Identifier
Created
Classification
Origin
08LAPAZ462
2008-03-03 20:30:00
CONFIDENTIAL
Embassy La Paz
Cable title:  

BOLIVIAN GAS: BEGGAR THY NEIGHBOR

Tags:  ECON PGOV PREL ENRG EPET EINV BL 
pdf how-to read a cable
VZCZCXRO3765
PP RUEHLMC
DE RUEHLP #0462/01 0632030
ZNY CCCCC ZZH
P 032030Z MAR 08
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 6638
INFO RUEHAC/AMEMBASSY ASUNCION 7662
RUEHBO/AMEMBASSY BOGOTA 5025
RUEHBR/AMEMBASSY BRASILIA 8936
RUEHBU/AMEMBASSY BUENOS AIRES 6151
RUEHCV/AMEMBASSY CARACAS 3365
RUEHGE/AMEMBASSY GEORGETOWN 0617
RUEHPE/AMEMBASSY LIMA 3582
RUEHMD/AMEMBASSY MADRID 3891
RUEHMN/AMEMBASSY MONTEVIDEO 5293
RUEHPO/AMEMBASSY PARAMARIBO 0297
RUEHQT/AMEMBASSY QUITO 5994
RUEHSG/AMEMBASSY SANTIAGO 0617
RUEHRI/AMCONSUL RIO DE JANEIRO 0978
RUEHSO/AMCONSUL SAO PAULO 2191
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHUB/USINT HAVANA 0962
RUEHLMC/MILLENNIUM CHALLENGE CORP
C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 000462 

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/01/2018
TAGS: ECON PGOV PREL ENRG EPET EINV BL
SUBJECT: BOLIVIAN GAS: BEGGAR THY NEIGHBOR

REF: SAO PAULO 31

Classified By: A/DCM Mike Hammer for reasons 1.4 (b) and (d).


-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 000462

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/01/2018
TAGS: ECON PGOV PREL ENRG EPET EINV BL
SUBJECT: BOLIVIAN GAS: BEGGAR THY NEIGHBOR

REF: SAO PAULO 31

Classified By: A/DCM Mike Hammer for reasons 1.4 (b) and (d).


--------------
Summary
--------------


1. (SBU) Bolivia is struggling to cope with stagnant
national gas production, increased contractual obligations,
and growing domestic demand. In an effort to largely allay
Argentinean fears of energy shortfalls over the winter
months, President Morales met with the Presidents of Brazil
and Argentina on February 23 to try to convince Lula to
reduce the amount of gas being sent to Sao Paulo in order to
increase what it sends to Argentina. The meetings yielded no
gas concessions; rather, Brazil promised to analyze the
possibility of sending electricity to Argentina during
moments of critical need. The energy ministers from the
three nations will meet again in March to attempt to further
"coordinate actions," but considering the current energy
realities in the Southern Cone these meeting will likely
yield few results. End Summary.

--------------
The Bolivian Reality
--------------


2. (U) Current Bolivian production of gas hovers around 40
million cubic meters of gas per day (Mm3/d). Bolivia's
contractual obligations total more that 46Mm3/d. Bolivia
will not have the gas to fulfill these contract through 2008
and is unlikely to have sufficient production in 2009.
Bolivia has already cut gas entirely for contracts to supply
an electrical plant in Cuiaba Brazil (1.1Mm3/d) and with
Comgas (.6Mm3/d) in Sao Paulo. The principal contract with
Brazil, the Gas Sales Agreement (GSA),is the only contract
being fully met. It requires that 30Mm3/d be delivered to
Sao Paulo (Note: In order to deliver this quantity, over
31Mm3/d needs to be placed in the pipeline. End note.) After
fulfilling the GSA, Bolivia is left with less that 9Mm3/d,
and this is divided between domestic users (around 6Mm3/d)
and Argentina.

--------------

The Contract with Argentina
--------------


3. (C) The contract with Argentina is a "ramp-up" contract
which increased the amount of gas Bolivia should supply to
Argentina this year to 7.7Mm3/d (up from 4.6Mm3/d in 2007).
Moreover, it further increases commitments to 27.7Mm3/d in

2010. Bolivia will clearly need to renegotiate this contact
and has already publicly admitted as much. The real pending
issue is if Argentina will push to collect on rather strict
"delivery of pay" portions of the contract. Late last year
Argentina did bill the Bolivia government US$10 million for
violating the terms of the contract. According to Martin
Recondo, who manages the gas portfolio at the Argentine
Embassy in La Paz, this bill is "working its way through the
channels," but in truth he admits that the political will to
fully execute the terms of the contract does not exist.
Moreover, he reports that the Argentine Embassy in La Paz is
not very involved in the negotiations, rather the Argentine
State Hydrocarbon Company (ENARSA) and the Energy Ministry
are taking the lead. Bolivian officials argue that,
according to the contract, the quantities of gas piped to
Argentina need to be "confirmed" by the Bolivian State
Hydrocarbon Company (YPFB). If the quantities of gas sent
are not "confirmed" then delivery or pay clauses cannot be
enforced. In reading the contract with the Petrobras
representative in La Paz, Auturo Castanos, such arguments

LA PAZ 00000462 002 OF 003


seem disingenuous and would be difficult to defend in court.
The lack of follow through on the delivery of pay fines is
more likely the result of the lack of Argentine political
will.


4. (C) Recondo also thought that the construction of the
proposed new Bolivia/Argentina pipeline (without which the
quantities of gas called for in 2010 could not be delivered)
would not begin without a significant increase in Bolivian
production. Despite this, the bidding process for pipeline
construction has gone forward in Argentina, with two bidders
on the shortlist.


5. (C) Currently Argentina is paying seven dollars per
million BTU for Bolivian gas, whereas Brazil pays between
$4.50-$5.00. Logic would dictate that as a response to
unfulfilled quantities of gas being shipped, Argentina might
begin to demand a price discount. Recondo responded to the
idea by questioning why logic would apply. However, as
Bolivia moves forward in renegotiating the existing contract,
price is likely to be on the table.

--------------
The Contract with Brazil
--------------


6. (C) Brazil has more leverage over Bolivia than Argentina.
It is telling that there has been no public criticism of
Brazil by the government for it's unwillingness to cede any
gas to Argentina. The Morales Administration is relying
heavily on Petrobras to invest in gas production. Moreover,
considering Petrobras represents close to half of all gas
produced in Bolivia, the industry looks to the Brazilian
company for leadership in the sector. The President of
Petrobras, Jose Gabrielli, said that at the moment it is
impossible for Brazil to divert even one molecule of Bolivian
gas to Argentina. The gas situation in Brazil looks very
tight for the upcoming winter (Reftel) and pleading from Evo
and calls to be "responsible" by Cristina Kirchner are
unlikely to force Lula's hand.


7. (C) Additionally, Petrobras Representative Castanos
pointed out that there are serious contractual obstacles to
diverting gas from Brazil to Argentina. Not only are there
"take or pay" and "deliver or pay" clauses in the GSA
contract, there are "transport or pay" clauses as well.
These clauses entail that the pipeline operator be paid as if
the full volume were transported even if less gas were
actually delivered. Bolivia would be hard pressed to pay
"deliver or pay" penalties, while also compensating pipeline
operators. Furthermore, not that the Morales Administration
is particularly averse to hypocrisy, but in the past Bolivia
was rigid in applying the "take or pay" clauses on Brazil
when it was not prepared to receive minimum shipments of gas.

--------------
The Morales Government Response
--------------


8. (C) In typical fashion, Vice President Linera's response
to the contractual bind was to blame the oil companies. He
claims they are "defending themselves by halting investments"
and that for this reason Bolivia will need to renegotiate
with Argentina. According to the Vice President, the
administration "gave a strong blow to the oil companies, we
whipped them and they resent it." The reality is that
Bolivia is suffering from an increasing lack of credibility
within the industry and among its neighbors. Not only does a
possible new constitution loom over the entire sector, but
the official rhetoric continues. Brazil and Chile are both
clearly planning on future independence from Bolivian gas,
while Argentina stumbles ahead with it's own market
distorting policies and looks to cope with the immediate

LA PAZ 00000462 003 OF 003


crisis with increased imports of fuel oil.

--------------
Comment
--------------


9. (C) The future of gas integration in the Southern Cone
is not particularly promising. Trust and a history of
fulfilled contracts are in short supply. Despite calls for
cooperation and a clear economic rational, Bolivia is not a
reliable partner. Some of the blame also falls to Argentina,
which knew when it signed the "ramp up" contract that Bolivia
would be hard-pressed to deliver. As Martin Reconco
commented, "the current situation was not hard to imagine."
Ironically, the only agreement that came out of the
Presidential meetings was to cooperate on the construction of
five hydroelectric dams. Despite the announcement, both
Brazil and Chile are clearly steering a course for energy
self sufficiency. Bolivia, meanwhile, increasingly risks
isolation and unsecured markets for its gas.


GOLDBERG