On 30 July 2009, the Venezuelan government said that it would make an initial payment of US$378m (out of US$819m) to Swiss cement group Holcim and French building materials group LaFarge in compensation for nationalising them in 2008. Last year, Venezuela’s government embarked on a fresh campaign to seize the majority control of private companies including in the cement sector. President Hugo Chavez initially justified this nationalisation by arguing that foreign cement companies were exporting too much of their product, rather than channelling it into the domestic market.
The payment draws fresh attention to the risk of expropriation and nationalisation by leftist governments (excluding the centre-left government of Brazil’s Luiz Inácio Lula da Silva, or Lula) in Latin American – in particular Bolivia, Venezuela and to a lesser extent Ecuador. The governments of Chavez and Evo Morales, for example, want to improve government returns on national resources and improve the situation of the poor. Venezuela and Bolivia have therefore moved aggressively forward with state takeovers of private entities.
Venezuela
There is no shortage of examples to cite in Venezuela. On 4 July 2009, the Venezuelan government formally took control of the country’s third largest bank, Banco de Venezuela, which had previously been owned by Spain’s Grupo Santander (the government agreed to pay Santander US$1.05bn for the takeover). The month before, the government mobilised troops to assist Venezuela’s state-owned oil company, PDVSA, to seize the assets of 60 oil service companies, including Helmerich & Payne and Ensco International. The oil service companies previously threatened to suspend operations until PDVSA paid a backlog of outstanding invoices worth US$12bn. Previous examples include the government’s 2007 decision to order oil companies to relinquish operational control over four multibillion-dollar projects in the oil-rich Orinoco Belt. Exxon Mobil and ConcoPhillips consequently left the country and filed for international arbitration against the government.
Bolivia
Bolivia’s President Morales has been as keen as his Venezuelan counterpart to take over private entities. Successive nationalisations are in line with the thinking behind the new Bolivian constitution adopted in January 2009, which, among other things, forbids foreign companies from repatriating profits or seeking international arbitration to resolve disputes with the government. At a national May Day rally, Morales told a crowd of supporters that he had signed a decree to take over Air BP, a division of British oil giant BP, and that he had instructed troops and the national oil firm, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), to take control of the company. Previously, in 2006, he nationalised the country’s natural gas reserves and forced producers – including Malaysia’s Petrobras, Spain’s Repsol YPF, France’s Total, and Britain’s BG Group – to sell all hydrocarbons to YPFB. Morales then designated 2007 as “the year of recovering our mineral resources” and seized control of numerous strategic industries including Glencore’s Empresa Metalurgica Vinto tin smelting plant in February 2007. He also seized the gas distribution network, Transredes, in June 2008 and Chaco Oil Company, another subsidiary of BP, in January 2009.
Ecuador
Although Ecuador’s President Rafael Correa has not demonstrated the same appetite to take over private entities as his two leftist neighbours, he is likely to move ahead with piecemeal privatisations. For example, his leftist government seized control over French oil company Perenco’s oil fields in the north-eastern Amazon region over a tax dispute in mid-July 2009. Correa justified the move by saying that the distribution of profits from crude oil extraction was unfair, adding that the seizure came as a result of the firm’s failure to pay overdue arrears (which the government claimed amounted US$327m). Back in September 2008, the government nationalised the assets of the Brazilian construction company Construtora Norberto Odebrecht, justifying the move by claiming that one of its hydroelectric plants was poorly maintained.
Problems with Alienating Foreign Investment
There is no denying that Chavez, Morales and Correa are taking an economic gamble by alienating foreign investors. Bolivia, Ecuador and Venezuela are all rated as extreme risk according to Maplecroft’s Corporate Governance Index and Business Integrity and Corruption Index. Both indices make up part of Maplecroft’s Dynamic Political Risk Index, which covers 170 countries. Venezuela (14) is considered extreme risk, while Ecuador (35) and Bolivia (47) are both high risk.
Nowhere is this risk more acute than in Venezuela’s and Bolivia’s hydrocarbons industries, which need the technological know-how of the world’s leading international oil companies to prolong the life of oil and gas reserves and increase output. In Venezuela, oil production fell from 2.8 million barrels per day (bpd) in 2006 to 2.6 million bpd in 2007 and 2.5 million in 2008. In the case of Bolivia, natural gas production has continued to increase, but it is doubtful whether this trend will continue. In 2006, the country produced 12.9 billion cubic meters of natural gas, rising to 13.8 billion cubic meters in 2007 and 13.9 billion in 2008. However, investment in Bolivian hydrocarbons has dropped from US$149m in 2007 from a peak of US$581m in 1999. The government says it aims to boost gas and oil investments to US$530m in 2009, but it is hard to see where this money will come from.
Like Venezuela, the government’s nationalisation drive has raised questions over Bolivia’s reliability as a supplier and has affected demand for its exports, particularly in Brazil, Argentina and Chile. These countries have looked to diversify their supplies, encouraging new oil and gas suppliers, including offshore around the Falkland Islands in the south Atlantic and the Uruguayan coast.
The Bolivian and Venezuelan economies’ reliance on income generated from the extractive industries has raised the stakes. Approximately 50% of Venezuela’s national budget comes from oil revenue, while over 90% of Venezuela’s foreign exchange comes from oil exports. The slump in global demand and continuously low oil prices has hit the country’s economy hard. Back in April 2009, the International Monetary Fund (IMF) announced that it expected Venezuela’s real gross domestic product (GDP) to retract by 2.2% in 2009 and 0.5% in 2010, after having expanded on the back of high oil prices by 4.8% in 2008. The country’s current account balance, according to IMF projections, will deteriorate from 12.3% of GDP in 2008 plunging to -0.4% in 2009, but then rebound to 4.1% in 2010 (as commodity prices recover).
The growth outlook for the Bolivia, which sits on merely 0.4% of the world’s proven natural gas reserves – equivalent to the second largest natural gas reserves in South America after Venezuela, is better, however. The IMF expects the Bolivian economy to grow by 2.2% in 2009 and 2.9% in 2010, having expanded by a comparatively robust 5.9% in 2008. The government reports that Bolivia’s economy expanded by 6.5% in 2008 due, in no small part, to growth in the mining and construction sectors However, the IMF says that Bolivia’s fiscal external current account is expected to register a deficit of 0.5% of GDP this year. It is then projected to move into surplus in 2010 due to an anticipated recovery in hydrocarbon prices. The size of this surplus, however, will be affected by the amount of investment that goes into Bolivia’s extractive industries in the years to come.
This is not to say that Latin America’s leftist governments are oblivious to the risk of losing business from western investors. Both Bolivia and Venezuela are trying to forge new ventures with the likes of Russia and neighbours in the region to compensate for the potential loss. In February 2009, Bolivia’s energy minister, Saul Avalos, said that Bolivia expects to boost oil and natural gas investments to US$530m this year thanks to ventures with Venezuela and Russia. Russia’s natural gas exporter, Gazprom, has agreed to develop gas deposits in the country’s gas-rich lowlands. A joint exploration venture between the state-owned YPF Bolivianos and Venezuela’s Petroleos de Venezuela (which started in October 2009) is focused on seven locations in the northern Bolivia.
Yet, oil and gas rich states the world over are aware that many big western oil companies will want to exploit their resources. Chavez and Morales know that they could conceivably attract more western oil companies back to their countries in the future by providing more favourable business terms should the need arise. Venezuela, after all, is home to 7.9% of the world’s proven oil reserves – a fact that the world’s oil majors are all too aware of. Losing out to competitors, such as emerging nations Russia and China, is as much of a concern. Little reminder is needed that 19 companies, including BP and Chevron, paid US$2m for bidding packs in an auction for the Carabobo area, which contains 32 billion barrels of proven reserves, in Venezuela’s Orinoco Belt. The tender has not yet taken place.
However, companies that are not investing in the hydrocarbons industry and whose business is not as dependent on the world’s finite oil and gas reserves are more likely to think carefully before entering Venezuela, Bolivia and Ecuador. Nor can these governments ignore the fact that they are limiting the future development of their countries by expelling technically able international oil and gas majors with a proven ability to raise funds. Industry experts, for instance, say that Bolivia’s reliance on Venezuelan and Russian national hydrocarbons companies – which they regard as inefficient compared to private companies – will eventually lead to a decrease in national output. Yet, for ideological reasons the governments of Bolivia and Venezuela want to rely mostly on state-run energy companies. They can therefore be expected to contemplate increasing the pace of government takeovers of private business if and when the price of oil and gas significantly rebounds.