US embassy cable - 04LAPAZ2814

C O N F I D E N T I A L SECTION 01 OF 04 LA PAZ 002814 
 
SIPDIS 
 
STATE FOR WHA/AND (DBOYLE), WHA/EPSC, AND EB/ESC/IEC/EPC 
STATE ALSO FOR EB/IFD/OMA (KMOSS) 
STATE PASS AID (LAC/SA) 
STATE PASS USTR (BHARMAN) 
STATE PASS TDA (AANGULO) 
SANTIAGO FOR FCS (RDELAMBERT) 
BUENOS AIRES FOR TREASURY (MHAARSAGER) 
COMMERCE FOR JANGLIN 
ENERGY FOR GWARD 
TREASURY FOR RTOLOUI AND DDOUGLASS 
NSC FOR CBARTON 
USCINCSO FOR POLAD 
 
E.O. 12958: DECL: 09/02/2014 
TAGS: EPET, ECON, SOCI, EFIN, EINV, ENRG, PGOV, PREL, BL 
SUBJECT: PRESIDENT MESA AND CONGRESS TO WORK TOGETHER ON 
NEW HYDROCARBONS LAW 
 
REF: A. LA PAZ 2694 
 
     B. LA PAZ 2692 
 
Classified By: ECONOFF AMANDA CRONKHITE FOR REASONS 1.4(B) AND (D). 
 
1.  (C)  Summary: The Chamber of Deputies' Economic 
Development Committee has proposed nullifying all of the 
contracts signed under the current (soon-to-be-invalid) 
hydrocarbons law.  This follows three days of intense 
meetings in the MAS/NFR-led committee.  Minister of Economic 
Development and head of the economic cabinet Horst Grebe told 
the Ambassador that passing a new law fast was key to 
ensuring Bolivia's access to potential export markets, while 
private sector analysts worried that exporting through Peru 
(as the Government wants to do) was impossible. 
Subsequently, after weeks of insisting that Congress pass and 
the private sector support its draft "short" law, the 
Executive and Congress agreed to work together on one longer 
law.  Some industry representatives acknowledge that they 
could probably operate profitably with the new taxation rates 
proposed by the GOB, but that further investment in the 
sector would be unlikely.  Finally, the private sector 
remains relatively isolated, talking sporadically with the 
GOB (with another videoconference scheduled for September 3), 
but still not fully trusting its Government interlocutors. 
End Summary. 
 
A RADICAL PROPOSAL 
------------------ 
 
2.  (SBU) The MAS/NFR-led Economic Development Committee in 
the Chamber of Deputies held weekend meetings to determine a 
course of action with respect to President Carlos Mesa's 
proposed referendum (hydrocarbons) law.  On August 31, 
calling natural gas a national strategic resource, the 
Committee made a recommendation that the current hydrocarbons 
law be repealed.  Despite arguments to the contrary from the 
counsel for Bolivia's state-owned hydrocarbons company, 
Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the 
committee interprets this to mean the nullification of 
contracts signed under the previous law, as the legal 
framework providing for the contracts will be gone. 
(Comment:  This is a committee action that has yet to be 
debated by the full Chamber of Deputies.  Even were the more 
radical lower House to pass this recommendation, we would be 
surprised to see the idea get past the more conservative 
Senate.  End Comment.)  The Committee also recommended that 
the GOB retake ownership of hydrocarbons at the wellhead 
(vice underground) and force companies to migrate to 
Production Sharing Contracts (PSCs).  Private sector sources 
have told us that they could be open to PSCs.  Migrating, 
however, would be difficult as the GOB and each company would 
have to come to an agreement about how much investment the 
companies had undertaken.  Hydrocarbons executives expect 
that the YPFB would be unwilling to consider unsuccessful 
investment -- i.e., dry wells -- when considering how much to 
chip in, thereby leaving the companies holding the bag for 
all of the risks they have already incurred, without feeling 
the full benefits of their investments. 
 
3.  (C) Minister of Economic Development and head of the 
economic cabinet Horst Grebe commented to the Ambassador on 
August 31 that the situation with Congress and the 
hydrocarbons law remained "complicated."  He noted that 
Bolivia had to triple its gas exports to pull itself out of 
poverty and that only private investment would make that 
possible.  He said that the Executive is looking to increase 
revenues in the short-term without killing mid- and long-term 
investment.  "We lost the market in California, and we run 
the risk of losing the market in Mexico," Grebe commented, 
skeptical about the likelihood of any law being passed in 
September and worried that one might not be passed before the 
Mexican call for bids for a liquefied natural gas (LNG) 
project in November.  That said, Grebe was hopeful that 
relations with Congress would improve in the following few 
days, making Congress more open to the GOB's plan to first 
submit a short referendum law before fleshing out a full 
hydrocarbons law with the assistance of World Bank-funded tax 
experts.  (Comment:  The World Bank Resident Representative 
(ResRep) in Bolivia told us that the GOB has selected three 
names from the World Bank's short list.  It is now the GOB's 
responsibility to contact those people, convince them to 
agree to the project and figure out when they will come to 
Bolivia.  End Comment.) 
 
CONSULTING WITH THE PRIVATE SECTOR 
---------------------------------- 
 
4.  (C) On August 30, Minister of the Presidency Jose 
Galindo, Petroleum Minister Torres and Grebe participated in 
a videoconference with private sector representatives. 
Galindo reportedly did most of the talking, lobbying the 
private sector to jump on the short law bandwagon and noting 
that it would be "naive" to expect Congress to be more 
pro-business than the administration.  The private sector 
then argued that the a short law would create a legal vacuum 
and that the proposed Complementary Tax on Hydrocarbons (ICH) 
would discourage investment.  In response to the GOB's plea 
that the private sector stop talking about any Chilean export 
route, as only a Peruvian export route is politically 
feasible, one executive commented that no company will put 
money into any Pacific export route for at least four to six 
years because "with all this mess, no buyer will ever believe 
that there is stability in Bolivia."  To the private sector's 
surprise, the Ministers reportedly did not even flinch. 
Another executive commented to the Ambassador that, even in 
the context of an acceptable law, no investment will come to 
Bolivia until the Constituent Assembly process finishes, 
which take two years. 
 
 
5.  (C) Grebe also met privately on August 27 for nearly two 
hours with the head of the Hydrocarbons Chamber who told us 
that Grebe "almost died of anger" when he heard that Torres 
has been working on his own draft law.  Torres did little 
talking during the August 30 videoconference, and Torres' 
technical staff spent August 31 working with the private 
sector to better understand each other's projections.  The 
head of one company thought that the Minister's consultants 
were being swayed by reason, but cautioned that it would be 
necessary to wait and see what political decision was taken, 
as technical facts can often be ignored.  On August 31, a 
senior YPFB executive was fired for writing what was supposed 
to be a private memo about the inviability of a Peruvian 
export route.  The Ministers have requested updated figures 
before the next GOB-private sector videoconference, scheduled 
for September 3. 
 
CONGRESS AND PRESIDENT AGREE TO WORK ON ONE LAW 
--------------------------------------------- --- 
6.  (C) After weeks of wrangling, Congress and the Executive 
agreed September 2 to work together on a single comprehensive 
law.  With that, the GOB formally abandoned its petition that 
Congress pass the Executive-drafted "short" (Fulfilling the 
Referendum) bill, but insisted that the language of that bill 
be incorporated wholesale into the single longer law. 
Congressional leaders have agreed in principle to this 
condition.  In addition, both sides agreed that Congress, led 
by a mixed Senate-Chamber of Deputies economic development 
commission, will assume primary responsibility for 
elaborating the full bill. 
 
7.  (C)  Minister of the Presidency Galindo told the 
Ambassador on September 2 that, because details of the longer 
law still need to be worked out, it was not likely to be 
passed until sometime in October (vice late September.) 
Galindo explained that the agreement with Congress is that 
taxation rates contained in the Executive's draft law would 
remain unchanged.   More troubling, however, is Galindo's 
view that across the political spectrum there is widespread 
support for scrapping existing petroleum contracts and 
forcing  companies to renegotiate with the GOB.   Galindo 
remains hopeful, but not optimistic, that the GOB can 
convince companies to voluntarily migrate from existing 
contracts to new contracts which would be in compliance with 
the new law.  In earlier discussions with us, the Presidents 
of the lower and upper houses, Mario Cossio and Hormando Vaca 
Diaz, insisted that Congress needed to shape a a sound law 
without the counterproductive pressure of artificial 
deadlines.  As Cossio said: "We need for this law to remain 
in place for a long time, and not be revisited and revised 
every two years.  For this reason, we need to take the time 
to get it right."  He speculated that doing this in less than 
one month was unrealistic. 
 
COMMENT 
------- 
 
8.  (C) While the agreement between Mesa and the Congress to 
elaborate a single law is an encouraging development, the 
private sector and the GOB continue to be on different pages. 
While Mesa was riding a popular wave of support following the 
Referendum, Congress seems to have captured some of this 
popular support as the Congress, and not Mesa, appears to be 
defending the long-term interests of the people. 
Increasingly, Mesa is viewed as defending the petroleum 
companies, which is not a popular place.   While some private 
sector representatives lament that production sharing 
contracts are not feasible, Presidential Delegate for 
Capitalization Franscesco Zaratti has convinced Grebe that 
companies will migrate to new contracts.  Some industry 
representatives acknowledge that they could probably operate 
profitably with the new taxation rates proposed by the GOB, 
but that further investment in the sector would be unlikely. 
The private sector is talking to representatives of the MNR 
and MIR parties, but neither has power with the people nor 
Mesa's ear.  The Embassy will continue to emphasize the 
sanctity of contracts and the importance of a 
business-friendly (or at least business-acceptable) law for 
Bolivia's economic future.   End Comment. 
GREENLEE