DEADLINES COME AND GO, MUTUN TALKS CONTINUE

UNCLAS LA PAZ 000574

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND LPETRONI
ENERGY FOR SDAY AND SLADISLAW
COMMERCE FOR JANGLIN
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: EMIN EINV ECON PGOV BL
SUBJECT: DEADLINES COME AND GO, MUTUN TALKS CONTINUE

REF: 05 LA PAZ 2598

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SUMMARY
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1. (U) Deadlines have come and gone, but Mutun contract
negotiations continue. The principal outstanding dispute
centers on natural gas prices; as of February 28, the GOB and
India's Jindal Steel and Power remained unable to reach
agreement. Gas supplies are apparently uncertain, and
communities near the Mutun iron ore deposits have initiated
road blockades to pressure the government to move forward.
End summary.

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DID SOMEONE MENTION A DEADLINE?
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2. (U) GOB officials have announced and subsequently failed
to meet no fewer than four negotiating deadlines since
mid-January, each time disappointing expectations of a
finished contract to say they needed more time. The GOB and
India's Jindal Steel and Power have been engaged in
discussions since August 2006, when the two parties announced
general agreement on the broad outlines of a joint venture
contract allowing Jindal to develop Mutun, one of the world's
largest iron ore deposits (reftel).


3. (U) The principal outstanding dispute centers on natural
gas prices. Jindal has consistently demanded stiff
concessions, initially proposing it pay just $2.10 per
million British thermal units (BTU),or half the then-export
price of $4.20 per million BTU. The company later revised
its offer, suggesting it pay full price for gas used in
exploration and exploitation activities but insisting on a
subsidized price for gas used in a proposed thermoelectric
power plant; the firm based its position on existing
hydrocarbons legislation, arguing that Hydrocarbons Law 3058
obliges the government to cover 50 percent of the cost of gas
used in industrialization projects. When Jindal revised its
offer a second time, offering to pay $3.20 per million BTU
for all gas, the GOB offered an alternative, suggesting the
firm pay $4 per million BTU for gas used in exploration
activities and $2 per million BTU for gas used in the
thermoelectric power plant. As of February 28, the two sides
remained deadlocked.

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GAS SUPPLIES UNCERTAIN
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4. (U) Vice Minister of Exploration and Production Guillermo
Aruquipa announced, meanwhile, that domestic gas production
may not meet Mutun's needs, as Bolivia currently produces
only enough gas to supply domestic demand and fulfill export
contracts with Brazil and Argentina. Aruquipa noted that the
government could push hydrocarbons companies to develop new
gas fields but acknowledged that the strategy's success was
uncertain. He later implied that the problem was of little
immediate concern, as Mutun would not begin production before

2010.

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COMMUNITIES DEMAND RESOLUTION
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5. (U) Residents of Puerto Suarez and other communities near
the Mutun iron ore deposits demanded quick resolution,
initiating road blockades February 26 and vowing to maintain
them until the GOB signs a contract. Civic leaders disrupted
road and rail transportation to Brazil and hinted at still
tougher measures, including the taking of municipal
buildings. Residents have demanded for months that the GOB
move the project forward and called on the government to
protect the thousands of jobs at stake.

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COMMENT
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6. (SBU) India's honorary consul in Bolivia assured Econoff
March 1 that contract negotiations were in their final
stages, but this may be an overly optimistic assessment;
despite the consul's statement, it remains impossible to
predict either the timing or the terms of a final contract.
If the two parties do reach agreement, uncertain gas supplies
and lingering doubts about Jindal's technical expertise may
mean the project will go nowhere fast.


7. (SBU) Comment continued: It appears Jindal believed from
the outset that it would receive subsidized gas, as estimates
of relatively low gas prices played a key role in assuring
the project's economic viability; indeed, the GOB faced
opposition criticism of the original proposal's inclusion of
gas subsidies. The government's willingness to play hardball
with Jindal now suggests that the political pay-off of the
deal is not worth the economic cost, particularly given the
beneficiaries' location in the department of Santa Cruz, an
opposition stronghold. End comment.
GOLDBERG