UNINTENDED CONSEQUENCES OF GOB'S HYDROCARBONS

UNCLAS LA PAZ 001936 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: UNINTENDED CONSEQUENCES OF GOB'S HYDROCARBONS POLICY REF: LA PAZ 1805 ¶1. (SBU) Summary: The Inter-American Development Bank (IDB) and the Andean Development Corporation (CAF) have frozen the pipeline operator Transredes' financing for expanding and constructing three natural gas pipelines due to the GOB take-over of company shares. Without these pipelines, various regions of Bolivia could face electricity outages in the medium-term. Tarija threatened to hold a 24-hour strike on July 13 in response to the GOB's plan to give all additional profits from Argentine gas sales to YPFB (Bolivia's state oil company),rather than to the producers who would pay taxes that would then be shared with the departments per Bolivian law. End summary. Pipeline Projects on Hold -------------- ¶2. (SBU) Jorge Alvarado, President of Bolivia's state oil company YPFB, announced in a press conference on July 11 that the Inter-American Development Bank (IDB) and the Andean Development Corporation (CAF) had frozen financing owed to pipeline operator Transredes because of the change in Transredes' ownership structure. In its May 1 nationalization decree, the GOB stated that YPFB would acquire 50 percent plus one of Transredes' shares. To date, YPFB has acquired 37 percent of the shares, which were previously held by the Bolivian pension fund administrator. On July 11, the two board members named by YPFB and Alvarado participated in their first Transredes shareholder meeting, where they were informed of the financing freeze. ¶3. (SBU) The IDB and CAF loans were earmarked for the widening of the pipeline to the Altiplano (GAA) and the construction of pipelines between Carrasco and Cochabamba in central Bolivia and Villamontes and Tarija in southern Bolivia. Transredes officials told us that they are using their own resources to complete the GAA expansion due to heavy GOB pressure and the urgency of avoiding electricity shortages in La Paz and El Alto. However, the construction of the other two pipelines will not be possible without external financing, according to Transredes. Due to increasing natural gas and electricity demand in the Cochabamba region, the construction of the Carrasco-Cochabamba pipeline is essential to avoid power outages. Without it, operations of the U.S.-owned San Cristobal mine, which are scheduled to begin by summer 2007, could also be hindered. San Cristobal intends to use 8 percent of Bolivia's electricity and would be fueled by power plants in Cochabamba. Argentina Agreement Cuts Out Companies and Departments -------------- -------------- ¶4. (SBU) The GOB's June 29 energy accord with Argentina (reftel) stated that the additional amount that Argentina agreed to pay for Bolivian gas (approximately USD 1.5 per million BTU) beginning on July 15 will go to YPFB. This means that the private companies that produce the gas, particularly Repsol, will not benefit from the price increase. It also means that the companies will not pay the 32 percent direct hydrocarbons tax (IDH) on this additional income. Bolivian law establishes that the central government must share hydrocarbons tax revenue with the departments. Because the central government will not collect IDH on the additional income, neither the national treasury nor the departments will get "their shares." Tarija Threatens to Strike -------------- ¶5. (SBU) The Civic Committee of Tarija, the south-eastern department which contains 85 percent of Bolivia's natural gas, threatened to hold a 24-hour strike on July 13 to protest the GOB's plan to retain hydrocarbons revenues that Tarija argues should be shared with the departments. (Note: The strike was not held. End note.) Santa Cruz departmental officials and the Santa Cruz Civic Committee came out in support of the strike and demanded that the GOB share the revenues. The GOB responded to the departments' complaints by pointing out that the departments already have IDH resources that they are not investing, implying that they do not need this extra money which would be better spent by YPFB on gas industrialization projects. This latest source of friction has increased the already heightened tension between the GOB and the East. ¶6. (SBU) Comment: Thus far, the GOB has confronted several obstacles in the hasty implementation of its hydrocarbons policy, including the difficulty of obtaining privately-owned company shares and negotiating a gas sale price increase with Brazil (which the GOB has now postponed until after Brazil's presidential election). The most recent problems, including the loss of financing for GOB-supported projects and increasing tension with the East, will certainly not be the last. End comment. GREENLEE