GOB EXPLAINS HYDROCARBONS NATIONALIZATION

UNCLAS LA PAZ 001316 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/AND TREASURY FOR SGOOCH ENERGY FOR CDAY AND SLADISLAW E.O. 12958: N/A TAGS: ECON EAID EINV ENRG EPET PGOV BL SUBJECT: GOB EXPLAINS HYDROCARBONS NATIONALIZATION REF: LA PAZ 1157 ¶1. (SBU) Summary: Hydrocarbons Minister Andres Soliz Rada, accompanied by the Finance and Planning Ministers, convened a meeting of international donors on May 12 to discuss the GOB's hydrocarbons nationalization decree issued on May 1 (ref A). After decrying the "neoliberal" economic model, the moral decline of the Bolivian state, and Bolivia's gas crisis, Soliz expounded upon the dependency of its neighbors -- Brazil, Argentina, and Chile -- on Bolivian gas. He explained that future tax rates for the private companies would be set after the GOB completed audits to determine how much of their investments the companies had recouped. He added that, even after being set, these rates could increase again in the future once companies had earned more. He said that the current "shared-risk" contracts were illegal and that the GOB would seek to sign "association" contracts with the companies during the next six months. ¶2. (SBU) He implied that the GOB intended to provide compensation to the companies that it planned to take over, perhaps through establishing a trust fund in which the GOB would place proceeds of future gas sales. (Note: according to the May 1 nationalization decree, no compensation will be provided for the company shares held by Bolivian pension fund managers that the GOB plans to take over. The GOB issued a decree on May 15 giving the pension fund managers three days to sign over their shares to YPFB, despite manager protests that such action would violate several laws. End note.) Soliz said that the GOB planned to create a parallel treasury, using the proceeds of the new 32 percent YPFB tax, to use for whatever it desired, as it was frustrated by the lack of funds available in the National Treasury. German Embassy officials told us that Germany would not provide budget support aid to Bolivia this year due to Bolivia's anticipated expropriation of assets from a German-invested hydrocarbons logistics company. End summary. Soliz Rada Waxes Long on History -------------- ¶3. (SBU) In a May 12 meeting with international donors, Hydrocarbons Minister Soliz Rada claimed that the "neoliberal" policies enacted by the Bolivian government, beginning in 1985 with the issuance of Supreme Decree 21060, along with international cooperation, had weakened the state and led to the moral and economic breakdown of the country. He added that international sponsorship of GOB ministries had blurred the line between international interest and national interest, while GOB officials' involvement with multinational companies had blurred public interest and private. He claimed that the hydrocarbons companies were paying part of the salaries of Hydrocarbons Ministry contractors, creating conflicts of interest within the ministry. ¶4. (SBU) Soliz said that in 1996, when the previous (investor-friendly) hydrocarbons law was passed, Bolivia had 0.7 TCFs of natural gas reserves, but now had 48 TCFs of reserves. Although it was largely private investment that facilitated the discovery of these reserves, Soliz concluded that the state had freely transferred USD 10 billion worth of natural resources to the capitalized companies that had supplanted YPFB (the state oil company). He said that the "solidarity" price of gas initially paid by Argentina (USD 0.98) during the Carlos Mesa regime was not in solidarity with Argentina, but with the oil companies, who were both the buyers and the sellers of gas (Petrobras with Brazil and Repsol and Plus Petrol with Argentina). ¶5. (SBU) Soliz went on to explain that 92 percent of the public had agreed with recouping the nation's hydrocarbons in a referendum held under former President Mesa, which led to the passage of a revised hydrocarbons law in May 2005. He further explained that the GOB had issued a decree on May 1, 2006 instead of a law, because the decree was based on the May 2005 law, which already spoke of nationalization. The decree merely converted the law into practical reality, he said. (Note: the decree went further than the law in terms of taxation and the GOB's take-over of Bolivian pension funds' assets without payment. The GOB issued a decree on May 15 giving the pension fund managers three days to sign over their assets to YPFB or face intervention by the hydrocarbons regulator, despite the managers' arguments that several laws must be modified before they can legally take such action. End note.) Bolivia's Leverage over its Neighbors -------------- ¶6. (SBU) Soliz claimed that Brazil, Argentina, and Chile needed Bolivian gas. He said that 84 percent of the gas consumed in Sao Paulo came from Bolivia. He added that Brazil would need another 50 million cubic meters of gas daily within the next few years, and that it was planning to use Bolivian gas to meet its needs. Soliz said he told Brazilian officials that Bolivian troops were stationed at production facilities to ensure continued production and supply of exports to Brazil. Soliz claimed that, because Chile relied on Bolivian gas sold to it by Argentina, "if Bolivia stopped selling gas to Argentina tomorrow, Chile would offer us the sea coast right away!" Decree Implementation Date and Tax Rates -------------- ¶7. (SBU) Soliz explained that the May 1 nationalization decree could not be implemented immediately because of the Hydrocarbons Ministry's lack of technical experts and the need to audit the companies; thus, the decree had established a 180-day transition period. He explained that the GOB had decided on the increased tax/royalty rate of 82 percent that was provisionally applied to the two largest producing fields as a symbolic reversal of the situation under President "Goni" Sanchez de Lozada, in which the GOB got 18 percent and the companies 82 percent. Soliz claimed that Petrobras had not conducted any exploration in the two mega-fields, San Alberto and San Antonio, and that the Brazilian company had already amortized all of its investment costs, and therefore, it could afford to pay taxes of up to 90 percent. However, if after the audits were conducted, the GOB determined that it had miscalculated, it would change the rates. Soliz left open the possibility that even producers with small fields, who should receive tax breaks according to the 2005 law, might be required to pay more than 50 percent in taxes and royalties if they had recouped their investments. He added that tax rates would be set after the audits, but that those rates could be increased again in the future once the companies had recouped more of their investments. The Vice President of Chaco told us that she had heard that the GOB would push for profitability caps and progressive tax rate formulas that would be set out in the contracts after negotiations with the companies. Contract Legality, New Association Contracts -------------- ¶8. (SBU) Soliz said that the current shared-risk contracts were invalid, because they were not approved by Congress. He explained that ignorance was not an excuse for failing to follow Bolivian law, and that the companies had lawyers who were just as responsible as the GOB for ensuring that legal requirements were met. However, he recognized that the contracts had produced consequences and could not simply be disregarded, and therefore, the GOB planned to conduct audits and negotiate new contracts with the firms. Soliz said that the GOB had modified its previous position and would now seek to negotiate "association" contracts with the companies, rather than "service" contracts. (Comment: This is perhaps because of Petrobras' stated refusal to sign a "service" contract. End comment.) Take-over of Five Companies -------------- ¶9. (SBU) Soliz explained that the GOB would take over majority ownership of five companies (ref A). He said that the Bolivian Constitution allowed expropriation with indemnification, and emphasized that President Morales planned neither to confiscate assets nor expel private investors, but rather to negotiate. He said that Petrobras had accepted the GOB's compensation plan to pay it USD 35 million for 50 percent plus one of its refineries' shares. He claimed that Petrobras actually had paid only USD 70 million for the refineries, not USD 100 million, because at the time of purchase the refineries contained USD 30 million worth of diesel and gasoline in their storage tanks. The GOB would likely pay for these shares by creating a trust fund in which it would place earnings from future gas sales. According to Soliz, Petrobras had agreed to this form of compensation and to the change in its board composition. Soliz added that Chaco had agreed to the GOB's take-over as long as its management structure and management salary scale were maintained. ¶10. (SBU) Chaco Vice President Jana Drakic told us on May 16 that Chaco had begun discussions with the GOB, and was disposed to negotiate shareholder equity changes if it could maintain operating control as a minority shareholder. She added that Soliz had oversimplified Chaco's position. The two key issues for Chaco were company profit margins (not managerial margins) and maintaining control over management decisions, but contract details and a shareholder agreement were also important, she explained. She said that Chaco was not wedded to one particular type of contract, i.e. association or service, and that the details of the contract, and ultimately the protection of the company's bottom line, were what mattered, not the name. The GOB has not yet begun audits of Chaco, she said. The Parallel Treasury -------------- ¶11. (SBU) Although the Morales administration fought to eliminate government slush funds ("gastos reservados"),it now seeks to create one of its own. Soliz said that the money derived from the new 32 percent YPFB tax applied to the two largest fields would be held in a special fund within YPFB that the central government could use for whatever projects it would like to pursue. He noted that President Morales complained that the National Treasury lacked funds because the local governments were "like vampires" sucking all of the resources away. Vice President Alvaro Garcia Linera stated in a speech May 1 that the new hydrocarbons taxes would generate up to USD 300 million in additional revenues for the GOB. Germans to Cut Aid -------------- ¶12. (SBU) Although Soliz declared that "as a member of the international community, Bolivia has a right to international cooperation that complements Bolivia's internally-set policies," some donors left the briefing with differing opinions. Attendees from the German Embassy told us that Germany would not be providing budget support aid to Bolivia this year due to the GOB's plan to take-over the 60 percent German-owned Bolivia Hydrocarbons Logistic Company. ¶13. (SBU) Comment: Soliz' statements implied that some form of compensation would be given to the companies that are being taken over by the GOB, including two partially U.S.-owned companies, Transredes and Chaco. However, if payment for company shares is to be made through future gas sales, it is likely to be neither prompt nor adequate. Soliz again demonstrated in front of a broader international audience the strong ideological arguments informing the GOB's hydrocarbons policy. There remains a steady grumbling among European and Brazilian diplomats, as well as representatives of international financial institutions, as commercial interests are threatened and the further development of Bolivia's hydrocarbons industry is placed in jeopardy. End comment. ROBINSON