HYDROCARBONS REGULATOR ENSURES FUEL SUPPLY

UNCLAS LA PAZ 001918

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: HYDROCARBONS REGULATOR ENSURES FUEL SUPPLY

REF: A. LA PAZ 1885


B. LA PAZ 1660


1. (SBU) Summary: Bolivia's state oil company, YPFB,
successfully assumed control of Bolivia's wholesale
hydrocarbons market on July 1, as provided for by the 2005
Hydrocarbons Law. To ensure adequate supplies of gasoline
and diesel, the hydrocarbons regulator issued an emergency
decree requiring Petrobras-owned refineries to sell to YPFB.
No fuel shortages have occurred. The hydrocarbons regulator
is focusing on preventing liquid petroleum gas (LPG)
contraband from going to neighboring countries, where the LPG
prices are higher, in order to ensure sufficient domestic
supply. The regulator is concerned that the GOB's plan to
eliminate it would damage the sector and increase corruption.
End summary.

YPFB Takes On Gas Distribution
--------------

2. (SBU) On June 30, gasoline wholesaler contracts with the
GOB expired, and YPFB (Bolivia's state oil company) took over
the wholesalers' duties of transporting liquid petroleum gas
(LPG) and gasoline from refineries to gas stations and
distributions points. (Note: the May 2005 Hydrocarbons Law
ordered that YPFB assume this function. End note.) GOB
hydrocarbons regulator Mario Adrian told Econoff on July 11
that YPFB has not yet signed a distribution contract with
Petrobras, which owns the refineries that provide the fuel
for distribution. YPFB and Petrobras negotiations are likely
to continue into the fall. To ensure that YPFB's take-over
of distribution did not result in fuel shortages, the
hydrocarbons regulator issued an emergency decree ordering
Petrobras to provide YPFB fuel without a contract.


3. (SBU) Although sector contacts had anticipated that YPFB's
service would be poor, leading to shortages and blockades,
Adrian said YPFB's take-over of fuel distribution was
proceeding fairly smoothly. He explained that YPFB had hired
50 employees and expanded its presence nationwide to ensure
that it could provide the service. (Note: To YPFB's credit,
there have not been long lines for gasoline or LPG in La Paz.
End note.)

YPFB to Import Venezuelan Diesel
--------------

4. (SBU) According to Adrian, YPFB also became the country's
only diesel importer on July 1. YPFB plans to import 200,000
barrels of diesel per month from Venezuela. Adrian confirmed
earlier press reports that these imports will be paid for
partially with Bolivian soy products and partially using
Venezuelan credit. Bolivia signed the "Caracas Energy
Cooperation Accord" with Venezuela in 2005, in which
Venezuela's state oil company (PDVSA) agreed to provide
diesel to Bolivia. According to the agreement, 75 percent of
the amount due PDVSA would be paid upon delivery, and 25
percent would be paid over 17 years.

LPG Contraband
--------------

5. (SBU) Adrian explained that Bolivia produces approximately
970 tons of LPG per day, which is roughly equivalent to
domestic demand. However, because of the vast price
differential between subsidized Bolivian LPG and neighboring
countries' LPG, a significant LPG contraband outflow reduces
the amount available domestically, producing periodic
shortages. The hydrocarbons regulator works with customs and
the police to intercept contraband fuel, and the GOB is
drafting a supreme decree to authorize the regulator
additional powers to seize contraband (ref A). However,
Adrian acknowledged that the root problem is the price
differential, caused by subsidies that cost the GOB roughly
USD 100 million per year. He believed contraband problems
will continue until the root problem is attacked, perhaps
through changing the energy matrix since price increases are
politically untenable. The GOB is promoting installing
natural gas connections in homes to encourage the public to
use natural gas instead of LPG. However, the installation
costs are formidable for the average Bolivian, and bringing
additional natural gas to the Altiplano would require the
construction of another pipeline from the southern gas
fields.

Regulator's Uncertain Future
--------------

6. (SBU) The GOB's National Development Plan released in June
proposed the elimination of the six independent
regulators -- hydrocarbons, electricity, telecommunications,
transportation, basic services (water and sanitation),and
forestry -- created by law in 1995 when state-owned
enterprises were privatized. According to the plan,
regulatory control would pass to the relevant ministries by
January 2007, after the approval of a new law (reftel B).
Adrian said that his office has not yet discussed this plan
with the Hydrocarbons Ministry, and lamented the GOB's poor
political perception of the regulators. He argued that his
authority should be expanded, not reduced, to include
regulation of the upstream producers, rather than just the
downstream market. He added that his staff was technical,
not political, and that for this reason, they had failed to
advertise their accomplishments. He asked the Embassy to
note the importance of maintaining independent, fair
regulatory bodies in our meetings with GOB officials.


7. (SBU) Comment: Maintenance of apolitical regulatory
institutions is important to ensure the efficient functioning
of the involved sectors, fairness to U.S. investors, and
control of corruption. We will note our concern about the
GOB's plan to eliminate six industry regulators as
appropriate with GOB officials. End comment.
GREENLEE