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P 101523Z MAY 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 8881
INFO RUEHLP/AMEMBASSY LA PAZ 5340
RUEHBU/AMEMBASSY BUENOS AIRES 4760
RUEHCV/AMEMBASSY CARACAS 3683
RUEHQT/AMEMBASSY QUITO 2220
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RUEHMN/AMEMBASSY MONTEVIDEO 6869
RUEHAC/AMEMBASSY ASUNCION 6079
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RUEHBO/AMEMBASSY BOGOTA 4215
RUEHRI/AMCONSUL RIO DE JANEIRO 4336
RUEHRG/AMCONSUL RECIFE 6617
RUEHSO/AMCONSUL SAO PAULO 9817
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEHC/USDOC WASHDC
RHEBAAA/DOE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 000833 

SIPDIS 

SIPDIS 

DOE FOR GWARD/CGILLESPIE 
TREASURY FOR OASIA USDOC FOR 4322/ITA/MAC/WH/OLCA/JANDERSEN/ADRISCOLL/MWAR D USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 

E.O. 12958: DECL:05/08/2017 TAGS: ENRG EINV PGOV PREL BR

SUBJECT: BRAZIL: PETROBRAS AND GOB RESPOND TO BOLIVIAN OIL SECTOR DECREE 

REF: LA PAZ 1280 Classified by Deputy Economic Counselor J. Andrew Plowman, reasons 1.4 (b) and (d). 

¶1. (C) Summary: The Bolivian Government's decree prohibiting Brazil's Petrobras from exporting refined petroleum products (reftel) has drawn an incrementally more robust official response from the Brazilian Government than previous Bolivian actions prejudicial to Petrobras. Foreign Ministry (Itamaraty) Bolivia desk officer Lauro Beltrao told Emboff May 9 that their press statement of the previous day, which notes the "negative effects that this and other unilateral actions might have on cooperation between the two countries" was meant to be a clear signal to Bolivia that Brazil expects fair treatment of Petrobras. Meanwhile, Petrobras has asked for a response by May 10 to its proposal for the sale of its two refineries to Bolivian parastatal YPBF stating that it would ask for international arbitration if the Bolivian government fails to make a fair offer for the two refineries. While not tipping his hand as to what Petrobras will do in the next few days, CEO Gabrielli made clear to the Ambassador May 8 (septel) that there would not be any further investment in Bolivia and Brazil will be importing liquid natural gas beginning next year to reduce its dependence on Bolivian gas. Brazil's current dependence on Bolivian gas constrains its near term response to La Paz's decree. End Summary. 

¶2. (U) The Bolivian May 6 decree barring Petrobras from exporting refined petroleum products directly from its two refineries in Bolivia, and requiring their sale to a YPFB monopoly trading operation, has effectively "expropriated" the refineries' cash flow and made their operation "unviable," Gabrielli told the press May 7. Gabrielli announced that Petrobras was opting to sell the two refineries to YPFB. It had put a proposal on the table to YPFB, he said, and Petrobras expected an answer by the morning of May 10. If the Bolivian government did not offer fair compensation for the refineries, Gabrielli said, Petrobras would take all necessary legal steps at its disposal. Gabrielli did not specify what Petrobras would consider a fair offer, although the press quoted unnamed Petrobras sources stating the company is seeking USD 120 to USD 135 million. 

¶3. (SBU) Itamaraty Bolivia desk officer Beltrao confirmed to Emboff in a May 9 conversation the outline of Petrobras' response so far, including the May 10 deadline for a response to Petrobras' offer. Petrobras, he noted, made this investment through a Dutch subsidiary and therefore could use the option it has under the Bolivia-Netherlands bilateral investment treaty to compel binding international arbitration. Beltrao stated that despite Petrobras' May 10 deadline, Bolivian President Morales has said the negotiations would take ten days at least. 

¶4. (C) Beltrao denied press allegations that the GoB already has begun to take retaliatory actions, stating the incidents cited as evidence of retaliation (e.g. cancellation of a high-level meeting between Brazil's Ministry of Development Industry and Trade and its Bolivian counterpart) were taken out of context. The GoB also would continue its strategy of keeping negotiations, to the maximum extent possible, between Petrobras and YPFB, according to Beltrao. Nevertheless, he implied that the latest Bolivian action had forced the GoB to re-evaluate its approach, noting that the language of the GoB's press release was meant as a clear signal to Bolivia that there are limits. The press release (informal translation at paragraph 7) does note the "negative effects that this and other unilateral actions might have on cooperation between the two countries." 

¶5. (SBU) The subject of Bolivia came up in the Ambassador's May  7 meeting with Gabrielli (septel). While Gabrielli did not telegraph Petrobras' specific game plan for the next few days, he did make it clear that Petrobras would not be investing further in Bolivia. He also outlined Petrobras' plans for reducing Brazil's dependence on Bolivian gas by beginning to import liquefied natural gas, including from Nigeria and Qatar. According to Gabrielli, Petrobras will bring two floating re-gasification plants to Brazil in the next two years, the first arriving in May 2008 and the second in January 2009. These would have a capacity to import and re-gasify 20 million cubic meters of natural gas a day. One would be placed in Rio and the second in Recife. 

¶6. (C) Comment: Although it took over a year since the May 1, 2006 surprise nationalization decree for the Brazilian Government to begin to show signs of a stiffer spine, the latest attack on Petrobras appears finally to have elicited a firmer response. In dealing with Bolivia, however, the Lula Administration remains constrained by a multitude of other considerations, including the repercussions for its near-term gas supplies and for the thousands of Brazilian farmers and settlers in Bolivia. There remains little desire here for confrontation with Bolivia. End Comment. 

¶7. (U) Text of Brazilian press release: Note number 211, May 7, 2007. Decision of Bolivia Regarding the Monopoly over Export of Petroleum and Gasoline The Government of Brazil expresses its disappointment with the Supreme Decree 29122, which gives YPFB a monopoly over the export of crude petroleum and white gasoline [distillates], which has a direct effect over the economic viability of the Gualberto Villaroel and Guillermo Elder Bell refineries, both properties of Petrobras. The measure harms, and might make unviable, the negotiation process for normalization of the situation of the two refineries within the legal and institutional framework created by the Supreme Decree 28701, a process in which Petrobras was engaging in good faith. Independently of whatever legal actions Petrobras may take in defense of its legitimate interests, the Brazilian government cannot fail to note the negative effects that this or any other unilateral action might have on cooperation between the two countries. End text of release. 

SOBEL