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THE WALL STREET JOURNAL: Bolivia, Brazil Tread Delicate Line In Energy Talks

Bolivia, Brazil
Tread Delicate Line
In Energy Talks

May 11, 2006; Page A10

LA PAZ, Bolivia — Bolivia and Brazil began tough negotiations yesterday on terms of Bolivia's recent decision to nationalize its oil-and-gas industry, as well as its desire to raise the price of gas it exports to its energy-hungry neighbor.

How talks play out over the next few months will shape the development of South America's energy market over the next few years.

If Bolivia's terms are too tough, foreign firms that operate here, such as Brazil's Petróleo Brasileiro SA, known as Petrobras; Spain's Repsol YPF; and France's Total SA, may stop investing in finding new gas supplies or simply walk away, leaving Bolivia to try to manage fields it hasn't run for nearly a decade. Either move would hurt the economy in South America's poorest nation, home to the region's second-biggest gas reserves after Venezuela.

Foreign firms, which have invested nearly $4 billion since Bolivia opened its energy sector in the late 1990s, were caught off guard by the May 1 decree, which states that local subsidiaries of foreign oil firms must hand over majority control to Bolivia's state oil firm Yacimientos Petrolíferos Fiscales Bolivianos, or YPFB.

The move also temporarily increased the portion of money that the government keeps through taxes and royalties in the two largest gas fields to 82% from 50% — a level much higher than the average in most oil-producing nations. Foreign companies say the new rates are too high to make a decent return on their investment and want Bolivia to lower them again.

While new contracts are being negotiated, Bolivia will audit foreign companies here to see how much money they make, a process that will take months.

“The conditions are pretty tough. The companies have to recoup the investment they have already made, plus make a decent return on their ongoing production,” says Rob Cordray, an analyst at PFC Energy in Houston.

Despite the pitfalls, Bolivia is pressing ahead. This week, it named new directors — most of them lawyers and military officers — who will represent YPFB on the boards of local subsidiaries. Each company will have four directors representing YPFB and three directors for the foreign investors. The companies include Andina, controlled by Spain's Repsol; Chaco, a unit of Britain's BG Group PLC and BP PLC; Transredes, a gas-transport company controlled by Royal Dutch Shell PLC, and two refineries owned by Petrobras.

Petrobras says Bolivia's move to name new directors was illegal. The company argues that Bolivian law says the government must compensate foreign firms before taking control of their operations. A Petrobras official also warned the company wouldn't operate its refineries in Bolivia if the company couldn't decide on day-to-day matters, such as personnel. “Petrobras will not operate in Bolivia with inefficient personnel,” said the official. “We are not going to be like a public company where every time a new government comes in, it sticks unnecessary people in the company, inflating payroll,” said the official.

Oil-producing nations such as Venezuela and Russia have seized on high oil prices to extract more of the bounty from private oil firms, but Bolivia's move is the most aggressive yet.

Aside from the final terms of the nationalization, a key to the talks that began yesterday is Bolivia's desire to raise the price it charges Brazil for gas by about $2 per million British Thermal Units from about $3.60 now. For every $1 increase in the price, Bolivia expects to get an additional $300 million in income — a large sum in a country with only about $5 billion a year in economic output. The move against foreign oil companies has proved popular at home for Bolivian President Evo Morales but has angered the country's biggest neighbor, Brazil.

Brazil will probably agree to a substantial increase because it needs Bolivian gas. “I think Bolivia has the winning hand in this poker game,” says Carlos Miranda, a Bolivian former energy regulator. But he adds that Brazil is likely to focus on exploiting its own gas supplies in the future because Bolivia has proved to be a partner that unexpectedly changes its terms.

A higher price of gas charged by Bolivia would help soften the blow for other foreign energy companies operating here because they would share the spoils with Bolivia, although their share will be smaller. But it would be a double whammy for Petrobras, which not only loses control of its local operations but also has to foot the bill for higher gas prices.

Although Brazilian President Luiz Inácio Lula da Silva has promised Bolivia that Petrobras will stay, company executives are furious at Bolivia as well as Venezuelan President Hugo Chávez, who has close relations with Bolivia's leader.

Brazil's delegation was led by Energy Minister Silas Rondeau and Petrobras President Jose Sergio Gabrielli. Bolivian officials included Energy Minister Andres Soliz, a nationalist journalist and lawyer before taking on his current job.

–José de Córdoba contributed to this article.

Write to David Luhnow at [email protected]

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