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Cablegate: Hydrocarbons Nationalization Faces Obstacles

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PP RUEHWEB

DE RUEHLP #2196/01 2262112
ZNR UUUUU ZZH
P 142112Z AUG 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0239
INFO RUEHAC/AMEMBASSY ASUNCION 6047
RUEHBO/AMEMBASSY BOGOTA 3364
RUEHBR/AMEMBASSY BRASILIA 7214
RUEHBU/AMEMBASSY BUENOS AIRES 4479
RUEHCV/AMEMBASSY CARACAS 1752
RUEHPE/AMEMBASSY LIMA 1772
RUEHMN/AMEMBASSY MONTEVIDEO 3964
RUEHQT/AMEMBASSY QUITO 4383
RUEHSG/AMEMBASSY SANTIAGO 8950
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 002196

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: HYDROCARBONS NATIONALIZATION FACES OBSTACLES

REF: A. LA PAZ 1157

B. LA PAZ 1248

1. (SBU) Summary: Bolivia's hydrocarbons nationalization
plan is facing legal and financial obstacles that have
delayed its implementation. The state oil company, YPFB,
lacks the necessary resources to take on its new mandated
role as controller of the entire hydrocarbons production
chain. The GOB is considering revising the Central Bank law
to enable the bank to lend to YPFB. YPFB's lack of capacity
and complicated negotiations with gas companies and buyers
mean that the GOB will have to revise the nationalization
timetable that it set for itself in the May 1 decree (ref A).
The danger now is that the GOB, in its quest for expediency,
will undermine existing governmental institutions and
safeguards. End summary.

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Nationalization Delayed
-----------------------
2. (U) Bolivia's hydrocarbons nationalization plan is facing
legal and financial obstacles that have delayed its
implementation. The May 1 nationalization decree gave the
government 60 days to restructure state oil company YPFB and
180 days to sign new contracts with private oil firms, and
called for the state to immediately gain control of the
"entire hydrocarbons production chain" through majority
ownership of five key companies. YPFB also had an August 12
deadline for reaching an increased natural gas price
agreement with Brazil. The GOB has realized that these
timetables are not possible to maintain and publicly reported
that the implementation of nationalization will be delayed.

YPFB Lacks Resources
--------------------
3. (SBU) The revamping of YPFB to enable it to take control
of hydrocarbons exploration, exploitation, refining, storage,
distribution, sales, and industrialization requires financial
and human resources that the GOB lacks. The government
reportedly is considering revising the Central Bank law to
enable the Bank to loan money to state entities, in line with
the Venezuelan model. The GOB has its sights set on the
record high levels of international reserves held by the Bank
and plans to seek a loan from the Bank to YPFB, contingent on
the legal revision. The loan could be as large as USD 180
million, although other reports put the figure at USD 45
million. National Treasury contacts told Econoff on August
11 that YPFB had requested money from the Treasury, but the
Treasury had refused so YPFB went to the Central Bank.

Other Snags in the Plan
-----------------------
4. (SBU) The GOB has also realized that 180 days are
insufficient to sign new contracts with the private firms.
Government audits of the firms were only begun two weeks ago
and will likely not be completed prior to the 180 day
deadline on November 1. The GOB has also failed to gain
majority ownership of the five production, transportation,
refining, and storage companies as mandated by the May 1
decree. Although it has taken over the shares formerly held
by the Bolivian Pension Funds and has named directors to the
boards of these companies (ref B), it has discovered that
obtaining private company shares is a complex endeavor that
involves several laws, regulations, and financing.

Gas Price Negotiations with Brazil Postponed
-------------------------------------------
5. (SBU) Separately, the GOB has been unable to reach
agreement with Petrobras on increasing the price of Bolivian
natural gas exports to Brazil. YPFB and Petrobras decided to
resume negotiations following Brazil's presidential election
in October. Meanwhile, Brazil has declared that it will only
import the amount of gas from Bolivia that it is bound to
import by contract, and Petrobras has frozen all investments
except those necessary to meet its contractual obligations.
Petrobras signed large investment deals with Peru and

Venezuela in the past month and is developing Brazil's own
resources to meet the nation's growing energy demands.
(Comment: Venezuela claims solidarity with Bolivia, but
appears to be taking its natural gas market. End comment.)

6. (SBU) Comment: Although the government has not changed
its overall hydrocarbons strategy, evidence is accumulating
that it needs more time to accomplish its goals. A
significant concern now is that the GOB will attack
institutional safeguards currently in place in its quest for
expediency. Changing the Central Bank law to enable the Bank
to lend to state-owned companies would permit the Bank to
once again support inefficient state companies and would
compromise lending transparency and Bank autonomy. In the
past, this type of lending has contributed to serious
inflation and macroeconomic instability. End comment.
GREENLEE

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