Turning Gas into Development in Bolivia

Will Evo Morales' attempt at re-nationalization bring real change?

Aaron Luoma and Gretchen Gordon

On May 1 of this year, banners reading "Nationalized: Property of the Bolivian people" were hung over filling station entrances and strung across the gates of refineries and gas and oil fields across Bolivia. From the San Alberto field in Bolivia's southern state of Tarija, President Evo Morales stood flanked by his ministers and military before a crowd of television cameras. In a carefully orchestrated public relations event, Morales made the surprise announcement that the military was at that moment securing the country's oil and gas fields.

"This is the solution to the social and economic problems of our country," Morales proclaimed. "Once we have recovered these natural resources, this will generate work; it is the end of the looting of our natural resources by multinational oil companies."

By the time Evo Morales won his unprecedented landslide electoral victory in December 2005, nationalization of Bolivia's oil and gas reserves had become a widespread popular demand. In a national referendum in 2004, 94% of Bolivians had voted to recover state ownership of oil and gas. After then-president Carlos Mesa responded to that vote with only moderate legislative proposals, protests and blockades demanding nationalization rocked the country. Morales and his Movement for Socialism (MAS) party originally supported a more limited reform of the energy sector, but as the protests mounted, MAS joined the call for nationalization. When Mesa resigned, triggering early elections, nationalization became the primary electoral issue.

On paper, the Morales government's oil and gas policy falls far short of what is traditionally meant by nationalization: government expropriation of foreign property to gain total control of an industry. Instead, his administration is taking a softer approach, opening negotiations with private investors to recover a measure of control over the industry and increase government revenues from it.

The May 1 announcement drew strong reactions from both ends of the political spectrum. Gabriel Dabdoub, president of the Santa Cruz Chamber of Commerce and Industry, told the Miami Herald, "We're very concerned about the international repercussions. This might isolate Bolivia from the world." Spanish Prime Minister Jose Luis Rodriguez Zapatero expressed his "most profound concern," warning of "consequences for bilateral relations." At the same time, many on the Bolivian left faulted the policy for not going far enough. The Bolivian Center for Information and Documentation criticized the decree for failing to "recover the oil and gas industry that was privatized in the capitalization process."

A Cochabamba cab driver named Enrique summed up the sentiment of the majority of Bolivians in the middle: "This isn't nationalization; if it were, the multinationals wouldn't be here. But if we kick them out, they'll sue us. So we have to negotiate."

Six months on, Bolivia's government has had mixed results in implementing the decree. Slow progress in negotiations to rebuild the state oil and gas company, political scandals, and logistical problems initially gave Bolivian opposition parties ample opportunity to question the government's intentions and competence. But in October the government reached agreement on new contracts with 10 oil and gas companies, including Petrobras, the Brazilian public-private energy company, and Spanish energy giant Repsol, which together control 74% of Bolivia's gas reserves. The step garnered praise from both foreign and domestic business interests. While the government continues difficult negotiations over remaining issues with foreign energy companies, Bolivians wait to see whether Morales' "nationalization through negotiation" strategy will bring about concrete improvements in their standard of living.

How Did Bolivia Get Here?

At more than 13,000 feet above sea level, the legendary colonial city of Potosi rests at the base of Cerro Rico ("Rich Hill"), once so full of silver it virtually bankrolled the Spanish empire for more than 300 years. Though the glory of Potosi faded as the silver market waned, to this day Bolivian children are taught that a bridge of silver stretching from Potosi to Madrid could have been built from Cerro Rico's bounty. For nearly five centuries, Bolivia has seen its abundant natural resources extracted by outsiders, while the people of Bolivia have remained the poorest in South America.

Today, natural gas is Bolivia's new silver. The country boasts 47.8 trillion cubic feet of certified gas reserves; in South America only Venezuela has more. And proven reserves could rise dramatically since only 15% to 40% of the oil- and gas-rich zone has been explored to date. Until a few years ago, many oil developers regarded natural gas as nothing more than a waste product of the oil extraction process. "The notion that gas might be a moneymaker would have struck most oil executives as absurd," writes Paul Roberts in The End of Oil. With oil becoming increasingly scarce, however, natural gas prices have doubled in the last six years. Gas is now seen as the bridge fuel that will help ease global demand for oil and move industry toward cleaner, non-hydrocarbon energy sources. As analysts continue to debate when oil supplies will peak, the "dash for gas" is already in full swing.

With its price rising and vast reserves to tap, natural gas has become the focus of Bolivia's politics. A keen sense of their own history drives Bolivians' demand that their gas not meet the fate of the silver, rubber, and tin before it—that the people benefit in tangible ways from the wealth beneath their feet. A leader of former state oil workers recounts the words of an Aymara woman from La Paz: "I think that if they take it all now, what will be left for my grandchildren?"

"So for this reason I have to defend it," she explains.

Giving Away the Store

On October 17, 2003, under cover of night, then-President Gonzalo Sánchez de Lozada boarded a jet for Miami after Bolivians took to the streets en masse to demand his resignation. The architect of a radical economic reform in the 1990s, Sánchez de Lozada left behind a devastated economy and a capital in chaos. He also left over 60 people dead and over 400 wounded, casualties of his government's month-long crackdown on mounting protests.

U.S.-educated and known as "El Gringo" for his American accent, Sánchez de Lozada had worked in close collaboration with international lending institutions such as the World Bank and the International Monetary Fund to implement the economic mantra coming out of Washington: a downsized government and unfettered free markets will create a tide that will lift people out of poverty. During his first term in office (1993-1997), Sánchez de Lozada privatized all of Bolivia's most strategic state industries, including telecommunications, electricity, air and rail transportation, and the government's biggest revenue producer, oil and gas.

Sánchez de Lozada claimed his plan, dubbed "capitalization," would ensure that the public would benefit from the privatization of state-owned industries. These would be converted into public-private enterprises, with Bolivians maintaining a 51% interest in the new "capitalized" firms, while foreign investors would receive a 49% share in exchange for putting forth that same value in investment. Bolivia would still have control over the industries but would be able to double their value, spurring job creation and jumpstarting the economy. Almost half a million new jobs would be created in four years, the economy would double in size in ten years, and the dividends from the new capitalized firms would fund an ambitious pension plan for Bolivia's elderly. That was the theory, at least.

Thanks to a mix of backroom deals and grievously unrealistic economic predictions, the reality played out quite differently.

What Sánchez de Lozada's administration actually did was to divide up the assets of the state energy company YPFB (Yacimientos Petroliferos Fiscales Bolivianos) to form three public-private consortiums: two exploration and production firms and one transportation firm. Majority control of these firms—complete with over $11 billion in reserves and infrastructure—was given, free of charge, to foreign corporations such as British Petroleum and Enron in exchange for only a promise of future investment. A new oil and gas law, a condition for an IMF loan, transferred an additional $108 billion of reserves to private control and slashed oil and gas royalties on those reserves by almost two thirds, from 50% to 18%. Then, in 1999, Sánchez de Lozada's successor Hugo Banzer sold off Bolivia's refineries, pipelines, and gas storage facilities at bargain prices, completing the dismantling of YPFB.

In the end, capitalization turned out to be even more destructive than a classic privatization in which the state at least receives compensation for its assets. Under capitalization, Bolivia handed over its most strategic industries and resources, as well as, in the case of YPFB, its most profitable industry. The promised 51/49 split of public versus private control ended up the reverse, leaving Bolivians with no decision-making power over the capitalized firms. The foreign companies that took over Bolivia's oil and gas industry never invested in modernizing its domestic infrastructure or technical capacity, finding it more profitable to export Bolivia's natural gas as a cheap raw material to be processed in Argentina or Brazil. While capitalization brought Bolivia a swath of new foreign investors, the promised trickle-down wealth creation never came. For Bolivians, it was like giving the mechanic the keys to your car, only to see him drive off with it.

Although average annual gas production rose by 65% between the years prior to (1990-1996) and following (1997-2004) capitalization, government gas revenues increased only 10% due to slashed royalty rates (see figure on page 25). Government revenue from oil and gas, which made up between 38% and 60% of state revenues in the years before capitalization, dropped to under 7% in 2002. Bolivia's finite natural resources were being depleted faster, and the country had little to show for it.

Mark Weisbrot, economist and co-director of the Washington-based Center for Economic and Policy Research (CEPR), views the results of the Washington Consensus experiment in Bolivia this way: "They clearly failed by any objective measure—income per person is less than it was 27 years ago." According to a CEPR report, Bolivia's per capita income has grown by less than 2% in total over the past 25 years, compared to 60% between 1960 and 1980. "In the short run it's the loss of revenue," explains Weisbrot. "Over the longer run it's the loss of control over the resources themselves, which is what you need … as a source of financing for development and as part of a development strategy."

"The majority of government revenues in Bolivia now come from donations and loans," explains Roberto Fernandez, a professor of economics and history at San Simon University in Cochabamba. "We borrow money to pay salaries. What kind of government is this that doesn't even have the autonomy to say, ‘I'm going to build a little school'? It has to look for who internationally can give us a loan."

Prohibited by law from running for a second consecutive term in 1997, Sánchez de Lozada regained the presidency in 2002. In October 2003, Bolivians' growing frustration and anger over the dismal state of the economy exploded on the streets, in what later became known as the Gas War. Thousands of primarily indigenous residents of El Alto, the sprawling municipality that surrounds the capital city of La Paz, came out to protest Sánchez de Lozada's plan to export cheap gas to the United States through Bolivia's historic rival, Chile. The protesters erected blockades, strangling La Paz. Sánchez de Lozada declared a national emergency and called out the military.

As a convoy of soldiers carrying cisterns of gas toward La Paz pushed through makeshift blockades of rocks and tires in the streets of El Alto, the city's overcrowded neighborhoods became a battlefield.

"They began to shoot at houses," remembers Nestor Salinas, a resident of El Alto, "shooting at any human being who put themselves in front of the convoy." "Imagine children just five years old, eight-year-old girls, pregnant women, men, brothers, fathers, teenagers," he continues. "They died to defend our oil and gas."

Within days, Sánchez de Lozada fled Bolivia. As he was landing in Miami, Nestor's 29-year-old brother, David, died from a bullet wound, joining the 59 other civilians killed by government troops.

Morales' hybrid energy policy

Most Bolivians viewed Evo Morales's electoral win last year as a victory for the movement to take back control of the country's natural resources and use them to tackle Bolivia's entrenched poverty. Not an outright nationalization, Morales's oil and gas decree this May set forth a complex series of steps aimed at boosting revenues from gas and regaining some control over the industry. The decree seeks to resurrect the state oil and gas company, YPFB, to assume regulatory functions, direct oil and gas development, and participate in the entire chain of production, from exploration to commercialization.

The decree requires the three public-private energy firms created by Sánchez de Lozada in the mid-1990s, along with the two private firms that bought YPFB's refineries and pipelines at the time, to sell back to the government enough shares (at market prices) to give YPFB majority ownership. To put this in context, these firms hold only 10% of Bolivia's oil and gas reserves. The rest are held exclusively by several foreign companies, including Petrobras and Repsol.

The decree placed a temporary additional tax of 32% on production in the country's two most productive fields, bringing in $32 million a month in new revenues devoted exclusively to rebuilding YPFB. It gave oil and gas companies operating in Bolivia six months to sign new exploration and development contracts.

The decree also reasserted the government's right to establish domestic and export prices. In addition to hiking tax and royalty rates, the Morales administration aims to raise the base prices on which taxes and royalties are calculated. It is currently locked in intense negotiations with Petrobras, arguing that export prices under its existing contracts are far below current market prices. In June, the administration negotiated a 48% increase in the gas price with Argentina, bringing in an additional $110 million a year in revenues—a key achievement of the May 1 decree.

Ultimately, Morales aims to transform Bolivia from an exporter of raw materials into an industrial producer of value-added goods such as electricity, synthetic diesel, fertilizers, and plastics. "The vision is that by 2010 we could see Bolivia as a main exporter of value-added products covering the entire South American market," explains Saul Escalera, a YPFB official. While some critics assert that small countries like Bolivia lack the capital and technology necessary for industrialization, Escalera disagrees. He notes that YPFB has already "received 20 project proposals with a total value of $12 billion from foreign firms that want to invest in Bolivia."

Many of those firms are not the predictable Western players. Gazprom, the Russian state energy giant with more than 25% of the world's gas reserves, has expressed interest in investing more than $2 billion in Bolivia, while inquires have also come from several Asian countries. In May, Venezuela's state oil company, PDVSA, inked a deal to build a gas separation plant to produce fertilizer both for Bolivia's domestic use and for export to Brazil. And an Indian firm, Jindal Steel, has a deal in the works to build a plant that will power the industrialization of Mutún, site of one of the largest iron ore deposits in the world. The $2.3 billion project is projected to generate more than 10,000 new jobs and $200 million a year in government revenue.

According to Hydrocarbons Minister Carlos Villegas, $2 billion of foreign investment has already been committed to expand gas production and export capacity, particularly to Argentina and Brazil. At an International Development Bank conference in Washington, D.C., this July, Villegas declared: "Bolivia has completed its cycle as an exporter of raw materials. The resources are there, but we will give them a new path."

Bolivia's Bumpy Road

The efforts of YPFB to exert control over the oil and gas industry have had mixed results. Shortly after Morales' May 1 announcement, YPFB was involved in a growing corruption scandal and admitted its inability to take over fuel distribution duties as mandated by the nationalization decree. A few weeks later the government declared the nationalization process temporarily suspended due to "a lack of economic resources," creating further unease and confirming critics' concerns that YPFB lacked the capacity, competence, and cash to carry out its new role. In late August the debacle culminated with the resignation of YPFB's president, Jorge Alvarado, who had been accused of signing a diesel contract that violated the decree. It was a major setback for a president who had asserted that YPFB would be "transparent, efficient, and socially controlled."

In August, police and prosecutors searched Repsol's Bolivia offices for the second time in six months in separate smuggling and malfeasance investigations. Repsol expressed outrage, warning that these investigations were jeopardizing the company's continued investment in Bolivia. In this case as in others, the government is pursuing a problematic strategy with foreign energy companies: wielding a strong hand to expose malfeasance and discredit them while simultaneously negotiating for their continued investment in the country.

Despite these obstacles, in late August the government became more assertive in implementing the May decree. After a four-month delay, government threats of expulsion secured the additional $32 million in monthly payments to YPFB due from Repsol, Petrobras, and France's Total, providing the state company with a critical infusion of cash.

In September political problems again flared. A resolution issued by then-hydrocarbons minister Andres Soliz Rada ordered Petrobras to hand over control of exports and domestic sales of gasoline and diesel in its two Bolivian refineries in compliance with the decree. This move backfired, however, after the Brazilian foreign minister said the measure could cause Petrobras to pull out of Bolivia, which led Vice President Garcia Linera to suspend Rada's resolution. Rada responded by tendering his resignation, another setback for the administration. Linera, feeling the political weight of the moment, was resolute in declaring that the nationalization process was "irrevocable" and that the government, while maintaining a posture of "negotiation and tolerance," would be "intransigent" in obligating companies to comply with the decree.

In October, however, the government reached agreement on new exploration and development contracts with 10 major companies operating in Bolivia—a major milestone. Under the new contracts, the foreign companies are to extract Bolivia's oil and gas and hand them over to YPFB, which compensates the companies for production costs, investment, and profit. The tax and royalty rates in the new contracts are variable depending on a company's level of production and whether or not they have recovered past investments. The government claims its take will range between 50% and 80%, although questions remain about how it will be calculated. YPFB president Juan Carlos Ortiz estimates that the new contracts will put annual revenue for 2006 at $1.3 billion; President Morales assured the public that with the increase in exports to Argentina and the new tax rates, annual oil and gas revenue will rise to $4 billion within the next four years.

"Mission accomplished," declared Morales in a press statement at the contract signing. "We are exercising as Bolivians our property rights over natural resources, without expelling anyone and without confiscating. With this measure, within 10 to 15 years, Bolivia will no longer be this little poor country, this beggar country, this country that is always looking to international assistance."

Critics, however, question whether the government got a good deal for the country, pointing out that the contracts don't commit foreign investors to substantial future investments or provide YPFB with the physical resources to participate in all phases of the industry. And tense negotiations continue over control of the five companies which used to make up the state company, prior to capitalization. Petrobras, which owns the two formerly YPFB refineries, has shown reluctance to give up any operational control of these facilities. Considering that Bolivia supplies 50% of Brazil's gas needs and that Petrobras' transactions account for 18% of Bolivia's gross domestic product, both countries have much to lose should a deal not be reached.

Opportunities and Obligations

As Bolivia struggles to work through the pitfalls of implementing Morales' decree, a clear end goal is to achieve a larger shift in power dynamics. Rather than receiving policy prescriptions from Washington or from international institutions and foreign investors, Bolivia aims to draft its own blueprint, joining a growing political shift in the region away from free-market ideology.

YPFB's Escalera describes the difference the nationalization decree has made for the state energy company. "Before, we had big plans—jobs industrialization, value added products—but didn't have the [gas]," he explains. "It was like knocking on the multinationals' door, ‘Could you give me a little sugar for my tea?' If they don't want to do it, the deal is off." "Even if they were willing to give it to me, I'd then have to go talk to Transredes [the public-private pipeline company created under capitalization] to beg for transportation," he explains, "and they would say ‘forget it.'" "Since the May 1st decree," he continues, "everything has changed. We can guarantee everything the investor wants—transportation, volume, price—now it's in my hands."

Many Bolivians hope the government's new resources and new authority will translate into concrete improvements in quality of life for the country's nine million people, including new jobs and increased state resources for education, health care, and infrastructure. But the challenges Bolivia faces in transforming its oil and gas policy cannot be overstated. Whether the nationalization decree can be fully implemented, let alone generate concrete benefits for ordinary Bolivians, depends on multiple factors: not only getting all of the pieces in place to ensure that the anticipated surge in oil and gas revenues actually materializes, but also creating strong and effective governmental and social institutions, mitigating the social and environmental impacts of energy development, and using the new revenues effectively for national development projects.

For Nestor Salinas, a member of the Association of Family Members of those Fallen in Defense of Gas, which is pushing for Sánchez de Lozada to return to Bolivia to stand trial for the killings during the Gas War, the Morales government also carries a moral debt.

"Our name says it clearly: ‘Fallen in defense of gas,'" he explains. "This is the importance the country has to place on this issue. The families that lost [loved ones] didn't lose them for nothing, their loss made possible the social, economic, and political change that Bolivia is now living. The government now owes these families justice."

Aaron Luoma and Gretchen Gordon are research associates with the Cochabamba-based Democracy Center. They are both contributors to the forthcoming book Dignity and Defiance: Stories from Bolivia's Challenge to Globalization from The Democracy Center, www.democracyctr.org.