Why do foreign oil companies continue to operate in exploration and production activities in Bolivia's hydrocarbon industry after its 2006 nationalization?

Dissertation for the Master’s program in International Strategy and Trade Policy

Abstract

This report explores the question: Why do foreign oil companies continue operate in exploration and production activities in Bolivia’s hydrocarbon industry after its 2006 nationalization?

The history of Bolivia’s hydrocarbon industry is filled with cycles of nationalization and privatization. Each cycle has produced dramatic changes in Bolivia’s petroleum fiscal regime. Bolivia’s 2006 nationalization of its hydrocarbon industry has given Bolivia an international reputation as a high risk country to investment in. However, foreign direct investment is still occurring since the 2006 nationalization. The most interesting aspect of this continued foreign direct investment is that, the majority of it is from existing foreign companies that were there before the 2006 nationalization. This report exposes the underlying reasons as to why foreign companies continue to operate in Bolivia’s hydrocarbon sector despite its most recent nationalization in 2006. A historical analysis will be conducted on Bolivia’s hydrocarbon industry; more specifically, the time period between 1990 until 2009 will be the main focus of this report. The legal changes in Bolivia’s hydrocarbon industry since the 1990s will be evaluated in order to understand Bolivia’s strategy of nationalization in 2006.

Throughout the history of Bolivia’s petroleum fiscal regime, there has been a fluctuation of contractual agreements in use with foreign oil companies. After 2006, Bolivia’s contractual agreements finally began to benefit the state by allowing it to receive its fair share of wealth from its hydrocarbon resources. Additionally, Bolivia’s “nationalization” did not involve expropriation; instead it consisted of the enforcement of renegotiations of contractual agreements between the Bolivian State and foreign oil companies. The renegotiations are instrumental in explaining why foreign companies continue to operate in Bolivia’s hydrocarbon industry after its nationalization in 2006. This report will focus on examining Bolivia’s contractual agreements from 1990 until 2009 in order understand why foreign oil companies continue to operate in Bolivia’s hydrocarbon industry in spite of its 2006 nationalization.

Bolivia’s main source of revenue comes from foreign companies’ exploitation and exploration of its hydrocarbon resources, yet Bolivia has always lost its fair share of wealth from its natural resources due to unfavorable contractual agreements with foreign oil companies. Before the 2006 Nationalization, Bolivia had continuously given foreign investors the majority of revenue from its hydrocarbon resources in an effort to attract and keep foreign investors in its hydrocarbon industry. In the 1990s, Bolivia wanted to increase its levels of foreign direct investment in order to import new technologies as well as to improve the expertise in exploration, extraction, transport and production activities within its hydrocarbon industry. Bolivia’s main goal behind seeking FDI was to develop its hydrocarbon sector in order to increase its national wealth from its natural resources. In addition, Bolivia’s hydrocarbon sector was extremely undeveloped. The Bolivian State was ill equipped and had inefficient state assets to develop its hydrocarbon industry. Bolivia’s petroleum fiscal regime in the 1990s was designed to favor foreign investors in order to attract and maintain foreign investment within its hydrocarbon industry. However, this caused Bolivia to lose significant control over its hydrocarbon industry as well as the wealth from its hydrocarbon resources.

As a result, it became necessary for Bolivia in 2006 to renegotiate their contracts with foreign energy companies in order for Bolivia to obtain its fair share of revenue from its hydrocarbon resources. Since 2005, the government has sought to increase its share of total hydrocarbon revenues. In May 2005, the former president, Carlos Mesa introduced a new Hydrocarbon Law No. 3058 which created a direct tax, the IDH (Direct Tax on Hydrocarbons), which required companies to pay 32% of production value to the state, in addition to an 18% royalty rate that was already required. However, this law was not yet implemented until Evo Morales became the president of Bolivia in 2006. Shortly after Evo Morales became president of Bolivia, he implemented the 2006 Nationalization Decree which mandated the Hydrocarbon Law No. 3058. This law required renegotiation of contractual agreements with all foreign oil companies operating in Bolivia. The Law No. 3058 made the Bolivian State owner of all hydrocarbon resources and private companies were permitted to only keep 18 percent of production value. This law also nationalized refineries and hydrocarbon distribution companies in order to ensure the presence of Bolivia’s national oil company YPFB (Yacimientos Petrolíferos Fiscales Bolivianos) in every stage of the value chain. These actions, together with the rising international hydrocarbon prices have increased the Bolivian state’s hydrocarbon revenues.

The information obtained from the research in this report, will explain why foreign companies continue to operate in exploration and production activities in Bolivia’s hydrocarbon industry since its 2006 nationalization. Bolivia’s strategy behind its nationalization and its current use of contractual agreements will provide the main arguments as to why foreign companies continue to operate in Bolivia in spite of its hydrocarbon nationalization in 2006.

Keywords: Bolivia, Hydrocarbon, Foreign Direct Investment, Contracts, Nationalization