Latin America’s New Petro-Politics

As Latin American citizens elect more left-leaning leaders, countries are increasingly turning away from multinational energy companies and shifting their energy policies inward, nationally and regionally.

In his 2006 State of the Union address, President Bush famously stated that “America is addicted to oil.” He soon followed that proclamation with an announcement that his solution to the addiction is to diversify U.S. sources of oil — not to diversify away from oil with clean, renewable sources of energy.

That is sure to mean increased U.S. political attention to Latin America. Oil multinationals are already looking to intensify drilling operations in Latin America, because that’s where the oil is. The U.S. government and oil and gas companies are likely to pressure Latin American countries like Mexico, Venezuela, Colombia and Ecuador — already major suppliers of oil to U.S. markets — to ramp up production and to exploit new oil and gas fields. And Big Oil is likely to propose new exploration and development projects in Costa Rica, Nicaragua, Panama, Bolivia and Peru as the industry struggles to maintain a steady flow of energy resources to the North.

But the political landscape is rapidly evolving in Latin America, with traditional docility to U.S. economic and political demands giving way. As Latin American citizens express their discontent with conservative economic policies by electing more left-leaning leaders, countries are increasingly turning away from multinational energy companies and shifting their energy policies inward, nationally and regionally.

That approach is not likely to sit well with policymakers in Washington, or industry executives in Houston.

The Failure of Corporatization

Although Venezuelan President Hugo Chavez has become the Bush administration’s least favorite pundit, he is one of several new leaders in Latin America who are vowing to run their countries differently than their predecessors, and becoming very popular because of it. Behind Chavez’s blunt style and provocative speeches, such as the one at the United Nations when he referred to President Bush as the devil, is a discourse that is resonating with voters from Mexico to Argentina. Particularly the poorest Latin Americans see in leaders like Chavez a sign of hope for improving their deteriorating conditions.

In the early 1990s, under the influence of the International Monetary Fund (IMF) and the World Bank, Latin American countries embarked on a series of free-market economic reforms. Central to the economic reform package was the privatization of a range of formerly state-owned industries, from phone companies to electric utilities to oil and gas companies.

The “Washington Consensus” policies of privatization, deregulation, reduced labor rights, opening to foreign trade and investment, and orienting economies to exports were a failure for Latin America’s people. The Washington, D.C.-based Center for Economic Policy Research’s “The Scorecard on Development” found that for low- and middle-income countries in the region, the last 25 years have seen sharply reduced economic growth as well as setbacks in health and education, when compared with the two decades before 1980.

But the Washington Consensus policies did benefit a narrow elite and foreign investors. Multinational companies, especially those in major industries like oil and gas, were able to acquire privatized government-owned enterprises on the cheap and secure outrageous profits.

Latin American energy markets really opened to multinationals with the privatization of Argentina’s national oil company, Yacimientos Petroliferos Fiscales (YPF), in 1993. Similarly, in 1995, Venezuela began opening up parts of its petroleum sector to foreign investment, including the Orinoco Belt’s heavy-oil deposits — the world’s largest petroleum reserve. Brazil swiftly liberalized its oil industry through a constitutional amendment — the Brazilian constitution had prohibited foreign involvement in oil and gas — and in 1998 began offering several lease agreements to private oil companies to tap into Brazil’s offshore oil reserves.

The case of Bolivia illustrates how large corporations, often foreign companies, reaped huge benefits from privatization at the expense of Latin American governments and people. Bolivia has the second largest gas reserves in South America, after Venezuela. The Bolivian Constitution declares that all hydrocarbons are property of the state, but in the mid-1990s, the IMF demanded the government permit the sale of oil and gas concessions to foreign companies. Bolivia complied. All of the country’s gas transportation networks were sold to a consortium owned by Royal Dutch Shell and the now-defunct Enron. Other corporate winners included BP-Amoco, British Gas, Australia’s BHP, Spain’s Repsol and Petrobras, the Brazilian state-owned oil company. The deal allowed foreign corporations in the oil and gas business, gave them a majority share in previously state-owned companies and, at the same time, lowered the government’s share of profits from the operation to a mere 18 percent, a steep drop from the previous 50 percent.

In October 2003, then-President Gonzalo Sanchez de Lozada fled the country amidst massive popular protests. Already disenchanted by his earlier privatization policies, Bolivians rose up to block yet another gas export deal, known as Pacific LNG. (That the project was meant to transport gas to Mexico and the United States via Bolivia’s archrival, Chile, didn’t help. The enmity dates back to 1884, when Chile swiped Bolivia’s only coast following the War of the Pacific, leaving the nation landlocked.) The project was halted and the episode became known as the “gas war.” Subsequently, calls for the government to retake control of Bolivia’s resources expanded and gained strength. By the 2005 election, eventually won by Evo Morales, every single major candidate for president was offering significant reforms in the oil and gas sector.

Resource Sovereignty

After decades of dictatorship and civil war, it is no small feat that democratic elections have been held throughout Latin America in the last two decades. New, non-traditional leaders — like a coca farmer in Bolivia, a former metal worker in Brazil, a torture survivor in Chile, and socialists in Uruguay and Venezuela — have been elected president in countries throughout the region. In Bolivia, Evo Morales won the presidential election in December 2005 with a stunning 54 percent of the popular vote. No president in Bolivia’s fractured electoral history had achieved even close to that support. In Venezuela, Chavez won another term in 2006 with 60 percent of the vote in an election where an impressive number of voters — nearly 75 percent — went to the polls.

These votes offered an explicit mandate for the new leaders to bring about significant change. In Bolivia, reasserting control of the oil and gas industry was one of the main issues of the election campaign. Shortly after taking office, Morales announced a decree nationalizing Bolivia’s hydrocarbons. Government negotiators met an established six-month deadline to rewrite existing contracts with oil and gas companies. The new contracts will direct between 50 and 80 percent of oil profits to the government, according to Gretchen Gordon of the Democracy Center in Bolivia. The government’s oil revenues will rise an estimated $1.3 billion in 2007, increasing to roughly $4 billion by 2011. “The challenge will be ensuring that those resources are used effectively to improve people’s lives,” Gordon concludes.

In Venezuela, the government has significantly increased royalties and cracked down on oil companies for underpayment of income taxes. During his re-election campaign, Chavez promised to expand his “socialism for the 21st century” program, which requires the government to take a dominant role in the economy and in the provision of social welfare programs, funded largely with oil revenues. Immediately after Chavez started his new term last year, the Venezuelan government resumed attempts to re-negotiate several oil contracts signed with a number of oil majors in the 1990s — including ExxonMobil, ChevronTexaco and ConocoPhillips — and to replace them with more favorable joint-venture agreements dominated by the state-owned oil company, known by its Spanish acronym PDVSA.

In July 2007, all the international companies doing business in Venezuela’s Orinoco oil belt agreed to negotiate new contracts with the Venezuelan government. ChevronTexaco and ExxonMobil, however, announced that they would cease their Venezuelan operations. Both have reserved the right to seek compensation through international arbitration.

In Ecuador, calls for redistributing oil revenues are high on the agenda of newly elected President Rafael Correa. Oil revenues account for approximately one-third of Ecuador’s national budget and over 40 percent of its export earnings. However, “the largest portion of the revenue from oil exports goes to servicing the country’s massive debt,” explains Debayani Kar of the Jubilee USA network. “This leaves few funds that can be allocated for social infrastructure and development, while creating an incentive for the country to pump more oil,” she says. Correa has vowed to renegotiate contracts with foreign oil companies to ensure that a greater share of the oil wealth goes into the national treasury. He has also offered to leave some oil in the ground — to lessen global warming and protect endangered areas — if Ecuador’s debt is cancelled.

Efforts like those of Chavez, Correa and Morales to garner greater control over their countries’ profitable oil businesses and to spread the industry’s economic benefits have been extremely popular in resource-rich but economically poor countries throughout Latin America. High global oil prices mean that governments obtaining a sizeable chunk of oil profits will be able to fund a variety of social programs to assist the poor. The power flowing from exerting greater control of oil at a time of high prices has also emboldened leaders to openly distance themselves from Washington, and to seek to diminish the traditional U.S. dominance in the region by reaching out to other allies in the international community, and by increasing regional ties.

Regional Petro-Politics

Given the likely prospects for continued unrest in the Middle East, analysts expect Latin America to be the fastest-growing oil producing region in the world in the coming years. However, domestic demand is also likely to increase significantly. Large and rapidly growing countries like Brazil, Chile and Argentina are already experiencing energy shortages and thus looking for ways to ensure steady supplies of resources to meet their demand. At the same time, as energy producers and exporters like Venezuela, Bolivia and Ecuador look to diversify their markets, they are increasingly looking to regional buyers.

Governments have been moving to forge stronger regional ties. Venezuela has signed agreements with Central American and Caribbean countries to supply discounted oil and other petroleum products, often in exchange for something else. Cuba, for example, provides Venezuela with thousands of highly skilled professionals, teachers and doctors, who work in the poorest areas of the country. After long and difficult negotiations, Bolivia and Brazil reached an agreement for Brazil to purchase Bolivian gas at rates many times higher than the discounted rates it had been paying. “Brazil’s President Lula was criticized by his opponents for being too soft on Bolivia and allegedly playing ideological politics,” explains Lucia Ortiz of Friends of the Earth in Brazil. “In the end, agreeing to pay the global market price for gas is only fair, but it does show that there is a level of solidarity among Latin American countries that wasn’t there before.”

The 12 South American countries have come together to create the South American Union (known as Unisur), in a process similar to the one that launched the European Union. Although the Unisur agenda includes myriad issues upon which its members are attempting to find common ground, energy integration is at the top of the list. One such proposal is to merge the region’s oil and gas companies into one.

Led by Venezuela, the region’s energy ministers in 2005 officially endorsed the concept of a strategic alliance of state-owned oil companies to manage and operate all aspects of the energy sector. According to its founding declaration, PetroAmerica, as it is called, “will integrate Latin America and the Caribbean on principles of self-sufficiency, and re-invest profits into development and social programs.” This ambitious undertaking is already taking shape, particularly through its Caribbean subsidiary, PetroCaribe, which has established a formal structure that includes a board comprised of the members’ energy ministers, as well as a secretariat, and is already carrying out several joint projects.

The Democracy Alternative

Although Latin Americans have generally welcomed these initiatives — and the wider regional strategy — to become less dependent on the United States and strengthen regional ties, some plans have been criticized as too reminiscent of business-as-usual.

For example, environmental and indigenous rights advocates are already sounding alarm bells about plans to build a 10,000-mile pipeline from Venezuela to Argentina through the Brazilian Amazon. “It is really worrisome that this project is being talked about as a done deal, without a comprehensive process of public debate and consultation,” warns Maria Eugenia Bustamante, director of Amigransa, a citizens group for the protection of the Gran Sabana national park in Venezuela. “This project will directly impact some of the most vital ecological areas in this part of the world, including the Guyana Shield and the Amazon Rainforest.”

Brazil has recently expressed reservations about going forward with the project. Venezuela’s Chavez has declared that the project is currently “frozen,” but that he remains committed to finding ways to make it happen.

As governments attempt to find ways to free themselves from the shackles of past economic failures and to chart a new path for the betterment of their peoples, their greatest challenge will be achieving a true transformation that also makes social and environmental concerns a central pillar. While they need revenue to carry out social welfare programs and to create jobs that will revive the economy, advocates are calling on Latin American leaders to be keenly aware of the negative impacts that often accompany an oil-based economy.

Other challenges will emerge as regional integration moves forward, threatening the oil multinationals of the United States. The Bush administration, for example, is scrambling to ensure that the United States isn’t fully left out. In what some see as a move to counter Venezuela’s collaboration with its neighbors, President Bush offered Brazil an energy deal for the production and trade of biofuels — a controversial alternative energy source — during a visit to Latin America in March 2007. The United States and Brazil are already the world’s largest ethanol producers, and it is estimated that demand for the fuel\ will face a significant increase worldwide.

Throughout the developing world, oil has correlated with imperial subjugation, local authoritarianism and human rights abuses.

As Latin America’s new wave of democracy consolidates, Latin Americans are seeking to disrupt this equation. If they can achieve positive change without excluding dissenting opinions from public debate, the region’s countries could even become the world’s most authentic democracies. 

Nadia Martinez is co-director of the Sustainable Energy and Economy Network (SEEN), a project of the Institute for Policy Studies in Washington, D.C.