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On the Eve of Civil War, Russia Invests in Bolivia

evomorales1214.jpgOne wears “sartorial” black turtlenecks, the other prefers bright stripy alpaca wool sweaters – even at diplomatic meetings. Yet Vladimir Putin and Bolivian President Evo Morales, both of whom have seen their presidencies enormously affected by political issues surrounding natural gas, are looking into striking an energy deal – yet another seemingly ideal marriage of resource populists. Reports indicate that Gazprom is currently negotiating with YPFB (Yacimientos Petrolíferos Fiscales Bolivianos), the Bolivian state energy company, on a $2 billion investment in two gas exploration sites in the resource-rich Tarija region of the South, despite the many difficulties experienced by other energy investors. Has Gazprom, one of the world’s leading practitioners of resource nationalism, lost its sense of risk aversion in Bolivia?

Perhaps not. Like Russian politics, the populist rise of Evo Morales has involved an strong element of strident anti-Americanism, and in its re-nationalization of the gas fields, there was a widespread perception that the brave president was standing up to “foreign imperialists” and taking back the natural patrimony of natural gas for the people (which very well may be true, but the Americans had next to nothing invested in Bolivian gas – mostly it was Spain and Brazil to bite the bullet).The result has been a decidedly more hostile attitude toward non-state foreign oil and gas majors, and a more friendly attitude toward investment from seemingly fraternal and politically palatable SOEs (state-owned enterprises). In an interview with the Financial Times about the Gazprom-Bolivia deal, CERA’s Sylvie D’Apote, said that the Russians are “a natural partner to Bolivia’s state-run YPFB, which would prefer investment by another state company to private foreign investors.“Gazprom certainly hopes to escape the fates of Repsol, Petrobras, Total, and BP, which all were forced to re-negotiate their large gas holdings and licenses with the Bolivian government back in 2006. Although a $2 billion commitment may seem small for cash-rich Gazprom, it is large by Bolivia’s standards, and their confidence in a challenging foreign market with a heavy government presence may be telling of future trends.bolivia1214.jpgPolitical unrest over the proceeds of Bolivia’s natural gas deposits have been a constantly recurring reality, even for President Evo Morales. Today the army is preparing to confront regional separatists unwilling to accept a new constitution.But what about risk? The attraction is easy to understand, as very few would doubt the unparalleled opportunities for natural gas in Bolivia. Just recently, Repsol, one of the biggest foreign players in the sector, announced the discovery of a deposit which could produce 800,000 cubic meters a day – 1% of Spain’s consumption. Last week Petrobras, which is reaching into its deep pockets to try to lure the Bolivians away from Venezuela, committed to a $750 million investment to expand output and export to Brazil. Eike Batista, the impressively successful entrepreneur behind Brazilian energy firm OGX, has said that he is extremely optimistic that the Bolivian government is coming around to foreign investment again: “is extremely optimistic that the government there will reverse its position on foreign investment. “We want to go to Bolivia because it has the largest gas reserves next to Venezuela,” he told the National Post. All this from the man who was declared “persona non grata” by Evo Morales a year and a half ago.Mr. Batista may be right about the shift in attitude. Since the 2006 nationalization, Bolivia, like Russia, has realized that despite bringing the largest amount of assets under state control as possible, they still require the foreign technology and capital to successfully and profitably extract the natural gas. Unmobilized resources do very little to fulfill the promises of a populist revolution, and the Bolivian government realizes that foreign investment is central to development. Vice President Álvaro García Linera explained to CSM, “We offer our humble contribution to what we see as 21st century-style nationalization, which means that foreign companies with capital and know-how are present in the country with their machinery, and they can earn profits, but never again can they be the owners of the gas and the petroleum.“Exactly how this works in practice is left unsaid, but it appears that things may be slightly improving for gas investors as the business community gets used to Evo and as Bolivia remembers how much they need help to get the gas out.However the state’s current attitude is not all that’s at stake for Gazprom’s strategy in Bolivia – there are also considerable geopolitical factors at factors at play. The extreme poverty suffered by the majority of Bolivians, the poorest nation in South America, remains largely unchanged and therefore a constant threat to stability (if three presidents have been ousted as a result of this underpinning factor, there’s no reason why Morales couldn’t be next).There are also extraordinary separatist tensions in the south of the country, including the area which Gazprom is hoping to get exploration licenses for. Tomorrow (Dec. 15) the regions of Santa Cruz, Tarija, Beni and Pando will officially declare autonomy from the Central government, which is drafting a new constitution to redirect the majority of gas income to the north and redistribute property – which could also have an impact on Gazprom’s ideas for export of its gas in Tarija. Some are even talking civil war, and the army has been put on alert just today as the country braces for violence.The separatist trend is also making an impact on the gas market, as the notoriously impossible pipeline to the Pacific Ocean becomes less and less likely, and as neighboring consuming countries are scattering away from Bolivia. In response to the political tensions, Argentina and Uruguay opting for an expensive LNG terminal over the development of Bolivian gas imports.YPFB1214.jpgGeopolitically, it’s impossible to talk about Evo Morales and Bolivia without mentioning Venezuelan President Hugo Chavez, who is seen as Morales’s inspiring mentor, patron, and, in the eyes of many Bolivians, a guest who has overstayed his welcome after one too many gestures of paternalism. As we’ve noted many times on this blog, Vladimir Putin’s relationship with Hugo Chavez, is central to the Kremlin’s strategy to expand its influence in Latin America, and it is conceivable that Gazprom is counting on this unofficial president of Bolivia to a) keep their investment safe and b) help rope Bolivia into the growing alliance of resource nationalists (which may or may not involve a role in the gas cartel).Russian companies have also had dramatic success in capturing numerous exploration licenses in Venezuela’s Orinoco basin, while U.S. and European energy firms are getting squeezed out. Like in Bolivia, national oil companies are at an advantage: Peter DeShazo of CSIS has said that “Chávez is looking for support and business deals from countries that he sees as rivals or adversaries of the US” There is also an understandable synergy in that relationship, as Venezuela is buying up as many weapons as possible from Russia, while Gazprom chips in to help PDVSA build the “Hugoducto” pipeline to divert supplies away from export to the United States to function either as a political lever or a move to capture control of a lucrative market (similar maneuvers are being simultaneously orchestrated with BP’s LNG assets in Trinidad and Tobago, where the Russians are looking to gain control to a key U.S. supply source by squeezing BP over the Kovykta Field).However there seems to be significantly less political and commercial expediency for the Russians to get into Bolivia, and invest in gas that they will have difficulties accessing, producing, and exporting. It is also possible to imagine that if relations were to deteriorate between Chavez and the “new” Russian government, that this “incursion” into Venezuela’s perceived sphere of influence could become a point of conflict.But perhaps the Kremlin is going forward with its Latin American adventures because barely anyone has noticed. Diplomatically the US State Department has been so mired in the Middle East that it has virtually ignored Latin America in recent years (…it can be hard to say whether or not this is an improvement over times when the U.S. actually has a Latin American policy), but the US Southern Command has taken notice in a 2006 report on resource nationalism in the region: “A re-emergence of state control in the energy sector will likely increase inefficiencies and, beyond an increase in short-term profits, will hamper efforts to increase long-term supplies and production. … Pending any favourable changes to the investment climate, the prospects for long-term energy production in Venezuela, Ecuador and Mexico are currently at risk.”It is entirely too early to get a clear sense of Russia’s objectives in Latin America, and whether or not the Bolivian experiment is the beginning of many more investments and relationships in comparable sectors and countries. The lesson that we can draw from this news is that more and more, petro-states and the enterprises they control are learning to do preferential business with each other, which brings with it a dangerous political component that corrupts purely commercial decisions – and that’s bad news for investors, consumers, and practically everyone else outside the small circles of power that control these groups.