VZCZCXRO8825
PP RUEHRG
DE RUEHSO #1143/01 2971939
ZNY CCCCC ZZH
P 241939Z OCT 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 5984
INFO RUEHAC/AMEMBASSY ASUNCION 2828
RUEHBR/AMEMBASSY BRASILIA 7043
RUEHBU/AMEMBASSY BUENOS AIRES 2517
RUEHLP/AMEMBASSY LA PAZ 3095
RUEHMN/AMEMBASSY MONTEVIDEO 2196
RUEHSG/AMEMBASSY SANTIAGO 1903
RUEHRG/AMCONSUL RECIFE 3203
RUEHRI/AMCONSUL RIO DE JANEIRO 7553
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NSC WASHDC
RHMFISS/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 001143 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR FEARS 
STATE PASS USTR MSULLIVAN/SCRONIN 
STATE PASS EXIMBANK AND OPIC 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
TREASURY FOR OASIA, DAS LEE AND DDOUGLASS 
USAID/W FOR LAC/AA 
 
E.O. 12958: DECL: 10/24/2011 
TAGS: EPET ENRG EINV ECON BR BL
SUBJECT: BG VIEWS BOLIVIAN GAS CONTRACT AS UNACCEPTABLE 
 
REF: A. BRASILIA 1972 
 
     ¶B. LA PAZ 2817 
 
Classified By: Deputy Principal Officer David C. Wolfe for reason 1.4(d 
). 
 
¶1. (C) SUMMARY: Sao Paulo-based British Gas (BG) Executive 
Vice President for South America Rick Waddell called DPO on 
Oct. 20 to discuss ongoing gas contract negotiations with the 
Bolivian Government.  Due to a series of unrealistic demands, 
Waddell deemed the Bolivian model contract completely 
unacceptable and stated that BG would not sign the contract 
by the Bolivians' October 28 deadline.  Nonetheless, he 
judged the risk low that Bolivia would expropriate foreign 
hydrocarbons assets for failure to sign or expel the 
companies, as threatened by Bolivia's vice president, because 
the Bolivians realize they do not have the money to keep up 
operations at current levels for long.  Waddell termed the 
relations between Petrobras and Bolivia as tense, and opined 
that the big new deal to supply Bolivian gas to Argentina is 
unrealistic because no one will fund it.  END SUMMARY. 
 
Bolivia's Contract Offer Unacceptable 
------------------------------------- 
 
¶2. (C) The Bolivian Government's May First hydrocarbons 
decree mandated that all companies currently operating in 
Bolivia, including BG, "migrate" their existing contracts to 
the new system by October 28.  According to Waddell, contract 
negotiations normally take many months, and the Bolivians, 
who only sent model contracts to the companies on September 
22, are trying to finish this complicated process in only 
five weeks.  He said the initial model contract sent over, 
though still inadequate, was not all that bad.  The draft the 
Bolivians sent over on October 13, however, was much worse, 
and there was no way BG could sign it.  Waddell said the most 
charitable interpretation of this worse second draft is that 
the inexperienced current group of Bolivian officials have no 
understanding of how contracts in the real world are actually 
negotiated and what demands are realistic.  He listed six 
main problems with the model contract: 
 
--  Bonus Payment:  The Bolivians demand that an unspecified 
bonus payment be paid upon signing of the contract.  Waddell 
noted that bonus payments, which could be many millions of 
dollars, are common when signing contracts for exploration 
block bids but are not done for renegotiated contracts.  The 
unspecified amount is also worrisome, since the Bolivians 
could demand anything from a token amount to something really 
big. 
 
--  Parent Guarantee:  As with the bonus payment, the 
Bolivians demand an unspecified guarantee.  Waddell explained 
that in bid contracts, parent guarantees, with specific 
amounts and percentages, are signed that commit the parent 
corporation to spend a certain amount on well work programs 
or pay fines.  With the current renegotiation, there is 
nothing new to guarantee.  The added uncertainty of whether 
the Bolivian Congress would approve the contract while still 
committing the company means no parent corporate board would 
approve the signing of such a contract. 
 
--  Waived Arbitration Rights:  The Bolivians want the 
companies to agree in the contract to give up their rights to 
international arbitration.  The Government could effectively 
seize and transfer assets to third parties under any number 
of pretexts, with the companies helplessly standing by. 
 
--  Dictated Prices:  The contract would allow the Bolivian 
Government, as the sole buyer and seller of gas, to set the 
price for both natural gas and liquids at artificially low 
prices, again with no recourse. 
 
 
SAO PAULO 00001143  002 OF 003 
 
 
--  Questionable Capital Recovery:  The international 
standard is for a contract to "front load" a company's 
recovery of capital expended to develop a well, so that even 
if the company never makes a profit, it can at least get back 
the investment through guaranteed set asides from the revenue 
stream.  The Bolivian model contract does not guarantee 
capital recovery, nor pay interest should capital recovery be 
shifted to subsequent years.  With the high tax rates being 
charged, a company could very well reach the end of a well's 
life without every recovering the capital and simply be out 
of luck. 
 
--  No Stabilization Clause:  The Bolivians offer no 
guarantee (stabilization clause) that the contract will not 
be changed in the future. 
 
Expropriation Risk Low 
---------------------- 
 
¶3. (C) Based on the objections listed above, Waddell stated 
that BG could not possibly sign such a contract and doubted 
any of the other companies would either.  One tactic might be 
to go ahead and sign the contract as an "intermediate" step, 
with the hope of improving the contract later, though he 
dismissed this option as too risky.  He noted that President 
Morales repeatedly stated at the UN, before the European 
Parliament, and elsewhere that the Bolivian Government had 
not and would not expropriate any assets or expel companies. 
Back in Bolivia, however, Vice President Garcia Linera was 
saying that any company that did not sign the new contract 
would have to leave the country and there would be no 
extensions.  Waddell commented that new Hydrocarbons Minister 
Villegas was much more reasonable than former Minister Soliz, 
and that new Bolivian state hydrocarbons company (YPFB) 
President Ortiz was much more rational than his predecessor. 
Nonetheless, the Bolivians have painted themselves into a 
corner for political reasons from which it will be very 
difficult to extricate themselves. 
 
¶4. (C) Waddell then stated that BG rates the risk of 
expropriation or expulsion by the Bolivians for failure to 
sign the contract as low, mainly because the Bolivians do not 
have the cash to keep things running for long.  BG has 74 
employees in Bolivia, only three of whom are foreigners.  In 
the event of an expropriation or expulsion, the likely 
scenario would be for the foreign employees to be expelled 
and the Bolivian employees to be declared part of whatever 
entity takes over and ordered to keep up operations.  While 
the Bolivian employees are quite capable of running the 
current operation, Waddell assessed that the Bolivian 
Government is unlikely to kick foreign companies like BG out 
at this juncture because they realize they don't have the 
capital to maintain operations at their current level for 
long, much less invest to expand operations.  In the event of 
an expropriation, BG will cooperate with Bolivian authorities 
for an orderly transition while pursuing its rights in the 
international system. 
 
Petrobras Piqued 
---------------- 
 
¶5. (C) When asked about Petrobras' situation, Waddell replied 
that the Brazilian giant, which has the most invested in 
Bolivia, is in no mood to be coerced.  For Petrobras, as with 
all the foreign companies, a crucial issue is the booking of 
hydrocarbons reserves as required by New York and other stock 
exchanges.  If reserves in Bolivia become unreliable and thus 
have to be removed from the books, share prices for the 
Petrobras and other companies could take a hit.  Petrobras 
has been especially hard hit, with taxes upped to a whopping 
82 percent on its big gas fields.  In addition to Petrobras' 
contract renegotiation, Waddell recounted the convoluted 
story of Petrobras' refineries in Bolivia and how a series of 
 
SAO PAULO 00001143  003 OF 003 
 
 
pre-Evo Bolivian Government decrees intended to keep fuel 
prices low in Bolivia had skewed the liquid fuel market. 
Producers ended up having to deliver liquids at a loss to 
Petrobras refineries, and Petrobras made a profit by 
exporting excess liquids at higher world prices.  Producers 
like BG kept quiet about this arrangement to avoid 
destabilizing the various weak Bolivian governments.  Because 
of the scarcity of diesel in Bolivia due to low prices and 
smuggling of fuel to neighboring countries, Petrobras agreed 
to import Brazilian diesel as long as the Bolivian Government 
made up the price differential.  Chronic late payments by the 
Bolivians led Petrobras to end this arrangement in July. 
Notwithstanding public accounts circulating at the time (Ref 
A), Waddell continued that the latest impasse in September 
between Bolivia and Petrobras on the refineries was due to 
Bolivian retaliation to end Petrobras' special authorization 
to export excess liquids, a decision that the Bolivians 
suspended due to the sharp Brazilian reaction and that led to 
Minister Soliz' downfall. 
 
Argentina Deal -- Pipe Dream? 
----------------------------- 
 
¶6. (C) Waddell also commented on the recently announced deal 
for Bolivia to supply an extra 20 million cubic meters of gas 
per day to Argentina by 2010 (Ref B).  He noted that Bolivia 
has trouble meeting the current commitment of 7.7 million 
cubic meters per day to Argentina.  The deal would require 
several billion dollars to build new pipelines and develop 
existing and new fields.  Such money, he opined, could only 
come from the multinational gas companies, which are in no 
mood under existing uncertainties to even consider further 
investments in Bolivia.  Enarsa, Argentina's state energy 
company, has the same relatively low investment rating as 
Argentina itself and could not itself raise the money needed, 
Waddell concluded.  Finally, he observed that, even under the 
right circumstances, such deals take a long time: the 
Bolivia-Brazil gas deal signed in 1992, but gas did not start 
flowing until 1999, seven years later. 
 
¶7. (U) This cable was coordinated with Embassies Brasilia and 
La Paz. 
MCMULLEN