Bolivia’s Gas Nationalization: Opportunity and Challenges (1)

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.

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 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.

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.
* AIN researcher Emily Becker contributed to this report.

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.