Theme: The ‘nationalisation’ agreement with the petroleum companies operating in Bolivia provides a badly needed political victory for President Evo Morales, whose government has been weakened by local and ideological disputes that have tested its credibility. Now the focus will be on the future investments needed to reverse expected production declines and meet expanding domestic and export demand.
Summary: Bolivia was already in a process of transition when President Evo Morales shocked the country’s main economic partners on 1 May 2006 by decreeing the nationalisation of the installations of foreign companies producing and exporting gas to Brazil and Argentina, the main sources of foreign currency for this poor, landlocked republic. Taking office in January 2006 after an overwhelming first-ballot election victory that also gave control of Congress to his Movimiento al Socialismo (MAS), Morales announced that he was seeking to ‘refound the republic’, calling elections for a constituent assembly to draft anew constitution. Morales quickly fired the army’s top generals, installed a new Central Bank President and forced the resignation of four judges of the Supreme Court and half of the members of the Constitutional Tribunal. On 29 April, Morales joined Venezuelan President Chávez and Fidel Castro in Havana to receive promises of massive financial, technical and material support from Venezuela as he signed a new ‘Commercial Treaty of the Peoples’. Two days later he decreed nationalisation at the new San Alberto gas field in the southern department of Tarija and sent troops to seize the installations of Petrobrás, Repsol and Total, the main foreign investors in Bolivia’s petroleum industry. Asset managers, subsidiaries of Spanish and Swiss banks administering Bolivian pension funds, were forced to transfer, without compensation, their holdings of private oil company stocks to YPFB, the Bolivian state petroleum company, which will now pay old-age pensions.
Analysis: The ‘nationalisation’ agreement with the petroleum companies operating in Bolivia provides a badly needed political victory for President Evo Morales, whose government has been weakened by local and ideological disputes that have tested its credibility. Now the focus will be on the future investments needed to reverse expected production declines and meet expanding domestic and export demand.
The midnight gas deal, signed under pressure by 10 foreign companies to meet a 28 October deadline imposed by the Bolivians, provides short-term benefits that failed to end posturing by both sides. Both the Bolivian government and the companies, especially Petrobrás, badly need continuity of operations. Bolivia needs the money from gas exports to fund its government while Petrobrás needs Bolivian gas, for now, to fuel Brazil’s industries. With a minor role in Bolivian gas production, British Gas (BG) is a major actor in São Paulo’s economy through its COMGAS subsidiary, which depends on imports of Bolivian gas.
Referring to the new contracts, Ambassador Rubens Ricupero, former head of UNCTAD (United Nations Conference on Trade and Development), warned that ‘agreements signed under pressure always contain the seeds of future conflict’. Different versions quickly emerged over what was agreed on two key issues: future investments by the companies and whether companies retain the right, as provided by previous contracts, to appeal to international arbitration in any dispute with the government or its state oil company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB).
The principal foreign companies involved in Bolivia are:
(1) Petrobrás, Brazil’s state oil company, which controls 20% of Bolivia’s gas production and has a 15% share in the export pipeline to Brazil. Petrobras operates the largest gas fields, San Antonio and Sábalo, as well as two refineries. Its network of service stations is being taken over by YPFB as part of the new state distribution monopoly.
(2) Repsol YPF, which is the second-largest corporate producer in Bolivia after Petrobrás, operating the large Margarita field and several smaller reservoirs.
(3) Total of France, which operates the Itaú field, adjacent to San Alberto, in which it is a partner under Petrobrás’s management. Total has charged that Petrobrás has been extracting gas from the Itaú reservoir, adjacent to San Antonio. YPFB officials have spoken of unifying the two fields, which constitute a single reservoir.
(4) British Gas (BG), which operates the La Vertiente, Escondido and Los Suris fields and is a partner in Margarita and Itaú. BG’s Palo Marcado and Ibibobo fields are under retention for lack of sufficient market.
The position of Petrobrás was undermined at first by President Lula, whose statements of sympathy and tolerance for Morales’ nationalisation provoked protests by leading Brazilians. The president of Petrobrás, José Sérgio Gabrielli, said the new contracts were ‘production sharing agreements’, not service contracts, a role that the company insisted that it would never accept.
Repsol YPF has been trying to safeguard the roughly US$1 billionit invested in Bolivia since 1997 in seven reservoirs where it has been exploring and another 25 reservoirs from which it has been producing oil and gas, either as an operator or as a stakeholder in joint ventures that generate only 1.5% of its world-wide profits. The new agreement, Repsol YPF said in a statement, is in line with a public commitment made by Morales ‘to guarantee a framework of legal security for its investments, a principle that Repsol YPF considers indispensable for development of its activity in the country’, adding that ‘Repsol YPF believes that the new contracts guarantee the profitability of the investments made until now in Bolivia as well as those to be developed in the future’.
YPFB officials freely admit that Bolivia lacks the technical manpower and financial capacity to develop and operate its own industry. After previous attempts at nationalisation in 1937 and 1969, followed by accusations of overstaffing and corruption at YPFB, the shrunken state company’s role in recent years has been limited to supervising the activities of foreign operators. The new gas contracts are subject to approval by Bolivia’s Congress and to decisions of a new Constituent Assembly, convoked under a referendum organised by Morales to ‘refound’ the republic. Plans for the companies’ new investments must first be approved by YPFB.
The churning of Bolivian politics produced six presidents since 2001. Bolivia has suffered almost continuous agitation ever since street violence forced the resignation of President Gonzalo Sánchez de Lozada in October 2003, amid furious nationalist protest against plans to export gas via the port of Arica in Chile, a hated neighbour ever since Bolivia lost all its coastal lands to Chile in the War of the Pacific (1879-84). The Bolivian supplies were to have been transformed at Arica into liquid natural gas (LNG) and embarked on special ships for delivery at ports in Mexico and California. These markets are now to be supplied with Indonesian LNG. The ouster of Sánchez de Lozada ended two decades of stability for Bolivia. Between 1978 and 1982 seven presidents ruled the country. However, along with the rest of Latin America, in the 1980s Bolivia achieved government by consent of the governed, a precious heritage of western civilisation, in contrast to the military rule that prevailed in most of the region in the 1960s and 1970s. Bolivia enjoyed two decades of constitutional democracy since 1982, embracing six orderly successions by freely-elected Presidents. It overcame hyperinflation to gain stability of its currency and prices. Over the past two decades, infant mortality was halved, school enrolments grew fast and transport, communications, electricity and basic sanitation networks expanded dramatically to raise living standards in a very poor country.
Despite the political turmoil and changes of government, Bolivia’s macroeconomic performance improved, influenced greatly by the seven-fold growth of gas export volumes since 2000. Inflation is low (4%), despite disruptions caused by frequent road blockades and conflicts. The currency is stable. Without oil and gas taxes and royalties, the public sector deficit would be around 10% of GDP during these years instead of 3.5% in 2005. World Bank economists predict a government surplus of 6% for 2006.
Resources and Access
Early in the 20th Century, the crescent of sedimentary basins running east of the Andes, from the llanos of Venezuela and Colombia to the desert valleys of north-western Argentina, was seen by some geologists and oil industry executives as a possible source of petroleum potentially as important as the Middle East. While the big discoveries of Occidental and Shell in eastern Colombia and the Peruvian jungle in the late 1980s can be seen as long-delayed support for earlier optimism, hopes of finding giant or super-giant fields in the lowlands of Bolivia and Paraguay and in Argentina’s sub-Andean valleys have receded. However, while previous discoveries were marginal in size and marketability, improvements in technology and infrastructure now give Bolivia’s gas reserves strategic importance for São Paulo and other Brazilian cities and for Bolivia’s own economic viability. Bolivia was the scene of one of the first commercial oil discoveries in Latin America, in Santa Cruz in 1875, but development was delayed until Standard Oil bought two concessions from American speculators in 1921, around the same time foreign companies began exploring the more abundant and accessible reservoirs in Venezuela. At that time the struggle for access to the resources of the South American heartland was plagued by a lack of modern infrastructure. In 1918, Standard Oil engineers reckoned that the only way to market oil from Santa Cruz would be a pipeline to the Paraguay River, 500 miles away, and from there to carry it by barge 700 miles downstream to Buenos Aires, at a capital cost of US$12 million (roughly US$150 million in 2006 money). By 1927, Standard’s total Bolivian production averaged only 71 barrels a day, but the company kept trying to overcome the problem of access, only to be entangled in a web of nationalisms and geopolitical rivalries that led Argentina to veto the export of Bolivian oil through its river ports. The same entanglements led to the nationalisation of Standard’s Bolivian operations after the Chaco War with Paraguay (1932-35) in which Bolivia lost a large swath of its territory.
The first breakthrough in Bolivia’s search for export markets for its petroleum came in the rails-for-oil deals signed with Argentina and Brazil. The first agreement was signed with Argentina in 1922 and was gradually expanded in the 1930s and 1940s. Bolivia repaid Argentina’s railway loans with oil, with movement in both directions on a modest scale. Small quantities of Bolivian oil were sent through Argentina’s Campo Durán pipeline to a refinery on the Paraná River. Bolivian Gulf was nationalised in 1969 while a pipeline to Argentina was under construction and was replaced by YABOG, a subsidiary of YPFB, which delivered an average of 188 million cubic feet daily for the life of the contract (1972-91). Gas sold by foreign companies working exploration blocks by 1991 became a majority of exports, flowing continuously despite hyperinflation and political convulsions in both countries and despite large Argentine payment arrears. These arrears were finally settled in a Clean Slate (Borrón y Cuenta Nueva) agreement in 1989 by which Argentina’s US$310 million gas debt to Bolivia was swapped for US$800 million in Bolivia’s long-term debt to Argentina, with 18% of future payments going into a common public works fund. Argentina no longer needed Bolivian gas and its arrears resumed shortly thereafter.
The importance of these previous export deals lies less in the scale of financial and gas flows than in the infrastructure and institutional practice developed, helping to prepare Bolivia for the much larger project of a gas pipeline to Brazil. Earlier rails-for-oil deals between Brazil and Bolivia, beginning with the 1938 Roboré accord, were much more ambitious in scope but were frustrated by the meagre resources that both parties could mobilise. The Roboré accord, signed a year after the Standard Oil nationalisation, reserved large areas of the Bolivian Oriente for exploration by Brazil-Bolivian joint ventures that never went into action. The initial capital for exploration was Standard Oil’s geological studies, provided by Bolivia, and a US$750,000 loan from Brazil, to be repaid in oil. Brazil was then struggling to explore, integrate and develop its own continental territory with meagre financial and technological resources.
In the 1950s as in the 1980s, YPFB was a major propagator of public deficits and inflation, trading in its foreign accounts at the artificially low official exchange rate, instead of the more realistic parallel rate, some 20 to 50 times higher. According to Professor George Jackson Eder, the US economic stabilisation adviser to the Bolivian government in the 1950s: ‘Pipelines were purchased from Brazil at prices higher than they could be bought elsewhere, the cost being disguised by the exchange rate and by arrangements for the purchase of Bolivian oil in “treaty dollars” that could only be exchanged for Brazilian goods at exorbitant prices. As an example of unrealistic accounting, in 1955 YPFB bought 20 tank cars, worth over $15,000 each, and paid for them through the Central Bank at the boliviano equivalent of $675 each.’ As for the rails-oil deal with Argentina, Bolivian exports were ‘payable in treaty dollars so that this trade must be looked upon a subtraction from the nation’s wealth rather than as a source of income’. These previous experiences led the present Bolivian government to press for and win provisions for payment in convertible dollars in the gas pipeline agreement signed by Presidents Itamar Franco of Brazil and Paz Zamora of Bolivia on 17 February 1993, which was strenuously opposed by the Petrobrás bureaucracy.
There have now have been three nationalisations of the petroleum industry in Bolivia, with a cyclical history: Standard Oil in 1937, Gulf in 1969 and Petrobrás, Repsol, British Gas, Total and other foreign operators in 2006. The two previous nationalisations were followed by another wave of foreign investment two decades later. The seizures of the Standard and Gulf installations, for which compensation was paid years later, were decreed as nationalist gestures by two military dictators, David Toro (1936-37) and Alfredo Ovando (1968-70), in futile efforts to secure their hold on power. Plans to lay an export pipeline to the Chilean port of Mejillones, which provoked furious nationalist demonstrations that led to the resignation of Sánchez de Lozada in 2003, were first broached in 1932 by Bolivia to the Chilean government. Gulf finally built a pipeline in the 1950s, but Bolivia lacked enough oil reserves to fill it.
Politics
In the five months since decreeing nationalisation on 1 May, President Morales’ approval ratings fell from 81% to 50% in five major cities, according to Mori, an international polling firm, with expectations of further falls in coming months. Meanwhile, those thinking that Bolivia is headed in the wrong direction increased from 19% to 59%. The gas deal with 10 foreign companies helped to reverse these trends. A new Mori poll taken four days after signing the 44 contracts showed a 13% rise in Morales’ popular support to 63%. Morales is engaged in conflict on several fronts. He told the French newspaper Le Monde that ‘20 specialists, military veterans’, had come from Santa Cruz to kill him at a political rally. A few days earlier, amid rumoors of a coup d’etat, President Chávez of Venezuela warned that ‘Venezuela will not remain idle (brazos cruzados) if the government of Bolivia and the people of Bolivia are attacked from outside or inside’.
Nevertheless, Morales’ government has been accused by supporters and opponents alike of using inflammatory rhetoric while seeming incapable of effective action. The MAS is less a structured party than a coalition of the interest groups that are already clamouring for political benefits:
(1) The coca-growers (cocaleros) of the semi-tropical Chapare region, who have formed Morales’ primary political base since the early 1990s.
(2) The Federación de Juntas Vecinales (FEJUVE) of El Alto, the giant Aymara suburb of La Paz, whose population grew from 11,000 in 1950 to roughly 800,000 today, developing a political machine mainly of poor people, whose strikes, marches and road blockades played a key role in forcing the resignations of Presidents Sánchez de Lozada in 2003 and Carlos Mesa in 2005.
(3) The miners’ cooperatives, who provided shock troops in recent political uprisings and last month provoked clashes with the salaried employees of COIMIBOL, the state mining company, over access to rich tin lodes at the Huanuni mine, resulting in the death of 16 workers. In response, Morales announced that he would renationalise the whole mining industry, a measure he later postponed until next year.
(4) Various peasants’ and teachers’ unions.
The main theatre of conflict today is the Constituent Assembly, created under a statute requiring two-thirds majorities to enact constitutional provisions. The MAS won a simple majority in the Assembly but lacks the two-thirds needed to impose its will, paralysing proceedings over the past three months. MAS insists that a simple majority is sufficient to approve individual provisions and claims that the Assembly enjoys transcendent powers over all other governmental institutions. These claims are resisted by four lowland departments –Santa Cruz, Tarija, Beni and Pando–, where most of Bolivia’s natural resources, including oil and gas, are concentrated and which seek regional ‘autonomy’ to reduce the powers of the central government. This week the government announced that it would propose to the Assembly a reorganisation of Bolivia’s territory into 42 ‘regions’ in a way that would reduce the powers of the existing departmental administrations.
Confrontation or Cooperation?
Morales’ aggressive tactics against Brazil, despite President Lula’s conciliatory response, shows the MAS coalition’s vocation for attack rather than for building stable relationships and institutions. Before Lula and Petrobrás started receiving rough treatment by the Bolivians after nationalisation was decreed on 1 May, Marco Aurelio García, Lula’s key adviser on Latin American policy, was telling visitors that Morales and the MAS were the great hope for stability in Bolivia. The threats continued about the forcible seizure of the refineries bought by Petrobrás in 2000. ‘If I was Brazil, I would give the two refineries as a present [to Bolivia] if we are thinking in helping us reduce social inequalities’, Morales said at a press conference two days after the settlement was announced. ‘If some company did not sign the contract, the armed forces were totally prepared to exercise [our] property rights’. A few days before the 28 October agreement was reached, Vice-President García Linera sent an envoy to Brasília with an ultimatum stating that the Bolivian army was ready to take over Petrobrás’s installations again unless the contracts were signed.
In this uncertain climate, the new gas deal provides a short-term increase in revenues for the MAS government but leaves unanswered important questions to be settled in order to assure supplies for Bolivia and its neighbours beyond the next five years. Industry sources insist that the new contracts do not commit the companies to future investments, concentrating instead on increasing fiscal income for Bolivia based on volumes of oil and gas produced, recovery rates from different fields and compensation to the companies for current costs and previous investments. All proceeds of gas sales are deposited in an escrow account managed by YPFB, which signs the cheques for payouts to the companies. YPFB would pay the companies quarterly in proportion to their investments.
The 44 ‘operation contracts’ that were submitted to Congress for approval before they can go into effect are complex documents with variations negotiated with each company. A model contract published by YPFB contains 33 clauses in 44 pages, plus seven appendices in another 40 pages. Carlos Miranda, a former Petroleum Minister, observed that YPFB will need ‘a regiment of young auditors, accountants, lawyers, etc’ to supervise the contracts. He explained: ‘Present and future production will be delivered to YPFB in the contract area. YPFB will pay for transport and compression of gas until delivery to the foreign or domestic buyer. These buyers will be chosen by YPFB. From this income YPFB first will pay departmental royalties and taxes, reaching 50% of income. From the other 50%, YPFB will recognize the contractor’s so-called Recoverable Costs up to an established maximum of income received. These costs will be defined in detail and will be subject to auditing and approval by YPFB. Once the Recoverable Costs are subtracted from the balance, a percentage of total income will be paid in dollars to the contractor. This percentage is fixed by a factor that takes into account investments, prices and production volumes, with the contractor’s share falling as the income stream increases. The remainder accrues to YPFB to cover its own costs. The Energy Minister correctly estimates that, as a general average, the State will receive 60% of the income… The phrasing leaves no doubt that the oil companies provide services agreed with YPFB. Work programs and budgets should be subject to consultation and approval by YPFB in minute detail.’
Hydrocarbons Minister Carlos Villegas said that companies would invest US$3.5 billion over the next three years to increase output. He anticipated investments of US$900 million by Repsol, BG and Pan American Energy in the Margarita field and another US$586 million by Total, Exxon-Mobil and BG in the nearby Itaú field, both in the southern department of Tarija. The Bolivian government’s increasing share of the cash flow from petroleum production and exports follows a familiar pattern in the industry, intensifying during world-wide surges in fuel prices. Host governments offer generous terms to induce companies to explore their territories and then raise taxes and royalties after discoveries are made, production and exports grow and the industry matures. The host countries recently increased their share in different ways: more state participation and higher export duties in Russia and Argentina, higher royalties in Kazakhstan, heavier taxation in Britain and Denmark and lower ceilings for cost recovery in Nigeria and Angola.
Investments in exploration and production in Bolivia have fallen drastically in recent years, from nearly US$600 million annually in 1998-99 to US$200 million in 2005. Before signing the new contracts, Petrobrás reduced its planned investments in Bolivia for 2006-10 from US$2 billion to only US$90 million. Of 38 drilling rigs operating in 2004, only three remain today. Companies are investing only enough to maintain current production and meet contractual obligations. Following a downward revision in reserves, Bolivia soon may not be producing enough gas to meet both domestic demand and export commitments. Any increase in Bolivia’s production and export capacity will demand major infrastructure investments, especially in wells and pipelines, involving long lead times for planning and construction before entering into operation. ‘There is little or no public awareness in Bolivia about the pending natural gas deliverability challenge’, said Carlos Alberto López, a veteran consultant. ‘The government has continued to feed public expectations of increasing gas production, announcing almost weekly new industrialization initiatives, new export projects and signing letters of intent with new investors and buyers. All these pronouncements revolve around the general illusion that the country possesses almost limitless natural gas reserves.’
Bolivia’s commitments expanded rapidly with a contract signed recently by Presidents Morales and Néstor Kirchner of Argentina that would raise Bolivia’s gas exports to Argentina, which desperately needs more gas supplies, from 4.5 million cubic metres (MM³) daily today to 27.7 MM³ by 2010 at a price of US$5 per million British thermal units (BTUs), about 20% more than Brazil is currently paying. Daily demand for Bolivian gas is currently about 1.5 MM³ greater than its 37.5 MM³ capacity to produce and deliver, a deficit that independent experts expect to grow to 8.2 MM³ by 2010, even without the new demand added by the recent deal with Argentina. The companies have strong financial incentives to increase exports to Argentina, since their 30% share of the new wellhead price of US$4.75 would be nearly double what they received in 2002 from 68% of the US$1.17 wellhead price for exports to Brazil. At that time the Bolivia-Brazil pipeline was operating at one-third of capacity under ‘take or pay’ contracts by which Petrobrás accumulated a US$400 million debt still outstanding to other suppliers for gas not taken. In 2003 Lula’s new government adopted a policy of stimulating the use of natural gas, which rose in its share of Brazil’s energy matrix from 3.3% in 1995 to 5.4% in 2000 to 9.4% in 2005. The pipeline then ran at full capacity, which Petrobrás planned to double before nationalisation caused the company to suspend all investments in Bolivia. Meanwhile, in the wake of Argentina’s bond default and economic depression that began in 2001, successive governments froze energy prices. The price freeze stimulated consumption amid resurgent economic growth and discouraged exploration for new gas reserves, increasing Argentina’s need for imports from Bolivia to meet booming demand. Now the pipeline is running at full capacity, which Petrobrás had planned to double before nationalisation caused the company to suspend all investments in Bolivia.
Conclusion: Under the new contracts and legislation, YPFB will control marketing of all Bolivian gas, enabling it to play off Brazil and Argentina against each other. The 27.7 MM³ daily promised to Argentina by 2010 is roughly the same as what Brazil imports today from Bolivia. ‘Competition between Argentina and Brazil for scarce Bolivian resources in the short to medium term could put Bolivia in a stronger position to demand further price adjustments, as it will be unable to comply with the full volume provisions of either export contract at least until 2010’, according to a new report from Cambridge Energy Research Associates (CERA). ‘This period unfortunately coincides with a time of tight power market conditions in Chile, Brazil and Argentina that are already compelling these governments to turn to more expensive fuels, LNG imports and demand-management measures’. Responding to these uncertainties, Brazil is planning two LNG terminals to import 20 MM³ daily by 2008-09 and is accelerating development of the large oil and gas discoveries in the Santos basin. Argentina imported Bolivian gas and then re-exported much of it to Chile until Argentina’s supply problems, worsened by artificially low domestic prices and rapidly expanding demand, forced a cut-off of exports to Chile. Chile now is building a US$400 million regasification plant for importing LNG and has expressed interest in buying Bolivian gas. However, Bolivian Foreign Minister David Choquehuanca said that ‘first we must solve the maritime problem’. Recently there have been quiet discussions between Bolivian and Chilean leaders about Chile ceding a sliver of its seacoast along its border with Peru to satisfy Bolivia’s long-standing claim for a sovereign outlet to the Pacific. Morales and the MAS stand at the crossroads between confrontation and cooperation. Their more radical supporters will resist cooperation unless Morales can show clear benefits from developing a viable working relationship with foreign companies and governments. Otherwise the problems in Bolivia will multiply.
Norman Gall
Executive director of the Fernand Braudel Institute of World Economics