Bolivia's gas poll

Bolivia's gas poll

Financial Times

July 21 2004

Prices of oil, gas and minerals may be high but the world's natural resource companies have not been having it all their own way in Latin America. True, Colombia, keen to attract oil companies back to boost exploration, has reduced its take from tax and royalties but the sector faces the challenge of a new state energy company in Argentina and higher mining royalties in Chile and Peru. It has lost opportunities with a botched liberalisation in Ecuador and on Sunday saw Bolivians vote in a referendum for the state to play a much bigger role in developing South America's second biggest reserves of natural gas. Executives, however, should not get too depressed.

First, much of what has been happening simply reflects what could be a long- term change in market conditions. With the prices of oil, gas and minerals rising it is understandable that producer nations are looking to increase their income from the windfalls. Moreover, some of the money is being invested in stabilisation funds that can smooth macro-economic performance over time, helping bolster investment conditions in a more general sense.

Second, as Bolivia demonstrates, in many Latin American countries the debate is not whether public or private companies should exploit the region's natural resources but whether they should be exploited at all. In this sense Sunday's referendum result was a victory for common sense.

Many left-wing and indigenous opponents of Carlos Mesa, the president, are opposed per se to exporting gas and were seeking to disrupt the referendum. All this raised fears that the country was about to re-live the anarchy that led to the overthrow of pro-US President Gonzalo Sanchez de Lozada last October. By routing these extremists, Mr Mesa has won himself a mandate not only to develop the gas resources but to govern.

Defeat would have been disastrous not just for Mr Mesa but for foreign companies, such as BG, the UK gas group, and Repsol of Spain, which have sunk hundreds of millions of dollars into gas exploration but have so far been unable to sell as much gas as they would like.

Mr Mesa now needs to use this political capital effectively. He will seek to raise royalties and tax rates, but must be careful not to make investments uneconomic and to be mindful that companies have alternatives.

The president knows that he needs foreign companies to develop his country's energy resources. He has sensibly promised not to nationalise private assets and will want to forge new relationships with existing investors. Ideally, he should look to build a pipeline to a port on the Pacific coast to allow Bolivia access to the attractive Asian and west coast North American markets, although given popular opposition to any deal with Chile, Bolivia's historic enemy, this could be difficult. It is a tough agenda but Mr Mesa has made an excellent start. Investors should respect his efforts.