Oil Bomb May Explode Another Presidency in Bolivia

Bolivian President Carlos Mesa faces further political turmoil. To the dissatisfaction of multinational energy firms like Brazil’s Petrobras and Indians groups alike, a new law raises corporate royalty rates from 18 to 32% and adds an 18% tax on corporate revenues.

The new legislation, which Mesa didn’t sign, is known as the Hydrocarbons Law. Political consensus has emerged behind a 50% energy royalty – a figure that was mandated by a national referendum in 2004.

China has indicated that it is prepared to invest in Bolivian energy resources under such a regime.

For the third time in four months, Bolivian President Carlos Mesa finds himself at the center of a political maelstrom that continues to threaten his future as the country’s President.

On May 17, Mesa failed to either sign or veto the Bolivian congress’ controversial Hydrocarbons Law, thus constitutionally requiring Senate President Hormando Vaca Dí­ez to sign the measure and put it into effect.

Days later, his inaction led to the formation of massive street protests as well as threats from energy companies with investments in Bolivia who ominously suggested that if the legislation was implemented they would take the matter to international litigation.

The new law mandates an increase in royalties paid by energy companies for the extraction of petroleum and natural gas from Bolivia’s vast reserves. In addition to a royalty surge from 18 to 32%, the law will tax the companies’ earnings an additional 18%.

Energy companies are outraged at the alleged “confiscatory” royalty rates which would abrogate their existing contracts with Bolivian authorities, though these agreements were never legally ratified by the congress.

From their side, indigenous social groups, who represent a majority of the country, are equally angered that the law is not even stronger. The leading political party for these groups, the Movement Toward Socialism (MAS), initially called for a 50% royalty rate to be charged to foreign multinationals.

Yet, on May 23, many MAS leaders joined even more radical leftist elements in demanding the complete nationalization of the natural gas industry.

Mesa must find a way to reconcile these diametrically opposed forces in order to calm the increasingly passionate national dialogue or, like his predecessors, flee the presidency, leaving the country in disarray.

The Multinational Energy Companies

Since the privatization of Bolivia’s oil and gas industries in the late 1990s, multinational energy corporations such as British Petroleum, Repsol (Spain), Total (France), and Petrobras (Brazil) have invested a total of US$ 3.5 billion in oil and gas extraction programs.

These companies signed contracts with consecutive Bolivian presidents, agreeing to pay an 18% royalty fee for all oil and gas extracted, though these contracts failed to obtain congressional validation as required by the constitution.

However, after an initial surge of investment that reached US$ 600 million in 1998, the companies drastically reduced the pace of their financial inputs to an anemic US$ 200 million in 2004.

In an interview with The New York Times, energy consultant Carlos Alberto López blamed decreased investment in the country on its political instability:

“[Companies] have found gas reserves but have not had the conditions to even think of developing them.”

These companies have called the newly enacted Hydrocarbons Law “indigestible,” rejecting any increase in royalty rates.

Brazilian oil giant and state-owned Petrobras was the first company to offer an official response to the new measure, stating that while they will not pull out existing investments, they have cancelled all planned future projects in Bolivia.

Both the Argentine and Brazilian governments, whose economies are highly dependent on Bolivian gas, have sent high level observers to La Paz this week to analyze the current political unrest.

Despite these tensions, waiting in the wings is the increasingly gas-thirsty China. According to Xinhua online, in early May, leaders of the Bolivian Leftist Revolutionary party (MIR) including Jaime Paz Zamorra, met with officials from the Communist Party of China to discuss future relations.

This meeting, held amid the domestic chaos caused by congress’ ongoing debate of the Hydrocarbons Law, indicates that Bolivia’s leaders are looking to China to replace possible losses in foreign direct investment prompted by the new hydrocarbons bill.

MIR has supported the 50% royalty figure, thus showing that Beijing, as revealed in its meeting with MIR officials, is not averse to investing in Bolivian gas even with such a drastically increased extraction fee.

All Bolivians, “not just the MIR, seem anxious and happy to welcome the Chinese,” according to GeorgeAnn Potter, a research fellow at the Council on Hemispheric Affairs (COHA).

Potter, a longtime resident of Cochabamba, has been tracking Bolivia’s natural resource policies for many years. She notes that China’s ambassador to Bolivia made his nation’s stance clear: “Chinese businesses are interested in negotiating with Bolivia about the future of gas and oil.”

Indigenous Social Movements

On the other side of the gas issue are the indigenous social movements mainly hailing from Bolivia’s western highlands and valleys. These movements comprise some of the poorest elements of Bolivian society: miners, peasant farmers, small business owners and the un- and under-employed.

The most visible leader of this group is Evo Morales, head of the MAS party in congress, which according to many analysts is now the most powerful political group in the country.

His followers exhibited their clout earlier in the year by successfully coordinating massive roadblocks that crippled Bolivian commerce and cost the government an estimated US$ 1 million per day.

More recent blockades, however, were instigated by non-MAS miners and other radical sectors – indicating that some on the left have abandoned their previous solidarity with MAS.

MAS and associated protesters reject the entire concept of globalization and neoliberal economic reforms, which they feel have not delivered tangible benefits to average Bolivians but have actually plundered the country for the last 20 years.

Morales maintains that even the new Hydrocarbons Law overwhelmingly caters to corporate interests, while ignoring the poor. He and his followers initially pushed for an increase in royalties to 50% of revenues – as was called for by last year’s gas referendum.

Yet, this week some MAS officials (but not Morales) joined more radical elements of the indigenous social movements to call for full nationalization of the oil and gas industries.

They believe that since the congress never ratified the oil and gas contracts, as required by the constitution, that all such agreements are non-binding.

Why Approve the Bill?

With a significant controversy surrounding the Hydrocarbons Law and considering the range of influential groups mobilized against it from all sides, it seems remarkable that the bill passed in the first place. However, upon closer inspection, the bill’s passage is actually quite understandable.

First, according to Barrows Company, an international reference library for oil, gas and mineral laws, Bolivia currently has one of the lowest tax and royalty rates for energy in Latin America.

An increase in these rates would only bring the country into line with the rest of the continent, making it unlikely that multinationals would withdraw from Bolivia over this issue.

Ramiro Orias, Professor at the Diplomatic Academy of Bolivia, said that he believes that the transnationals “have invested too much to decide to leave the country.” Petrobras’ decision to remain in the Bolivia verifies this thesis.

Second, according to Orias, the 50% charge on corporate energy revenues has a “significant political consensus” in Bolivia. This “consensus” rejects the idea that the new legislation offers something tantamount to a 50% royalty, as the newly mandate 18% tax mandated by the new law is likely to go uncollected because of corruption.

With China chomping at the bit and not a single enterprise threatening a full pullout, most Bolivians believe that the country would be unwise to seek nationalization – which orthodox economists consider to be a weak economic strategy largely responsible for the severe underdevelopment of Bolivia’s oil and gas industries prior to the 1990s.

A Way Out for Mesa

Stuck in the middle of powerful opposing forces, an embattled President Mesa needs to find his own road, but one that reflects his nation’s thinking. He might decide to join those who embrace a 50% royalty in order to counter more radical calls for full nationalization.

This royalty figure, mandated by the referendum that Mesa himself promoted last year, enjoys popular support and has been tacitly accepted by Beijing as a basis for its possible future investments.

This may be the only way Mesa can avert his own downfall and, quite possibly, the breakup of Bolivia. Critics consistently recount Bolivia’s past nationalization nightmare, which was marked by public sector corruption and inefficiency with few tangible benefits for the people.

Resorting to nationalization might also accelerate movements toward increased autonomy and even secession for the so called “media luna” (half moon, for its geographical shape) region of northern and eastern Bolivia.

This region, separated geographically, ethnically and economically from the rest of the country, is home to most of Bolivia’s gas reserves and is responsible for a large portion of its GDP growth.

Nationalization of Bolivia’s gas industry is likely to exacerbate the crisis, as it would only increase internal division and possibly precipitate a civil conflict.

On the other hand, the indigenous groups’ vehement complaints that the new Hydrocarbons Law panders to corporate interests, shows that support for this proposal may not be a tenable position.

The proposed 50% royalty, backed by the referendum, approved as a basis for Chinese investment, and supported by a “significant political consensus,” may be the only way for the Bolivian political process to counter its most committed opponents and avert deepening the current crisis.

Analysis prepared by Joseph Taves, COHA Research Associate.

The Council on Hemispheric Affairs (COHA) – www.coha.org – is a think tank established in 1975 to discuss and promote inter-American relationship. Email: coha@coha.org.


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