HYDROCARBONS: A NATIONALIZATION IN NAME ONLY?

C O N F I D E N T I A L LA PAZ 003080

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 11/14/2016
TAGS: ECON EINV ENRG EPET BL
SUBJECT: HYDROCARBONS: A NATIONALIZATION IN NAME ONLY?

REF: LA PAZ 2967

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

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Summary
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1. (C) A British Gas executive told Econoff that he thought
the company's new operation contract (reftel) was equitable
and would allow BG to recoup its investment and invest more
in the future. Opposition leaders and leftist radicals agree
that Bolivia's "nationalization" was in fact a
nationalization in name only. Partially U.S.-owned Chaco was
less optimistic about future investment prospects than BG and
concerned about on-going negotiations with Bolivia's
state-owned oil company, YPFB, in which YPFB seeks to gain
majority ownership of the company. U.S.-owned Vintage
Petroleum, a subsidiary of Occidental, said that it was
pleased with its new contracts. Vintage was more optimistic
about future investment prospects than Chaco, but agreed with
Chaco that future sector development would depend
significantly on YPFB's capacity, fairness, transparency, and
control of corruption -- about which the companies have
doubts. Hydrocarbons Minister Carlos Villegas told the
Ambassador that several countries had expressed approval of
the new contracts and that Bolivia's investment climate had
improved. The Ambassador responded that Bolivia's investment
environment had been tarnished by the use of the word
"nationalization" and by sending troops into the gas fields
and that this harm would be difficult to repair. Despite the
fanfare and rhetoric, Bolivia's "nationalization" appears to
have been more a renegotiation of contracts, albeit under
intense pressure, than a traditional nationalization. End
summary.

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BG Says Contracts Are Equitable
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2. (C) British Gas (BG) executive Carlos Siles told Econoff
on November 7 that all of the hydrocarbons production
companies operating in Bolivia had finalized their operating
contracts with YPFB and that the GOB presented the 44
contracts to congress for approval on November 5. He
expected that congress would approve the contracts within a
few weeks. He said that he thought the contracts were
equitable and would enable companies to recoup their
investments. He explained that the companies would get
greater returns with greater investment, providing incentives
for the companies to invest. He said that in the initial
period after an investment, the GOB take could be as low as
50 percent (direct hydrocarbons tax and royalties) plus
general taxes, but would increase over time (with the
additional amount going to YPFB) as companies recouped their
investments. Siles feared that opposition political leaders
might campaign that the contracts were not favorable to the
state and that the companies were profiting excessively in
order to reduce the MAS' popularity. Opposition party leader
Tuto Quiroga confirmed Siles' fears in a meeting with the
Ambassador on November 14, stating that the "nationalization"
was in fact a "virtual nationalization" or a mere
renegotiation of contracts, and he planned to criticize the
"nationalization" as a doling out of "sweetheart deals" for
certain companies. Former radical leftist Hydrocarbons
Minister Andres Soliz Rada has already publicly criticized
the "nationalization", claiming (accurately) that
nationalization as a strict governmental takeover of company
assets has not been accomplished.

3. (C) Siles thought that it would be possible for Bolivia to
meet its recently contracted gas supply obligations to
Argentina. He had heard rumors that some investors were
interested in the pipeline that must be built in order to
move this additional gas to Argentina. BG's contract did not
contain a forced investment clause. Siles explained that
after the pipeline was built, the companies would conduct
profit calculations for providing certain amounts of gas to
YPFB to sell to Argentina and that if they determined the
operations would be profitable, they would sign supply
contracts with YPFB, at which point they would take on the
risk of providing certain quantities of gas to YPFB -- risk
which they did not take on with the general operating
contracts signed at the end of October.

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Chaco: Worried About YPFB Take-Over
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4. (C) Chaco's Vice President Jana Drakic was less upbeat
about Chaco's contract and explained to Econoff on November 9
that Chaco had signed in order to recoup its investment,
because of the appeal of the Argentine market, and because
the company felt that it did not have a better option, as
arbitration would likely be lengthy and would not pay in the
end. In the contract, Chaco gave up the right to legal
recourse specifically regarding the May 2005 hydrocarbons law
and the transition to new contracts. However, Chaco still
has the right to arbitration for future disputes. She said
that the returns Chaco would get under the new contract are
not favorable, as the government consolidated its 50 percent
in royalties and direct hydrocarbons taxes and would take
extra for YPFB based on a table of variables and formulas in
Chaco's contract.


5. (C) Drakic explained that the company was concerned about
the risks of YPFB having control over commercialization and
the right to assign market share to the producers. Chaco's
contract obliges the company, one of the countries largest
producers of liquid petroleum gas (LPG),to sell to the
internal market at significantly below-market prices. The
producers, she explained, want to sell to the external market
at higher export prices. She said that she thought it was
possible for Bolivia to meet its export obligations to
Argentina if YPFB was revamped into an efficient, transparent
company with competent technical staff and political backing
-- a doubtful prospect. Chaco was also worried about the
ongoing negotiations with YPFB, in which YPFB was seeking to
gain 50 percent plus one of the shares of the company.

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Vintage: Happy With Contract
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6. (C) Vintage President Jorge Martignoni told Econoff on
November 9 that he thought all of the companies had signed
contracts within acceptable margins and that the contracts
had slight variations. For example, he said that Vintage had
agreed to cede legal recourse relating to contract migration,
like Chaco, but that Total had negotiated to remove that
clause. Vintage still has the right to arbitration on future
disputes. Vintage signed its first operating contract on
October 27 and a second contract for the Napuko field jointly
operated with Pan-American on October 30, averting potential
legal problems with Pan-American. Vintage President Jorge
Martignoni told Econoff on November 9 that he was extremely
pleased with the Napuko contract, in which Vintage had
negotiated not paying any taxes for YPFB, but paying only the
50 percent royalties and direct hydrocarbons taxes required
by the 2005 hydrocarbons law and general taxes, less value
added tax rebates. He said that the resignation of radical
Minister Soliz Rada had opened space for negotiation,
enabling Vintage to retain the right to book its reserves as
assets and maintain operating control without excessive
interference by YPFB. He said the GOB had pledged to issue
an incentives decree for producers with small fields which
would give Vintage preferential market share with Argentina
and provide compensation for liquid production for domestic
use.

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YPFB's Disorganization
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7. (C) Martignoni lamented the lack of organization at YPFB,
explaining that he had been asked to come to La Paz on
November 3, two days before the contracts were presented to
congress, to sign two revised annexes. He said that during
the contract negotiations prior to the signing at the end of
October, he had spent 26 hours straight at YPFB without food,
water, or restroom access. Martignoni expressed concern that
future sector development depended on YPFB's capacity,
fairness, transparency, and control of corruption. He said
that YPFB President Juan Carlos Ortiz was accessible and
transparent, but he would need an equally competent team for
YPFB to function smoothly, and with a salary cap of USD 1,750
per month, it would be difficult to attract such a team.
Nevertheless, Martignoni was optimistic about sector
development and said that he thought companies would invest
enough for Bolivia to meet its export obligations -- as long
as gas prices remain fairly high.

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Minister: Improved Investment Climate?
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8. (SBU) Hydrocarbons Minister Carlos Villegas told the
Ambassador on November 8 that the government had fulfilled
its promises to the Bolivian people and hoped to stimulate
sufficient investment in the sector to meet its gas export
obligations to Brazil and Argentina. He said that only 11
percent of Bolivia's gas fields have been explored. He
explained that he would travel with President Morales to
Europe at the end of November and later to New York to drum
up investment. He said that a decree offering incentives for
producers with small fields, a key decree for Vintage, is
already defined and would be issued immediately after
congress approves the contracts. He explained that the
ministry's next step would be to negotiate ownership control
over Chaco, Repsol, Petrobras' refineries, Transredes, and
the Bolivian Hydrocarbons Logistics Company, as outlined in
the GOB's May 2006 decree.


9. (SBU) Minister Villegas claimed that the GOB had received
calls from several countries, including Brazil, Spain,
France, and England expressing approval of the contracts
signed at the end of October. He said that Bolivia now has a
more attractive investment environment. The Ambassador
responded that Bolivia had tarnished its international image
by using the word "nationalization" for what was actually
something else and sending the troops into the gas fields,
noting that Bolivia's investment climate would be difficult
to repair. Minister Villegas responded that Bolivia had
implemented a "different" nationalization, in which no
companies were expelled, nothing was expropriated, and no
indemnity was paid. He claimed that Bolivia was just
following the world-wide tendency to change hydrocarbons
rules and renegotiate contracts.

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Comment
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10. (C) Despite the fanfare and rhetoric, Bolivia's
"nationalization" appears to have been more a renegotiation
of contracts, albeit under intense pressure, than a
traditional nationalization. The future development of the
hydrocarbons sector seems unclear, with some companies
(Brazil's Petrobras and Chaco) saying that they would stay to
recoup their investments but no new investments would be made
and other companies (Vintage and BG) being somewhat more
optimistic, saying that Bolivia could possibly increase its
production by the 50 percent required in the next few years
to meet its export commitments to Argentina. Although
Bolivia may have diminished its future investment prospects
by imposing higher tax rates on the companies, by saying one
thing ("nationalization") and doing another (renegotiating
contracts),it has been able to guarantee current production
and at the same time respond to overwhelming public demand
for "nationalization," a demand which ousted two former
presidents when it was unmet. End comment.
GOLDBERG