Bolivia’s Nationalization of Natural Resources to Bring an Increase in Gas Prices

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Researched by Industrialinfo.com (Sugar Land, Texas). Bolivian President Evo Morales´ decision to nationalize Bolivia’s natural resources will have a direct impact on the price of the natural gas that it exports to Argentina and Brazil, and more specifically to companies such as Repsol YPF (Madrid, Spain) and Petrobras of Brazil. However, after the meeting held on May 4, 2006 in Puerto Iguazu, Argentina, President Evo Morales, along with Lula Da Silva of Brazil, Hugo Chavez of Venezuela, and Nestor Kirchner of Argentina, agreed on fixing the increase in gas prices in the most democratic way possible.

The decree #28701 signed by Evo Morales on May 1, 2006, put an end to the privatization of gas exploration and production in Bolivia, which took place in 1997 and reduced YPFB to an administrative role. Since YPFB is incapable of becoming a producer again without investing plenty of money, the Bolivian government will negotiate with foreign operating companies to make sure they are willing to comply. Foreign operating companies will have a six-month deadline to renegotiate their contracts to give the state a minimum of a 50% take on their oil production or else they must abandon their work in Bolivia. According to experts in this area, those companies can easily make a respectable profit even with only 40% stake in their production. During this transition period, in large fields producing more than 100 million cubic feet a day of gas in 2005, the Bolivian state will have an 82% participation, which includes a 32% participation of the Bolivia’s state owned oil company YPFB, 32% hydrocarbons tax, and 18% for royalties. If these companies do not sign new contracts within the following 180 days (starting as of May 1, 2006), they could be stripped of their operating rights.

With Morales´ decision to nationalize natural resources, early calculations show that the country will end up with a profit of nearly $780 million per year. According to Morales declarations, "at the end of May we will make an agreement to industrialize the energy resources …and if we are now beginning to nationalize hydrocarbons, tomorrow it will be mining, then forestry resources, and then all other natural resources."

Bolivia to Join Gas Pipeline Project

The project of building a nearly $20 billion gas pipeline spanning more than 8,000 kilometers (4,971.2 miles) connecting Argentina, Brazil, and Venezuela was launched during Mercosur´s summit in December 2005. This comes just as Venezuela entered Mercosur as a permanent member. Argentina’s government accepted President Morales´ request to include Bolivia in the giant gas pipeline project. For details see related January 30, 2006, news article – Venezuela, Brazil and Argentina Agree to Begin New Gas Pipeline Project.

According to President Chavez, preliminary feasibility studies of this project are underway and the initial outline of the project should be concluded in their next meeting in June. Besides, after the meeting on May 4, 2006 he added “Bolivia will join the Gasoducto del Sur pipeline project ...and now we can speed the project up again, the pipeline will supply gas to all the countries of the South American continent for a century."

The Overall Situation for Foreign Oil Companies

According to this new decree, all partnerships formed during YPFB´s partial privatization, that is, Andina SA, Chaco SA, and Transredes, will have to sell the necessary amount of assets to the Bolivian state so that Bolivia becomes the major shareholder. Repsol YPF (Madrid, Spain) has a 50% stake in Andina SA. In Chaco SA, British Petroleum (BP, London, England) owns 40% and Argentine Bridas the remaining 40%. Shell (Den Haag, Netherlands) and Prisma Energy (Houston, Texas) own 25% each in Transredes, the owner of most of Bolivia’s oil and gas pipelines.

Argentina’s Concern

In 2004, Argentina and Bolivia signed natural gas supply contracts, which end in December 2006 and stipulate up to 7.7 million cubic feet per day of natural gas exports to Argentina at a current price of $3.40 per million British thermal units.

According to experts, Argentina is planning to increase the volume of natural gas imports to 30 million cubic feet per day even though Bolivia’s hydrocarbons ministry does not foresee the nationalization of the country's hydrocarbons affecting the export of gas to Argentina or Brazil. Bolivia is seeking to approach international market prices.

Brazil’s Concern: Petrobras Suspends Future Investments

Petrobras is Latin America’s fastest growing oil company with a domestic and international expansion program that made it a major player in the region’s energy sector. Its achievements are remarkable since, unlike other companies, Petrobras is not a natural net oil exporter. This state oil company is planning to invest a large part of its profits to become a major oil exporter and ship around 350,000 barrels per day by 2010. Outside Brazil, Petrobras is already pumping around 25,000 barrels per day of oil and natural gas in other Latin American countries such as Argentina, Bolivia, and Venezuela.

According to President Morales, renationalizing the industry does not mean expelling foreign operating companies or expropriating foreign property, but it does obligate those companies to render all production to the Bolivian state for its commercialization and industrialization. What is more, military forces and YPFB´s officials took control of two refineries (one in Cochabamba and the other one in Santa Cruz, Bolivia). For details see related May 2, 2006, news alert – Bolivia: Nationalization of Natural Resources Shocks Foreign Oil Companies.

According to Petrobras´ President Sergio Gabrielli, Evo Morales’ decision to take the energy industry into the Bolivian state’s hands means there would no longer be sufficient returns to justify their increased investment. According to Petrobras, they will start with the suspension of the investments by abandoning the plans to expand a gas pipeline between Brazil and Bolivia. Even though Brazil is Bolivia’s biggest gas buyer, Petrobras is now looking towards imports of liquefied natural gas (LNG) from other countries to feed growing domestic demand. What is more, Petrobras will sue the Bolivian state to stop the expropriation of its assets.

At this point in time, nationalizing natural resources means seizing majority control of ownership from foreign oil and gas investors and taking over immediate control in the country from these operating companies. Bolivian President Morales´ ideology is closely related to Chavez´s since both countries seem to be driven by their desire to avoid multinational exploitation of their country’s resources and to create new markets for their own benefit. To read more on Venezuela’s plans for nationalization of it’s resources, see the related April 21, 2006 news article - Venezuela's New Strong Negotiating Position Shocks Oil Companies.

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