But the sector’s disappointing contributions to the state treasury has forged wide support among Bolivian politicians for restoring the former royalties and state control. Some have even suggested nationalizing the gas industry. Voters will cast ballots next month in the country’s first-ever referendum on natural-gas policies. “The people demand the recovery of the gas from the transnational corporations,” says labor unionist Roberto de la Cruz. “It is the only way to reduce poverty.”
Nationalizing the gas industry is a minority view in Bolivia. But it does reflect growing disenchantment across Latin America with the privatization of energy resources. In the headlong rush to embrace free-market models of economic growth during the 1990s, governments from Venezuela to Argentina opened up their energy sectors to foreign investment. It made sense at the time because many state-owned oil, gas and electric-power companies lacked the capital to expand operations and keep pace with rising demand. But partly because of political pressures and regulatory disputes, privatization hasn’t achieved the desired outcome. Argentina, for example, is facing gas shortages as the Southern Hemisphere’s winter approaches. To mitigate the problem, the country has reduced exports to Chile and Uruguay, threatening those countries with shortages of their own. “There is a feeling that the shift toward a market-oriented model hasn’t delivered the goods to the population,” says Jed Bailey, Latin America research director for the consulting firm Cambridge Energy Research Associates.
That perception is not entirely valid. The biggest problem with Latin America’s energy sector isn’t too much privatization–or too little. It’s that no country has found the right balance between foreign investment (or ownership) and state oversight–a policy mix that would boost production, enhance government revenues, protect consumers from high prices and provide foreign companies with enough incentives (read: profits) to keep investing in energy infrastructure. Mexico’s Constitution still forbids any foreign investment in oil and gas production, and two state-owned companies have exclusive control over the electrical power sector. But that go-it-alone statist strategy has been as ineffective as the market-based approach in Argentina: Mexico must double its electricity-generating capacity over the next decade but doesn’t have the resources to do so. “The crises in 2002 and 2003 tested many [companies’] resolve to stay in the region,” notes Bailey of CERA. “Many elected to withdraw.”
Energy is an emotional issue in Latin America, where oil and gas reserves are as much a part of the national patrimony as pre-Columbian artifacts. The industry functions as a cash cow for the governments of oil-exporting countries like Venezuela and Mexico–whose huge state-owned energy corporations account for about 75 and 35 percent of all public-sector revenues, respectively–and is extremely vulnerable to political pressures. Bolivian President Gonzalo Sanchez de Lozada’s attempt to steer the export of natural gas to California and Mexico last year triggered a populist uprising that led to his ouster, barely 14 months into his term. Little surprise then, that politicians are reluctant to cede control of a natural resource to foreigners.
Nowhere has that been more true than in Mexico, where the state-owned behemoth Petroleos Mexicanos, or Pemex, maintains a longstanding monopoly over oil and gas exploration and production. Mexico was the first developing country to nationalize its oil industry when it expropriated U.S. and British companies in 1938. The anniversary of that bold decision is solemnly observed each year. When privatization fever swept through Mexico in the mid-1990s, Pemex stayed firmly in government hands even as state-owned banks, steel mills and the phone company were sold off. When President Vicente Fox attempted to open up the electric-power and petrochemical industries to private investment, the opposition-controlled Mexican Congress blocked the initiatives.
Market pressures may force changes. Energy Secretary Felipe Calderon estimates that Mexico must invest $130 billion in its oil-and-gas industry over the next decade to meet rising demand, and Pemex alone won’t be able to raise that kind of capital. Last year Pemex invited private companies to submit bids on seven natural-gas blocks near the U.S.-Mexican border. Pemex officials circumvented the constitutional ban on private investment by offering so-called multiple-service contracts that, in effect, reimburse private companies for the costs of exploration and production. The physical assets still belong to the government, a condition that dissuaded major U.S. energy companies from pursuing the opportunity.
But three international consortia and a mid-size U.S. company have agreed to invest $4.4 billion in developing the Burgos Basin, in northeastern Mexico. For some of these foreign firms, the multiple-service contracts represent a foot in the door of a closed industry that they believe will eventually have to open up to significant private investment. “We feel it will be a profitable venture, and it allows us to get into Mexico,” says Rod Lewis, president of the San Antonio, Texas-based Lewis Energy Group, which will invest $344 million over the next 15 years.
No area will feel Latin America’s energy crunch more sharply than the Southern Cone. When Argentina devalued its currency and defaulted on its foreign debt at the end of 2001, the government froze utility tariffs to help keep inflation in check. Among the interests most adversely affected were the European and U.S. companies that incurred substantial debts in dollars as they snapped up Argentine natural-gas firms in the 1990s. The foreign firms responded to the freeze on prices they could charge with a freeze on new investment. But only now are the full implications of the standoff between industry and government being felt. Argentines have been told by public officials to reduce their gas consumption this winter if they want to avoid hefty tariff increases.
What’s to be done? For one thing, the government of President Nestor Kirchner appears ready to go back into the oil business. Earlier this month it announced the formation of a new state-owned company called Energia Argentina. It has a green light to participate in all stages of oil and gas production as well as electricity generation.
For better or worse, the prevailing trend is toward greater state intervention. Brazil’s President Luiz Inacio Lula da Silva has halted further privatization of that country’s hybrid energy sector. While three quarters of all electricity distribution in Brazil is handled by privately owned utilities, the government still owns 80 percent of power-generation capacity. Lula also wants to curb the authority of independent regulatory agencies and give his Energy minister the final say over which companies can operate in Brazil. Foreign energy executives are frustrated. “Before, government was the lawmaker and regulator,” says Mickey Peters, a group vice president for the U.S. company Duke Energy, which has invested $1.7 billion in Brazil and other South American countries. “Now it’s also a competitor and a planner in the business.”
By playing the statist card, Lula is ignoring the lessons of one of his country’s own major success stories. In the early 1990s Brasilia largely cut its ties to Petrobras, the state-owned oil monopoly, giving the company free rein to operate like a private concern. Petrobras has taken advantage of its autonomy, venturing outside Brazil and doing deals with both state and private companies. Today it produces 85 percent of the oil that Brazil consumes–a startling turn-around from the 1970s, when the country imported 85 percent of its oil. Petrobras is one of the firms that landed a multiple service contract to drill for natural gas in Mexico. “Petrobras is growing very fast in terms of oil and gas production, and these days it’s looked at as the Latin American oil company,” says David Shields, a Mexico City-based expert on Latin American energy issues, who recently published a book on Pemex.
So is Petrobras a model for how the region’s energy companies might evolve? Shields says yes, in at least one way: “State-run companies should be separated from governments and be given freedom to operate worldwide.” In that way company officials can decide whom to partner with, how best to boost energy production and how to find those efficiencies that have proved elusive. Privatization hasn’t been a panacea for all of Latin America’s energy ills. But state-run oil monopolies are no answer either, and most governments in the region will have to continue working with the foreign energy firms they both need and fear.
