NATIONALIZATION OF HYDROCARBONS

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 22B
NATIONALIZATION OF HYDROCARBONS
Ricardo Indacochea S.M.
Attorney
Indacochea & Asociados Abogados
Santa Cruz, Bolivia

RICARDO INDACOCHEA S.M.

Between 1979 and 1990, Ricardo Indacochea S.M. was legal counsel for Latin America at Occidental Petroleum Co serving in Peru, California and Bolivia. In 1990 he established Indacochea & asociados, Abogados (IA), providing legal counsel in all areas of law, with a strong focus on oil and gas expertise (commercial and corporative) and project/corporate finance.

Ricardo has participated in the biggest corporate financing projects in Bolivia, advising international institutions such as KfW, IDB and CAF or acting as counsel for multinational companies. He counseled Brown, Roots & Murphy, the company that built the Bolivia-Brazil Pipeline (BBPL), and is presently counsel for GasTransboliviano (GTB), which now owns and operates the BBPL. He also acts as counsel for Shell and Prisma/Enron (now Ashmore Energy), shareholders of Transredes SA, the biggest company dedicated to the transportation of Hydrocarbons in Bolivia.

Chambers Global 2004-2005 catalogued Ricardo as a "proactive and strong negotiator, one of the most experienced and knowledgeable lawyers in the hydrocarbon sector". Latin Lawyer stated "IA has been involved in some of Bolivia's biggest projects in recent years, often in connection with the oil industry".

Ricardo is currently a Board Member of the Bolivian Hydrocarbon Chambers, Founding Board Member of "Fundación Boliviana para el Desarrollo Social" (institution supported by the Bolivian Hydrocarbons Chamber) and an active member of the Latin American Network, composed of major law firms in North, Central and South America specializing in energy, telecommunications, infrastructure development, financial services and capital markets. Due to his expertise, Ricardo has been regularly invited as international lecturer for institutions such as the International Law Institute, Dallas, Texas (2003); the International Bar Association, Sao Pablo, (2003) and Buenos Aires, (2005); and the International Association of Petroleum Negotiators, Buenos Aires, (2004) and Lima 2006.

Ricardo has been chosen as the "number one practitioner in Bolivia for oil and gas legal expertise", according to the second edition of The International Who's Who of Oil & Gas Lawyers.

INDEX

1. The 80's and Bolivia in the Oil & Gas map

2. Investors: Bring them on

3. Gas to Chile? No way!

4. Referendum: What do Bolivians want?

5. New Hydrocarbons Law

6. Wasn't enough, let's nationalize

7. They are staying!: Execution of new Contracts

8. Conclusions

NATIONALIZATION OF HYDROCARBONS

In order to discuss or analyze the Hydrocarbons "nationalization" process that Bolivia has recently started implementing, we believe appropriate to provide the participant with a brief summary of which were the most important facts that led the Bolivian Government to take such measure. With this in mind, let us just make clear that, usually, no Government nationalizes any industry if such industry is not an important economic factor to its country. In other words, had Bolivia maintained the rate of hydrocarbons production it used to have during the 80's and 90's, obviously we would not be discussing at this stage the "nationalization" of its hydrocarbons.

Consequently, we deem necessary to provide the participant with a quick overview of where was Bolivia located in terms of hydrocarbons production during those decades; the measures that were taken by the different Governments during such period, which drove Bolivia to become an important player in the oil & gas industry; and, certainly the recent nationalization process itself.

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1. 80's, a little country called Bolivia

Back in the 80's, Bolivia had the second highest hyperinflation worldwide.

Because of it, the Government of that time decided to open up the Bolivian market and created new incentives to attract foreign investment to Bolivia. For that reason the Administration headed by President Jaime Paz Zamora, decided to press Congress for the issuance of the Investment Law of 1990 and the Privatization Law of 1992, respectively.

The main message that the Bolivian government wanted to send across was one of "equal treatment between local and foreign investors".

To put things into perspective, during such period Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) was in charge of all activities in the hydrocarbons industry, such as the Exploration, Exploitation, Transportation, Commercialization and Refinery activities.

YPFB's main economic sources came from Multilateral and Bilateral Financial Organizations, as well as Direct Loans.

YPFB's latest budget in 1994 - before the 1996 Hydrocarbons Law - was only US$ 60MM per year, for all the activities before mentioned.

No doubt that investment relates to production and reserves. As the charts below show, up to 1995 Bolivia's oil production amounted to 10.5 MMbl (28K Bbls) and gas was about 135 BCFs (369 MMCF).

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•Yearly oil production by state owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB)

•Yearly gas production by State owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB)

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With such production, Bolivia during the eighty's, and early nineties' was no way near the Oil & Gas world map.

2. Investors: Bring them on

Clearly, the reality showed that the measures taken to attract investors (like the Investments Law, which established equal rights for foreign and local investments, and the Privatization Law, which authorized the transfer of public assets for the incorporation of mixed economy companies) were not sufficient to achieve the Government's objective. For this reason, in 1994, the Bolivian Government, with Gonzalo Sánchez de Lozada as head of State, passed the Capitalization Law No. 1544 (Capitalization Law).

Said legal disposition, in turn, provided that some of the biggest Bolivian public companies (including YPFB) would become at first stage Mixed Economy Companies and, as part of the same process, would ultimately become fully private, with the State owned shares transfered in trust and administered by private entities - the "Administradoras de Fondos de Pensiones" (Pension Funds Administrators).

Under the umbrella of said law, foreign investors decided to inject private capital into public companies; thereby, privatizing certain State owned companies among others in the telecommunication, energy and hydrocarbons sectors.

Last but not least, the Hydrocarbons Law which was passed on October, 1996 constituted the legal disposition that completed this legal investment promotion package. It defined and determined the responsibilities and obligations of the different actors in the industry. Its main objective was to promote foreign investment in the Bolivian Hydrocarbons Industry.

This law had a tributary frame that was:

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(i) Attractive to foreign investors;

(ii) Assured an adequate income for the State; and,

(iii) Maintained the competitiveness of Bolivian hydrocarbons in the international market.

The almost immediate acceptance of such 1996 Hydrocarbons Law resulted in the transferring of the financial responsibilities to foreign investors through share risk contracts.

Once the public companies started becoming private, the Government needed to create an organism which would supervise and regulate their activities, inasmuch the services that were to be provided by those recently privatized companies were considered of public interest.

With this on the Government's mind, the Regulated System (SIRESE) was created by Law No. 1600 of 1994 with the objective of regulating, controlling and supervising the telecommunication, electricity, hydrocarbons, transportation, and water industries' activities.

The immediate results of the acceptance by foreign private investors of the legal measures implemented by the 1996 Hydrocarbons Law were:

(i) The increase to 56 exploration areas under contracts

(ii) The increase to 44 exploitation fields

(iii) Proven and probable gas reserves are a dramatic example of the investments outcome. We went in the same 10-year period from 6.3 TCFs to 48.7 TCF (with a peak of 55TCF in 2003), that is almost 900% increase. (see chart below)

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(iv) The increase of oil reserves from 478 MMBbl in 1995 to 856 MMBbl in 2005, as shown in the chart below.

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(v) A total investment -in exploration and exploitation activities-during the period between 1996 - 2003 of over US$ 3000 millions. (That is a yearly average of $ 375MM while YPFB total budget for all activities was $ 60MM). If the previous chart compared investment against proven and probable reserves, the following chart compares investment against actual production on those years. Bolivia was producing about 10.5 MMbls in 1995, and in 2006 (latest YPFB official report we could avail ourselves) went to 14,8 MMBls and in gas from 135 BCF to 442,6 BCF.

Outcome of the new system

(vii) It might be added that the aforementioned increases represented an increase on taxes paid. In fact, taxes that were paid and collected during such period exceed the $ 3.1 Billions.

(vi) Finally, as a consequence of the Government's investment policies as discussed, in the transportation sector two new natural gas pipelines were built with an investment of over $ 650 MM. It now exports gas to Argentina and to Brazil, and oil to Chile, as shown in the chart below.

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Integration with Neighbors

These figures put Bolivia comfortably in the Oil & Gas map. If we just focus on gas due to Bolivia's reserves and, compare it with consumption (whether its internal demand and contracts in place due to Bilateral Treaties with Argentina and Brazil), it may be easily conclude that Bolivia during those years...