Evo sticks to his word
The government's decision to nationalise Bolivia's hydrocarbon's industry means the country's national treasure is likely to remain buried, writes Robert Cauclanis
BOLIVIA'S chances of becoming a gas hub for the Southern Cone gas market receded significantly last month, after President Evo Morales stuck to his campaign pledge to nationalise the country's hydrocarbons industry.
The 1 May nationalisation will force private investors to write-down the value of their assets in the Andean country. Some may leave the country altogether. And it might limit the growth prospects of the South American gas market, which has been expanding at 10% a year, outstripping growth in all other regions.
Since its privatisation in 1997, Bolivia's gas industry has been largely run by Repsol YPF, Petrobras, Total, BG, Shell, BP and 15 other foreign companies. Together, their $4bn in investments resulted in the discovery of most of Bolivia's 48 trillion cubic feet (cf) of proved and probable gas reserves (see Figure 1), turning the country into a major exporter to Brazil and a smaller, but growing, supplier to Argentina.
Morales' election in December, on campaign pledges to reassert state control over the country's energy sector, was a disaster for foreign energy companies, which his Movement to Socialism (MAS) party has vilified for years. Violent protests led by Morales, a former coca farmer, had – since 2003 – produced a precipitous fall in investment in the Bolivian gas business.
Brazil's Petrobras, the biggest investor in Bolivia, spent $218m in the country in 2002. In 2004, it spent just $19m. Another large investor, Repsol YPF, cancelled a $5bn plan to export Bolivian gas to North America, through Chile.
Since taking office in January, Morales has been threatening to make good on that promise. The prospect of nationalisation was one of the factors behind Repsol YPF's January write-down of 25% of its global reserves (more than half of the reduction came from Bolivia).
On 1 May, his 100th day in office, Bolivia's first indigenous president did just that, issuing a presidential decree authorising nationalisation and sending armed troops to occupy 56 hydrocarbons fields, refineries and pipelines. Supporters waved banners reading: "Nationalised, the property of the Bolivians." The occupations occurred despite Morales saying after his January swearing-in, and several times since, that no expropriations would take place.
At the time of writing, the government had not clearly set out the terms of the nationalisation. The likeliest outcome, based on various statements by Morales, is that it would not prohibit private investment, but that private investors would only be able to hold minority shares in projects. Further reserves write-downs by Repsol YPF and other operators are inevitable (see box).
The decree gives companies 180 days to sign new contracts or leave the country, but Morales has made clear the new terms will be enforced immediately. How – or even if – privately owned companies will be compensated remains unclear.
Bolivia's nationalisation: what it means
ON 1 May, President Evo Morales issued a Supreme Decree retroactively deeming illegal what was, in the 1990s, considered the legal and standard procedure for privatisations, writes Robert Cauclanis.
Morales claims the 1990s' privatisation of the state's energy resources was illegal because not every contract with a privately owned company or asset sale was explicitly approved by Congress. Although there is virtually no precedent over the last century for Congress being consulted on contracts between the government and the private-sector, La Paz is attempting to prosecute three ex-presidents and at least half a dozen former energy ministers for handing over Bolivian property to privately owned companies.
The presidential decree declares that the state must gain a stake of at least 50% plus one share in all hydrocarbons-industry projects and assets. Technically, this would give Bolivia a majority stake in all revenues from assets, such as refineries or pipelines, but, as Petrobras has pointed out, it would also mean Bolivia must assume the majority of debt held by companies in the country.
The government says its presidential decree is justified because of the alleged unconstitutionality of the previous terms and because it is the sovereign right of the people, expressed in a July 2004 referendum. Two years ago a majority voted in favour of nationalisation of Bolivia's hydrocarbons assets and reconstituting the state-owned energy company, YPFB.
The decree represents a significant broadening of the May 2005 Hydrocarbons Law – a precursor to nationalisation – which raised the royalty/tax burden on privately owned companies to at least 50%, from a previous range of between 18% and 34%. As of 1 May 2006, any field producing more than 100m cubic feet a day (cf/d) must pay 82% of the proceeds from the project to the state.
In addition, private-sector companies have been told to take Bolivian reserves off their books. Reserves are likely to be passed to YPFB. However, it is too early to say whether assets will be confiscated without compensation. After his election in December and at his January swearing-in, Morales said expropriation would not occur. But the catch is that Morales believes the assets the private-sector companies thought they owned are not legally theirs, so it remains a possibility. Just how robust this argument would be in legal terms is questionable (Morales' own justice minister is not a lawyer, but a former housemaid).
Unanswered questionsThere are other unanswered questions. Does Bolivia intend to compensate Petrobras for the 51% shares in its refineries and, if so, how? Petrobras does not yet know, but believes it would be illegal for the state to take majority control without just compensation. Morales has not laid down specific provisions for how oil companies will be compensated or when. However, it is unlikely that Bolivia will come up with cash to pay for its shares in assets and projects.
YPFB was largely privatised in 1997, when it was spun off into several units, including Andina (led by Repsol YPF), Chaco (led by BP) and Transredes (a pipeline operator, led by Shell). YPFB was largely gutted of qualified petroleum engineers in the 1990s and became a bookkeeping entity. The 56 fields Morales sent troops to occupy last month were those held by Andina and Chaco.
Rising revenuesThe presidential decree also significantly increases royalty and tax rates on upstream production, especially on fields producing more than 100m cf/d. Petrobras and Repsol YPF are the worst affected because they control the only two fields over this size. The government estimates royalties and taxes will almost double this year, to $0.78bn. But the increase will almost certainly stop further investment in exploration for gas or in new field development. Morales' nationalisation comes at a crucial juncture. While South America's gas market remains in its infancy, demand has been surging. Average annual growth over the past half decade in Brazil has exceeded 20%, according to a recent report by Deloitte and Touche.
Repsol YPF produces about 23% of Bolivia's daily gas output of 1.3bn cf. Its Bolivian production accounts for 11% of the company's global daily production and Bolivian reserves, even after its recent write-down, still make up a 18% of its global total of 3.67bn barrels of oil equivalent.
About 15% of Bolivia's proved gas reserves are on Total's books (although these are a tiny percentage of the French firm's global reserves and make up less than 1% of group output). The French firm made a major gas discovery in 2004, which it has not tried to develop.
For BG, which produces 5% of Bolivia's gas, the country represents less than 3% of proved global reserves and less than 2% of its capital investments. BP-led Chaco produces 11% of Bolivia's gas, but the assets constitute a minuscule part of the UK major's reserves. Shell controls the country's main domestic pipeline operator, Transredes, which Morales has also threatened to seize.
For Petrobras, which produces 57% of Bolivia's daily gas, Bolivian reserves still account for less than 4% of global reserves and less than 3% of group production. However, the Brazilian company lists assets in Bolivia with a net value of about $370m and says it has invested $1.5bn there since 1997. Petrobras owns the only two refineries in the country, which have a combined processing capacity of 60,000 barrels a day (b/d).
Over the next six months, there will be plenty of bickering between the government and foreign companies over the valuation of assets and the terms of compensation. Morales ordered audits on all the foreign companies operating in the energy sector. These are likely to attempt to root out back-taxes and charges owed to the Bolivian government.
In some cases, firms may receive no compensation. At a May summit of European and Latin American leaders in Vienna, Morales said companies should not be compensated for the loss of operating concessions if they had recouped their investments through profits.
Bolivia claims it is owed $497m by Petrobras for gas Brazil was obliged to buy, but did not, under a take-or-pay contract in effect since 1999. Petrobras claims that debt is closer to $250m. In any event, the company says that if the government wants to take over 51% of Petrobras' operations in Bolivia, it must take on an equal proportion of Petrobras' local debt.
A rude awakeningThe nationalisation is also a rude awakening for Argentina, which has been hoping to build a pipeline to increase Bolivian gas imports to at least 0.71bn cf/d by around 2010, from 160m cf/d now. But Brazil is the biggest potential loser. Ironically, the nationalisation comes just weeks after Brazil reached its goal of becoming self-sufficient in crude production. With forecast oil output of 1.9m b/d, Brazil will for the first time be a net crude exporter in 2006.
Unfortunately for Brazil, it cannot claim the same independence for gas. Petrobras had plans, which it has now scrapped, to raise Bolivian gas imports from 0.9bn cf/d to 2.4bn cf/d by 2010. That would have meant Bolivia supplying more than two-thirds of Brazil's forecast demand by the end of the decade. On 5 May, Brazilian President Luiz Inácio Lula da Silva said there was still hope that Brazil and Bolivia could reach an agreement. He added that even if Petrobras has to pay a higher price for Bolivian gas, the price paid by Brazilian consumers would not change.
But Lula's comments appeared to contradict a statement by Petrobras. On 5 May, the Brazilian company said it had entered a 45-day period of review with Bolivia's state-owned YPFB over the pricing terms of gas to Brazil. The review was requested by YPFB under the terms of the 20-year take-or-pay gas contract signed in 1999 between the parties. However, Petrobras said it would not accept a price increase and that it would resort to international arbitration in New York should the parties fail to agree on contract terms.
There are some grounds for optimism on Petrobras' part. Its chief executive, Jose Sergio Gabrielli, points out that Petrobras and Brazil are vital to the health of the Bolivian economy, which should make negotiations over gas prices reasonably balanced. BG Group's chief executive, Frank Chapman, has made similar comments. The UK firm's highly profitable São Paulo gas-distribution unit, Comgas, is also reliant on steady supplies of gas through the Bolivia-Brazil trunkline.
Nonetheless, the situation is disastrous for Petrobras, particularly in its capacity as Brazil's main energy supplier. It has recently found a large amount of gas at home, but new reserves are not large enough to make the country self-sufficient in gas. It will also take several years to bring them on stream. The 14.8 trillion cf Petrobras booked in 2003 in the offshore Santos Basin may yield maximum production of around 1bn cf/d by 2012, but only 283m-318m cf/d are likely to be in production in 2008.
Morales' zeal is forcing Petrobras to consider alternatives for supplying the domestic market. Brazil's state-run company acts as the ultimate guarantor for the country's gas supply. It has committed to doubling Brazilian daily gas supply to 3.5bn cf/d by 2010, with 1.6bn cf/d for thermoelectric plants, 1.4bn cf/d for industries, and 0.5bn cf/d for other uses. Brazilian consumption, including 0.9bn cf/d from Bolivia, is around 1.8bn cf/d.
Bolivia has been selling gas to Brazil at a price of around $3.60/m Btu. Transportation brings the wholesale price outside São Paulo, South America's biggest city, to near $5.50/m Btu. Bolivia is under contract to supply Brazil with the gas equivalent of about 200,000 barrels of oil. This is delivered to city gates in Brazil at around $30 a barrel – less than half the price of comparable petroleum-based products.
On 3 May, Petrobras executives said they have begun to study liquefied natural gas (LNG) options. Brazil would need a few years to build the two regasification plants that are under study – a 0.5bn cf/d plant in the southeast and a 212m cf/d terminal in the northeast, Petrobras said. LNG is "not a bad option and not so far above the price of Bolivian gas", says Petrobras' gas director, Ildo Sauer. Such statements show how off-guard Bolivia's nationalisation caught Petrobras, since just months ago Petrobras officials were scoffing at the LNG option as a "last resort" and remained confident in Bolivia offering more exports.
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