The Democracy Center – Bolivia Briefing Series
April 6, 2006
Oil and Gas Policy in Bolivia – Post-election Update
By: Aaron Luoma, Gretchen Gordon and Jim Shultz – The Democracy Center
In power now just over two months, Bolivia's new MAS government, led by President Evo Morales, has moved swiftly to announce plans for changes in the hydrocarbons sector. These include breathing new life into the state-controlled oil and gas company (YPFB) and securing investment for new development projects. Many of these initial changes stem from the 2005 Hydrocarbons law that was passed during the Mesa administration, but which has not yet been fully implemented.
The international investment community seems to be regarding the new Bolivia with eager interest, as opposed to the capital flight some analysts predicted. In terms of a more radical restructuring or complying with the promised nationalization of the industry, progress has been limited. While rhetoric remains strong, the failure to meet the public demand for profound change could bring social unrest in the future. Things to watch for are the upcoming April announcement of a more detailed government plan for oil and gas, and a June deadline for the revision of all contracts as mandated in the May hydrocarbons law.
A note to readers: This briefing has been compiled from various news sources, documents, and informal contacts with Bolivian academics. The briefing is meant to be a summary of recent developments rather than an in-depth analysis on current oil and gas policy. Up-coming Democracy Center publications will provide greater context to better understand the complexity of the current debate.
The Administration’s Team
Minister of Economy and Planning, Carlos Villegas. Villegas is an economist and oil and gas analyst, and formerly served as director of the Graduate Program in Development Sciences at the Greater University of San Andres in La Paz. He is now in charge of overseeing the reversal of Bolivia's controversial "capitalization" program (in which state-owned resources and companies were sold off to foreign multinationals in the 1990s) as well as overall economic development plans.
Minister of Hydrocarbons, Andres Soliz Rada. Rada, before entering the government, was a journalist, lawyer, and outspoken critic of the conduct of foreign oil companies operating in Bolivia. His appointment raised concerns within the international business community, but his approach since has been more moderate than many anticipated.
President of Yacimientos Petroliferos Fiscales Bolivianos (YPFB), Jorge Alvarado. Alvarado, formerly the director of the public water company in the city of Cochabamba (SEMAPA), has also served as a MAS party member of Congress and in December was MAS's (losing) candidate for governor of the state of Cochabamba. His responsibilities are to revitalize the state oil and gas company and to reassert its presence throughout the chain of production.
The Terms of the Debate
In the public discourse over hydrocarbons, the word ‘nationalization’ is often used by the administration to reassure the public of its intention to comply with campaign promises and public demand for the state to "recover" ownership and control of Bolivia's gas and oil resources. Minister Villegas has declared that the neo-liberal model will be replaced in the next three months with a new development model, stating that neo-liberalism failed to bring employment and the industrialization of natural resources. Villegas has also stated that Bolivia’s days as primarily an exporter of raw materials will soon be over.
In late February, President Morales accused foreign oil and gas companies of a conspiracy to undermine his government during the election period. The president has stated that the gas reserves have been ‘looted’ since privatization in the mid-1990s, and that companies should pay more for the privilege of extracting Bolivian gas. Nonetheless, the government has made it repeatedly clear that their nationalization is a nationalization without confiscation and there will be no expulsion of foreign oil and gas companies, nor expropriation of company assets. Morales has publicly pledged himself to creating an environment conducive to a company's ability to make a profit. Morales has also stated the desire to have a relationship with foreign companies as ‘partners’ rather than ‘owners,’ and expressed the need for foreign investors to be committed to Bolivia’s ‘national objectives.’
Implementing the 2005 Hydrocarbons Law
Much of the policies being implemented by the government are in implementation of the May 2005 Hydrocarbons Law (Ley 3058) passed during the administration of Carlos Mesa:
1) Existing company contracts must migrate to new contracts. The original deadline for this renegotiation was November, but has been extended until the end of June. Companies originally protested this forced revision of contracts and threatened to sue in international courts. Many are now taking a more amenable stance, though it remains to be seen what shape new contracts will take.
2) Adds a 32% tax to existing 18% royalties. The new tax scheme was implemented immediately after the law took effect, and all companies are now paying this new rate, though they originally stated that their compliance was tentative. The government hasn’t announced plans for any change in the amount of taxes and royalties, though Villegas announced a plan to change the destination of the 32% Direct Hydrocarbons Tax (IDH) which currently is destined mainly toward departments and specific sectors. The new plan would instead direct these resources to an economic development fund.
3) Asserts state ownership over natural resources. One of the fundamental aspects of the law approved last year was that it reasserted state ownership of natural resources above ground. However, the law also limited that state ownership to resources at the “boca de pozo,” defined as the point after which oil or gas leaves the ground and is separated for refining or transport.
4) Mandates re-vitalization of YPFB and asserts its right to establish prices and its involvement in total chain of production. During the January inauguration week, Bolivia signed agreements with Venezuela to help in the revitalization of YPFB, until recently only a bureaucratic entity and shell of its former pre-privatization self. Brazilian state oil company, Petrobras, is also pledging $5 billion in new investments in joint projects with YPFB. YPFB president, Jorge Alvarado, announced that YPFB will be the sole distributor of diesel for the domestic market, and steps will be taken to gain management of 43 YPFB gas stations currently operated under contracts awarded during the privatization process. Attention has been focused on asserting state involvement in industrialization and commercialization – both in terms of reasserting the state's role as a forceful regulator and as a participant in production sharing arrangements that make the government a major shareholder in profits. The government is currently renegotiating prices for the export of Bolivian gas to Argentina and Brazil, both of which had previously before been guaranteed a significantly discounted “solidarity” price.
Reversing "Capitalization"
The most recent comprehensive policy initiative, announced by Minister Villegas, is the reversal of the "capitalization" of five state industries in the mid 1990’s. These include three oil and gas companies: Transredes (Enron-Shell) which handles gas and oil transport in the country and Andina (Repsol) and Chaco (BP) which do exploration and exploitation. Bolivia currently holds a minority share in these companies and exercises no decision-making power over their operations.
Minister Villegas stated that the government will attempt to purchase enough shares to regain a 51% managing interest. If the capitalized companies are unwilling to sell, then ‘measures of another nature’ would be taken, though those have not been specified. According to Villegas, the objective is to obtain the capacity to make decisions regarding investment, taxes, salaries, and the naming of directors within each of the companies. Critics point to the financial and political obstacles to purchasing or recovering these shares. In many cases, Bolivia’s 49% original share from capitalization has been significantly diminished since then. Additionally, the de-capitalization proposal only affects three joint venture companies, and does not apply to the rest of the foreign companies operating on concession agreements, which make up a significant share of Bolivia’s oil and gas sector.
The Response from State and Private Companies
The government has received an eager response from other countries’ state oil companies, many of which, including Argentina, Brazil, Venezuela, and Mexico, have expressed interest in agreements of cooperative development with YPFB. Examples of potential agreements include the construction of new plants, the exchange of technicians, and significant investment for the reanimation of YPFB. Russia, India, and China have all pledged assistance in helping fund the hundreds of millions of dollars needed to make YPFB a viable entity capable of participating in joint operations with other state or private oil and gas companies. India and China have announced willingness to invest in the construction of two new gas pipelines to serve the domestic market and financing from Holland will help fund YPFB’s goal of connecting 200,000 homes to gas pipelines by the end of the year.
In the last month, the administration has had numerous meetings with foreign companies currently operating under concession agreements with Bolivia, regarding the migration of contracts to comply with last year's hydrocarbons law. All companies, according to the administration, have expressed a willingness to renegotiate their contracts, despite the earlier hostile positions of several investors. Minister Soliz Rada himself has expressed surprise at the amenable stance that the corporations are taking. In the last month, negotiations over new operating terms with Repsol (Spanish, private) and Petrobras, the two biggest players in the Bolivian oil and gas market, have begun. Petrobras, the Brazilian state oil company, with its dominant position as the exporter of 50% of Bolivian gas to Brazil, was designated as a partner with YPFB in every step of production. As stated earlier, Petrobras has pledged an additional $5 billion in new investments in the coming years.
Repsol garnered a lot of press attention of late as well. Repsol's subsidiary, Andina, has been accused of $9.2 million in oil smuggling and upon failing to arrive in court, Repsol’s two principal executives in Bolivia were detained last week by Bolivian law enforcement officials. This confrontation is juxtaposed by previously cordial talks between the oil giant’s Spanish CEO and President Morales to expand shared operations. Repsol has stated their offer of a $150 million investment in joint projects with YPFB is contingent on the resolution of the smuggling case. Both Andina and Chaco are under investigation for improper sale of Bolivian gas.
The Public Response
Thus far, there has not been much public response to the government’s oil and gas policy proposals. On the part of the general public, this is likely due to the complex nature of the issue. Conservative business interests such as separatist movements in Santa Cruz and the Hydrocarbons Chamber seem satisfied with the government’s stance thus far. On the Left, though there is significant criticism of the limited and cautious nature of the government’s policies and its position with foreign investors, there have been no mobilizations or major public denunciations by social movements. This could be attributed to a desire to give the government some breathing room to act, to the successfulness of MAS in consolidating party loyalty, or to a belief among social movements that the upcoming Constituent Assembly is the mechanism through which real nationalization will occur. The work of the Assembly, though there is much debate over the extent of its powers, will be to redraft the constitution and to tackle some of the major structural issues affecting Bolivia, including land reform and oil and gas nationalization.
Next Steps
The government has stated that in April it will reveal its comprehensive hydrocarbons policy. This new policy will also determine its negotiating position with multinationals concerning the migration of current contracts. The potential of legislation modifying last year's legislation has also been mentioned, though without detail. A more aggressive nationalization in the future has been hinted at by Alvarado and Soliz Rada, but only after YPFB becomes a viable player. This month, the government secured a political victory in the passage of legislation setting up the upcoming Constituent Assembly to start this August. However, it must be noted that indigenous groups have expressed serious concern about the delegate selection process and whether their interests and voice will be adequately represented.