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DE RUEHAC #0288/01 1252126
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O 052126Z MAY 09
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7817
INFO RUCNMER/MERCOSUR COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0392
RHMFISS/HQ USSOUTHCOM MIAMI FL PRIORITY
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C O N F I D E N T I A L ASUNCION 000288 
 
SIPDIS 
 
STATE FOR WHA/BSC MDASCHBACH, WHA/EPSC FCORNEILE 
 
E.O. 12958: DECL: 07/26/2027 
TAGS: ECON EFIN PGOV PA VZ
SUBJECT: PETROPAR AND PDVSA: A NECESSARY EVIL FOR PARAGUAY 
 
REF: A. ASUNCION 00228 (2008) 
     ¶B. ASUNCION 00378 (2008) 
     ¶C. ASUNCION 00473 (2008) 
     ¶D. ASUNCION 00721 (2008) 
 
Classified By: DCM Michael J. Fitzpatrick; reasons 1.4 (b) and (d). 
 
¶1. (C) SUMMARY: Paraguay's state-owned oil company PETROPAR 
racked up short-term debts of 317 million USD with 
Venezuela's state-owned oil company PDVSA for diesel supplied 
since 2007 and about 270 million USD of that is past due. 
PETROPAR's total debt more than doubled since 2006 because 
Paraguay maintained subsidies just as diesel prices peaked in 
¶2007. PETROPAR's President Pedro Sugastti traveled in April 
to Venezuela to propose refinancing Paraguay's debt. Paraguay 
tried to pay part of its debt with in-kind payments in a 
food-for-oil scheme, but Paraguayan private agriculture 
producers refused to participate, resisting the Ministry of 
Foreign Affairs' overtures. The possibility of PDVSA making a 
push into Paraguay seems unlikely, as PETROPAR is a weak 
financial partner for PDVSA, and the market is saturated with 
private retailers. The immediate issue for Lugo is what to do 
with PETROPAR's debt. The only real option is limited to 
long-term refinancing by PDVSA or anyone else willing to take 
risk. END SUMMARY. 
 
¶2. (SBU) Paraguay's state-owned oil company PETROPAR has 
accumulated short-term account payables of over 374 million 
USD with suppliers. Of this total, 85 percent, or 317 
million, is owed to Venezuela's state-owned oil company 
PDVSA, and about 270 million USD of PETROPAR's debt to PDVSA 
is past-due. PETROPAR's debt with PDVSA reflects its 
limitations in finding suppliers. With the exception of 
PDVSA, few suppliers want to trade with PETROPAR, as the 
company is highly leveraged and in a very weak financial 
position with only 50 million USD in assets (reftels b and 
c). 
 
¶3. (SBU) PETROPAR incurred most of its debt because it 
maintained diesel subsidies when oil prices peaked in 2007. 
The pressure to immediately solve acute shortages also 
contributed to Paraguay,s increasing reliance on PDVSA. 
During one of the most severe diesel shortages in July and 
August 2008 (the month President Lugo assumed the 
presidency), PETROPAR got from PDVSA about 3 month's stock of 
diesel on consignment. Since 2006, PETROPAR's debt more than 
doubled, coinciding with the severe diesel shortages 
experienced in 2007 and the second half of 2008 (reftel a). 
High costs associated with bad management and corruption, 
particularly in the selection of freight companies to 
transport the fuel, also contributed to PETROPAR's growing 
debt. (NOTE: PETROPAR ceased to subsidize diesel in November 
2008, following the decline in market diesel prices. END 
NOTE.) 
 
¶4. (SBU) In a visit widely criticized by the press, 
PETROPAR's President Pedro Sugastti went to Venezuela in 
April to propose refinancing Paraguay's debt per the terms 
set in the 2004 energy cooperation agreement between Paraguay 
and Venezuela. According to Sugastti, his PDVSA counterpart 
accepted Paraguay's proposal. (NOTE: Under the terms of an 
energy cooperation agreement signed in late 2004 between 
Paraguay and Venezuela and ratified by Paraguay,s Congress 
in mid-2005 (reftel a), PDVSA could supply PETROPAR with up 
to 70 percent of Paraguay,s diesel needs. Under the same 
agreement, PETROPAR could refinance up to 25 percent of the 
total supplied by PDVSA to a 15-year loan at a flat-rate of 2 
percent per annum with a 2-year grace period. END NOTE). 
PDVSA supply contracts with PETROPAR are renewed every six 
months, and, per the contractual terms agreed by PETROPAR, 
PDVSA can apply a late penalty-fee of about 18 percent per 
annum (12 percent flat-rate plus 6 percent for administrative 
and collection charges) over past due amounts. The 
late-penalty fee for PETROPAR's past due debt has not been 
yet applied by PDVSA. 
 
¶5. (C) Paraguay tried to pay part of its debt with in-kind 
payments (food-for-oil), but Paraguayan private agriculture 
producers refused to participate, resisting the overtures of 
Paraguay's Ministry of Foreign Affairs (MFA). Several large 
agriculture producers told Econoff in April that officials 
leading a food-for-oil agenda in the MFA, including Vice 
Minister Rodriguez Campusano, have repeatedly asked for a 
joint public-private sector commission to explore how to 
export food products in exchange for diesel imports. The 
Paraguayan private agriculture producers refused, claiming 
that it will be impossible to expect any payments for the 
goods exported to Venezuela. Producers cited PETROPAR's weak 
position with PDVSA. According to them, PDVSA will ask 
PETROPAR to pay for the goods exported to Venezuela by 
deducting the payment from the outstanding account payables 
PETROPAR has with PDVSA. In this scheme, PETROPAR will owe 
producers, and they argued that the state-owned company is in 
no condition to make and honor its financial obligations. 
(NOTE: A memorandum of understanding signed in 2007 modified 
the 2004 energy cooperation agreement to allow for 
food-for-oil transactions where PETROPAR can pay in-kind for 
PDVSA's fuel (reftel a). END NOTE.) 
 
¶6. (C) Private distributor Exxon General Manager Alejandro 
Conti told Econoff in April that private distributors are 
increasingly responsible for supplying a larger share of 
Paraguay's diesel. Conti said PETROPAR maintains an advantage 
in its storage capacity, but private distributors are 
actively managing stock to further undermine PETROPAR's 
usefulness. Since PETROPAR no longer subsidizes diesel, Conti 
argued that PETROPAR is irrelevant in Paraguay's fuel retail 
market, and the project to upgrade Paraguay,s only refinery 
(the small-volume but highly staffed state-owned Villa Elisa 
refinery, reftels a and d) is inconsequential and likely a 
"smoke-screen" to avoid the real problems -- corruption and 
inefficiency. (NOTE: Under the Colorado's, PETROPAR was a 
huge source of funds for party patronage, pork, and 
corruption. There are allegations of fuel "disappearing" 
before it reaches Asuncion and exceedingly high markups for 
transport services benefiting a "selected" group of 
contractors. These issues and the lack of results in 
improving PETROPAR's performance contributed to Lugo's 
decision to replace Minister of Commerce and Industry Martin 
Heisecke. END NOTE.) 
 
¶7. (C) COMMENT: Lugo's administration appears to be looking 
for a solution to PETROPAR's debt and its increasing reliance 
on PDVSA as a supplier. However, PETROPAR's financial 
problems will continue, even if PETROPAR refinances its debt 
with PDVSA, because the company is poorly managed and 
operates mainly to support corrupt patronage structures. 
Fortunately, with the decline of diesel prices, PETROPAR's 
role as a market-maker is diminished. As long as diesel 
prices maintain at current levels, the possibility of PDVSA 
using PETROPAR's compromised position to make inroads in 
Paraguay is unlikely. PETROPAR is a weak financial partner 
for PDVSA, and the retail market is saturated with private 
distribution retailers such as PETROBRAS and Exxon. The 
immediate issue for Lugo is what to do with PETROPAR's debt. 
The only real option is limited to long-term refinancing by 
PDVSA or anyone else willing to take risk.  END COMMENT. 
 
Please visit us at     http://www.state.sgov.gov/p/wha/asuncion 
 
AYALDE