[Mb-civic] An article for you from Michael Butler.

Wed Apr 5 10:57:45 PDT 2006

- AN ARTICLE FOR YOU, FROM ECONOMIST.COM -

Dear civic,

Michael Butler (michael at intrafi.com) wants you to see this article on Economist.com.

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BOLIVIA
Apr 5th 2006  

Venezuela's nationalist government, led by president Hugo Chavez, has
seized control of two foreign-run oilfields. Taking advantage of high
oil prices, Mr Chavez has confirmed that foreign companies will play a
reduced role in the country's energy industry. The president of
Bolivia, Evo Morales, has suggested he will nationalise its oil and gas
industry, unsettling foreign firms there

WHEN Hugo Chavez, Venezuela's nationalist president, talks of "full oil
sovereignty" and waving goodbye to foreign oil firms it seems he should
be taken seriously. This week his rhetoric was translated into deeds.
On Monday Mr Chavez's oil minister, Rafael Ramirez, confirmed that the
government had taken control of two (smallish) oilfields run by foreign
operators. He gleefully showed a video of workers raising a Venezuelan
flag over one of them.

The two companies involved in the incident--Italy's Eni and France's
Total--had refused new contracts pushed by Mr Chavez, to be agreed by
this month, for foreign firms operating 32 oilfields scattered across
the country. Together, these fields account for roughly a fifth of the
oil pumped in Venezuela, the world's fifth largest exporter of oil.
Original contracts were struck in the 1990s when a pro-investment
policy known as APERTURA PETROLA ("oil opening") prevailed. But with
current high oil prices and Mr Chavez less inclined than his
predecessors to deal with American and European oil firms, foreigners
have been told they may only work as minority partners in joint-venture
operations.

Some balked at the new deal. Exxon Mobil sold its stake to Repsol of
Spain, and Eni and Total failed to come to terms. The government has
promised that the two will be compensated for their lost investment,
but has not specified what sums it has in mind. But most of the
companies, including Repsol and Norway's Statoil, did agree to the new
terms, prepared to sacrifice some profit for the sake of holding onto a
source of supply. Though investors might reasonably have concluded that
Venezuela is a risky place to do business, in practice, with demand
bumping right up against global production capacity, few chose to leave.

In the short term Venezuela's government will get a bit more oil
revenue and Mr Chavez bolsters his reputation as a firebrand socialist.
But Venezuela may, possibly, find it more difficult to attract
investors to develop long term supplies. Its oil is anyway difficult to
pump and refine. The geological structure of its fields means
production declines more sharply than elsewhere. The crude is heavy and
sulphurous, requiring extra handling to turn into usable products. If
foreign funds and know-how become unavailable, Venezuela will depend on
PDVSA, the state-owned oil company, to do this. But in recent years it
has skimped on investment in order to funnel money to Mr Chavez's
spending programmes. No wonder Mr Chavez said he would like to see oil
prices fixed at the (historically high) level of $50 a barrel.

IN BOLIVIA, TOO

Mr Chavez knows that, while supplies are tight, he can continue to
squeeze oil firms. So far, the strategy looks successful enough so that
others are trying it for themselves. Bolivia's new president, Evo
Morales, swept to power in December promising to nationalise the
country's oil and gas industry. Last month he said he would soon issue
a decree to do just that. It is unclear exactly what this will entail
and Mr Morales, a friend of Mr Chavez, seems to hope that the current
crop of privately-run companies will stay on to operate the
"nationalised" fields.

But Mr Morales seems to be taking an even bigger gamble than his friend
to the north. Bolivia, a poor and landlocked country, has an
opportunity to use its gas reserves to develop. Bolivia is the energy
hope of the southern part of South America. Its gas reserves rank
second only to those of Venezuela. It already exports around 30m cubic
metres a day, mainly to Brazil but also to Argentina. With more
investment, it could quickly double those exports, and add more to
gas-hungry Chile. While Argentina will need seven years to develop
fresh supplies, a pipeline from Bolivia could be built in four,
according to Marco Aurelio Tavares of Gas Energy, a consultancy. For
Brazil, too, Bolivian gas "is the ideal solution", says a manager at an
energy firm. 

Yet such expansion would depend on big investment, precisely from the
sort of firms that Mr Morales is threatening. The energy companies in
Bolivia are already operating under conditions which they consider
barely tolerable. A law approved last year under public pressure raised
royalties, almost doubling the government's take from gas. That allowed
it to begin paying civil servants' wages on time while cutting the
fiscal deficit. But the law tore up the terms on which the companies
had invested. 

Mr Morales has made some soothing noises, for example he invited the
companies to become "partners" of YPFB, the revived state oil firm. If
that means surrendering both their gas and the right to set export
prices, the firms will want compensation and/or big tax breaks on
future investment. The main hope for compromise is that rupture could
be worse for both sides. The companies would be forced to write off
their investments. The government could seek deals with state oil
companies in Venezuela and elsewhere but would face lawsuits in
international courts.

See this article with graphics and related items at http://www.economist.com/agenda/displaystory.cfm?story_id=6767727&fsrc=nwl

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