May 4, 2006

This week's announcement by Bolivian President Evo Morales that he will nationalize the impoverished Latin American country's natural gas industry has sent shockwaves throughout the global energy industry.  The move comes on the heels of meetings with Venezuelan President Hugo Chavez and Cuban leader Fidel Castro, and has drawn heavy criticism from baffled governments and oil executives.  The news also helped push the price of oil up to nearly $75 dollars per barrel, putting an already tight market braced for similar developments elsewhere further on edge.

A populist agenda

“As president of Bolivia, I am going to guarantee the right to property and investments,” said Morales this past January following meetings with neighboring Brazilian President Luiz Inacio Lula da Silva.  His promise, it appears, was short lived.  An indigenous Aymara Indian and longtime socialist leader, Morales campaigned on a populist, anti-corruption platform, a winning combination that has seen a new wave of Latin American leaders come into power in recent years.  While campaign vows to legalize the production of cocoa initially worried Western countries, especially the U.S., few expected Morales to take radical steps that might alienate foreign investors in the energy and natural resources sectors.  Many hoped that once in power, Morales would move closer to the moderate leftist policies of Brazil's da Silva and other regional leaders in Chile and Uruguay.

This week's announcement that Bolivia will require natural gas companies to hand over 82 percent (up from 50 percent) of revenues to the government or face eviction, however, puts Bolivia squarely in what many view as the “radical” camp of Venezuela, Argentina and Cuba.  “The pillage of our natural resources is over,” announced Morales, speaking at an oil field controlled by Brazil's state-owned Petrobras.  Morales added the move was “just the beginning, because tomorrow it will be the mines, the forest resources and the land.”

While an analysis in The Economist notes Bolivia's shift to the left was somewhat anticipated, “What was not expected was the boldness of Mr. Morales' decree, the extent of his populist rhetoric, the calling in of troops and the making of the announcement at a gas field operated by the Brazilian oil company.”

The move, according to the BBC, is expected to increase Bolivian revenues from natural gas production from $460 million in 2005 to $780 million by 2007.  “Governments all over see that the oil companies are raking it in now, and they want a share,” Great Decisions author and head of the Inter-American Dialog Peter Hakim told the Washington Post.  While such revenue is critical for Latin America's poorest country, however, the risk of alienating the international investors and donors its economy depends upon is high.  “The solution they picked was the worst possible,” Hakim said.  “The diagnosis wasn't so bad, but the treatment will leave them worse off.”

Regional energy security

Indeed, the decision has left investors in Bolivia's natural gas industry baffled. Many question the capacity of Bolivia's state-owned energy entity, Yacimientos Petroliferos Fiscales Bolivianos (YPFB) to manage its natural gas industry without outside expertise. “No one doubts Bolivia's right to decide for itself how to exploit its natural treasures,” said an editorial in the Miami Herald following the announcement.  “But without a foreign stake, there would be no natural gas industry to speak of.”  This is particularly true for Petrobras, which has invested over $1.5 billion in developing Bolivian production.  It is also the majority stakeholder in a $2 billion dollar Bolivia-Brazil gas pipeline through which 85 percent of Bolivia's natural gas is exported to Brazil. 

While Brazilian officials have diplomatically referred to the move by Morales as “unfriendly” as they await further details, Petrobras President Jose Sergio Gabrielli said future operations in Bolivia were “practically impossible” though he did not signal the company was ready to pull out.  Brazil, which produces most of its own oil, is awaiting development of its own natural gas resources set to be tapped in 2009. 

Other foreign investors, including Spain, Britain and France, have invested some $3.5 billion in Bolivia's energy sector over the past decade.  Spanish officials told the Financial Times they were “deeply concerned” with the nationalization plan and said it could impact bilateral relations, while a European Commission spokesman said they had hoped for “process of discussion and consultation” ahead of the abrupt adoption of such measures.  Regional leaders from Brazil, Bolivia, Venezuela and Argentina are set to meet at the request of da Silva this week in order to address the growing crises.

A growing trend

The furor set off by the Bolivian action comes at a precarious time for the global energy market.  Much has been made of recent moves by a growing number of countries to project power regionally and globally at a time when oil is in high demand and prices have skyrocketed.  “Ten years ago, Bolivia wouldn't have created a ripple because there was enough world supply,” said Phil Flynn, vice president and energy analyst for Alaron Trading in a USA TODAY report.  “But now it's a sellers market.  What we're seeing now is any nation with any supply is trying to cash in.  It's a very dangerous trend.  Power has gone to the heads of these countries.”

Flynn's comments of course refer to large-scale suppliers like Russia and Venezuela, which have leveraged energy supplies into tools for exerting power over their respective regions and beyond.  But the trend also has grown to include smaller countries looking to take advantage of the current energy bonanza.  In Ecuador, for example, the government of President Alfredo Palacio is negotiating for better terms on oil royalties with the U.S., according to an AP report.  And in the Central African country of Chad, the fragile government of President Idriss Deby recently clinched a deal to unfreeze oil assets frozen by the World Bank, which the government has said it needs for arms.

While many analysts, including Bernard Aronson, a former assistant secretary of state for inter-American affairs who now manages a private equity firm, have discouraged international oil firms from caving in to increasingly assertive governments such as the one in Bolivia, there is some potential for cooperation.  “There's an energy-starved north and an energy rich south,” he told the Washington Post.  It would be a huge win-win for the hemisphere to come together.”

Others, however, like Petroleum Industry Research Foundation President Larry Goldstein, are more cautious.  “Either you hang together, or surely you will hang one by one,” he said of the industry bulls in an AP report.   “I'm not sure Bolivia is the end of the game.”