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Cablegate: Hydrocarbons Regulations Needed to Stimulate

VZCZCXYZ0001
PP RUEHWEB

DE RUEHLP #3361/01 3471247
ZNR UUUUU ZZH
P 131247Z DEC 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 1640
INFO RUEHAC/AMEMBASSY ASUNCION 6387
RUEHBO/AMEMBASSY BOGOTA 3711
RUEHBR/AMEMBASSY BRASILIA 7581
RUEHBU/AMEMBASSY BUENOS AIRES 4831
RUEHCV/AMEMBASSY CARACAS 2083
RUEHPE/AMEMBASSY LIMA 2156
RUEHLO/AMEMBASSY LONDON 0099
RUEHMD/AMEMBASSY MADRID 3224
RUEHME/AMEMBASSY MEXICO 1975
RUEHMN/AMEMBASSY MONTEVIDEO 4279
RUEHFR/AMEMBASSY PARIS 0104
RUEHQT/AMEMBASSY QUITO 4720
RUEHSG/AMEMBASSY SANTIAGO 9305
RUEHSO/AMCONSUL SAO PAULO 2099
RUEHBS/USEU BRUSSELS
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 003361

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 REGULATIONS NEEDED TO STIMULATE
INVESTMENT

REF: A. LA PAZ 2943

B. LA PAZ 1157
C. LA PAZ 2880

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

1. (SBU) British Gas (BG) Bolivia President Jose Magela told
Emboffs on December 11 that he thinks the operating contract
BG signed with Bolivia's state oil company YPFB at the end of
October is reasonable. He argued that the contracts provide
necessary, but not sufficient, conditions for investment. He
explained that regulations implementing the 2005 law, which
the GOB has yet to issue, and the development of YPFB's
operating capacity are essential for future investment.
However, he was optimistic that the production companies
would go forward with significant investments beginning in
mid-2008 to supply the Argentine market. End summary.

--------------------------------
Operating Contract is Reasonable
--------------------------------

2. (SBU) British Gas (BG) Bolivia President Jose Magela told
Emboffs on December 11 that he thinks the operating contract
BG signed with Bolivia's state oil company, YPFB, at the end
of October is reasonable (ref A). He said that the majority
of the contracts are reasonable and "win-win," although they
contain significant differences in the percentages of the
profits going to YPFB for its operations. Magela argued that
the companies that were the most proactive in negotiations
with the government received better contract terms, meaning
essentially a higher take for those companies/lower take for
YPFB. He acknowledged that negotiations are still ongoing
between YPFB and the five companies destined by decree for
government take-over (ref B). He predicted that the
government would purchase the shares needed to have majority
ownership of those five companies and would sign
administration contracts with the companies, leaving them
with operating control.

----------------------------------------
Regulations Needed to Promote Investment
----------------------------------------

3. (SBU) Magela argued that the contracts provide necessary,
but not sufficient, conditions for investment. He explained
that the government still needs to issue important
regulations to implement the 2005 law, including on
transportation and on incentives for producers with marginal
fields. These regulations, along with the development of
YPFB's capacity, are essential for future investment, Magela
said. Under the new contracts, YPFB took over transportation
and commercialization responsibilities that formerly fell on
the companies, who are now only responsible for production.
YPFB's capacity to handle these new obligations will
influence the success of the sector. Magela said that
investors have lost confidence in Bolivia, and that the
regulations must not impose additional fiscal obligations on
the companies if investment is to flourish.

------------------------------------------
Argentine Carrot Makes Investment Probable
------------------------------------------

4. (SBU) Magela explained that the natural gas supply

agreement signed by Bolivia and Argentina in October (ref C),
which is similar to the agreement between Bolivia and Brazil,
provided the companies an incentive to sign new contracts.
He was optimistic that the Argentine government would finance
the construction of the pipeline necessary to transport the
Bolivian gas exports, because Argentina needs the gas.
Despite the loss of investor confidence, Magela was
optimistic that Bolivia could meet its supply obligations to
Argentina through increased investment in the sector if the
government created the right conditions. He explained that
the companies, in agreement with their operating contracts,
would only commit to investing and producing additional gas
if the Argentine pipeline was built, the companies determined
that their investments would be profitable, and YPFB approved
the companies' development plans. He predicted that
significant increases in investments would not occur before
mid-2008 due to technical and procedural requirements.


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

5. (SBU) The manner in which the contracts were negotiated --
under threat of expulsion if agreements were not reached --
and the two-year period of uncertainty leading up to the
signing of new contracts caused investors to lose confidence
in Bolivia. However, if technocrats like YPFB President Juan
Carlos Ortiz are able to prevail on regulatory matters, and
if YPFB receives the political backing necessary to become an
effective organization, the Bolivian hydrocarbons sector
could see a revival in the coming years. End comment.
GOLDBERG

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