The dramatic Labour Day decision by the Bolivian President Evo Morales to nationalise the energy industry has alarmed the Brazilian and Spanish governments and could scare off the very investment and expertise Bolivia needs to turn its vast natural resources into wealth for its poor.
Mr Morales, an indigenous former coca farmer who has vowed to stop foreign companies cashing in while indigenous people scrape a living in South America's poorest country, had long promised to take over oil and gas companies but had not yet delivered on his populist promise.
His sudden decision to send troops to guard dozens of plants, refineries and pipelines and give foreign companies including Brazil's Petrobras, Spain's Repsol-YPF, BP and British Gas and Total of France six months to renegotiate their contracts or get out, signalled a tougher stance as he marks 100 days in office. And it underlined a growing affinity with the Venezuelan President, Hugo Chavez, who has also cracked down on foreign firms.
Though a tiny, landlocked country, Bolivia is an energy powerhouse with the second-largest gas reserves in South America behind Venezuela. Neighbouring countries rely heavily on its gas exports, and prices can now be expected to rise.
Brazil's President Luiz Inacio Lula da Silva called an emergency cabinet meeting on Monday and the Spanish government yesterday expressed "deep concern". Petrobras, whose investment in the decade since Bolivia privatised its energy sector has helped the country quadruple its gas reserves, called the measure "unfriendly" and said it would be impossible to make new investment when companies would only be allowed to keep 18 per cent of profits.
Repsol, the most exposed of the Western oil companies, already had to slash reserves in Bolivia in January amid uncertainty about the political climate. BP has two joint ventures in Bolivia. Wendy Silcock, a spokeswoman for BP, said the company was a "very small player" in Bolivia. "It's a small piece of our business and it's too early for us to be able to comment," she said.
Bolivia's Vice-President Alvaro Garcia said nationalisation would earn an extra $320m (£175m), boosting state revenues from the sector to $780m.
"There could be a short-term gain, but at what cost?" said Peter DeShazo, director of the Americas programme at the Centre for Strategic and International Studies in Washington. "The long-term sustainable development of Bolivia's natural gas sector will be set back by this because it will discourage foreign investment and technical expertise that (foreign companies) bring," he added.
Soldiers guarding gas plants held up Bolivia's red, yellow and green flag and banners proclaiming "Nationalised. Property of the Bolivians" were erected. Mr Morales, wearing a white hard-hat and speaking from a plant owned by Petrobras, said that if companies did not comply "we will use force to make them".
Mr Morales later told jubilant crowds in the capital, La Paz, that nationalisation of oil and gas was just the start and that mining and "all natural resources" would be next.
A Bolivian political analyst, Cayetano Llobet, called the energy nationalisation a "political act. We'll have to wait and see what the economic consequences are." Bolivia nationalised its energy sector, in 1937 and 1969, both times by military governments.
Foreign companies were already spooked by a 2005 hydrocarbons law that paved the way for nationalisation and jacked up taxes, and many had put investments in Bolivia on hold. When Mr Morales did not immediately expropriate foreign assets after he took office, company officials were quietly breathing a sigh of relief and expressing the cautious hope that he would turn out to be less radical than they had feared.
But Mr Morales, who has echoed Mr Chavez's desire to pull out of an Andean trade pact and was in Havana last week cementing trade ties with Cuba and Venezuela in a summit he described as "a meeting of three revolutions", has now turned up the heat on foreign firms.
"I think his natural reactions are conditioned by a deep-seated nationalism and populism," said Mr DeShazo. "To what extent he will be authoritarian not democratic has yet to be fully revealed."
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