Bolivia's Risky Game

Bolivian President Evo Morales' announcement on May 1 that he is nationalizing the country's oil and gas resources made headlines around the world. But it didn't come as a total surprise to investors in the country's energy sector. Morales made nationalization a key theme in his election campaign, saying he would use the revenues to improve living standards in what is South America's poorest country.

What's more, Morales has long flaunted his friendship with Venezuelan President Hugo Chávez, who last month sharply hiked royalties on foreign oil companies and forced them to cede majority stakes in their projects to the government. Still, companies were surprised by the speed with which the new government took action, dispatching Bolivian soldiers to stand watch over more than 50 gas and oil complexes around the country. And they were taken aback by Morales' strident tone: "The looting by the foreign companies has ended," Bolivia's president told cheering supporters.

The immediate consequence of Morales' move is that investments by foreign companies in Bolivia will now end -- or be sharply curtailed. "It's a big gamble for Morales," says Michael Shifter, a Latin American expert at the Inter-American Dialogue, a Washington, D.C. think tank. In addition to angering allies in Brazil and Spain, his radical move may alienate moderates in Washington who had been willing to take a conciliatory approach in spite of his opposition to U.S. drug-control policies.


  Morales, who took office in January, does not seem troubled by the prospect of foreign investment -- and possibly aid -- drying up. He made his announcement just one day after meeting with Chávez and Cuban leader Fidel Castro in Havana to sign a trade and economic cooperation agreement called the Bolivarian Alternative for the Americas, that is being touted as a socialist alternative to the U.S.-led Free Trade Area of the Americas.

Chávez has been using Venezuela's oil wealth to fund populist social programs at home and to support like-minded leaders throughout Latin America.

Venezuela, which is the world's fifth-largest oil exporter and holds the largest petroleum reserves outside of the Middle East, can afford to play hardball with international oil companies. With international prices for crude at near record levels, few of the majors want to walk away from Venezuela. But for tiny, poor Bolivia, which sits on South America's second-largest natural-gas reserves, the risks are much greater. Says Shifter: "Petropolitics has an irresistible lure right now, but not everyone can play the game."


  Over the past decade, companies such as Brazil's national oil company Petrobras (PBR), and Repsol-YPF (REP) of Spain, have poured $3.5 billion into Bolivia. Yet the country's efforts to commercialize its natural gas riches remain in their infancy. Gas, by its very nature, is more difficult to transport and export, requiring big outlays for infrastructure such as pipelines and liquefaction facilities.

For years, Bolivians have chafed at the presence of foreign companies like Petrobras, Repsol, and Total of France (TOT), which they believe have been looting the country much as the Spanish conquerors did. That perception was reinforced by the fact that some investors were paying royalties as low as 18%.

Support for nationalization has been building steadily in recent years. In a 2004 referendum, 95% of Bolivian voters said they favored it. And last year the congress approved a new hydrocarbons law that boosted royalties to 50% for most projects.


  Although Morales isn't seizing companies' assets, he is forcing them to accede to new terms, which in some cases raise the government's take to 82%. While Petrobras is likely to reach some sort of compromise agreement, players with less significant positions may well leave the country. Morales says that mining and forestry concessions will be the next to be reexamined.

When Morales was running for office, he vowed to become Washington's "worst nightmare." (In Latin America, that title is currently held by his friend Chávez.) The former leader of Bolivia's coca leaf growers union was expected to reject U.S. aid aimed at wiping out illegal plantations of coca, the raw ingredient for cocaine. But now, Morales is turning out to be more of a problem for countries that many presumed would be natural allies: Brazil and Spain. Both are led by left-leaning governments inclined to sympathize with Bolivia's first-ever indigenous president.

Brazilian President Luiz Inácio Lula da Silva, a former union leader who has worked to establish close ties with Morales, clearly miscalculated. Brazil's national oil company has invested nearly $1 billion in Bolivia and is the country's biggest natural gas producer, as well as its biggest customer. Brazil depends on its neighbor for half of the natural gas its industries and power plants consume and could face shutdowns if supplies were interrupted.

On May 3, Petrobras President José Sergio Gabrielli announced the company was suspending all new investment in Bolivia, including a proposed expansion of the Bolivia-Brazil gas pipeline. Although Petrobras has a long-term contract to buy up to 30 million cubic meters of Bolivian gas daily, he said Petrobras will look into building Atlantic coast regasification terminals to import liquefied natural gas from other countries. The moves could be a blow to Bolivia, which last year collected $536 million in taxes from Petrobras -- 24% of the country’s total tax take.


  Bolivians regularly remark, with much bitterness, that their country is like a poor man seated on a throne of gold, so it's little wonder that the nationalization announcement was warmly received by many. With an annual per capita income of just $900, Bolivia is the poorest nation in South America. Morales' move could well encourage other mineral-rich governments in Latin America, such as Ecuador and Peru, to take control of key natural resources from private companies.

But, Shifter says, they may wait to see how badly Bolivia suffers from the consequences of its drastic decision: "Most governments are apt to be more cautious, fearing that badly needed investment and capital could just walk away, worsening poverty and distress throughout the region." Morales' move could turn Bolivia into a pioneer -- or a pariah -- depending on how oil companies react.

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