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06BUENOSAIRES984 2006-05-02 21:59:00 CONFIDENTIAL Embassy Buenos Aires
Cable title:  

ARGENTINA PUBLIC AND PRIVATE SECTOR REACTION TO

Tags:   EPET ENRG EINV ECON AR BL 
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DE RUEHBU #0984/01 1222159
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R 022159Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RHEHNSC/NSC WASHDC
RUEHC/SECSTATE WASHDC 4365
INFO RUEHAC/AMEMBASSY ASUNCION 5500
RUEHBR/AMEMBASSY BRASILIA 5298
RUEHLP/AMEMBASSY LA PAZ MAY MONTEVIDEO 5507
RUEHSG/AMEMBASSY SANTIAGO 5094
RUEHRI/AMCONSUL RIO DE JANEIRO 1964
RUEHSO/AMCONSUL SAO PAULO 2873
RHMFISS/HQ USSOUTHCOM MIAMI FL
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					  C O N F I D E N T I A L BUENOS AIRES 000984 

SIPDIS

SIPDIS

WHA FOR PDAS CHARLES SHAPIRO AND DAS PATRICK DUFFY
NSC FOR DAN FISK
USDOC FOR 4322/MAC/OLAC/BASTIAN/PEACHER
ENERGY FOR GARY WARD

E.O. 12958: DECL: 05/02/2016
TAGS: EPET ENRG EINV ECON AR BL
SUBJECT: ARGENTINA PUBLIC AND PRIVATE SECTOR REACTION TO
BOLIVIA'S NATIONALIZATION OF OIL AND GAS RESERVES

REF: A. BUENOS AIRES 119


B. BUENOS AIRES 140

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



1. (C) Bolivian President Evo Morales nationalized the
country's oil and gas reserves by decree on May 1. The
decree fulfilled one of Morales' most prominent campaign
pledges, but the scope and speed of the decision came as a
shock to Argentine officials and business representatives
alike. GOA officials have responded to the nationalization
with assurances that they will monitor developments closely
and will coordinate closely with Brazil. U.S. and Argentine
oil and gas firms have adopted a "wait and see" approach
before making a decision on the future of their
Bolivia-related investments. An industry analyst noted the
nationalization decree will pressure the GOA into a decision
on meeting rising natural gas demands going forward. End
Summary.



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Morales Nationalizes Hydrocarbons Resources


--------------------------



2 (U) Bolivian President Evo Morales fulfilled one of his
most prominent campaign pledges on May 1 when he nationalized
the country's oil and gas reserves by decree on his 100th day
in office. Argentine officials and industry representatives
told Embassy officers they were surprised by the timing and
suddenness of the decision and Morales' deployment of troops
to assist with its implementation.



--------------------------


GOA Reacts with Shock, Concern


--------------------------





3. (C) The Ambassador spoke to Secretary of the Presidency
Carlos Zannini about the nationalization on May 2. Zannini
said that the Bolivian action took the GOA by surprise. He
doubted that Bolivian authorities would be able to manage the
nationalized reserves by themselves, if it comes to that. He
also expressed concern about the price of natural gas that
Argentina currently imports from Bolivia. Zannini further
speculated that the GOB action might be a "negotiating ploy."



4. (C) MFA Deputy Foreign Minister Roberto Garcia Moritan
confirmed to the Ambassador that Argentina was surprised by
the GOB action. Argentina is currently evaluating events in
Bolivia and is coordinating closely with Brazil. Garcia
Moritan offered to meet with the Ambassador later in the week
once the dust had settled.



--------------------------



--------------------------


U.S. Oil Companies Taking a Wait-and-See Approach


--------------------------



--------------------------





5. (C) The Economic Counselor also spoke to the CEOs of two
U.S. companies and the principal Argentine oil company that
have oil and gas investments in Bolivia. All three CEOs said
it was too early to tell the impact of the decree as there is
no detail explaining how the nationalization will take place.
For example, the decree states that the GOB will take
control of production and marketing in Bolivia and for
export. Nevertheless, there are no instructions as to where
the oil and gas would be transferred to the GOB, who pays
royalties, and what happens to existing contracts.
Meanwhile, all three companies continue to operate normally
and safely.



6. (C) Pan American Energy CEO Felipe Bayon confirmed that
Petrobras, (Andina) Repsol, Total, and Chaco (50 percent
owned by Pan American), and Transredes (Enron and Shell) are
the companies that are the largest producers and the most
affected by the decree. The decree seeks to take over the

"capitalizadas" that took over parts of the former state oil
company by: 1) taking over that portion of the shares owned
by the state pension fund; and 2) asking the companies to
turn over enough additional shares to give the GOB 51 percent
control of the companies. It is not clear how this would
happen, but if it did happen, there would be no guarantee
that the GOB would not drag the company into bad investments,
higher operating costs or bureaucratic inefficiencies,
actions that could eventually destroy the value of the
company. The decree also seeks to increase the governments
share of production from 50 percent to 82 percent in those
fields that produce more than 100 million cubic feet of gas
per day. Finally, the decree seeks to take over a number of
refineries owned by Petrobras. Some of the larger companies
will be impacted by two or three of these measures. Finally,
the decree declares that any company that refuses to accept
the terms of the decree will lose their concessions
immediately. Bayon added that the military occupation of the
larger fields had no direct relationship with the volume of
production. For example, Chaco has fields that were occupied
that produce less than 100 million cubic feet per day. He
added that there were "quite a few Venezuelan technicians
running around the fields helping the YPFB run things."
Bayon concluded that Pan American had not ruled out filing a
claim with the International Center for the Settlement of
Investment Disputes (ICSID).



7. (C) The DCM later spoke to Pan American Chairman and
Argentine part-owner Alejandro Bulgheroni. Bulgheroni said
that he and other Pan American executives had been in Bolivia
during the week of April 24 and had spoken to Bolivian
President Morales and Vice President Linera about the
proposed Argentine-Bolivian (GNA) natural gas pipeline. The
Bolivians had said that everything was fine with going ahead
with the pipeline. The result was that they had been
completely blindsided by the decree. He noted that the
decree was the "coup de grace" for the GNA pipeline. In his
view, "no one in his right mind would invest anything in
Bolivia." Bulgheroni said that "taken literally" the decree
amounted to confiscation, since there is no discussion of the
mechanism for compensation. This could change, so Pan
American will wait to see if the GOB offers any compensation
before taking further action. Pan American had already shown
flexibility in the recent past and had agreed to work with
the GOB in accommodating the new hydrocarbons law. In the
meantime, Pan American is preparing to file a claim with
ICSID. Bulgheroni also noted that many of the oil in gas
projects in Bolivia had heavy World Bank (IFC) exposure and
that it was time for the international financial institutions
and the G-7 to "stand united and take a hard line in Bolivia."



8. (C) Vintage of the U.S. President Michael Kyle said he
was surprised at the aggression expressed against Repsol of
Spain and Petrobras of Brazil. He thought the GOB had sent a
strong message to the oil and gas companies, but he was not
sure whether the message was, "pack your bags" or "we want a
larger participation in your business." He thought Vintage
might not be as affected by the decree since the company's
operations in four different fields produced only 30 million
cubic feet per day. He also expressed doubts about the
continued exports of gas to Argentina, since "the GOA will
not be able to lean on Repsol to continue to export gas to
Argentina if it is not making money in Bolivia."



--------------------------



--------------------------


Argentine Firms Also Take "Wait and See" Approach


--------------------------



--------------------------





9. (C) Plus Petrol of Argentina CEO Steven Crowell thought
there was a huge emotional component in the decree in the way
that it lashed out at Repsol of Spain and Petrobras of
Brazil. He noted that whenever Repsol's Spanish CEO Antonio
Brufau travels to Bolivia, "things only get worse." He
compared it with the strong domestic reaction against the
Meza government's proposed exports of natural gas through
Chile. "They can't get past their national history," he

said. Like Kyle, Crowell thought that Plus Petrol's
operations "might still be under the radar," since the
company only produced 35 million cubic feet of natural gas
per day from a single field (Tacabo).



10. (C) Techint's Director for Institutional Relations
Gabriel Sbruzzi told Econoff that the company had expected
Morales to nationalize Bolivia's hydrocarbons resources.
(Note: Techint is an Argentine holding company with oil and
gas as well as steel producing assets around the world.
Techint developed the Camisea pipeline in Peru. End Note.)
He added that the company was surprised at how Morales had
chosen to implement his campaign pledge and that the decision
was "all bad news for Argentina." Sbruzzi speculated that
Morales' decision will have "a damaging effect on long-term
investment in Bolivia." He was more circumspect, however,
about the prospects of Techint's involvement in the
development of the GNA pipeline and expansion of Bolivia's
natural gas producing capacity. "As a result of Morales'
decision, we are simply putting our plans on hold," Sbruzzi
said. He said the company will be closely monitoring the
six-month contract renegotiation process with YPF-Bolivia
that Morales' May 1 decree has mandated. Sbruzzi said the
outcome of those renegotiations will be critical to the scope
of Techint's investments in Bolivia.



--------------------------


Local Energy Consultant Has a Harsher View


--------------------------





11. (C) The Economic Counselor also spoke with local energy
consultant Daniel Gerold who described the decree as
"extremely aggressive," "very overdone," and "much tougher"
than anything that had been discussed or negotiated before.
He noted that the decree states that oil and gas companies
must accept the new conditions immediately or lose their
operating rights. If the companies refuse, YPFB engineers
and the Bolivian military will operate the fields. If the
companies agree, they have 180 days to sign new contracts to
become service operators and will obtain a service fee based
on past investments and earnings. There is no way of
predicting what these fees will be, so companies are before
forced to accept the new conditions without knowing what they
involve. The companies which operate the large fields will
not be able to continue to operate when they have to take 100
percent out of their costs out of the remaining 18 percent of
their production. He thought that Bolivian Vice President
Linera was the "mastermind" behind the decree and noted that
Linera had recently said that "every Bolivian should be
prepared to defend the nationalization of the oil and gas
sector with his life."



12. (C) Gerold has regular contact with Secretary of Energy
Daniel Cameron, who had been sent by Minister of Planning
Julio DeVido to Bolivia on April 27-28 to try to negotiate
the purchase of additional volumes of gas from Bolivia. He
said that Cameron had been completely blindsided by the
decree, which tracks with what Bulgheroni told the DCM.
Gerold added that Cameron was worried about both the
continued importation of gas from Bolivia and the feasibility
of importing larger volumes of gas in the future. Gerold
also noted that Venezuelan President Chavez had immediately
said that he would invest in Bolivia and would provide
"whatever is needed" to develop the sector. That might be
the only way forward for the GNA pipeline, since no one else
would want to invest in Bolivia. He concluded that, "the GNA
pipeline is dead unless there is a significant increase in
the role of the Argentine state and Chavez finances it."
This, in turn, will bring "delays, higher costs, and the risk
of insufficient supply in the coming years." Gerold added
that the developments in Bolivia would put pressure on the
GOA, since radical elements will point to the
nationalizations in Venezuela and Bolivia and ask why the
same thing can not be done in Argentina.



13. (C) Gerold stated, reflecting on the weekend's events,
that "this is a disaster for Argentina." He remarked that
the nationalization decree puts the GOA in a difficult
position. If GOA goes ahead with the GNA, according to
Gerold, it will be seen as tacitly supporting Morales' and
Chavez's actions against Repsol of Spain and Petrobras of
Brazil. At the same time, he said, the GOA cannot afford
further delays in making a decision on advancing with the GNA
pipeline or expanding the capacity of existing pipelines to
Neuquen or the Austral region. Gerold observed that if the
GOA proceeds with development of the GNA pipeline, Bolivian
gas will not arrive to Argentina until 2008 or 2009, despite
reliable forecasts that domestic demand for natural gas is
expected to create serious shortages in 2007. Secretary of
Energy Daniel Cameron has not made any decisions either on
developing the GNA pipeline or on expanding existing pipeline
capacity in last three years, according to Gerald. Demand
has, meanwhile, been growing at a rapid rate and domestic
production has lagged. Gerold lamented that "the GOA does
not understand Bolivia, its own domestic priorities, or the
big energy picture in the region."



--------------------------


Comment


--------------------------





14. U.S and local companies are taking a "wait and see"
approach. They all see the nationalization as a step in the
wrong direction, however, and are not optimistic going
forward. The GOA's initial reaction has also been "wait and
see," but officials have not expressed optimism regarding the
outcome of Morales' decree. Post agrees with Gerold's
assessment that time is running out for the GOA to address
its rising energy needs. Failure to build the GNA pipeline
or to expand the capacity of existing domestic pipelines will
limit opportunities for industrial growth while the GOA
continues to prioritize natural gas availability for
residential users in major metropolitan areas. A decision to
abandon efforts to build the GNA Pipeline means the GOA will
need to proceed with the expansion of domestic pipelines,
which will lead to a more rapid reduction of Argentina's gas
exports to Chile. The Government of Chile, however, has
probably already seen the handwriting on the wall, as
evidenced by its decision to proceed with the USD 300 million
degasification project in the Port of Ventanas.



15. (U) To see more Buenos Aires reporting, visit our
classified website at:
http://www.state.sgov.gov/p/wha/buenosaires.< /a>
GUTIERREZ