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Last Updated: Wednesday, 3 May 2006, 15:13 GMT 16:13 UK
Q&A: Bolivia's gas takeover
A worker applies the Bolivian energy firm's logo to seized foreign-owned premises in El Alto
The Bolivian state is putting its mark on seized energy assets
Bolivia's President Evo Morales has defended his decision to place the country's natural gas industry under full state control.

He said energy companies were not going to be expelled or expropriated - but added that contracts with foreign energy companies would be completely renegotiated.

The decision has been greeted with dismay by Brazil's Petrobras and Spain's Repsol-YPF, the biggest foreign investors in the Bolivian energy sector, who have seen their installations seized by Bolivian troops.

What does the decision mean for foreign energy firms in Bolivia?

Mr Morales was elected in December last year on a campaign pledge to increase the state's share of the proceeds from Bolivia's lucrative natural gas industry, with the aim of benefiting the country's impoverished indigenous majority.

Until his May Day decree nationalising the energy sector, it was unclear how he planned to do this.

Now it appears that foreign energy firms will have a much-reduced role in Bolivia. They will be reduced to mere operators of the gas fields, while state-run Yacimientos Petroliferos Fiscales Bolivianos (YPFB) will own all the gas produced.

The details will not be finalised until foreign companies have agreed new contracts with YPFB, which they must do within six months.

However, Bolivian Vice-President Alvaro Garcia has explained that under the decree, the government's share of revenue from gas production will go up from $460m last year to $780m by 2007.

The government has already laid down that from now on, the two largest gas fields - San Alberto and San Antonio - must hand over 82% of production revenues to the state, rather than the 50% they do now.

The head of YPFB, Jorge Alvarado, has justified this decision by arguing that even on those terms, foreign firms will still be making a profit of 20 to 25%.

How have the companies reacted?

The president of Brazil's state-owned Petrobras, Jose Sergio Gabrielli, disagrees with Mr Alvarado's arithmetic.

Mr Gabrielli has said that the new conditions make gas operations "practically impossible" in Bolivia, although he has given no indication that Petrobras is contemplating pulling out of Bolivia.

Petrobras is the foreign company with the biggest stake in Bolivia's energy sector, having invested more than $1bn in the country.

The Spanish government is also concerned by the nationalisation and is sending a delegation to La Paz to discuss the consequences of the move.

Britain's BP has interests in Bolivia, as does BG Group, the former exploration and production arm of British Gas.

However, both firms have played down the risk, saying Bolivia represents only a small part of their business.

Where does Bolivian gas go?

About two thirds of the gas exported by Bolivia ends up in Brazil - a factor which explains the depth of Petrobras's concern.

About 75% of the natural gas used in Brazil's biggest city, Sao Paulo, comes from Bolivia, while some states in wealthy southern Brazil are 100% dependent on Bolivian gas.

Brazil is now self-sufficient in oil and recently discovered big offshore gas reserves, but will be unable to extract them until 2009 at the earliest.

That puts Mr Gabrielli under pressure in the short term not to jeopardise continuity of Bolivian gas supplies.

However, landlocked Bolivia has few other potential customers for its gas reserves - the second-largest in Latin America - because of a long-standing border dispute with Chile that leaves it with no access to the Pacific Ocean.

What happens next?

Brazil and Spain probably have too much at stake to withdraw from Bolivia, although other companies will doubtless be deterred from investing in a country with such a volatile political climate.

But Mr Morales has now embarked on a path of populism and economic nationalism that is unlikely to stop with state control of the gas fields.

In fact, the Bolivian president has already said the gas fields are "just the beginning, because tomorrow it will be the mines, the forest resources and the land".

Protesters calling for greater state control of the country's natural resources have already forced two previous presidents to resign - Gonzalo Sanchez de Lozada in 2003 and Carlos Mesa in 2005.

Now the demonstrators have got what they wanted. But with international investors in retreat, Bolivia may find that it lacks the money and expertise to manage its own resources.

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