ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and León Portocarrero

January 20th - February 3rd, 2009

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Bolivia's new Constitution and its impact on the extractive sector

Latin American extractive companies seek financing

Adjustments in oil price stabilization mechanisms for 2009

Bolivia's new Constitution and its impact on the extractive sector

On January 25th, the new Political Constitution of the State of Bolivia was submitted for referendum, and approved by a majority of voters. It includes new definitions for the relationship between the Bolivian state and companies in the extractive sector. Indeed, in contrast to prior legislation, the new Constitution dictates that private companies can only be service providers, eliminating the option of contracts in which companies keep and commercialize a share of production while giving the state another part. Companies also can no longer resort to International Courts if conflicts with the government arise.

Both private companies and foreign state-owned companies operating in Bolivia's oil sector expressed concern over the new Constitution and announced they would freeze their investments. Russian company Gazprom declared it would wait to develop its 2009 investment plan until it is assured of legal stability, through a Mixed Society Agreement with the Bolivian state-owned oil company YPFB. Similarly, several Brazilian companies stated that they would have to re-negotiate the terms of their contracts with the Bolivian State. These same companies felt that the new Constitution lacks provisions for assuring the acceptance of local communities before oil blocks are given out as concessions.

Seeking perhaps to calm down the companies, officials informed mining companies that they would have a one year period to renegotiate their contracts with the State. Going even further, the Director of Mining, Freddy Beltr‡n, pointed out that concessions already awarded under the previous system would not be modified: "We will not ignore those who have mining ownership under the grid system; they will all continue to work within their concessions."

Despite these words of reassurance, the mood between industry and the Government was tense in the days leading up to the approval of the Constitution. Just two days before the referendum, the Bolivian Government nationalized the "El Chaco" oil company, which was owned by the Anglo-Argentinean company Pan American Energy (PAE). The nationalization included a military takeover of the company's facilities. These actions were taken because no agreement was reached with the state-owned YPFB regarding the framework of the nationalization law, where the State was proposing mixed operations between PAE and YPFB.

Some analysts say that it is risky for the State to take control of the company (via the purchase of 50% of the company plus one share). They argue that YPFB does not have the necessary experience to take on upstream operations, since it has been absent from this stage of production since 1997 and that it also lacks sufficient capital for the required investments.

Meanwhile, in Ecuador, the government is preparing to rescind its contract with the French company Perenco, after a re-negotiation process failed to modify its contract to a service provision model. It is not clear whether the Ecuadorian Government will seek to exploit the wells previously developed by Perenco itself, or if it will freeze the production process all together. The Ecuadorian authorities are facing the same dilemma regarding the Italian company Agip, since its operations appear to no longer be profitable for the State at current oil prices.

The new Bolivian Constitution has generated another moment of uncertainty in the long process that began with extractive sector contract re-negotiations in 2006. Moving forward, though the timelines are still uncertain, the sector's entire relationship with the State will have to be re-negotiated. As the recent experience in Ecuador suggests, we must also consider that these re-negotiations will not take place in the context of high prices and certain profits, but at a moment when prices are very low and profits are scarce.

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Latin American extractive companies seek financing

In light of the international crisis, companies in Latin America's extractive sector have been forced to seek new sources and methods of financing to support their investments, or even to maintain previous levels of production. Countries and companies have adopted a variety of strategies, including public-private associations, sales of assets, and the use of international reserves.

In Brazil, the Anglo-Australian company Rio Tinto offered two of its major projects up for sale at a price of US $1.6 million, seeking to reduce their 10 million dollar debt. Company representatives announced that Vale do Rio Doce would buy the potassium extraction project in Argentina and the iron mine in Corumbá, Brazil.

Meanwhile, the state-owned Ecuadorian company Petroamazonas released plans for State spending of US $356 million under the 2009 budget, but also announced that it would resort to Operational Alliance Contracts with the private sector reach the total investment of US $506 million total necessary to maintain the production level of 100 thousand barrel per day. Under this new scheme, the private company would handle all of the project's activities in exchange for 25% of Petroamazonas's output.

In Trinidad and Tobago, the government announced that it was seeking alternatives that would allow state-owned Petrotrin, a subsidiary of Trinmar, to continue operations. The company significantly reduced its production during 2008 and would require the injection of an estimated US $10 million to keep it going. Initially, the Government said it was looking for a partner to form a joint venture. However, later statements indicated that the possibility of renting or selling Petrotrin was also being considered.

Peru announced the sale of oil company Petrotech to a partnership between the stated-owned companies ECOPETROL of Colombia and KNOC of Korea. This sale took place even as Petrotech had been linked to a wiretapping scandal and faced numerous problems with tax payments.

In contrast to these cases of public-private alliances or sales, Bolivian president Evo Morales confirmed on January 27th that he would allocate 1,000 million dollars to state-owned oil company YPFB for investments in 2009. These resources will be taken from the international reserves valued at US $7. 8 million at the time of the announcement.

Though some state-owned companies have had to seek private financing, the overall trend toward strengthening these national oil companies continues. For instance, ECOPETROL in Colombia is still taking on projects outside the country. The case of Bolivia is cause for concern, though, because the use of international reserves as a source of financing is not only unsustainable, but also threatens to generate liquidity scarcities in foreign currency.

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Adjustments in oil price stabilization mechanisms for 2009

After several months where international oil prices hovered around US$50, governments in countries such as Peru and Ecuador have estimated that they will not need to allocate resources at previous levels in order to stabilize fuel prices.

Officials in Ecuador have said that 2008 fuel subsidies amounted to approximately US $1.8 of the US $2.7 million spent on oil imports. The subsidy allowed fuel to be sold at US $35.6 per barrel, while it was being bought at US $107 in the international markets. In 2009, the price of oil imports has stayed at US $65 per barrel. To keep domestic prices at levels similar to 2008, Ecuador will thus still need to spend some amount subsidies, but the figure will be significantly lower, alleviating the pressure on a budget already severely affected by the drop in revenue from crude oil exports.

Peru did not use direct subsidies to avoid excessive fluctuations in oil prices. Instead, the government created a Fuel Price Stabilization Fund to which it allocated around 250 million soles. These resources were used to compensate refineries and oil importing firms so they would not increase their prices. However, the money in this fund was not enough to cover the compensations over the full high price period, which led to a debt with refineries and oil importing firms that reached 1,000 million soles by January 22nd.

Seeking a way to repay the debt, the Government has allowed refineries to keep their internal sales prices high, even as international prices have plummeted, providing them with and additional margin that covers the debt. Vice Minister of Energy Daniel Cámac has said that if the debt continues to be paid at the current rate of 20 million soles per week, it could be eliminated by the end of the year. However, the new gasoline price cuts now being evaluated would lower the margin at which the debt is paid.

The differences in policies across country borders is notable: While Ecuador protects its consumers through a subsidy, Peru protects companies' earnings by forcing consumers to pay artificially high prices, leaving the people, and not the Fund, to sustain the companies and ensure their profits.

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Sources: Clarin.com, ElComercio.com, ElDeber.com.bo, Folha Online, El Universal, The Trinidad Guardian, La Razón, La Republica.pe

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