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Paraguay warns energy companies to follow rules

* Govt. in row with two firms over exploration licenses

* Foreign investment seen key to developing energy sector

* Paraguay relies on imports for fuel needs

ASUNCION, July 29 (Reuters) - Paraguay’s leftist government has warned companies looking for natural gas that they could lose their exploration licenses if they fail to make promised investments and comply with disclosure rules.

Two subsidiaries of Dynamic Production, a private oil and gas company based in Texas, have filed legal complaints against the government in a licensing dispute. They accuse officials of unfairly seeking to revoke their exploration rights.

Mercedes Canese, vice minister for mining and energy, said the firms searching for natural gas in the inhospitable Chaco region bordering gas-rich Bolivia must properly document their investments and operating plans.

“Those who do not fulfill their obligations need to leave,” Canese told Reuters in a recent interview.

Landlocked Paraguay has sought to strengthen its regulatory system to attract more investors, particularly in the pursuit of natural gas, but the energy companies say the row risks deterring exploration.

Theodore Stimson, legal representative for the firms, said the dispute had already halted some $50 million of investment in the impoverished country, which relies on imports of fuels and suffers regular power shortages.

Earlier this year, President Fernando Lugo ordered the lights to be switched off at the presidential palace to save power. [ID:nN10242891]

Emilio Boungermini, a director at the Vice Ministry of Mining and Energy, told Reuters investors were increasingly keen to look for natural gas in Paraguay.

“Energy companies are turning their attention to the country’s potential. We’re constantly receiving visitors from energy companies,” he said.

The government hopes economic stability and growth expectations, along with steps to fight corruption, will help draw in new capital and boost its energy sector even with the tighter regulatory regime.

Gustavo Volpe, head of the Paraguayan Industrial Union, said such efforts were fundamental to attracting new investment to the country and ensuring sustained growth. “We need foreign companies to invest in the country and confidence in the legal system is a determining factor,” he said.

Paraguay’s government forecasts 6 percent economic growth in 2010 and the International Monetary Fund expects a 5.3 percent increase. (Writing by Laura MacInnis; Editing by Helen Popper and Marguerita Choy)