Riders of the Storm

Resource nationalism: distant thunder or looming storm?

By Keith Campbell

It was last year’s Zambian presidential election campaign that brought the ‘resource nationalism’ issue into focus for Southern Africa.

Resource nationalism has been defined as the control, by the State in whose territory they are located, of in-the-ground (including under-the-seabed) resources and the means of extracting and refining them. As a phenomenon, it is by no means new – Mexico nationalised its oil industry in 1938, and has never privatised it.

In Zambia, opposition Patriotic Front (PF) candidate Michael Sata promised that, if elected, he would limit foreign ownership of the country’s copper mines. He was reported to have said that “we will give foreign investors 51% and the rest of the shares should be in Zambian hands”.

He also stated that, if elected, he would revoke the 15-year tax exemptions granted to mining companies by the incumbent administration of President Levy Mwanawasa in order to stabilise the sector. As it turned out, Mwanawasa was re-elected with 43% of the vote, with Sata running second with 29,4%.

In the simultaneous parliamentary elections, Mwanawasa’s party, the Movement for Multiparty Democracy (MMD), won 72 of the 148 contested seats – the president nominates a further eight Members of Parliament, giving the MMD 80 seats in total – and the PF won 46. So it seemed that, as far as the mining and minerals industry was concerned, the danger of resource nationalism emerging had been averted, though re-emerging would be more accurate, in that Zambia originally nationalised its copper mines in 1969 when it took a 51% stake in them; they were privatised again in 2000.

(But Zambia’s next elections are in 2011, and the electoral cycle for democracies is inescapably much shorter that the development, exploitation, and decommissioning cycle for large mining and minerals projects.)

Then, last November, Angola announced its application to join the Organisation of Petroleum Exporting Countries (Opec), an entity strongly associated with resource nationalism; Angola hopes to achieve membership by March this year.

Of course, the current inter-national focus on resource nationalism was triggered by events in a country, which, although part of Opec, lies far from Southern Africa and, indeed, the Middle East – Venezuela. It has been the perfervid nationalism, increasingly coupled with socialism, of Venezuelan President Hugo Chavez that has once more brought resource nationalism to the fore.

Chavez was originally elected, with 56% of the vote, at the end of 1998 (taking up office in early 1999); he had, however, attempted to overthrow the democratically elected President Carlos Andrez Perez in a coup in February 1992, which cost 18 lives, and, while in military prison, supported (through a video recording, broadcast on a television station temporarily captured by the rebels) a second coup attempt against Perez in November 1992 – Chavez was pardoned after spending two years in prison.

After his election, he oversaw the writing of a new constitution (by an elected constituent assembly in which his supporters were a majority), which was approved by 71% of the voters in a referendum; stood for and won the election in 2000 under this new constitution with 59% of the vote; survived a coup attempt in 2002; rode out a two-month national strike by managers and skilled workers at the State-owned hydrocarbons company Petróleos de Venezuela SA (PDVSA) in December 2002/January 2003; won a recall election in 2004,allowing him to complete his mandate; and was re-elected last month with almost 63% of the vote.

Chavez has focused his attention on hydrocarbons: the country has the largest oil reserves in the Americas and is the world’s fifth-largest oil producer – it also has the largest proven gas reserves in Latin America. Following the strike against him, he has brought PDVSA under tighter political control.

In 2005, 32 oil exploration deals involving foreign oil companies were declared illegal; foreign oil companies have also been hit by demands for back taxes – in March 2006, for example, BP was presented with a back-tax demand for $61.4-million for the years 2001 to 2004, while in July 2005 Shell was on the receiving end of a demand for $131-million for the same period.

Taxes and royalties on foreign oil companies have also been increased – in 2004, royalty payments for companies with drilling rights in Venezuela were increased from 1% of the sale price to 16%. Then, last year, Chavez replaced the (by then) 17% oil royalty with a 33% ‘extraction tax’.

Foreign oil companies producing extra-heavy crude in the eastern region of Faja, near the Orinoco river, which were already paying 34% in tax on income, had this figure raised to 50%.
Further, foreign oil companies were forced to transform their operations in the country into joint ventures (JV) with PDVSA, in which the Venezuelan company would have majority shareholdings; by last year’s March deadline, 16 had done so while the two that had not – Total, of France, and Eni, of Italy, – had their Venezuelan fields seized by PDVSA.

Then, in early January, after his re-election, Chavez announced that the electricity and telecommunications sectors were to be nationalised, that the foreign-owned oil operations in the Orinoco Basin – excluded from the previous round of forced transformation into JVs – were now required to give up majority stakes to PDVSA, and any who refused would have their operations completely nationalised. Chavez also announced that the country was to be renamed the Socialist Republic of Venezuela.

Fellow South American, President Evo Morales of Bolivia, has emulated Chavez. Elected in December 2005, Morales actually ran ahead of Chavez by nationalising Bolivia’s oil and gas sector in the middle of last year, the Andean country having the second-largest gas reserves in Latin America.

The main victims of this were not renowned international petrochemicals giants, such as Exxon, Chevron, Shell or BP, but Spain’s Repsol and, especially, Brazil’s Petrobras, itself predominantly State-owned. But the first sign of the re-emergence of resource nationalism in Bolivia occurred before Morales’ election – the erstwhile State oil company, Yacimientos Petroliferos Fiscales Bolivianos, privatised in 1996/1997, was renationalised in 2004.

Last November, Morales attacked Swiss mining company Glencore International, claiming that the company, which bought assets in the country – including Bolivia’s largest tin smelter, Compania Minera del Sur – in 2005, had obtained these assets “unlawfully”. Glencore rejected this claim.

Morales also stated that “(because) the country is asking for it, those mines are going to be taken back”. The 2007 theme would be the Bolivian mining industry, Morales has stated. In early January, Morales re-affirmed, “(last year,) we nationalised hydrocarbons. This year, it will be mining.”

However, Bolivian Mining and Metals Minister Guillermo Dalence subsequently suggested that, instead of nationalisation, the country would increase taxes on the mining sector by some 660%. According to Dalence, Bolivia’s mining exports were worth $1-billion but the country gained only $45-million in taxes and wished to increase this income to $300-million annually.

It should be noted that Bolivia may be seeking directly to emulate Venezuela – forcing foreign operators to hand over majority stakes in their Bolivian operations to the state mining company (Comibol) as well as massively increasing taxes on the international companies.

Meanwhile, in Ecuador, during his campaign for the presidency last year, Rafael Correa promised to renegotiate contracts with foreign investors in the country’s oil industry. Correa was inaugurated as Ecuadorian president on January 16, promising a “citizen’s revolution”. Ecuador is also considering rejoining Opec.

But while much international attention has been focused on the return of resource nationalism in the Andean region of South America – largely due to the colorful political showmanship and verbosity of Chavez – things have been quietly happening elsewhere, as well.

Last December the Export Finance and Insurance Corporation (Efic), the Australian government’s export credit agency, warned that resource nationalism was becoming a growing issue for mining and oil companies active in emerging market countries.

The Efic report cited Uzbekistan and Kyrgyzstan, whose governments had effectively expropriated the local operations of Western mining companies by imposing back taxes and starting bankruptcy proceedings.

In the Middle East, the agency points out that Dubai, Kuwait, and Qatar are all intent upon either strengthening fiscal and contract terms for international oil companies or restricting the territorial extent of their concessions. And in Iran, President Mahmoud Ahmadinejad was elected on a platform that included opposition to foreign investment in the country’s oil and gas sector. But the really big example is Russia. There, under the administration of president Vladimir Putin, the Russian private-sector energy giant Yukos was broken up at the direction of the State and, as a result, many privatised assets came back under the control of the state.

A recent subsoil law requires that ‘strategic’ – which seems to be interpreted to mean large oil and gas fields must be at least 51%-owned by Russian interests. The country’s oil pipeline system is controlled by the State monopoly, Transneft, while state-owned Gazprom holds the gas infrastructure. Gazprom has announced that it will develop the giant Shtokman gasfield without a foreign partner.

Further, Gazprom’s interruptions of gas supplies to, and through, Ukraine and Belarus in recent months, which hit other European countries as well, have been seen in the West as actions that are at least partly political in inspiration and intent, and not merely commercial disputes.
A return to resource nationalism is now also visible in North Africa.

Last year Algeria, which had been moving to liberalise its oil and gas sector, abruptly reversed course with the passage of a new law which imposed ‘windfall’ taxes of up to 50% on foreign oil companies whenever crude-oil prices go above $30/barrel. The new legislation also requires State-owned oil company Sonatrach to take a 51% share in all oil-production-related activities in the country.

In Libya, the government created a Council for Oil and Gas Affairs, which is a regulatory agency with the function of monitoring the hydrocarbons sector and setting policies. The mandate of the council stresses the issues of ‘national interests’ and ‘maximum revenue’, which suggest that it is intended to be an agency of resource nationalism.

Further south in Africa, Chad last year took what international consultancy Control Risks called “aggressive measures” to strengthen state control of the oil sector. And Angola and Equatorial Guinea brought in new laws that seek to increase the involvement of local companies in the sector. Overall, however, resource nationalism seems unlikely to become a major factor in sub-Saharan Africa, at least this time around.

Firstly, and with the notable exception of Bolivia, resource nationalism has been focused on the hydrocarbons sector, where demand is great, prices are high, and the product is the lifeblood of all modern economies. No one can do without oil and gas; although substitutes do exist – for example, nuclear power for energy generation, and biofuels for transport – it will take decades to switch to these energy sources on a large scale. This does not apply to many of the minerals and metals produced by African states.

Secondly, again with the exception of Bolivia, all the countries engaging in resource nationalism have significant indigenous technical expertise in the sectors involved – experienced managers, engineers, technicians, artisans, geologists, geophysicists, and so on. And Bolivia is being supplied with this expertise by Venezuela.

Most countries in sub-Saharan Africa are chronically short of skills and still heavily dependent on foreign expertise. Further, the consequences of the last round of resource nationalism – which swept Africa in the 1960s – are often still very visible.

For example, according to the World Bank, Zambia’s copper production peaked at 700 000 t/y in the 1970s, just after nationalisation – thereafter it was downhill until it fell below 300 000 t/y; following privatisation in 2000, the country’s copper production has now risen to some 500 000 t/y.

Keith Campbell is Senior Contributing Editor at Creamer Media's Mining Weekly. This commentary was originally published by Creamer Media's Mining Weekly on 30 January 2007.