Thursday, September 14, 2006

Petrobras Arbitration III (Petrobras v. Bolivia)

On September 12, 2006, Bolivia’s Ministry of Hydrocarbons issued the Resolución Ministerial No. 207/2006 (“Resolution”), which set new rules for foreign ownership of production and sale of oil and liquefied petroleum gas in Bolivia (in fact, Bolivia is expropriating and taking full control over the entire chain of production, without paying for it). The Resolution is an extension of Bolivia’s nationalization Decree of oil and gas, dated May 1, 2006.

The new conditions set forth by the Resolution have a directly effect on Petrobras, Brazil's state-controlled oil company. Petrobras, which has two refineries in Bolivia, processes about 90 percent of the Bolivia's natural gas.

No one should expect that the Brazilian Government defends Petrobras. Last May 2006, Brazilian President Luiz Inácio Lula da Silva said that he recognized Bolivia's "sovereign rights" over its own natural resources. But Petrobras is a publicly-traded company, and --as Bolivia does not intend to pay anything to Petrobras-- it should go after its compensatory rights.

Chances are, therefore, that Petrobras will be very soon initiating arbitration proceedings against Bolivia.

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