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Extreme Takeover

The nationalization of oil and gas resources in Latin America will eventually backfire

by Alexander H. Tullo
June 5, 2006 | A version of this story appeared in Volume 84, Issue 23

Nothing causes a global energy market freak-out quite like an armed government takeover of natural gas fields. And there are very good reasons why we don't−or at least shouldn't−see such events every day.

Nevertheless, that's exactly what happened on May 1 when Bolivian President Juan Evo Morales Ayma ordered his army to occupy natural gas fields in his country operated by Petrobras, Brazil's state oil company. From there, Morales decreed a nationalization of Bolivia's hydrocarbon resources.

The announcement, and its bellicosity, caused a diplomatic row between Bolivia and its larger neighbor, Brazil. Bolivia supplies nearly half of Brazil's natural gas though a pipeline that Petrobras helped to build. Petrobras has invested more than $1 billion in Bolivia over the past 10 years. Now it has about six months to renegotiate terms or leave the country.

The moves inflamed Brazilian President Luiz Inácio Lula da Silva, normally regarded as part of Latin America's recent political left turn and somewhat of an ideological ally of Morales'. Brazil even threatened to recall its ambassador. About two weeks later, the two presidents discussed the issue. As da Silva said to reporters, "I told Evo Morales that Brazil needs Bolivian gas and Bolivia needs to sell its gas to Brazil."

José Sérgio Gabrielli de Azevedo, Petrobras' chief executive officer, has been less conciliatory. At a press conference in New York City late last month, he explained how instrumental Petrobras has been in discovering much of Bolivia's natural gas and bringing it to the marketplace. He reminded the audience that the $536 million in taxes Petrobras paid to Bolivia last year was 24% of the government's revenue.

Gabrielli also laid out a robust response to Morales' actions. He pledged to exhaust all of Petrobras' legal means. "Nationalization needs just indemnification," he told the audience.

The company is suspending all new investments in Bolivia, including, Gabrielli confirmed to C&EN, a new ethylene cracker complex Petrobras had been planning with the Bolivian state oil company and the Brazilian chemical company Braskem. Instead, Petrobras plans to spend billions of dollars to more than double Brazil's own domestic gas supply by 2008.

Morales is a protégé of Venezuela's Hugo Chávez, the architect of Venezuela's own creeping nationalization. Chávez has driven up royalties of foreign oil companies and has demanded that state oil company PDVSA get controlling interest in oil fields.

Like Petrobras in Bolivia, ExxonMobil is on the short end of nationalization moves in Venezuela. The company sold a stake in an oil field to its partner rather than operate under the government's terms. Exxon was also replaced by Braskem in a petrochemical complex planned for Jose, Venezuela.

One can understand the desire by Latin American leaders to tighten their grip on oil resources. To Chávez and Morales, foreign oil companies had been operating under corrupt bargains struck with previous governments. These new socialist leaders want to change the rules and funnel more revenues into government coffers.

But their use of words like "theft" is loaded and inaccurate. The price Petrobras pays for Bolivian gas is based on internationally determined heating oil prices. Petrobras says it has been paying Bolivia $3.80 per million Btu, a rate that would be considered high in the Middle East, or even North America, not so long ago.

And nationalization isn't without its consequences, the most obvious being its poisoning effect on foreign investment. Lack of this investment is a huge barrier for a developing country seeking to exploit its oil resources. Because of underinvestment at Pemex, the Mexican state oil monopoly with a famous aversion to foreign capital, Mexico imports petrochemicals and natural gas despite ample resources in the ground.

Venezuela and Bolivia believe they have found an end-run around the investment issue: overtures to investors from countries they favor. This is not unlike the Cold War when leftist governments found a friend in the Soviet Union.

After kicking ExxonMobil off the Jose chemical project, PDVSA said it would look to Brazil, Japan, Saudi Arabia, or Iran for investors, and indeed found Braskem. But one wonders whether such a strategy is realistic over the long term. While Ch??vez may be warm to Braskem now, he was running Venezuela in 1999 when ExxonMobil and PDVSA announced the project. Braskem has no guarantee Ch??vez won't change his mind again.

And nationalization has political consequences as well. Potential Chávez backers, such as Brazil's da Silva, ought to be having their doubts.

But Chávez' support for Morales is a challenge to Brazilian leadership in Latin America, and Chávez' popularity in Brazil is flagging. Facing reelection this year, da Silva is not likely to warm up to him now. An association with Chávez is also beginning to weigh on the prospects of leftist presidential candidates in Peru, Nicaragua, and Mexico, where the public is starting to resent Chávez' meddling.

Chávez' influence may very well be diminishing, to the detriment of the region's nascent nationalization movement. Chávez and Morales will have to wait a few years to see the influence of diminished foreign investment on their economies.

Views expressed on this page are those of the author and not necessarily those of ACS.



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