilian elections) the planned September 14 
visit by Silas Rondeau.  Itamaraty's Baena Soares emphasized to 
Emboff that the visit was not canceled, merely postponed, and that 
the GoB needed time to analyze the effect of the decree.  That visit 
was to be the next negotiating session over the price Brazil is to 
pay for Bolivian gas.  Petrobras CEO Sergio Gabrielli, however, 
stressed to the press that the decree on the refineries was a 
separate issue from that of ongoing price negotiations for Bolivian 
gas. 
 
¶4. (SBU) Much like the original May 1 Evo Morales decree 
nationalizing Bolivia's hydrocarbons sector, this latest Bolivian 
action appears to have blind-sided the Lula Administration, 
according both to press reports and our Itamaraty contacts.  The 
Bolivian action reportedly set off a series of phone calls between 
Lula foreign affairs advisor Marco Aurelio Garcia (MAG) and Bolivian 
government officials, including Vice President Garcia Linera.  MAG 
later commented to the press that "If they had taken into account 
(the Brazilian electoral period), they surely would not have taken 
this unilateral decision."  These contacts, according to sources 
cited in the Brazilian press, resulted in the Bolivia's September 14 
suspension of the implementation of the decree.  An Itamaraty 
contact stressed to Emboff, however, that Bolivia had not backed 
away from its position, but merely postponed implementation. 
 
¶5. (SBU) Comment:  Despite the apparent suspended implementation of 
the decree, the Bolivian action exposes Lula politically, giving the 
opposition every opportunity to remind Brazilians of their visceral 
negative reaction to the May 1 nationalization of national champion 
Petrobras' assets.  Lula's management of that incident was perceived 
as weak and roundly criticized.  It also opens Lula up for more 
general criticism of his foreign policy priority on south-south 
 
BRASILIA 00001972  002 OF 002 
 
 
integration.  Already the opposition is spinning the Bolivian action 
as the logical consequence of Lula's bungled response to the May 1 
decree.  Unfortunately for Alckmin and Helena, there is very little 
time before elections for this line of attack to find resonance with 
the electorate.  Moreover, the Lula Administration's apparent 
success in convincing Bolivia to suspend implementation may keep the 
incident from truly seeping into the broader public consciousness. 
 
SOBEL