HYDROCARBONS NATIONALIZATION FACES OBSTACLES

UNCLAS LA PAZ 002196 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 NATIONALIZATION FACES OBSTACLES REF: A. LA PAZ 1157 ¶B. LA PAZ 1248 ¶1. (SBU) Summary: Bolivia's hydrocarbons nationalization plan is facing legal and financial obstacles that have delayed its implementation. The state oil company, YPFB, lacks the necessary resources to take on its new mandated role as controller of the entire hydrocarbons production chain. The GOB is considering revising the Central Bank law to enable the bank to lend to YPFB. YPFB's lack of capacity and complicated negotiations with gas companies and buyers mean that the GOB will have to revise the nationalization timetable that it set for itself in the May 1 decree (ref A). The danger now is that the GOB, in its quest for expediency, will undermine existing governmental institutions and safeguards. End summary. Nationalization Delayed -------------- ¶2. (U) Bolivia's hydrocarbons nationalization plan is facing legal and financial obstacles that have delayed its implementation. The May 1 nationalization decree gave the government 60 days to restructure state oil company YPFB and 180 days to sign new contracts with private oil firms, and called for the state to immediately gain control of the "entire hydrocarbons production chain" through majority ownership of five key companies. YPFB also had an August 12 deadline for reaching an increased natural gas price agreement with Brazil. The GOB has realized that these timetables are not possible to maintain and publicly reported that the implementation of nationalization will be delayed. YPFB Lacks Resources -------------- ¶3. (SBU) The revamping of YPFB to enable it to take control of hydrocarbons exploration, exploitation, refining, storage, distribution, sales, and industrialization requires financial and human resources that the GOB lacks. The government reportedly is considering revising the Central Bank law to enable the Bank to loan money to state entities, in line with the Venezuelan model. The GOB has its sights set on the record high levels of international reserves held by the Bank and plans to seek a loan from the Bank to YPFB, contingent on the legal revision. The loan could be as large as USD 180 million, although other reports put the figure at USD 45 million. National Treasury contacts told Econoff on August 11 that YPFB had requested money from the Treasury, but the Treasury had refused so YPFB went to the Central Bank. Other Snags in the Plan -------------- ¶4. (SBU) The GOB has also realized that 180 days are insufficient to sign new contracts with the private firms. Government audits of the firms were only begun two weeks ago and will likely not be completed prior to the 180 day deadline on November 1. The GOB has also failed to gain majority ownership of the five production, transportation, refining, and storage companies as mandated by the May 1 decree. Although it has taken over the shares formerly held by the Bolivian Pension Funds and has named directors to the boards of these companies (ref B),it has discovered that obtaining private company shares is a complex endeavor that involves several laws, regulations, and financing. Gas Price Negotiations with Brazil Postponed -------------- ¶5. (SBU) Separately, the GOB has been unable to reach agreement with Petrobras on increasing the price of Bolivian natural gas exports to Brazil. YPFB and Petrobras decided to resume negotiations following Brazil's presidential election in October. Meanwhile, Brazil has declared that it will only import the amount of gas from Bolivia that it is bound to import by contract, and Petrobras has frozen all investments except those necessary to meet its contractual obligations. Petrobras signed large investment deals with Peru and Venezuela in the past month and is developing Brazil's own resources to meet the nation's growing energy demands. (Comment: Venezuela claims solidarity with Bolivia, but appears to be taking its natural gas market. End comment.) ¶6. (SBU) Comment: Although the government has not changed its overall hydrocarbons strategy, evidence is accumulating that it needs more time to accomplish its goals. A significant concern now is that the GOB will attack institutional safeguards currently in place in its quest for expediency. Changing the Central Bank law to enable the Bank to lend to state-owned companies would permit the Bank to once again support inefficient state companies and would compromise lending transparency and Bank autonomy. In the past, this type of lending has contributed to serious inflation and macroeconomic instability. End comment. GREENLEE