Bolivia and Foreign Oil Companies Sign New Contracts

Readers,

This past weekend marked the official 180 day deadline by which the Morales government pledged to sign new contracts with foreign oil companies doing business in Bolivia. Below is a Blog posting from one of The Democracy Center's oil and gas researchers, Gretchen Gordon, about the signing of new agreements with the ten biggest firms -- a major development in this story.

Jim Shultz

Bolivia and Foreign Oil Companies Sign New Contracts

Late Saturday night, Evo Morales and representatives of Bolivia’s state oil and gas company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB) signed new contracts with 10 of the largest oil and gas companies operating in Bolivia. Saturday marked the 180-day deadline by which foreign companies were required to ‘migrate’ their existing contracts to a new framework or leave Bolivia, as established in the government’s Nationalization decree issued last May.

The reactions from the government, Bolivian business interests, the foreign companies, and their home governments have been extremely celebratory. The companies applauded their new legal stability and expressed contentment with their share of oil and gas profits. Morales promised that in four years, $4 billion in annual government revenue from oil and gas will pull Bolivia out of poverty.

Because the details of the new contracts have not yet been made public, however, it’s difficult to know exactly under what terms the foreign companies will be operating: What revenue will the government secure? What did it concede? Who will have the final say on how Bolivia’s gas is utilized and who benefits?

We’ll be following this issue and updating our analysis as more information becomes available, but from public statements by the government and the companies over the past two days, here’s what we can discern so far:

Why did the companies need to sign new contracts?

Though the October deadline comes from Morales’ May 1st Nationalization decree, the migration of contracts was actually legislated during the government of Carlos Mesa as part of the New Oil and Gas law passed in May of 2005, but never implemented. Bolivia’s Constitutional Court ruled in 2005 that the existing contracts were unconstitutional because they were never approved by congress.

Which companies did the government sign with?

The government signed contracts with 10 companies: Spanish Repsol, French Total, two affiliates of Brazilian Petrobras, Argentinian companies Matpetrol and Pluspetrol, Andina (controlled by Repsol), British Gas, Chaco (controlled by British Petroleum), and US Vintage (controlled by Occidental).

What kind of contracts are they?

The contracts are for exploration and development. Contracts covering transportation, or establishing export volumes are still to be negotiated. The type of contract agreement is called an “operation” contract. The private company handles the extraction of Bolivia’s gas- using their own machinery and personnel. The gas is handed over to YPFB who then compensates the company for its costs, investments, and a profit margin.

How will gas revenues be split between Bolivia and the private companies?

This is still quite unclear. Basically, what the government is saying is that Bolivia will get 50% in taxes and royalties, and the other 50% will be split between the private company and the state company, YPFB. The company’s share of that 50% will vary depending on the level of production, what’s being produced, whether the gas is being sold in the domestic market or exported, and whether or not the company has recovered their investments. So, in shorthand, the government’s take will increase over time. As the private companies recover their investments, they will pay more to the government. Companies operating in small gas fields will also pay less than those with larger production.

The range of the government’s take is being described as between 50% and 80%, but exactly how that’s calculated is unclear, specifically whether that percentage is taken after the company’s costs are subtracted. 80/20 is a common government/private split in the oil and gas industry, after costs are subtracted.

How does that compare with what companies were paying before?

After the May 1 decree, most companies operating in Bolivia were paying 50% in royalties and taxes, which is what they paid before rates were slashed during the privatization of the mid nineties. Petrobras and Total, which operated Bolivia’s two largest producing fields were paying an extra 32% above that, leaving them with 18%. Repsol, which operates another of Bolivia’s largest fields, will likely be paying more than the 50% it paid previously, but Petrobras and Total will now be paying less, though theoretically all rates will increase with time.

Bolivia’s gas is a particularly lucrative business because it has one of the lowest costs of production in the world. A president of Repsol boasted a few years ago that for every dollar invested in Bolivia, the company made $10 in profit. Unfortunately, the extreme profit margins previously enjoyed by oil and gas companies operating in Bolivia came at the expense of benefits for Bolivians.

What will new tax and royalty rates mean in terms of revenue for Bolivia?

According to YPFB’s president, with the new contracts, the government will receive over $1.3 billion dollars a year which is nearly triple revenues from 2004. Evo Morales stated that in four years, that number will increase to around $4 billion in oil and gas revenues each year. For Bolivia, the poorest country in South America, those are very significant resources.

What are some possible concerns with the contracts?

Without seeing the details, it’s impossible to know. In many ways these contracts, which are for durations of between 23 and 31 years, are more important than legislation or the nationalization decree in terms of their impact on government revenues or the level of control YPFB will have over the industry. Some important questions on the details are: How is the revenue split calculated? Will the contracts leave foreign companies in control of the industry? Will the companies or YPFB decide how Bolivia’s gas will be used, who it will be sold to and at what price?

There are also, however, important broader development questions that have been conspicuously absent, such as: Are the companies required to make investments in development of new fields or diversifying the industry? Are they required to contract with local businesses, or to share technological know-how with YPFB? How will YPFB with minimal resources and staff monitor and enforce the contracts? What provisions will be taken to prevent environmental and health hazards from increased oil and gas operations? How will the new revenues be spent?

What’s next?

The next step is that the contracts will need to be approved by Bolivia’s congress. The government plans to deliver them within the next three weeks. The contracts signed Saturday, however, are only one component of implementing the nationalization decree. The government still has several other tasks pending: negotiating a buy-back of shares in five exploration, refining and transportation companies that were carved out of YPFB when it was privatized; negotiating a higher export price with Brazil; and the biggest task, providing YPFB with the resources, infrastructure and staff to actively participate in the entire chain of production so that it has the ability to make and enforce decisions about the development of Bolivia’s gas.

Written by Gretchen Gordon