Foreign Companies Renegotiate Bolivian Contracts

Sources: Financial Times, Foreign Investors Bow to Morales; BBC News, Bolivia Agrees to New Energy Deals; Reuters, BG Says New Bolivia Contracts as Profitable as Old.

Just days before the deadline President Evo Morales established last May, on October 29 ten foreign petroleum companies operating in Bolivia agreed to comply with the country’s plan to nationalize its oil industry. In exchange for the right to continue operating in the country, foreign companies will now be required to pay increased taxes, hand over the majority of their Bolivian operations to the state, and invest billions of dollars in the country’s energy industry. The money will be used to further oil exploration and production. Initially, foreign investors had threatened to force Bolivia to undergo international arbitration, but failed to follow through with their threat, agreeing instead to negotiate with Morales.

The new contractual arrangements transfer all commercialization of the hydrocarbon industry to Yacimientos Petroleos Fiscales Bolivianos (YPFB), the national energy company. Because YPFB will be responsible for all sales, the foreign companies currently operating within the country will be relegated to mere service providers. Brazil’s state-run energy company, Petrobras, is the biggest foreign investor in Bolivia and was the most resistant to the nationalization program. Throughout the negotiation process, Brazil complained about Bolivia's bullying tactics. Despite previous tensions, however, Brazil’s energy minister has confirmed that Petrobras will become a service provider and accept a tax increase from 50% to 82% in order to continue its Bolivian operations.

Other companies that renegotiated their contracts with Bolivia include Spain’s Repsol, the UK’s BG Group, France’s Total SA, and the United States’ Vintage Petroleum. The president of YPFB anticipates that the new contracts will bring in $1.2 million annually, a step in the direction of realizing Morales' dream that Bolivia will overcome its status as a "beggar" nation.

Question:

(1) While President Morales believes that the nationalization program will help the nation develop more quickly, a few petroleum companies have expressed concern that under the new contracts they will not have the money (or incentive) to explore previously unexplored oil fields in Bolivia. Does requiring such a big payout have the potential to backfire if the aggregate money collected from the companies does not equal the investment they would have made on their own? If so, what are some possible consequences?

For additional postings on Bolivia’s move to nationalize see Bolivia Nationalizes the Gas Industry and Bolivia’s Oil Nationalization Moves Forward.