Bolivian Gas Takeover Sets a Familiar Scene
Thursday, May 4, 2006
A new government in Bolivia, anxious to win public support, charges the big foreign oil companies with fraud and confiscates their local properties. The move generates applause among Bolivian citizens and attracts attention throughout Latin America.
The year: 1937.
Seven decades later, Latin America is experiencing another wave of nationalist fervor, fueled by old resentments and rising energy prices. Inspired in part by the economic nationalism of Venezuelan leader Hugo Chavez, new Bolivian President Evo Morales celebrated his 100th day in office Monday with a reprise of 1937: charging foreign oil firms with corruption and sending troops to seize control of the oil and gas fields.
In the end, say many foreign companies and economists, Bolivia -- and other countries that follow the same path -- might end up the loser. "The signal it sends is that no foreign investment is safe here," said Bernard Aronson, former assistant secretary of state for inter-American affairs and now managing partner of Acon Investments LLC, a private equity firm. Acon has more than 15 percent of its investments in Latin America but none in Bolivia.
Yesterday, Spain said it would send a delegation to Bolivia for talks regarding the interests of Repsol YPF, a Spanish-Argentine energy company that has invested more than $1.2 billion in Bolivia since 1997. "What we know does not augur well," Spanish foreign ministry aide Bernadino Leon said in a radio interview. And Jose Sergio Gabrielli, chief executive of Petroleo Brasileiro SA, the other big investor in Bolivia, told reporters in Rio de Janeiro yesterday, "It is very clear at this moment there is no economic viability of investing any additional money in Bolivia."
In the past, countries that have abruptly nationalized their oil industries and booted out foreign companies with little or no compensation have rarely managed to meet earlier oil and gas production levels. Starved of capital by leery foreign investors and lacking the skills to fully exploit their own resources, Iran after the 1979 revolution and Venezuela after the 2002-2003 strikes have watched their oil and gas output sag. In Bolivia, where the state-run firm lacks the manpower to run the gas fields, foreign firms will continue to operate them while talks continue.
Meanwhile, European and U.S. companies operating in Bolivia, while no doubt upset about the actions by Morales, are not mortally wounded by the affair.
"Total has low exposure in this country," said Patricia Marie, a spokeswoman for Total SA in Paris. She noted that Total's net production in Bolivia amounts to less than 1 percent of the group's total output. The shares of the BG Group, which gets more than 3 percent of its supplies from Bolivia, actually rose on the day of the takeover because the British firm made a more important gas supply agreement with Oman.
Bolivia is gambling by picking a fight over its natural gas exports. Lacking pipelines to the sea, landlocked Bolivia has one main customer: Brazil. While Bolivia supplies almost half of Brazil's natural gas needs, Brazil accounts for 70 percent of Bolivia's natural gas sales. Bolivia's government gets 34 percent of its revenue from hydrocarbons, which also account for 9 percent of gross domestic product. While Bolivia has received an economic boost from the rising prices of all the commodities it exports -- including tin, copper and silver -- it is still the poorest country in South America and heavily indebted to international institutions. It can ill afford a damaging economic war over natural gas, and Morales assured Brazil yesterday that he wouldn't disrupt supplies.
Some experts on South America express some understanding of Bolivia's nationalist criticism of the oil and gas industry. "Governments all over see that the oil companies are raking it in now, and they want a bigger share," said Peter Hakim, president of the Inter-American Dialogue, a Washington-based center for policy analysis. "We don't nationalize companies, but we talk about putting in a windfall profits tax, which is essentially breaking the previous contract."
In addition, prices paid to Bolivia for natural gas are about half the current U.S. levels. "The Latin American countries haven't been treating Bolivia generously in any sense," Hakim said. But, he added, while "Bolivia does have a problem with the oil companies, the solution they picked is the worst possible. The diagnosis wasn't so bad, but the treatment will leave them worse off."
Latin American confrontation with foreign oil companies dates to the 1930s in Mexico. Article 27 of the Mexican constitution said the "subsoil" of Mexico belongs to the Mexican state, but it was enforced only after Gen. Lazaro Cardenas was elected. Oil company interests were seized, and the U.S. companies eventually received a piddling $30 million.
Today, Venezuela's Chavez is leading the charge. He has been pushing the idea of an axis of left-leaning Latin American governments and an oil and gas pipeline that would link those countries to his own rich petroleum reserves -- an idea dubbed "the Hugo pipe" by some observers. The weekend before Bolivian soldiers took over foreign oil and gas interests, Morales had met with Chavez and Cuban leader Fidel Castro in Havana and signed a "people's trade accord."
"It's going to be much harder for the moderates [of the U.S. policy debate] who have been advocating a pragmatic approach to the Morales government," said Michael Shifter, who teaches Latin American politics at Georgetown University's School of Foreign Service. "It looks like he's cast his lot with Chavez and Fidel and plans to ride this bonanza of unprecedented energy prices."
Chavez has also pressured foreign oil companies to cede greater shares of their Venezuelan output to the state-run oil and gas company, and he expropriated the shares of Total and Ente Nazionale Idrocarburi (ENI), the Italian state-owned oil company, when renegotiating deadlines passed. Marie, the Total spokeswoman, said they failed to reach agreement "for commercial reasons." She said the company still hopes talks can resume.
"The gas belongs to them and it's a sovereign state; they can change the rules. But there's a contract that governs the arrangement," said an executive of one major European firm. "We decided to take a legalistic approach, which with Chavez I assume is meaningless. So the question is, can you make a deal you can live with?"
Chevron Corp. is one company that did reach a new accord with Venezuela. A Chevron spokesman, Don Campbell, said the new terms "are not expected to have a material effect on the company."
With rebels in Nigeria, war in Iraq and tension in Iran, this might be a natural time for the United States to look to Latin America to diversify its sources of energy. But with nationalist anti-oil company fervor spreading, that opportunity is being lost. Mexico still restricts foreign investment; investment in Argentina's energy sector has plunged since its financial crisis; and elections in Peru, where one candidate has been endorsed by Chavez, could alter policies there.
"There's an energy-starved north and an energy-rich south," Aronson said. "It would be a huge win-win for the hemisphere to come together."