How are Colombia's neighbors doing?

Have Bolivia, Ecuador set themselves up for a fall?

Posted 5/30/2006 11:01 PM ET E-mail | Save | Print | Subscribe to stories like this

By Danna Harman, Christian Science Monitor
CARACAS, Venezuela — In recent weeks, both Bolivian President Evo Morales and Ecuador's president, Alfredo Palacio, have taken a page out of Venezuelan populist President Hugo Chvez's natural resources manual.
It's the page that features politicizing the oil and gas industries and nationalizing them — keeping more of the petrodollars at home but alienating longtime foreign investors.
With new, smaller profit margins for outside companies, foreign investors are now slowing the rate of investment in the jointly run oil and gas fields.
"The outlook for increases in the future is starting to go up in smoke, and we see a petroleum industry in contraction," said Luis Giusti, the former president of Petroleos de Venezuela (PDVSA), in an interview earlier this month with Venezuela's Union Radio. "The day the prices change, the situation is going to be evident once and for all," he said.
The Venezuelan government and PDVSA declined repeated requests for comment.
Venezuela's experience with nationalizing its oil industry doesn't seem to bother neighboring countries.
On May 1, Morales announced that "foreign companies will not be able to steal from Bolivia any longer," and summarily nationalized the country's gas industry.
A week later, in the middle of a contract dispute, Palacio endorsed the confiscation of assets of the U.S. company Occidental Petroleum, the biggest producer of hydrocarbons in Ecuador.
Short-term gains
The moves played well at home. Bolivia and Ecuador, like Venezuela, are countries where anti-Americanism is on the rise. Poverty is often blamed on foreign companies, which are accused of exploiting natural resources, making exorbitant profits and leaving insufficient money behind for anti-poverty programs.
Yet, while popular, and clearly profitable initially, such nationalizations — and more particularly the way in which they are carried out — are unwise, say critics, and are likely, in the long term, to hurt those who are applauding now.
"These are politically and ideologically inspired moves and are not in the national best interest," argues Orlando Ochoa, an economist at Caracas' Catholic University.
Morales and Palacio should look carefully at Venezuela's example and take heed, he says. "It's clear this oil-rich country is moving backward, and eventually it will all end badly."
The state oil company, PDVSA, reports production of 3.3 million barrels a day. There is no way to independently confirm this, and most outside analysts, including the International Energy Agency, say that PDVSA's numbers are inflated and that production is closer to 2.6 million barrels per day.
But whatever the real output, Venezuela is raking in more petrodollars than ever because of the high price of oil. When Chvez came into office in 1999, the country reported production of 3.5 million barrels per day and, with oil selling at about $15 per barrel, was making just over $18 billion a year.
This month, with oil at about $70 a barrel, PDVSA Finance Director Eudomario Carruyo told Reuters he expects revenue to top $85 billion this year. PDVSA officials have reportedly said that oil production will increase to 4 million barrels per day by 2012.
Furthermore, in part thanks to Chvez plowing billions of those petrodollars into new housing, free medical care, adult literacy projects and other social programs, Venezuelans perceive the industry to be exceedingly robust now.
"Normal people don't care about whether production is 3.3 million barrels per day or 2.6. For them, the oil is huge and forever," says Alfredo Keller, an independent pollster in Caracas.
What's the problem?
The problem, says Ochoa, is that politicizing the industry has rotted it, and served both to empty PDVSA of its best professionals, and to scare foreign partners away from new investment.
"It is generally safe to assume a pretty steep fall in PDVSA production over the last few years," says Jack Sweeney, a former analyst at Stratfor, a private intelligence agency, and now an independent consultant in Caracas.
Maria Mercedes Febres was a senior engineer at PDVSA until 2000, when, she says, she "saw the writing on the wall," and quit. "Political appointees were taking over from qualified long-timers, and I knew it was going downhill," she says. Most of her friends stayed on, but their frustration with the political cronyism finally exploded in a strike in 2002.
Chvez refused to negotiate and fired about 18,000 workers, many of them top engineers.
"Most of my ex-colleagues left the country. They are oil professionals, but here, where the oil industry is in the hands of the state, they were blacklisted," says Febres. After the firings, she says, the level of professionalism plummeted. "You need to exploit your oil efficiently — and for that you depend on technology and maintenance. We have neither."
Foreign partners pull back
Meanwhile, Venezuela's joint partners — companies such as Chevron, Royal Dutch Shell, and British Petroleum — are also slowing production here.
Last year, Chvez announced that these foreign companies, which had been invited into Venezuela in the 1990s to operate 32 marginal fields, were to have their contracts converted to joint ventures that give PDVSA majority stake and control of the board. With the exception of France's Total and Italy's ENI — which subsequently had their fields seized by PDVSA — all the companies accepted the new terms, including a sharp increase in the state's royalty share.
Oil minister and PDVSA director Rafael Ramirez promised output in those fields would soon rise. In fact, the opposite has happened. According to industry reports, output has steadily fallen in foreign-operated fields. The largest drop was at Royal Dutch Shell's Urdaneta field, where output fell to 43,400 barrels per day in March from 46,900 barrels per day in October.
"Governments have the right to want a bigger part of profits," says Pietro Donatello Pitts, editor of Latin Petroleum. "It's the same all over the world, and the big companies are not surprised. Latin American rates were the best in the world, so this was bound to happen."
But, while most companies desperate for oil won't pull out, they will slow their rate of investment. "When the rent goes up, you become wary of new investment; it's logical," he says.
The Chvez nationalization model plays well in Ecuador and Bolivia.
Ecuadorean officials say the country will receive an extra $100 million per year in oil revenue due to the Occidental contract cancellation, and even more from a new 50% windfall tax on foreign oil companies.
Presidential elections take place in Ecuador in five months.

Posted 5/30/2006 11:01 PM ET E-mail | Save | Print | Subscribe to stories like this

By b bruce on Jun 7, 2006, 14:00 in Politics & the war.

juancegomez says on Jun 8, 2006, 10:07:

They seem to be doing just fine for now They've choosen Morales and Chavez as their presidents, which tends to imply that most of their voters expected such nationalizations / renegotiations to take place.

Of course, whether they actually end up being good or bad for their countries as a whole is still up to history, I'd think. Too soon to speak of "falls" yet.

Btw, Ecuador continues to be far too politically and institutionally unstable, at least for the moment. Palacio is only a transitional president. Too many things can change, before anyone can accurately predict what will happen further down the road. They may or may not follow the same path, eventually.

mcraig says on Jul 29, 2006, 22:21:

These types of socialist idealogues have shown to do nothing but lead to being poor. The article states all the proceeds the oil brought in for there country but the internationally community has labeled them as bad trade partners. Socialism brought down Russia an made them bankrupt in the 80's an 90's do you not think it will bring down bolivia, Valenzuela , Equador. All the oil proceeds spent on billion dollars worth of military equipment by Chavez this last month. An nothing for all the poor children an poor famlies because they have no jobs to support themselves. Socialism is a economic killer an trading with only 5 coutries like Cuba, equador, bolivia does not create jobs for the country. but, what is probaly going to happen is Chavez is going to keep running his mouth an buying billions on billions of dollars of military weapons thinking he is tough guy an the US will come pick him up off the roof of a house somewhere like Oretega an he will rot in a US prison. Democracy brings peace an free trade an builds econommies an a job base hence US unemployment rate is under 5% which in economic terms is perfecet employment. How would the latin american countries look today if there just 90% employment it would be a whole different place an people would not live lives in poverty generation after generation.