Wednesday, May 03, 2006

Nationalization in Bolivia: Will Foreign Oil & Gas Companies Suffer?

Why the big guns, does he fear Lestat is coming?

Yesterday evening President Evo Morales made good of his campaign promise of “nationalizing” Bolivia’s oil and gas resources. Via an official decree President Morales ordered the military to “occupy” foreign-operated gas extraction plants, refineries, and gas stations. He even addressed the country from the grounds of the Petrobras-operated San Alberto field, while heavily guarded by members of the US-trained counterterrorism task force Fuerza 10 [1] and a gleeful cadre of ministers, including nationalization “mastermind” Andrés Soliz Rada. While due to its now bore-some rhetoric his speech is not worth dissecting, the resulting official decree, the legal basis for any future nationalization plan is. However, I will leave that post for later this week, when we may have more information.

In this post I only want to report on the reactions of some of the companies directly affected by the announcement and the market’s reaction to the event itself:

§ Repsol (NYSE:REP).- Spain’s Repsol is the most exposed Western oil company in Bolivia, they operate some 30 fields. Bolivia is the source of 18 percent of the Madrid-based firm's reserves and 9 percent of its production. However, after the big write-down in the value of these assets in January (See the post about this here), the actual impact on Repsol is less than the reserves and production figures would suggest. Repsol ADR’s opened down three percent today and closed at a slight negative. In Madrid, the company’s stock recovered during the day and closed higher than the prior day. Repsol’s press release states that the company is evaluating the viability of renegotiation (link here).

§ British Gas (LSS:BG).- Shares of BG Group, which holds three fields in Bolivia including the Margarita field, also opened lower this morning. Bolivia only accounts for 3 percent of BG’s production and 4 percent of reserves. The Company did not issue a press release regarding the issue, though more information about its operations in Bolivia is available here.

§ Pluspetrol Energy. - The company holds 6 fields, including the Madrejones camp, it’s more invested in the Peruvian Camisea project than in Bolivia and did not issue an statement. It's operations in Bolivia function under the Repsol umbrella. It was not immediately affected by the events.

§ Total (NYSE:TOT). – Bolivia represents less than one percent of the company’s reserves, and its stake in San Alberto is shared with Petrobras. The company did not comment on the issue. It’s stock was not affected by the events

§ Vintage Petroleum (A subsidiary of Occidental Petroleum Corporation NYSE: OXY). - It currently operates three fields, the Bolivian operations represent a marginal segment of its South American operation, and there was no release for the company regarding this issue. This is the only US company significantly involved in Bolivian gas extraction. (Exxon-Mobil has gas transport operations)

§ Petrobras (NYSE: PBR). - Brazilian company Petrobras holds small but very public stake in Bolivia, its investments there yield only 2.4 percent of its output and form 2.8 of reserves. However dire the situation may look, Petrobras is in a position to actually profit from the current situation. Under the current administration, renegotiation of contracts will benefit a selected few, and depending on the company's decision or intervention from Brazilian president Lula da Silva, Petrobras may be one of them. As I have stated elsewhere in this blog Petrobras has a competitive advantage in not being a European or American company. Surely it’ll never be able to pull the same weight as an Exxon-Mobil but it is a force to be reckoned with in South America. Petrobras is a “politically correct” candidate for partnership under the awry rationale of the current administration - where the red dye of banners surpases logic. Now will Petroleo Brasileiro take over when Repsol finally decides enough is enough? Or will PBR go the other way and take Bolivia off line?

As far as the immediate reaction of the market, we can see that firms were quick to clarify their exposure in Bolivia and investors took note. Even Repsol, which would come out the greatest loser from a far-reaching expropriation, does not depend on Bolivia for its profitability. While other affected companies, namely Petrobras, stand to gain from this turn of events.

It’s not clear how far this “nationalization” will really go; as far as I’m concerned, this is nothing but the long needed and awaited contract-renegotiation under a populist guise. Production is only being channeled through YPFB while administrative control of infrastructure remains on foreign control until negotiations start.

And judging by the text of the initial decree, the only asset that has truly changed hands, are the millions of Andina, Chaco and Transredes shares owned by Bolivian citizens themselves in their pension funds, which have now being transferred for free to the MAS-controlled YPFB coffers. No clue on what that money will be used for, and with that source of income offline lets hope Chavista aid keeps flowing to pay the Bonosol, or Morales is going to see first hand that expropriation is not “the answer to all of our miseries”.

Note:[1] The only reason why I point this out is because this elite unit was compromised by Morales himself when earlier this year he practically cut its US funding and training. It's personnel had been allegedly involved in the controversial transfer of Man Portable Missiles to the US, an operation that tarnished it's reputation and pride. By placing them along his side in this very nationalistic ocassion, is Morales trying to rebuild their persona as his own little shock troops? Afterall they are not supossed to do guard duty...

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Anonymous said...

This is a horrible way to get to you, especially since I have absolutely nothing to say about Evo's decision, at least not here, but you have seemed to dissappear off the face of the planet,and I have either lost your phone number or you changed it. I've been sick for the past couple of months and just got back to Stgo. Write to me when you can!

Anonymous said...

I think He used the military wisely, otherwise you would have the populace taking over and posibly destroying the infraestructure, hurting personnel and pitting the government against the people.