VZCZCXRO1472
PP RUEHRG
DE RUEHBR #0833/01 1301523
ZNY CCCCC ZZH
P 101523Z MAY 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 8881
INFO RUEHLP/AMEMBASSY LA PAZ 5340
RUEHBU/AMEMBASSY BUENOS AIRES 4760
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RUEHSO/AMCONSUL SAO PAULO 9817
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 000833 
 
SIPDIS 
 
SIPDIS 
 
DOE FOR GWARD/CGILLESPIE 
TREASURY FOR OASIA 
USDOC FOR 4322/ITA/MAC/WH/OLCA/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
 
E.O. 12958: DECL:05/08/2017 
TAGS: ENRG EINV PGOV PREL BR
SUBJECT: BRAZIL: PETROBRAS AND GOB RESPOND TO BOLIVIAN OIL 
SECTOR DECREE 
 
REF: LA PAZ 1280 
 
Classified by Deputy Economic Counselor J. Andrew Plowman, 
reasons 1.4 (b) and (d). 
 
¶1. (C) Summary: The Bolivian Government's decree prohibiting 
Brazil's Petrobras from exporting refined petroleum products 
(reftel) has drawn an incrementally more robust official 
response from the Brazilian Government than previous Bolivian 
actions prejudicial to Petrobras.  Foreign Ministry (Itamaraty) 
Bolivia desk officer Lauro Beltrao told Emboff May 9 that their 
press statement of the previous day, which notes the "negative 
effects that this and other unilateral actions might have on 
cooperation between the two countries" was meant to be a clear 
signal to Bolivia that Brazil expects fair treatment of 
Petrobras.  Meanwhile, Petrobras has asked for a response by May 
10 to its proposal for the sale of its two refineries to 
Bolivian parastatal YPBF stating that it would ask for 
international arbitration if the Bolivian government fails to 
make a fair offer for the two refineries.  While not tipping his 
hand as to what Petrobras will do in the next few days, CEO 
Gabrielli made clear to the Ambassador May 8 (septel) that there 
would not be any further investment in Bolivia and Brazil will 
be importing liquid natural gas beginning next year to reduce 
its dependence on Bolivian gas.  Brazil's current dependence on 
Bolivian gas constrains its near term response to La Paz's 
decree.  End Summary. 
 
¶2. (U) The Bolivian May 6 decree barring Petrobras from 
exporting refined petroleum products directly from its two 
refineries in Bolivia, and requiring their sale to a YPFB 
monopoly trading operation, has effectively "expropriated" the 
refineries' cash flow and made their operation "unviable," 
Gabrielli told the press May 7.  Gabrielli announced that 
Petrobras was opting to sell the two refineries to YPFB.  It had 
put a proposal on the table to YPFB, he said, and Petrobras 
expected an answer by the morning of May 10.  If the Bolivian 
government did not offer fair compensation for the refineries, 
Gabrielli said, Petrobras would take all necessary legal steps 
at its disposal.  Gabrielli did not specify what Petrobras would 
consider a fair offer, although the press quoted unnamed 
Petrobras sources stating the company is seeking USD 120 to USD 
135 million. 
 
¶3. (SBU) Itamaraty Bolivia desk officer Beltrao confirmed to 
Emboff in a May 9 conversation the outline of Petrobras' 
response so far, including the May 10 deadline for a response to 
Petrobras' offer.  Petrobras, he noted, made this investment 
through a Dutch subsidiary and therefore could use the option it 
has under the Bolivia-Netherlands bilateral investment treaty to 
compel binding international arbitration.  Beltrao stated that 
despite Petrobras' May 10 deadline, Bolivian President Morales 
has said the negotiations would take ten days at least. 
 
¶4. (C) Beltrao denied press allegations that the GoB already has 
begun to take retaliatory actions, stating the incidents cited 
as evidence of retaliation (e.g. cancellation of a high-level 
meeting between Brazil's Ministry of Development Industry and 
Trade and its Bolivian counterpart) were taken out of context. 
The GoB also would continue its strategy of keeping 
negotiations, to the maximum extent possible, between Petrobras 
and YPFB, according to Beltrao.  Nevertheless, he implied that 
the latest Bolivian action had forced the GoB to re-evaluate its 
approach, noting that the language of the GoB's press release 
was meant as a clear signal to Bolivia that there are limits. 
The press release (informal translation at paragraph 7) does 
note the "negative effects that this and other unilateral 
actions might have on cooperation between the two countries." 
 
¶5. (SBU) The subject of Bolivia came up in the Ambassador's May 
 
BRASILIA 00000833  002 OF 002 
 
 
7 meeting with Gabrielli (septel).  While Gabrielli did not 
telegraph Petrobras' specific game plan for the next few days, 
he did make it clear that Petrobras would not be investing 
further in Bolivia.  He also outlined Petrobras' plans for 
reducing Brazil's dependence on Bolivian gas by beginning to 
import liquefied natural gas, including from Nigeria and Qatar. 
According to Gabrielli, Petrobras will bring two floating 
re-gasification plants to Brazil in the next two years, the 
first arriving in May 2008 and the second in January 2009. 
These would have a capacity to import and re-gasify 20 million 
cubic meters of natural gas a day.  One would be placed in Rio 
and the second in Recife. 
 
¶6. (C) Comment:  Although it took over a year since the May 1, 
2006 surprise nationalization decree for the Brazilian 
Government to begin to show signs of a stiffer spine, the latest 
attack on Petrobras appears finally to have elicited a firmer 
response.  In dealing with Bolivia, however, the Lula 
Administration remains constrained by a multitude of other 
considerations, including the repercussions for its near-term 
gas supplies and for the thousands of Brazilian farmers and 
settlers in Bolivia.  There remains little desire here for 
confrontation with Bolivia.  End Comment. 
 
¶7. (U) Text of Brazilian press release: 
 
Note number 211, May 7, 2007. 
 
Decision of Bolivia Regarding the Monopoly over Export of 
Petroleum and Gasoline 
 
The Government of Brazil expresses its disappointment with the 
Supreme Decree 29122, which gives YPFB a monopoly over the 
export of crude petroleum and white gasoline [distillates], 
which has a direct effect over the economic viability of the 
Gualberto Villaroel and Guillermo Elder Bell refineries, both 
properties of Petrobras. 
 
The measure harms, and might make unviable, the negotiation 
process for normalization of the situation of the two refineries 
within the legal and institutional framework created by the 
Supreme Decree 28701, a process in which Petrobras was engaging 
in good faith. 
 
Independently of whatever legal actions Petrobras may take in 
defense of its legitimate interests, the Brazilian government 
cannot fail to note the negative effects that this or any other 
unilateral action might have on cooperation between the two 
countries. 
 
End text of release. 
 
SOBEL