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25/04/2006 | Repsol in Bolivia: When Business Serves Foreign Policy

Stratfor Staff

Bolivia's government will take away control of energy prices and export volumes from foreign companies, and will proceed with the implementation of a law raising energy-output taxes from 18 percent to 50 percent, Bolivian officials said April 23 in Washington.

 

The move increases the difficulties facing Spanish state-owned company Repsol YPF, which has nearly a quarter of its reserves portfolio in Bolivia. Despite this new blow, Repsol's role as a tool for Spanish state policy means the company cannot simply pull out of Bolivia.


Bolivia will raise taxes on energy outputs from 18 percent to 50 percent and foreign oil companies "will no longer have the freedom to set prices and export volumes," Bolivian Planning and Development Minister Carlos Villegas said April 23.

The move is just the latest of a number of challenges state-owned Spanish oil company Repsol YPF faces in the region, in which it is heavily invested. Despite Bolivia's decision, it is unlikely that Repsol -- and more important, the Spanish government -- will reconsider the economics of its investments in South America.

Repsol acquired a majority stake in the Bolivian oil company Andina in 2001, giving the Spanish firm an added 576 million barrels of oil equivalent (boe) to its stated reserves. By the end of 2004, Repsol reported reserves of 1.31 billion boe in Bolivia alone, and boasted that it controlled as much as 70 percent of the natural gas Bolivia exports to Brazil.

Repsol's investments in Bolivia have not fared well of late. In the beginning of 2006, the company announced a reduction in its reserves of roughly 25 percent, or 1.25 billion boe. Approximately 52 percent of that decline originated from its holdings in Bolivia, with the majority coming from the Sabalo and San Alberto fields. In making the write-off, Repsol cited concerns over nationalization of the country's oil and gas fields and higher tax rates, which made extraction less desirable. Repsol's headquarters in Madrid is auditing the evaluation procedures used in Bolivia, however; the company has declared $50 million in losses since the oil was discovered, despite the rise in world oil prices.

With Bolivia accounting for roughly a quarter of Repsol's reserves, the recent decision by Bolivian President Evo Morales to control prices and exports comes as a hard blow to Repsol. Its profit margins will suffer, along with its operations in Brazil, which usually receives raw inputs from the Bolivian fields. Now La Paz, and not producers, will dictate export volumes to countries like Brazil and Argentina, thereby controlling the cost and amount of resources delivered to Repsol's operations in those countries. With the consequent dramatic increase in taxes and the new inability to set its own prices, Repsol will most likely be forced to service the Bolivian market at a loss.

Further complicating the problem, Bolivia's announcement sends a clear signal of the shape of energy policy to come. While claiming it will not nationalize technology or capital, the Bolivian government has made it clear it is considering nationalizing its oil and gas reserves as well as its mineral deposits. And La Paz has the luxury of nationalizing profitable assets while merely taxing loss-making operations.

Repsol has experienced situations similar to this. Madrid frequently uses Repsol -- both Spain's largest oil company and a state-owned entity -- as a foreign-policy tool. The company has invested heavily in South America, often in projects most commercial firms would deem unviable. Repsol's Argentine investments -- which at 2.36 billion boe constitute nearly half of its recorded reserves -- its largest in South America, are a good example. Despite economic risks in Argentina, including the financial crisis of 2001 and worker strikes in 2004, Repsol continues to invest heavily in the country, including an increase of $700 million announced in January, to a total of $6.7 billion to be invested between 2005 and 2009.

The logical progression of Repsol investment would lead to Venezuela, one of South America's largest oil suppliers. In fact, Repsol has already purchased a stake in the Quiamare-La Ceiba field from ExxonMobil, which left Venezuela after Caracas took control of a majority stake in the field while leaving Exxon to cover the bulk of the investment costs. Repsol also seeks agreements with the Venezuelan government to form two joint ventures with Petroleos de Venezuela for exploration and production in Venezuela. Given the difficulty and expense of producing Venezuelan crude, any Repsol investments in Venezuela likely will be significant. And given Venezuela's history of government involvement and state ownership of energy projects, it also seems likely Repsol will continue being not particularly profit- or efficiency-oriented.

By international standards, Spain is a midsized state, and lacks the resources to compete globally with its fellow Europeans France and Germany. In order to operate in the international arena, Madrid has fallen back on a region of the world it knows well: Latin America. This is why the Spanish government, via Repsol, invests so heavily in South American countries that many commercial firms have found uninviting. Thus, Spain has invested in loss-making operations to fund development projects of governments it wishes to befriend. Unfortunately for Madrid, the policy is becoming costly.

Investing in Bolivia is not Repsol's first, or last, mistake. Its short-term and midterm plans call for investment in offshore exploration in South America and a strengthening of the company's position in Venezuela. Because of its nature as a state tool, Repsol will continue to invest in projects of dubious profitability -- and will continue to suffer the ill effects.

Stratfor (Estados Unidos)

 


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