Multinational Monitor

SEP/OCT 2007
VOL 29 No. 4


Ecuador's Oil Change: An Exporter's Historic Proposal
by Kevin Koenig

Fueling Another Debt Crisis
by Neil Watkins

The Best Congress Oil Could Buy
by Steve Kretzmann

A Call for Global Economic and Energy Transitions

Sin and Society II
by Edward Alsworth Ross


Bolivia Asserts Oil Sovereignty
an interview with Carlos Villegas

Causes of Soaring Oil Prices
interviews with oil industry analysts

Can Big Oil Adapt to Climate Change?
interviews with oil industry analysts


Behind the Lines

Independence from Oil

The Front
CAFTA and the Politics of Fear - Whistleblowers Betrayed

The Lawrence Summers Memorial Award

Greed At a Glance

Commercial Alert

Names In the News


Bolivia Asserts Oil Sovereignty

An interview with Carlos Villegas

Carlos Villegas is Bolivia’s Minister of Hydrocarbons and Energy. Villegas assumed the post in 2006 after previously serving as the Minister of Planning and Development.

Multinational Monitor: What is the extent of Bolivia’s gas reserves?

Carlos Villegas:
We currently have 24 trillion cubic feet of proven and probable reserves.

MM: Prior to Evo Morales becoming president of Bolivia, how were the gas reserves controlled? How much revenue was Bolivia earning?

Villegas: During the privatization of hydrocarbons that took place in the 1990s, the corporations owned the reserves and they managed and administered them independently. There was no state agency with oversight and there were no bodies that controlled the use of the reserves or defined an acceptable relationship between production and reserves.
Prior to Evo Morales coming to power, only 18 percent of the gross income from gas sales went to the government. That’s a quite low percentage, particularly if you look over the 10-year period of privatization, and if you take into account that the international oil market was going to have varying performance or behavior. And on the other hand, these companies had independent and bilateral relationships of sales and purchases, and therefore, the revenue that was generated was high and continued to grow over the period of privatization.

MM: How did the privatization or capitalization come about in Bolivia?

: Between the 1980s and the 1990s, a number of changes took place. One was globalization. If a country didn’t come on board with globalization, it was going to be kept out of international relations. And so therefore, you had to give in to globalization. Transnational corporations had a very strong presence in government and multilateral agencies, and they would pressure the country to come on board with globalization using policies that were promoted by multilateral agencies — the World Bank, the International Monetary Fund, the Inter-American Development Bank — which were developing policy under the umbrella of the Washington Consensus.
The main focus of the Washington Consensus was privatization of our natural resources and privatization of public enterprises, resulting in a reduction in the significance of the roles and functions of the state and government. In the middle of the 1980s, the Bolivian government came in line with the Washington Consensus.
In the 1990s, there was greater intensity of this privatization and capitalization, particularly with hydrocarbons. The whole hydocarbon production chain was privatized. But at the same time, paradoxically, one state company from outside of Bolivia, Brazil’s Petrobras, started to rebuild and control the hydrocarbon production chain within Bolivia.
The companies that worked in Bolivia under the joint-venture scheme under privatization had total leeway and freedom in the context of the free market to define volume and production, and even to declare reserves, establish export levels and set prices. Consequently, the hydrocarbon policy was in essence privatized. In other words, each company would define its own policy and function in terms of its own interests. The revenues paid to Bolivia were meager, and could not satisfy the promise that had been made to the people in connection with this privatization.

MM: Which were the main foreign companies that took control of Bolivian resources?

: Not necessarily in order of importance, the companies include France’s Total; Spain’s Repsol; Petrobras Brazil; British Gas; Chaco Pan-American Energy, an Anglo-Argentinean company; Vintage Petroleum, which is a U.S. company; DongWon, which is Korean; and Pluspetrol, which is Argentinean. There were 12 in total.

MM: The signature move of the Morales administration has been the nationalization. But what specifically does it mean that Bolivia has nationalized these resources?

: The nationalization of hydrocarbons has many levels and many stages. The first level has to do with regaining ownership of hydrocarbons. Currently, hydrocarbons that are below the soil and on the surface of the soil are the property of the Bolivian state. Before nationalization, they belonged to the oil companies. Now the Bolivian state manages and administers production from the moment the oil comes to the well-head, to the final destination, whether it be the domestic market or the foreign market.
Nationalization also means de-privatizing hydrocarbon policy. It is no longer the corporations that define the policy. Now, the Bolivian state decides, implements, oversees and controls hydrocarbon policy throughout the entire production process.
Nationalization also means there was a redistribution of revenue from the sales of hydrocarbons. Fifty percent automatically is allocated to the Bolivian state. The other 50 percent goes toward operational costs, covering the cost of the companies and investment.
But those investments only occur after the approval of YPFB [Yacimientos Petroliferos Fiscales Bolivianos], the state oil company. Today, the oil companies have the freedom to purchase drilling equipment, for example. In the past, they would buy overpriced equipment and charge the government. Now, the state company verifies if that equipment meets quality specifications, whether it is used or new.
After expenses, the remaining revenue allocated to operational costs is distributed to the companies and the state oil company, based on a pre-established formula.
We also renegotiated export prices. Prior to nationalization, private companies had the discretion to sell gas to [foreign companies or their affiliates] at a dollar or 80 cents per million BTUs [an artificially low price resulting in Bolivia receiving lower royalties]. Now, after the price negotiations, they pay the same thing that Petrobras pays: $4.30.

MM: The companies still do the drilling and operate the gas fields?

: Foreign companies produce and explore, but in qualitatively different conditions from what they were before. That’s another element related to the nationalization. Nationalization required operation contracts to clearly establish the new roles and duties of the foreign companies.
Now, they are service providers. Therefore, they explore and produce in the name of YPFB. And YPFB, with its technical team, accompanies the process to ensure the production and use of the reserves is appropriate and that there is no unapproved use of the reserves.
Furthermore, YPFB is going to begin to produce in the areas that have been set aside for YPFB. The state company is also entering into joint partnerships to produce and explore with state companies from other places in the world. YPFB is also entering partnerships with private companies, under specific terms and conditions including that the Bolivian company has to control, at a minimum, 50 percent plus one of the shares, and have in its power all of the management and administration of the company. Operational exercise must be in a balanced arrangement between the company and the state company that they formed the partnership with.

MM: Except for the Petrobras refineries, there was no expropriation?

: The mandate of nationalization was to gain back the capitalized and privatized companies. Previously, the private corporations held 51 percent of the shares. With nationalization, all of those shares went to YPFB. Now Yacimientos (YPFB) is the owner of part of those shares and the other part is divided up among the enterprises’ workers and investment funds.
Refinery and storage and transportation through pipelines had been privatized. Refineries were run by Petrobras and all the storage contracts went to a German-Peruvian company. In order to gain back control of the refineries, we negotiated the purchase of the shares of stock, buying 50 percent plus one. In all cases, we paid based on the actual value of the asset. Furthermore, we negotiated to be in charge of all of the management and operational control or oversight. Petrobras said you can have 50 plus one, but we want to have operational control. We did not accept this. Petrobras said, otherwise we’ll sell you 100 percent of it. So, we bought 100 percent, and now it belongs to the Bolivian state.
We have had efficient management since the transition point from Petrobras control, and the market has always had sufficient supply. It wasn’t even felt.

MM: When you say the renegotiation of price for the gas is related to the nationalization, you’re saying it’s because you’ve taken control again of policy making?

: That’s right. For example, Repsol and British Gas are in Bolivia and Brazil and Argentina. Prior to nationalization, they would sell to each other at 80 cents or $1. The revenue the Bolivian state received was based on that price. Once we took over, President Morales had a meeting with Brazilian President Lula, and I had a meeting with the Brazilian Minister of Energy [Dilma Rousseff] and the president of Petrobras [Jose Sergio Gabrieli]. We told them we were changing the pricing. They were understanding and accepted the new arrangement. And that’s why the prices went up. Now they pay a market price, $4.30 per million BTUs.

MM: What’s been the fiscal impact of these revised policies?

: To get an idea of the magnitude of the fiscal impact: In 2004, Bolivia had revenues obtained from petroleum of $284 million. In 2006, after the nationalization, Bolivia obtained $1.63 billion. That’s quite a significant impact.
Of these oil revenues, 20 percent is administered or managed by the central government, and 80 percent goes to the local governments. There are expectations that have been generated among the population that the resources will be properly utilized to fund healthcare, education, housing, basic sanitation, and the production and generation of jobs. If we use the resources in that way, then the results of the nationalization process will be a success.
President Morales is always reminding each and every one of us that the resources generated from natural gas must be used to improve the living conditions of the population of Bolivia. And for this reason, [decisions] are in the hands of the governors and the mayors at the local level.

MM: Bolivia is the first country in the world to withdraw from ICSID [International Center for Settlement of Investment Disputes], a World Bank-administered arbitration system for disputes between foreign investors and national governments. Does that relate to the nationalization of the hydrocarbon sector?

Villegas: We said to the companies, “These are the conditions for you all to enter. They are binding. If you do not want to sign then we will try to find the best mechanism for you to exit Bolivia.” One of the clauses of the new operation contracts is that arbitration over any contractual disputes shall be conducted in Bolivia. The companies must submit to Bolivian law, Bolivian arbitrators, and dispute resolution has to take place in city of La Paz. Should problems arise with regard to selection of the members of the arbitration tribunal, then members of the tribunal from other countries may be brought in. Furthermore, the contract says that companies cannot resort to diplomatic measures — in other words, companies cannot try to claim protection under bilateral investment treaties. Any disputes will be very separate from ICSID.

The End of History

In the 1990s, the government of Sanchez de Lozada handed over all of our natural resources, gas and oil, to private hands. But the history of foreign control of hydrocarbons in Bolivia goes way back, to 1956 when a hydrocarbon law called the Davenport Code gave U.S. firms control over Bolivian oil and gas. It was called the Davenport Code because that was the name of a U.S. law firm. [The Davenport Code was revoked in 1969, but its spirit was revived in the 1990s.] That part of history is now over.

— Gustavo Guzman, Bolivian Ambassador to the United States


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