US embassy cable - 05ASUNCION1342

UNCLAS SECTION 01 OF 04 ASUNCION 001342 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC 
ALSO FOR EB/IEC 
STATE PASS TO USTR FOR BETH LEIER 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OSIA MAUREEN WAFER 
TREASURY FOR OTA VJORSTAD 
COMMERCE ITA SARAH COOK 
NSC FOR MIKE DEMPSEY 
SOUTHCOM FOR POLAD 
US SOUTHERN COMMAND MIAMI, FLORIDA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, ECON, PA 
SUBJECT: PARAGUAY: CDS CLAIMS `SIGNIFICANT' QUANTITIES OF 
OIL AND GAS FOUND IN CHACO EXPLORATION 
 
REF: ASUNCION 1047 
 
1. (U) This cable is sensitive but unclassified.  Please 
protect accordingly. 
 
------- 
Summary 
------- 
 
2. (SBU) After a lull of nearly thirty years in hydrocarbon 
exploration, a Paraguayan company, CDS Energy, is 
undertaking an exploration and drilling project in the 
country's Chaco region.  In a September 23 meeting with DCM, 
company president James Wade said preliminary results show 
that significant deposits of oil and gas are present, and 
that their extraction and marketing will have a major impact 
on the Paraguayan economy.  Wade predicts that the 
extraction of hydrocarbons will radically change Paraguay's 
position from net importer to major regional supplier of oil 
and gas.  He is cautiously optimistic about the GOP's 
capacity to manage this find, and is openly seeking USG 
support in safeguarding his company's investment.  End 
Summary. 
 
---------------------- 
Why Paraguay, Why Now? 
---------------------- 
 
3. (U) James Wade, Chairman of CDS Energy, met with DCM on 
September 23 to discuss the results of his company's recent 
tests for oil and natural gas near Paraguay's border with 
Bolivia in the country's western Chaco region.  Accompanying 
Wade was Daniel Morrison, who serves as the company 
president.  Wade, a Canadian, is a 30-year veteran of oil 
and gas exploration, with previous projects in Russia, India 
and China.  CDS Energy, which is working in cooperation with 
local partners, holds exploration rights to just under three 
million contiguous hectares across the border from existing 
Bolivian and Argentine oil and gas fields. 
 
4. (U) Penzoil carried out the last significant oil and gas 
exploration in Paraguay in the early 1970s.  According to 
Wade, neither the technology nor the economics of the time 
were favorable.  With the price of oil currently hovering 
above USD $50 per barrel, and with advances in technology 
pioneered during Permian Basin exploration, Wade believes 
the time is ripe to explore in Paraguay.  Beginning in late 
July 2005, CDS drilled appraisal wells in areas to the east 
of proven reserves in Bolivia, retracing the steps of 
earlier exploration with new technology.  According to the 
company's prospectus, prepared by the London firm City 
Capital Corporation, Ltd., the majority of the wells 
previously drilled on concessions held by CDS showed 
deposits of oil and/or gas.  Wade attributed inappropriate 
drilling techniques used in prior exploration as "masking" 
the true content of the wells.  He also said that the data 
from prior exploration in the area was fragmented, and that 
it had only recently been put together to provide a more 
complete picture of potential reserves. 
 
5. (SBU) Regional developments also play into Wade's 
calculations.  Current Bolivian instability, coupled with 
huge potential markets in Brazil and Argentina, mean that a 
significant find in Paraguay could position the country to 
supplant Bolivia as a major regional supplier of natural 
gas.  As for the domestic market, Wade envisions a total 
revolution in the local energy sector.  Paraguay is 
presently a 100 percent importer of hydrocarbons.  According 
to CDS, these imports represent a USD $200 million negative 
in the country's balance of payments.  Wade speculated that 
the revenues from natural gas alone could exceed those 
generated by the Itaipu dam.  He is optimistic that better 
access to Paraguay's Chaco region will enable CDS to easily 
market any oil it produces in its test production phase, 
providing resources for further exploration. 
------------- 
Capital Ideas 
------------- 
 
6. (U) Wade told econoff that CDS is funded with mainly 
European capital.  Additional capital is being sought on the 
London Stock Exchange Alternative Investment Market (AIM), 
which listed the company on September 27.  CDS' April 2005 
prospectus listed the expected value of three of its oil 
wells at USD 37 million.  The prospectus assigned no value 
to the wells targeting gas.  Based on the results of his 
test wells, Wade told DCM that his concessions could hold as 
much as 175 million barrels of oil and 4.4 trillion cubic 
feet of natural gas.  These estimates of gas volumes would 
indicate a quantity well above that deemed necessary by the 
prospectus to support exports to neighboring markets in 
Brazil, Chile and Argentina. 
 
7.  (U) CDS' prospectus listed total assets at the end of 
April 2005 as approximately USD 3.2 million.  Based on its 
expected drilling program of five wells, the company plans 
to spend approximately USD 16.4 million by the end of 2006. 
Financing for this expenditure will come through its recent 
IPO in London.  The company has contracted Texas-based 
Nabors Drilling International to carry out its drilling 
campaign, and final costs for the program will depend on the 
performance of each of the five wells planned for this 
phase. 
 
--------------------------- 
Charting the Revenue Stream 
--------------------------- 
 
8. (U) Paraguay's Hydrocarbons Law, Number 779, contains the 
legal framework for prospecting, exploration and 
exploitation of petroleum and other hydrocarbons.  Title 
Eight of the law exempts concession holders from government 
and municipal taxes during exploration.  Once production 
begins, the royalties on the gross production of crude oil 
are ten percent for 100 to 5000 barrels per day, twelve 
percent from 5001 to 50,000 barrels per day and fourteen 
percent for 50,001 barrels and beyond.  The law defines a 
barrel as containing 42 US gallons.  Royalties for natural 
gas, defined as compressed and liquefied hydrocarbons, are 
twelve percent on total gross production and fifteen percent 
for any other solid and semisolid hydrocarbons in natural 
state.  Chapter 8, Article 44 of the law requires that 
royalties be paid in cash within ten days after the 
reception of the liquidation of the resources. The royalties 
would be general revenues; the law does not contemplate any 
type of special fund. 
 
9. (SBU) Comment: Should hydrocarbon finds begin to generate 
revenue for the Paraguayan treasury, Post will seek to help 
the GOP institute sufficient safeguards to assure 
transparent use of the funds.  Post's economic working group 
is already examining this.  Post would welcome Department's 
guidance on ways to encourage transparency and 
accountability of hydrocarbons revenues, including best 
practices from other countries, as the potential supply 
becomes more clear.  End Comment. 
 
------------------------- 
`A Heads-up To Uncle Sam' 
------------------------- 
 
10. (SBU) DCM asked Wade how much CDS has told the GOP 
regarding its find in the Chaco.  Wade replied that he had 
recently met with the Vice President, but that he had not 
yet revealed the extent of the reserves he says are present. 
Wade stated: "This meeting is me saying `Heads up' to Uncle 
Sam.  We want you to be telling the Paraguayans: `We know 
who they are. Treat them well.'"  Wade was cautiously 
optimistic when assessing the GOP's reaction to the find. 
Wade complained to DCM that Ministry of Public Works 
officials, including Vice Minister of Mines and Energy 
Hector Ruiz Diaz, have repeatedly given the press inaccurate 
information about resources in the Chaco.  Morrison noted 
that CDS has purposefully attempted to maintain a low 
profile during the project, quietly laying the groundwork 
for its exploration program and preferring actions to 
rhetoric. 
 
11. (SBU) During a June meeting with Econoff, VM Ruiz Diaz 
took a measured approach in discussing the country's 
hydrocarbon potential.  He emphasized the need for careful 
studies of the data uncovered during the exploration 
process.  Despite his cautious tone, however, he was keen to 
show to econoff a film produced in December 2004 that 
chronicles hydrocarbon exploration in Paraguay.  This film 
features footage of Independencia I, the natural gas well 
drilled by CDS Energy's partner company Primo Cano Martinez 
Energy.  A dramatic nighttime photo of Independencia I, its 
methane flare glowing brightly is prominently exhibited in 
his office. 
 
---------- 
Next Steps 
---------- 
 
12. (SBU) Wade predicted to DCM that after intensified 
exploration in coming weeks, CDS would "soon" begin pumping 
oil, and that under the terms of Paraguay's hydrocarbons 
law, the state-owned petroleum entity PETROPAR will buy the 
oil from the company for market price at the well head.  It 
would then be trucked from the Chaco to PETROPAR's refinery 
in Asuncion. If sufficient quantities of oil are discovered, 
Wade stated that he has access to financing sufficient to 
build a diesel refinery in the Chaco.  If the company's gas 
fields prove large enough to market commercially, Wade also 
discussed the possibility of bringing in foreign capital to 
construct a Gas-to-Liquid (GTL) plant closer to Asuncion. 
 
-------------------- 
Potential Challenges 
-------------------- 
 
13. (SBU) During an earlier meeting with Econoff, CDS 
President James Wade and his associate Daniel Morrison were 
frank about some of the potential challenges facing their 
project.  Wade lamented the lack of institutional capacity 
within the Paraguayan government, stating his doubts that 
the Ministry of Interior possessed the capacity to even 
interpret his drilling reports.  Morrison also told Econoff 
that some local environmental groups were reflexively 
opposed to any hydrocarbon exploration.  Defending the 
thoroughness of CDS' environmental impact assessments, 
Morrison told Econoff "We documented plants and animals that 
the environmental groups didn't even know about." 
 
14. (U) During his meeting with DCM, Wade noted that in 
addition to selling his project to prospective investors, he 
was tasked with "selling Paraguay."  Morrison noted that the 
recent expropriation of land around the community of Puerto 
Casado (reftel) sent a bad signal to business people 
interested in investing in the country, stating "It was the 
worst thing the GOP could have done." 
 
15. (SBU) CDS has retained both local legal counsel and a 
government relations specialist, whom Wade refers to as "my 
apostle", to help the company navigate the local 
bureaucracy.  In a meeting with Emboffs, Morrison stated 
that CDS had not been the target of extortionists, and that 
the company would not pay bribes.  In part, Wade believes 
that many Paraguayans, including officials, were dismissive 
of oil and gas potential because of past exploration 
failures and prevailing myths about the inaccessibility of 
the Chaco region.  For that reason, Wade believes the CDS 
project has received less than serious attention from some 
people.  Both men noted that other companies have acquired 
neighboring oil and gas concessions after CDS, in hopes of 
capitalizing on any discovery. 
 
Comment 
------- 
 
16. (SBU) The discovery of significant hydrocarbon reserves 
in Paraguay (if true) the investment that would follow, and 
the resulting increase in government revenues, would have 
profound economic and political implications.  While CDS's 
capital primarily comes form the U.K., they already employ a 
U.S. subcontractor and would likely rely heavily on U.S. 
suppliers for any significant production.  Post remains in 
close contact with CDS and will report on further 
developments as the company turns from exploration to 
production.  Wade is keen to keep the USG informed, and to 
show the GOP the Embassy's interest in his company.  End 
Comment. 
 
KEANE