BOLIVIAN GAS: LOWER SALES MAY HURT MORALES

C O N F I D E N T I A L SECTION 01 OF 02 LA PAZ 000127 SIPDIS E.O. 12958: DECL: 01/21/2019 TAGS: ECON PGOV PREL ENRG EPET EINV BL EFIN PINR SUBJECT: BOLIVIAN GAS: LOWER SALES MAY HURT MORALES Classified By: A/EcoPol Chief Joe Relk for reasons 1.4 b,d ¶1. (C) SUMMARY. President Evo Morales called in favors the first weeks of January, after Brazil announced it would cut its demand for natural gas by one-third (a potential loss of $600 million for Bolivia in the first four months of 2009). Morales sent delegations to both Brazil and Argentina in an attempt to encourage more purchases from Bolivia, and later both countries publicly announced that they would increase imports from Bolivia. Due to lower pricing, the gas industry in Bolivia will face serious challenges in 2009 as Morales seeks to use international reserve funds to reinvest in the state-owned gas company YPFB. The potential monetary downturn is already causing funding shortfalls for Morales' "Evo Delivers" agenda. END SUMMARY. - - - - - - - - BIPOLAR BRAZIL - - - - - - - - ¶2. (U) In early January, Brazil began importing one-third less gas from Bolivia. Brazil said that their demand had been steadily decreasing due to the economic slowdown and expanding alternative energy options, such as hydropower. Petrobras, the Brazilian state-run oil company, decreased imports from 30 million cubic meters a day to 19 million cubic meters a day. Under a 20-year contract signed in 2007, the Brazilians are required to purchase between 19 and 31 million cubic meters per day at a fixed price from Bolivia with price adjustments every quarter. Bolivian officials announced that this cut could mean in a loss of $600 million for YPFB in the first four months of 2009 alone. ¶3. (U) A Bolivian delegation was sent to Brazil January 9, led by Minister of Development and Planning Carlos Villegas. The delegation achieved a turn-around: Brazilian officials said they would increase their imports from Bolivia after Petrobras "found" two thermoelectric plants that required Bolivian gas. Brazilian President Lula Da Silva further supported Morales at a joint event by announcing January 15 that Petrobras will invest $1.1 billion dollars in Bolivia to explore new reserves. Brazil is still expected to request a price adjustment due to the significant drop in crude oil prices worldwide. Bolivian officials say this price drop could result in a full 50 percent drop in revenues. - - - - - - - - - - ARGENTINA AUGMENTS - - - - - - - - - - ¶4. (U) After the initial Brazilian success, Morales announced that he would also attempt to sell surplus gas to Argentina. After some negotiation, Argentina agreed to increase their imports from 1.3 mcms per day to 7.7 mcms, the maximum possible given infrastructure and production capability. Argentina, however, pays lower prices for gas than Brazil, making it a less-than-ideal replacement. - - - - - - - - - - - - CALMING CONTRADICTIONS - - - - - - - - - - - - ¶5. (U) To allay public concerns over the demand decrease, Morales has publicly stated his intent to try to export the excess gas to Paraguay and Uruguay. Other members of his cabinet have quietly contradicted that possibility, saying that YPFB is operating at full capacity and it would not be possible to export to Paraguay or Uruguay, as there are no pipelines to deliver the gas. ¶6. (U) In a strange twist, another suggested plan is to export any excess gas to Chile. This differs only slightly from former President Gonzalo "Goni" Sanchez de Lozada's LA PAZ 00000127 002 OF 002 unpopular plan which ignited the "Gas Wars" of 2003, causing over 60 deaths and Sanchez de Lozada's resignation. Morales' supporters did not protest the new plan to export to Chile, largely because of a warming of Bolivian-Chilean relations in recent months. - - - - - - - - - - - DIMINISHING DEPOSITS - - - - - - - - - - - ¶7. (SBU) With a decrease in gas production, important byproducts such as gasoline have been in short supply in the domestic market, causing difficulties for individuals and companies particularly in Santa Cruz. Bolivian departments (states) also fear for their hydrocarbons funding, which makes up most of their budget. ¶8. (U) In early January, Morales publicized that he would draw from the country's international reserves to reinvest in YPFB. Economists immediately criticized the plan, saying that of the $7.7 billion in reserves, very little is available for withdrawal. They also said that strict Bolivian regulations make it illegal for Morales to take the funds and that doing so could destabilize the Bolivian economy. - - - - COMMENT - - - - ¶9. (C) Morales' popularity depends to some degree on YPFB's success, as it is the primary example of his statist economic model. Morales' base is already feeling some of the effects of lower hydrocarbons sales, as lack of tax revenues have slowed the expansion of popular government programs such as the "Dignity" retirement plan and the Juancito Pinto subsidies to schoolchildren. Decreased aid from Venezuela will also likely damage Morales' popularity: Venezuela is the main backer of Morales' flagship "Evo Delivers" program and increased gas purchases by neighbors Brazil and Argentina cannot replace it. Some of Morales' "social movement" supporters are now calling for the national elections currently scheduled for December to be moved earlier. If Morales' popularity is hurt by decreasing gas-funded social programs, he may decide that an earlier election is necessary to ensure his re-election. END COMMENT. LAMBERT