President Morales’ Decree, June 2006
By Gretchen Gordon
Editors Note: For readers interested in this topic, we strongly encourage you to also look at The Democracy Center’s review of foreign media coverage of the gas decree, which can be viewed here.
On May 1, 2006 Bolivia’s president, Evo Morales, issued an executive decree (#28701) declaring the “nationalization” of Bolivia’s oil and gas reserves. The decree was accompanied by a set of images aired worldwide of Bolivian troops sent to many of the nation’s oil fields by Morales to “protect” the nation’s oil and gas.
The popular demand for gas and oil nationalization is a long-standing one in Bolivia, and has been at the forefront of national politics for three years. In July 2004 more than 90% of the voters in a national referendum supported a measure to recover control of Bolivia’s gas and oil reserves. Nationalization was also a central pledge by Morales during the 2005 elections.
In general, foreign media coverage of Morales’ announcement has significantly overstated what the decree actually does, and painted the move as one far more radical than is evidenced by the content of the decree and the government’s actions. This brief seeks to explain what the decree actually does; provide some historical context; discuss some of the issues the decree raises; and note what developments to watch for in the months ahead.
II. The “Nationalization” Decree In a Nutshell
The essence of the Morales decree is an attempt to obtain a partial reversal of the 90s era “capitalization” of Bolivia’s gas and oil reserves. Under that process the state-owned oil company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB), was broken into pieces and control of those pieces given away or sold at rock bottom prices to foreign corporations. Tax and royalty rates for gas and oil exploitation were also slashed.
The Morales decree is a far cry from a classic “nationalization” scheme, in which foreign corporations are removed from the country and all operations are taken over by the government. Instead, the decree aims to have Bolivia acquire a majority, managing interest in the five consortiums that were once components of Bolivia’s state-owned oil industry, through a combination of buy-backs and negotiations. The decree additionally increases government revenues from Bolivia’s two most productive gas fields and establishes a six-month time frame in which foreign oil companies must renegotiate their existing contracts with the government. The end goal is to have a reconstituted YPFB engaged in and calling the shots on the direction and development of the Bolivian oil and gas sector.
To put this in a historical perspective, while the decree will allow the government greater revenues and greater participation in and oversight over the industry, the move to recover a majority interest in five previously state-owned firms does not come close to the oil nationalizations of 1937 and 1969 in which the government took over (with compensation) entire foreign companies. It is instead, ironically much closer to what former-President Gonzalo Sanchez de Lozada (the key architect of most of Bolivia’s recent Washington Consensus Reforms) originally proposed as the blueprint for privatization of the sector in 1992 – public-private joint ventures in which the state maintains majority ownership. And even in that aspect the Morales decree only applies that objective to the five companies that were previously 100% public enterprises.
The shares necessary to reach that majority ownership in the five affected companies would be acquired through a combination of buy-backs and negotiations. The decree also establishes a six-month time frame in which foreign oil companies must renegotiate their existing contracts with the government and places the newly reconstituted YPFB in charge of oversight and development of Bolivian oil and gas.
Details of the decree include:
1. A declaration that the Bolivian state is recovering “property, possession, and total and absolute control over” its oil and gas resources.
The decree lays out the government’s intention to assert control over all aspects of oil and gas development including “control and direction” of production, commercialization, transportation, and the setting of price and volume levels. The decree does not refer to or mandate the confiscating of property or assets of the private companies or to kicking them out of the country (despite allusions to such in some of the foreign media coverage). The “recovery” described in the decree is targeted at reasserting the property of the oil and gas reserves after they’ve been pumped out of the ground and separated and reasserting the Bolivian government’s domain over industry planning as established in the constitution, as well as its participation in the full chain of production.
2. A 180-day period for renegotiation of the current oil and gas contracts.
Because none of the oil and gas contracts currently in existence were approved by the Bolivian Congress, as required by the Bolivian constitution, they are illegal, based on a ruling by the Constitutional Court. The renegotiation of those contracts was already mandated last year by a new hydrocarbons law (#3058) during the administration of then-President Carlos Mesa and was approved by the Bolivian Congress (in which Morales’ MAS party was a minority). The deadlines established for that contract “migration” have come and gone.
In essence then, this provision of Morales’ decree is simply reinforcement of the law approved last year, but with an additional stipulation that companies which do not renegotiate their contracts within the six months will be required to cease doing business in Bolivia. In addition, these contract renegotiations will likely include some increases in the taxes and royalties companies are required to pay, based on the audit underway of corporate expenses and profits.
3. Recovery of a majority interest (50% + 1) in five “capitalized” and privatized companies created in the 1990s out of the state YPFB company.
The decree declares the government’s intent to secure a majority interest in five key oil and gas firms that were created a decade ago out of the carving up of the state-owned oil and gas operations.
Three of the affected companies are public-private enterprises created out of YPFB during the “capitalization” process pressured by the World Bank and the International Monetary Fund (IMF) in the 1990s:
- Chaco – (led by British Petroleum) which does exploration and production.
- Andina – (led by Spain’s Repsol) which also does exploration and production.
- Transredes – (a subsidiary of Shell & Enron) responsible for pipeline transportation of oil and gas within Bolivia and for export.
The other two companies affected by this part of the decree were created out of a follow-up privatization scheme in the late 90s:
- Bolivian Refining Company (ERB) – two refineries controlled by Brazil’s state oil company, Petrobras.
- Compania Logistica de Hidrocarburos de Bolivia (CLHB) – a German/Peruvian pipeline and storage consortium.
Recovery of shares will be done through a mixture of buy-backs and negotiations.
4. An increase in the government’s ‘take’ from 50% to 82% for operations in Bolivia’s two most productive oil and gas fields.
The current Bolivian tax and royalty rate on oil and gas is 50% (under the law passed during the Mesa administration). The decree adds an additional 32% ‘participation’ that will go to YPFB to finance its revitalization into a working company. However, this new rate only applies to Bolivia’s two most productive fields – San Antonio and San Alberto, representing 70% of the country’s current production. Petrobras, Repsol, and Total are the only companies that will be affected by this part of the decree. Smaller fields and smaller companies will continue to pay the 50% rate. YPFB officials estimate that this increase will generate $20 million per month for YPFB over the 180-day transition period.
5. An audit of investments and earnings for all oil and gas companies operating in Bolivia.
The stated purpose of the audit is to determine exactly what companies have invested, what they have paid to the government, and what profits they’ve made. Based on that information, auditors will seek to determine which companies have been either underpaying the government or violating the terms of their contracts. The audit will also be used to determine what tax levels are financially viable for each company based on whether or not the company has already recovered its investments. After the 180-day audit the 50% and 82% tax rates could be increased or decreased on a company-by-company basis.
III. Some Historical Background
For decades, prior to Bolivia’s privatization if its oil and gas company, the state-owned gas and oil industry was a major economic force in the nation and a key source of public revenue. Originally created in 1937, by 1985 YPFB had almost $2.6 billion in assets and a net worth of over $1.2 billion. While the former YPFB could be criticized for inefficiency, it was a solvent and financially stable company – contributing $3.5 billion to the national treasury between 1985 and 1995, between 38 and 60% of total government revenues.
That era ended with Bolivia’s wholesale adoption of the “economic liberalization” policies of the so-called Washington Consensus, a package of market-driven reforms pushed on to Bolivia in the 1980s and 1990s as a condition of foreign aid. In 1993, the administration of President Gonzalo Sanchez de Lozada, with close participation by the World Bank and IMF, began the process of handing over Bolivia’s state-owned industries, including oil and gas to foreign corporations.
Because “privatization” carried negative connotations in Bolivia, Sanchez de Lozada’s plan introduced the new concept of “capitalization.” The theory behind Sanchez de Lozada’s “capitalization” scheme was illustrated by his electoral campaign slogan, “1+1=2”. Bolivians would maintain control of 51 percent of the shares of the newly “capitalized” companies while foreign corporations would be given 49 percent control free of cost, in exchange for the promise of that same value in investment. State investment plus private investment would then, theoretically, double the worth and economic potential of the country’s strategic industries.
The government’s “capitalization” of YPFB handed over billions of dollars of public assets – infrastructure as well as gas and oil reserves – to private corporations (all foreign) and slashed oil and gas royalty payments from 50 percent to 18 percent. By the end of the process the 51/49 percent government-corporate split was turned on its head, putting majority control in the hands of the foreign corporations. Instead of being held by individual Bolivians as originally promised, Bolivia’s shares in the capitalized companies were placed under management of private pension fund administrators. Over the following years, Bolivia’s minority share was whittled away as the government was forced to sell shares and take on millions of dollars in loans in order to meet pension payments not covered by weak dividends from the capitalized companies.
IV. Analysis: Issues and Implications
What the decree will mean as it is implemented – in terms of public revenue, foreign investment, and a range of other issues – is still to be seen. Here are some of the key issues raised by the Morales decree:
A Symbol of a Reversal in Economic Direction
Aside from the specifics of the gas decree, the move by the government to assert control over the country’s oil and gas needs to be seen as well in the context of a larger effort to reduce two decades of economic policies coerced onto Bolivia from abroad and as a reassertion of national sovereignty. The gas decree represents the latest in six years of political developments aimed at reversing the nation’s adoption of World Bank and IMF-backed economic policies.
Those efforts gained force in 2000 when the people of Cochabamba shut their city down with three separate general strikes to reverse the privatization of the city’s public water system into the hands of the California-based Bechtel Corporation. Efforts continued in February 2003 when nationwide protests erupted opposing Sanchez de Lozada’s attempts to implement an IMF belt-tightening package through a new income tax on the working poor. Since 2003 the future of the nation’s gas and oil (Bolivia has the second largest gas reserves on the continent) became the rallying point for that larger movement – leading both to Sanchez de Lozada’s ouster from office in October 2003 and Morales’ landslide election to the Presidency in December 2005.
Is the Decree Really “Nationalization”?
Morales’ declarations and foreign media coverage in the aftermath have all cast the government’s move as “nationalization”. The term “nationalization” traditionally means expropriation, or the taking of privately held assets (with or without compensation) to make an area of the economy the property of the government. Expropriation with compensation or indemnification is an internationally recognized right of sovereign nations when acting in the public interest. The Morales government’s policy, however, does not take the expropriation route. In fact, the Morales policy is not really nationalization in the traditional sense, but closer to contract renegotiation.
Nationalization or not, the most important policy question raised by Bolivia’s new gas policy is this one: How much control will the government have over development decisions and revenue? In the 1990s, Bolivia went from having an active state oil and gas company that participated in the entire chain of production, contracting out to private companies where advantageous, to ceding almost all control (along with reserves and infrastructure) to foreign companies. Now the question is how far will the pendulum swing back.
Many in Bolivia argue that the government is not going far enough in recovering state control. Various social movements have long called for expropriation without indemnification for all foreign oil and gas companies operating in Bolivia, citing the unconstitutionality of current oil and gas contracts and that many companies have not complied with their contractual obligations. Critics also point to charges of millions of dollars in contraband, tax evasion, and egregious environmental violations.
How much control will the government gain? Recovering majority ownership in the five targeted companies will give the government the means to participate once again in the entire chain of production from exploration to refining, but “control” is a different question. The decree still leaves Spanish Repsol, French Total and Brazilian Petrobras operating 83% of the country’s gas reserves and 86% of its petroleum reserves. Much will depend on the process of renegotiating the existing contracts and on the ability of the Bolivian government to be an effective regulator of the companies continuing to do oil and gas business in Bolivia.
The Effect on Government Revenues
The increase in the government take from 50% to 82% for Bolivia’s two most productive fields will bring in significant revenues for the rebuilding of YPFB. Critics, however, argue that the rate increase is only partial, pointing out that Bolivia’s largest gas field, Margarita, controlled by Repsol, will continue paying 50% because it is not currently producing at capacity. Many other fields are also not affected by the rate increase.
In terms of government revenue, more important than the level of taxes and royalties is the establishment of base prices on which those taxes and royalties are determined. Since privatization, Bolivia’s domestic gas and oil prices were pegged to international market prices, often requiring extensive government subsidies to keep domestic gas and oil products affordable. Export price levels, however, were established through contracts at discounted rates, leading to the questionable scenario in which Repsol Bolivia, for example, sells raw gas to Repsol Argentina at well below international prices, paying the government taxes off that price. Then Repsol industrializes the gas in Argentina, and sells it to Chilean consumers at international prices, reaping record profits.
While the government’s recovery of refineries will give it the power to set gas and gas product prices in the domestic market, the establishment of export prices will still be determined through difficult contract negotiations with foreign companies. According to some analyses, while the increase in the participation rate to 82% could bring the government an increase around $300 million, the failure to establish higher gas prices with Brazil and Argentina could cost the government as much as $3 billion in potential revenues each year. Setting higher base prices with Bolivia’s gas-purchasing neighbors will remain one of the more complicated issues faced in implementation of the government’s plan.
Financial Risks and Economic Stability
Another issue is the financial risk associated with the decree. One of the capitalized companies the government will be taking control over, Andina, is highly indebted. Through the decree, the government is also committing to maintaining dividend payments to the national pension fund created as part of the capitalization process. The dividends paid by the capitalized firms, however, have never reached the financial needs of the country’s pension system. The government is thus committing itself to maintaining this unsustainable system and making up shortfalls that can equal tens of millions of dollars annually. Million dollar legal suits from oil and gas companies over the forced contract renegotiation is also a potential financial risk.
While much doom and gloom has been prophesied about foreign corporations taking their business out of Bolivia, the actual economic situation does not appear unstable. Bolivia has a wealth of easily accessible natural gas in a region of potential future buyers. In the case of Argentina and Brazil, Bolivia’s two current export destinations, the countries’ consumers are dependent on Bolivia’s gas.
There will be lots of negotiating, lots of playing hardball on all sides, even threats of legal action. But Bolivia enjoys a good bargaining position and what the decree is asking does not push the corporations outside of their ability to make a profit. It merely cuts down on the exorbitant profits they’ve gotten used to making off of Bolivian gas. How significant the cut will be remains to be seen as negotiations, especially those around pricing, proceed.
V. What Next?
About the only thing set in stone right now is that the state of Bolivia’s oil and gas policy is far from determined. The decree itself is a temporary measure and only part of the government’s overall policy restructuring effort. The government continues to talk about this as a “nationalization process” and Bolivians on the right and left wait to see what direction the next step will take.
The most critical process to watch will be the current 180-day renegotiation and audit period that goes through late October, during which much could again change. Another important factor will be the Constituent Assembly that will begin the long process of drafting a new constitution this August, and which may take up the gas issue as well.
This briefing paper, one in a series from The Democracy Center, was written by Gretchen Gordon and edited by Jim Shultz (JShultz@democracyctr.org). It is based on research that Gretchen conducted in association with Aaron Luoma and draws as well from research on the Bolivian gas issue by two Bolivian organizations, the Center for Higher University Studies (CESU) of San Simon University and the Center for Labor and Agricultural Studies (CEDLA), as well as research by Professor Mirko Orgaz Garcia at the University of San Andres.
- Oil and Gas Policy in Bolivia – Post Election Update, April 6, 2006
- Review of the May 1 Gas Decree – (VERSIÓN ESPAÑOLA)
- Review of Foreign Media Coverage of the Decree – (VERSIÓN ESPAÑOLA)
- What Are They Saying About the Decree? – A Summary of Initial Commentary on the May 1st Decree.