BRAZIL RESPONDS TO BOLIVIA REFINERY SEIZURE

UNCLAS SECTION 01 OF 02 BRASILIA 001972

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USAID FOR LAC
NSC FOR FEARS
TREASURY FOR OASIA - J.HOEK AND TAX OFFICE - P.BROWN
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
DOE FOR S.LADISLAW

E.O. 12958: N/A
TAGS: EPET PGOV PREL EINV ECON BR
SUBJECT: BRAZIL RESPONDS TO BOLIVIA REFINERY SEIZURE

REF: LA PAZ 2511


1. (SBU) Summary: Brazilian Minister of Energy Silas Rondeau told
the press Thursday September 14 that the Bolivian effective seizure
of Petrobras' refineries without compensation was "unacceptable"
while President Lula rejected "unilateral" measures. Stating that
it needed time to study the Bolivian decree, the GoB postponed until
the second week of October (after the first round of elections) a
planned trip by Energy Minister Silas Rondeau, who was to lead a
delegation for negotiations on the separate issue of gas prices.
The Lula Administration appears to have again been blind-sided on
hydrocarbons issues with Bolivia, as it was by Bolivian President
Morales' May 1 nationalization decree. While the Bolivian
government reportedly suspended implementation of the measure on
September 14, opposition presidential candidates nevertheless are
spinning the incident as the logical consequence of Lula's "weak"
response to the May 1 nationalization. End Summary.


2. (SBU) The Lula Administration again finds itself fighting a
rearguard action over Bolivian government intervention in the assets
of Petrobras, this time the effective seizure of the finances (via
Bolivian Ministry of Hydrocarbons Resolution number 207/2006) of two
Petrobras refineries. According to local press accounts, the
resolution, by giving Bolivian parastatal YPFB control of the sales
of the refined product, hands YPFB financial control of the
refineries and effectively reduces Petrobras to the role of service
provider, operating the refinery. Brazilian press accounts also
complain loudly that there has not been any compensation paid
Petrobras, stating that Bolivia is arguing that Petrobras has made
"excess profits" which are to be deducted from any compensation for
the refineries, resulting in no payment to Petrobras. Clemente
Baena Soares, the Foreign Ministry office director who covers
Bolivia, noted to Emboff, however, that the issue of compensation
was the subject of ongoing negotiations in one of three
Brazil-Bolivia working groups. It was as yet uncertain, he said,
what effect this latest Bolivian action would have on those
negotiations.


3. (SBU) The Brazilian Ministry of Mines and Energy issued a terse
statement, closely coordinated with the foreign ministry, stating
that it would postpone until the second week of October (after the
first round of the Brazilian elections) the planned September 14
visit by Silas Rondeau. Itamaraty's Baena Soares emphasized to
Emboff that the visit was not canceled, merely postponed, and that
the GoB needed time to analyze the effect of the decree. That visit
was to be the next negotiating session over the price Brazil is to
pay for Bolivian gas. Petrobras CEO Sergio Gabrielli, however,
stressed to the press that the decree on the refineries was a
separate issue from that of ongoing price negotiations for Bolivian
gas.


4. (SBU) Much like the original May 1 Evo Morales decree
nationalizing Bolivia's hydrocarbons sector, this latest Bolivian
action appears to have blind-sided the Lula Administration,
according both to press reports and our Itamaraty contacts. The
Bolivian action reportedly set off a series of phone calls between
Lula foreign affairs advisor Marco Aurelio Garcia (MAG) and Bolivian
government officials, including Vice President Garcia Linera. MAG
later commented to the press that "If they had taken into account
(the Brazilian electoral period),they surely would not have taken
this unilateral decision." These contacts, according to sources
cited in the Brazilian press, resulted in the Bolivia's September 14
suspension of the implementation of the decree. An Itamaraty
contact stressed to Emboff, however, that Bolivia had not backed
away from its position, but merely postponed implementation.


5. (SBU) Comment: Despite the apparent suspended implementation of
the decree, the Bolivian action exposes Lula politically, giving the
opposition every opportunity to remind Brazilians of their visceral
negative reaction to the May 1 nationalization of national champion
Petrobras' assets. Lula's management of that incident was perceived
as weak and roundly criticized. It also opens Lula up for more
general criticism of his foreign policy priority on south-south

BRASILIA 00001972 002 OF 002


integration. Already the opposition is spinning the Bolivian action
as the logical consequence of Lula's bungled response to the May 1
decree. Unfortunately for Alckmin and Helena, there is very little
time before elections for this line of attack to find resonance with
the electorate. Moreover, the Lula Administration's apparent
success in convincing Bolivia to suspend implementation may keep the
incident from truly seeping into the broader public consciousness.

SOBEL