PETROBRAS-BOLIVIAN GOVERNMENT RELATIONS

1. (SBU) Summary: Petrobras representatives told Econoffs
that in several difficult meetings with the GOB, the
Brazilian energy giant vowed not to invest another cent in
Bolivia until key issues were resolved. In those meetings,
GOB officials reportedly displayed a confounding ignorance of
the hydrocarbons sector, and even "offered" to take control
of Petrobras' refineries -- for free. The GOB's intention to
increase the sale price of gas to Brazil and to nationalize
the hydrocarbons sector has prompted Brazil to investigate
alternatives to Bolivian gas, including by building
regasification plants. Perhaps due to Petrobras' tough line,
the GOB has yet to issue its long-awaited nationalization
decree. Problems in the hydrocarbons area suggest a possible
early souring of relations between Brazil and the Morales
government. End summary.

Meetings Accomplished Little


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2. (SBU) In an April 19 meeting with Econoffs, Petrobras
Director of Institutional Relations Dr. Arturo Castanos said
that meetings between Petrobras and Bolivian government
officials in both Bolivia and Brazil during the past week had
gone poorly -- and that tensions between the GOB and
Petrobras, which first surfaced in early March (ref A),
continue to grow. Castanos lamented that GOB officials,
including Hydrocarbons Minister Soliz Rada and YPFB (Bolivian
state oil company) official Morales Olivera, lacked a basic
understanding of the economic realities of the sector. He
speculated that Bolivia was following Venezuela's example,
and that Bolivia believed it would be able to twist the
companies' arms. The problem, Castanos said, was that GOB
officials failed to realize Bolivia was not in Venezuela's
league with respect to markets and production quantities.



3. (SBU) Brazilian Embassy contacts confirmed that the
meeting between Petrobras, the Brazilian Energy Minister, and
the GOB in Rio de Janeiro had been a disaster. They told us
that Bolivian Hydrocarbons Minister Soliz Rada, realizing
that no agreement would be reached, had declared at the end,
"We'll have to get our Presidents to work this out."
According to Brazilian Embassy contacts, Bolivia's gas
negotiations with Argentina are not going well either.

Refineries for Free: Such a Deal!


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4. (SBU) As an illustration of the GOB's ignorance, Castanos
explained that YPFB officials, led by Morales Olivera (whom
Castanos described as the "spokesman" of Venezuela), made a
"generous" offer for the Bolivian refineries owned by
Petrobras. Morales, with a straight face, told Petrobras
that the GOB did not want to nationalize the refineries, did
not want to pay anything for them, yet wanted to gain control
of 50% plus one vote. Although the GOB would have control,
Petrobras would continue operating and investing in the
refineries until such time as the GOB told Petrobras to
leave. Naturally, Petrobras rejected this proposal outright,
Castanos said.

Brazil Investigating Other Options


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5. (SBU) In response to continued confusion in Bolivia,
Brazil is investigating alternatives to Bolivian gas (ref B).
This includes the construction of two roughly $350 million
regasification plants that would enable Brazil to import
liquefied natural gas from other countries at approximately
the same cost as Bolivian gas. If Bolivia were to insist on
a significant gas price increase, Brazil may be pushed to

pursue this option. Castanos noted that, contrary to
Bolivian press reports, price changes were not discussed
during any of the past week's meetings. Brazilian Embassy
contact, Alfredo Camargo, added that judging from the press
reports the GOB had grossly unrealistic expectations. He
said that Brazil might agree to a price increase of 50 to 70
cents per MCF, but that more would be impossible.



6. (SBU) Moreover, the Brazilian government's acceptance of
a price increase would likely be conditioned on eliminating
the price formula in the Gas Supply Agreement between the two
nations (which is supposed to remain in effect until 2019.)
Camargo explained that under the contract formula, the price
would probably increase by 50 or more cents anyway before the
end of 2006 due to oil price increases. The Brazilian and
Bolivian governments could both save face, he suggested, by
agreeing to an increase now and scrapping the formula.
Camargo acknowledged that this decision might be difficult
for the Brazilian government because of October presidential
elections, a reluctance to appear to be giving in to Bolivian
pressure, and resistance from Petrobras.

Supreme Decree Still Pending


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7. (SBU) Following Petrobras' meetings with the GOB, the
GOB's promised mid-April "nationalization" decree was not
issued (ref c). Castanos told us that Petrobras had not seen
a copy of the decree, but speculated that it was being
revised again ("for the 15th time") in response to Petrobras'
refusal to accept the GOB's plan to turn the company into a
service provider, charge it a 50% direct tax in addition to
general taxes and a surtax, and grant YPFB control over its
operations. The GOB told Petrobras that after the decree was
issued, there would be a six-month transition period before
the terms of the decree would be implemented and during which
details would be negotiated. Petrobras vowed to invest not
one cent until those issues were resolved, Castanos
emphasized.

Comment:


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8. (SBU) Castanos claimed that the GOB was not concerned
about offending Bolivia's current hydrocarbons investors
because it believed that PDVSA (Venezuela's state oil
company) would step in and "save" Bolivia if the other
companies fled. However, the delay in issuing the
nationalization decree suggests GOB interest in making the
decree palatable for the companies and for Brazil. Whether
intentionally or not, GOB actions have begun to alienate
Bolivia's large and influential neighbor, and could
foreshadow an unexpected early souring in one of Bolivia's
most important bilateral relationships. End comment.
GREENLEE