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by Franz Chavez

Crisis In Bolivia Over Foreign Control Of Nation's Oil (2005)

(IPS) LA PAZ-- "If you agree, sign the decree!" Bolivian President Evo Morales told his ministers on the morning of May 1, as he got ready to announce the renationalization of an industry that will bring in $200 billion over the next two decades to South America's poorest country.

Morales was ready to reassert state control over the country's natural gas reserves -- the second largest in South America.

That day, according to one of the architects of the plan, Morales handed the decree to his cabinet, sitting around a huge carved wooden table in the meeting room in the government palace, as the first rays of sunlight filtered through the chilly morning of La Paz.

Signatures, applause and the national anthem. After the last verse ("Morir antes que esclavos vivir" -- "Better to die than to live as slaves"), Morales smiled and said, "The plane is waiting for us."

Only a few of his closest associates knew that the army would be called out to occupy Bolivia's oilfields, refineries and petrol stations, or that the president and his stunned ministers would ride that morning in a C-130 Hercules transport plane to the region of Carapari, 1,200 kilometers to the south.

When Morales reached the doors of the San Alberto gas plant, controlled until that day by Brazil's state-owned oil giant Petrobras, the smiling employees asked which part of the gas field or facilities he wanted to visit.

But the president had not come for a visit. He had come to seize control of the installations and the gas fields.

A day earlier another army, this time of oil engineers, had moved quietly through the gas fields and plants on the pretext of carrying out inspections and controls, although in larger numbers than usual. "New technicians are accompanying the old ones to gain experience on the ground," the engineers told the guards and watchmen at the foreign oil companies, to allay any suspicions.

The aim of the secret mission by the oil industry technicians was to take emergency action in case the companies decided to respond to the nationalization by cutting off energy supplies.

The little-known story behind the events of May 1 was related to IPS by one of the six strategists responsible for the secret plan, Manuel Morales Olivera, general adviser to Bolivia's state-owned oil company Yacimientos Petroliferos Fiscales Bolivianos (YPFB).

Morales Olivera is the son of lawyer Manuel Morales Davila, who spent 42 days in prison in 1996 after accusing then-president Gonzalo Sanchez de Lozada of betraying the fatherland by privatizing the energy industry.

Decree 28701 returned the country's energy resources to state hands, in compliance with a 2004 referendum in which Bolivians voted for the renationalization of the natural gas reserves, and with two articles of the constitution.

It also put YPFB in control of the entire chain of production as well as domestic natural gas prices, and gave foreign companies six months to renegotiate the terms of their existing contracts under the new rules.

The May 1 presidential decree reaffirmed that the companies' exploration and production contracts were annulled because they had not been approved by the legislature as established by the constitution.

It also outlined the conditions under which the industry would operate during the transitional period, while the Ministry of Hydrocarbons decides, "on a case by case basis, and by means of audits," on investments, repayments, operating costs and profit margins for each company.

The result of the audits will serve as the basis for the new contracts.

In the meantime, in the case of fields that produce more than 100 million cubic feet of gas a day, 82 percent of the proceeds will go to the state -- 18 percent in royalties, 32 percent in a direct tax on production, an additional 32 percent to YPFB -- and 18 percent to the foreign companies.

For smaller gas fields, the current 50/50 split of revenues will remain in place during the transitional period, the decree states.

To guarantee the continued distribution of supplies, the decree gave YPFB a controlling stake in the companies.

The origins of the decree date back to the second half of 2002. The now governing Movement Towards Socialism (MAS) and its leader Evo Morales came in second in the elections, just 20,000 votes behind Sanchez de Lozada (1993-1997 and 2002-2003), who had privatized not only the country's natural gas industry but also telecommunications, the railways, power companies, and other state assets and enterprises.

Morales Davila, the father of the current YPFB adviser, was in charge of drawing up the first bill for the nationalization of the gas industry introduced to Congress by MAS in October 2002, with the backing of 30 legislators and 10 trade unions.

That support, however, was insufficient for the bill to make it through the legislature, explained Morales Olivera.

What Congress did approve, in May 2005, was a law raising the royalties and taxes paid by foreign oil companies from 18 percent to 50 percent.

Leaning back in an armchair in his home in a middle-class neighborhood of La Paz, across from a stylized image of legendary Argentine-Cuban revolutionary Ernesto "Che" Guevara, Morales Olivera responded to IPS's questions on the third nationalization of Bolivia's oil and gas industry, as the smoke rose from the cigarette in his hand.

IPS: What is the predominant current of thought in the MAS, in favor of nationalizing the country's energy resources?

MANUEL MORALES OLIVERA: The first current arose from the indigenous movement for the recuperation of their land and power. This nationalization process puts capital at the service of the interests of the nation instead of expropriating it. Like Evo Morales says, we want partners, not bosses. That explains the deployment of the armed forces. If any company had rejected the decision, at that same moment, the armed forces and government engineers would have taken control of the operations.

IPS: Ten years after the privatization of the gas industry, the concept of what a state-owned oil company is supposed to do seems to have been forgotten. What role did the YPFB used to play?

MMO: It operated in the entire production chain. It owned the oil that was pumped, supplied the domestic market and exported gas to Argentina. Foreign companies operated here, but they were subordinate to YPFB.

Through royalties and other mechanisms, the state received 50 percent of all proceeds. After privatization, the state-run company was dismantled and its role was limited to the administration of contracts with the foreign firms. By law it was prohibited from "touching oil or smelling gas."

The private companies took over the industry. They were eager to take in $5 billion to export natural gas as raw material (to the United States and Mexico), but they were incapable of investing $40 million in a gas pipeline to provide the western part of the country with energy supplies. For example, we have not found a balance between the low level of production and the great demand for liquefied petroleum gas, but we export natural gas that is rich in liquefied gas.

IPS: How much did YPFB contribute to the state prior to privatization?

MMO: YPFB contributed $400 million a year. But in 1993, during the government of Sanchez de Lozada, its contribution to the state coffers began to decline, and they began to kill off YPFB on the argument that it was inefficient and loss-making.

IPS: After privatization, how much did the private firms contribute to the state coffers?

MMO: No more than $100 million, and in some years as little as $10 million. After the popular movement grew in strength, in October 2003 [when mass protests triggered by the plans to export natural gas to the United States and Mexico toppled the government of Sanchez de Lozada], the foreign companies increased their contributions, accepted government decisions on their activities, and set an oil price for the domestic market.

To prevent price hikes for gasoline, the government paid the difference between international prices and the domestic price that was subsidized through a compensation mechanism. The oil companies basically loaned us money to buy our own gasoline for ourselves at an international price, with a commercial interest rate of 8 percent a year.

IPS: What would happen if the companies decide to pull out of the country?

MMO: The oil companies would not be able to withdraw their investment immediately, and if they decided to do so, they would have to transfer their installations, pipelines and other assets to new companies, and there are already firms interested in buying them.

The new firms coming in would find a new scenario and new conditions, and would know that it is the state and Bolivians as a whole who make the decisions here.

In the past, they told us that charging a 50 percent tax would trigger an economic blockade and the death of the oil industry. But now that the San Alberto and San Antonio gas fields [which were under Petrobras control] will have to pay 82 percent in taxes, no one is saying they will die because we know that even under these conditions, they will still be making a profit.

The two mega-gas fields produced around $940 million a year in earnings and [since the May 2005 law went into effect in September], they were supposed to pay half -- $470 million. Now they will pay approximately $780 million a year.

IPS: What will happen in case one of the companies tries to sue Bolivia?

MMO: They do not have valid contracts on the basis of which to sue us. And if they tried to do so, the Bolivian state could refuse to respond to an international court of arbitration. Even if the suit moved forward, and in seven years they won, we would innocently ask how they planned to enforce the arbitration awards.

No arbitration award against a sovereign state has ever been collected by force, and there is no international legislation creating a mechanism to enforce such an award against a state. The majority of states face arbitration -- including Brazil and Argentina, for example -- and they don't collapse and they aren't embargoed.

IPS: Is the Bolivian state being opportunistic in nationalizing an industry that had received $3.5 billion in investment since 1996? It looks like you kicked out the rival team and kept their ball.

MMO: We had our own team, and a coach came and replaced the players with foreigners. They kept our ball as well as the field, and took control of the whole game. The ball and the field have now returned to us, and the foreign players are submitting to the new coach. An audit will determine how much investment was actually made, and whether or not they have recovered it totally or partially.

IPS: What guarantees will there be in the future to keep social movements from once again pressing successfully for a change in the rules governing foreign investment?

MMO: We are sure that more than 80 percent of the population agrees with the nationalization, which was born of the July 2004 referendum, in which voters ordered us to recover state ownership of the country's energy resources. We will be very tough with the companies, but we will guarantee secure contracts. They either accept, or they leave.

IPS: Will YPFB once again directly operate in the chain of production?

MMO: Thirty-two percent of the San Alberto and San Antonio gas fields will go to YPFB. And sooner rather than later, the public will hear the news that the state-owned company will once again get involved in exploration.

Nationalizing the entire chain of production would have been a leap in the dark. The next day, fuel supplies would have come to a halt. But the nationalization of 51 percent of the companies that belonged to YPFB prior to privatization guaranteed that operations would continue smoothly.

IPS: To what extent did the Venezuelan model influence the decision?

MMO: This system is different from the one that our brothers and sisters in Venezuela are applying. Despite facile accusations that the decision was influenced by Venezuela, industry experts know that the concept of joint ventures is different from the model that Bolivia is following.

IPS: Has Cuba made any ideological contribution to the nationalization process?

MMO: Cuba is a guiding light for Latin America's social movements, but with respect to the oil industry, our style is different. In Cuba, the state sells part of the output, while in Bolivia the state will sell 100 percent.

IPS: The media reported that Morales was criticized by Presidents Luiz Inacio Lula da Silva of Brazil and Nestor Kirchner of Argentina for nationalizing the industry without prior notice. What is your opinion on that?

MMO: At the summit meeting [in which Lula, Kirchner, Venezuela's Hugo Chavez and Morales met] in Puerto Iguazu, Argentina, the three large economies of South America [Argentina, Brazil and Venezuela] had to recognize Bolivia's sovereign right to make decisions on its natural resources.

As of now, there is a new important actor in the negotiations: the Bolivian state and government.

IPS: How much did the urgent demand for natural gas in Brazil and Argentina influence the decision to take the big step?

MMO: The market conditions and current circumstances in the industry at a regional and international level were analyzed, which allowed us to take firm, bold decisions. The truly daring aspect was to have had the courage to adopt sovereign measures without consulting Brazil, Argentina, the United States or the European Union.

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Albion Monitor   May 11, 2006   (

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