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BOLIVIA: Natural Gas a Mixed Blessing

by Hal WeitzmanFinancial Times
May 4th, 2005

La Paz is not used to receiving high-profile political guests. But this week Vicente Fox, Mexico's president, Ernesto Derbez, his foreign minister, and a group of Mexican industrialists spent two days in the Bolivian capital on a mission, in the words of Mr Fox, to “reacquaint themselves” with the country.

What really tempted the Mexicans south was the smell of gas. Bolivia sits on the second largest reserves of natural gas in South America, and Mexico wants to incorporate exports from the Andean country into its energy strategy.

Mr Fox and his Bolivian counterpart, Carlos Mesa, agreed to start working on plans to export Bolivian gas north. Although such a move would benefit both economies, the agreement was a vivid example of the gap between rhetoric and reality in Bolivia.

It is far from clear that the Andean country will even be able to meet any of the deals it has struck so far to increase gas exports to neighbours such as Argentina and Brazil. The problem is a looming political deadlock over long-awaited hydrocarbons legislation. After eight months of wrangling, Congress is expected this week to pass the bill, which would impose a tax of 32 per cent on foreign investors in the gas sector on top of existing royalties of 18 per cent and allow existing contracts to be altered.

That has infuriated international energy companies such as Petrobras, Repsol, BP and British Gas, which have invested more than $3bn (€2.3bn, £1.6bn) in Bolivia. They say the new tax--which is non-deductible and imposed at the wellhead--amounts to a “hidden royalty” that effectively confiscates 50 per cent of their revenues.

If it passes the legislation, Congress will throw a hot political potato into the president's lap. “Mesa is cornered,” says Winston Moore, a political analyst in La Paz. “This may be his most difficult moment.”

Gas has become the focus of debate in Bolivia, bringing widespread social unrest. Mr Mesa offered to step down twice in March as protestors--aiming to secure increases in royalty levels--paralysed the country with roadblocks.

Since then, an uneasy truce has prevailed between the government and radical social movements as both sides waited for Congress.

Mr Mesa is in a bind. If he signs the bill, he will anger investors in the gas industry, who have threatened to take the government to international arbitration, to freeze investment and to abandon some fields.

But if the president who has said he will veto any legislation that makes the gas industry “unfeasible” refuses to back the bill, he will provoke the wrath of the social movements which are demanding further increases in royalties or even the outright nationalisation of the industry.

Mr Mesa cannot afford to shrug off the unrest. His predecessor, Gonzalo Sánchez de Lozada, was forced out in 2003 by protests over plans to export gas to Chile. Should Mr Mesa veto the bill, Congress could over-rule him with a two-thirds majority. Other options could be to submit the law to the constitutional tribunal or to do nothing, forcing Congress itself to promulgate the law.

Mr Mesa has 10 days from when Congress passes the bill to make his choice.

He will make his decision against background of heightened political tensions across the Andean region following the ousting of Lucio Gutiérrez as Ecuador's president last month amid a wave of street protests.

On her trip to South America last month, Condoleezza Rice, the US secretary of state, singled out Bolivia and Ecuador as countries whose instability was “certainly troubling” for the region.

The question is whether that instability will exhaust Mr Mesa before his term ends in 2007. Mr Moore has a sense of déjà vu. “This government is effectively not governing. They have the ceremonial trappings but no operational capacity. It reminds me of the last days before Sánchez de Lozada was forced out.”

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