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Cablegate: Response to Lac Biofuels Initiative

VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #2730/01 2842027
ZNR UUUUU ZZH
P 112027Z OCT 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0832
INFO RUEHAC/AMEMBASSY ASUNCION 6172
RUEHBO/AMEMBASSY BOGOTA 3486
RUEHBR/AMEMBASSY BRASILIA 7347
RUEHBU/AMEMBASSY BUENOS AIRES 4609
RUEHCV/AMEMBASSY CARACAS 1863
RUEHPE/AMEMBASSY LIMA 1904
RUEHME/AMEMBASSY MEXICO 1812
RUEHMN/AMEMBASSY MONTEVIDEO 4073
RUEHQT/AMEMBASSY QUITO 4499
RUEHSG/AMEMBASSY SANTIAGO 9074
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 002730

SIPDIS

SIPDIS

STATE FOR WHA/AND, WHA/EPSC/CORNEILLE, EB/ESC/IEC/IZZO,
S/P/MANUEL, OES/STC/BATES
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: ECON EINV ENRG PREL PGOV BL
SUBJECT: RESPONSE TO LAC BIOFUELS INITIATIVE

REF: SECSTATE 164558

1. (U) Summary: This cable responds to the questions posed
in reftel on the investment climate, the energy sector and
the sugar industry in Bolivia. The investment climate,
particularly in natural resource industries, is poor due to
legal uncertainty and increasing governmental interference.
Bolivia's biodiesel and ethanol production is minimal, but a
few investors are looking to expand production in Santa Cruz.
Bolivia has a framework biofuels law, but has not issued
implementing regulations. The law aims to have the
automobile fleet operating on a 20 percent ethanol blend
within ten years, but does not mandate such use. Land reform
proposed by the GOB is a barrier to increased investment in
sugar production. End summary.

General Overview
----------------
2. (U) Bolivia holds South America's second largest natural
gas reserves. Bolivia produces enough natural gas,
petroleum, gasoline and liquid petroleum gas to supply its
domestic market and exports approximately 30 million cubic
meters of natural gas per day to Brazil and Argentina.
Bolivia imports diesel. The government spends around USD 100
million per year on diesel subsidies to maintain a low
domestic price. Electricity generators use natural gas and
hydro-power. Automobiles run on gasoline, natural gas, and
liquid petroleum gas. The general investment climate is
poor, particularly in the hydrocarbons sector, due to legal
uncertainty and increasing governmental interference in key
sectors. Land reform proposed by the GOB has created
uncertainty for large farms, and increased the difficulty
farmers face in obtaining credit to finance investments.


Investment Climate
------------------
3. (U) The general investment climate in Bolivia is poor due
to legal uncertainty, GOB attempts to nationalize natural
resource industries, and government efforts to exert stronger
state control over key sectors. Bolivia has a general
environmental protection law, but no specific regulations for
bio-refineries. The Oil Seed Producers Association (ANAPO)
in Santa Cruz is running a pilot bio-diesel project using
soy. Ethanol production is currently minimal, but a Santa
Cruz business, Bethanol LLC, is seeking investment for three
ethanol plants it hopes to build in the next four years to
produce a total of 160 million gallons of ethanol per year.
For more information on the projects, see www.bethanol.net.
Although the manager of Bethanol told us that he does not
know of other ethanol initiatives, according to a report by
the Worldwatch Institute, 15 sugar cane distilleries are
being constructed in Bolivia. Exports of biodiesel and
ethanol are minimal.

4. (U) Automobiles generally run on gasoline, diesel, or
liquid petroleum gas (LPG). Many vehicles have been
illegally converted to run on LPG, because the government
maintains an artificially low LPG price. Newer vehicles
could use a 10 percent ethanol/90 percent gasoline blend, but
many of the vehicles on the road in Bolivia would not be able
to use an ethanol blend due to age. Few flex fuel cars are
contained in the fleet. Bolivia lacks adequate distribution
infrastructure for transporting and blending ethanol.
Private operators distributed gasoline, diesel, and LPG from
Bolivian refineries to gas stations until July 1, when the
state-owned oil company YPFB assumed control of distribution.

5. (U) Foreigners currently have the right to own land in
Bolivia; however, Bolivia is in the process of rewriting its
constitution, and land reform is a main issue. Approximately
60 percent of Bolivia's soy is produced by Brazilian-owned
farms. Owners of industrialized farms are concerned that the
GOB will take their land to distribute to landless peasants
or grant community property titles to indigenous groups. The
government has stated, in accordance with the current law,
that land which is not deemed to be fulfilling an economic
and social function will be taken by the state and
redistributed. Although the current law allows for this,
redistribution has not occurred in the past. The land
titling process can take several years to complete, but the
government plans to streamline this process. Legal
uncertainty has hindered farmers' ability to obtain credit.

6. (U) Bolivia is landlocked, but does have access to port
facilities in Arica, Chile and on the Paraguay River leading
into Brazil. Bolivia has road access to Chile, Argentina,
and Brazil. Bolivia's transportation infrastructure in
general is poor, and transportation costs add significantly
to its export costs. Bolivia lacks support services for
industrial infrastructure, as it lacks industry. Skilled
workers are migrating in large numbers to other countries due
to the lack of opportunities in Bolivia. The government does
not offer concessional financing or tax breaks for energy
investments. In fact, the GOB tax scheme for hydrocarbons
producers is a disincentive for investment. Royalties are
currently 18 percent, taxes 32 percent, with an additional 32
percent temporary tax on the largest producers. Potential
investors in biodiesel and ethanol are currently seeking to
clarify if the GOB would consider such fuels to be
hydrocarbons. They argue that they should be considered fuel
additives, and thus the hydrocarbons law (and tax regime)
should not apply. This debate is critical for the future of
the industry, as the industry is not likely to flourish if it
is forced to pay the same taxes as gas producers. According
to ANAPO, producers of biodiesel for export would be exempt
from import duties on machinery inputs for five years under
import tariff regulations. Producers in general, not for
export, would pay a 5 percent tariff on all capital goods
imported.

Energy Sector
-------------
7. (U) During the late 1990s, the GOB partially privatized
state-owned industries in the electricity and hydrocarbons
sectors. At that time, the government also passed
investor-friendly legislation, promoting significant private
investment in both sectors. However, a backlash between 1999
and 2003 caused by an economic downturn and continued high
poverty rates has resulted in a push to nationalize these
sectors and revitalize the diminished state industries. In
May 2005, the GOB passed a new hydrocarbons law which
increased taxes and took commercialization control away from
private investors. In May 2006, the government issued a
supreme decree which partially nationalized hydrocarbons in
line with the 2005 law and required hydrocarbons producers to
sign new contracts by October 31, 2006. The decree mandated
the restructuring of the state-owned hydrocarbons firm YPFB,
but to date YPFB remains largely a shell which lacks human
and financial resources. According to the law, the domestic
price of natural gas can be no more than 50 percent of the
export price. Domestic LPG prices are capped by the
government, with producers effectively subsidizing consumers.
The government imports diesel and spends approximately USD
100 million per year on subsidies, which benefit soy
producers in Santa Cruz who are the main users.

8. (U) The government plans to revitalize the state-owned
electricity company, ENDE, but the sector is currently
dominated by private generators. Electricity is generated
using hydro-power and natural gas. The GOB established an
electricity "dignity tariff" on March 21, introducing a 25
percent reduction in rates for consumers who use fewer than
70 kilowatt hours of electricity per month. The 16 companies
comprising Bolivia's national electricity network agreed to
accept the rates and to bear an estimated $4.5 million in
annual costs, but only under heavy government pressure. The
companies are essentially subsidizing consumers. Electricity
demand is predicted to grow significantly in the next decade,
but investment prospects in the sector have been dampened by
the uncertain legal environment and the GOB's actions which
have diminished company profits. The private electricity
producers supply electricity to the national electricity grid
and to isolated rural systems. According to ANAPO contacts,
there is a framework biofuels law in place, but no
implementing regulations have been issued. The biofuels law
aims to have the automobile fleet using a 20 percent ethanol
blend within ten years, but does not mandate such use.

Sugar Industry
--------------
9. (U) Bolivia has been self-sufficient in sugar since 1963.
The sugar industry is concentrated in Santa Cruz department
and is not highly mechanized. Bolivia has been criticized by
human rights organizations for employing child labor in sugar
cane cultivation. Harvesting methods do include burning in
the field. This practice is forbidden by Bolivia's
environmental law, but restrictions are not enforced. The
total area cultivated for sugar cane is 107,000 hectares,
producing 5 million metric tons of sugar cane and 420,000
metric tons of sugar in the last year. Each hectare yields
around 47,000 kilograms of sugar cane. GOB statistics
indicate that Bolivia exported 83,911 metric tons of sugar in
2003, while USDA estimates that Bolivia will export 175,000
metric tons of raw cane sugar in 2006. During fiscal year
2006, Bolivia utilized all of its granted tariff rate quota
to export 14,375 metric tons of raw cane sugar to the U.S.
The bagasse is not used for electrical power generation. The
industry is privately-owned.
GOLDBERG

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