Petro-Politics and the Collapse of the Bolivian Government

Abstract: The economics indicated it made sense to export Bolivian natural gas as LNG to the U.S. through Chile. The political reality said otherwise. Bolivia's president backed the economic arguments. Last weekend his government collapsed.

Analysis: Petro-politics brought an end to the presidency of Bolivia's Gonzalo Sanchez de Lozada last weekend.

The collapse of the Bolivan presidency constituted the latest blow to globalization and provided further evidence that the tide has turned for market liberalization and economic reform in Latin America.

The collapse came on the heels of a national strike that started in September as word spread that Sanchez de Lozada had agreed to export Bolivian natural gas through Chile to the United States.

Bolivians have literally despised Chile since the end of the Pacific War 120 years ago. Bolivia lost and Chile occupied land that once linked Bolivia to the Pacific Ocean. Enmity towards Chile runs deep in the national psyche. In Bolivia, new military recruits swear a loyalty oath that includes the phrase "death to Chile," while graffiti scrawled about the colonial streets of La Paz, Bolivia's capital, often proclaims: "Chile? I'd rather die first."

Recall for a moment the scene in Jurassic Park where a character discusses chaos theory, postulating that the random path of a butterfly in Central America eventually produces rain in New York City. In this case, the repercussions of the governmental collapse in Bolivia stretch north to California and impact potential LNG projects across the Pacific Ocean in Asia.

The demise of the Sanchez de Lozada presidency has again shelved an oft-delayed proposal to ship 800 million cf/d in Bolivian natural gas to California. The project involves developing a liquefaction plant on the Pacific Coast of South America, which would convert the natural gas LNG before shipping it to a re-gasification plant in northern Mexico. From there, up to 5 trillion cf of natural gas would be distributed in Mexico's Baja California over the next 20 years with another 10 trillion cf destined for the state of California and the southwestern United States.

The project would have met up to 20 percent of California's energy needs had it gone forward. On paper, it looked as though it was a sure bet. Pacific LNG, a consortium of British Gas, BP, and Repsol, had invested $200 million in the concept, which called for transporting natural gas via a 430-mile pipeline from the Margarita Field in southern Bolivia to the proposed liquefaction plant on the Pacific coast, either in Chile or Peru.

In return, Bolivia would receive up to $1 billion annually in revenues, which the country planned to invest in education and rural development, helping to provide alternatives for farmers involved in Bolivia's coca leaf economy.

Bolivia sits atop an estimated 52 trillion cf in natural gas reserves, the second largest in Latin America after Venezuela. As recently as one year ago, Bolivia had been regarded as the linchpin in a strategy to bring prosperity to the Southern Cone of South America by exporting surplus natural gas to Brazil, Argentina, Paraguay, and Chile.

Bolivia had embraced privatization and economic reforms in the early 1990s, which culminated in the partial privatization of Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the state-owned oil company. A number of foreign multinationals subsequently entered joint venture arrangements with YPFB, expanding E&P activities and piling up significant hydrocarbon reserves. Natural gas reserves, for example, grew nearly ninefold in less than a decade.

With little demand internally, Bolivia began exporting 320 million cf/d of natural gas to Brazil in the late 1990s under a 20-year arrangement. However, pipeline transportation charges effectively created $3.25 gas in Brazil, which many power plants and manufacturing firms found too expensive. Then there were limits on how much gas the Southern Cone could absorb--hence, the genesis of the idea that called for exporting Bolivian gas to North America as LNG.

It is an idea that makes sense from an economic standpoint, but faces significant political hurdles. Bolivia is home to 8.5 million people--half of whom subsist on less than $2 per day. The Bolivian economy hit tough times after 2000 as recession impacted its main trading partner, the U.S., as well as neighboring Brazil and Argentina. The downturn added fuel to long-simmering political resentment. Many of Bolivia's citizenry associate the economic downturn with International Monetary Fund structural reforms, privatization, and trade liberalization--policies that began under Gonzalo Sanchez de Lozada's first term as president from 1993 to 1997.

Mr. Sanchez de Lozada also backed U.S. efforts to eradicate coca leaf production among the nation's indigenous farmers. The program fanned additional resentment against the Bolivian president since it was commonly believed that Sanchez de Lozada, who received 23 percent of the national vote in the August 2002 elections, was installed in office only through U.S. efforts to create a governing coalition in Bolivia. These events transpired against a backdrop unique to Bolivia. The nation is characterized by a large indigenous population who view the last 500 years as a systematic attempt by non-natives to denude the country of its natural resources, typically for personal gain. Those efforts exhausted abundant deposits of tin and silver. As a result, modern discussion over exporting natural gas to the United States reinforces popular mistrust in a country that has witnessed 200 coups or countercoups in the last 180 years.

True to form, Sanchez de Lozada was forced to flee the presidential palace temporarily in the wake of civil unrest last February. Then in August, he journeyed to Mexico, revealing his decision to back Pacific LNG's proposal to build the natural gas pipeline through Chile. While in Mexico he met with Sempra Energy representatives in an attempt to secure long-term supply contracts for the LNG regasification terminal in northern Mexico.

While the pipeline through Chile made sense economically, it turned out to be political suicide. Within a matter of weeks, sporadic protests began among rural indigenous populations, urban workers, and coca leaf farmers, citing opposition to the $5 billion pipeline to Chile.

Events quickly spiraled out of control. Sanchez de Lozada imposed martial law in early October as protestors closed the six main highways into the capital of La Paz. When more than 100,000 protestors converged on La Paz, Sanchez de Lozada first called for a referendum on the Chilean pipeline, then announced he had shelved the decision to build through Chile entirely. However, the die was cast. Clashes between the military and protestors resulted in more than 80 deaths nationwide in a 10-day period. Governing coalition members began distancing themselves from the crumbling presidency a week ago, and the government collapsed last Friday. Gonzalo Sanchez de Lozada left the country for Miami. The new president, Carlos Mesa, immediately promised quick elections and a referendum on the natural gas project.

While political expediency favors a route through Peru, Pacific LNG indicates the new iteration would add more than $600 million in costs, weakening the project's economics. There are also issues concerning political stability in Peru.

With the window of opportunity closing fast on Bolivia's ability to participate in the North American gas picture, attention is turning to other potential LNG sources such as Russia's Sahkalin Island, Australia's North West Shelf, or Malaysia.

While the U.S. views LNG as a partial solution to future gas demand, foreign gas reserves may present political stability challenges similar to those involving oil.

Last weekend's Bolivian turmoil illustrates once again that politics and energy--whether oil or natural gas--remain deeply intertwined.