PETROBRAS TALKS WITH GOB

UNCLAS LA PAZ 000251

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ENRG EPET ECON BL
SUBJECT: PETROBRAS TALKS WITH GOB



1. (SBU) Summary: Petrobras, the largest player in the
Bolivian hydrocarbons industry, had its first meeting with
the Bolivian government on January 31 to begin discussing a
new relationship. According to a Petrobras official, Arturo
Castanos, the GOB representatives were cordial, but they only
discussed the negotiation process and did not touch on
complex issues such as transportation tariffs, contract
migration, and forming a partnership with YPFB, the Bolivian
state oil company, as reported in the press. Petrobras hopes
to sign a Memorandum of Understanding about the negotiation
process with the GOB in February and begin formal
negotiations in March. Petrobras is concerned about
Venezuela's influence on YPFB. The press reported that the
GOB will nationalize two refineries owned by Petrobras.
According to Castanos, the GOB has not yet made a purchase
offer for the refineries, but Petrobras is willing to sell if
the price is right. Castanos explained that there is little
room for GOB negotiation on gas prices with Brazil. End
summary.

Petrobras Meets with GOB
--------------

2. (SBU) On January 31, Petrobras representatives, including
Arturo Castanos, met with the Bolivian Hydrocarbons Minister,
Andres Soliz Rada, and the head of YPFB, Jorge Alvarado, to
discuss how to move forward on politically-sensitive
hydrocarbons issues. Castanos told Econoffs on February 1
that the meeting was cordial and that Soliz Rada,
surprisingly, appeared rather open and reasonable. According
to Castanos, the only agreement reached in the meeting was to
meet again to draft a Memorandum of Understanding in February
and begin serious talks in March. He added that although
Petrobras is vitally interested in transportation tariff
regulations and contract migration questions, these topics
were not raised. The press reported on February 1 that
Petrobras, which is involved in the entire hydrocarbons
productive chain from exploration to distribution, wants to
form a 50% partnership with YPFB in all of the productive
areas; however, Castanos said that no such idea was discussed
in the meeting and would not be of interest to Petrobras.

Venezuelan Woes
--------------

3. (SBU) Castanos expressed several worries about the state
of Bolivia in general, and in particular about Venezuelan
influence. He cited the recent opening of a PDVSA
(Venezuelan state oil company) office with several PDVSA
employees in La Paz, Venezuela's offer to barter Venezuelan
diesel for Bolivian food, and YPFB head Jorge Alvarado's
strong ties to Venezuela. Castanos explained that Petrobras
does not have a good relationship with PDVSA and would see
increased PDVSA operations here as a "thorn in its side". He
added that although YPFB's Alvarado would be the logical
choice for interlocutor, he would rather negotiate with
Minister Soliz Rada due to the fact that Alvarado spent
several years living in Venezuela and might be susceptible to
PDVSA influence.

Petrobras Willing to Sell Refineries If. . .
--------------

4. (SBU) Castanos explained that Petrobras purchased two
refineries from the Bolivian government for US$ 105 million
in 2000 and has had problems ever since. In 2000, the
refineries had a profit margin of US$ 6 per barrel, but by
2003, thanks to the GOB's fuel price manipulations, the
margin was negative. Castanos stated that Petrobras is happy
to sell the refineries to the GOB if it will pay the full
value of the refineries. Petrobras would only consider a
partnership with the GOB if Petrobras continued to operate
the refineries. To date, Petrobras has not received an offer
from the GOB (despite press reports that the GOB plans to
nationalize the two refineries),and they have not had
serious discussions on the topic.

Bolivia's Gas Price Illusions
--------------

5. (SBU) GOB representatives have stated that they intend to
increase the price of gas sold to Brazil. Brazil and Bolivia
are partners to a Gas Supply Agreement (GSA) that is in
effect until 2019. The agreement contains a price-setting
formula, which is based on the amount of gas sold and a
weighted basket of world fuel prices. According to the
contract, every year the parties have the right to request
price-revision negotiations, and every five years the parties
must conduct a thorough price negotiation. Brazil had
planned to request negotiations last year to seek to lower
the price, but did not push the process forward given the
political climate in Bolivia. Brazil is currently paying US$
3.25 per MCF, which comes to almost US$ 4.75 including
transportation costs to Sao Paulo. Castanos explained that,
contrary to public perception in Bolivia, Brazil does have
alternatives to Bolivian gas, i.e., developing its own
fields, lowering gas subsidies, and developing biodiesel and
nuclear energy, and would not agree to pay much more than US$
4 to 5 per MCF. Castanos lamented that the GOB does not
appear to understand that gas prices are regional (because of
the difficulty of transporting it, gas is not a commodity
with a common world price) and that prices in South America
cannot be compared to prices in Europe or the United States.


6. (SBU) Comment: Although he emphasized that Petrobras would
only accept a favorable commercial outcome in future
negotiations, Castanos was clear that the company is willing
to arrive at a comprehensive deal with the GOB, even if it
means sacrificing some of their profit margin. End comment.
GREENLEE