Gas law flaws

By Published On: June 2, 2005Categories: Gas & Oil0 Comments on Gas law flaws

Some of the press reaction to huge protests about the new gas law have suggested that Bolivians are crazy to take to the streets. Doesn’t the new law promise added revenue from increased taxes and refound the State industry? What on earth would nationalisation achieve? Aren’t these people just shouting slogans for no real reason?

However analysis by the research body, CEDLA, suggests that there are good reasons for protestors to challenge the new law because it contains serious flaws that affect Bolivia’s long-term ability to maximise its natural resources to tackle profound levels of poverty.

Most of all, it fails to live up even to the ambiguous wording of the referendum on gas in 2004 in which people voted to recover ownership of gas resources and develop them to help industrialise the country. They argue that nationalisation is needed for Bolivia to develop its strategic resources.

The document is quite technical and one of the problems that comes through is how ambiguous and at times contradictory the law is. But from my still limited spanish, here is an overview of the key weaknesses it cites in the new law. The full report is on CEDLA’s site:

1. Property and Contracts

The law regains State control over its hydrocarbons (gas and oil) at the point of extraction, but companies retain ownership after that. This means the Government still has no control over most of the chain of production of gas. The lack of ownership by the State over its resources is highlighted by the fact that the newly reformed State company, YPFB, has to pay compensation to the private companies for exploitation of any reserves hitherto granted to private oil and gas companies. Given the likely cost of this indemnity, YPFB will be heavily restricted in its ability to exploit gas reserves for some time.

2. New royalties and tax regime

The law is most known for increasing taxes which has prompted considerable outrage from multinational energy firms. What is less well known is that the law allows the possibility in the future of deducting taxes, something that the energy firms will be quickly pressuring the Congress and Government to do. One of the ways this could well happen is based on the distinction the law makes between small and big gas fields, which can be decided unilaterally by the Government.  The Government’s version of the law judged that those producing up to 52 million cubic feet a day could be called small gas fields, which means that 29 of the 32 gas fields in production are small.

3. Refoundation of the State Oil and Gas Company (Yacimientos Petroliferos Fiscales Bolivianos)

The new law reestablishes the State Oil and Gas Company (YPFB), stating that it allows it to participate at all stages of the gas production chain from exploration to sales of gas. The reality is that YPFB is given no advantages to enable it to compete fairly with the private energy firms. In fact it will be forced to share part of its dividends with three private companies, Andina, Chaco and Transredes which will limit its possibility to invest and compete.

Moreover the complicated way it has been set up (with 6 boards in La Paz, Tarija and Santa Cruz linked to the Presidency and Vicepresidency and a further 5 operating boards) mean that it is likely to be open to considerable corruption and will certainly limit its effectiveness and ability to compete.

4. Industrialisation of hydrocarbons

The law states that industrialisation of hydrocarbons is "necessary and a national priority" but again the law does little to encourage this process except list good intentions to encourage multinationals to look beyond simple export of hydrocarbons.  It is not really in the interest for multinational energy firms to invest in the industrialisation of hydrocarbons within the country. The history of their lack of development of key technologies in refineries and their failure to deliver promised thermoelectric plants is evidence of the failure of the companies to live up to their rhetoric of investment. YPFB with its marginal role will have little capacity to compensate in this area.

5. Fixing prices of hydrocarbons

Multinational oil and gas firms will continue to be able to control the prices for exports of gas, often made to subsidiaries in other countries.  Only petrol is required to be tied to a real price fixed by the world market. In the internal market, the State is allowed to subsidise the price for what are determined key national needs, but none of this prioritising of social needs falls on the profits of the multinational energy firms.

6. Rights of indigenous peoples and peoples of origin

In one of the earlier drafts of the law, indigenous communities were allowed to veto projects in their lands. Now gas and oil companies are merely required to consult, and only once even if they open up new activities in the same region.  The law also removed reference to the establishment of a Fund for Indigenous Development that aimed to support development projects with affected communities (an amendment that appeared in earlier versions of the law).

7. Possibility of watering down of law by the Executive

The Government refused to sign the new law, taking the side of the multinational oil and gas companies by stating it would harm foreign investment. Yet the Government  retains the power to use decrees in its application of the law that could open up even further the gap between the new law and the social demands that first led to demands for a revised law. As CEDLA argues, it was in the application of the former law by the former Government that multinationals gained such immense advantages to the detriment of the urgent need to use resources to develop Bolivia and tackle the profound poverty that exists here.


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