Negative Business Outlook Essay Example

criticized the decree for being "contrary to norms and logic that should govern relationships between companies and states." The recent measures against foreign gas companies have raised concern domestically and internationally; in March, a Bolivian judge even issued an arrest warrant for Repsol's top two executives within the country.

In the gas sector of Bolivia, foreign investment has had a notable impact as $3.5 billion has been invested since 1997, leading to an increase in proven reserves from 6 trillion to 48.7 trillion cubic feet. Nevertheless, EBX, a Brazilian steelmaker, was expelled by Morales in the past month.

Petrobras, the top investor in Bolivia with a $1.5 billion investment, stated that Venezuela has the largest gas reserves in Latin America. Petrobras contributes 24% of Bolivia's tax revenue, 18% of its GDP, and 20% of all direct investments.Bolivia heavily relies on Petrobras, Repsol, Total SA, and BG Group Plc for its gas reserves, refineries, and fuel production. Petrobras owns nearly half of Bolivia's gas reserves and produces all gasoline as well as 60% of the country's diesel fuel. Additionally, Repsol is currently the leading gas producer in Bolivia after investing over $1 billion since 1995. However, unfavorable investment conditions caused both Petrobras and Repsol to cancel plans for new investments even before the nationalization of gas resources.

According to Brufau's statement in January, Repsol's amount was 400 million euro. However, Global Insight, a US-based consultancy, suggests that Bolivia needs further investment in order to increase production and meet the demands of Argentina and Brazil. The consultancy warns that the recent decree may damage existing investments and discourage new export projects. The decree, announced by Morales, specifies that foreign companies

have six months to sign new contracts or face expulsion from Bolivia. Additionally, it dictates that the government will claim a controlling stake in refineries presently under Petrobras' control, while also requiring an increase in the state share of production from the San Alberto and San Antonio gas fields to 82 percent.

If Petrobras declines to sell, the government can expropriate the company, as Vice President Alvaro Garcia stated last week, according to the Associated Press. Tissot claims that this action will have nearly instantaneous effects, resulting in a doubled revenue. It is evident that Bolivia will benefit greatly as long as the two fields continue to operate. By increasing state ownership of gas production, it is projected that an extra $780 million will be earned in revenue, as stated by Global Insight.

A new decree by the Bolivian government allows it to regain control of partially privatized companies Chaco, Andina, and Transredes. These companies were previously co-owned by private investors holding a 50 percent stake and a state entity (FCC) managed by pension funds. According to the new hydrocarbons law, the government can transfer FCC's stake to YPFB and acquire an additional one percent ownership, ensuring at least 51 percent control of YPFB. However, experts warn that while the government could see short-term revenue increases, there may be negative long-term consequences.

"The government's aim is to increase their share of profits from rent revenue," says Jeremy Martin, director of the energy program at the Institute of the Americas, a nonprofit organization based at the University of California San Diego. The recent decree and higher taxes and royalties from last year's hydrocarbons law may provide short-term benefits. However,

it should be noted that Bolivia is not Venezuela and the commodity under discussion is not oil but rather one already ranking as fifth largest in production worldwide. Martin and Farnsworth agree that statements made by Brazilian oil company Petrobras are significant as they plan to cease further investments in Bolivia. As Martin explains: "Petrobras has been investing heavily in Bolivia's energy sector for many years with an impressive $1.5 billion invested thus far."

Although the new decree provides a six-month grace period for compliance, the Bolivian government is not open to negotiating new terms with gas companies and is determined to enforce the new conditions. Martin believes that it is unlikely for companies to fully accept the new terms, leading to a potentially contentious renegotiation period for Bolivia. The decree is the latest development in an increasingly hostile environment for foreign gas companies. In July 2004, a majority of Bolivians voted to repeal the investor-friendly hydrocarbons law enacted by former president Gonzalo Sanchez de Lozada, nationalize Bolivian state gas company YPFB (which had been partially privatized in 1996), and increase the state's ownership of hydrocarbons.

Despite the violent protests from groups led by Morales, the referendum held by then-president Carlos Mesa did not commit to a complete nationalization of the gas sector. As a result, the protests remained strong. In the following year, a new hydrocarbons law was approved by the legislature that increased taxes from 18 to 50 percent, required the migration of existing contracts, and mandated consultations with indigenous groups on new contracts and exploration. Although Mesa refused to sign the new law, it was still passed into law by the Bolivian congress.

Investments in Bolivia's natural gas sector drastically declined due to the new hydrocarbons law and political instability. The Hydrocarbons Chamber provided data indicating that exploration and production investment in the sector reached its all-time low of $175 million in 2020, since privatization in 1997. The innovative capitalization scheme, which involved the original privatization of YPFB and other companies, earned international recognition for Sanchez de Lozada. It enabled state companies to welcome fresh investments, create a new pension system for Bolivians, and add capital to the country's stock market. Despite praise from abroad, the concept was not well-received domestically, leading to growing violence led by Morales. This ultimately led to Sanchez de Lozada's removal from office in 2003 and his successor Carlos Mesa's ousting in 2005 as a result of the same protests.

Mesa was followed by Eduardo Rodriguez as Supreme Court president until Morales took office in January. The political turmoil was a significant factor in Bolivia's placement as the second-worst country in the 2006 Latin Business Index produced by Latin Business Chronicle, ranking only slightly higher than Haiti. The deployment of armed troops to seize gas fields and protect foreign gas companies' offices was concerning to many overseas investors, in addition to the actual nationalization.

According to Farnsworth, who is based in Washington, DC, the symbolic value of the Bolivian president's control over both the military and police is significant both domestically and internationally. Domestically, it demonstrates that President Morales is now the unchallenged leader of Bolivia after previous feuding between the two forces under the previous government. This move strengthens his base and shows that he is in control. Internationally, however, it implies that the

government will likely exercise a heavy-handed approach in the marketplace, deterring potential investors from seeking out Bolivia as a market. This may result in Bolivia being set back a generation or more in terms of economic development. The European Union expressed its disapproval of using the military for this action in a statement.

According to Haar, Morales' gestures may have been popular but lacking in substance. It is worth noting that there are indigenous political groups that are more radical than Morales'. To deal with these factions, Morales has had to embrace policies that lean even further left. Before the gas nationalization, Bolivia's economy was projected by the IMF to grow at a rate of roughly 4.1% this year and another 3.9% in the next year - on par with the growth rate from the past two years.

Although there are expectations of decreased growth as a result of nationalization and reduced private investment, the economic outlook for Bolivia is concerning. Farnsworth warns that without a sensible and efficient plan to develop its plentiful natural gas reserves, the country's future remains uncertain. Even with aid from donor nations, attracting both local and international investors may continue to be difficult, posing challenges for sustaining the economy.

Anticipate challenging and uncertain times ahead, as it is speculated that foreign gas companies will depart and Venezuela will likely assume a larger role in Bolivia. Given the close alliance between Bolivian president Morales and Venezuelan president Hugo Chavez, the economic prospects of Bolivia may largely hinge on Chavez's generosity towards Morales. According to Haar, the size of Chavez's checkbook and his willingness to support Morales's decisions will be more decisive than the

price of gas. However, apart from gas shipments and welfare aid from Chavez, Bolivia does not possess many advantages. As cautioned by Farnsworth, Bolivia may experience speculative and short-term investments that do not benefit the country.

According to Haar, Bolivia may face negative consequences for its long-term development prospects if future investments are speculative and short-term. He warns against reliance on foreign governments for investment and predicts a slowdown in economic activity in the productive region of Santa Cruz as local private capital seeks alternative options. The hopes for change across Bolivia's social, ethnic, and economic divides have been present for some time. Haar cautions that Morales must deliver tangible results to succeed in Bolivian politics, as winning an election is distinct from governing effectively. (Source: Latin Business Chronicle)