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Oil Report

Brazil to deal with Paraguay on power price demand

RIO DE JANEIRO, April 22 (Reuters) - With the victory of former Catholic bishop Fernando Lugo in Paraguay’s presidential election, Brazil is facing another leftist neighbor whose demands for higher prices for energy could sour relations.

But analysts said Lugo’s demands for a “fair” deal over the countries’ shared Itaipu power plant would be easier for Brazil to fend off than when Bolivia nationalized its gas fields in 2006, partly because Paraguay has far less leverage.

Brazil’s President Luiz Inacio Lula da Silva has publicly rejected the idea of changing the contract, but his foreign minister, Celso Amorim, appeared to leave room for negotiations over the price Brazil pays for the power.

“Let’s discuss with Paraguay about how to achieve an adequate price for their energy. That is fair,” Amorim told the government news agency.

Lugo, whose victory in Sunday’s election broke 61 years of one-party rule in Paraguay, made renegotiating the Itaipu contract a central plank of his poverty-alleviation, anti-corruption campaign.

The pledge tapped into a popular anger over the 50-year contract, whose terms are now widely seen as unfair to Paraguay. The deal was signed in secret in 1973 by the then military governments of the two countries. The plant now supplies about 20 percent of Brazil’s energy needs.

Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, said Brazil would likely adopt the same conciliatory approach as it had with Bolivia after initial tensions caused by President Evo Morales’ 2006 nationalization of the energy sector.

Brazil, which is heavily dependent on Bolivian natural gas, has offered to invest $1.5 billion in new gas projects, roads and farm assistance in the land-locked Andean country.

“I think it’s likely they’ll come to some agreement. The prices were set a long time ago and they are nowhere near market prices today,” Weisbrot said.

“Lula has been very supportive of the whole project of South American integration. He’s been a team player, though he hasn’t always had the support of everyone in his government on these issues.”

LITTLE LEVERAGE

Brazil’s Valor newspaper quoted an unnamed foreign ministry source on Tuesday as saying that the government may renegotiate the contract with Paraguay if it agrees to sell Brazil excess power beyond 2023, rather than to energy-hungry Argentina.

Whereas Bolivia’s gas fields are far from Brazil’s border and governed by contracts between private companies and Bolivia, Itaipu sits on Brazil’s border and is subject to an agreement between two nations. That gives Lugo far less leverage than Morales had, said Erasto Almeida, an analyst at Eurasia Group.

“The Lula administration has placed a very high premium on low (electricity) tariffs for consumers, and I don’t think the government would accept anything that had a significant impact on prices,” he said.

“That doesn’t mean that Brazil couldn’t negotiate some additional compensation to Paraguay, new investments, economic assistance, this kind of thing.”

Paraguay, one of the poorest, most corrupt Latin American countries, teamed up with Brazil to build the Itaipu dam across the Parana river. Paraguay, which consumes 7 percent of the total output, must sell its excess amount to Brazil at cost price, giving Brazil an essential source of cheap power at a time when world oil prices are at record highs.

Lugo, who spoke on the campaign trail of Brazilian “colonialism” and threatened to take the case to the International Court of Justice, repeated on Tuesday his call for power deal renegotiations with Brazil and Argentina.

“We think there must be a fair price set for the energy that Paraguay gives Argentina and Brazil ... and for us that is the market price,” he told a news conference in Asuncion.

Paraguay gets about $400 million a year from its sales to Brazil, but Lugo has said the market price is about $1.8 billion. (Additional reporting by Mariel Cristaldo in Asuncion; Editing by Eric Walsh)

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