UNCERTAINTY STILL REIGNS IN BOLIVIA'S NATURAL GAS

UNCLAS SECTION 01 OF 03 LA PAZ 001404

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EINV ENRG EPET BL
SUBJECT: UNCERTAINTY STILL REIGNS IN BOLIVIA'S NATURAL GAS
SECTOR

REF: A. LA PAZ 870

B. LA PAZ 559

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Summary
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1. (SBU) The Bolivian Hydrocarbons Chamber told Emboffs May
18 that, while some smaller natural gas producers have agreed
to invest in increased gas production, the largest players in
the Bolivian industry are still waiting cautiously. Chaco
has agreed to invest around USD 250 million over the next
five years, but that figure only represents about 8 percent
of the total investment needed to meet gas supply commitments
to Brazil and Argentina. Sector representatives explained
that legal uncertainty in the exploration business almost
guarantees that no company will invest in exploration, with
the exception of Venezuela's PDVSA for political reasons.
Constituent Assembly proposals regarding hydrocarbons
threaten the future of both exploitation and exploration.
GOB negotiations to gain majority ownership of four
hydrocarbons companies are ongoing. The Canadians are
providing technical assistance to Bolivia's state oil company
YPFB, which could help the state company in its management of
the two gas refineries recently acquired (rather forcibly)
from the Brazilian company Petrobras. End summary.

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Company Gas Exploitation Plans in the Works
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2. (SBU) General Manager of the Bolivian Hydrocarbons Chamber
Raul Kieffer told Emboffs on May 18 that the private gas
production companies are preparing project and investment
proposals, which are due to the government in November 2007.
Kieffer predicted that we could see some investments in the
sector by May 2008. He said that investments could be
delayed by new public consultation requirements for each step
of a project, which could delay each step by six to eight
months. He explained that there is a divide between the
companies that have committed to investing in order to
decrease their share of the undesirable domestic market and
gain access to the more lucrative Argentine market (the
smaller operators, including Chaco (partially U.S.-owned),
Vintage (U.S.-owned),and Plus Petrol) versus the larger
operators who were previously supplying Brazil and Argentina
and plan to wait before making investment commitments,
including Petrobras, Repsol, and Total.

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But Few Investment Commitments to Date
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3. (SBU) Chaco told Emboffs in a separate meeting May 18 that
it has agreed to invest USD 50 million per year over the next
5 years, or approximately 8 percent of the USD 3 billion
needed by Bolivia to meet its contractual commitments to
Argentina and Brazil. Chaco is optimistic that the new
pipeline to Argentina will be constructed because of
Argentine and Chilean needs for fuel. Petrobras official
Arturo Castanos confirmed that Petrobras does not intend to
invest in Bolivia any more than necessary to maintain current
operations. Castanos added that, contrary to Bolivian press
reports, Brazilian petrochemical company Braskem, has not
committed to investing USD 1.5 billion in Bolivia nor to
building a plant in Bolivia. He explained that the company
had expressed interest in buying 5 million cubic meters of
ethane, if Bolivia could provide that amount.

LA PAZ 00001404 002 OF 003



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And Exploration Business is Dead
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4. (SBU) Kieffer explained that during the congressional
contract approval debacle (ref A),Podemos had won the
argument that exploration contracts (as opposed to
exploitation contracts) do not have to be approved by
congress. This liberated former President and Podemos leader
"Tuto" Quiroga from GOB legal charges that he had approved
illegal exploration contracts, but means a lack of legal
security for any company that may undertake exploration.
Kieffer said that no company -- with the political exception
of Venezuela's PDVSA which would receive special benefits
under the bilateral cooperation agreement currently up for
approval by the Bolivian congress -- would invest in
exploration without knowing what the terms would be for
exploitation, i.e. tax rates, once they discovered
hydrocarbons. Chaco's vice president agreed that the
exploration business has been ruined and that no company
would enter except PDVSA. Kieffer expressed concern about
Constituent Assembly proposals regarding the hydrocarbons
sector. He said that if the proposals that he had seen
become part of the new constitution, no private company would
be able to operate in Bolivia in either exploration or
exploitation.

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Company Take-Over Negotiations Ongoing
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5. (SBU) Kieffer said the GOB really intends to gain majority
ownership of the four hydrocarbons companies that it pledged
to take over in its May 2006 nationalization decree.
According to Kieffer, the GOB is currently negotiating with
the German-Peruvian owned Bolivian Hydrocarbons Logistics
Company, but has not held recent meetings with Chaco
(partially U.S. owned),Andina (Spanish-Argentine),or
Transredes (partially U.S owned). Chaco confirmed that it
has not held discussions with the GOB, but said that reaching
agreement with the GOB to purchase the required shares would
be possible as long as Chaco retained administrative and
operating control over the company. On May 17, Transredes
officials told Emboffs that they also had not held formal
discussions with the GOB recently about the issue, and said
that allowing Bolivia's state oil company YPFB to gain
operating control of the Transredes was impossible. Raul
Kieffer mused that the GOB would agree to cede operating
control to the private companies, in order not to repeat its
failures following nationalization of the Vinto smelter (ref
B). Kieffer said the GOB would contract an international
firm to evaluate the worth of the companies in the next three
months.

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Canadians Providing TA to YPFB
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6. (SBU) Kieffer told Emboffs on May 18 that the Canadians
are providing technical assistance to Bolivia's state oil
company YPFB, in attempts to improve its currently extremely
limited capacity to manage its new duties after
"nationalization." Kieffer said that YPFB President Aruquipa
is quite logical and learns quickly, but lacks the capacity
to manage the organization. The GOB has proposed a bill to
exempt YPFB staff and the workers from the previously
Petrobras-owned refineries from the general GOB pay scheme,

LA PAZ 00001404 003 OF 003


which would enable these state workers to earn competitive
salaries.

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Refinery Plans
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7. (SBU) Petrobras official Arturo Castanos told Emboffs on
May 14 that Petrobras made an offer to the GOB to sell its
refineries for USD 112 million, because a decree issued by
the GOB on May 6 had cut almost all of the refineries'
profits and left Petrobras with no room to negotiate a
partial sale. Regarding the GOB's announced plans to expand
the refineries' production, Castanos said that the GOB would
have to invest large sums to expand diesel production, but
that such an investment did not make economic sense in
Bolivia. Raul Kieffer estimated that the GOB would need to
invest around USD 45 million to increase the capacity of the
refineries, pipelines, and storage to be self-sufficient in
diesel. (Note: This amount seems small compared to the USD
100 million the GOB spends annually on diesel imports. End
note.) Chaco's vice president noted that, although the
refineries represented only a small portion of Petrobras'
global profits, they were the top-earning businesses in
Bolivia in 2006. Castanos said that the refineries, if
properly run, could generate USD 60 million per year if the
price of fuel remained high.

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Comment
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8. (SBU) Although a few natural gas operators have committed
to increasing investments, the large players in the Bolivian
industry remain skittish. Future risks to the sector include
YPFB's lack of capacity to fulfill its enlarged role,
Constituent Assembly proposals that would hinder private
operations, uncertainty in the exploration business that will
lead to declining gas and oil reserves, and GOB plans to take
over majority ownership of four production, storage, and
transportation companies. End comment.
GOLDBERG