BG VIEWS BOLIVIAN GAS CONTRACT AS UNACCEPTABLE

C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 001143 SIPDIS SIPDIS NSC FOR FEARS STATE PASS USTR MSULLIVAN/SCRONIN STATE PASS EXIMBANK AND OPIC USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D USDOC FOR 3134/USFCS/OIO/WH/SHUPKA TREASURY FOR OASIA, DAS LEE AND DDOUGLASS USAID/W FOR LAC/AA E.O. 12958: DECL: 10/24/2011 TAGS: EPET ENRG EINV ECON BR BL SUBJECT: BG VIEWS BOLIVIAN GAS CONTRACT AS UNACCEPTABLE REF: A. BRASILIA 1972 ¶B. LA PAZ 2817 Classified By: Deputy Principal Officer David C. Wolfe for reason 1.4(d ). ¶1. (C) SUMMARY: Sao Paulo-based British Gas (BG) Executive Vice President for South America Rick Waddell called DPO on Oct. 20 to discuss ongoing gas contract negotiations with the Bolivian Government. Due to a series of unrealistic demands, Waddell deemed the Bolivian model contract completely unacceptable and stated that BG would not sign the contract by the Bolivians' October 28 deadline. Nonetheless, he judged the risk low that Bolivia would expropriate foreign hydrocarbons assets for failure to sign or expel the companies, as threatened by Bolivia's vice president, because the Bolivians realize they do not have the money to keep up operations at current levels for long. Waddell termed the relations between Petrobras and Bolivia as tense, and opined that the big new deal to supply Bolivian gas to Argentina is unrealistic because no one will fund it. END SUMMARY. Bolivia's Contract Offer Unacceptable -------------- ¶2. (C) The Bolivian Government's May First hydrocarbons decree mandated that all companies currently operating in Bolivia, including BG, "migrate" their existing contracts to the new system by October 28. According to Waddell, contract negotiations normally take many months, and the Bolivians, who only sent model contracts to the companies on September 22, are trying to finish this complicated process in only five weeks. He said the initial model contract sent over, though still inadequate, was not all that bad. The draft the Bolivians sent over on October 13, however, was much worse, and there was no way BG could sign it. Waddell said the most charitable interpretation of this worse second draft is that the inexperienced current group of Bolivian officials have no understanding of how contracts in the real world are actually negotiated and what demands are realistic. He listed six main problems with the model contract: -- Bonus Payment: The Bolivians demand that an unspecified bonus payment be paid upon signing of the contract. Waddell noted that bonus payments, which could be many millions of dollars, are common when signing contracts for exploration block bids but are not done for renegotiated contracts. The unspecified amount is also worrisome, since the Bolivians could demand anything from a token amount to something really big. -- Parent Guarantee: As with the bonus payment, the Bolivians demand an unspecified guarantee. Waddell explained that in bid contracts, parent guarantees, with specific amounts and percentages, are signed that commit the parent corporation to spend a certain amount on well work programs or pay fines. With the current renegotiation, there is nothing new to guarantee. The added uncertainty of whether the Bolivian Congress would approve the contract while still committing the company means no parent corporate board would approve the signing of such a contract. -- Waived Arbitration Rights: The Bolivians want the companies to agree in the contract to give up their rights to international arbitration. The Government could effectively seize and transfer assets to third parties under any number of pretexts, with the companies helplessly standing by. -- Dictated Prices: The contract would allow the Bolivian Government, as the sole buyer and seller of gas, to set the price for both natural gas and liquids at artificially low prices, again with no recourse. SAO PAULO 00001143 002 OF 003 -- Questionable Capital Recovery: The international standard is for a contract to "front load" a company's recovery of capital expended to develop a well, so that even if the company never makes a profit, it can at least get back the investment through guaranteed set asides from the revenue stream. The Bolivian model contract does not guarantee capital recovery, nor pay interest should capital recovery be shifted to subsequent years. With the high tax rates being charged, a company could very well reach the end of a well's life without every recovering the capital and simply be out of luck. -- No Stabilization Clause: The Bolivians offer no guarantee (stabilization clause) that the contract will not be changed in the future. Expropriation Risk Low -------------- ¶3. (C) Based on the objections listed above, Waddell stated that BG could not possibly sign such a contract and doubted any of the other companies would either. One tactic might be to go ahead and sign the contract as an "intermediate" step, with the hope of improving the contract later, though he dismissed this option as too risky. He noted that President Morales repeatedly stated at the UN, before the European Parliament, and elsewhere that the Bolivian Government had not and would not expropriate any assets or expel companies. Back in Bolivia, however, Vice President Garcia Linera was saying that any company that did not sign the new contract would have to leave the country and there would be no extensions. Waddell commented that new Hydrocarbons Minister Villegas was much more reasonable than former Minister Soliz, and that new Bolivian state hydrocarbons company (YPFB) President Ortiz was much more rational than his predecessor. Nonetheless, the Bolivians have painted themselves into a corner for political reasons from which it will be very difficult to extricate themselves. ¶4. (C) Waddell then stated that BG rates the risk of expropriation or expulsion by the Bolivians for failure to sign the contract as low, mainly because the Bolivians do not have the cash to keep things running for long. BG has 74 employees in Bolivia, only three of whom are foreigners. In the event of an expropriation or expulsion, the likely scenario would be for the foreign employees to be expelled and the Bolivian employees to be declared part of whatever entity takes over and ordered to keep up operations. While the Bolivian employees are quite capable of running the current operation, Waddell assessed that the Bolivian Government is unlikely to kick foreign companies like BG out at this juncture because they realize they don't have the capital to maintain operations at their current level for long, much less invest to expand operations. In the event of an expropriation, BG will cooperate with Bolivian authorities for an orderly transition while pursuing its rights in the international system. Petrobras Piqued -------------- ¶5. (C) When asked about Petrobras' situation, Waddell replied that the Brazilian giant, which has the most invested in Bolivia, is in no mood to be coerced. For Petrobras, as with all the foreign companies, a crucial issue is the booking of hydrocarbons reserves as required by New York and other stock exchanges. If reserves in Bolivia become unreliable and thus have to be removed from the books, share prices for the Petrobras and other companies could take a hit. Petrobras has been especially hard hit, with taxes upped to a whopping 82 percent on its big gas fields. In addition to Petrobras' contract renegotiation, Waddell recounted the convoluted story of Petrobras' refineries in Bolivia and how a series of SAO PAULO 00001143 003 OF 003 pre-Evo Bolivian Government decrees intended to keep fuel prices low in Bolivia had skewed the liquid fuel market. Producers ended up having to deliver liquids at a loss to Petrobras refineries, and Petrobras made a profit by exporting excess liquids at higher world prices. Producers like BG kept quiet about this arrangement to avoid destabilizing the various weak Bolivian governments. Because of the scarcity of diesel in Bolivia due to low prices and smuggling of fuel to neighboring countries, Petrobras agreed to import Brazilian diesel as long as the Bolivian Government made up the price differential. Chronic late payments by the Bolivians led Petrobras to end this arrangement in July. Notwithstanding public accounts circulating at the time (Ref A),Waddell continued that the latest impasse in September between Bolivia and Petrobras on the refineries was due to Bolivian retaliation to end Petrobras' special authorization to export excess liquids, a decision that the Bolivians suspended due to the sharp Brazilian reaction and that led to Minister Soliz' downfall. Argentina Deal -- Pipe Dream? -------------- ¶6. (C) Waddell also commented on the recently announced deal for Bolivia to supply an extra 20 million cubic meters of gas per day to Argentina by 2010 (Ref B). He noted that Bolivia has trouble meeting the current commitment of 7.7 million cubic meters per day to Argentina. The deal would require several billion dollars to build new pipelines and develop existing and new fields. Such money, he opined, could only come from the multinational gas companies, which are in no mood under existing uncertainties to even consider further investments in Bolivia. Enarsa, Argentina's state energy company, has the same relatively low investment rating as Argentina itself and could not itself raise the money needed, Waddell concluded. Finally, he observed that, even under the right circumstances, such deals take a long time: the Bolivia-Brazil gas deal signed in 1992, but gas did not start flowing until 1999, seven years later. ¶7. (U) This cable was coordinated with Embassies Brasilia and La Paz. MCMULLEN