Latin America’s New Petro-Politics

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.