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C O N F I D E N T I A L BRASILIA 001224 
 
SIPDIS 
 
E.O. 12958: DECL: 09/10/2018 
TAGS: PREL ENRG ECON EPET EINV BR BL
SUBJECT: Bolivian Gas in Brazil: Stable But Waiting For The Shoe To 
Drop 
 
REFTELS: A) Brasilia 1215, B)Sao Paulo 0031, C) La Paz 0462, D) 
Brasilia 0593, E) Brasilia 0672, F) La Paz 1905 G) Sao Paulo 0392 
H)La Paz 1941, I) Sao Paulo 0260 
 
Classified By: DCM Lisa Kubiske for reasons 1.4 (b) and (d). 
 
¶1. (C) SUMMARY: As of September 12, Brazil's gas supply had 
stabilized following first a minor (10 percent) and then major (50 
percent) disruption in Brazilian imports of Bolivian natural gas 
during the preceding two days as the result of a domestic political 
struggle in Bolivia.  Flow remains down almost ten percent from the 
previous normal flow of 30 million cubic meters per day (Mm3/d) but 
is generally sufficient for maintaining normal operations. 
Government sources report that the current situation is sustainable 
for the near term and no contingency measures are being taken by the 
government to compensate for the loss at this time.  Petrobras has 
removed one Sao Paulo thermoelectric power plant from the electric 
grid but otherwise operations in Brazil are continuing normally. In 
Bolivia, officials have been able to make some repairs, restoring the 
majority of the flow, but the situation remains very tense. Industry 
associations in Brazil say that they are concerned about the possible 
ramifications for industrial production but feel more confident about 
the prospects for avoiding a major electricity crisis in the face of 
a prolonged disruption due to the contingency plans in place and the 
overall electricity picture which has improved in the last year.  END 
SUMMARY 
 
¶2.  (C) As of the morning of September 12, the gas supply situation 
in Brazil was stable despite a 10 percent cut in supply from Bolivia, 
which provides approximately 50 percent of Brazil's natural gas. In a 
public statement at a press conference in the evening of September 11 
Energy Minister Edison Lobao confirmed that though there was a 
temporary reduction of fifty percent of gas flow, the flow had 
returned to approximately 90 percent of the normal level.  He said 
that there was no need at this time for Brazil to put into place any 
of the contingency measures envisioned by the government for a major 
disruption in supply.  Petrobras disconnected one Sao Paulo 
thermoelectric power plant from the electricity grid, but so far have 
not suspended any oil production which involves natural gas 
re-injection. Braz Campanholo Filho, Executive Director of ONS, 
Brazil's system operator for the integrated national electronic grid, 
told Brasilia Econoff that although there is a lot of concern over 
the developments in Bolivia, no special processes have been put in 
place due to the minimal disruption experienced thus far.  According 
to Campanholo Filho, September 11 was a very stressful day as Brazil 
experienced a 50 percent reduction in Bolivian gas supply for seven 
to eight hours.  However, the limited duration of the 50 percent 
shortage meant that Brazil was able to continue operating its plants 
normally and the situation had no effect on Brazil's energy supply. 
He said that Brazil could continue operating with the 10 percent 
reduction for the short term.  He was hopeful that the situation 
would remain stable over the weekend but noted that current 
conditions in Bolivia were notably unstable so ONS will be watching 
carefully.  In the meantime the well-stocked reservoirs for 
hydroelectric power generation will help to compensate for the loss. 
In case the disruption becomes more severe or is protracted, 
Campanholo Filho confirmed that the industrial sector would be the 
primary victim but the electricity consumer would also suffer higher 
electricity prices as some plants would be forced to switch to more 
expensive fuels. 
 
¶3.  (C) Rio Econoff spoke with a contact from Britain's BG Group 
which operates in Bolivia who confirmed what energy analysts are 
telling Rio as well-- that their counterparts in Bolivia report that 
the situation there is very tense.  The extent of pipeline damage is 
still being assessed and could take from a few days to a few weeks to 
repair.  The main issue is whether protesters will give access to the 
site for repairs, Rio-based energy analysts say.  AmEmbassy LaPaz 
reports that as of 4:00 Bolivia time, September 11, the damaged valve 
on the Transierra line (export to Brazil) had been fixed.  Exports to 
Brazil had fallen by half (from 30 million cubic meters, Mm3/d, to 
14Mm3/d), but following the repairs are now back up to 28Mm3/d, vice 
31Mm3/d prior to the disruption. 
 
 
¶4.  (C) Marcel Biato, chief of staff to President Lula's foreign 
policy advisor Marco Aurelio Garcia, told the DCM on September 11 
that the current situation is worrisome but not grave for Brazil. 
Brazil can continue for some time (many weeks) with the 10 percent 
shortfall in Bolivian supply of natural gas to Brazil through a 
variety of contingency plans (see Reftel A), including use of 
alternative fuel sources.  In his public statements on September 11, 
Minister Lobao noted that possible contingency plans would begin with 
switching fuels for Petrobras and Eletrobras thermal plants (all 
thermal plants nationally use 12 Mm3/d), then suspending the 
re-injection of gas in the oil extraction process.  In addition, he 
confirmed that other industries could be asked to switch fuels, 
possibly to oil or diesel, if the need arises.  Lobao said a last 
resort would be to reduce the supply of vehicular natural gas, a fuel 
that gasoline powered vehicles can be converted to use or can be used 
by some types of flex fuel vehicles as an alternative to gasoline or 
ethanol (which in July accounted for the consumption of 6.5 Mm3/d). 
Biato told the DCM that though the current situation is manageable, a 
prolonged shortfall of 50 percent in Bolivian supply of natural gas 
to Brazil would be serious; at that level of shortfall, the main cost 
for Brazil would be economic - higher energy costs raising prices 
more broadly in the economy. 
 
¶5.  (C) Mauricio Correa, Director Institutional relations at the 
Brazilian Association for Electrical Commercialization (ABRACEEL) 
confirms that the private sector electricity providers that belong to 
his organization are concerned.  Correa told Brasilia Econoff that he 
thought GOB contingency planning in case of a significant disruption 
would include prohibiting use of natural gas for vehicular fuel, 
mandating that gasoline be used instead, as well as requiring that 
thermal electrical plants begin using more expensive, and more 
environmentally degrading, oil in place of natural gas.  In doing so, 
the electricity producers would pass the cost increase directly to 
the consumer.  As noted in Reftel A, Correa said that the industrial 
base would suffer the most from a major disruption. Although a few of 
the industrial plants that use natural gas are capable of fuel 
switching, he estimated that up to 80 percent of industry could not, 
recalling that much of Brazil's industrial base switched to natural 
gas at the instigation of the government, in response to an incentive 
program. 
 
¶6.  (C) The Federation of Industries of Sao Paulo's (FIESP) natural 
gas specialist Leonardo Caio told Sao Paulo Econoff that FIESP is 
concerned about possible interruptions for their industrial members. 
He noted that contingency plans had already been established 
following shortages from October of last year (Reftels A and B) and 
that Brazil is in a much better position to address any shortage now 
than last year.  The rainy season will begin in October, reservoirs 
are relatively full, and Brazil is less dependent on gas-fired power 
plants for electricity right now.  Caio cited as possible contingency 
measures: interrupting natural gas sent to thermal electrical plants 
(as Petrobras has already done in Sao Paulo) to guarantee more supply 
available for industry; powering refineries by oil instead of natural 
gas; converting to other fuels oils, as some ceramic, glass, and 
chemicals companies have flexible systems that would allow them to do 
so if necessary.  Caio noted that this conversion process would be 
time consuming and expensive and would likely require a GOB incentive 
or subsidy to permit industry to make these changes while still 
remaining competitive, as well as maintaining their production pace. 
While Brazil should benefit in this situation from recent efforts to 
diversify its gas supply, having just inaugurated a new LNG terminal 
in Pecem (Reftel A) which in theory can supplement Brazil's natural 
gas supply by about 7mm3/d, Caio says that to his knowledge the new 
terminal has not been entirely connected to the rest of the system 
and would be used in emergency only.  He said the price is closer to 
12 usd per million BTU for that gas, versus 6-9 usd for the imports 
from Bolivia. 
 
¶7.  (C) More broadly, Correa speculated that if Brazil were to 
experience a significant, protracted decrease in gas flow from 
Bolivia which resulted in damage to the industrial sector, the Lula 
Administration could see some backlash to its candidates in upcoming 
 
 
municipal elections, particularly in the bid by possible 2010 
presidential candidate Marta Suplicy to become mayor of Sao Paulo. 
He added that these developments would likely intensify the 
dissatisfaction of many in the business sector with current foreign 
policy which they believe places other interests (Note: Some would 
say regional interests, others ideological) ahead of Brazil's 
national interest. 
 
¶8.  (C) COMMENT: Brazilian interlocutors agree that current 
conditions are manageable but they are watching anxiously to see what 
happens next.  The situation is fluid and sources worry that a major 
or long-term disruption would have a significant economic impact with 
possible political ramifications as well.  If these are the only 
pipeline disruptions, then Brazil can manage in terms of short-term 
supply.  Analysts note violence seems to be escalating in Bolivia so 
if a political solution is not reached then we may see more attacks, 
triggering a longer-term emergency.  Post notes that experience the 
world over demonstrates that pipelines are notoriously vulnerable and 
if Bolivia's opposition perceives this to be a successful strategy, 
it is possible to envision this as an ongoing scenario, adding 
urgency to Brazil's continued drive to expand its energy matrix.  END 
COMMENT. 
 
¶9.  (C) This cable has been coordinated with U.S. Embassy La Paz, 
Congen Sao Paulo, and Congen Rio. 
 
SOBEL