NATIONALIZATION: COMPANY PERSPECTIVES

UNCLAS LA PAZ 001191

SIPDIS

SENSITIVE
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: NATIONALIZATION: COMPANY PERSPECTIVES

REF: A. LA PAZ 1157


B. LA PAZ 1159


1. (SBU) Summary: While foreign investors were not surprised
by most of the terms of the GOB's May 1 nationalization
decree (ref A),they were nonetheless taken aback that their
long-dreaded expectations appeared to have become reality.
So far most companies have reacted in measured fashion, and
reportedly plan to continue negotiating with the government.
The Hydrocarbons Chamber President speculated that no company
would proceed to arbitration in the short term.
U.S.-invested companies, particularly Chaco and Transredes,
are worried about the GOB's plan to gain ownership control
over their operations. Brazil has publicly expressed its
concern about ensuring domestic gas supply and protecting
investor rights, which are threatened by the GOB's plan to
nationalize Brazilian-owned refineries, increase taxes
attributable to Petrobras, and raise gas prices.
Brazilian-owned Petrobras, which previously took a
conciliatory tone with the GOB, ratcheted up its response on
May 3, threatening to halt all investment and to initiate
arbitration. The Brazilian, Argentine and Venezuelan
presidents are meeting with President Morales today (May 4)
to discuss the decree. Spain has also publicly expressed its
discontent over the decree and reportedly plans to send a
delegation to Bolivia. End summary.

Waiting for the Smoke to Clear
--------------

2. (SBU) Foreign investors had no reason to be surprised by
most of the terms of the GOB's May 1 decree "nationalizing"
the country's hydrocarbons resources, but that didn't stop
them from feeling shock that long-dreaded expectations
appeared to have become a reality. So far, most companies
have taken a measured public response, as though waiting for
the smoke to clear. An advisor to Repsol told us that, apart
from the temporary 32% tax increase on operators in
mega-fields, it remained unclear what the decree had
concretely changed. He said the decree had been mostly
political, and intended to shore up the government's base as
the Constituent Assembly campaign got underway (ref B). At
the same time, the decree had also conveyed the government's
hard-line starting position on negotiating new contracts, for
which it allowed six months, and that the results of those
negotations were what mattered most.

Hydrocarbons Chamber: Companies will Negotiate
-------------- -

3. (SBU) Bolivian Hydrocarbons Chamber President, Enrique
Menacho, told us the Chamber issued a cautious press
statement in response to the decree expressing concern that
the GOB had unilaterally and negatively altered the
conditions under which companies must operate and
counterproductively impacted legal security and investment
promotion, but that the Chamber would try to promote a
productive dialogue between the companies and the GOB.
Menacho told us that his impression from a May 2 meeting the
Chamber had held with company representatives was that the
companies would continue to seek negotiations with the
government and refrain from initiating arbitration -- which
he described as a last resort -- at least in the short term.
He added that the GOB and Venezuelan auditors (ref A) were
investigating the companies in order to pressure and weaken
them in the run up to negotiations with the government. He
stated that the GOB's 32 percent increased taxation of fields
producing more than 100 million cubic feet per day could
cause a production decrease.

U.S. Company Perspectives: Chaco, Transredes, GTB, Vintage
-------------- --------------

4. (SBU) U.S. companies have invested roughly USD 800

E
million in Bolivia's hydrocarbons sector. Of these, the two
companies that invested in enterprises that had been owned by
the state before being "capitalized" -- Pan-American and
Prisma -- would likely be most impacted by the decree. Chaco
(Pan-American) executive, Jana Drakic, told us on May 2 that
the company was particularly concerned about the GOB's plan
to acquire 50 percent plus one of its shares. She said the
GOB had not discussed acquiring the shares with Chaco, and
that it was unclear whether the GOB intended to purchase or
expropriate them. She explained that the pension funds held
approximately 49 percent of the company's shares, and that
after confiscating those from the Bolivian public, the GOB
would need to obtain an additional 1 percent plus one share
from U.S. and Argentine private investors to gain majority
control. Drakic added that roughly 80 percent of pension
payments directed to elderly Bolivian retirees currently came
from Chaco, Repsol Andina, and Transredes, the three
capitalized hydrocarbons companies, and said she did not know
how the GOB would continue to make these payments after these
pension fund shares had been confiscated and transferred to
YPFB (the state oil company). Drakic said that news reports
of military occupation were exaggerated, and that less than
20 (compared with 56 reported in the news) installations had
a military presence.


5. (SBU) Transredes (Prisma, pipeline operator) executive,
Maria Claudia Dabdoub, told us the company would continue
negotiating with the GOB, but (echoing her Chaco counterpart)
did not know how the GOB would seek to acquire majority
ownership of the company. Dabdoub explained that only 34
percent of Transredes was held by Bolivian pension funds,
while 16 percent was held by private individuals, 25 percent
by Shell, and 25 percent by Prisma. Thus, after the GOB
confiscated the pension fund shares, it would still need to
obtain 16 percent plus one. Dabdoub doubted that Prisma or
Shell would be willing to sell these shares. She added that
YPFB staff had told her that Transredes' foreign executives
would be replaced by Bolivians after the take-over. She
noted that the military occupation had created an unpleasant
working environment, in which all staff were searched
entering and exiting the offices to ensure that they were not
removing documents.


6. (SBU) GTB (U.S.-invested pipeline operator that is 51
percent owned by Transredes) President Ed Miller said that
the GOB had neither met with them nor provided them with a
model contract. He said that the GOB's potential plan to
expropriate shares, name board presidents, and take control
of corporations was contrary to Bolivian law. He expressed
his concern that the Transredes Board could be infiltrated by
YPFB members, which might then attempt to take over seats on
the GTB board, on which 2 of 5 positions are held by
Transredes. He was also concerned about the GOB audits being
conducted in part by Venezuelans. He claimed that such
audits would be used to "find irregularities, which could be
found at any company, and blow them out of proportion" in
order to gain negotiating leverage. He heard that up to 50
Venezuelan auditors had been contracted by the GOB at a rate
of USD 2 million to inspect the hydrocarbons companies.
Dabdoub confirmed that Venezuelan auditors had been in
Bolivia for more than one week.


7. (SBU) Vintage Petroleum (Occidental),a relatively small
producer, told us that the decree would have a minimal impact
on its operations, in comparison with the already enacted May
2005 Hydrocarbons Law. As a producer with small fields, the
law provides for a lower than average tax rate, even though
the relevant regulations have not yet been promulgated.
Moreover, he said, Vintage was not a capitalized company, and
thus not subject to direct GOB control. He was nonetheless
concerned about the requirement to sign a new "service"
contract and to give up ownership rights to its production
and control over commercialization decisions.

Brazilian, Spanish, and Argentine Actions
--------------

8. (SBU) The Brazilian Ambassador told Ambassador Greenlee on
May 2 that Brazil was not surprised by the terms of the GOB's
decree, including its plan to nationalize the Petrobras-owned
refineries, but by its timing, as it had interrupted ongoing
talks with Brazil and burst the illusion of progress during
those talks. He said that the GOB had previously stated that
it intended to pay for the refineries, possibly through
future concessions to Petrobras, but that it was currently
unclear whether or not compensation would be provided, and if
so, how much or how. If Petrobras received adequate
compensation, he said, it would prefer that the Bolivian
government take over 100 percent of the refineries instead of
51 percent. He expressed concern about the unilateral nature
of Bolivian policy, the unreasonable tax increase applied to
Petrobras, and the decree's provision that gas prices would
be established by YPFB, which implied that mutual consent --
as required by the GSA contract between YPFB and Brazil --
would play no role. He was also worried about the
requirement to sign service contracts, which Petrobras had
already declared it would not do, but acknowledged that
Petrobras' real bottom line was not clear. The Brazilian
Ambassador gave the Ambassador a copy of an official
statement issued on May 2 after the emergency meeting between
President Lula, several ministers, and the President of
Petrobras (ref A). The statement recognized Bolivia's
sovereignty and right to manage its own resources and
emphasized maintaining a steady gas supply to (dependent)
Brazil, but also noted that private investor rights should be
respected. The Brazilian Ambassador told us that these
issues would be discussed further in a May 4 meeting between
Brazilian President Lula, Argentine President Kirchner,
Venezuelan President Chavez, and President Morales.


9. (SBU) According to press reports, Petrobras ratcheted up
its response on May 3, threatening to halt all investment and
bring the GOB to court. Petrobras executive, Arturo Castanos
told us on May 4 that the company has not yet filed a trigger
letter to begin the arbitration process, but is considering
doing so.


10. (SBU) According to news reports, Spain has expressed
discontent with the decree and plans to send a delegation to
Bolivia to discuss the issue. Hydrocarbons Chamber President
Menacho told us that Spain is providing considerable support
to Repsol in its negotiations with the GOB. Repsol
executive, Miguel Cirbien, told us the company was worried
about the 32 percent tax increase imposed on large producers
as well as the GOB's plan to take over its Bolivian
operation. He said Petrobras was the only company producing
more than 100 million cubic feet per day in the two fields to
which the 32 percent tax applies, thus Petrobras was the only
company that would have to pay the additional tax. Other
industry representatives believe that the tax would apply not
only to Petrobras, but also to Repsol and Total. Cirbien
acknowledged that Repsol had recouped its initial investment,
but argued that the company continued to make additional
investments since that time. Cirbien said Repsol would
continue trying to work with the GOB to clarify what it
"really wants."


11. (SBU) Comment: Ultimate company decisions to continue
playing the GOB's game, pull out, or seek arbitration will
depend on the GOB's flexibility in negotiating tax rates, its
ability and willingness to pay for company shares, and its
definition of "service" provider. Company executives are
hoping that President Lula pressures Morales into softening
his tone and demands in today's (May 4) meeting. Petrobras'
hardening tone has reassured other companies, which intend to
ride on Bolivia's largest gas producer's coattails as much as
possible. End comment.
GREENLEE