Bolivia natural gas find; new cartel & nationalization?

Posted on Thu, Jul. 22, 2004
Bolivia's natural-gas find opens financial floodgates, raises regional tensions
By Kevin G. Hall
Knight Ridder Newspapers

LA PAZ, Bolivia - Seemingly innocent questions about natural gas sales have suddenly become South America's most controversial issue.

Venezuela's anti-American president, Hugo Chavez, wants South American nations to form a regional energy cartel to stand up to the United States and Europe. Chile and Argentina are feuding over broken contracts. Bolivia won't sell natural gas to Argentina without assurances that "not a molecule" of it ends up in archenemy Chile.

The moves mean new uncertainty for U.S. energy companies working in South America.

The high-powered haggling is a far cry from the 1990s, when South American countries adopted U.S.-espoused open-market policies, privatized inefficient state monopolies and opened up their energy sectors to British Petroleum, Shell, Amoco, Enron and others. The market openings brought foreign investment and new tax revenue, but those benefits never trickled down to the poor.

Now, new natural gas controversies are at once uniting and dividing South America, and Bolivia, for once, holds high cards. After allowing foreign gas companies to search for gas deposits, South America's poorest Spanish-speaking nation discovered it had vast underground wealth. Bolivia claims certified reserves of 52.3 trillion cubic feet, about as much as Kuwait has, and neighbors are hungry for energy.

To win favor, Brazil promises to build a petrochemical complex and thermoelectric plant near the Bolivian border city of Puerto Suarez. Argentina wants to build a pipeline across its northeastern border with Bolivia. Even tiny Uruguay pledges to import cheap Bolivian natural gas.

Plentiful natural gas is cheaper and cleaner than petroleum. It's a mix of hydrocarbons in a gaseous state, mostly methane. When condensed at a processing plant, natural gas becomes liquefied petroleum gas. Power plants seek natural gas since it is a clean-burning fuel.

After Bolivia opened its gas sector to foreign investors in 1996, U.S. energy giant Enron helped build a pipeline to Brazil. Vintage Petroleum, a Tulsa, Okla.-based producer of natural gas, invested millions. So did multinational energy giants.

But average Bolivians started to question why private companies and not the treasury would get the most benefit from gas exports. Under the 1996 law, gas underground belongs to the Bolivian state but becomes private property at the wellhead.

In a Sunday referendum, Bolivian voters overwhelmingly supported a plan by President Carlos Mesa to repeal the 1996 law. That is tantamount to expropriation since it declares government ownership of what the 1996 law deemed private property.

"You can run the gamut on guessing where this will go," said a top American executive of one of Bolivia's foreign-owned gas companies, who spoke on the condition that he not be identified. "We have to just wait and watch."

Bolivian politicians broadly favor nationalizing gas at the wellhead.

"When the referendum shows almost 90 percent of the people support recovering hydrocarbons it means recovering all of them," Evo Morales, leader of the increasingly important Movement to Socialism (MAS) party, said in an interview.

Morales' proposal to nationalize the gas sector will compete with Mesa's in the congress. Both Mesa and Morales say they oppose an immediate takeover, but business groups are not so sure.

"The fear is that strong social pressure will follow that will lead to expropriation," said Oscar Ortiz, general manager of the Chamber of Commerce of Santa Cruz, where most oil companies are headquartered.

Energy companies and the U.S. government want to see just how far Mesa will retreat from free-market policies when he sends a proposed energy law to congress the week of Aug. 6.

"We don't know how the results of the referendum are going to translate into a new hydrocarbons law. This will be very important for Bolivia's economic future," U.S. Ambassador David Greenlee said in an interview.

Antonino Mena Goncalves, Brazil's ambassador to Bolivia, has warned in interviews of "an end to business" if Mesa raises royalties paid by industry to the government from the current 18 percent level to 50 percent. Brazil is worried since its quasi-state oil company Petrobras is heavily exposed in Bolivia.

President Mesa moved quickly to seize on Sunday's victory. He inked a 10-year supply deal Thursday with Argentine President Nestor Kirchner. The deal includes completion of a 932-mile, $1 billion pipeline to be operational by 2007. Bolivia stands to gain $500 million annually once the pipeline is operational.

Bolivia's foreign ministry announced on Tuesday that Mesa will sign an accord next month with Peru to jointly develop a program to export gas to Mexico. On July 9, Peru struck out on its own, offering to supply Mexico from the 8.6 billion cubic feet of natural gas discovered in the Peruvian Camisea region.

A Bolivian proposal to sell gas to Mexico and Southern California through Chile provoked rioting and the fall of Mesa's predecessor in October 2003. Bolivians were irked that the deal would benefit Chile, the country's enemy since Chile seized Bolivian coastline in 1880 and left Bolivia landlocked.

Earlier this year, Argentina abruptly halted natural gas exports to Chile, where natural gas fuels power plants that provide about 32 percent of Chile's electricity. After a diplomatic row over the sanctity of contracts, Argentina backed off and now halts exports only when internal demand for natural gas cannot be met.

Concerned that Argentina would re-export Bolivian gas to Chile, President Mesa insisted in April on contract language that ensures "not a single molecule of (Bolivian) gas" would go to Chile.

Mesa wants to use gas as a leverage to persuade Chile to return landlocked Bolivia's coastline. Chile has offered a 99-year irreversible land corridor concession that allows Bolivia to build a seaport and gas liquefaction plant. The only catch is the Bolivian flag could not fly there, something unacceptable to proud Bolivians.