Morales “Nationalizes” Bolivia’s Gas – But the Devil Still Remains in the Details

At first glance the “gas nationalization”decree on Monday from President Evo Morales looks like a far more radical turn than many in Bolivia predicted. For months, since his January inauguration, Morales has surprised everyone from US government officials to members of his own political base by his apparent moderation (sparking notably different reactions). He cajoled coca growers to hold the line on new production. He refused to takeover the struggling LAB airline, despite massive protests by workers and their supporters. He tear gassed former friends.

Then, on May 1, International Day of the Worker (the closest thing the international left has to its own holiday) Morales issued a sweeping executive decree putting control of the nation’s oil and gas reserves firmly in the hands of the state gas company, YPFB. Then, to punctuate the move with some powerful symbolism the President sent in the the army to occupy 56 major oil fields and installations – a photo-op loved by the Bolivian left and which was seized upon by the international press as evidence that Morales has shed his sheep's clothing for something more along the lines of a Hugo Chavez costume.

Many Bolivians are rejoicing, others are worried, the companies are issuing warnings, and journalists (Bolivian and foreign) are working overtime to sort out what the decree really means.

And what does the new gas decree really mean? On its face it means that the state-owned gas company will have control, not only over getting the gas and oil out of the ground, but also will take charge of setting the volume of production and the price Bolivia is willing to sell it for on the market. It signals the new government's intent to ratchet up Bolivia’s share of oil and gas profits from the 50% (mas o menos) that was supposed to result from last year’s “moderate” gas reform law, to 82%. The Bolivian government will also take over control of the “privatization” shares held by the nation’s semi-private pension funds, a move aimed at getting control of a 51% controlling interest in companies currently held by the likes of Shell, Enron, Petrobras and others.

But, as always with the complicated gas issue, “the devil remains in the details”. Will this turn out to be what Morales' Vice-President, Alvaro Garcia Linera, once referred to as economic shock therapy from the left? Will it turn out to be a flurry of nationalist symbolism, coincidently at the official start of the campaigning for seats in he upcoming national Constituent Assembly to rewrite the constitution, in which Morales MAS party is seeking to amplify its political strength? Is it a new bargaining position by the Bolivian government, as it seeks to deal from a position of strength with foreign oil companies upon which it still depends for the investment required to actually get Bolivia's formidable oil and gas reserves out of the ground and to market?

It is also worth pondering this question. As a negotiating strategy (Bolivia has said it will renegotiate all contracts with foreign oil firms in the next six months), is tough rhetoric about nationalization a bad opening move?

We'll do our best to look for the answers to these questions in the days ahead – starting with this brief article below from Gretchen Gordon, a research associate at The Democracy Center who is part of a team leading our research on the gas and oil issue.

Jim Shultz

Bolivia’s Nationalization by Decree

by Gretchen Gordon

The smell of gas hangs strongly in the air as a crowd of flag-waving Bolivians celebrate outside the Petrobras Gualberto Villaroel oil and gas refinery.

A state worker clad in a tan work suit and hardhat props a wooden ladder against the front wall of the refinery just beneath the blue metal letters that read PETROBRAS, and ascends the ladder as the crowd looks on. He carries a laminated banner with the name, “Yacimientos Petroliferos Fiscales Bolivianos” or YPFB, Bolivia’s former state oil and gas company, essentially privatized in the mid-1990s through a process called “capitalization.”

“Take down the placard!” someone yells from the crowd. “Throw the letters in the trash!” someone else shouts, making a rhyme with the Spanish words.

As the worker struggles a bit to secure the banner over the blue letters, someone in the crowd observes, “No, they’re not going to take it down, just cover it over.”

As the banner is secured, someone calls out, “Que viva Bolivia! Que Viva la nacionalizacion!”

“Que viva!” the crowd erupts in response.

It’s Monday, May 1st, not coincidentally International Workers Day, and the Bolivian government has just declared the nationalization of oil and gas by presidential decree.

Though the “nationalization” and “recovery” of Bolivia’s oil and gas resources has been the main political issue in the country for the last several years, the Supreme Decree 28701 read publicly by president Evo Morales Monday came as a surprise to Bolivians and foreign investors alike. During the government’s first 100 days, several policy options have been floated regarding the restructuring of the oil and gas sector, however no clear comprehensive policy has been put forward until now.

Nationalization by Decree

Under the main goal of recovering “the property, possession, and total and absolute control” of oil and gas resources for the state, Decree 28701 contains five principal measures:

- Declaration of the state the agent empowered to commercialize, set conditions, volumes and prices both for internal consumption, export, and industrialization, and to take “control and direction” of all aspects of oil and gas production and distribution.

-Establishment of a 180-day time period for the renegotiation of contracts to bring them in line with the oil and gas law 3058 passed last year.

-Recovery of 51% of the shares of five capitalized companies, carved out of the state company in 1996.

-Increase of the tax and royalty level from 50% to 82% for companies operating in Bolivia’s two largest gas fields (Petrobras, Repsol, and Total).

-An audit of investments and earnings for all other oil and gas companies operating in Bolivia to determine their future tax rate and terms of operation.

While the discourse of the day is powerful, punctuated by the imagery of the securing of the country’s 56 oil and gas fields and two refineries by the Bolivian military, the real extent and impact of the government’s policy are not yet clear.

The recent oil and gas debate in Bolivia has shown that the term “nationalization” is open to definition and interpretation. Since Morales’ landslide electoral victory and “democratic revolution” last December, the government has consistently maintained that their “nationalization” does not involve expropriation, as traditionally understood by the term.

The decree in fact does not confiscate private infrastructure or expel foreign companies as some in Bolivia have demanded. The plan to recover 51% shareholding of the capitalized oil and gas firms is seen by some as insufficient, due to the fact that the holdings of these companies were under 100% YPFB control prior to the privatization of the mid-1990s. Others criticize that the new restructuring is too similar to the oil and gas law passed during the Mesa administration, rejected by social movements as inadequate. Jaime Solares, the leader of Bolivia’s Labor Federation has criticized the decree as a “partial” nationalization and renewed the demand for the state to take “absolute control” through confiscation without compensation.

At the same time, many see the government’s plan as the key to much needed economic development and as a means of recovering state sovereignty in a country that historically has been managed in the interests of foreign capital. “The recovery of the oil and gas resources is what Bolivia is counting on to be able to develop,” explains Roberto Delis, an YPFB employee participating in the refinery “takeover.” “Now those resources are going to be returned so that they serve Bolivia.”

The potential increase in government revenues through the elevation of tax and royalty rates from 50% to 82% will be very significant for this impoverished nation, but is an unexpected move by a government which previously was exploring more cautious options. The figure of 82% is also highly symbolic in that it is the inverse of the 18% tax rate put in place during the privatization process in 1996. What the companies were putting in their pockets as recent as a year ago, will now be what Bolivia keeps for itself.

Many aspects of the decree, however, remain to be determined and its true impact will depend on the details of its implementation over the coming months. The mechanism for the recovery of majority shares in the capitalized companies remains unspecified, as does the treatment of the 54 fields not impacted by the tax rate increase. The government calls the decree “flexible and consensual.” However, they have made it clear that those companies unwilling to play by the new rules of the game will not be allowed to remain in Bolivia.

Domestic business interests have reacted with concern, though without marshalling a strong challenge. Many support the concept of recovering greater state control, but fear economic instability and warn against the possibility of costly international litigation by transnational companies. The response by foreign investors has been strong, though still not completely bellicose. Brazilian President Lula called the move “unfriendly” while Spain’s Zapatero expressed his “profound preoccupation.” Brazilian Petrobras and Spanish Repsol are two of Bolivia’s largest foreign investors. Many companies, however, are keeping their comments reserved.

Government Takeover?

From La Paz’s main plaza, in a skillfully orchestrated event weaving together the nationalistic historical memory of Bolivia’s previous two oil nationalizations with the class themes of International Workers Day, President Morales addresses a crowd of thousands urging Bolivians to come together to defend this new endeavor.

Meanwhile, back at the Gualberto Villaroel refinery outside Cochabamba, Saul Escalera, the director of Industrialization for YPFB, addresses the crowd from the bed of a red pickup truck. Escalera explains:

“We will now engage in a symbolic entrance of YPFB technicians in which we will give official notification [to Petrobras] that as of this moment this refinery will be administered by YPFB.”

Escalera asks the crowd to refrain from trying to enter the refinery, warning that such an action could jeopardize the nationalization process. As the group of around fifteen technicians and representatives pass through the front gates of the plant, a military band strikes up the national anthem as the crowd sings. Young soldiers proceed through the gates carrying a giant Bolivian flag.

Returning back through the front gates after several minutes, with little fanfare, Escalera notifies the crowd, “We have now recovered this refinery...You may now all return home.”

With the waning notes of a brass band, Bolivia’s “nationalization without expropriation” advances, as has Morales’ broader “democratic revolution,” without violence or disruption, and to the great surprise of most onlookers.

The question which remains is how much will this nationalization secure a profound change for Bolivia: how much of the old system will be dismantled, and how much, like refinery placards, will more pragmatically, merely be covered over.

Gretchen Gordon is a research associate with the Democracy Center in Cochabamba, Bolivia. She is co-writing a study on Bolivia and its efforts to take control of its gas and oil reserves.