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Bolivia’s Gas
Nationalization: Opportunity and Challenges
By Tina Hodges
Popular protests in Bolivia demanding greater benefits
to the population from the country’s vast natural gas reserves
contributed to the resignation of two presidents, the election
of President Evo Morales, and the nationalization of the country’s
oil and gas industry. Rather than expropriation, the nationalization
consisted of higher taxes on petroleum companies and renegotiated
contracts. As such, the private companies chose to stay in the
country and continue operations. As a result of the new policy
and high gas prices, the Bolivian government’s income from
the country’s oil and gas industry has increased dramatically,
nine fold in fact between 2002 and 2007.
The new funds present an opportunity to Bolivia,
the poorest country in South America, to use this income
for social and
economic development to benefit the population. But the revenues
also present numerous challenges: developing a shared vision
for the use of the revenues, determining an equitable distribution
of resources, engaging the population and civil society in
decision-making, investing resources wisely, and ensuring transparency
and accountability – challenges which other resource
rich countries have faced and failed.
This memo is the first of a three part series
discussing Bolivian oil and gas policy and the challenges
facing the nation with
regards to distribution, investment and transparency. The series
is part of an ongoing project of the Andean Information Network
and Erika Weinthal from the Nicholas School of the Environment
and Earth Sciences at Duke University examining Bolivia’s
efforts to confront the “resource curse.”1
Part I:
Background on Bolivian Oil and Gas Policy, Current Conflicts,
and Challenges
Bolivia has a long history of an economy largely driven by
exports of primary materials, from silver to tin to oil and
gas. Though it has previously experienced various resource
boons, the resulting revenues did not help alleviate poverty.
Bolivia has the second largest reserves of natural gas in South
America after Venezuela and exports most of its natural gas
to Brazil and Argentina. A little less than 80 percent of the
dollar value of Bolivia’s production from the oil and
gas industry comes from natural gas, 20 percent from petroleum,
and 1 percent from butane and propane. Natural gas exportation
requires long term contracts with purchasers and significant
investment in pipeline infrastructure.
Privatization spurs protests and re-nationalization
State involvement in the petroleum industry
has fluctuated drastically, including two previous nationalizations
of the
industry, in 1937 and again in 1969. In 1996, President Gonzalo
Sanchez de Lozada privatized the oil and gas industry in accordance
with dominant neoliberal policies. The privatization law set
the Bolivian government’s share of revenues at 50 percent
for existing wells and 18 percent for new wells. Since new
wells represented 94 percent of production,2 this meant that
the Bolivian government’s share was much closer to 18
than 50 percent.3 This new structure brought a large amount
of foreign investment in exploration, which identified vast
additional natural gas reserves.
The discovery of new reserves led to an idea
for a project to sell liquid natural gas (LNG) through a
port in Chile, which
could then be exported to international markets beyond Bolivia’s
immediate neighbors. This proposal to sell gas through Bolivia’s
traditional enemy, which had taken Bolivia’s only coastline
though war in the late 1800s, angered the population and resentment
over a lack of transparency in oil and gas policy grew. The
perception that government policy benefited transnational companies
over the Bolivian populace, as well as a myriad of other social
and economic conflicts inspired large public protests in September
and October 2003. What is now referred to as the “Gas
War” led to the deaths of 67 people and the resignation
of President Sánchez de Lozada. After he fled to the
United States, Vice President Carlos Mesa assumed the presidency.
In a July 18, 2004 national referendum on the
gas issue, the majority of citizens voted for greater state
control in the
industry and an increased share of revenues for the state.
Under popular pressure, the national congress passed Law 3058
in May 2005 imposing a new tax on petroleum companies and specifying
a greater role for the Bolivian state oil and gas company,
Yacimientos Petrolíferos Fiscales Bolivianos (YPFB).
However, Mesa hesitated to sign the bill and popular protests
then led to his resignation as well. Both heads of Congress
signed the bill, putting the new gas law into effect. During
the term of Interim President Eduardo Rodriguez, supreme decrees
established mechanisms to distribute the huge increase in gas
revenues. In the December 2005 presidential elections, Evo
Morales, promising to nationalize the oil and gas industry,
gained 54 percent of the vote.
On May 1, 2006, three months after his inauguration,
President Morales announced the nationalization of the country’s
oil and gas industry with Supreme Decree 28701. The decree
would not typically be considered a nationalization by international
standards as it did not involve expropriation of assets. Rather,
it consisted of higher taxes, renegotiating contracts with
private companies, and rebuilding the state oil and gas company.
The new law retains the 18 percent royalty and adds a 32 percent
tax called the Direct Hydrocarbons Tax (Impuesto Directo a
los Hidrocarburos, IDH).4 For the largest natural gas fields,
those that produce over 100 million cubic feet of gas per day,
the decree adds an additional 32 percent tax to benefit the
state owned YPFB. However, this additional 32 percent was only
collected during the period while contracts were being negotiated.5
The Bolivian government negotiated forty-four contracts with
twelve different companies between May and November 2006. The
contracts were then reviewed by the Bolivian congress, approved
in April 2007, and entered into effect in May 2007. Under the
new contracts, the remaining 50 percent of revenues, after
the royalty and IDH, is then split evenly between YPFB and
the private company. However, YPFB must cover the recoverable
costs of the private companies, leaving YPFB with about four
percent of revenue, according to experts.6 This means an overall
government share of gas and oil income of about 54 percent.7
The new law calls for YPFB participation in the entire chain
of production and commercialization of oil and gas and the
acquisition of majority control, or a 51 percent share, of
the privatized petroleum company operations. The Bolivian government
already owned a 48 percent share of operations as part of a
fund that was set up to pay a benefit to retired Bolivian senior
citizens under the 1996 privatization. In addition to the three
percent share from each company, YPFB also bought back two
refineries for $120 million.8
Increase in revenue changes political dynamics
As a result of the new oil and gas policy and
high gas prices, the Bolivian government’s income from
oil and gas increased from US$173 million in 2002 to an estimated
US$1.57 billion
in 2007.9 The Bolivian government has expressed a commitment
to distribute these resources equitably and spur development
to benefit the population. However, there are multiple, complex
factors that impact gas policy and revenue distribution, including
the ongoing decentralization process, calls for departmental
autonomy, and constitutional assembly deliberations.
The 2005 law governing the use of the main tax on petroleum
companies requires that funds be used for education, health,
roads, productive development, and projects that contribute
to the generation of employment. Though it does have a National
Development Plan, the Bolivian national government has not
yet developed a specific plan of how to use the new increased
royalties and taxes from the oil and gas sector, according
to a government official and non-governmental organization
experts. The national debate over the use of oil and gas revenues
has focused on the distribution from the national government
to the, departmental, and municipal governments, as well as
to universities and indigenous groups, rather than how best
to invest these resources. The current system of distribution
of revenues perpetuates inequities and lacks a clear logic
because the distribution was negotiated at a time of political
turmoil.10
Departmental prefects (the equivalent of state governors)
were popularly elected for the first time in the 2005 elections.
Previously, prefects were appointed by the central government
and historically the departmental governments have merely been
weak, implementing arms of the national government. The country
is currently in the process of rewriting its constitution,
which will determine the structure of the national and sub-national
governments. A strong autonomy movement seeks to influence
the constitution to increase the power and jurisdiction of
the departmental governments. The prefects of six of the nine
departments are from parties in opposition to the President,
complicating relations.
While the departmental and municipal governments
benefit from the majority of the gas revenues, there is a
lack of administrative
capacity to use the massive new infusion of funds and carry
out projects. The Ministry of Finance reports that some US$700
million, the equivalent of a year’s worth of the main
oil and gas tax, are sitting in departmental, municipal, and
university bank accounts. At the departmental and municipal
levels, the largest expenditures in revenues from gas and oil
are going to road construction.
At the national level, the government is spending oil and
gas revenues on a program to provide money to the families
of each child enrolled in primary school. In order to fund
a social security program for the elderly, the Morales administration
proposed cutting the funds from the main oil and gas tax received
by departments and municipalities by 30 percent. This plan
has been met with strong resistance, marches, and protests,
but has received widespread support from the elderly. Beyond
these two programs, which have been specifically promoted as
benefiting from oil and gas revenues, it is currently not possible
to determine which central government programs are being funded
from oil and gas revenues and which from other general treasury
sources, according to government officials.
Public participation and the future gas policy
Bolivia’s highly mobilized population, strong unions,
and civil society organizations can be an asset in ensuring
that funds are spent to the benefit of the population. Furthermore,
the current administration has strong ties with many social
movements and has recruited several civil society leaders into
top government positions. However, Bolivia’s weak legislature
and a lack of information and analysis available to the public,
impedes public participation. While a participative planning
process at the local level channels public input into budget
decisions, Bolivia lacks similar participative mechanisms for
addressing larger regional and national development issues.
Bolivia’s public participation and government oversight
laws are helpful, but gaps remain to fully guarantee accountability
and transparency.
Bolivia lost investment opportunities during
the time that oil and gas policy was in flux, starting with
the protests
in 2003 and ending with the new contracts entering into effect
in May 2007. Investment in the sector is currently much lower
now than it was prior to 2003. Even so, large gas reserves
and relative economic feasibility of extraction lend a large
comparative advantage to the country. The government should
be able to maintain high levels of income from the sector into
the near future but will need to act to increase investment
in production and exploration so that production is able to
meet both internal demand and external demand from signed contracts.
Governments on all levels need to strengthen existing and develop
new mechanisms to invest new revenues responsibly in order
to have the greatest positive impact on Bolivia’s economy
and people.
1. The author wrote this memo as an independent consultant
and accepts all responsibility for any errors contained within.
2. Raul Escalera and Roberto Fernández. PowerPoint Presentation
on Hydrocarbons Revenue, Centro de Estudios Superiores Universitarios,
Universidad Mayor de San Simón (CESU-UMSS). PowerPoint
provided during author interview. October 12, 2007.
3. Nations worldwide typically receive closer to 50 percent
of revenues.
4. Law 3058, Article 52.
5. República de Bolivia, Ministerio de Hidrocarburos
y Energía, Nacionalización en el siglo XXI,
May 2007, p189.
6. Autor interview with Carlos Arze, Centro de Estudios para
el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007
and autor interview with Roberto Fernández Terán,
Centro de Estudios Superiores Universitarios, Universidad Mayor
de San Simón (CESU-UMSS), October 12, 2007. Recoverable
costs may include everything from investment, administration,
and production costs to salaries and benefits.
7. In addition, consumer taxes such as the value added tax
and the Impuesto Especial Directo a los Hidrocarburos (IEDH)
also apply. This report does not focus on the consumer taxes
as they did not change with the nationalization.
8. Autor interview with Carlos Arze, Centro de Estudios para
el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007.
9. República de Bolivia Ministerio de Hidrocarburos
y Energía, Nueva Política Hidrocarburífera
del País: Distribución de I.D.H., Regalías,
y Participaciones, La Paz, Bolivia, March 2007, p 2.
10. The main legal document determining the distribution of
the funds, Supreme Decree 28421, was developed under an interim
president in October 2005, after massive social protests had
brought down two presidents.
Tina
Hodges is WOLA program
Assistant for Mexico and the Andes. AIN
researcher Emily Becker contributed to this report. The
Washington Office on Latin America
( WOLA) is funded by foundations,
religious organizations, and individuals. Petroleumworld
not necessarily share these views.
Editor's
note: This
commentary was originally published by Andean
Information Network, on Wednesday,
21 November 2007.
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