Latin America demands more for its oil and gas

Forty miles in from the eastern city of Santa Cruz, down a rough dirt road lined by nothing save a few crude homes and the odd cow, stands a jungle of shiny silver and yellow tubes and tanks.

It's the property of the Spanish gas and oil company Repsol YPF, which earned $4.1 billion in net revenue in 2006 and is processing natural gas from nearby wells and pumping it via pipeline throughout Bolivia and Brazil.

It's this disparity between the wealth of the big foreign companies and the poverty of the local population that Bolivian President Evo Morales sought to reduce when he "nationalized" the country's natural gas industry by sending federal troops out to gas fields last May, insisting on more revenue from foreign operators. Bolivia has Latin America's second-largest gas reserves but is one of the region's poorest countries.

Mr. Morales joins other energy-rich Latin American nations in claiming more from – and depending less on – international investors and institutions, a movement led by Venezuela's President Hugo Chávez.

In multiple elections last year, voters in the region overwhelmingly rejected the orthodox free-market policies of the past few decades by electing leftist leaders.

But as their new leaders respond, critics say that moves to nationalize gas and oil industries could chase away investment from multinational energy firms, which could prove devastating for the region's developing economies. Others say this is an experiment in developing a new model: one that mixes nationalism with a healthy dose of corporatism.

"Right now, Latin America is a continent with a political expression looking for an economic model," says Roger Tissot, director of country strategies at PFC Energy, a consulting group. Countries are not forcing foreign companies out as they did in the 1950s, but they aren't being bullied by the US either, he says. "The region is taking some of the lessons from the 'Washington consensus' [that championed privatization], but also some of things they think worked in the previous model. It is trial and error."

'Nationalizing' Bolivia's gas fields

Almost a year ago, on May 1, Morales carried out his campaign promise to nationalize the gas fields that provide Brazil half its daily consumption. But in many ways, nationalization is a misnomer. Unlike expropriations of the past, none of the foreign companies, such as Brazil's state-owned Petrobras or Spain's Repsol YPF, were kicked out.

Instead, Morales gave companies six months to accept new contracts that raise the state's take – and raised taxes on the two most productive fields by 32 percent for six months. It also gave the former state energy company, YPFB, a majority stake in the industry, with control over prices and commercial sales.

The move was wildly popular. In 2004, 92 percent of Bolivians supported a stronger state role in gas exploration and production in a referendum. Morales estimates that they will reap $1.5 billion in additional revenue in 2007.

While Morales, the first to be elected among the wave of leftists as front-runners across Latin America in the past two years, has taken the most sudden steps toward "nationalization," he is not alone.

Last spring, Ecuador's state oil company seized an oil field operated by the American Occidental Petroleum Corp., and passed a law that raises tariffs on private firms when oil prices increase. Analysts say it is unclear what Rafael Correa, Ecuador's new leftist leader who campaigned on pledges to reap more from foreign companies, will do in terms of contract negotiation. "He wants Ecuador to get its fair share, but there is uncertainty about how far he will go," says Jed Bailey, director of research for Latin America at Cambridge Energy Research Associates (CERA) in Massachusetts.

Even in Peru, one of the US's closest free-trade allies in the region, President Alan Garcia is seeking to increase the government profit from minerals – a campaign pledge – but he is taking a gentler approach so as not to scare investors. So far, he has been able to extract a "voluntary" tax of 3 percent, says Mr. Tissot. But it remains to be seen how patient the population will remain with his softer stance.

Leading the pack is Venezuela, the world's fifth-largest oil exporter. In the past year, Chávez has gradually asserted more state control over oil production, targeting joint ventures first. He has declared May 1 as the deadline for state majority control in the extra-heavy oil products in the Orinoco River basin. Analysts expect the natural-gas industry to be among the next targets, says Mr. Bailey.

Following Chávez's lead?

In Bolivia, many say Chávez inspired Morales's nationalization plan.

"[Morales] echoes the threats that Chávez makes about nationalization. They have the same goals. I don't think Morales tries to hide that," says Napoleon Pacheco, an economist at the Millennium Foundation in La Paz.

Chávez's influence in the region cannot be underestimated – not just the discounted oil he ships around the region but his plans to reduce dependence on the US. He has promised Bolivia some $1 billion to invest in petroleum projects and recently announced he would help the country explore new natural-gas sources. He announced an initiative for natural-gas exporters in the region based on the principles of OPEC. The most ambitious plan is a $20-billion pipeline that would send Venezuelan natural gas all the way to Argentina. Morales may be ahead of him on that one, having inked a deal last month with Argentina to build a gas pipeline that will quadruple the amount of gas Bolivia exports to its southern neighbor.

Many analysts, however, say that resource nationalism has little to do with Venezuela. "It is true that Chávez is the main advocate for taking advantage of a favorable energy market and trying to squeeze foreign companies as much as possible," says Michael Shifter, who recently authored a report on the challenges the Chávez administration poses to US policymakers. "But the kind of 'nationalization' being carried out by the Morales government stems from Bolivia's own particular circumstances, and the mounting pressures of the country's poor, indigenous majority to get what they see as their rightful share of the national wealth. Even without Chávez on the scene, it is likely we would be witnessing such a move in Bolivia today."

That is the case in Ecuador, too, where protesters forced shutdowns of pipelines throughout the Amazonian basin.

"We should be the bosses of our own resources," says Adolfo Chávez, the leader of the Indigenous Confederation of Bolivia in Santa Cruz, where the country's natural resources lie. "It is because of the demands of the indigenous that things are changing."

In the past two decades, fiscal sense has been dictated by institutions like the International Monetary Fund, extolling free-market practices and a climate friendly to foreign investors. In raising taxes on foreign firms, Bolivia is bringing in another billion dollars, says Jim Shultz, a political analyst in the Bolivian city of Cochabamba. "It's exactly the thing economic theories say you should never try to do. But the companies are all still here."

But critics worry about the long-term impact on foreign investment. Brazil and Bolivia have, thus far, found common ground in negotiating contracts, but if demands get harder on Brazil, analysts say, it may move more quickly to explore its own energy alternatives. "Nationalist policies are only sustainable when prime materials are high, and as long as there are materials to export," says Mr. Pacheco.

Carlos Arze, an energy specialist at the Center for Labor and Agricultural Development in La Paz, says that Bolivia has taken a path that is economically and politically pragmatic. But the risk of a backfire exists if the central government moves down a more radical path driven by popular demands. "People want to see results," Mr. Arze says. They want resource revenue to improve their quality of life. "As of yet, [the government] hasn't been able to advance on that."