VZCZCXYZ0007
PP RUEHWEB

DE RUEHLP #0870/01 0921022
ZNR UUUUU ZZH
P 021022Z APR 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 3000
INFO RUEHAC/AMEMBASSY ASUNCION 6673
RUEHBO/AMEMBASSY BOGOTA 3996
RUEHBR/AMEMBASSY BRASILIA 7883
RUEHBU/AMEMBASSY BUENOS AIRES 5137
RUEHCV/AMEMBASSY CARACAS 2361
RUEHPE/AMEMBASSY LIMA 2477
RUEHMD/AMEMBASSY MADRID 3401
RUEHMN/AMEMBASSY MONTEVIDEO 4517
RUEHQT/AMEMBASSY QUITO 5006
RUEHSG/AMEMBASSY SANTIAGO 9587
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUEHUB/USINT HAVANA 0240
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 000870 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GAS "NATIONALIZATION" -- MORE POLITICAL SHOW THAN 
ECONOMIC REALITY 
 
 
------- 
Summary 
------- 
 
¶1. Despite President Morales' claim that hydrocarbons 
"nationalization" will bring in billions of dollars of 
additional income for the state, in fact, the Morales 
administration's actions will not significantly impact future 
GOB revenues.  Although "nationalization" will not boost GOB 
hydrocarbons revenues by billions of dollars as publicly 
claimed by the government, it has certainly been a political 
victory, with President Morales' approval ratings spiking to 
81 percent following the issuance of the nationalization 
decree in May 2006.  The GOB's bungled implementation of the 
nationalization decree and the new operating contracts has 
somewhat tarnished the government's image in 2007, but 
nationalization remains exceedingly popular.  End summary. 
 
---------------------------------------- 
The Impact of the Nationalization Decree 
---------------------------------------- 
 
¶2. Despite President Morales' claim that hydrocarbons 
"nationalization" is his administration's greatest 
accomplishment, "nationalization" basically implemented the 
2005 law passed by former President Carlos Mesa during his 
administration, generating very modest additional revenue. 
According to our estimates, Morales' nationalization decree 
boosted government revenue by some USD 224 million in 2006 
(largely as the result of a transitory 32 percent tax on two 
large petroleum fields), and it will not materially increase 
revenue in out years.  Only Petrobras was significantly 
impacted by the fee, as it operates the two large fields 
affected by the transitory tax. 
 
--------------------------------------------- - 
So Why the Large Increases in Revenue in 2006? 
--------------------------------------------- - 
 
¶3. GOB revenue from the hydrocarbons sector amounted to USD 
409 million in 2004, USD 863 million in 2005, USD 1.5 billion 
in 2006, and a projected USD 1.3 billion in 2007.  The 
increases in GOB revenue resulted from three main 
factors: increases in the price of gas sales (sales to Brazil 
increased from USD 2.15 per million cubic feet in 2004 to USD 
3.80 per million cubic feet in 2006), increases in the volume 
of production (gas production increased from 
35 million cubic meters per day in 2004 to 41 million cubic 
meters per day in 2006), and the implementation of the direct 
hydrocarbons tax by the 2005 law passed by former President 
Carlos Mesa (the companies paid USD 695 million in IDH in 
2006).  Only USD 224 million of the 2006 revenue resulted 
from the Morales administration's "nationalization" decree, 
which imposed a temporary 32 percent tax on the large fields 
operated by the Brazilian company Petrobras.  Once the new 
operating contracts enter into force, presumably in 2007, 
this temporary tax will disappear. 
 
------------------------------- 
The Impact of the New Contracts 
------------------------------- 
 
¶4. International gas production companies operating in 
Bolivia signed new contracts in October 2006.  The government 
erroneously claimed that the new 23 to 30 year contracts 
would yield billions of dollars in additional revenue for the 
state.  The contracts were approved by congress in November 
¶2006.  Subsequently, the GOB realized that the versions of 
the contracts approved by congress were incorrect, because 
the state oil company YPFB had provided congress with the 
 
wrong documents.  Many of the approving laws contained 
typographical and substantive errors.  The GOB proposed a 
short law to amend superficial errors, which was approved by 
the lower house and blocked in the senate.  The senate held 
hearings the weeks of March 19 and 26 to decipher the 
confusion, including why YPFB supposedly signed two versions 
of a particular annex with Petrobras.  Opposition leaders, 
and far-left members of the MAS, have asserted bad faith on 
the part of the GOB.  On March 30, the senate approved 41 
production contracts, while debate continued regarding the 
remaining three. 
 
¶5. The GOB's main accomplishments with the signing of the new 
contracts were convincing the companies to drop their pending 
legal claims against the 2005 law and solidifying the law's 
mandates of contract migration and paying the 32 percent 
direct hydrocarbons tax (IDH).  Although, in addition to 
requiring companies to pay the pre-existing taxes and 
royalties, the contracts imposed another variable tax to be 
paid to YPFB, they also allowed companies to deduct certain 
general taxes.  Based on GOB revenue predictions, it seems 
that in 2007, the increased costs of the YPFB tax, perhaps 
less than USD 100 million, may be roughly offset by the 
deduction of certain general taxes, including the value added 
tax.  According to Petrobras, some fields will even be paying 
less to the GOB under the new contracts than they were paying 
previously.  Under Petrobras' prior contract, including the 
32 percent IDH which it was paying under protest, Petrobras 
paid the government around 60 percent of the value of its 
production.  Under its new contract, it will pay around 54 
percent in 2007, but that percentage will increase to around 
61 percent by 2010. 
 
--------------------------------------------- -- 
The Impact of the Argentine Gas Sales Agreement 
--------------------------------------------- -- 
 
¶6. With the signing of a gas sales contract with Argentina in 
October 2006, the GOB opened up the possibility of expanding 
Bolivia's gas production by 50 percent.  The possibility of 
supplying this additional market encouraged the companies to 
agree to sign new contracts.  The ability to meet the terms 
of this agreement will depend on the construction of a USD 
1.5 billion pipeline, almost all in Argentina, and private 
companies' willingness to invest in production and 
exploration in Bolivia.  Given the ongoing legal uncertainty, 
such investment has not yet been forthcoming.  If the 
investment eventually pans out, the significant increase in 
production would mean a significant increase in GOB revenues. 
 If production increases by 50 percent by 2010, as required 
by the contract, the GOB predicts that revenue will reach USD 
2.4 billion by 2010, a 60 percent increase over 2006. 
However, given the current lack of investment, reaching these 
production figures within three years will be near impossible. 
 
----------------- 
The Lost Bonanza? 
----------------- 
 
¶7. It is difficult to predict what would have happened to 
sector investment if the gas wars, the 2005 law, the 
nationalization decree, and the new contracts had never 
happened.  However, it is certain that foreign direct 
investment in the sector has declined to the minimum 
necessary to meet contractual obligations, amounting to USD 
197 million during 2006 compared with the 1998 peak of USD 
600 million.  According to Petrobras' explanation of typical 
gas investment cycles, Bolivia should have received another 
large wave of investments, similar to what occurred in 1998, 
around 2004.  However, investment hit rock-bottom in 2005 and 
 
 
remained there during 2006 due to the ongoing legal 
uncertainty and GOB plans to increase state intervention in 
the sector.  The companies were hopeful after the signing of 
the new contracts that they could finally make long-term 
plans, but because of the GOB's failure to send correct 
documents to the congress for approval, the uncertainty has 
continued.  Without increased investment, gas reserves will 
continue to decline.  Current production, already at its 
maximum, is insufficient to meet Bolivia's contractual 
obligations with Brazil and Argentina and domestic demand. 
Without additional investment, Bolivia could be forced to pay 
contract penalties.  Additionally, Bolivia has likely lost 
the opportunity to supply a greater share of the Brazilian 
market than it currently does, because Brazil is looking for 
alternatives to reduce reliance on Bolivian gas. 
 
--------------------- 
The Political Fallout 
--------------------- 
 
¶8. The GOB's nationalization decree and the signing of new 
contracts boosted the administration's popularity, as around 
85 percent of the population supports "nationalization." 
However, the congressional hearings regarding YPFB's 
negotiation of the contracts, GOB errors, and possible secret 
negotiations by former YPFB adviser Manual Morales Olivera 
with Petrobras, have somewhat tarnished the government's 
image.  (Note: In response to the scandal, the GOB replaced 
Manuel Morales as YPFB president with Guillermo Aruquipa on 
March 23.  End note.)  The failure to revamp the state oil 
company YPFB, to negotiate the take-over of five key 
companies, and to secure additional investment in the sector 
has also reflected poorly on the GOB.  Recent polls show that 
52 percent of the residents in La Paz, typically a region of 
strong support for the Morales administration, disapprove of 
the GOB's handling of the gas contracts.  (Note:  This has 
not affected President Morales' popularity, however.  A March 
poll put his approval rate at 65 percent, the same level as 
in the month of February.  End note.) 
 
---------- 
Conclusion 
---------- 
 
¶9. After the GOB signed new operation contracts with natural 
gas production companies in October 2006, the press announced 
that the four largest gas fields would have to pay an 
additional 32 percent tax to state-owned oil company YPFB. 
The assertion regarding the large fields was not true, but it 
led the public to believe that the contracts would 
immediately yield an enormous windfall for the country.  In 
fact, the new operating contracts will not significantly 
impact GOB revenue in comparison with what it would have been 
under the terms of the old contracts plus the direct 
hydrocarbons tax imposed by the 2005 law.  Some fields will 
even be paying less under the new contracts than they were 
before, although the government take will increase over time. 
 The instability which began in 2002 and has been perpetuated 
by the Morales administration has cost the country 
hydrocarbons investment and market opportunities, which would 
have broadened the tax base.  It remains to be seen if the 
sector's decline can be turned around and the promise of the 
Argentine market fulfilled, but short-term prospects are 
negative.  In sum, the GOB's revenue gains from the 
nationalization decree and new contracts appear to be 
marginal compared with the potential loss of investment due 
to the "nationalization's" damage to the investment climate. 
End comment. 
GOLDBERG