Petrobras’s position in Bolivia after nationalization

Mar 06, 2008 01:00 AM

On May 3, 2006 Petroleo Brasileiro (Petrobras) announced that, as a consequence of the Bolivian Republic’s Nationalization Decree 28701, it will act to:
-- Protect Petrobras’s interests through negotiations with the Bolivian authorities, and by all legal means possible and at all levels of the Bolivian judicial system as well as through avenues of international jurisdiction;
-- Suspend all new investments in Bolivia as well as those related to the Bolivia-Brazil Gas Pipeline (Gasbol), including the current public tender bid for the pipeline’s expansion;
-- Immediately initiate studies aiming at the diversification of supply sources including the possibility of an LNG regasification project(s).

Petrobras also wishes to make public that the net book value of its Bolivian assets is $ 365 mm, controlled through its Dutch subsidiary, PIB. Petrobras’s proven oil and natural gas reserves, and its production in Bolivia represent only 3.7 % and 2.4 %, respectively of the company’s totals.
The company’s President, José Sergio Gabrielli de Azevedo, together with Directors Almir Guilherme Barbassa (Finance and Investor Relations), Ildo Sauer (Gas and Energy), Nestor Cunat Cervero (International) and Paulo Roberto Costa (Downstream), announced that the Gas Supply Agreement (GSA), a contract which governs the sale of natural gas by YPFB (the Bolivian state oil company) to Petrobras in Brazil is unaffected by the Nationalization Decree and continues in full force and effect. This contract is governed by international law with the forum for settling eventual disputes being the courts of New York.

The GSA provides for periodic meetings of the parties to the contract with the purpose of re-discussing the pricing of up to 30 mm cmpd of gas traded between the two countries. At this time, Petrobras has not received any request from YPFB for price readjustments. Petrobras wishes to place on record that it will not accept any price readjustments outside the parameters established in the relevant clauses to the GSA.
The delivery of gas under the GSA has never been threatened and at no time has Petrobras received any indication that such deliveries might be suspended. Among others, for technical reasons no disruption to gas supplies is contemplated, as the production of condensates, for processing in local refineries and subsequent supply to the Bolivian market, requires the off-take of the natural gas produced simultaneously.

The Nationalization Decree only affects Petrobras’ activities inside Bolivia itself and provides for a transitional 180-day period during which time:
-- The Ministry of Hydrocarbons shall determine through an audit, the investments, costs and returns realized to date in the case of each nationalized oil and/or natural gas field;
-- The audit’s results shall form the basis on which YPFB shall determine the final compensation to be paid for each producing field.

Several legal features of the Decree remain unclear. For example, how Petrobras is to be compensated for the nationalization of the majority of the shares in its existing refineries, as prescribed under the Bolivian constitution, has yet to be determined. During the transitional period, Petrobras intends to explore all legal means at its disposal to protect its interests.
On the international front, Petrobras is to examine the application of the Bolivia -- the Netherlands bilateral treaty signed within the framework of the International Centre for the Settlement of Investment Disputes, part of the World Bank Group, as Petrobras controls its assets in Bolivia through its PIB subsidiary with registered offices in the Netherlands.

Petrobras participation in the possible expansion of Gasbol’s transport capacity, for which TBG had already requested public tender bids, is abandoned. Consequently, natural gas volumes to be acquired by Petrobras from YPFB are to remain at 30 mm cm until the termination of the GSA in 2019.
To counterbalance the loss of this additional natural gas volume, Petrobras is to begin studies immediately to examine the feasibility of building regasification unit(s) for processing imported LNG from the international marketplace.

Petrobras has been operating in Bolivia since October 1996 with the beginning of exploration activities in the San Alberto field and the start of construction work on Gasbol. Petrobras’s total investments in Bolivia in nominal terms amount to $ 989 mm, peaking in 2002 at an annual amount of $ 218 mm. Since then, investments declined to $ 50 mm and $ 19 mm in 2003 and 2004 respectively, stabilizing at this level in 2005.
In August 2005, Petrobras’s activities in Bolivia accounted for 40 % of the national production of oil and condensates and 57 % of the country’s natural gas production. In 2005, Petrobras’s tax payments in Bolivia -- $ 536 mm -- represented 24 % of the total taxes raised by the Bolivian government.

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