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Theme: The nationalisation of hydrocarbons in Bolivia
marked the end of a long struggle involving protests and political slogans by
the ruling party in relation to the country’s natural resources. The signing of
the new Operating Contracts with oil companies has made evident the pragmatism
and flexibility with which it can negotiate nationalisation measures, as well
as the degree of influence of Hugo Chávez on
the Bolivian government.
Summary: The discovery of significant natural
gas reserves in the 1990s was a major factor in bringing about a change in Bolivia’s
political life, since it triggered a strong nationalist sentiment which
translated into a rejection of the economic model, political elites and oil
companies. The nationalist and statist revival heightened the country’s political
instability, triggered legislation changes in the sector and enabled the rise
to power of the Movimiento al Socialismo (MAS), the political party led
by President Morales. The MAS government, in compliance with its electoral programme,
nationalised hydrocarbons, granted the State company Yacimientos
Petrolíferos Fiscales de Bolivia (YPFB) management and control of all oil
operations and urged companies in the sector to negotiate contracts in line
with the new legislation.
Analysis
The Best Slogan to Gain Power
The nationalisation
of hydrocarbons, which was decreed via Supreme Decree 28701, dated 1 May 2006, is
part of the reactions against the neo-liberal privatisation model in place in
the 1990s (which sidelined the State from all involvement in oil operations and
dismantled public companies), and also against the corrupt political elites
which implemented it. Although this model represented a break with the existing
balance between State and private participation, the prospects of returning to a
highly ideological statist policy, such as that proposed in the aforementioned
Decree, could imply a further imbalance, concentrating economic activity in the
State, increasing insecurity for investments and hampering economic development.
The defence
of the country’s hydrocarbon resourcess, due to its sheer scope and versatility,
was an excellent platform from which to capitalise on discontent. The skilful
management of social disapproval in the first few years of the century concentrated
first on the obstruction and then on the outright rejection of the project to
export natural gas as liquefied natural gas (LNG). The plan had been devised by
Pacific LNG, a consortium comprising Repsol, BG and Pan American Energy to
operate the Margarita gas field and supply the North American markets. The historic
memory of Chile’s spoliation of Bolivia’s coastal territory stirred up the
masses, who in violent demonstrations prevented the signing of any agreement to
build the liquefaction plant and the gas pipeline through Chilean territory. After
the LNG project was thrown out and replaced by projects from other countries, the
hydrocarbons law was changed and hydrocarbons were eventually nationalised. Political
instability in the last four years triggered three changes of constitutional
government, the delay of all projects to monetise reserves and the destruction
of the fragile institutional nature of the technical companies in the sector. The
political platform to defend natural resources soon became more radical and
brought its leaders to power, with an absolute majority in the elections of
December 2005.
The nationalisation
of hydrocarbons, despite its spectacular stage management, is no more than a
repeat of the contents of Hydrocarbons Law 3.058, except for two new measures:
(1) The
creation of an additional stake for YPFB, during the transitory period of 180 days,
amounting to 32% of the value of production on fields which in 2005 produced
more than 100 million cubic feet of gas daily. Accordingly, the State taxed at
a rate of 82% the only two fields which met the stipulated requirement, San
Alberto and San Antonio, both operated by Petrobrás in partnership with Repsol
(50%), the owner of the capitalised company Andina, and with French player Total
(15%).
(2) The
nationalisation of 50% plus one of the shares of companies resulting from the
processes of capitalisation and privatisation. This measure was implemented
partially in the capitalised companies Andina and Chaco (subsidiaries of Repsol
and BP, respectively) and Transredes (a company belonging to Ashmore –the
successor of Enron– and Shell), transferring shares, managed in trusts by two
pension managers (Futuro de Bolivia, owned by Swiss capital, and Previsión BBVA,
owned by Spanish capital), to YPFB, via another Supreme Decree. Accordingly,
YPFB now owns 48% of the shares in Chaco and Andina and 37% of Transredes. The
government is currently negotiating the transfer of the fractions required to
attain an absolute majority. The greatest difficulties would be in Transredes, because
it needs more than 13% of the shares. Financing for Transredes’ projects has
been frozen due to the change in its ownership structure, triggering the collapse
of transport and subsequent rationing of gas to the cities of La Paz and Tarija,
the department with the country’s largest reserves. For this reason, President
Morales, in a visit to the Netherlands in the last week of November, directly asked
Shell’s CEO to transfer its shares in YPFB.
The
negotiations to obtain majority holdings in the companies resulting from the
privatisation (namely Petrobrás Bolivia de Refinación –PBR–, the current owner
of the refineries, and Compañía Logística de Hidrocarburos –CLHB, 40% Peruvian-owned
and 60% German-owned–, which owns the pipelines and storage plants) have yet to
yield specific results. Petrobrás has expressed an interest in remaining in the
refining business provided it can maintain technical and administrative control;
otherwise, it would prefer to sell 100% of its shares. If this proposal is
accepted, the amount and method of payment would need to be set. CLHB has
expressed a similar position to that of PBR.
The government
has been involved in tough talks with Petrobrás since before the nationalisation
to revise –outside the framework agreed in the 1996 Contract– the prices of gas
exported to Brazil. According to the government, the prices paid by Brazil fall
short of market value. The
tension in the relations sparked by the Bolivian request mounted when Petrobrás
was accused of hampering the development of Mutún (Bolivia’s largest iron and
steel project), of refusing to supply it with gas and of operating illegally in
Bolivia. The tension led to the decision by Petrobrás to suspend its investment
in Bolivia and, in the wake of the nationalisation, to freeze its volume of purchases
of Bolivian gas and seek alternative sources of supply.
The
nationalisation decree ratified the precepts of Law 3.058 which gave a period
of 180 days to companies (28/10/2006) to sign new upstream contracts and to
perform audits in all the areas to establish the amounts invested, their
profitability, production costs and amortisation until 1 May. The negotiations
with the oil companies concluded with the signing of the new operating contracts.
The
operating conditions of Petrobrás and Repsol are clearly different from those
applying to all the other oil companies in Bolivia. In the case of Petrobras,
this is because its presence is integral in both the upstream and downstream
markets and in the case of Repsol because it owns Andina, which is
capitalised with 50% of the fields previously operated by YPFB. Petrobrás and Repsol
are both partners in the largest gas fields.
Because of
these characteristics, Petrobrás and Repsol, with the backing of their
respective governments, were the first to negotiate their contracts. Repsol and
BBVA had the support of the Undersecretary of State for Foreign Affairs,
Bernardino León, designated by Spain as interlocutor before the Bolivian
government to participate in the talks. A high-level commission then arrived in
Bolivia and in August Vice-President Fernández de la Vega visited the country. The
Spanish government’s support for its companies was made evident at times of crisis,
such as the arrest of the Repsol executives or the police raids of their
central offices, where it was quick to protest and show its concern at the very
highest level. The Brazilian government, for its part, sent its Mining and
Energy Minister several times and President Lula expressed increasingly firm support
for the negotiators of Petrobrás as the elections approached. The Morales government
clearly differentiated between the talks with Brazil, which it sought to bring
to the political stage, claiming affinity with the Lula government. This
annoyed Petrobrás and placed Lula in a difficult position, since his voters
accused him of weakness in the face of Bolivia’s belligerence.
The New Course for Nationalisation
On 27 and 28
October, YPFB signed new exploration and development contracts with all the oil
companies operating in Bolivia. This was seen as a resounding success of the
nationalisation decree in the upstream
market, since it regains ownership of hydrocarbons at well mouth, increases the
State’s production holding to above 50% for most fields and introduces State
limits and controls on company expenditure and operations throughout their
execution phase. The outcome of the nationalisation was a unanimous decision by
the companies to remain in Bolivia under the new conditions.
The
government’s oil policy has taken a more flexible and less ideological course
since the second half of September, after the change in the sector authorities,
whose initial result was the signing of the contract to sell gas to Argentina, which
opened a new market of 27.7 million m3/day for 20 years. This
contract will be a catalyst for new investment, initially estimated at US$2
billion, for developing fields and US$1.2 billion for the construction of the new
gas pipeline. The contract encouraged companies to remain in Bolivia, especially
Repsol, which operates the Margarita field, which will supply the gas for
export. The second result was the signing of the 12 contracts mentioned above, which
have shifted the form and content of the nationalisation from a perspective of
expulsion and confiscation to one of migration or adaptation of contracts to
the new legal framework. These contracts would also ensure investment in
exploration amounting to US$3.5 billion in 2007-10. If the projections are met,
this would be a turning point for the country’s oil investments.
It should be
highlighted that both the political instability in recent years and the tough
nationalisation decree sparked a drastic slide in investments. According to the
Bolivian Chamber of Hydrocarbons (CBH), oil investments, to cite only last year’s,
fell from US$600 million in 2005 to just US$100 million in 2006. These two
results derive from a shift in the MAS’s political vision regarding the sector.
The MAS opposed the export of raw materials, prioritised the industrialisation
of gas, sought to dispense with the involvement of oil multinationals and did
not consider it important to offer investors legal security. Reality has shown
the government that the lack of investment in the upstream market was jeopardising compliance with the gas export
contracts and even the supply to the domestic market (less than 5 million m3/day).
It also realised that without plentiful fresh financial resources it was
risking the very execution of its programme of long-term structural change. Consequently,
nationalisation has ceased to be such in the strictest sense: it has been
reduced to producing a new form of contract and the majority acquisition of
shares from privately managed companies, although politically it fulfilled its
aims and at the same time ensured the government’s economic stability.
The signing of the 12 contracts,
including those of Repsol and Petrobrás, brought relief and satisfaction to the
parties involved, as made evident by the statements in the press. Brazil’s
Energy Minister said that ‘Staying in Bolivia is good business’ and the Spanish
Under-Secretary of State, Bernardino León, affirmed that: ‘We are going to
invest in the next few years a similar amount (US$1 billion) to ensure mainly
compliance (with the supply) to Argentina’. The Chairman of Repsol said that
the impact of the contracts ‘will be positive because it will allow investment
with the necessary legal security to unlock the value of the assets which we
now have’. Remarks along the same lines were made by Pedro Mejía, Under-Secretary
for Tourism and Trade in Spain.
President Morales said
that: ‘This is a way of putting natural resources to good use. I did the
figures and shared the calculations: in four year’s time, from hydrocarbons
alone Bolivia will be posting revenues of more than US$4 billion. This way we
will resolve the country’s economic and social problems’. In fact, this amount would correspond to
the activities of the sector as a whole, including the gas export contracts
with Brazil and Argentina, when the latter has reached the maximum volume
agreed. Furthermore, the President assured legal
security to the companies: ‘I say to all the companies that they should not
doubt the commitment to uphold these contracts. We will give them the legal
security they always asked for’. All of these statements show the satisfaction of
the parties involved and bode well for the development of the sector based on
the new mutually-accepted rules.
The following characteristics of the contracts should
be highlighted:
- The
contract periods are variable. For the larger fields, like San Alberto and San Antonio, operated by Petrobrás, they
have a duration of 30 years, whereas the contract for Margarita, operated
by Repsol, has a duration of 24 years. For smaller fields, like those
operated by Petrobrás Energía (Colpa and Caranda), the period is 22 years,
and for those operated by Vintage (Porvenir and Chaco), it is 10 years.
- The State will recognise the companies’ right
to a maximum percentage of the value of net production as recoverable
costs. This percentage is variable for each contract and is so flexible that
it even subsidises the operations of the smaller fields. The Annexes to
the contracts contain provisions defining the recoverable costs for each
of the activities to be performed.
- Calculation of the percentage of
distribution of net production between YPFB and the company, after
recoverable costs, is subject to a mathematical procedure, established in
another annex, dependent upon variables such as monitoring tax point production
volumes, investment levels and the depreciation of investments. The
Minister of Hydrocarbons affirmed that the average State holding will
amount to 70% of production value.
- Costs and remuneration will be paid
directly to oil companies by third-party companies with which the YPFB has
signed contracts to market the production.
- Investments executed and amortised by
companies up to 1 May 2006 shall be reconciled with the results of the audits
and set forth in the final annex of the contracts (Annex G).
The future
development of the energy sector, particularly that of hydrocarbons, will hinge
on the ability to minimise uncertainty and show signs of greater legal security
to investors. Neither YPFB nor the State electric utility ENDE have the
capacity to execute the major investments required to develop Bolivia’s energy
industry. Legal security will increase if the sector entities, and particularly
the regulator, are strengthened so as to be valid interlocutors with companies
and investors. If these conditions prevail, new projects to monetise reserves
would be launched, such as the projects to export gas to Chile, the installation
of electric power generation plants, industrialisation projects, including
fertilizers, the petrochemical hub on the border with Brazil, gas liquefaction,
the expansion of domestic transport infrastructure and Bolivia’s return to
international markets. Bolivia would also regain its role as a reliable gas
supplier to the Southern Cone.
PdVSA in the Southern Cone
Another
aspect related to the prospects for energy development in Bolivia is the
political affinity between the governments of Bolivia and Venezuela, which has resulted
in the signing of five agreements in the hydrocarbons sector. All five schedule the development of
activities between YPFB and PdVSA, including the organisation of mixed
companies between the two to operate service station chains, install plants for
natural gas liquefaction, implement industrialisation projects to produce
petrochemical products, the supply of 200,000 barrels of diesel per month in
preferential conditions to offset domestic market deficits, and joint
exploration and operating tasks. In mid-December, Presidents Morales and Chávez
are due to inaugurate the works on the first gas liquefaction/separation plant
in southern Bolivia.
PdVSA’s total investment in Bolivia is to total US$1.5
billion, most of which is to be executed within two-and-a-half years. President Chávez has shown his firm support for Bolivia’s oil
policy in all international forums, even expressing his decision to provide the
investments not made by private companies to develop Bolivian energy. Venezuela’s
support and experience were a key factor to the success in the talks between
the Bolivian government and oil companies to ensure sustainable resources to
finance the social and political change proposed in the government’s programme.
It is worth
considering that Venezuelan interests go beyond energy cooperation and integration
with Bolivia. President Chávez’s geopolitical ambitions aim at using
Venezuela’s oil potential to dispute the leadership of Latin America, gaining
the upper hand over Brazil in South America and over Mexico in Central America.
It is with this purpose that he has fomented the creation of Petroandina and Petrocaribe
respectively, is providing oil supplies in preferential conditions and has
devised the ambitious southern gas pipeline (Gasoducto del Sur) project,
which would alter the energy balance in the Southern Cone. Bolivia is a
linchpin of Venezuela’s long-term strategy.
Conclusions: The
discovery of major gas reserves showed up even further the deficiencies and
errors of the privatising economic model of the 1990s and unleashed a period of
acute social and political instability which has not yet been overcome. The
instability and insecurity made the sustainable operation of the reserves
impossible and culminated with the nationalisation of hydrocarbons.
The new operating
contracts for the upstream market
and for gas exports to Argentina should be considered a turning point in the
government’s statist oil policy, which is now less ideological and more
flexible. Signing these contracts should ensure the government investments and
liquidity to execute its plans to change Bolivia’s social and political
structure. This turnaround would have been highly unlikely without the
influence of the Venezuelan government.
Hugo del Granado
Consultant for HGC Consultores
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