The recent ENERGÍABolivia symposium highlighted that Bolivia’s energy sector has been influenced by two political-ideological processes, capitalization and nationalization, especially in the last 20 years. It is evident that Bolivia requires a policy that breaks this pendulum-like pattern.
ISSUE 122 | 2023
Vesna Marinkovic U.
Francesco Zaratti Sacchetti and Carlos Borth Irahola painted a complex picture of the already fragmented reality of the hydrocarbon sector, which was considered the most significant source of fiscal revenue in Bolivia until recently. It positioned the country as a major producer and net exporter of natural gas to the markets of Argentina and Brazil, significantly expanding networks for the domestic market.
As an opening question, they were asked if they considered the hydrocarbon sector’s policy, from capitalization to Evo Morales’ nationalization, as pendular, erratic, strategic, or if it had been confined to the edges of a national hydrocarbon strategy. This is because both political-ideological processes undoubtedly marked the sector’s performance over the past 20 years.
THE CAPITALIZATION IN HYDROCARBONS WORKED
Zaratti Sacchetti stated that he didn’t think it was relevant to dig into the time of capitalization. However, in a concise summary, he stated, “My opinion is that the capitalization policy in hydrocarbons worked, and it worked well. We had a large market, which was Brazil, and we had enough reserves to fulfill a 20-year contract, as required by that major market.”
He added that a series of rules were established under this policy to open the country to foreign investment, and the surprise was that much more gas was discovered than was needed. “In other words, what Petrobras had was sufficient to supply the Brazilian market, so there was a market deficit and an excess of reserves, leading to the search for other markets.”
Indeed, the capitalization introduced in 1994 during the first government of Gonzalo Sánchez de Lozada meant that the state lost control of the hydrocarbon chain, promoted Foreign Direct Investment (FDI), increased proven and probable gas reserves, especially after the discovery of the mega San Alberto field, and opened up two major foreign markets: Argentina and Brazil. It also launched the Pacific LNG consortium project, which aimed to liquefy 30 million cubic meters of gas daily on the Chilean coast for sale to Sempra Energy’s Californian power plants, generating substantial profits.
In this context, it could be said that during the first government of Gonzalo Sánchez de Lozada, to address the deep macroeconomic imbalances caused by an almost apocalyptic hyperinflation in 1984 and 1985, the pendular stance of “nothing with the State” was adopted, leading to some claims that grew and became evident in 2003 when the architect of Capitalization had to flee the country, likely because he stubbornly favored one side of the pendulum.
According to the Jubilee Foundation, one of the main grievances was the low level of income the state received from royalties and profit shares, as most of the producing fields were classified as new and paid a royalty of 18%, distributed among the producing departments, Beni and Pando, and YPFB. In these cases, the oil companies kept the remaining 82%.
“Another concern generated among the population was the possible implementation of a project to export natural gas (liquefied natural gas) to North American countries through a Chilean port. This was not only because Chile is the country with which Bolivia has its maritime encroachment issue but also due to the low sale price being negotiated at that time, which was around 60 cents per thousand cubic feet,” Jubilee stated, claiming that this was the tipping point for the so-called “Gas War” in October 2003.
THEN THE MAS CAME TO RIDE THE TIGER
Zaratti claimed that “then came the MAS, riding the tiger demagogically. With the slogan of nationalization, they won the 2005 elections, but even before that, they fundamentally contaminated the Hydrocarbon Law and later, even more seriously, they contaminated the Political Constitution of the State with issues that could have been of a transient nature but were written into a constitution that could last for 20 or 30 years, and now we are tied hand and foot.”
Zaratti’s reference to the scheme that led the entire hydrocarbon chain to be under state control, starting from Supreme Decree 28701 on Nationalization, indicates a return to the other extreme of the pendulum: “everything with the State.” This also doesn’t seem to have been effective, given the results in 2023, which show a significant and dramatic decline in gas reserves in the country, mainly due to reduced FDI in the sector, as a result of regulations imposed by the MAS government, as several experts argue.
“What was favored was the monetization of these reserves. In other words, turning them into money to virtually perpetuate themselves in power through good, bad, mediocre, and very short-term projects,” said Zaratti, adding that “around 2014, when they realized that this monetization policy required reserve replenishment, it seemed too late because the objective conditions for relations with companies that could have invested to expand markets were virtually non-existent.”
In this context, he said that Bolivia is now objectively experiencing the end of the gas cycle. “I defined this years ago because this situation was already foreseeable. That is, the gas cycle, like that of silver, tin, gold, or rubber, was coming to an end, and this is something that we must assimilate and react accordingly,” he noted, regarding President Luis Arce Catacora’s recent statement that “gas reserves are hitting rock bottom.”
ALL ABSOLUTELY SYMBOLIC
Carlos Borth Irahola, on his part, stated that the nationalization of hydrocarbons during Evo Morales’ government was an “absolutely symbolic” act because all they did was toughen the already radical provisions of Hydrocarbons Law 3058.
“With this policy, what happened were the following issues that lie at the root of what we are experiencing today. First, the super cycle of commodities was coming, and they created the Direct Hydrocarbon Tax (IDH). The second measure of this nationalization policy was the shift to the Operation Contracts regime, with the stipulation that YPFB, the state company, should hold more than 50% of the shares, which, in terms of tax revenues, determined a Government Take of approximately 70%.”
“In these conditions, some companies chose to withdraw, naturally those that operated the less profitable fields, and the ones that still had significant resources like San Alberto and Margarita, for example, remained,” he added.
RESERVE REPLENISHMENT WAS FORGOTTEN
For Borth Irahola, this is the root of today’s problems in the sector. “In practice, the new policy, if we can call it that, determined that the state and YPFB be both the referee and the operator. In conclusion, the companies that remained devoted themselves to intensive exploitation of the fields discovered in the previous period until depletion. The state became intoxicated with the large influx of resources and even forgot to demand that companies comply with reserve replenishment, something that is still in Law 3058. In other words, the operators, at their own cost, had to explore and replenish the exploited reserves.”
In this context, both agreed that there has been no capacity to find a fair middle ground for the sector and, therefore, for the country in terms of energy management. “I completely agree. I believe that the MAS hydrocarbon policy, in general, is the biggest failure of that project, and what lies ahead is quite serious,” stressed Zaratti.
…the state became intoxicated with the large influx of resources and even forgot to demand that companies comply with reserve replenishment, something that is still in Law 3058.
“It is undoubtedly a failed policy,” added Borth, lamenting the current state of the sector and emphasizing that this failure has at least two very serious consequences that the government is also not addressing: first, the reduction of resources for its own economic model, with effects on the entire economy. The other major problem for Borth is that 70% of electricity generation in Bolivia is based on gas, and with the decline in reserves, the electricity sector is flooded with very dangerous uncertainties. “That is my perception of the seriousness of the consequences of the failure of the government’s hydrocarbon policy,” he emphasized.
WE WILL NO LONGER BE A GAS POWER
When asked if changes in regulations for the sector would allow an aggressive exploration plan to address the acute gas reserve crisis, Borth said that, in legal terms, the entire regulatory framework would need to be changed, starting with the Constitution. However, he stated that the government, “for political-ideological reasons,” is prevented from doing so. Still, he pointed out that the MAS era is coming to a close, and it would be necessary to wait until 2026 to see if, in addition to the reserve deficit, the natural gas resources have also run out, or if it is still possible to regain national prominence with this hydrocarbon.
Zaratti was more categorical, stating that there is no longer a possibility of returning to being a gas power in the region, and beyond some minor development resulting from a new discovery, this resource will no longer be able to support the national economy.
In the absence of gas, Zaratti drew attention to the fate of the thermoelectric plants in the country and the urgency of designing an energy transition plan that gradually addresses Bolivia’s energy generation. However, he pointed out that no other natural resource will allow the extraordinary levels obtained from the gas rent. Borth also highlighted the likelihood that, in the near future, the domestic market may have to be sacrificed to avoid losing the flow provided by gas exports.
Another danger, according to Borth, would be to present lithium as the substitute for the significant income received from natural gas. They noted that currently, neither lithium, biodiesel, nor even gold can replace these revenues, acknowledging that the management of Bolivia’s natural resources, by the political class in general, remains a pending issue.
The symposium highlighted that the country lacks an appropriate natural resource management policy, leaving as a consequence the experiences concerning silver, tin, and now gas. There is a sense that after “triggering” hydrocarbons, the next step will likely involve biodiesel, gold, and, of course, lithium. Nevertheless, it seems that times have changed.
