President of Bolivia Steps Up Oil Nationalisation Before Opposition’s "Unconstitutional" Referendum

Investor Alarm on Labour Day

Bolivian investors received another shock yesterday as President Morales consolidated state control over the economy. Plans to nationalise the oil industry were announced two years ago underlined by the deployment of soldiers to protect natural gas resources reclaimed for the state. Since then, foreign firms such as Brazil’s Petrobras have been required to sign new contracts with improved terms for the Bolivian government in order to continue operating in the Andean country (see Bolivia: 1 May 2007: Hydrocarbons Nationalisation Gains New Momentum as Bolivia Celebrates One-Year Anniversary). However, two years on, the formal implementation of the nationalisation programme was incomplete with the objective of the state oil company YPFB acquiring a controlling stake in the oil companies that were capitalised (partially privatised) in the 1990s still outstanding: Andina, Chaco, and Transredes. YPFB was also seeking to acquire a controlling stake in the Compañía Logística de Hidrocarburos de Bolivia (CLBH), a private company controlled by Germany's Oil Tanking and Peru's Graña Montero that operates oil terminals and pipelines in the country. YPFB fulfilled these goals yesterday, enabling the government to claim that the nationalisation of the hydrocarbons sector is "complete".

Three presidential decrees yesterday asserted government control over the capitalised companies in which BP and Ashmore Energy participate, Chaco and Transredes, as well as over the privatised company CLBH. A fourth operation came under state management after Spain’s Repsol-YPF signed an accord for the sale of shares equivalent to a 1.08% stake in its Andina subsidiary to Bolivia’s national YPFB energy firm. Following the latest government pronouncement, YPFB will hold controlling stakes (50% plus one share) in the three capitalised companies and 100% in CLBH. President Morales described the local entities in question as "badly capitalised companies", which warranted direction by the government under the May 2006 Nationalisation Decree.

After Bolivia’s head of state used the announcement to woo crowds in the capital, La Paz, Hydrocarbons Minister Carlos Villegas gave a press conference denying the action consisted of expropriation. He pointed out that the affected foreign entities—including telecommunications giant ENTEL—were given until 30 April to reach a settlement with the MAS administration. The minister confirmed that Repsol-YPF received almost US$6.3 million for the lost shares while BP’s Pan American Energy (Chaco) was paid US$4.8 million. Bolivia’s YPFB granted US$12.4 million to Transredes and a further US$20 million to CLHB. Villegas played down the unilateral nature of the transaction by claiming that the government had written evidence from the companies’ management accepting the purchases. Nonetheless, local press reports suggest that Repsol-YPF was the only company that reached an agreement with the government prior to the announced takeover of the companies. Relations with ENTEL, also affected by the May Day pronouncement, are particularly strained. The Telecom Italia subsidiary was denied its recourse to the World Bank's International Centre for Settlement of Investment Disputes (ICSID) in November last year when the Bolivian government confirmed its withdrawal from the global arbitrator. Energy firms wishing to seek international arbitration will face a similar predicament. Juridical security for investors has reduced markedly in Bolivia since President Morales won election in December 2005.

Outlook and Implications

Just as the deployment of troops to secure gas fields in May 2006 was largely a symbolic move, it may well turn out that despite the decrees issued yesterday asserting state control over the capitalised oil companies, negotiations over the actual signing of agreements to form mixed companies to administer the companies (as in the Venezuelan model) will allow some room for agreements to be reached over how the partnership with YPFB will work in practice. YPFB's own technical and operational shortcomings mean that it will be heavily dependent on its private partners if Andina, Chaco, and Transredes are to run smoothly, and it will be in its own interest to smooth relations with the foreign companies.

President Morales’s rhetoric is typically more radical than his actions and yet there is no doubt that investment risks have increased under his watch. Traditionally, he uses May Day pronouncements to rally support from traditional circles and, this year, the declarations served to challenge right-wing provincial opponents, particularly in Santa Cruz, which is scheduled to hold a referendum on devolution this Sunday (4 May). National electoral authorities—and the Morales administration—refuse to recognise the validity of the vote that provincial prefect (governor) Rubén Costas is expected to win with a 70% majority, according to polls. Bolivia’s Central Workers’ Union (COB) led a protest yesterday against Santa Cruz’s alleged attempt "to divide the country" in reference to the province’s secessionist ambitions. Organization of American States (OAS) representative Dante Caputo remains in Bolivia trying to broker the peace between President Morales and Prefect Costas. Santa Cruz will not secure international support for any attempt to win full independence from Bolivia. Even autonomy statutes have been described as “unacceptable” by the Morales government.

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