Identifier
Created
Classification
Origin
06LAPAZ2661
2006-10-03 12:03:00
CONFIDENTIAL
Embassy La Paz
Cable title:  

GAS CONTRACT NEGOTIATIONS STUMBLE FORWARD

Tags:  ECON EINV ENRG EPET BL 
pdf how-to read a cable
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DE RUEHLP #2661/01 2761203
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P 031203Z OCT 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0763
INFO RUEHAC/AMEMBASSY ASUNCION 6150
RUEHBO/AMEMBASSY BOGOTA 3466
RUEHBR/AMEMBASSY BRASILIA 7324
RUEHBU/AMEMBASSY BUENOS AIRES 4589
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RUEHMN/AMEMBASSY MONTEVIDEO 4053
RUEHQT/AMEMBASSY QUITO 4479
RUEHSG/AMEMBASSY SANTIAGO 9053
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L LA PAZ 002661 

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 09/29/2016
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GAS CONTRACT NEGOTIATIONS STUMBLE FORWARD

REF: A. LA PAZ 1157


B. LA PAZ 2519

C. LA PAZ 1805

D. LA PAZ 1936

E. LA PAZ 1842

F. LA PAZ 1491

Classified By: Amb. Philip Goldberg for reasons 1.4 (b) and (d).

C O N F I D E N T I A L LA PAZ 002661

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 09/29/2016
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GAS CONTRACT NEGOTIATIONS STUMBLE FORWARD

REF: A. LA PAZ 1157


B. LA PAZ 2519

C. LA PAZ 1805

D. LA PAZ 1936

E. LA PAZ 1842

F. LA PAZ 1491

Classified By: Amb. Philip Goldberg for reasons 1.4 (b) and (d).


1. (C) Summary: Based on the May 1 hydrocarbons
nationalization decree's mandate that private firms must sign
new contracts by October 31 (ref A),the GOB recently
provided hydrocarbons companies with draft contracts and
began the first round of negotiations with companies on
September 27. U.S.-owned Vintage Petroleum said that the
draft contract was unacceptable, as it referred to
resolutions and laws that do not yet exist. According to
Vintage, the GOB would like the companies to sign contracts
by the end of October and work out important issues later.
On a positive note, companies view recently named
Hydrocarbons Minister Villegas as more flexible than his
predecessor (ref B). Vintage expressed concern that the GOB
might follow through on its threat to expel companies that do
not sign by the deadline, but draft legislation currently
under consideration by Congress may extend the time limit.
The Bolivian Hydrocarbons Chamber told the DCM that the five
companies destined for GOB take-over by the nationalization
decree were unlikely to agree to cede operating control.
Pipeline operator Transredes confirmed this assertion.
According to the Chamber President, gas price negotiations
between Bolivia and Argentina were proceeding fairly
smoothly, but volume negotiations were problematic (ref C).
Transredes warned of potential blackouts after 2007 due to
the freezing of an important pipeline construction project
(ref D). End summary.

U.S. Gas Company Says Draft Contract Unacceptable
-------------- --------------

2. (C) The GOB's May 1 hydrocarbons nationalization decree
required that private investors sign new contracts, to be
approved by the Bolivian Congress, by October 31, 2006 (ref
A). Vintage Petroleum Manager Jorge Martignoni and parent

company Occidental Petroleum Latin American Legal Adviser
Greg Romero told Econoff on September 28 that the GOB
provided an incomplete, draft contract to the company.
(Note: Although U.S.-owned Occidental Petroleum acquired
Vintage, it has decided to continue operating as Vintage in
Bolivia, a legally separate entity, to avoid potential damage
to Occidental. End note.) Company representatives held
their first meeting to discuss the draft contract with
Hydrocarbons Minister Carlos Villegas, state oil company YPFB
President Juan Carlos Ortiz, and other YPFB representatives
on September 28. Martignoni said that the GOB insisted that
Vintage must sign a new contract by the end of October, the
deadline imposed by the May 1 nationalization decree. Vice
President Alvaro Garcia Linera stated to the press on
September 19 that the companies must stick to the October 31
deadline or leave. However, the draft contract refers to
regulations that have not yet been issued and nonexistent
laws, Martignoni said.

Sign Now, Settle Later Untenable
--------------

3. (C) The GOB had planned to use the results of company
audits as the basis for contract negotiations; however, the
audits are not scheduled to be completed until the end of
November. Martignoni said that the government has asked the
auditors to provide an interim report by October 10 to serve
as the basis for negotiations. In view of the time pressure,
the GOB wants the hydrocarbons companies to sign new
contracts first and work out important issues later -- a
position which the companies cannot accept, explained Romero.
The companies cannot sign contracts under such uncertain
conditions, he added. British DCM Steve Townsend told us
that British Gas (BG),who also met with the GOB on September
28, had received a similar, unacceptable draft contract from
the GOB. He said that BG was willing to significantly expand
its presence in Bolivia provided that there was legal
stability, but unfortunately, that was not the case.

But New Minister Seems More Flexible
--------------

4. (C) Martignoni said that the recently named Minister
Villegas seemed more flexible than the previous radical
Minister Andres Soliz Rada (ref B). Villegas made an attempt
to behave in a conciliatory manner in the meeting, but it was
clear that the GOB would not negotiate certain issues,
including the right of YPFB to commercialize hydrocarbons.
However, Villegas, unlike Soliz Rada, apparently is willing
to allow companies to book Bolivian gas reserves as assets,
according to Martignoni.

Sign or Leave?
--------------

5. (C) Romero expressed concern that the GOB would follow
through on its threat to kick out companies that did not sign
new contracts by October 31. He explained that only about 5
percent of Vintage's staff were foreigners, with the bulk
being locally-hired. He added that the Ecuadorians had been
able to continue operating Occidental's business in Ecuador
after ejecting the foreigners, although at a loss. However,
press reports on September 29 indicated that the Chamber of
Deputies' Economic Development Commission is considering a
draft law that would raise the May 1 nationalization decree
to the rank of law and extend the contract negotiation
deadline by 30 to 60 days. The initiative reportedly has not
been discussed with the Executive branch. (Comment: It seems
unlikely that the GOB could manage fields currently being
operated by multinationals due to the lack of expertise in
country. The draft law under consideration in Congress also
sheds doubt on the idea of expelling the companies. Some
speculate that Venezuela's PDVSA might fill the void that
would result from such action, but PDVSA lacks experience in
natural gas operations. End comment.)

Hydrocarbons Chamber Outlines Negotiation Obstacles
-------------- --------------

6. (C) Bolivian Hydrocarbons Chamber Vice President Raul
Kieffer told the DCM on September 22 that completing
contracts with all the companies by the end of October would
not be feasible. He added that the five companies destined
for GOB majority ownership by the May 1 decree, including two
with U.S. investment -- Transredes and Chaco, were unlikely
to agree to sell company shares to the government without
assurances of maintaining operating control (ref A). He said
that the sector was somewhat more optimistic about
negotiations since the replacement of Minister Soliz Rada
with Minister Villegas, but were still keeping all but
essential investments on hold. He explained that the GOB
resolution that confiscated Petrobras' refinery production
and led to vehement Brazilian complaints and Minister Soliz
Rada's ousting (ref B) was frozen, but still legally in
force, adding to the uncertainty of an already uncertain
situation. Price formula negotiations between Bolivia and
Argentina, due to be completed by year-end, were proceeding
fairly smoothly; however, volume negotiations were more
complicated because Bolivia lacked the capacity to supply
additional volumes to Argentina without additional investment
which was on hold (ref C),according to Kieffer.

Transredes Unwilling to Cede Operating Control
-------------- -

7. (C) In a meeting with Econoff on September 23, Transredes
executive Oscar Serrate seconded Kieffer's assertion that
Transredes would not agree to cede operating control to YPFB.
Although the company is willing to negotiate share sales, it
is unwilling to risk damaging its reputation (and those of
its investors Prisma and Shell) by allowing YPFB operating
control, which could result in accidents. According to
Serrate, the GOB has expressed flexibility on the operating
control issue in recent meetings.
Transredes' Credit Freeze Could Produce Blackouts
-------------- --------------

8. (C) The GOB's attempts to change Transredes' shareholder
structure have placed the company in a tight spot with its
creditors -- the Inter-American Development Bank (IDB) and
the Andean Development Corporation (CAF) -- who have frozen
loans to the pipeline operator (ref D). Serrate recently
traveled to Washington with GOB representatives to meet with
the IDB and the CAF. Serrate said that the GOB
representatives demonstrated their naivete in requesting that
the IDB and CAF just sign over the loans to YPFB, which the
lending institutions refused. Without the financing,
Transredes will be unable to complete pipeline projects that
would bring gas to the Cochabamba area, enabling increased
electricity generation to meet increasing demand. He
predicted that the country would face electricity shortages
after 2007. Serrate also commented on the failings of
Bolivian justice, noting that he is under investigation by
the prosecutor's office and named as a defendant in a law
suit against Enron (ref E),even though he was in New York
working for the United Nations at the time in question.
(Note: Enron is the former owner of Transredes investor
Prisma, which was recently sold by Enron to Ashmore Energy,
which is 40 percent U.S.-owned (ref F). End note.)


9. (C) Comment: With President Morales' approval ratings
dropping to 52 percent on September 29, the MAS
administration is likely feeling significant pressure to
deliver something to the public framed as new hydrocarbons
contracts on October 31. On the other hand, there is not
enough time to complete serious negotiations with the
companies and arrive at consensus prior to that date.
Despite the Vice President's threats to sign or leave, in
line with the May 1 nationalization decree, it seems that the
GOB cannot afford to expel the international gas operators
and will be forced to come up with a clever way to save face
when it once again has to extend its self-imposed deadline.
End comment.
GOLDBERG