Just Walk Away

True to his campaign promises, Bolivia's new President Evo Morales has nationalized his country's natural gas sector, seizing the assets of the regional and international energy firms that had invested to develop Bolivia's gas infrastructure and giving them an ultimatum: renegotiate on our terms or leave. In my view, the companies involved--and global energy consumers--would be best served if the firms in question would take the hint and go.

Gaining (and retaining) access in order to develop resources is the single biggest challenge facing the extractive portion of the energy industry in the 21st century. But it is mirrored by a less obvious, equally critical challenge on the part of the resource owners: attracting the capital and expertise necessary to bring resources to market. In their report on this story last night, the BBC World News trotted out a feckless talking head from a Washington-based NGO. He thought this was a wonderful development, because gas revenues were the only hope of the Bolivian people. Apparently, despite a Ph.D. in the subject, he understands development economics no better than Mr. Morales; those revenues would not exist without substantial investment and technical know-how from energy companies. And the notion that they are taking back resources that were stolen from them is a canard; Bolivia always owned the underlying gas. Rather, they are expropriating infrastructure that was paid for by others, and that they couldn't have built or paid for themselves.

We are beginning to see a dangerous trend here, and its logical extrapolation is a world that is not only much more challenging for the international oil and gas companies and their investors, but that would impose permanent energy constraints on the world economy. We saw this recently in Venezuela, and with the exception of ExxonMobil, the companies involved apparently concluded they had too much at stake to do anything but concede the incremental nationalization of their assets. Bolivia is a different case.

First, although Bolivia has the second largest natural gas resources in South America, after Venezuela, the world can live without its gas. Nor does Bolivia have a professional state energy company, as Venezuela does--or did before it was decimated after the strike of 2001-02. Bolivia without foreign investment in its energy sector will shortly be a Bolivia without an energy sector. Could Venezuela step into the gap, shoring up its revolutionary co-religionists? Perhaps, but that would stretch the already strained capabilities of PdVSA, the Venezuelan state oil company.

However unpleasant this might become, Bolivia is the place to stand on principle. The affected companies should evacuate all their third-country personnel and file a claim against Bolivia in the World Court and WTO. If they don't oppose this nascent trend there, they will find themselves fighting the same battle again, but on much more significant turf, such as Nigeria.