Bolivian Gas Conflict - The 2005 Hydrocarbons Law

The 2005 Hydrocarbons Law

On May 6, 2005 the long awaited Hydrocarbons Law was finally approved by the Bolivian Congress. On May 17 Mesa again refused to either sign or veto the controversial law, thus constitutionally requiring Senate President Hormando Vaca Díez to sign the measure and put it into effect.

The new law returned legal ownership to the state of all hydrocarbons and natural resources, maintained royalties at 18 percent, but increased taxes from 16 to 32 percent. It gave the government control of the commercialization of the resources and allowed for continuous government control with annual audits. It also ordered companies to consult with indigenous groups who live on land containing gas deposits. The law stated that the 76 contracts signed by foreign firms must be renegotiated before 180 days. This has not yet been done. Protesters argued that the new law did not go far enough to protect the natural resources from exploitation by foreign corporations, demanding a complete nationalization of the gas and process in Bolivia.

Due to the uncertainty over renegotiation of contracts, foreign firms have practically stopped investing in the gas sector. Foreign investment virtually came to a standstill in the second half of 2005. Shortages in supply - very similar to those observed in Argentina after the 2001 price-fixing - are deepening in diesel, LPG, and begin to be apparent in natural gas. The May–June social unrest affected the supply of hydrocarbons products to the internal market, principally LPG and natural gas to the occidental region. Brazil implemented a contingency plan - led by the Energy and Mines Minister - to mitigate any potential impact from gas export curtailment. Although the supply was never curtailed, the social unrest in Bolivia created a strong sensation that security of supply could not be guaranteed. Occasional social action has continued to affect the continuity of supply, especially valve-closing actions.