Global Insight Perspective

Significance

Under the decree, foreign companies have 180 days to sign new contracts or be forced to leave the country.

Implications

Although the nationalisation of the gas sector is a well-known goal of the Evo Morales government, the way in which it is being implemented sends a negative signal to investors, who had been hoping for the opportunity to negotiate new contracts.

Outlook

The decree threatens to undermine existing investments in the country and means that companies will remain unwilling to invest in new export projects.

Bolivia Nationalises Gas Sector by Presidential Decree

Bolivian President Evo Morales yesterday signed a decree nationalising the gas sector and ordered troops to seize control of 56 fields.

Under Decree 28701:

Foreign companies have 180 days to sign new contracts or be forced to leave the country.

An audit will be carried out of investments by individual companies.

In a move that goes even further than the tax changes introduced through the 2005 hydrocarbons law, during the transition period, the government's share of production from the huge San Alberto and San Antonio fields will rise to 82% (18% royalties, a Direct Hydrocarbons Tax (IDH) of 32% and an additional 32% through reformed state oil company YPFB's participation). Foreign companies will be able to retain 18%. Additional revenues for the government from this move are estimated at US$780 million.

The state will regain control of Bolivia's partially privatised or 'capitalised' companies, Chaco, Andina and Transredes. Previously, private investors held a 50% stake in the capitalised companies, with the remaining shares held by the Fondo de Capitalización Colectiva (FCC), which is managed by pension funds. In line with the hydrocarbons law, the shares held by the FCC will be transferred to YPFB. However, as announced by Planning Minister Carlos Villegas on 5 March 2006, the government also plans to buy 1% of the stake held by foreign companies in order to obtain a controlling stake.

The state also intends to acquire a majority stake in the country's refineries currently controlled by Petrobras.

Outlook and Implications

The decree completes a process that began with the July 2004 referendum on gas and the approval of a controversial hydrocarbons law last May. However, the manner in which it has been implemented has triggered fresh concern among investors. Although the deployment of the army is being regarded by many as essentially a symbolic move, the increased taxes on the San Alberto and San Antonio fields threaten to undermine the investments of Petrobras, Repsol-YPF and Total and come despite Morales's earlier pledge to recover control over the country's national resources, but without expropriation. The decree also appears to leave no room for contract renegotiation, imposing the changes unilaterally and leaving foreign companies with no option but to accept the new rules or leave the country. Several investors have already reacted. Brazil's energy and mines minister and the president of Petrobras both described the decree as 'unfriendly', and the Spanish government also expressed its concern.

The US$3.5 billion that foreign companies have invested in the gas sector since 1997 allowed the country to increase its proven and probable natural gas reserves from just 6 Tcf to 48.7 Tcf, placing it in second place in the region, behind Venezuela. However, greater investment will be needed to ensure that future production is sufficient to meet the demand of a new gas pipeline with Argentina, if it proceeds, and a possible expansion of the capacity of the Gasbol pipeline to help cover rising gas demand in Brazil over the next few years. Greater investment is also needed in domestic projects to ensure no repetition of the liquefied petroleum gas (LPG) shortages that provoked protests in the cities of La Paz and El Alto last year. However, political instability and the new hydrocarbons law approved in 2005 have already resulted in a fall in investment. According to preliminary data from Bolivia's Hydrocarbons Chamber, exploration and production (E&P) investment in Bolivia's natural gas sector plunged to just US$175 million in 2005 (of which around US$40 million was in exploration), the lowest level since the sector was privatised in 1997. The gas decree will cause further anxiety among investors, and unless the government shows itself to be more open to discussion, investments will suffer.

Contact: Raul Dary

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raul.dary@globalinsight.com

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