GAS CONTRACTS HAVE VARIABLE RETURN RATES

C O N F I D E N T I A L LA PAZ 002967

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 10/31/2016
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GAS CONTRACTS HAVE VARIABLE RETURN RATES

REF: A. LA PAZ 2943


B. LA PAZ 2900

C. LA PAZ 2880

Classified By: Ecopol Chief Andrew Erickson for reason 1.4 (e).


1. (C) Summary: The new contracts signed by hydrocarbons
production and exploration companies on October 27 and 28
(ref A) contain tables of variables, including investment and
production figures, which will be used to calculate company
returns and the state oil company YPFB's take. The amount of
return will vary by field and will likely range from 18 to 50
percent. Hydrocarbons Minister Villegas announced that
contracts would be presented for congressional approval by
November 20. Despite press announcements otherwise,
according to Repsol, Chaco, Vintage, and BG executives, the
contracts do not contain forced investment clauses. The
markets guaranteed by the Gas Supply Agreements between YPFB
and Brazil until 2019 and YPFB and Argentina until 2026,
along with the lack of forced investment and sole risk
clauses in the new contracts, shifted significant business
risks from the producers onto YPFB, encouraging the companies
to sign by the October 28 deadline. Chaco and BG said that
they, along with several other producers, did not sign
complete contracts but were still negotiating details with
YPFB. U.S.-owned Vintage is pleased with the GOB's plan to
favor producers with small fields. End summary.

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Press Says Taxes Vary from 50 to 82 Percent
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2. (SBU) The press reported on October 31 that the new
contracts guarantee 50 percent return for the state (18
percent royalties plus 32 percent direct hydrocarbons tax
(IDH),as required by the May 2005 hydrocarbons law) plus a
variable rate of return, of up to 32 percent, for YPFB.
(Note: The May 2006 nationalization decree added a temporary
32 percent tax for YPFB on the two largest fields, San
Alberto and San Antonio, operated by Petrobras. End note.)
The percentage return for YPFB will vary based on company
profits, according to the press. YPFB will sell company
production, receive payment directly, and use the income to
pay the 18 percent royalties and 32 percent IDH to the
national treasury. It will decide how much to pay the
companies for their services based on formulas which vary by
field and will keep the rest. The press reported that
Petrobras (Brazil) was pleased to sign a new contract with
variable tax rates, because since the May 2006 decree, it had
been paying 82 percent and would now pay less. Hydrocarbons
Minister Carlos Villegas told the press that the contracts
would be presented for congressional approval prior to
November 20 in hopes of finalizing them before congress ends
its session in mid-December.

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Repsol Says Returns Based on Table of Variables
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3. (C) According to Repsol (Spain/Argentina) executive Albaro
Pedrazas, the information in the press was not quite
accurate. He said that the companies did not agree to pay 18
percent in royalties or 32 percent in IDH in their contracts,
but that all taxes/company return calculations were a
function of a variable formula. He explained that one of the
contract annexes contains tables of variables, including
investment amounts, amount of investments recouped,
production amounts, operating costs, and gas prices that will
be used to determine how much the companies receive from YPFB
for their services. Company reimbursement rates will vary by
field, but will likely range from 18 to 50 percent with
operators of larger fields receiving lower percentages. He
added that negotiations regarding Repsol share sales to YPFB
were ongoing. He said that Repsol may invest up to USD 1
billion in the development of the Margarita gas field;
however, the company did not commit to this in its new
contract. He was hopeful that it would be possible for
Bolivia to meet its gas supply commitments to Argentina if
companies began to increase investments.

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Chaco Signed Incomplete Deal and PAE Did Not Sign
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4. (C) Chaco (Partially U.S.) Vice President Jana Drakic told
Econoff on October 31 that Chaco had signed an incomplete
contract, as had many other operators. Negotiations over
contract annexes and Chaco share sales to YPFB are ongoing.
She said that the amount of return that Chaco would receive
was not completely clear. Chaco did not commit to making
investments in the contract. Chaco's main shareholder is Pan
American Energy (PAE). PAE is 60 percent owned by BP
America, which was formed by the merger of Amoco and BP.
According to Drakic, PAE has one operation in Bolivia that is
separate from Chaco and has not yet signed a new contract
with YPFB for that operation.

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Vintage Promised Greater Return and Assured Market
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5. (C) Vintage (U.S.) President Jorge Martignoni said that
Vintage signed a final contract and that it was pleased that
the government promised to issue a decree to benefit
producers with small fields. He told Econoff on October 31
that such producers would receive a higher percentage return
than producers with large fields and also would be given
preference for gas sales to Argentina. He explained that the
promised decree would allow companies producing less than 0.5
million cubic meters per day to be first in packing the
pipeline to Argentina, assuring a market for their
production. Martignoni confirmed reports by Repsol and Chaco
that the companies were not forced to invest by the new
contracts. He explained that the guaranteed market and lack
of forced investment clauses had shifted significant business
risks away from the companies and onto YPFB, encouraging the
companies to sign new contracts.

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Contracts Contain No Forced Investment Clauses
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6. (C) According to the British DCM Steve Townsend, based on
conversations with British Gas (BG) on October 30, the
contract that BG signed was incomplete. BG inserted several
caveats to protect itself in case the final contract
contained undesirable elements. Townsend said the contracts
contained no forced investment clauses and no clauses forcing
the companies to assume all of the risks, despite an earlier
version of the model contract that was published in the press
stating otherwise (ref B). He agreed with Martignoni,
stating that the lack of investment commitments, along with
assured markets, significantly reduced the risk for the
companies and encouraged them to sign. He said that BG
thought meeting the recently contracted supply commitments to
Argentina (ref C) within three years would be extremely
difficult, as only three exploration rigs are currently in
Bolivia and it could take several years to get enough rigs to
increase production by the required amount.


7. (C) Comment: The variable tax rates, the shifting of risk
to YPFB, the lack of forced investment clauses, and the
prospect of supplying the Argentine market based on the
October 19 contract (ref C) provided incentives for the
hydrocarbons companies to sign new contracts by the October
28 deadline. Although the GOB met its decree-imposed
deadline publicly, in reality, important contract details
remain to be worked out with several companies before the
contracts can be presented to congress for approval. The
lack of contractual commitments to invest in exploration and
exploitation on the part of the companies sheds doubt on
Bolivia's eventual ability to meet its contracted supply
obligations. End comment.
URS