VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #2730/01 2842027
ZNR UUUUU ZZH
P 112027Z OCT 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0832
INFO RUEHAC/AMEMBASSY ASUNCION 6172
RUEHBO/AMEMBASSY BOGOTA 3486
RUEHBR/AMEMBASSY BRASILIA 7347
RUEHBU/AMEMBASSY BUENOS AIRES 4609
RUEHCV/AMEMBASSY CARACAS 1863
RUEHPE/AMEMBASSY LIMA 1904
RUEHME/AMEMBASSY MEXICO 1812
RUEHMN/AMEMBASSY MONTEVIDEO 4073
RUEHQT/AMEMBASSY QUITO 4499
RUEHSG/AMEMBASSY SANTIAGO 9074
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 002730 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/AND, WHA/EPSC/CORNEILLE, EB/ESC/IEC/IZZO, 
S/P/MANUEL, OES/STC/BATES 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG PREL PGOV BL
SUBJECT: RESPONSE TO LAC BIOFUELS INITIATIVE 
 
REF: SECSTATE 164558 
 
¶1. (U) Summary:  This cable responds to the questions posed 
in reftel on the investment climate, the energy sector and 
the sugar industry in Bolivia.  The investment climate, 
particularly in natural resource industries, is poor due to 
legal uncertainty and increasing governmental interference. 
Bolivia's biodiesel and ethanol production is minimal, but a 
few investors are looking to expand production in Santa Cruz. 
 Bolivia has a framework biofuels law, but has not issued 
implementing regulations.  The law aims to have the 
automobile fleet operating on a 20 percent ethanol blend 
within ten years, but does not mandate such use.  Land reform 
proposed by the GOB is a barrier to increased investment in 
sugar production.  End summary. 
 
General Overview 
---------------- 
¶2. (U) Bolivia holds South America's second largest natural 
gas reserves.  Bolivia produces enough natural gas, 
petroleum, gasoline and liquid petroleum gas to supply its 
domestic market and exports approximately 30 million cubic 
meters of natural gas per day to Brazil and Argentina. 
Bolivia imports diesel.  The government spends around USD 100 
million per year on diesel subsidies to maintain a low 
domestic price.  Electricity generators use natural gas and 
hydro-power.  Automobiles run on gasoline, natural gas, and 
liquid petroleum gas.  The general investment climate is 
poor, particularly in the hydrocarbons sector, due to legal 
uncertainty and increasing governmental interference in key 
sectors.  Land reform proposed by the GOB has created 
uncertainty for large farms, and increased the difficulty 
farmers face in obtaining credit to finance investments. 
 
 
Investment Climate 
------------------ 
¶3. (U) The general investment climate in Bolivia is poor due 
to legal uncertainty, GOB attempts to nationalize natural 
resource industries, and government efforts to exert stronger 
state control over key sectors.  Bolivia has a general 
environmental protection law, but no specific regulations for 
bio-refineries.  The Oil Seed Producers Association (ANAPO) 
in Santa Cruz is running a pilot bio-diesel project using 
soy.  Ethanol production is currently minimal, but a Santa 
Cruz business, Bethanol LLC, is seeking investment for three 
ethanol plants it hopes to build in the next four years to 
produce a total of 160 million gallons of ethanol per year. 
For more information on the projects, see www.bethanol.net. 
Although the manager of Bethanol told us that he does not 
know of other ethanol initiatives, according to a report by 
the Worldwatch Institute, 15 sugar cane distilleries are 
being constructed in Bolivia.  Exports of biodiesel and 
ethanol are minimal. 
 
¶4. (U) Automobiles generally run on gasoline, diesel, or 
liquid petroleum gas (LPG).  Many vehicles have been 
illegally converted to run on LPG, because the government 
maintains an artificially low LPG price.  Newer vehicles 
could use a 10 percent ethanol/90 percent gasoline blend, but 
many of the vehicles on the road in Bolivia would not be able 
to use an ethanol blend due to age.  Few flex fuel cars are 
contained in the fleet.  Bolivia lacks adequate distribution 
infrastructure for transporting and blending ethanol. 
Private operators distributed gasoline, diesel, and LPG from 
Bolivian refineries to gas stations until July 1, when the 
state-owned oil company YPFB assumed control of distribution. 
 
¶5. (U) Foreigners currently have the right to own land in 
Bolivia; however, Bolivia is in the process of rewriting its 
constitution, and land reform is a main issue.  Approximately 
60 percent of Bolivia's soy is produced by Brazilian-owned 
farms.  Owners of industrialized farms are concerned that the 
GOB will take their land to distribute to landless peasants 
or grant community property titles to indigenous groups.  The 
government has stated, in accordance with the current law, 
that land which is not deemed to be fulfilling an economic 
and social function will be taken by the state and 
redistributed.  Although the current law allows for this, 
redistribution has not occurred in the past.  The land 
titling process can take several years to complete, but the 
government plans to streamline this process.  Legal 
uncertainty has hindered farmers' ability to obtain credit. 
 
¶6. (U) Bolivia is landlocked, but does have access to port 
facilities in Arica, Chile and on the Paraguay River leading 
into Brazil.  Bolivia has road access to Chile, Argentina, 
and Brazil.  Bolivia's transportation infrastructure in 
general is poor, and transportation costs add significantly 
to its export costs.  Bolivia lacks support services for 
industrial infrastructure, as it lacks industry.  Skilled 
workers are migrating in large numbers to other countries due 
to the lack of opportunities in Bolivia.  The government does 
not offer concessional financing or tax breaks for energy 
investments.  In fact, the GOB tax scheme for hydrocarbons 
producers is a disincentive for investment.  Royalties are 
currently 18 percent, taxes 32 percent, with an additional 32 
percent temporary tax on the largest producers.  Potential 
investors in biodiesel and ethanol are currently seeking to 
clarify if the GOB would consider such fuels to be 
hydrocarbons.  They argue that they should be considered fuel 
additives, and thus the hydrocarbons law (and tax regime) 
should not apply.  This debate is critical for the future of 
the industry, as the industry is not likely to flourish if it 
is forced to pay the same taxes as gas producers.  According 
to ANAPO, producers of biodiesel for export would be exempt 
from import duties on machinery inputs for five years under 
import tariff regulations.  Producers in general, not for 
export, would pay a 5 percent tariff on all capital goods 
imported. 
 
Energy Sector 
------------- 
¶7. (U) During the late 1990s, the GOB partially privatized 
state-owned industries in the electricity and hydrocarbons 
sectors.  At that time, the government also passed 
investor-friendly legislation, promoting significant private 
investment in both sectors.  However, a backlash between 1999 
and 2003 caused by an economic downturn and continued high 
poverty rates has resulted in a push to nationalize these 
sectors and revitalize the diminished state industries.  In 
May 2005, the GOB passed a new hydrocarbons law which 
increased taxes and took commercialization control away from 
private investors.  In May 2006, the government issued a 
supreme decree which partially nationalized hydrocarbons in 
line with the 2005 law and required hydrocarbons producers to 
sign new contracts by October 31, 2006.  The decree mandated 
the restructuring of the state-owned hydrocarbons firm YPFB, 
but to date YPFB remains largely a shell which lacks human 
and financial resources.  According to the law, the domestic 
price of natural gas can be no more than 50 percent of the 
export price.  Domestic LPG prices are capped by the 
government, with producers effectively subsidizing consumers. 
 The government imports diesel and spends approximately USD 
100 million per year on subsidies, which benefit soy 
producers in Santa Cruz who are the main users. 
 
¶8. (U) The government plans to revitalize the state-owned 
electricity company, ENDE, but the sector is currently 
dominated by private generators.  Electricity is generated 
using hydro-power and natural gas.  The GOB established an 
electricity "dignity tariff" on March 21, introducing a 25 
percent reduction in rates for consumers who use fewer than 
70 kilowatt hours of electricity per month.  The 16 companies 
comprising Bolivia's national electricity network agreed to 
accept the rates and to bear an estimated $4.5 million in 
annual costs, but only under heavy government pressure.  The 
companies are essentially subsidizing consumers.  Electricity 
demand is predicted to grow significantly in the next decade, 
but investment prospects in the sector have been dampened by 
the uncertain legal environment and the GOB's actions which 
have diminished company profits.  The private electricity 
producers supply electricity to the national electricity grid 
and to isolated rural systems.  According to ANAPO contacts, 
there is a framework biofuels law in place, but no 
implementing regulations have been issued.  The biofuels law 
aims to have the automobile fleet using a 20 percent ethanol 
blend within ten years, but does not mandate such use. 
 
Sugar Industry 
-------------- 
¶9. (U) Bolivia has been self-sufficient in sugar since 1963. 
The sugar industry is concentrated in Santa Cruz department 
and is not highly mechanized.  Bolivia has been criticized by 
human rights organizations for employing child labor in sugar 
cane cultivation.  Harvesting methods do include burning in 
the field.  This practice is forbidden by Bolivia's 
environmental law, but restrictions are not enforced.  The 
total area cultivated for sugar cane is 107,000 hectares, 
producing 5 million metric tons of sugar cane and 420,000 
metric tons of sugar in the last year.  Each hectare yields 
around 47,000 kilograms of sugar cane.  GOB statistics 
indicate that Bolivia exported 83,911 metric tons of sugar in 
2003, while USDA estimates that Bolivia will export 175,000 
metric tons of raw cane sugar in 2006.  During fiscal year 
2006, Bolivia utilized all of its granted tariff rate quota 
to export 14,375 metric tons of raw cane sugar to the U.S. 
The bagasse is not used for electrical power generation.  The 
industry is privately-owned. 
GOLDBERG