Is Bolivian seizure a resource nationalism trend?
By: Dorothy Kosich
Posted: '08-MAY-06 04:00' GMT © Mineweb 1997-2004
RENO--(Mineweb.com) Did Bolivian President Evo Morales shoot himself in the foot or, rather, follow a growing resource nationalism trend when he moved to nationalize Bolivia's energy fields on May 1?
As the dust cleared during this past week, a mixed bag of international opinions emerged regarding the impacts of Morales's nationalization decree.
At home, Morales gave himself a must-needed boost as the hero of the poor and downtrodden in Bolivia. The seizure of foreign-owned assets or increasing taxes on resource companies generally give governments short-term popularity. In fact, some have suggested that, if Morales can consistently maintain his popularity, it may actually bring a degree of stability to a nation that has averaged one national government turnover annually.
In a recent analysis, Standard & Poor's Credit Analysts highlighted "the complex and tumultuous social and political dynamics, which already led to the ouster of two Bolivian presidents, are the overarching factors explained the government's current [low] sovereign ratings and outlook." Analysts Sebastian Briozzo and Jane Eddy noted that "while the decree reflects an election promise, it appears to represent more of a political effort to regain momentum than a concrete plan designed to increase the government's direct participation in the sector." They asserted that no comprehensive plan to advance the hydrocarbon sector exists "and a country as poor as Bolivia lacks the resources to develop a capital-intensive sector."
Morales's seizure of natural gas assets belonging to Brazil's state-owned Petrobas, the largest investor in Bolivia's gas sector, could also have economic impacts on Brazil's economy. Brazil's industrial and natural resource sectors depend on natural gas supplies, including those from Bolivia. Petrobas said Friday that it will seek international arbitration if it does not reach a deal with Bolivia on natural gas import prices in 45 days.
Meanwhile, Bolivian Planning Minister Carlos Villegas said his government also wants to raise prices on its natural gas exports to Argentina, which also relies on cheap Bolivian gas. Morales is hoping for a $2 increase in price of the natural gas it supplies to Brazil and Argentina. Morales said the increase will generate an additional $600 million to the state, necessary to alleviate a $300 million fiscal deficit. S&P explained that "the nationalization and recent developments greatly aggravate the additional uncertainty, and the exploration and production development plans of current producers will be further and significantly delayed. In addition, a changing and uncertain tax regime and the new role of YPFB (Yacimientos Petrolifieros Fiscales Bolivianos) constitute additional risks to the entry of new private companies."
Nevertheless, Morales is not alone in his quest for greater rights to domestic hydrocarbons reserves now in the hands of foreign companies. It may not be too far-fetched to draw parallels between an oil and gas sector--largely held by foreign companies who are experiencing record profits and prices--and a metals mining sector, also largely held by foreign companies, whose quarterly statements proclaim best-ever sales and demand during this current and long-term trend of record metals prices.
Washington, D.C.-based consulting firm PFC Energy suggested the pressure for resource nationalism is coming from "the barrios of Las Paz, the shantytowns of Caracas, and the highlands of Peru." PFC Country Strategies Group Director Robert Tissot told the Houston Chronicle that the status quo is not longer viable. "You cannot have countries where foreign firms invest billions and average people do not see the benefits," he declared.
Despite the potential impact to their own nations' economies, Presidents Luiz Iancio Luca da Silva of Brazil and Nestor Kirchner of Argentina publicly backed Morales's right to nationalize his country's gas reserves during a recent summit to discuss the issue. However, they insisted that negotiations were needed regarding the development of future gas supplies and investment in Bolivian energy.
Venezuela's President Hugo Chavez has made no secret of his desire to influence Latin American regional politics. He is also a persistent critic of U.S.-styled capitalism. Lawrence J. Goldstein, President of the PIRA Energy Group, a New York-based policy group, told the New York Times that Bolivia has been "conned by Castro and Chavez. They've been sold a bill of goods that's going to come back and bite them." However, Brookings Institution Fellow Carol Graham suggested, that because of its vast oil reserves, Venezuela "can afford to stumble on with irresponsible macroeconomic management and political rhetoric."
On Sunday Chavez announced a new tax on oil companies, which he hopes, will yield $1 billion in new revenue for the country. Chavez also said Venezuela plans to raise income taxes from 34% to 50% for oil companies operating along the Orinoco River, and hike taxes on natural gas companies.
In an interview with Business Week, Venezuelan Oil Minister Rafael Ramirez said that while foreign companies in Venezuela can now own up to 49% in joint ventures, only the minister and the state can decide the ultimate level of private participation. Oil executives worry that the state-owned Petroleos de Venezuela lacks the managerial skills to take on the management of 32 more oil fields.
Nevertheless, International Energy Agency Deputy Director William Ramsay warned Bolivia not to embrace the road toward nationalization followed by Venezuela. Last month, Venezuela transferred half of the value of 32 foreign oil assets back to the state. When French and Italian companies refused to comply, their oil fields were seized. "If there is not a balance between the interests of the companies and those of the country, the loser in the end is the country," Ramsey noted. "One has to only look at Venezuela's production capacity, which has slumped dramatically. That is the price to be paid."
Meanwhile, a few months ago, Venezuela announced plans to create a national state-owned mining company that would take charge of all mining activities in the country.
In the meantime, Peruvian Presidential candidate Ollanta Humala has vowed to force foreign mining and gas companies to renegotiate their contracts. During a recent television interview, Humala explained that his program won't include expropriations. Nevertheless, he added, the Peruvian government will decide what stake it will assume in foreign-owned Peruvian operations, and also determine the negotiating process.
A communiqué issued by Minister of Mining Walter Villarroel said the state mining policy "does not contemplate nationalization, and to the contrary, incorporates private companies such as San Cristobal, Amayapama and other that have already made investments. Bolivian Vice President Alvaro Garcia Linera recently told a Las Paz radio station, that no mining companies shall be expropriated, nevertheless, adding that the state "shall assume a high level of control."
Villarroel stated that a cost study is underway to proposed a "balanced tax that allows mining companies to maintain their exploitation operations while safeguarding the interests of the state." He explained that companies which establish smelters will enjoy national tax waivers.
Despite these assurances, Nesbitt Burns Metals Analyst Victor Lazarovici suggests that "the perception that foreigners are making unfair profits on resources is increasingly growing."
Meanwhile, Newmont Mining President Pierre Lassonde told reporters recently that he is nervous regarding the events in Bolivia, Ecuador and Venezuela. Lassonde noted that "it's every foreign investor's nightmare that you invest billions of dollars and all of a sudden you find that your investment has been nationalized."
Barrick Chairman Peter Munk declared last week that he would rather put his investment dollar in Pakistan rather than Bolivia and Venezuela.
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