PETROBRAS' NEW CONTRACT

C O N F I D E N T I A L LA PAZ 002998

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 11/03/2016
TAGS: ECON EINV ENRG EPET BL
SUBJECT: PETROBRAS' NEW CONTRACT

REF: LA PAZ 2943

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

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Summary
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1. (C) Along with nine other companies, Brazil's Petrobras
signed a new hydrocarbons production and exploration contract
on October 28 (reftel). Petrobras executives told Econoff on
November 1 that the company's rate of return would be lower
than that of its original contract, but better than the
return based on the May 1, 2006 nationalization decree. The
executives were pessimistic about long-term profits and
implied that Petrobras would not invest more than the amount
required to maintain current operations. Petrobras
successfully negotiated maintaining ownership of its assets
and the right to international arbitration, but agreed to
grant Bolivia's state oil company, YPFB, greater supervisory
authority over its operations. End summary.

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Better Than The Current Bad Deal
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2. (C) The Brazilian-owned Petrobras, the largest
hydrocarbons producer in Bolivia, signed a new production and
exploration contract with Bolivia's state-owned oil company
YPFB on October 28 (reftel). Petrobras executives told
Econoff on November 1 that its returns would be based on a
table of variables in its contract, including investment and
production amounts, and that returns would vary by field.
They said that although the new rate of return (around 20
percent) would be worse than that of its original contract
(around 40 percent),it would be better than the
unsustainable rate the company has been receiving since the
GOB issued its nationalization decree on May 1, 2006 (around
5 percent).

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Buying Time?
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3. (C) According to the Petrobras executives, the company's
new contract would enable it to profit in the short-term, but
not the long-term, as its rate of return would decrease over
time. They implied that Petrobras would not increase
investments above the level required to continue current
operations. However, they said that the contract contained a
clause obligating Petrobras to deliver a certain amount of
natural gas to YPFB, which would force them to make some
investment. They explained that oil companies must think
about the long-term, and that they hoped to get through the
next few years in the black and strike a better deal with the
next government.

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International Arbitration Preserved
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4. (C) Petrobras executives were able to negotiate
maintaining ownership of Petrobras' assets in Bolivia until
the end of the thirty-year contract term, rather than having
them pass to YPFB immediately, as earlier versions of the
model contract had prescribed. They also managed to retain
the right to international arbitration, despite press
announcements to the contrary, by including a clause stating
that they could seek arbitration in accordance with Bolivian
law and the regulations of the International Chamber of
Commerce in Paris. YPFB achieved greater supervisory
authority over Petrobras' operations, including the right to
approve its work plans, drilling plans, and bidding
processes. The executives were concerned that this greater
YPFB oversight role would increase corruption.

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Comment
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5. (C) Based on conversations with Petrobras and other
companies, it seems that the new contracts vary by producer,
with bigger producers like Petrobras having less favorable
rates of return than smaller producers, like Vintage, who
predict their return rates will continue roughly the same as
before. End comment.
GOLDBERG