Last week’s Economist presented an editorial cartoon of an overly confident, rabble-rousing, Hugo Chavez who preached from a soapbox depicted as gradually-shrinking oil barrel leaving the petro-dictator on shaky grounds. I hope Bolivia’s President Evo Morales reads The Economist. Morales’ steroid of choice is not oil, but rather natural gas. In 1995, large natural gas deposits were discovered in Bolivia’s southeastern lowlands region. The poorest country in South America with a GDP/capita of only $1,500, Bolivia required the cooperation of the international community as investors, co-developers, and buyers. Bolivia’s 1996 hydrocarbons law encouraged such foreign investment and Brazil’s Petrobras, Spain’s RepsolYPF, and France’s Total all came running and invested billions of dollars in pipelines and production.
On May 1, 2006, after just 100 days in his newly-elected role as President of Bolivia, Evo Morales nationalized Bolivia’s hydrocarbon resources claiming the “total and absolute control of these resources” includes production, pipelines, and refineries. Morales’ confidence was bolstered last August when he won a referendum on his rule with 67% of the vote. He took control of 56 production facilities and increased Bolivia’s royalties to 82% of production. His timing was lucky has he was able to fund his government during a great boom in commodity prices.
According to the IAE, Bolivia produces 466 Bcf per year of natural gas (as a reference point, the US consumes about 61 Bcf per day), but only consumes about 83 Bcf. Over 300 Bcf is exported through three different pipelines into Brazil who is captive to Bolivia as a supplier. However, this may not be the case for long. Brazil’s Petrobas’s deep water natural gas discoveries in the Santos basis could eliminate Brazil’s dependence on Bolivia’s natural gas in five years. Natural gas is Bolivia’s primary asset with proved reserves of 25,000 Bcf. Bolivia’s interest is best served to adhere to previous contracts and cooperate internationally. Bolivia’s resource is only valuable if it can shipped (via pipeline or LNG) to other buyers.
Nationalizing natural gas is only one step along the path of socializing more aspects of Bolivia’s government. When energy prices are high, such petro-dictators appear very strong. Thomas Friedman say in his new book “Hot, Flat, and Crowded” that $10 oil didn’t sink the former Soviet Union, it was $80 oil followed by $10 oil that sunk the former Soviet Union. Nationalizing resources uses energy as a crutch. In a world of more volatile commodity prices and more tightly interconnected foreign relations, Morales should look for economic growth based in stronger fundamentals.
He has started doing this by building up the recovery of lithium. Lithium is the lightest metal and a critical ingredient in advanced battery technologies which will be a core advancement in the energy industry of the future. Bolivia holds 50% of the world’s proven lithium reserves. Countries like Venezuela and Iran and even communities the Detroit Michigan, have seen the perils of placing all of one’s economic eggs in one industrial basket. Morales is wise to diversify into this higher-tech and fast-growing area of the economy. Bolivia was blessed with their current natural gas assets only because of some large dinosaurs likely randomly walked within their boarders over 100 million years ago. They leaders of the next generation of the global energy economy will emerge from their decision to commit to advanced technologies such as energy storage, end-use efficiency, smart-grid technologies, and renewable energies. However, Morales has shown that he will expropriate foreign investments when it serves his political benefits. He will require other foreign partners to help him developed his advanced-battery future as well. When natural gas prices fall, and his few customers decided they don’t need his product, his political base will wane. He should hedge his bets by cooperating with others to diversify Bolivia’s economy around its old and new energy future.