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.

Casting for a New Cartel

Gas OPEC: economic advantages and political drawbacks

By Igor Tomberg

At the meeting with Secretary of the Russian Security Council Igor Ivanov in Tehran over the past weekend, Iran's supreme leader Ayatollah Ali Khamenei said: "Our countries could set up an OPEC-type organization on gas cooperation."

Judging from the initial response, the majority of analysts think that this proposal is rooted in politics rather than economics.

This is not the first time the idea has been put forward. Iranian President Mahmoud Ahmadinejad offered to Russian President Vladimir Putin at their meeting in Shanghai in June 2006 to establish what he described as cooperation "in fixing gas prices, and major flows in the interests of global stability."

Indicatively, the same idea was discussed during the recent Algerian visit of Viktor Khristenko, Minister of Industry and Energy: Algeria and Qatar could join the two countries. The resources of this potential cartel are very impressive - they account for more than 30% of the world's gas production, and their aggregate proven reserves exceed 60% of the total, which is comparable to OPEC's respective share in the global oil reserves - about 68%. The would-be cartel could include other members as well.

The excerpts of a confidential analytical report by NATO economic experts, published by The Financial Times last November, include Algeria, Qatar, Libya, Russia, Central Asian countries, and Iran into OPEC's gas counterpart. The list could be extended - Mauritania, Mali, and some Central African nations could also become part of it. Gazprom showed great interest in these countries during Khristenko's official visit.

In 2006, the appeals for a gas OPEC became stronger. The main reason was discontent with the European Union's energy policy. Its advocates see EU strategy as an attempt to set up an association of consumer countries aimed at driving a wedge into the ranks of gas producers in line with the divide-and-rule principle. In other words, the goal is to let the consumers dictate prices to the producers.

Judging by the number and tone of publications in the media, and interviews by politicians and experts, the idea of a gas OPEC is gaining a foothold in Russia as well. With different degrees of caution, it was supported by a number of State Duma deputies and Senators (Vladimir Medinsky, Viktor Orlov, Alexei Mitrofanov, and Gennady Seleznyov). The opinion they all share is that a gas alliance of producers is a sound idea, and Russia will profit from it. The bulk of experts polled by the media agree.

The official authorities have the opposite position. During his Algerian visit, Khristenko said that Russia and Algeria were against this idea. "We should not move towards a cartel agreement," the minister said.

For the time being, the Russian Government has not given any response to the latest Iranian proposal, which is understandable. Any clear-cut answer by the Kremlin is bound to directly influence the global geopolitical alignment of forces, something it does not seem to be ready for. For this reason, the authorities have limited their reaction to an interview by an anonymous official from the Ministry of Trade and Economic Development to RIA Novosti. It was clear from what he said that the ministry considered even a discussion of the idea premature.

The ministry's objections are based on the fact that OPEC has quotas for oil production, and this is something Russia does not need for gas. Gas production in Russia rests on potentialities of deposits and on the quickly growing demand for gas at home and abroad. Moreover, Gazprom is bound by long-tern export contracts, and they are its natural lodestar. As for OPEC, it was established in 1960 to coordinate the policy of oil producers in their clash with the U.S. and other Western countries.

In this case, the ministry's position coincides with Gazprom's view, which already accounts for a quarter of the European gas market, and half of import supplies. A formal alliance with other suppliers is the last thing Gazprom needs today. But this is today, when it still has enough gas to honor its long-term contracts and meet the growing external demand, although it already has to limit supplies to the RAO UES, the Russian electricity monopoly.

Gazprom's production is clearly lagging behind the growing demand. Under the circumstances, export quotas would not only help save face if there is not enough gas for exports, but also keep export profits at the same level with higher (or high) prices. Gas quotas promote rather than impede the development of the gas market in conditions of uncontrolled consumption. They are good for the global energy balance.

Interestingly, all politicians and analysts are trying hard to take the cartel idea of a gas OPEC out of its political context. It is clear that Khamenei's proposal is more political than economic. There is a risk that in a bid to restore its waning popularity, the George W. Bush Administration will still decide to deal pinpoint strikes at Iran's real or invented nuclear facilities. This compels Iran to go all-out in a bid to find potential allies, and prove that it has levers of influence on industrialized countries.

Clearly, Russia's cartel with Iran and Algeria would be an undisguised challenge to the West, and not only in the energy sphere. However, in perspective this alliance is quite possible. For the time being, long-term contracts are crucial in the world gas market, and most of them involve transportation through pipelines. But trade in liquefied natural gas (LNG) is skyrocketing. The LNG consumption is growing 3.5 times faster than that of pipeline-transported gas (7.7% a year against 2.2%). A clash of interests on the market between sellers and buyers may encourage consolidation of major gas exporters, all the more so since the LNG and oil markets have an identical structure. The EU is fully aware of this.

Some big Western companies are beginning to consolidate their positions in countries that can potentially become cartel members, ignoring political considerations, even the threat of America's anger.

On January 29, 2007, the European oil giants Royal Dutch Shell and Repsol YPF sighed a tentative agreement with the Iranian government to develop Persian Gulf gas deposits. Under the agreements, the UK-Dutch concern, and the Spanish company will build an LNG plant and a port terminal for the South Pars deposit in southern Iran. The plant will have a capacity of three billion cubic meters of gas a year. Shell estimates the project at $4.3 billion dollars. Iranian national oil company NIOC believes the costs may reach five to six billion dollars.

Returning to the question of Moscow's attitude to Iran's proposal, we should bear in mind that Russian President Vladimir Putin was the first to voice the idea of a gas OPEC. At the meeting with Turkmen President Saparmurat Niyazov in 2002, he offered Central Asian countries to create what he called a "Eurasian gas alliance" together with Russia. But at that time, Putin's suggestion did not meet with support of the proposed cartel's members, Turkmenistan above all.

Much has changed since then, including the gas correlation on post-Soviet territory. However, if Russia is to consider different versions of gas producers' alliances in the face of increasing consumer solidarity, it should start with its neighbors - Central Asian nations. The political will of potential members is the only missing instrument for translating the idea into reality, although in bilateral discussions, Central Asian leaders always talk about it.

Interest in this subject on the part of Iran, Algeria, and other Islamic countries may encourage Turkmenistan, Kazakhstan, and Uzbekistan to revive dialogue with Russia. Clearly, today Russia will have to share some of its monopoly, and possibly profits, on the Western markets with the future allies. But this turn of events may have its own advantages - guaranteed gas supplies, and a farewell to the tiresome competition for markets and top prices.

In mid February, Vladimir Putin will visit Saudi Arabia, Jordan, and Qatar. In April major gas producers and exporters - gas OPEC potential members - will meet in Qatar to discuss concerted efforts. The idea of a gas cartel will probably become institutional at this meeting.

Igor Tomberg, Ph. D. (Economics), is a senior research fellow at the Center for Energy Studies of the Institute of World Economy and International Relations, Russian Academy of Sciences.

The Problem in Venezuela

Emboldened Chávez eyes oil sector, may run into problems

Venezuelan President Hugo Chávez may run into some significant obstacles when he tries to take control of heavy oil projects in the Orinoco River belt, analysts say.

By Steven Dudely

The largest section of the Venezuelan congressional law passed Wednesday, which gives President Hugo Chávez the power to rule by decree for the next 18 months, concerns the energy sector, where Chávez hopes to enact swift changes, including taking a majority stake in the production of 600,000 barrels a day of heavy crude in the Orinoco River basin.

But analysts say the complicated finance packages involved in these heavy-crude deals may slow the takeover process considerably and that the government's ability to manage these wells over the long-term is in doubt.

Venezuela is the fifth-largest oil producer in the world, the fourth-largest supplier to the United States and has the highest amount of reserves outside of the Middle East. In the 1990s, the government opened up the oil sector to foreign producers. Now Chávez, with the help of a national assembly that is controlled by his allies, is turning back the clock.

The law, which was passed in a spirited public session in downtown Caracas, states that the president can ``dictate laws that permit the government to assume control . . . of the operations of associations operating in the Orinoco.''

It adds that the government can create ''mixed companies,'' as it did in 2005 with 32 oil wells then controlled by multinationals, or take complete control of the fields.

As expected

The move was expected, as Chávez has been hinting at taking over ''strategic interests'' of the country for weeks, including the oil wells in the Orinoco, natural-gas projects and the bulk of the telecommunications and electricity industries, all of which are mentioned in the law.

But analysts say the government may have overlooked the type of fine print that could hold up its bid to quickly take the majority stake in the Orinoco.

Corporate obstacles

Currently five of some of the largest oil companies in the world, including U.S.-based ExxonMobil and ConocoPhillips, have a majority stake in the four Orinoco projects. The companies launched the projects in the late 1990s -- a time when crude prices were closer to $10 than $50.

Consequently, the banks financing part of the estimated $27 billion needed to get these projects off the ground required more assurances. Part of the deal for ConocoPhillips' Petrozuata project, for instance, involved channeling some oil revenue through the lenders, which included Citibank, to ensure payment.

In addition to the banks, Chávez will have to negotiate debt acquired through bond issuances and multiple layers of partnerships. One of the messier examples is the Cerro Negro, Orinoco's largest producer at 101,000 barrels a day.

ExxonMobil and Venezuelan state oil company, Petróleos de Venezuela SA, or PDVSA, have partnered on both the production and refining sides of the Cerro Negro project. But the two sides have squabbled in the past. ExxonMobil refused to accept the government's new terms on a field in 2005 and pulled out of that project.

ExxonMobil is also one of the few companies that has openly questioned the Venezuelan government's actions, and some analysts think there might be another showdown concerning the Cerro Negro field.

''The cost of a divorce would be really high for both sides,'' said Roger Tissot, an analyst at PFC Energy, referring to the ExxonMobil and PDVSA project.

Not all analysts are troubled by the complicated operational agreements in the Orinoco, and most point to the government's $37 billion in reserves as its ace in the hole.

''The small print always takes a lot of time,'' said Alberto Quirós, a former Shell and PDVSA executive. ``But at the end of the day, they'll work it out because the government has a lot of money.''

Can it work?

If the government manages to untangle the knots to take control of the Orinoco, some oil analysts wonder whether it will be able to efficiently run the operations.

The government has made an effort to train new oil engineers as part of its push to double production in the country to nearly 6 million barrels per day by 2012. But technical know-how in PDVSA is still suffering from the departure of close to 20,000 state oil workers during a national strike in 2002-03, as evidenced by a string of deadly accidents at refineries in recent months.

''The government is living in fantasy land if they think they can kick everyone out and do it itself,'' said one analyst whose company does not allow him to be quoted by name because of the sensitivity of the issue.

Despite the obstacles, Chávez is moving ahead, and some expect the changes in the Orinoco operating contracts to be the first decree he enacts.

Steven Dudley is a correspondent with the Miami Herald.