VZCZCXRO3226
PP RUEHLMC
DE RUEHLP #1404/01 1421904
ZNR UUUUU ZZH
P 221904Z MAY 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 3651
INFO RUEHAC/AMEMBASSY ASUNCION 6799
RUEHBO/AMEMBASSY BOGOTA 4136
RUEHBR/AMEMBASSY BRASILIA 8026
RUEHBU/AMEMBASSY BUENOS AIRES 5272
RUEHCV/AMEMBASSY CARACAS 2510
RUEHPE/AMEMBASSY LIMA 2645
RUEHMD/AMEMBASSY MADRID 3483
RUEHMN/AMEMBASSY MONTEVIDEO 4629
RUEHQT/AMEMBASSY QUITO 5140
RUEHSG/AMEMBASSY SANTIAGO 9737
RUEHLMC/MILLENNIUM CHALLENGE CORP
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUEHUB/USINT HAVANA 0334
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 LA PAZ 001404 
 
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 BL
SUBJECT: UNCERTAINTY STILL REIGNS IN BOLIVIA'S NATURAL GAS 
SECTOR 
 
REF: A. LA PAZ 870 
     ¶B. LA PAZ 559 
 
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Summary 
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¶1. (SBU) The Bolivian Hydrocarbons Chamber told Emboffs May 
18 that, while some smaller natural gas producers have agreed 
to invest in increased gas production, the largest players in 
the Bolivian industry are still waiting cautiously.  Chaco 
has agreed to invest around USD 250 million over the next 
five years, but that figure only represents about 8 percent 
of the total investment needed to meet gas supply commitments 
to Brazil and Argentina.  Sector representatives explained 
that legal uncertainty in the exploration business almost 
guarantees that no company will invest in exploration, with 
the exception of Venezuela's PDVSA for political reasons. 
Constituent Assembly proposals regarding hydrocarbons 
threaten the future of both exploitation and exploration. 
GOB negotiations to gain majority ownership of four 
hydrocarbons companies are ongoing.  The Canadians are 
providing technical assistance to Bolivia's state oil company 
YPFB, which could help the state company in its management of 
the two gas refineries recently acquired (rather forcibly) 
from the Brazilian company Petrobras.  End summary. 
 
------------------------------------------- 
Company Gas Exploitation Plans in the Works 
------------------------------------------- 
 
¶2. (SBU) General Manager of the Bolivian Hydrocarbons Chamber 
Raul Kieffer told Emboffs on May 18 that the private gas 
production companies are preparing project and investment 
proposals, which are due to the government in November 2007. 
Kieffer predicted that we could see some investments in the 
sector by May 2008.  He said that investments could be 
delayed by new public consultation requirements for each step 
of a project, which could delay each step by six to eight 
months.  He explained that there is a divide between the 
companies that have committed to investing in order to 
decrease their share of the undesirable domestic market and 
gain access to the more lucrative Argentine market (the 
smaller operators, including Chaco (partially U.S.-owned), 
Vintage (U.S.-owned), and Plus Petrol) versus the larger 
operators who were previously supplying Brazil and Argentina 
and plan to wait before making investment commitments, 
including Petrobras, Repsol, and Total. 
 
-------------------------------------- 
But Few Investment Commitments to Date 
-------------------------------------- 
 
¶3. (SBU) Chaco told Emboffs in a separate meeting May 18 that 
it has agreed to invest USD 50 million per year over the next 
5 years, or approximately 8 percent of the USD 3 billion 
needed by Bolivia to meet its contractual commitments to 
Argentina and Brazil.  Chaco is optimistic that the new 
pipeline to Argentina will be constructed because of 
Argentine and Chilean needs for fuel.  Petrobras official 
Arturo Castanos confirmed that Petrobras does not intend to 
invest in Bolivia any more than necessary to maintain current 
operations.  Castanos added that, contrary to Bolivian press 
reports, Brazilian petrochemical company Braskem, has not 
committed to investing USD 1.5 billion in Bolivia nor to 
building a plant in Bolivia.  He explained that the company 
had expressed interest in buying 5 million cubic meters of 
ethane, if Bolivia could provide that amount. 
 
LA PAZ 00001404  002 OF 003 
 
 
 
-------------------------------- 
And Exploration Business is Dead 
-------------------------------- 
 
¶4. (SBU) Kieffer explained that during the congressional 
contract approval debacle (ref A), Podemos had won the 
argument that exploration contracts (as opposed to 
exploitation contracts) do not have to be approved by 
congress.  This liberated former President and Podemos leader 
"Tuto" Quiroga from GOB legal charges that he had approved 
illegal exploration contracts, but means a lack of legal 
security for any company that may undertake exploration. 
Kieffer said that no company -- with the political exception 
of Venezuela's PDVSA which would receive special benefits 
under the bilateral cooperation agreement currently up for 
approval by the Bolivian congress -- would invest in 
exploration without knowing what the terms would be for 
exploitation, i.e. tax rates, once they discovered 
hydrocarbons.  Chaco's vice president agreed that the 
exploration business has been ruined and that no company 
would enter except PDVSA.  Kieffer expressed concern about 
Constituent Assembly proposals regarding the hydrocarbons 
sector.  He said that if the proposals that he had seen 
become part of the new constitution, no private company would 
be able to operate in Bolivia in either exploration or 
exploitation. 
 
-------------------------------------- 
Company Take-Over Negotiations Ongoing 
-------------------------------------- 
 
¶5. (SBU) Kieffer said the GOB really intends to gain majority 
ownership of the four hydrocarbons companies that it pledged 
to take over in its May 2006 nationalization decree. 
According to Kieffer, the GOB is currently negotiating with 
the German-Peruvian owned Bolivian Hydrocarbons Logistics 
Company, but has not held recent meetings with Chaco 
(partially U.S. owned), Andina (Spanish-Argentine), or 
Transredes (partially U.S owned).  Chaco confirmed that it 
has not held discussions with the GOB, but said that reaching 
agreement with the GOB to purchase the required shares would 
be possible as long as Chaco retained administrative and 
operating control over the company.  On May 17, Transredes 
officials told Emboffs that they also had not held formal 
discussions with the GOB recently about the issue, and said 
that allowing Bolivia's state oil company YPFB to gain 
operating control of the Transredes was impossible.  Raul 
Kieffer mused that the GOB would agree to cede operating 
control to the private companies, in order not to repeat its 
failures following nationalization of the Vinto smelter (ref 
B).  Kieffer said the GOB would contract an international 
firm to evaluate the worth of the companies in the next three 
months. 
 
------------------------------ 
Canadians Providing TA to YPFB 
------------------------------ 
 
¶6. (SBU) Kieffer told Emboffs on May 18 that the Canadians 
are providing technical assistance to Bolivia's state oil 
company YPFB, in attempts to improve its currently extremely 
limited capacity to manage its new duties after 
"nationalization."  Kieffer said that YPFB President Aruquipa 
is quite logical and learns quickly, but lacks the capacity 
to manage the organization.  The GOB has proposed a bill to 
exempt YPFB staff and the workers from the previously 
Petrobras-owned refineries from the general GOB pay scheme, 
 
LA PAZ 00001404  003 OF 003 
 
 
which would enable these state workers to earn competitive 
salaries. 
 
-------------- 
Refinery Plans 
-------------- 
 
¶7. (SBU) Petrobras official Arturo Castanos told Emboffs on 
May 14 that Petrobras made an offer to the GOB to sell its 
refineries for USD 112 million, because a decree issued by 
the GOB on May 6 had cut almost all of the refineries' 
profits and left Petrobras with no room to negotiate a 
partial sale.  Regarding the GOB's announced plans to expand 
the refineries' production, Castanos said that the GOB would 
have to invest large sums to expand diesel production, but 
that such an investment did not make economic sense in 
Bolivia.  Raul Kieffer estimated that the GOB would need to 
invest around USD 45 million to increase the capacity of the 
refineries, pipelines, and storage to be self-sufficient in 
diesel.  (Note: This amount seems small compared to the USD 
100 million the GOB spends annually on diesel imports.  End 
note.)  Chaco's vice president noted that, although the 
refineries represented only a small portion of Petrobras' 
global profits, they were the top-earning businesses in 
Bolivia in 2006.  Castanos said that the refineries, if 
properly run, could generate USD 60 million per year if the 
price of fuel remained high. 
 
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Comment 
------- 
 
¶8. (SBU) Although a few natural gas operators have committed 
to increasing investments, the large players in the Bolivian 
industry remain skittish.  Future risks to the sector include 
YPFB's lack of capacity to fulfill its enlarged role, 
Constituent Assembly proposals that would hinder private 
operations, uncertainty in the exploration business that will 
lead to declining gas and oil reserves, and GOB plans to take 
over majority ownership of four production, storage, and 
transportation companies.  End comment. 
GOLDBERG