PRESIDENT NATIONALIZES HYDROCARBONS

UNCLAS LA PAZ 001157 SIPDIS SIPDIS STATE FOR WHA/AND TREASURY FOR SGOOCH ENERGY FOR CDAY AND SLADISLAW E.O. 12958: N/A TAGS: ECON EINV ENRG EPET BL SUBJECT: PRESIDENT NATIONALIZES HYDROCARBONS REF: A. LA PAZ 869 ¶B. LA PAZ 1107 ¶1. Summary: On May 1, the GOB issued its long-awaited Supreme Decree "nationalizing" the hydrocarbons sector. Largely consistent with prior GOB announcements and the May 2005 Hydrocarbons Law, the decree gives hydrocarbons companies six months to negotiate new "service" contracts with the GOB; transfers to the state control over the entire hydrocarbons chain, from production to commercialization; and offers the state oil company (YPFB) majority share of five companies, including two with U.S. investment. It also raises taxes, at least temporarily, by 32% on producers with large fields, while leaving open key questions about whether the takeover will be accomplished by payment, as required by the Bolivian Constitution, or by expropriation. Military troops symbolically occupied 56 oil and gas installations immediately following the president's announcement. End Summary. ¶2. On May 1, President Morales issued Supreme Decree 28701, postponed since April (ref A),"nationalizing" the hydrocarbons sector. With some exceptions, the decree is consistent with previous GOB statements. The decree gives the companies six months to negotiate new service contracts with the GOB, and requires that each new contract be approved individually by Congress. During the interim period, the GOB plans to audit the companies to verify levels of recouped investment and to assign final, differential tax rates to each company. The May 1 Decree also included the following: -- The State will gain control of the entire hydrocarbons chain: production, transportation, refining, storage, distribution, commercialization, and industrialization. YPFB (the state oil company) will determine volumes, prices, and conditions for commercialization of hydrocarbons for the internal market and for export. YPFB will be involved in the complete hydrocarbons production chain. YPFB will be restructured within 60 days. -- YPFB will take over 50 percent plus one of the shares of the capitalized (partially privatized) companies, Transredes (U.S.),Chaco (U.S.),and Andina (Spain/Argentina). This will be accomplished by confiscating the shares held in trust by the Bolivian Collective Capitalization Fund for payment of Bolivian pension funds (approximately 45 percent),and by forcibly acquiring the rest from the companies. -- YPFB will take over 50 percent plus one of the shares of Petrobras Bolivia Refining (Brazil) and the Bolivian Hydrocarbons Logistics Company (Germany/Peru). These are fully privatized companies, and would require a greater government investment to "take over." ¶3. The decree also contained a previously unannounced provision for a temporary 32 percent tax increase on companies operating in the mega-fields of San Alberto and San Antonio, mainly Petrobras (Brazil),Repsol YPF (Spain and Argentina),and Total (France, with U.S. investment by ExxonMobil). ¶4. It also left open key questions on how the takeovers are to be accomplished. According to Bolivia's Constitution, nationalization requires compensation. If the government intends to purchase the shares taken over from the companies, it is unclear where the funds to do this would come from. The same is true for the government's continued payment of pension funds, which Morales guaranteed in his announcement. ¶5. Petrobras officials told us they would hold a meeting in Brasilia on May 2 to discuss their response. According to a Brazilian Embassy official, President Lula will chair the meeting, and the Ministers of the Presidency and of Energy, along with the President of Petrobras, will participate. The Embassy official further noted Brazil's "surprise" at the Bolivian government's unilateral announcement and that Lula's domestic opponents were already seeking to make political hay out of Evo Morales' dissapointing actions. ¶6. After the decree was announced, Armed Forces troops were sent to occupy 56 oil and gas installations. Contacts at Transredes (U.S. pipeline operator) told us that the troops had entered their offices peacefully, without attempting to hinder operations. ¶7. Comment: Of the U.S. investors in Bolivia's hydrocarbons sector; i.e., Chaco (Pan-American),Transredes (Prisma), Vintage (Occidental),ExxonMobil (in partnership with French company Total),and BTG (pipeline operator); Transredes (with approximately USD 500 million invested) and Chaco will be hardest hit by the decree due to the GOB's plan to gain control of their operations. Company officials express grave concern privately about the decree, but thus far have preferred to refrain from public comments about it. End comment. GREENLEE