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04LAPAZ2814 2004-09-03 20:13:00 CONFIDENTIAL Embassy La Paz
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1. (C) Summary: The Chamber of Deputies' Economic
Development Committee has proposed nullifying all of the
contracts signed under the current (soon-to-be-invalid)
hydrocarbons law. This follows three days of intense
meetings in the MAS/NFR-led committee. Minister of Economic
Development and head of the economic cabinet Horst Grebe told
the Ambassador that passing a new law fast was key to
ensuring Bolivia's access to potential export markets, while
private sector analysts worried that exporting through Peru
(as the Government wants to do) was impossible.
Subsequently, after weeks of insisting that Congress pass and
the private sector support its draft "short" law, the
Executive and Congress agreed to work together on one longer
law. Some industry representatives acknowledge that they
could probably operate profitably with the new taxation rates
proposed by the GOB, but that further investment in the
sector would be unlikely. Finally, the private sector
remains relatively isolated, talking sporadically with the
GOB (with another videoconference scheduled for September 3),
but still not fully trusting its Government interlocutors.
End Summary.



2. (SBU) The MAS/NFR-led Economic Development Committee in
the Chamber of Deputies held weekend meetings to determine a
course of action with respect to President Carlos Mesa's
proposed referendum (hydrocarbons) law. On August 31,
calling natural gas a national strategic resource, the
Committee made a recommendation that the current hydrocarbons
law be repealed. Despite arguments to the contrary from the
counsel for Bolivia's state-owned hydrocarbons company,
Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the
committee interprets this to mean the nullification of
contracts signed under the previous law, as the legal
framework providing for the contracts will be gone.
(Comment: This is a committee action that has yet to be
debated by the full Chamber of Deputies. Even were the more
radical lower House to pass this recommendation, we would be
surprised to see the idea get past the more conservative
Senate. End Comment.) The Committee also recommended that
the GOB retake ownership of hydrocarbons at the wellhead
(vice underground) and force companies to migrate to
Production Sharing Contracts (PSCs). Private sector sources
have told us that they could be open to PSCs. Migrating,
however, would be difficult as the GOB and each company would
have to come to an agreement about how much investment the
companies had undertaken. Hydrocarbons executives expect
that the YPFB would be unwilling to consider unsuccessful
investment -- i.e., dry wells -- when considering how much to
chip in, thereby leaving the companies holding the bag for
all of the risks they have already incurred, without feeling
the full benefits of their investments.

3. (C) Minister of Economic Development and head of the
economic cabinet Horst Grebe commented to the Ambassador on
August 31 that the situation with Congress and the
hydrocarbons law remained "complicated." He noted that
Bolivia had to triple its gas exports to pull itself out of
poverty and that only private investment would make that
possible. He said that the Executive is looking to increase
revenues in the short-term without killing mid- and long-term
investment. "We lost the market in California, and we run
the risk of losing the market in Mexico," Grebe commented,
skeptical about the likelihood of any law being passed in
September and worried that one might not be passed before the
Mexican call for bids for a liquefied natural gas (LNG)
project in November. That said, Grebe was hopeful that
relations with Congress would improve in the following few
days, making Congress more open to the GOB's plan to first
submit a short referendum law before fleshing out a full
hydrocarbons law with the assistance of World Bank-funded tax
experts. (Comment: The World Bank Resident Representative
(ResRep) in Bolivia told us that the GOB has selected three
names from the World Bank's short list. It is now the GOB's
responsibility to contact those people, convince them to
agree to the project and figure out when they will come to
Bolivia. End Comment.)



4. (C) On August 30, Minister of the Presidency Jose
Galindo, Petroleum Minister Torres and Grebe participated in
a videoconference with private sector representatives.
Galindo reportedly did most of the talking, lobbying the
private sector to jump on the short law bandwagon and noting
that it would be "naive" to expect Congress to be more
pro-business than the administration. The private sector
then argued that the a short law would create a legal vacuum
and that the proposed Complementary Tax on Hydrocarbons (ICH)
would discourage investment. In response to the GOB's plea
that the private sector stop talking about any Chilean export
route, as only a Peruvian export route is politically
feasible, one executive commented that no company will put
money into any Pacific export route for at least four to six
years because "with all this mess, no buyer will ever believe
that there is stability in Bolivia." To the private sector's
surprise, the Ministers reportedly did not even flinch.
Another executive commented to the Ambassador that, even in
the context of an acceptable law, no investment will come to
Bolivia until the Constituent Assembly process finishes,
which take two years.

5. (C) Grebe also met privately on August 27 for nearly two
hours with the head of the Hydrocarbons Chamber who told us
that Grebe "almost died of anger" when he heard that Torres
has been working on his own draft law. Torres did little
talking during the August 30 videoconference, and Torres'
technical staff spent August 31 working with the private
sector to better understand each other's projections. The
head of one company thought that the Minister's consultants
were being swayed by reason, but cautioned that it would be
necessary to wait and see what political decision was taken,
as technical facts can often be ignored. On August 31, a
senior YPFB executive was fired for writing what was supposed
to be a private memo about the inviability of a Peruvian
export route. The Ministers have requested updated figures
before the next GOB-private sector videoconference, scheduled
for September 3.




6. (C) After weeks of wrangling, Congress and the Executive
agreed September 2 to work together on a single comprehensive
law. With that, the GOB formally abandoned its petition that
Congress pass the Executive-drafted "short" (Fulfilling the
Referendum) bill, but insisted that the language of that bill
be incorporated wholesale into the single longer law.
Congressional leaders have agreed in principle to this
condition. In addition, both sides agreed that Congress, led
by a mixed Senate-Chamber of Deputies economic development
commission, will assume primary responsibility for
elaborating the full bill.

7. (C) Minister of the Presidency Galindo told the
Ambassador on September 2 that, because details of the longer
law still need to be worked out, it was not likely to be
passed until sometime in October (vice late September.)
Galindo explained that the agreement with Congress is that
taxation rates contained in the Executive's draft law would
remain unchanged. More troubling, however, is Galindo's
view that across the political spectrum there is widespread
support for scrapping existing petroleum contracts and
forcing companies to renegotiate with the GOB. Galindo
remains hopeful, but not optimistic, that the GOB can
convince companies to voluntarily migrate from existing
contracts to new contracts which would be in compliance with
the new law. In earlier discussions with us, the Presidents
of the lower and upper houses, Mario Cossio and Hormando Vaca
Diaz, insisted that Congress needed to shape a a sound law
without the counterproductive pressure of artificial
deadlines. As Cossio said: "We need for this law to remain
in place for a long time, and not be revisited and revised
every two years. For this reason, we need to take the time
to get it right." He speculated that doing this in less than
one month was unrealistic.



8. (C) While the agreement between Mesa and the Congress to
elaborate a single law is an encouraging development, the
private sector and the GOB continue to be on different pages.
While Mesa was riding a popular wave of support following the
Referendum, Congress seems to have captured some of this
popular support as the Congress, and not Mesa, appears to be
defending the long-term interests of the people.
Increasingly, Mesa is viewed as defending the petroleum
companies, which is not a popular place. While some private
sector representatives lament that production sharing
contracts are not feasible, Presidential Delegate for
Capitalization Franscesco Zaratti has convinced Grebe that
companies will migrate to new contracts. Some industry
representatives acknowledge that they could probably operate
profitably with the new taxation rates proposed by the GOB,
but that further investment in the sector would be unlikely.
The private sector is talking to representatives of the MNR
and MIR parties, but neither has power with the people nor
Mesa's ear. The Embassy will continue to emphasize the
sanctity of contracts and the importance of a
business-friendly (or at least business-acceptable) law for
Bolivia's economic future. End Comment.