VZCZCXYZ0006
PP RUEHWEB

DE RUEHLP #2967/01 3042117
ZNY CCCCC ZZH
P 312117Z OCT 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 1159
INFO RUEHAC/AMEMBASSY ASUNCION 6240
RUEHBO/AMEMBASSY BOGOTA 3560
RUEHBR/AMEMBASSY BRASILIA 7422
RUEHBU/AMEMBASSY BUENOS AIRES 4683
RUEHCV/AMEMBASSY CARACAS 1933
RUEHPE/AMEMBASSY LIMA 1985
RUEHLO/AMEMBASSY LONDON 0091
RUEHMD/AMEMBASSY MADRID 3168
RUEHME/AMEMBASSY MEXICO 1858
RUEHMN/AMEMBASSY MONTEVIDEO 4134
RUEHFR/AMEMBASSY PARIS 0096
RUEHQT/AMEMBASSY QUITO 4572
RUEHSG/AMEMBASSY SANTIAGO 9146
RUEHRI/AMCONSUL RIO DE JANEIRO 0870
RUEHSO/AMCONSUL SAO PAULO 2018
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L LA PAZ 002967 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: DECL: 10/31/2016 
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GAS CONTRACTS HAVE VARIABLE RETURN RATES 
 
REF: A. LA PAZ 2943 
 
     ¶B. LA PAZ 2900 
     ¶C. LA PAZ 2880 
 
Classified By: Ecopol Chief Andrew Erickson for reason 1.4 (e). 
 
¶1. (C) Summary: The new contracts signed by hydrocarbons 
production and exploration companies on October 27 and 28 
(ref A) contain tables of variables, including investment and 
production figures, which will be used to calculate company 
returns and the state oil company YPFB's take.  The amount of 
return will vary by field and will likely range from 18 to 50 
percent.  Hydrocarbons Minister Villegas announced that 
contracts would be presented for congressional approval by 
November 20.  Despite press announcements otherwise, 
according to Repsol, Chaco, Vintage, and BG executives, the 
contracts do not contain forced investment clauses.  The 
markets guaranteed by the Gas Supply Agreements between YPFB 
and Brazil until 2019 and YPFB and Argentina until 2026, 
along with the lack of forced investment and sole risk 
clauses in the new contracts, shifted significant business 
risks from the producers onto YPFB, encouraging the companies 
to sign by the October 28 deadline.  Chaco and BG said that 
they, along with several other producers, did not sign 
complete contracts but were still negotiating details with 
YPFB.  U.S.-owned Vintage is pleased with the GOB's plan to 
favor producers with small fields.  End summary. 
 
------------------------------------------- 
Press Says Taxes Vary from 50 to 82 Percent 
------------------------------------------- 
 
¶2. (SBU) The press reported on October 31 that the new 
contracts guarantee 50 percent return for the state (18 
percent royalties plus 32 percent direct hydrocarbons tax 
(IDH), as required by the May 2005 hydrocarbons law) plus a 
variable rate of return, of up to 32 percent, for YPFB. 
(Note: The May 2006 nationalization decree added a temporary 
32 percent tax for YPFB on the two largest fields, San 
Alberto and San Antonio, operated by Petrobras.  End note.) 
The percentage return for YPFB will vary based on company 
profits, according to the press.  YPFB will sell company 
production, receive payment directly, and use the income to 
pay the 18 percent royalties and 32 percent IDH to the 
national treasury.  It will decide how much to pay the 
companies for their services based on formulas which vary by 
field and will keep the rest.  The press reported that 
Petrobras (Brazil) was pleased to sign a new contract with 
variable tax rates, because since the May 2006 decree, it had 
been paying 82 percent and would now pay less.  Hydrocarbons 
Minister Carlos Villegas told the press that the contracts 
would be presented for congressional approval prior to 
November 20 in hopes of finalizing them before congress ends 
its session in mid-December. 
 
--------------------------------------------- -- 
Repsol Says Returns Based on Table of Variables 
--------------------------------------------- -- 
 
¶3. (C) According to Repsol (Spain/Argentina) executive Albaro 
Pedrazas, the information in the press was not quite 
accurate.  He said that the companies did not agree to pay 18 
percent in royalties or 32 percent in IDH in their contracts, 
but that all taxes/company return calculations were a 
function of a variable formula.  He explained that one of the 
contract annexes contains tables of variables, including 
investment amounts, amount of investments recouped, 
production amounts, operating costs, and gas prices that will 
be used to determine how much the companies receive from YPFB 
for their services.  Company reimbursement rates will vary by 
field, but will likely range from 18 to 50 percent with 
operators of larger fields receiving lower percentages.  He 
added that negotiations regarding Repsol share sales to YPFB 
were ongoing.  He said that Repsol may invest up to USD 1 
billion in the development of the Margarita gas field; 
however, the company did not commit to this in its new 
contract.  He was hopeful that it would be possible for 
Bolivia to meet its gas supply commitments to Argentina if 
companies began to increase investments. 
 
--------------------------------------------- ----- 
Chaco Signed Incomplete Deal and PAE Did Not Sign 
--------------------------------------------- ----- 
 
¶4. (C) Chaco (Partially U.S.) Vice President Jana Drakic told 
Econoff on October 31 that Chaco had signed an incomplete 
contract, as had many other operators.  Negotiations over 
contract annexes and Chaco share sales to YPFB are ongoing. 
She said that the amount of return that Chaco would receive 
was not completely clear.  Chaco did not commit to making 
investments in the contract.  Chaco's main shareholder is Pan 
American Energy (PAE).  PAE is 60 percent owned by BP 
America, which was formed by the merger of Amoco and BP. 
According to Drakic, PAE has one operation in Bolivia that is 
separate from Chaco and has not yet signed a new contract 
with YPFB for that operation. 
 
--------------------------------------------- ----- 
Vintage Promised Greater Return and Assured Market 
--------------------------------------------- ----- 
 
¶5. (C) Vintage (U.S.) President Jorge Martignoni said that 
Vintage signed a final contract and that it was pleased that 
the government promised to issue a decree to benefit 
producers with small fields.  He told Econoff on October 31 
that such producers would receive a higher percentage return 
than producers with large fields and also would be given 
preference for gas sales to Argentina.  He explained that the 
promised decree would allow companies producing less than 0.5 
million cubic meters per day to be first in packing the 
pipeline to Argentina, assuring a market for their 
production.  Martignoni confirmed reports by Repsol and Chaco 
that the companies were not forced to invest by the new 
contracts.  He explained that the guaranteed market and lack 
of forced investment clauses had shifted significant business 
risks away from the companies and onto YPFB, encouraging the 
companies to sign new contracts. 
 
--------------------------------------------- - 
Contracts Contain No Forced Investment Clauses 
--------------------------------------------- - 
 
¶6. (C) According to the British DCM Steve Townsend, based on 
conversations with British Gas (BG) on October 30, the 
contract that BG signed was incomplete.  BG inserted several 
caveats to protect itself in case the final contract 
contained undesirable elements.  Townsend said the contracts 
contained no forced investment clauses and no clauses forcing 
the companies to assume all of the risks, despite an earlier 
version of the model contract that was published in the press 
stating otherwise (ref B).  He agreed with Martignoni, 
stating that the lack of investment commitments, along with 
assured markets, significantly reduced the risk for the 
companies and encouraged them to sign.  He said that BG 
thought meeting the recently contracted supply commitments to 
Argentina (ref C) within three years would be extremely 
difficult, as only three exploration rigs are currently in 
Bolivia and it could take several years to get enough rigs to 
increase production by the required amount. 
 
¶7. (C) Comment: The variable tax rates, the shifting of risk 
to YPFB, the lack of forced investment clauses, and the 
prospect of supplying the Argentine market based on the 
October 19 contract (ref C) provided incentives for the 
hydrocarbons companies to sign new contracts by the October 
28 deadline.  Although the GOB met its decree-imposed 
deadline publicly, in reality, important contract details 
remain to be worked out with several companies before the 
contracts can be presented to congress for approval.  The 
lack of contractual commitments to invest in exploration and 
exploitation on the part of the companies sheds doubt on 
Bolivia's eventual ability to meet its contracted supply 
obligations.  End comment. 
URS