VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #2817/01 2912009
ZNR UUUUU ZZH
P 182009Z OCT 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0928
INFO RUEHAC/AMEMBASSY ASUNCION 6195
RUEHBO/AMEMBASSY BOGOTA 3510
RUEHBR/AMEMBASSY BRASILIA 7374
RUEHBU/AMEMBASSY BUENOS AIRES 4631
RUEHCV/AMEMBASSY CARACAS 1886
RUEHPE/AMEMBASSY LIMA 1929
RUEHME/AMEMBASSY MEXICO 1825
RUEHMN/AMEMBASSY MONTEVIDEO 4093
RUEHMO/AMEMBASSY MOSCOW 0178
RUEHQT/AMEMBASSY QUITO 4522
RUEHSG/AMEMBASSY SANTIAGO 9098
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 002817 
 
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 PREL BL
SUBJECT: UPDATE ON YPFB NEGOTIATIONS WITH ARGENTINA, 
BRAZIL, AND PRIVATE INVESTORS 
 
REF: A. LA PAZ 1805 
 
     ¶B. LA PAZ 2196 
     ¶C. LA PAZ 1248 
     ¶D. LA PAZ 2661 
 
¶1. (SBU) Summary: YPFB (Bolivia's state-owned oil company) 
President Juan Carlos Ortiz told Econoff on October 18 that 
Bolivia will sign a twenty-year natural gas supply contract 
with Argentina on October 19.  Bolivia will agree to provide 
27.7 million cubic meters per day of gas to its neighbor 
after the completion of a new pipeline in three years, at a 
variable price currently set at USD 5 per million BTU. 
Bolivia has extended the gas price negotiation deadline with 
Brazil until November 10 and is threatening to bring Brazil 
to arbitration if no agreement is reached by then.  Ortiz 
said YPFB is working diligently to meet the October 28 
contract negotiation deadline, but has only provided 
producing companies a model contract and two out of seven 
annexes.  YPFB negotiations with Transredes and Petrobras to 
take over majority ownership of those companies are stalled. 
Comment:  The agreement with Argentina seems overly 
optimistic, as Bolivia will need a significant amount of 
investment to produce the 50 percent more gas required to 
meet its new obligations.  End comment.  End summary. 
 
Bolivia-Argentina Gas Supply Contract 
------------------------------------- 
¶2. (SBU) According to the Bolivian state oil company YPFB 
President Juan Carlos Ortiz, YPFB will sign a gas supply 
contract with Argentina on October 19.  Argentine President 
Kirshner will travel to Bolivia for the signing of the 
twenty-year agreement, which will contain a price formula 
that will self-adjust based on market conditions.  The 
current price will be USD 5 per million BTU, maintaining the 
price agreed upon by the two countries on June 29 (ref A). 
Ortiz said that Bolivia will commit to providing Argentina 
27.7 million cubic meters per day within three years (a 20 
million cubic meter increase over the current commitment), 
while Argentina will commit to constructing a pipeline on the 
Argentine side of the border.  Bolivia will be responsible 
for constructing the pipeline on the Bolivian side, but Ortiz 
explained that this portion will only be 50 kilometers and 
cost USD 40 million.  Ortiz claimed that the contract will 
benefit Bolivia with USD 1.8 billion of additional 
hydrocarbons income over the next twenty years.  When asked 
how Bolivia will provide the additional gas faced with the 
fact that production is at is maximum and investment at a 
minimum, Ortiz responded that YPFB plans to develop eleven 
areas in partnership with Venezuela's PDVSA, Argentina's 
ENARSA, or Russia's Gazprom.  Ortiz said that the contract 
includes restrictions on Argentine sales of Bolivian gas to 
Chile. 
 
No Advance on Bolivia-Brazil Gas Price Negotiations 
--------------------------------------------- ------ 
¶3. (SBU) Ortiz said that the GOB has extended the gas export 
price negotiation period with Brazil until November 10. 
According to Ortiz, if no price is agreed upon by that time, 
Bolivia will take Brazil to arbitration (ref B). 
 
Producer Contract Negotiations Near Deadline 
-------------------------------------------- 
¶4. (SBU) Ortiz said that YPFB is working diligently to meet 
the October 28 contract migration deadline.  He said that the 
producing companies have now been provided with model 
contracts and two out of seven annexes.  He argued that with 
the assurances of having a large market to supply based on 
agreements with Brazil and Argentina, the companies would not 
leave, but would compromise in order to take advantage of the 
good business opportunities offered by Bolivia.  He did not 
respond specifically about what the GOB plans to do if the 
 
deadline cannot be met.  He said that the contracts would 
allow the operators to make reasonable profits, which he 
considered to be a 12 to 13 percent return in a zero risk 
market, and would provide sufficient incentives to attract 
future investment.  It is unclear how much of a return this 
would translate into in the risky environment of Bolivia. 
 
Company Take-Over Negotiations Stalled 
-------------------------------------- 
¶5. (SBU) Ortiz said that YPFB wants to have a role in daily 
administration of the five companies -- Transredes, Chaco, 
Repsol, Petrobras refineries, and the Bolivian Hydrocarbons 
Logistics Company -- that are destined for GOB majority 
ownership, not only seats on the boards (ref C).  YPFB plans 
to pay market price for the 16 percent plus one share that it 
needs to gain majority ownership of Transredes.  YPFB has 
offered Transredes a contract that would enable it to 
maintain administrative control, but Ortiz explained, not 
operating control.  In prior meetings with Transredes, 
executives told Econoff that the company is not willing to 
cede operating control.  According to Ortiz, the 
Inter-American Development Bank (IDB) and the Andean 
Development Corporation (CAF) agreed to unfreeze Transredes' 
loans (which were frozen because of YPFB's plan to take over 
majority ownership of the company) if the restructured 
company can prove that it has good corporate governance and 
respect for minority shareholders.  (Note: Transredes told us 
previously that the IDB and CAF had refused to sign the loans 
over to YPFB as majority shareholder of Transredes (ref D). 
End note.)  According to Petrobras officials, negotiations 
over control of Petrobras-owned refineries have also stalled, 
with Petrobras complaining that the GOB,s proposed actions 
will make the refineries unprofitable.  Petrobras insists on 
either maintaining operating control or selling 100 percent 
of the refinery shares to Bolivian state-owned oil company 
YPFB. 
 
¶6. (SBU) Comment:  The agreement with Argentina seems overly 
optimistic.  Bolivia will need a significant amount of 
investment to produce the 50 percent more gas required to 
meet its new obligations to Argentina.  Although Bolivia is 
threatening to take Brazil to arbitration if no new gas price 
is reached, it seems unlikely that it would actually follow 
through with this threat, since Brazil appears to have a 
better case, as it wants to stick to the price formula in the 
existing contract between the two countries.  Ortiz' 
estimation of a reasonable return for private investors seems 
low compared to international standards, but with 
hydrocarbons prices so high and sunk costs of investments, 
companies currently working in Bolivia may agree to high tax 
rates.  However, it seems unlikely that Bolivia will be able 
to attract the amount of new investment needed to meet new 
supply commitments.  Without financing, pipeline operator 
Transredes will not be able to increase pipeline capacity. 
Industries in the La Paz area have already begun to feel the 
crunch of insufficient natural gas supply, and the situation 
is predicted to reach a grave state by 2008 if additional gas 
transport investments are not made.  End comment. 
GOLDBERG