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Financial Times: THE AMERICAS: Morales feels heat in negotiations over gas

Oct 27, 2006
By Hal Weitzman in Lima

At two minutes past midnight tonight – 180 days since Bolivia’s government decreed the state was to take back control of its natural gas reserves – President Evo Morales hopes to announce the nationalisation has been completed.

It is far from clear that the deadline will be met. Things have not gone smoothly since May 1, when Mr Morales donned a hard hat and entered the San Alberto gas field in south-eastern Bolivia operated by Petrobras, the Brazilian state-owned energy company, to declare that he was honouring a campaign pledge to renationalise the sector.

The nationalisation – the reserves are the second biggest in Latin America – provoked the wrath of governments in Brazil and Spain, and led to a drying up of international investment. It briefly boosted Mr Morales’s popularity at home but since then his approval ratings have fallen steadily.

With foreign relations still fragile and his domestic agenda gridlocked in political infighting, Mr Morales desperately needs to be able to announce some good news tonight.

One difficulty those in the industry frequently complain about was that in spite of the fanfare that accompanied the announcement, the administration did not initiate negotiations with most foreign investors until September. This was some seven weeks before the six-month ultimatum the companies were given to renegotiate operating contracts or pack their bags.

“The talks began 4½ months after they should have done,” says Ronald Fessy, a lawyer for the Bolivian Hydrocarbons Chamber, which represents foreign investors such as Repsol of Spain, France’s Total, British Gas and Royal Dutch Shell.

It is a widely held belief that the renationalisation process has been mismanaged. That became clear in August, when the government said it was “temporarily suspending” the nationalisation due to lack of funds and expertise.

Last month the hydrocarbons ministry was forced into an embarrassing U-turn after it issued a decree transferring control of refining and the sale of oil and gas derivatives from Petrobras to YPFB, Bolivia’s state energy company. Two days later, in the face of strong protest by Brazil, the government reversed the decree and Mr Morales sacked his hydrocarbons minister, the head of YPFB and Bolivia’s energy regulator.

La Paz has had one notable success: in June Argentina agreed to pay 50 per cent more for Bolivian natural gas, and last week the two countries signed a deal to triple export volumes.

However, for the most part the talks have been difficult and have frequently become embroiled in aggressive and bad-tempered rhetoric.

Industry insiders say tonight’s deadline is more of a negotiating tactic than a genuine ultimatum. Still, few foreign investors want to call the mercurial Mr Morales’s bluff and the cut-off point has at least served to focus minds.

The industry’s tone has changed markedly in recent weeks. Silas Rondeau, Brazil’s energy minister, said last week that “there have been signs of advances towards an agreement”.

Repsol representatives have also been upbeat and the Bolivian media has reported that Total and BG are “one step away” from signing new energy -contracts.

Bolivia desperately needs to make some progress in attracting fresh investment. This year the industry has spent $100m (€80m, £53.5m), one-sixth of the amount invested in 2000.

Carlos Alberto López, a former hydrocarbons minister, points out that, evenif new contracts are announced tonight, they will still have to be approved by Congress and may be affected by new rules emerging from an assembly rewriting the constitution.

Those close to the negotiations say it will be a tight squeeze to complete the talks in time. A fudge could be in the offing. Mr Fessy suggests that the government could, in any case, announce an “initial agreement” as a framework for a final deal.

Another possibility is that the government will be forced to declare an extension, as a congressional commission recommended this month.

“We are not that advanced in the negotiations,” Mr Morales admitted only last week, while promising some “surprises”. For many, the big surprise will be if his government is able to conclude the gas nationalisation process any time soon.

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