Identifier
Created
Classification
Origin
05ASUNCION1342
2005-10-26 19:49:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Asuncion
Cable title:  

PARAGUAY: CDS CLAIMS `SIGNIFICANT' QUANTITIES OF

Tags:  ENRG ECON PA 
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UNCLAS SECTION 01 OF 04 ASUNCION 001342 

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
ALSO FOR EB/IEC
STATE PASS TO USTR FOR BETH LEIER
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA MAUREEN WAFER
TREASURY FOR OTA VJORSTAD
COMMERCE ITA SARAH COOK
NSC FOR MIKE DEMPSEY
SOUTHCOM FOR POLAD
US SOUTHERN COMMAND MIAMI, FLORIDA

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG ECON PA
SUBJECT: PARAGUAY: CDS CLAIMS `SIGNIFICANT' QUANTITIES OF
OIL AND GAS FOUND IN CHACO EXPLORATION

REF: ASUNCION 1047

UNCLAS SECTION 01 OF 04 ASUNCION 001342

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
ALSO FOR EB/IEC
STATE PASS TO USTR FOR BETH LEIER
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA MAUREEN WAFER
TREASURY FOR OTA VJORSTAD
COMMERCE ITA SARAH COOK
NSC FOR MIKE DEMPSEY
SOUTHCOM FOR POLAD
US SOUTHERN COMMAND MIAMI, FLORIDA

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG ECON PA
SUBJECT: PARAGUAY: CDS CLAIMS `SIGNIFICANT' QUANTITIES OF
OIL AND GAS FOUND IN CHACO EXPLORATION

REF: ASUNCION 1047


1. (U) This cable is sensitive but unclassified. Please
protect accordingly.

--------------
Summary
--------------


2. (SBU) After a lull of nearly thirty years in hydrocarbon
exploration, a Paraguayan company, CDS Energy, is
undertaking an exploration and drilling project in the
country's Chaco region. In a September 23 meeting with DCM,
company president James Wade said preliminary results show
that significant deposits of oil and gas are present, and
that their extraction and marketing will have a major impact
on the Paraguayan economy. Wade predicts that the
extraction of hydrocarbons will radically change Paraguay's
position from net importer to major regional supplier of oil
and gas. He is cautiously optimistic about the GOP's
capacity to manage this find, and is openly seeking USG
support in safeguarding his company's investment. End
Summary.

--------------
Why Paraguay, Why Now?
--------------


3. (U) James Wade, Chairman of CDS Energy, met with DCM on
September 23 to discuss the results of his company's recent
tests for oil and natural gas near Paraguay's border with
Bolivia in the country's western Chaco region. Accompanying
Wade was Daniel Morrison, who serves as the company
president. Wade, a Canadian, is a 30-year veteran of oil
and gas exploration, with previous projects in Russia, India
and China. CDS Energy, which is working in cooperation with
local partners, holds exploration rights to just under three
million contiguous hectares across the border from existing
Bolivian and Argentine oil and gas fields.


4. (U) Penzoil carried out the last significant oil and gas
exploration in Paraguay in the early 1970s. According to
Wade, neither the technology nor the economics of the time
were favorable. With the price of oil currently hovering
above USD $50 per barrel, and with advances in technology
pioneered during Permian Basin exploration, Wade believes
the time is ripe to explore in Paraguay. Beginning in late

July 2005, CDS drilled appraisal wells in areas to the east
of proven reserves in Bolivia, retracing the steps of
earlier exploration with new technology. According to the
company's prospectus, prepared by the London firm City
Capital Corporation, Ltd., the majority of the wells
previously drilled on concessions held by CDS showed
deposits of oil and/or gas. Wade attributed inappropriate
drilling techniques used in prior exploration as "masking"
the true content of the wells. He also said that the data
from prior exploration in the area was fragmented, and that
it had only recently been put together to provide a more
complete picture of potential reserves.


5. (SBU) Regional developments also play into Wade's
calculations. Current Bolivian instability, coupled with
huge potential markets in Brazil and Argentina, mean that a
significant find in Paraguay could position the country to
supplant Bolivia as a major regional supplier of natural
gas. As for the domestic market, Wade envisions a total
revolution in the local energy sector. Paraguay is
presently a 100 percent importer of hydrocarbons. According
to CDS, these imports represent a USD $200 million negative
in the country's balance of payments. Wade speculated that
the revenues from natural gas alone could exceed those
generated by the Itaipu dam. He is optimistic that better
access to Paraguay's Chaco region will enable CDS to easily
market any oil it produces in its test production phase,
providing resources for further exploration.
--------------
Capital Ideas
--------------


6. (U) Wade told econoff that CDS is funded with mainly
European capital. Additional capital is being sought on the
London Stock Exchange Alternative Investment Market (AIM),
which listed the company on September 27. CDS' April 2005
prospectus listed the expected value of three of its oil
wells at USD 37 million. The prospectus assigned no value
to the wells targeting gas. Based on the results of his
test wells, Wade told DCM that his concessions could hold as
much as 175 million barrels of oil and 4.4 trillion cubic
feet of natural gas. These estimates of gas volumes would
indicate a quantity well above that deemed necessary by the
prospectus to support exports to neighboring markets in
Brazil, Chile and Argentina.


7. (U) CDS' prospectus listed total assets at the end of
April 2005 as approximately USD 3.2 million. Based on its
expected drilling program of five wells, the company plans
to spend approximately USD 16.4 million by the end of 2006.
Financing for this expenditure will come through its recent
IPO in London. The company has contracted Texas-based
Nabors Drilling International to carry out its drilling
campaign, and final costs for the program will depend on the
performance of each of the five wells planned for this
phase.

--------------
Charting the Revenue Stream
--------------


8. (U) Paraguay's Hydrocarbons Law, Number 779, contains the
legal framework for prospecting, exploration and
exploitation of petroleum and other hydrocarbons. Title
Eight of the law exempts concession holders from government
and municipal taxes during exploration. Once production
begins, the royalties on the gross production of crude oil
are ten percent for 100 to 5000 barrels per day, twelve
percent from 5001 to 50,000 barrels per day and fourteen
percent for 50,001 barrels and beyond. The law defines a
barrel as containing 42 US gallons. Royalties for natural
gas, defined as compressed and liquefied hydrocarbons, are
twelve percent on total gross production and fifteen percent
for any other solid and semisolid hydrocarbons in natural
state. Chapter 8, Article 44 of the law requires that
royalties be paid in cash within ten days after the
reception of the liquidation of the resources. The royalties
would be general revenues; the law does not contemplate any
type of special fund.


9. (SBU) Comment: Should hydrocarbon finds begin to generate
revenue for the Paraguayan treasury, Post will seek to help
the GOP institute sufficient safeguards to assure
transparent use of the funds. Post's economic working group
is already examining this. Post would welcome Department's
guidance on ways to encourage transparency and
accountability of hydrocarbons revenues, including best
practices from other countries, as the potential supply
becomes more clear. End Comment.

--------------
`A Heads-up To Uncle Sam'
--------------


10. (SBU) DCM asked Wade how much CDS has told the GOP
regarding its find in the Chaco. Wade replied that he had
recently met with the Vice President, but that he had not
yet revealed the extent of the reserves he says are present.
Wade stated: "This meeting is me saying `Heads up' to Uncle
Sam. We want you to be telling the Paraguayans: `We know
who they are. Treat them well.'" Wade was cautiously
optimistic when assessing the GOP's reaction to the find.
Wade complained to DCM that Ministry of Public Works
officials, including Vice Minister of Mines and Energy
Hector Ruiz Diaz, have repeatedly given the press inaccurate
information about resources in the Chaco. Morrison noted
that CDS has purposefully attempted to maintain a low
profile during the project, quietly laying the groundwork
for its exploration program and preferring actions to
rhetoric.


11. (SBU) During a June meeting with Econoff, VM Ruiz Diaz
took a measured approach in discussing the country's
hydrocarbon potential. He emphasized the need for careful
studies of the data uncovered during the exploration
process. Despite his cautious tone, however, he was keen to
show to econoff a film produced in December 2004 that
chronicles hydrocarbon exploration in Paraguay. This film
features footage of Independencia I, the natural gas well
drilled by CDS Energy's partner company Primo Cano Martinez
Energy. A dramatic nighttime photo of Independencia I, its
methane flare glowing brightly is prominently exhibited in
his office.

--------------
Next Steps
--------------


12. (SBU) Wade predicted to DCM that after intensified
exploration in coming weeks, CDS would "soon" begin pumping
oil, and that under the terms of Paraguay's hydrocarbons
law, the state-owned petroleum entity PETROPAR will buy the
oil from the company for market price at the well head. It
would then be trucked from the Chaco to PETROPAR's refinery
in Asuncion. If sufficient quantities of oil are discovered,
Wade stated that he has access to financing sufficient to
build a diesel refinery in the Chaco. If the company's gas
fields prove large enough to market commercially, Wade also
discussed the possibility of bringing in foreign capital to
construct a Gas-to-Liquid (GTL) plant closer to Asuncion.

--------------
Potential Challenges
--------------


13. (SBU) During an earlier meeting with Econoff, CDS
President James Wade and his associate Daniel Morrison were
frank about some of the potential challenges facing their
project. Wade lamented the lack of institutional capacity
within the Paraguayan government, stating his doubts that
the Ministry of Interior possessed the capacity to even
interpret his drilling reports. Morrison also told Econoff
that some local environmental groups were reflexively
opposed to any hydrocarbon exploration. Defending the
thoroughness of CDS' environmental impact assessments,
Morrison told Econoff "We documented plants and animals that
the environmental groups didn't even know about."


14. (U) During his meeting with DCM, Wade noted that in
addition to selling his project to prospective investors, he
was tasked with "selling Paraguay." Morrison noted that the
recent expropriation of land around the community of Puerto
Casado (reftel) sent a bad signal to business people
interested in investing in the country, stating "It was the
worst thing the GOP could have done."


15. (SBU) CDS has retained both local legal counsel and a
government relations specialist, whom Wade refers to as "my
apostle", to help the company navigate the local
bureaucracy. In a meeting with Emboffs, Morrison stated
that CDS had not been the target of extortionists, and that
the company would not pay bribes. In part, Wade believes
that many Paraguayans, including officials, were dismissive
of oil and gas potential because of past exploration
failures and prevailing myths about the inaccessibility of
the Chaco region. For that reason, Wade believes the CDS
project has received less than serious attention from some
people. Both men noted that other companies have acquired
neighboring oil and gas concessions after CDS, in hopes of
capitalizing on any discovery.

Comment
--------------


16. (SBU) The discovery of significant hydrocarbon reserves
in Paraguay (if true) the investment that would follow, and
the resulting increase in government revenues, would have
profound economic and political implications. While CDS's
capital primarily comes form the U.K., they already employ a
U.S. subcontractor and would likely rely heavily on U.S.
suppliers for any significant production. Post remains in
close contact with CDS and will report on further
developments as the company turns from exploration to
production. Wade is keen to keep the USG informed, and to
show the GOP the Embassy's interest in his company. End
Comment.

KEANE