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Cablegate: Unintended Consequences of Gob's Hydrocarbons

VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #1936/01 1952054
ZNR UUUUU ZZH
P 142054Z JUL 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 9972
INFO RUEHAC/AMEMBASSY ASUNCION 5997
RUEHBO/AMEMBASSY BOGOTA 3315
RUEHBR/AMEMBASSY BRASILIA 7164
RUEHBU/AMEMBASSY BUENOS AIRES 4426
RUEHCV/AMEMBASSY CARACAS 1704
RUEHPE/AMEMBASSY LIMA 1713
RUEHMN/AMEMBASSY MONTEVIDEO 3922
RUEHQT/AMEMBASSY QUITO 4335
RUEHSG/AMEMBASSY SANTIAGO 8896
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 001936

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: UNINTENDED CONSEQUENCES OF GOB'S HYDROCARBONS
POLICY

REF: LA PAZ 1805

1. (SBU) Summary: The Inter-American Development Bank (IDB)
and the Andean Development Corporation (CAF) have frozen the
pipeline operator Transredes' financing for expanding and
constructing three natural gas pipelines due to the GOB
take-over of company shares. Without these pipelines,
various regions of Bolivia could face electricity outages in
the medium-term. Tarija threatened to hold a 24-hour strike
on July 13 in response to the GOB's plan to give all
additional profits from Argentine gas sales to YPFB
(Bolivia's state oil company), rather than to the producers
who would pay taxes that would then be shared with the
departments per Bolivian law. End summary.

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Pipeline Projects on Hold
-------------------------
2. (SBU) Jorge Alvarado, President of Bolivia's state oil
company YPFB, announced in a press conference on July 11 that
the Inter-American Development Bank (IDB) and the Andean
Development Corporation (CAF) had frozen financing owed to
pipeline operator Transredes because of the change in
Transredes' ownership structure. In its May 1
nationalization decree, the GOB stated that YPFB would
acquire 50 percent plus one of Transredes' shares. To date,
YPFB has acquired 37 percent of the shares, which were
previously held by the Bolivian pension fund administrator.
On July 11, the two board members named by YPFB and Alvarado
participated in their first Transredes shareholder meeting,
where they were informed of the financing freeze.

3. (SBU) The IDB and CAF loans were earmarked for the
widening of the pipeline to the Altiplano (GAA) and the
construction of pipelines between Carrasco and Cochabamba in
central Bolivia and Villamontes and Tarija in southern
Bolivia. Transredes officials told us that they are using
their own resources to complete the GAA expansion due to
heavy GOB pressure and the urgency of avoiding electricity
shortages in La Paz and El Alto. However, the construction
of the other two pipelines will not be possible without
external financing, according to Transredes. Due to
increasing natural gas and electricity demand in the
Cochabamba region, the construction of the
Carrasco-Cochabamba pipeline is essential to avoid power
outages. Without it, operations of the U.S.-owned San
Cristobal mine, which are scheduled to begin by summer 2007,
could also be hindered. San Cristobal intends to use 8
percent of Bolivia's electricity and would be fueled by power
plants in Cochabamba.

Argentina Agreement Cuts Out Companies and Departments
--------------------------------------------- ---------
4. (SBU) The GOB's June 29 energy accord with Argentina
(reftel) stated that the additional amount that Argentina
agreed to pay for Bolivian gas (approximately USD 1.5 per
million BTU) beginning on July 15 will go to YPFB. This
means that the private companies that produce the gas,
particularly Repsol, will not benefit from the price
increase. It also means that the companies will not pay the
32 percent direct hydrocarbons tax (IDH) on this additional
income. Bolivian law establishes that the central government
must share hydrocarbons tax revenue with the departments.
Because the central government will not collect IDH on the
additional income, neither the national treasury nor the
departments will get "their shares."

Tarija Threatens to Strike
--------------------------
5. (SBU) The Civic Committee of Tarija, the south-eastern
department which contains 85 percent of Bolivia's natural
gas, threatened to hold a 24-hour strike on July 13 to
protest the GOB's plan to retain hydrocarbons revenues that
Tarija argues should be shared with the departments. (Note:
The strike was not held. End note.) Santa Cruz departmental

officials and the Santa Cruz Civic Committee came out in
support of the strike and demanded that the GOB share the
revenues. The GOB responded to the departments' complaints
by pointing out that the departments already have IDH
resources that they are not investing, implying that they do
not need this extra money which would be better spent by YPFB
on gas industrialization projects. This latest source of
friction has increased the already heightened tension between
the GOB and the East.

6. (SBU) Comment: Thus far, the GOB has confronted several
obstacles in the hasty implementation of its hydrocarbons
policy, including the difficulty of obtaining privately-owned
company shares and negotiating a gas sale price increase with
Brazil (which the GOB has now postponed until after Brazil's
presidential election). The most recent problems, including
the loss of financing for GOB-supported projects and
increasing tension with the East, will certainly not be the
last. End comment.
GREENLEE

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