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Bolivia's Irresistible Reserves
Wealthier Neighbors Need Nation's Gas for Economic Growth

By Monte Reel
Washington Post Foreign Service
Sunday, February 10, 2008

LA PAZ, Bolivia -- When President Evo Morales took state control of Bolivia's energy sector nearly two years ago, critics warned that investors would abandon the country's gas fields and ultimately sink the industry.

They were half-right. Production has slowed along with investment, forcing Bolivia to renege on some of its export commitments this year. But foreign governments, often in the form of state-owned companies, have jumped in to resuscitate the energy sector.

The reason is simple: They can't afford not to.

South America's largest countries -- particularly regional powerhouses Brazil and Argentina -- are facing energy crunches and need natural gas to fuel economic growth. That has made them dependent on the poorest country on the continent and has helped Morales salvage a sector that critics believed was on the road to ruin.

"With the new investment, we'll be able to increase production little by little starting now, in 2008," said Energy Minister Carlos Villegas. "The increases will allow us to meet our export commitments -- and in some years, we'll have more than enough to exceed them -- by 2010 or 2011."

For a country that trails only Venezuela in proven gas reserves in Latin America, merely complying with existing export agreements seems a modest goal. But even that has proved a challenge. Foreign investment, which is necessary to turn reserves into actual fuel, dropped from an estimated $650 million in 2002 to about $120 million in 2006, the year Morales launched his nationalization plan.

Along with Venezuelan President Hugo Ch¿vez, Morales advocates what he calls "21st-century socialism," and his partial state takeover of the energy sector represents the cornerstone of his political and economic philosophy. He argues that Bolivia's natural resources have been plundered for centuries by foreign interests. The new energy strategy was presented to Bolivians as a way for the country to keep more for itself -- a message that appealed to a population that has little to begin with.

Now, foreign energy companies act as service providers for the government, and they must give at least 50 percent of all profits to the state.

When existing contracts were rewritten to comply with that standard, some companies -- such as Brazil's Petr¿leo Brasileiro, or Petrobras -- initially balked, suspending their investments in the country. Television images of Bolivian soldiers occupying Petrobras installations outraged many in Brazil who believed it an insolent way to thank the country for investments in its much smaller neighbor. But in December, Brazilian President Luiz In¿cio Lula da Silva traveled to La Paz and reinstated investments in Bolivia's energy sector.

The Brazilian mega-city of Sao Paulo, in many ways the financial core of the continent, imports the majority of the gas it needs from Bolivia. In other parts of Brazil, periodic shortages of gas flows in recent years have led to temporary electrical failures, stoking fears of a looming energy crisis.

In Argentina, blackouts have been common in the past few years, and the news that Bolivia might not be able to export as much gas as it had promised only exacerbated concerns there. Last month, President Cristina Fern¿ndez de Kirchner met with Morales to discuss an agreement to build a $1.8 billion pipeline that would transport 20 million cubic meters of Bolivian gas to Argentina every day.

Even Chile, which no longer can freely import gas from Argentina because of the shortage there, has begun talking of a potential gas partnership with Bolivia. The very notion of such a partnership has long been unthinkable, complicated by a long-standing and bitter dispute between the two countries over access to the Pacific Ocean.

According to Bolivian officials, investment in 2008 will total at least $876 million. They expect that pending investment pacts -- including those with the governments of Venezuela and Iran -- will probably push the total to a record $1.5 billion this year. Russia's state-controlled Gazprom also signed a memorandum of understanding with Bolivia last year, although details of possible cooperation have not yet been announced.

Some of the investment coming into La Paz appears to be driven as much by politics as economics.

On a recent afternoon, Villegas sat at a conference table in the Energy Ministry, going over a PowerPoint presentation with a group that embodies the new kind of potential investors: Iranian diplomats, not private executives.

Morales and Iranian President Mahmoud Ahmadinejad don't share much political ground -- other than a pronounced dislike of the U.S. government. But Iran is eager to form alliances where it can, and last year Ahmadinejad pledged $1 billion to Bolivia over the next five years. Much of it is expected to go to the energy sector.

"We don't have any specific agreements yet, but in three months we'll know the projects and the amount of investment," Villegas said last month during a brief break in talks with the Iranian delegation.

Although such agreements could pump up investment totals, Morales's critics haven't abandoned their gloomy predictions for the energy industry.

Guillermo Torres, who was energy minister under Morales predecessor Carlos Mesa, said he is doubtful that some of the contributions, particularly from Iran, will prove much more than political theater. Even if they do, he said, he is skeptical about the government's ability to manage a sector that for years depended on more diverse sources of expertise.

"There's great confusion in the management of the sector," Torres said. "They obsessively talk about investment and the importance of it, but they never say exactly where they're going to invest."

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