HYDROCARBONS COMPANIES PESSIMISTIC, BUT WILLING TO

UNCLAS LA PAZ 000216

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: BEXP BL ECON EINV ENRG EPET PGOV
SUBJECT: HYDROCARBONS COMPANIES PESSIMISTIC, BUT WILLING TO
NEGOTIATE

REF: LA PAZ 195


1. (SBU) Summary: In a recent meeting with the Ambassador,
hydrocarbons company representatives discussed their concerns
about negotiations with the incoming administration. They
worried in particular about the likely absence of reasonable
GOB interlocutors (subsequent ministerial appointments proved
these worries well-founded),preferential treatment to
state-owned companies such as Brazil's Petrobras and
potentially Venezuela's PDVSA, and politicized charges of
alleged contraband activities. Despite these worries,
company representatives expressed a willingness to negotiate
with the government over contract details (and to consider
making additional investments) as long as they were assured
of making a profit. Separately, January 27 news headlines
announced that Repsol's share value dropped by 8%, in
significant part due to the situation in Bolivia. End
summary.

Reasonable Interlocutors are Key
--------------

2. (SBU) In a January 18 roundtable meeting in Santa Cruz
with the Ambassador, representatives from Petrobras (Brazil),
Repsol (Spain/Argentina),Total (France),Transredes (U.S.),
Vintage (U.S.),and Chaco (U.S) were unanimous about the need
for credible and trustworthy interlocutors in the
Hydrocarbons Ministry and YPFB (the state oil company),
underscoring that these positions would be key to the success
of their negotiations with the future GOB. At the same time,
they doubted they would get what they needed. In a separate
meeting, the president of British Gas in Bolivia (BG -
Britain) echoed that concern. (Comment: In the case of the
hydrocarbons minister, the companies' worries deepened with
the appointment of radical journalist and committed
nationalizer, Andres Soliz Rada. They view the new YPFB
chief, former MAS deputy and candidate for governor of
Cochabamba, Jorge Alvarado, as better than Soliz, but only by
comparison. End comment.)

A Host of Worries Plagues the Industry
--------------

3. (SBU) The Repsol representative emphasized that,
notwithstanding Evo Morales' assurances during his world tour
that his government would protect hydrocarbons investments,
the industry was in for some rough times. Several
representatives expressed concern that "politically correct"
state-owned Petrobras and Venezuela's state-owned
hydrocarbons company PDVSA, would receive more favorable
treatment than private companies. The Chaco representative
worried that PDVSA would "enter Bolivia through the back
door", by buying shares of Bolivian pension funds that the
May 2005 hydrocarbons law stipulates are to be transferred
from privatized companies to YPFB, and gain increasing
influence in Bolivia. (Note: PDVSA has recently opened an
office in La Paz. End Note.) In addition, the Repsol and
Chaco representatives were deeply worried about what they
described as the politicized allegations that their companies
were selling contraband and/or dodging taxes. (President Evo
Morales and VP Alvaro Garcia Linera have repeatedly stated
that the GOB would deal harshly with companies guilty of such
charges, including by rescinding their contracts and pursuing
legal action.) In addition, Transredes (the U.S.-owned
pipeline operator),which is facing potential prosecution for
a recent pipeline explosion, expressed concern that it could
be added to the political hit list.

Despite Uncertainty, Some May Invest More
--------------

4. (SBU) Despite their many concerns, company representatives
expressed a willingness to negotiate with the new

administration as soon as possible. With an air of
resignation, they suggested they could be flexible on the
details of a new hydrocarbons regime -- e.g., changing
contracts/agreeing to more state control over
commercialization -- as long as they were able to protect
their bottom lines. (Note: January 21 press reports stating
that Repsol and Total had agreed to withdraw their
arbitration trigger letters and negotiate with the GOB, which
President Morales cited in his meeting with A/S Shannon --
reftel, are somewhat misleading. According to Repsol
representatives, the company has not officially withdrawn its
trigger letter, but rather agreed to pause the process until
June 2006, at which time it will decide how to proceed based
on the outcome of prospective negotiations. End note.)
Furthermore, the President of BG told the Ambassador that his
company, in a joint venture with Pan-American and Repsol, is
considering going ahead with a US$ 1 billion development of
Margarita, one of Bolivia's largest gas fields. He explained
that the company must think of the long term, as development
beginning this year would not yield results until 2010 and
BG's license for Margarita will expire in 2025.

Repsol Shares Crash
--------------

5. (SBU) Separately, January 27 news headlines announced that
Repsol's share value on the New York Stock Exchange dropped
by close to 8%, in large part due to the Bolivia situation.
News reports indicated that the drop was mainly caused by
Repsol's reclassification of its reserves in Bolivia and
Argentina. According to the press, Repsol revised its
accounting practices to include only those Bolivian reserves
that will be used to fulfill the company's commitments under
the Gas Supply Agreement (GSA) between YPFB and Brazil that
is in effect until 2019. All other reserves in country were
written off. Repsol Bolivia President Julio Gavito told us
that political and legal uncertainty -- the May 2005
hydrocarbons law coupled with the deeply uncertain plans of
the new government -- had called into question the company's
ability to extract other previously counted Bolivian
reserves. Gavito added that other hydrocarbons companies in
Bolivia, including Petrobras and Total, were in roughly the
same boat.
GREENLEE