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