2006 Review: Bolivia, Venezuela reshuffle Latin America energy sector

By Veronica Sardon Dec 28, 2006, 12:37 GMT

Buenos Aires - The energy sector in Latin America was profoundly affected in 2006 by Bolivia's low-scale nationalization of its oil and natural gas resources, triggering readjustments for months in the region's economic and diplomatic relations.

Bolivia has the region's second-largest natural gas reserves after oil-rich Venezuela, and neighbouring Brazil - the 10th largest economy in the world - relies very heavily on Bolivian gas.

Yet Brazil also expressed its position as the region's superpower by demonstrating an upper-hand attitude to Bolivia similar to the one it complains of being victimized by in the US-Brazil relationship.

Bolivia's left-wing populist Evo Morales was inaugurated in January, with a pledge to generate greater income from the country's energy resources and use it to fight poverty, which affects 64 per cent of Bolivians.

On May 1, Morales took most people by surprise as he announced the 'nationalization' and gave transnational companies active in the Andean country 180 days to renegotiate contracts.

'The long-awaited time has come, the long-awaited day, a historic day for Bolivia to resume absolute control over its natural resources,' Morales said.

In fact, the 'nationalization' was not technically such - since it implied no actual confiscation of resources or facilities by the state. But it did imply substantial changes in the conditions of exploitation.

The new framework required all extracting companies to allow Bolivian state company Yacimientos Petroliferos Fiscales Bolivianos (YPFB) to market their entire production. Bolivia set out to claim 60 per cent of the energy proceeds - an amount that even Bolivian officials conceded was one of the highest energy-extraction taxes in the world.

The move unleashed a wave of complex negotiations across Latin America, and the initial reaction from oil companies and foreign governments alike was of deep worry.

The Brazilian state company Petrobras - responsible for over 40 per cent of the energy production in neighbouring Bolivia - was particularly shaken by Morales' decision, which caused a fair amount of tension between his government and that of his fellow-leftist Luiz Inacio Lula da Silva.

Brazil's Petrobras claimed it had special rights because of its high levels of investment in Bolivia, equivalent to about 20 poer cent of Bolivia's total of direct foreign investments. It said that its overall economic contribution to Bolivia's economy was 18 per cent of its Gross Domestic Product (GDP).

But Brazil is equally dependent on Bolivia, drawing 25 million cubic metres of natural gas daily from Bolivia, about half the requirements of the largest economy in Latin America. Thus both sides were forced to reach an agreement.

'I have told President Evo Morales: 'Evo, you cannot put a sword over the head of Brazil because you supply gas, because we can put a sword over your head too, since we buy your gas. And if you do not sell it to us, it will be very difficult for you to sell it to anyone,'' Lula said graphically in September.

In this context, Petrobras - and the remaining nine foreign firms affected by the changes, including Spain's Repsol-YPF, Britain's BG, France's Total and the US-based Vintage - all signed new contracts with the Bolivian authorities hours before the deadline.

In parallel events, Argentina accepted in late June a 47 per cent rise in the price on its natural gas imports from Bolivia, obtaining in return an increase in the amount of gas imported.

However, Argenina is taxing its own energy exports and re-exports more heavily to Brazil, Chile and Uruguay, in an effort to compensate on its domestic market for Bolivia's increased prices.

The vital Chilean mining industries of copper and other metals relies heavily on gas imports, as do residential consumers and electrical plants, and bilateral relations with Bolivia were marked by the issue throughout 2006.

The so-called nationalization raised fears that Bolivia might take similar measures in its substangial mineral resources such as tin, iron and manganese - and that other countries might follow suit. Oil-rich Ecuador terminated in May its contract with US oil firm Occidental - until then the largest foreign investor in the Andean country, with a 20-year presence.

While the southern part of the region struggled to solve such immediate energy problems, Venezuela - the fifth largest crude oil exporter in the world - headed regional initiatives to look to the future.

Caracas, Buenos Aires and Brasilia agreed to move forward towards the 8,000-kilometre-long Gasoducto del Sur, an ambitious project which contemplates the construction of a natural gas pipeline that links Venezuela and Argentina, via Brazil, and also allows the supply of Venezuelan natural gas to Chile and Uruguay. It is estimated to cost is 20-25 billion dollars and to be built 2009-2017.

However, despite the insistence of the heads of state in the importance of the plan, Petrobras president Jose Sergio Gabrielli stressed in an interview earlier this year that the project 'must face many challenges - regulatory, environmental, technological and social.'

At the other end of the region, the Colombian-Venezuelan Pipeline appears more feasible, at least at this stage, and construction formally started in July. The 220-kilometre project linking eastern Venezuela and Colombia is scheduled to be completed in two years, at a cost of 230 million dollars which will be covered by Caracas.

Chavez has expressed a wish to see the pipeline extended to Panama and Central America in the future, and the project also foresees the possible construction of another pipeline from Venezuela to Colombia's Pacific Coast, in order to facilitate the export of oil to Asian countries.