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Latin America demands more for its oil and gas

Gas-rich countries like Bolivia are rolling out plans to nationalize energy reserves.

By Staff writer of The Christian Science Monitor / April 10, 2007

Santa Cruz, Bolivia

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.

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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.