Brazilian Concerns over Bolivian Gas Disruptions

C O N F I D E N T I A L BRASILIA 001215

SIPDIS

E.O. 12958: DECL: 09/10/2018
TAGS: PREL ENRG ECON EPET EINV BR BL
SUBJECT: Brazilian Concerns over Bolivian Gas Disruptions

REFTELS: A) Sao Paulo 0260, B)Sao Paulo 0031, C) La Paz 0462, D)
Brasilia 0593, E) Brasilia 0672, F) La Paz 1905 G) Sao Paulo 0392
H)La Paz 1941

Classified By: DCM Lisa Kubiske for reasons 1.4 (b) and (d).


1. (C) Summary: Calling the situation "worrisome," Brazil's Ministry
of Mines and Energy Assistant Secretary for Petroleum, Natural Gas
and Renewables, Limo Neto, shared with Econoff the breaking news that
gas flow from Bolivia was decreasing, although the majority of the
supply to Brazil remains unaffected thus far. Given the Brazilian
dependence on Bolivian gas, a long-term disruption in supply could
have serious economic consequences, particularly with respect to
industrial output. Lima Neto reported that Petrobras had been
contacted by the opposition actors in Bolivia to say that they had
nothing against Petrobras or Brazil and, despite the threat to
Morales, would try to avoid taking actions that would be damaging.
Lima Neto said his next task would be to convene a group for
contingency planning. According to Lima Neto, there are already
draft plans in place for how to compensate for a sudden loss of gas
supply, which includes using alternate fuels to power some electrical
stations, for instance liquid fuels, as well as increasing production
in some of the coal powered thermal plants. Brazil has weathered a
disruption in gas supply as recently as October 2007 and some
additional energy sources have come online since that time. Lima
Neto noted that despite some existing contingency plans, a protracted
disruption in the natural gas flow from Bolivia could lead to
rationing. END SUMMARY


2. (U) According to Brazilian press reports, the Bolivian opposition
is using Brazil as a pawn in a dispute with President Evo Morales and
threatening the Brazilian industrial production and electrical supply
in the process. Brazilian newspapers characterize the Bolivia
domestic political dispute as centering around tax funds taken from
the states of Santa Cruz, Beni, Tarijia, and Pando, apparently for
the purposes of funding a pension system, as well as the contested
constitution being proposed by a Morales-backed Congress. During the
night and early morning of September 10, in what the President of the
Bolivia state gas company, Santos Ramirez, is quoted in press reports
as calling a "terrorist act" protesters attempted to shut off the
valves, but have thus far not succeed in completely turning off the
supply, despite multiple tries. Brazil is a major purchaser of
Bolivian natural gas exports, which bring in between $6-9 per million
BTU (Reftel F). Fifty percent of Brazil's natural gas comes from
Bolivia, with 60 percent of that coming from the Tarijia province.
(Note: Protesters may have believed that Morales would be
particularly vulnerable to the threat of disruption of the commercial
agreements with Brazil having learned how reliant Bolivia is on its
Brazilian market when he nationalized Petrobras' plants in Bolivia
and tried to unilaterally negotiate the contracts, resulting in a
severe loss of income. End note.)


3. (C) The Ministry of Mines and Energy's Secretary of Petroleum,
Natural Gas, and Renewables, Jose Lima Neto, told Econoff that the
situation was very worrisome. Given the Brazilian dependence on
Bolivian gas, a disruption in supply could have serious economic
consequences. Lima Neto reported that Petrobras had been contacted
by the opposition actors in Bolivia to say that they had nothing
against Petrobras or Brazil and, despite the threat to Morales, would
try to avoid taking actions that would be damaging. Lima Neto agreed
that the fact that the initial efforts to turn off the gas flow had
not cut off the supply entirely could be reflective of the
opposition's efforts to threaten Morales without causing undue damage
to their neighbors and business partners. Lima Neto noted that any
disruption would be harmful not only for Brazil but for the Bolivian
economy as well, and said he hoped that fact would make the situation
self-limiting.


4. (C) During the meeting with Econoff, at approximately 1:00 (noon
Washington, DC time) September 10, Lima Neto took a call conveying
the news that Brazil had just experienced a 2 million cubic meters
decrease from the normal natural gas flow from Bolivia of 30 million
cubic meters (Note: this coincides with reports about an explosion
connecting a major Petrobras field to the pipeline in Tarijia, see
Reftel H on same subject. News reports on September 11 say the flow
has now decreased by three million cubic meters and suggest the
decrease could last for ten to fifteen days. The situation remains
fluid and Congen Sao Paulo is now hearing rumors of a fifty percent
reduction in flow. End Note). He said his next task would be to
convene a group for contingency planning. According to Lima Neto,
there are already draft plans in place for how to compensate for a
sudden loss of gas supply, which includes using alternate fuels to
power some electrical stations, for instance liquid fuels, as well as
increasing production in some of the coal powered thermal plants. As
a result of a shortage in available gas in October of 2007, Brazil
has already had an opportunity to put some of these plans into
practice but Lima Neto was less than sanguine about the ability of
the existing plans to compensate for a continued interruption in the
gas flow. While noting that Brazil could weather a short term
decrease in supply without too much economic disruption, he admitted
that a more drawn out scenario could result in rationing. (Note: One
mitigating factor in a potential electrical crisis could be that
following an abundant rainy season, Brazil's reservoirs are better
prepared to meet demand. Over 80 percent of Brazil's electrical
supply comes from hydro power, with ten percent coming from natural
gas. The fact the oil prices have gone down recently and that the
threat comes at during the seasonal decline in energy usage might
help on the electrical supply side as well.)


5. (C) Were the interruption in gas supply to be serious, it would
be industrial output that would suffer the most. In Rio Grande do
Sul, nearly 100% of industrial production requires gas and in Sao
Paulo itself, the number is close to 60%. The 2007 annual survey by
the Sao Paulo State Industry Center of its 551 company members
conducted in November 2007 showed that more than 38 percent of
natural gas consumption is used by Sao Paulo industry. The study
showed that the lack of natural gas would boost production costs by
about 10 percent on average. Furthermore, the Federation of
Industries of Sao Paulo (FIESP) reported that an eventual natural gas
shortage would totally interrupt 19 percent of Sao Paulo industries,
20 percent of industries would be partially affected with the absence
of natural gas, and 61 percent could substitute another fuel for
natural gas if there was a shortage. (See Reftel B for more
information on natural gas in Brazil.) Several industries including
chemicals (30 percent),textiles (28 percent),and ceramics (26
percent) rely heavily on natural gas as their primary energy source.


6. (C) COMMENT: Since Evo Morales' attempts to nationalize
Petrobras' gas investments in Bolivia and dictate a contract price,
Brazil has been aware of the need to move away from dependence on
Bolivian gas, as well as diversify their energy matrix. For
primarily political reasons, Brazilian President Lula has committed
to an additional $1 billion dollars worth of gas investments in
Bolivia over the next five years. It is unclear whether recent
events will have an impact on future plans. Last year, Brazil
launched plans to build three liquefied natural gas (LNG)
regasification terminals, the first of which Petrobras inaugurated in
August at the Port of Pecem, which is capable of supplying 7 mm3/d of
natural gas. The terminal adds another 11 percent to Brazil's
natural gas supply and equals about half of the natural gas
consumption destined to Brazil's gas-fired power plants and more
modest increases in capacity are expected for 2009. The new
discoveries of oil and gas reserves at pre-salt levels (more than
4000 meters below the surface) in the Santos Basin, provide hope for
a larger increase in the long term. In the near term, Brazil will
hope that the current interruption is limited and short-lived. Ample
water reserves and new LNG and bioelectricity capacity (Reftel G)
will help them avoid shortages in electrical supply but Brazil will
need to ensure that the disruption is limited to avoid damage to
industrial output. We also expect that this will provide added
incentive for Brazil to continue to try to develop sources such as
bioelectricity so as not to be subject to the whims of Morales and
now, his opposition. END COMMENT


7. (U) This cable has been coordinated with U.S. Embassy La Paz,
Congen Sao Paulo, and Congen Rio.

SOBEL