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07/05/2006 | Bolivia's Energy Nationalization: Opting for Short-Term Gains

Stratfor Staff

The nationalization of Bolivia's energy resources sparked an immediate call from Brazilian President Luiz Inacio "Lula" da Silva for a meeting of heads of state in the region, which did little to resolve issues.

 

The decision, however, will affect the short- and long-term energy policy and investment decisions of several South American countries. Bolivia will gain some short-term benefits, but nationalization could prove a losing strategy in the long run.

Bolivian President Evo Morales' May 1 decision to nationalize his country's oil and gas resources came as a surprise to countries with the largest stakes in Bolivia, especially Brazil, Spain and Argentina. In response to the announcement, Brazilian President Luiz Inacio "Lula" da Silva called an emergency May 4 summit in Argentina to discuss the move with Morales and the presidents of Argentina and Venezuela. The summit accomplished little, though it did reveal tensions sparked by the move.

The nationalization likely will result in some short-term gains for Bolivia, but it could prove to be a costly strategy in the coming years. For one thing, it will affect short- and long-term investment prospects in Bolivia. The action, meanwhile, will force Brazil, Argentina, Chile and possibly Peru to reconsider their energy strategies, which could shift the countries' economic and political alignment.

Brazil stands to lose the most from the nationalization because of the size of its investments in Bolivia and its gas purchases from La Paz. Before the May 4 meeting, Morales said Bolivia would increase the price of gas it exports to Brazil and Argentina. Brazilian state-owned energy company Petroleo Brasileiro (Petrobras) already opposed Morales' pre-nationalization prices increases, and now it is arguing that Bolivia should honor existing contracts that run through 2019. Morales, however, says prices are too low ($3.80 per 1,000 cubic meters) and should have been revised years ago. With the nationalization decree, La Paz can set its own prices and production levels for oil and gas.

Brazil imports more than 40 percent of its natural gas, mostly from Bolivia. While Brazil has its own sizable natural gas reserves, most have not been exploited and transportation infrastructure is lacking. In recent years, however, Petrobras has increased investments in order to increase domestic production. Natural gas represents only about 6 percent of Brazil's energy requirements, but the imports are vital because they supply Brazil's most industrialized and populous southern regions. The country as a whole is not vulnerable, but a supply disruption could affect the most important regions and cities in Brazil.

On May 3, da Silva acknowledged that Brazil had committed a serious strategic mistake by becoming overly dependent on Bolivian gas. Because of this dependency, Brazil must now accept any price increases imposed by La Paz. Bolivia, however, will probably get only short-term gains from such a move, since Brazil has the means to shift to alternative sources of energy (hydroelectric, oil and nuclear) and to domestic production of natural gas in the medium and long term. In the short term, Brazil cannot count on Trinidad and Tobago, which produce the largest quantity of liquefied natural gas (LNG) in the region, because Brazil lacks the facilities to receive the LNG. The country cannot turn to Venezuela either, because of the lack of pipelines into southern Brazil. One possible solution would be for Brazil to build facilities to receive LNG from Trinidad, which it might do sometime in the future.

Argentina is a large producer and exporter of natural gas, though it imports some gas from Bolivia as well. Like Brazil, the imports are not significant, but they are necessary if the country is to continuing supplying some of its northern regions. Buenos Aires froze the price of natural gas during Argentina's economic crisis from 2001 to 2002, which resulted in extraordinary increases in domestic demand. As a precaution, Argentina has restricted exports of natural gas to Chile over the past couple of years and started importing more Bolivian gas. If Bolivia increases prices, then Argentine President Nestor Kirchner will be forced to increase prices as well -- or subsidize them even more. In the short term, Argentine consumers will pay more, either by an increase in prices or increased taxes or interest rates. In the long run, Argentina's economy and its gas market could benefit, though, as this could force users to ration their gas, thus reducing the need to import gas from Bolivia. Again, Bolivia wins in the short term, but it could see an end to its exports relatively soon.

Chile, meanwhile, faced energy-supply problems even before Bolivia's nationalization. Argentina, where the country gets most of its natural gas, had already restricted exports to Chile. As a result, Chile has been one of the main proponents of a plan to build an LNG-producing facility near the Peruvian border. The facility, however, was to receive natural gas from Bolivia via a pipeline. The processing facility would have supplied Chile, while allowing Bolivia to export gas to the United States and Mexico.

Morales' opposition to Chile's plan helped bring down the government of Gonzalo Sanchez de Lozada, who backed the proposal. Since taking power, Morales has tried to resume talks with Chile for a modified project -- but those talks are preliminary, and Morales is asking for access to the Pacific Ocean in exchange. After this week's events, Chilean President Michelle Bachelet's government, which did not comment on the nationalization, will think twice before engaging in business with Bolivia. Chile is likely to build facilities to receive LNG from Australia and Indonesia.

As for Peru, the effect of Morales's decision will depend on who wins the June 4 presidential runoff. If the victory goes to Ollanta Humala, who is back by Venezuelan President Hugo Chavez and has promised to nationalize the Peruvian hydrocarbon industry, Peru will not be an important player. Should Alan Garcia win the runoff, however, Peru could turn out to be an attractive alternative to Bolivia for foreign investors. Peru has the important Camisea gas field, which remains underdeveloped because of environmental and political concerns. Thus, Bolivia could also end up losing on that front.

In exchange for some short-term gains at the expense of Brazil and Argentina, Bolivia's allies in South America, Morales has put his country in a difficult long-term situation. Petrobras, which has invested more than $1 billion in Bolivia over the past decade, has announced it is freezing any further investment in the country -- a move Morales called blackmail. Although Bolivia has sizable gas reserves, it cannot supply to any country except Brazil and Argentina without equally sizable investments. With decrees that call for confiscation of 82 percent of earnings, it will be difficult for most foreign companies to justify investments there, especially while they remain jittery over other possible changes in the rules.

Chavez, who visited Bolivia just before the May 4 summit, said Venezuelan state-owned oil company Petroleos de Venezuela would sign a strategic alliance May 18 with Bolivia's YPFB to explore oil and gas fields with Venezuelan assistance and build a gas-separation plant near the border with Argentina and Paraguay. Even if Chavez is willing to invest in Bolivia, pipelines would need to cross through Brazil, Peru, Chile or Argentina. His support, then, could be limited to technical assistance and rhetorical backing.

Morales' decision has created political tensions within the group that was not aligned with the United States: Brazil, Argentina, Bolivia and Venezuela. For Chavez, who has escalated conflicts with Peru and Colombia over trade and attempted to influence Peru's election process, Morales' nationalization poses threatening challenges to the unity of his core group.

The only agreement reached at the May 4 summit was a Bolivian guarantee of uninterrupted natural gas supplies to Brazil and Argentina. The price remained up in the air, however, as the leaders agreed only to seek to establish "fair" prices in the future.

Stratfor (Estados Unidos)

 


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