Some see Bolivia strategy backfiring

BOGOTÁ -- When President Evo Morales nationalized Bolivia's gas industry this week, he fulfilled a popular campaign promise to return his country's riches to its people. But he may have done more harm than good to Bolivia's interests and those of the region, analysts said yesterday.

Bolivia boasts the second-largest hydrocarbon reserves in South America, with an estimated potential value of $70 billion and including nearly $1 billion in natural gas exports last year. If foreign investors are scared off by nationalization, the poorest country in the continent cannot afford to fully exploit its hydrocarbons sector alone, the analysts say.

Morales is expected to explain the move to Presidents Luis Inácio Lula da Silva of Brazil and Néstor Kirchner of Argentina -- whose countries are the biggest consumers of Bolivian gas and among its biggest investors -- at an emergency meeting in Argentina today. Also expected to attend is President Hugo Chávez of Venezuela, Morales's closest ally in the region, who controls the region's largest oil and gas reserves.

Meanwhile, business leaders in Santa Cruz, the headquarters of Bolivia's petroleum industry and its financial capital, have called for a general strike today to protest the occupation by soldiers of 56 gas installations around the country.

The nationalization follows similar moves that have soured the investment climate for energy companies in South America, from this year's tougher contracts in Venezuela's oil sector and higher taxes on oil profits in Ecuador, to recent calls by a presidential front-runner in Peru for state control of gas, to Argentina's freezing of gas and power tariffs in 2002.

Morales's government has said it expects nationalization to boost its annual gas revenues by $300 million. But with gas reserves concentrated in fields that are miles deep, billions of dollars are needed to capitalize on the potential of its hydrocarbons sector.

''Bolivia doesn't have the money to make major investments to continue developing the natural gas industry on its own," said James Ferrer, director of the Center for Latin American Issues at the George Washington School of Business in Washington, D.C. And it's hard to imagine any company who would find further investments profitable with the 82 percent taxes and royalties that Morales decreed Monday on the country's two biggest gas fields, he said. ''I can't help but believe he's damaging Bolivia's interests . . . by essentially terminating investment opportunities," Ferrer said.

Last May, Bolivia slapped oil companies with a mandatory 50 percent royalty. On Monday, foreign energy companies were told they must turn over ownership of assets to the state oil company known as YPFB, and have six months to agree to new contracts or get out.

Control of gas wealth has long been a contentious issue in Bolivia, with bloody demonstrations over plans to export gas to the United States and Mexico claiming scores of lives and bringing down the government in 2003.

Morales's decree follows similar moves by Chávez, who has wrested more favorable contracts from foreign oil companies. But Venezuela has the advantage that its oil fields are exponentially bigger, cheaper to exploit, and closer to a coastline for easy export. Bolivian natural gas, in contrast, is harder to reach and must be pumped through pipelines or liquefied for export, further raising costs for investors.

Carlos Alberto López, a La Paz-based energy consultant and former Bolivian secretary for energy and hydrocarbons, said that alienating major investors such as Brazil's Petrobras, Spanish-Argentine Repsol YFP, and France's Total could have devastating effects that could go so far as to threaten Bolivia's domestic gas supply by choking off investment in new fields.

''The system is at its very limit," López said.

According to the Bolivian state gas company's own estimates, without substantial investment in new fields, the country may find itself unable to fulfill existing contracts to export gas to Brazil and Argentina, and may be forced to import 12,000 barrels of natural gas a day by 2010 for domestic consumption.

López said it was unlikely that foreign companies would ''pack their suitcases and leave behind $5.2 billion investment in the exploitation, development, and transport of Bolivian gas since 1996." But it's hard to imagine any company wishing to sink more money in future energy exploration in a country that has nationalized the sector, he said.

Riordan Roett, director of the Western Hemisphere program at the School for Advanced International Studies at Johns Hopkins University, said it is hard to know yet how the Bolivian nationalization will shake out.

''It could be that Morales is playing to his populist base . . . but that lawyers will sit down with contracts and work out reasonable terms" to persuade foreign investors to stay. If not, he said, Morales risks robbing his countrymen of the chance to maximize gas revenues for state coffers.