The Energy Situation in Bolivia (ARI)

The Energy Situation in Bolivia (ARI)

Theme: The nationalisation of the hydrocarbon industry in Bolivia marks the culmination of a long, emotional battle by the ruling party to assert control over the country’s natural resources. The signing of new contracts with oil companies displayed the pragmatism and flexibility with which it can negotiate nationalisation measures, and the degree of influence that Hugo Chávez has come to exert over the Bolivian government.

Summary: The discovery of major natural gas reserves in Bolivia in the 1990s has been a key factor in changing the country’s political situation. It triggered powerful feelings of nationalism that manifested themselves in the rejection of the country’s economic model and of its political elite, as well as of foreign oil companies. The surge of nationalist and statist sentiment heightened Bolivia’s political instability, forced a change in the laws governing the energy sector and paved the way for the Movement to Socialism (Movimiento al Socialismo, MAS), the political party of President Evo Morales, to take power. Fulfilling its electoral programme, the MAS-run government nationalised the hydrocarbon industry, assigned management and control of all oil operations to the state-run company Yacimientos Petrolíferos Fiscales de Bolivia (YPFB) and forced oil companies to negotiate new contracts that abided by the new legislation.


Energy Situation and Prospects in Bolivia: The Best Way to Take Power
The nationalisation of the hydrocarbon industry, ordered in Supreme Decree 28701 of 1 May 2006, formed part of a wave of reaction against the neo-liberal, pro-privatisation model that was in force in Bolivia in the 1990s. This model denied the State any participation in oil operations and dismantled state-run companies. The measure was also a rejection of the corrupt political leadership that had implemented the policy. Although this model marked a break with existing balances between State and private-sector participation, the prospect of a return of highly ideologically-based statism, as called for in that Decree, could involve a new imbalance. The new one would concentrate economic activity in the State, accentuate insecurity for investments and contribute to slowing down economic development.

The defence of the country’s hydrocarbon reserves, by its breadth and versatility, was an excellent tactic for cashing in on the discontent of the Bolivian people. The first step, taken in the early years of this decade was to block and then reject outright a plan to export liquefied natural as (LNG). It was developed by Pacific LNG, a consortium made up of Repsol, BG and Panamerican Energy to work the Margarita field and supply the North American markets. The Bolivian masses had bitter memories of their country’s loss to Chile of its outlet to the Pacific Ocean. Violent demonstrations in Bolivia prevented an agreement being reached on building a gas liquefication plan and a gas pipeline through Chilean territory. After the LNG project was rejected and replaced by projects with other countries, Bolivia’s hydrocarbon law was amended and finally the whole sector was nationalised. Political instability over the past four years saw three elected governments come and go, plus delays in all projects to monetise energy reserves and the destruction of the fragile institutional structure of the technical bodies in this sector. The political movement that pushed the idea of Bolivia holding onto its natural resources quickly became more radical, and ushered into power its main advocates, who won an absolute majority in the elections held in December 2005.

Although the launch was spectacular, the nationalisation of Bolivia’s hydrocarbon industry was only a repetition of what was contained in Hydrocarbon Law 3.058, with the exception of two new measures. First was the creation of an additional stake for YPFB, during a transitional period of 180 days, of 32% of the value of the production of fields which, in 2005, would have turned out more than 100 million cubic feet of gas per day. The State thus imposed an 82% tax on the only two fields that met the requirement –San Alberto and San Antonio–. Both were operated by Petrobrás along with Repsol (50%), owner of the capitalised company Andina, and the French company Total (15%).

Secondly, the government nationalised 50% plus one of the shares of the companies that emerged from the processes of capitalisation and privatisation. This measure was carried out partially in the capitalised companies Andina and Chaco (units of Repsol and BP, respectively) and Transredes (a unit of Ashmore –the successor of Enron– and Shell). The shares were transferred to YPFB through another decree and managed in a trusteeship by two pension funds (Futuro de Bolivia, which involves Swiss capital, and Previsión BBVA, involving Spanish capital). YPFB thus became the new owner of 48% of the shares of Chaco and Andina and 37% of Transredes. The government is currently negotiating the transfer of the fractions needed to reach an absolute majority. Its biggest problem is with Transredes, because it needs more than 13% of the shares. Financing for Transredes projects has been frozen due to the change in its shareholder make-up, causing a collapse in transport and consequent gas rationing in La Paz and Tarija, the department where most of Bolivia’s gas reserves are located. For these reasons President Morales, during a visit to the Netherlands in the last week of November, asked Shell point-blank to transfer its shares to YPFB.

Negotiations aimed at gaining majority stakes in the companies that emerged from the privatisation have yet to yield concrete results. These companies are Petrobrás Bolivia de Refinación (PBR), which now owns Bolivia’s refineries, and Compañía Logística de Hidrocarburos (CLHB), which is part Peruvian (40%) and part German (60%) and owns pipelines and storage facilities. Petrobrás has said it is interested in staying in the refining business so long as it can retain technical and administrative control; it says otherwise it would prefer to sell 100% of its shares. If this were to be accepted, the two sides would have to negotiate a price for the refineries and a form of payment. CLHB is reported to have expressed a position similar to that of PBR.

Since before the nationalisation, the government has been holding complex negotiations with Petrobrás to revise –outside the framework agreed in the 1996 contract– the prices of gas exported to Brazil. Bolivia says Brazil is paying below-market rates. Tension stemming from Bolivia’s request worsened with accusations that Petrobrás is hindering the development of Mutún (Bolivia’s biggest iron and steel project) by failing to supply it with gas, and of operating in Bolivia illegally. Things got so bad that Petrobrás eventually suspended its investments in Bolivia. After the nationalisation, it froze the volume of Bolivian gas that it buys and decided to seek alternative sources of supply.

The nationalisation Decree ratified the precepts of Law 3.058 giving companies (28/10/2006) 180 days to sign new contracts for upstream operations and carry out audits on all fields to determine the amount invested, their profitability, production costs and amortisation up to 1 May. Negotiations with oil companies concluded with the signing of new operating contracts.

Of all the oil companies working in Bolivia, Petrobrás and Repsol stand out because of their distinct operating conditions. Petrobrás is essential in both upstream and downstream operations, and Repsol is important because it owns Andina, the capitalised company with 50% of the fields that used to be operated by YPFB. Petrobrás and Repsol are also partners in the largest gas fields in Bolivia.

For these reasons, with the support of their respective governments, Petrobrás and Repsol were the first to negotiate their contracts. Repsol and BBVA had the support of the Spanish Deputy Foreign Minister Bernardino León, designated by the government to take part in the negotiations. Later, a high-level commission went to Bolivia and in August, the Deputy Prime Minister María Teresa Fernández de la Vega. At times of crisis the support of the Spanish government for Spanish companies became clear, such as when Repsol executives were detained and their offices searched. The Spanish government called for their release and expressed concern at the highest levels. The government of Brazil, meanwhile, repeatedly sent its Minister for Mining and Energy and –with growing vehemence due to the election campaign– President Luiz Inacio Lula da Silva expressed support for Petrobrás’s negotiators. The Morales government tried to differentiate the negotiations with Brazil by taking them into the political realm, arguing that it was ideologically akin to that of Lula. This irked Petrobrás and put Lula in an awkward position because voters accused him of being weak in the face of Bolivian assertiveness.

The New Direction Taken by Nationalisation
On 27-28 October, YPFB signed new exploration and operating contracts with all the oil companies working in Bolivia. This was seen as a resounding victory for the nationalisation decree in the upstream sector of the industry. It restored hydrocarbon ownership at the wellhead, increased state participation in 50% of production for most oil fields and introduced limits and state controls on spending and operations by companies in all phases of oil-related activity. The result of the nationalisation was a unanimous decision by the companies to keep working in Bolivia under the new terms set by the government.

The government’s oil policy shifted towards greater flexibility and less ideology in the second half of September, after a change in authorities that oversaw the sector. The first result of the change was the signing of a contract to sell natural gas to Argentina. This opened up a market of 27.7 million m3/day for 20 years. The contract will stimulate investment, initially estimated at US$2 billion to develop fields and US$1.2 billion to build a new gas pipeline. The signing encouraged companies to stay in Bolivia, especially Repsol, which operates the Margarita field, the source of the gas to be exported. The second result was the signing of the 12 contracts mentioned earlier. They changed the form and essence of the nationalisation, replacing a vision based on expelling foreign companies and seizing assets with one of adjusting contracts to suit the new legal framework. These new contracts would also involve exploration investment totalling US$3.514 billion in the period 2007-10. If all of these forecasts prove correct, a major change in oil investment in Bolivia’s would come about.

It should be noted that both the political instability of recent years and the nationalisation decree caused a drastic reduction in investments. According to the Bolivian Hydrocarbon Association (Cámara Boliviana de Hidrocarburos, or CBH), oil investments dropped from US$600 million in 2005 to US$100 million in 2006, just to cite the latest numbers available. These results reflect a change in the political vision of the MAS party with regard to the energy sector. MAS was opposed to exporting raw materials, gave priority to industrialising gas, sought to do without multinational oil companies and did not consider it important to offer investors legal security. The reality of the situation has shown the government that the lack of upstream investment jeopardised the fulfilment of gas export contracts and even supplies for the domestic market of at least 5 million m3/day. The government also realised that without abundant, fresh financial resources it would have trouble carrying out its programme of long-term structural changes. In this sense, strictly speaking, the nationalisation is no longer a nationalisation. Rather, it has been downscaled to producing new kinds of contracts and allowing state purchases of majority stakes in companies that are run privately, although in political terms the nationalisation fulfilled the goals that were set out and guaranteed the government’s economic stability.

The signing of the 12 contracts, including those involving Repsol and Petrobrás, gave rise to expressions of satisfaction on both sides, as seen in comments published in the press. Brazils’ Energy Minister said that ‘staying in Bolivia is a good business decision’ and Spain’s Bernardino Leon said ‘In the next few years we are going to invest a similar amount (US$1 billion) to guarantee the fulfilment (of supplies) to Argentina’. Repsol’s Chairman said the impact of the contracts ‘will be positive because it will allow investments with the necessary legal security, which respects the value of the assets we now have’. Similar comments were made by Pedro Mejía, Spain’s Secretary for Tourism and Trade.

For his part, President Morales said: ‘this is a way to make good use of natural resources. I have been doing the numbers and share the estimates. Four years from now, from hydrocarbons alone we will be taking in more than US$4 billion. In this way we are going to resolve our economic and social problems’. In actual fact, this amount would correspond to all of the sector’s activities, including the contracts for gas exports to Brazil and Argentina, when the latter has reached the maximum agreed volume. He also promised the companies legal security: ‘I tell all the companies they should have no doubt about our commitment to respecting the contracts. We will give them legal security, as they have always asked’. All of these comments show how satisfied both sides are and the auspicious scenario that has emerged for developing the sector on the basis of the new rules that both have accepted.

The following features of the operating contracts that have been signed should be highlighted:

  • The contract durations vary. For large fields, such as San Alberto and San Antonio, operated by Petrobrás, it is 30 years, while for the Margarita field, operated by Repsol, the contract lasts 24 years. For the small fields, such as those operated by Petrobrás Energía (Colpa and Caranda), the time span is 22 years and for those operated by Vintage (Porvenir and Chaco), it is 10 years.
  • The State will recognise a maximum percentage of the value of net production as recoverable costs. This percentage varies depending on the contract and is so flexible it even subsidises operations at small fields. In annexes to the contracts, definitions are spelled out as to recoverable costs each of the activities being carried out.
  • Calculating the percentage of distribution of net production between YPFB and the company, once the recoverable costs are deducted, depends on a mathematical procedure set out in another annex. It depends on variables such as volume measures at the production monitoring point, the level of investment and depreciation of the investments. The Bolivian Minister for Hydrocarbons has said that the State’s average stake would be 70% of production value.
  • Costs and salaries will be paid directly to oil companies by third companies with which YPFB has signed contracts to market what is produced.
  • The investments carried out and recouped by the companies up until 1 May 2006 will be reconciled with the results of audits and noted in the last annex of the contracts (Annex G).

Future development of the energy sector, particularly hydrocarbons, will hinge on minimising uncertainty and giving greater signs of legal security to investors. Neither YPFB nor the state-run electrical utility ENDE can make the massive investments that are needed to develop the energy industry in Bolivia. Legal security would be enhanced if government institutions in the sector were strengthened, particularly the regulatory agency, so that they could become valid interlocutors for dealing with foreign companies and investors. If these conditions were created, new projects could get underway to monetise reserves. They include exporting gas to Chile, setting up electrical power plants, industrialisation projects including ones involving fertilisers, petrochemicals on the border with Brazil, converting gas to liquid, extending Bolivia’s transport infrastructure and helping it rejoin international markets. Bolivia would also once again become a reliable supplier of gas to the Southern Cone countries.

PDVSA in the Southern Cone
Another factor related to Bolivia’s prospects for energy development is the political affinity between its government and that of Venezuela. This has led to the signing of five agreements in the hydrocarbons sector. They foresee developing activities by YPFB and PDVSA and include: creating joint venture companies to run petrol stations, building plants to separate liquefiable materials from natural gas and producing petrochemicals, supplying 200,000 barrels a month of Venezuelan diesel fuel to Bolivia at preferential rates to make up for a deficit in the domestic market, and joint work in hydrocarbon exploration and operations. In mid-December, Presidents Morales and Hugo Chávez are scheduled to inaugurate work on the first liquefaction plant in the south of Bolivia.

Total PDVSA investment in Bolivia would be US$1.5 billion, most of which would be carried out over a period of two and a half years. President Chávez has endorsed Bolivia’s oil policy in all international forums. He has even said he would contribute investments that private companies did not want to carry out, in order to aid Bolivia’s energy development. Venezuela’s support and experience were influential factors in the negotiations that the Bolivian government held with oil companies to ensure sustainable resources that will pay for the social and political changes that Morales included in his election programme.

It must also be noted that Venezuela’s interests go beyond energy cooperation and integration in Bolivia. President Chávez wants to use his oil power to vie for the leadership of Latin America, overtaking Brazil in South America and Mexico in Central America. It is with this goal in mind that the has brought about the creation of Petroandina and Petrocaribe, respectively, supplies oil at subsidised prices and has proposed the Southern Gas Pipeline project, which would alter the energy balance in the Southern Cone. In Venezuela’s long-term vision, Bolivia is a key source of support.

Conclusions: Discovery of major gas reserves in Bolivia made clear the shortcomings and errors of the pro-privatisation economic model of the 1990s, and touched off a period of acute social and political instability that has yet to be overcome. Instability and insecurity made it impossible to exploit the reserves in a sustainable way and led to nationalisation of the hydrocarbon sector.

New contracts for upstream operations and gas exports to Argentina should be seen as a change in the statist oil policy of the Bolivian government. The shift is marked by a movement away from ideology and by greater flexibility. The signing of new contracts with foreign oil companies will ensure the government investment and liquidity to carry out its reform plans for Bolivian social and political structures. This change would probably not have happened were it not for the influence of the government of Venezuela.

Hugo del Granado Cosio
Chemical and petrochemical engineer with 30 years’ experience in the energy sector, and currently Chairman of the consulting firm HGC Consultores