South American gas giant in turmoil

The sound of exploding dynamite tossed by protesting miners in Bolivia's capital is reverberating across South America.

For three weeks, largely indigenous protesters have paralyzed the government and its capital, La Páz, demanding nationalization of the country's oil and gas resources and a new constitutional assembly. Two government ministers have resigned, rumors of a military coup have swept the capital, and Monday night President Carlos Mesa offered his resignation - for the second time in three months. Mr. Mesa said he will continue on as president until Congress decides whether to accept his offer.

Bolivia's turmoil is leading neighboring countries to reexamine their energy dependence on this landlocked Andean nation.

With an estimated 53 trillion cubic feet of natural gas, Bolivia holds the continent's second-largest gas reserves after Venezuela. Moreover, Bolivia's location among the surging economies of Argentina, Brazil, and Chile means the country is well positioned to be the fuel supply for the region's engine of growth. But complicated internal politics may push development of those resources far into the future.

"Bolivia is losing a real window of opportunity," says Carlos Alberto López, a former vice minister of energy and a consultant to the oil and gas industry. "Instead of using that window to lock in long-term contracts, we're watching it slip away."

Last month, Bolivia's Supreme Court declared 72 existing oil and gas contracts invalid because they were not explicitly approved by Congress. That was followed by the passage of a new hydrocarbons law that raises royalties and taxes on gas to 50 percent, more than double previous levels.

The legal changes have made headlines across the region. According to Mr. López, Bolivia currently exports approximately $830 million per year of gas to Brazil and Argentina. While demand in both countries is growing, any significant increase in supply would require billions of dollars in new investments.

Argentina had hoped to help build a new pipeline to raise its imports of Bolivian gas to more than 20 million cubic feet per day from 6.5 million, but those plans are now on hold.

Brazil, too, had considered increasing its reliance on Bolivian gas, but the recent turmoil and the discovery of a new gas field near the industrial city of São Paulo is leading the government to reconsider its options.

Highlighting that reluctance, Argentina and Brazil are expected to sign an agreement later this week with Chile and Uruguay to study the feasibility of building a $2.5 billion pipeline to bring Peruvian gas into their countries, bypassing Bolivia.

The new gas laws have already led several companies to announce delays in current and future investments. Brazilian giant Petrobras, for instance, says it may postpone plans for a $1.3 billion natural gas facility on the Bolivia-Brazil border. Estimates have put the total cost of delayed or canceled projects at $10 billion.

In addition to Petrobras, major international companies affected by the changing legal framework here include Exxon-Mobil, Royal Dutch Shell, Repsol YPF of Spain, and Total of France.

Meanwhile, the new law has failed to satisfy Bolivia's influential leftist groups, who are demanding even higher taxes or outright nationalization. Thousands of protesters continue to block roads to the capital, effectively cutting it off from the rest of the country. The government estimates the blockades is costing Bolivia $15 million to $20 million a day.

In central La Paz, police in riot gear have waged almost daily battles with protesters attempting to enter the main government plaza. Police fired tear gas at the crowds prior to Mesa's resignation speech Monday night.

The turmoil has revived memories of October 2003, when disputes over the development of Bolivia's gas led to the resignation and exile of President Gonzalo Sánchez de Lozada.

If Congress accepts Mesa's resignation, Senate President Hormando Vaca Diez would be first in the line of succession, followed by House leader Mario Cossio. But indigenous leaders have already signaled their displeasure with both men. Another scenario could involve Supreme Court President Eduardo Rodriguez, third in line, assuming the presidency and immediately calling for elections, currently slated for 2007.

Mark Schneider, senior vice president at the Crisis Group in Washington, says Bolivia is facing a "moment of uncertainty."

"At this point, there are no individual leaders in Bolivia who dominate the political spectrum," he says. "You can't keep stretching the social and political fabric of the country to the breaking point without something giving."

Even now, with the Catholic Church attempting to mediate the dispute, many analysts are pessimistic that any potential agreements will last.

"It's hard to predict what will happen here in the next three hours, let alone three years," says López. "But as long as oil and gas continues to be a rallying cry for every aspiring politician, I think we'll be stuck with all this gas sitting under our feet."

• Carlos Mesa, president since Oct. 17, 2003

• Succeeded Gonzalo Sánchez de Lozada, who was exiled.

• Population: 8.7 million.

• Land area: 423,970 sq. miles, (size of Texas and California)

• GDP: $8.1 billion (2004)

• Poverty rate: 63 percent

• Illiteracy rate: 13 percent

Source: US State Department, AP