May 4 (Bloomberg) -- Bolivia's crackdown on foreign energy companies may fuel inflation in neighboring Brazil, South America's largest economy, as the cost of importing gas climbs.

``Prices in Brazil are going to rise,'' said Tereza Fernandez, managing director of MB Associados, an economic consulting company in Sao Paulo. ``Even if Brazil and Bolivia reach an agreement, investing more in Bolivia is unlikely, which means we need new gas sources and they cost more and will take time to develop.''

Brazil's President Luiz Inacio Lula da Silva said after a meeting of South American leaders today he will negotiate the prices of natural-gas exports with Bolivian President Evo Morales ``in the most democratic way possible.'' Morales on May 1 gave producers six months to renegotiate contracts with the government.

Lula, 60, has little chance of preventing Bolivia's policies from pushing up the price of gas in Brazil, said Giuseppe Bacoccoli, an energy researcher at Rio de Janeiro's Federal University. Morales's plan to raise taxes on gas produced for export to as much as 82 percent alone may cause Brazilian gas prices to rise as much as 15 percent, Bacoccoli said.

Argentina

Argentina, South America's second-largest economy and an importer of Bolivian gas, also may face price increases from Morales's order to seize assets and raise taxes on foreign producers, said Francisco Mezzadri, the former head of natural gas operations in Bolivia for CMS Energy Corp., Michigan's largest natural gas utility, and now a consultant in Buenos Aires.

``I don't see how a tax like the one Bolivia announced won't be passed on to consumers,'' said Bacoccoli, who helped plan Brazilian state-controlled oil company Petroleo Brasileiro SA's Bolivian gas operations in the 1990s. ``Somebody has to pay for it.''

Under a contract maturing in 2019, Petroleo Brasileiro, or Petrobras, pays Bolivia less than half the natural gas prices in North America. Morales, making good on campaign pledges to enable Bolivia's poorest citizens to share in the nation's energy wealth, vowed to set export prices himself.

``We will always be open to dialogue, dialogue is important, but we will not modify the decree,'' Morales said in a telephone interview with Venezuelan state television network Telesur.

Lula met Morales, 46, today with Argentina President Nestor Kirchner and Venezuelan President Hugo Chavez in Puerto Iguazu, Argentina near the border with Brazil.

``The price of gas won't increase,'' Lula, who helped cut Brazil's inflation rate to 5 percent from more than 17 percent in May 2003, told reporters at the presidential palace in Brasilia yesterday. ``I'm not concerned about that.''

Dependence

Brazil gets half the natural gas it consumes from Bolivia, South America's poorest nation. While gas accounts for only 8 percent of Brazil's total energy needs, its use has been increasing and gas now is a major fuel source for urban bus companies, taxicabs, steelmakers, ceramics companies and fertilizer producers.

Fuel and urban bus fares are among the most heavily weighted categories in Brazil's benchmark consumer price index.

Petrobras, which has a fifth of its gas reserves in Bolivia, yesterday canceled all plans to invest more in the country to expand production capacity beyond the 30 million cubic meters a day available now, and said it would move quickly to find new gas sources.

Petrobras is Bolivia's largest oil and gas producer, accounting for 57 percent of the nation's 35.4 million cubic meters a day of gas output -- most of which is exported -- and 40 percent of its 51,966 barrels a day of oil output.

``It is very clear at this moment there is no economic viability of investing any additional money in Bolivia,'' Petrobras Chief Executive Officer Jose Sergio Gabrielli told reporters in Rio yesterday.

Growing Demand

Supplying Brazilian gas demand, which is growing at about 17 percent a year, will be more expensive than current Bolivian prices, MB Associados' Fernandez said.

Liquefied natural gas, which Petrobras may import from countries such as Nigeria, Libya, or Venezuela, costs about $6 per British thermal unit, or BTU, said Ildo Sauer, Petrobras' gas chief. Petrobras pays, without transport costs, $3.18 per BTU for Bolivian gas, Sauer said. Building a terminal to de- liquefy the imported gas would take more than two years and cost at least $400 million.

For Argentina, Bolivia accounts for about 5 percent of the nation's natural gas consumption. Still, Argentina has plans to increase its Bolivian imports five-fold to about 25 million cubic meters a day, or 20 percent of its needs, from about 5 million cubic meters a day within two years, said Mezzadri, head of Mezzadri & Associados consulting company in Buenos Aires.

Expansion

Such an expansion would cost as much as $4 billion, $2.5 billion of which would be spent in Bolivia, Mezzadri said.

Bolivian import prices are likely to rise almost 60 percent to about $5 per BTU from $3.18 per BTU today, he said. The average international price of natural gas is $7 per BTU, according to Argentina's Energy Secretariat says.

``For Argentina, the gas from Bolivia is absolutely vital because its own reserves are declining and its energy needs are growing,'' Mezzadri said. ``The increase in the cost of Bolivian gas will gradually be reflected in companies' costs.''

The government probably would step in with subsidies to ensure any price increase doesn't speed up inflation, said Dardo Ferrer, an economist at Fundacion Mercado research company in Bahia Blanca, Argentina.

Argentina's annual inflation rate rose to 11.6 percent in April from 11.1 percent the previous month, the government said today.

Contracts

Petrobras officials yesterday said the company's contracts in are protected by international treaties and contain clauses requiring arbitration if the parties don't agree. If prices do rise, they will rise gradually and as the result of negotiation, said Sauer.

In addition to Bolivia's obligation to negotiate prices, Petrobras and Brazilian gas distributors have contracts with major consumers that set out clear pricing rules that Petrobras won't break even if it faces losses in Bolivia, Sauer said.

``When I joined Petrobras we were paying for 24 million cubic meters of gas a day but only able to sell 12 million cubic meters in Brazil,'' Gabrielli said at the press conference yesterday. ``We asked Bolivia to renegotiate the price and they refused. Today things are different and they want an increase. We have no intention of agreeing to one.''

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net

Last Updated: May 4, 2006 16:15 EDT