Council On Hemispheric Affairs
MONITORING POLITICAL, ECONOMIC AND DIPLOMATIC ISSUES AFFECTING THE WESTERN HEMISPHERE

Thursday, May 4, 2006
COHA Memorandum to the Press:

Bolivia’s Gas Nationalization:

www.coha.org/NEW_PRESS_RELEASES/New_Press_
Releases_2006/06.27_Morales_Nationalization.html

• Monday’s sudden nationalization of Bolivia’s natural gas industry was a carefully orchestrated maneuver that has profound significance and implications for Bolivia, Latin America, and the developing world
• The scope of the nationalization program indicates that Morales is feeling the pressure from his indigenous base and needed to legitimate his rule by actually carrying out his campaign pledge
• Also at play were the growing ties between Caracas and La Paz, underscored by Bolivia’s recent signing of Chávez’s ALBA trade agreement, along with Fidel Castro
• The nationalization potentially could lead to a region-wide energy integration grid through the new gas pipeline projects now being planned, which would traverse South America and involve all of the “pink tide” countries
• Washington may see the nationalization plan as a clear sign that Morales is now too radical to tolerate, despite the fact that the U.S. has little involvement in Bolivian natural gas, or, for that matter, its politics, and in recent weeks had toned down its attacks against him
• The breadth of Morales’ nationalization decree may be overstated, as he already had insured foreign investors that they would not lose any of their funds and could translate their ownership into management rights
• Lula and Morales will strive to contain their conflict because they need each other

It was an almost theatrical strategic move. On May 1, his 100th day in office, Bolivian president Evo Morales decreed the nationalization of the country’s natural gas industry. Morales, elected in December by mainly appealing to Bolivia’s poor and his fellow indigenous, repeatedly had pledged to assert national sovereignty over the gas resource, although this promise was dismissed by many as merely political shenanigans. At other times in his career, Morales had proven to be more pragmatic than ideological and more manipulative than righteous, and as such there had been much speculation about what shape the eventual nationalization would take. By assertively ordering army units to occupy gas facilities, however, Morales not only demonstrated a firm vision for the country’s future, but also underscored the symbolic importance of the act.

Making such a public display was crucial for Morales, whose term in office has been – as predicted – less than smooth, with work stoppages and sectoral protests already breaking out. But the May 1 decree was not a hollow charade for simple political gain, and the design of Morales’ nationalization reveals a great deal about his personal bona fides, as well as his likely political future, and perhaps will help place him in a position of particular prominence within the regional “pink tide” populist movement.

Forging a Leader
As Morales came into office, it was uncertain how fluidly he would navigate the path between Washington and other international financial powerbrokers, some of whom, like the white and mestizo dominated middle class, had sought to gently guide his policies towards a position of Lula-esque moderation. Meanwhile, Morales’ chief confederates sought to push him towards a more Chávez-type populist model. While Morales has resisted some of the demands of his more radical backers, the nationalization is a clear move towards the desires of his support base. Despite the elements of pageantry, the decree was a fundamental statement of political ideology, and a clear step in Morales’ ongoing move towards the left of Latin America’s political spectrum and greater alignment with Venezuelan president Hugo Chávez and Fidel Castro.

Fulfilling a Promise
Morales swept into office on what amounted to two explicit pledges: the legalization of coca leaf production and the nationalization of the country’s gas industry. While a third, less programmatic plank – his indigenous identity which represented a rejection of traditional politics and politicians – was crucial to his success, it was the gas issue that provided him the largest groundswell of nationwide support for a policy position he had adopted as his flagship issue. Nationalization seemed to offer the possibility of redistributing the wealth generated by Bolivia’s natural resources to an impoverished population, particularly when his deeply needy people were taking to the streets in order to pressure the government for wage increases. As South America’s poorest nation, the general population had an easy case to make.

In fact, Morales’ campaign promises had been deliberately vague, and it appeared as though the candidate’s potent rhetoric belied what was likely to be a moderate stance subject to negotiation. Some observers were concerned that Morales had raised expectations among his central constituencies with talk of nationalization and that anything short of outright expropriation would have most likely been seen as a betrayal – which would have had ominous repercussions for his presidency.

The nationalization decree was delivered on Monday from the San Alberto gas field near Tarija with all the ceremony of a national holiday, and indeed that was the intended effect. Street celebrations erupted as many Bolivians celebrated the rare instance when a president actually followed through on a campaign promise. Adding to the show, military units, accompanied by teams of government engineers, occupied a total of 56 gas facilities in the country.

The nationalization decree was sweeping, and held true to Morales’ long-running assertion that the gas belonged to the Bolivian people, not the companies that extracted it. The details made public included an announced hike in royalties on production from the two major gas fields from 50% to 82%, with other fields being increased to 60%. According to Vice President Alvaro Garcia Linera, this will up the government’s take from $460 million in 2005 to $780 million by 2007.

As part of the nationalization, the Bolivian government will also assume complete control over the country’s natural gas production, including commercialization and distribution of gas by means of the state company YPFB (Yacimientos Petroliferos Fiscales Bolivianos). As with the Venezuelan oil industry, YPFB will take a management role and majority (51%) stake in all gas-related operations including pipelines. This strategy seemed to be something that Morales has long been planning: in January, when Jorge Alvarado was appointed to head YPFB, hydrocarbons minister Andrés Soliz Rada commented that the move would help YPFB “raise itself from the ashes to found a company similar to [Brazil’s state oil company] Petrobras or [Venezuela’s state oil company] PDVSA,” according to a BNAmericas report. In this effort, Bolivia will undoubtedly receive the assistance of highly trained PDVSA engineers and production managers provided by Chávez.

Gas Companies and International Markets
The gas companies currently operating in Bolivia, among them Spain’s Repsol-YPF, British Gas (BG), British Petroleum (BP), France’s Total, and Petrobras, now face a six month semester to renegotiate their contracts under the terms of the decree, or, however unlikely, be summarily expelled. Repsol is clearly the company most affected by the nationalization, as it had previously claimed 18% of its total reserves and 9% of its production in Bolivia. While U.S.-based Exxon-Mobile is active in Bolivia, its holdings are relatively small. Even Petrobras, which is the most active player in the Bolivian gas industry (responsible for around 45% of the country’s gas production), claims only 2.8% of its reserves and 2.4% of its production in Bolivia. Petrobras does, however, have around $1.5 billion invested in Bolivia, as well as two major refineries. Most analysts feel that despite the initial shockwaves over the nationalization, the gas corporations will continue to operate in Bolivia, and at the very least Petrobras will continue to have a strong presence among them.

Tensions with Repsol, however, are likely to remain high. The company has been consistently wary of Morales, downgrading its projections for the country shortly after he took office, and putting a halt on further investment. The decision by Bolivian officials to prosecute two Repsol officials for allegedly smuggling gas out of the country only has further frayed nerves. Madrid’s response, which has been rather blustery and has included a vague but likely empty threat by Prime Minister Zapatero to reduce aid to Bolivia, is highly influenced by that relationship. Petrobras has also expressed a degree of displeasure with the nationalization, backing up its verbal parries by putting a hold on further investment in Bolivia, and canceling plans to expand an existing pipeline between Brazil and the Bolivian gas fields.

While Morales had made non-committal references to changes in the country’s gas management regime in recent weeks, clearly the industry was caught off guard by Monday’s decision. Repsol officials have complained that they expected to be consulted prior to any change in the industry’s management. If a critique is to be made about the nationalization process, it is that in its execution Morales did not display a deft touch for the international markets. This is somewhat unlike Chávez, who despite driving a hard line on terms of investment, has maintained a consistent position regarding the levels involved and thus he is viewed as being predictable. Yet simultaneously, the nationalization decree was not altogether unexpected and future assertions of Bolivian sovereignty should not provoke the sort of gusty international reaction now being witnessed.

A Rough Ride
Ultimately, what was particularly striking was not the nationalization itself, so much as the manner in which it was carried out. The elements of showmanship – “property of Bolivia” banners draped over industrial complexes and army troops taking over refineries – were carefully calculated. What Morales has done cannot be classified as an expropriation (as the companies’ assets, such as refineries, are not being seized), since it is control over the gas resource itself that concerns the government. Nevertheless, the military’s presence was symbolic, and lent a desired degree of drama which led the nationalization process to resemble an expropriation, at least in terms of public perception, even though it was definitely not that. Morales, a leader in the popular movements that toppled several past presidents, is acutely aware of how easily his own base could rise up against him should he falter in his mandate for profound change. This knowledge undoubtedly weighed on the new president’s nationalization strategy, and his decision to issue the decree suddenly and sharply on Monday suggests that he properly registered the building pressure.

Only five months into his presidency, Evo already has faced numerous problems. While he successfully negotiated with opposition parties to hold a constituent assembly (members of which are soon to be elected), several strikes and protests have marred his brief tenure. These have included sit-ins by airline workers and a poorly supported strike by healthcare workers, both of which Morales was able to handily brush off. The country’s main workers union, the COB – although no longer as powerful or cohesive as in the past – has continually pushed Morales for accelerated reform. Additional pressure came when demonstrators in Puerto Suarez seeking to overturn the government’s decision to block construction of a steel plant there, took three government ministers hostage, forcing Morales to send in an army detachment to free them. Such flare ups were indicative of the situation which has reigned since the inauguration, as the various demands of an increasingly restive base (which has made no secret of its willingness to turn on Morales) were emphatically registered.

Implications of Nationalization
The crucial, and if anything, burgeoning, entente cordial between La Paz and Caracas was underscored by Morales’ recent decision to join Cuba in signing on to Chávez’s ALBA (Alternativa Bolivariana) agreement, which is presented as an alternative to the U.S.-backed FTAA (Free Trade Area of the Americas). With the nationalization, and the parallel growth of YPFB, Morales has also taken clear steps towards joining the regional movement in favor of energy integration. Chávez has stated that Bolivia must be included in the proposed Gasoducto del Sur, which will link much of eastern South America via a massive gas pipeline stretching from Venezuela to Argentina. The project already has the support of Brazilian president Luis Inacio Lula da Silva and Argentine president Nestor Kirchner. Bolivia’s nationalization will dramatically increase its interest in the project, for it now has its own gas to hurry to market. Yet at the same time, it could turn down Brazil’s desire to cooperate, since doing so would appear to be awarding La Paz for bushwhacking Brasilia’s investments in Bolivian gas. Moreover, Morales will now be able to more directly take the initiative in promoting additional energy projects, including the possible Uruguay-Paraguay-Bolivia pipeline which would be largely Venezuela-funded.

Yet there are potentially lurking problems that could plague the aftermath of the nationalization announcement. YPFB will need to prove that it is capable of serving as an effective administrator, and although it vastly lacks the technical expertise and financial wherewithal of PDVSA (which has succeeded in its model of being able to maintain an effective partnership with foreign companies) Chávez will be readily able to provide Morales with all of the technical and administrative support necessary in order to ensure the venture does not fail.

More pointedly, there are profound questions over how regional leaders, other than Chávez – principally Lula – will react to the decree. Given Petrobras’ large stake in Bolivia, and Brazil’s near total reliance on Bolivian gas, the prickly defensive stance taken by Lula’s government in the immediate wake of the nationalization of Petrobras’ holdings was understandable. A summit between Morales, Lula and Kirchner – whose country is also a major importer of Bolivia’s gas – is scheduled for today. While Morales has suggested that Petrobras will likely to be able to negotiate on favored terms, he has also declared the end to preferential gas deals with Argentina and Brazil, asserting that both countries will now need to pay the market rate.

The reunion comes at a crucial moment for Lula, who now must choose between affirming his pink tide credentials by supporting the nationalization, or retreat to a hangdog position of economic orthodoxy, where to the distress of many of his ruling PT party militants, he now can be found. It seems likely that Lula, up for reelection in October, and needing to reassure his own leftist base of his authenticity, will land softly on Morales, and that the current scrap will likely pass. Even the discomfort among Petrobras’ technical leadership, which produced the decision to halt investment in Bolivia, could be overturned by Lula’s intervention. This likely executive level stand-down notwithstanding, if the nationalization results in a marked increase in energy costs for Brazil, Lula may perhaps find himself in a difficult situation come election time. Surely, it is in the best interests of both men to contain the flap and not make it appear that there was a moderate and radical choice that could have been made.

For Washington, the gas nationalization, and Morales’ promise to return more industries to state control in the future, potentially ends the relatively well-mannered honeymoon period witnessed in recent weeks. While reasonably diplomatic stances had been taken by both sides on the issue of legalizing some coca-leaf production, it has always been a tense relationship, punctuated by outbursts and minor provocations. Economic repercussions for the U.S. from the nationalization decree are minimal, because U.S. energy corporations have only small investments at play in the country, and Bolivian gas currently does not reach the U.S. market. Nevertheless, it is not breaking any secrets to indicate that the nationalization – and the dramatic way in which it was launched – are likely to alarm the State Department, which undoubtedly has looked with suspect eyes at the growing ties between Caracas, La Paz, and Havana.

Marking the Way
The nationalization is undeniably a milestone for the newly fledged Morales presidency. It represents not only the dramatic fulfillment of a campaign pledge to his core constituents, but also promises to potentially change the face of Bolivia by providing funding for much needed social investment. Furthermore, it marks Morales’ ascension from the ranks of the chorus to being one of the principles, and now helps make him a fully credentialed member in the regional “pink tide” left-leaning movement.

This analysis was prepared by COHA Research Fellow Michael Lettieri
May 4, 2006
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COHA Memorandum to the Press 06.27
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