Price rises prompt tighter state grip on natural assets

Earlier this month the Bolivian president, Evo Morales, sent troops into his country’s natural gas fields. The move followed his announcement, made on May Day, that he was to nationalise the country’s natural gas industry. Installations owned by Petrobras of Brazil and Repsol-YPF of Spain, the biggest foreign investors in the sector, were seized. BG, a British energy company, also has assets in the country.

For anxious investors, the move could be seen as part of a dangerous left-wing trend in Latin America, and possibly beyond. Hugo Chavez, the Venezuelan president who is seen by some as a modern-day Che Guevara, often berates foreign oil companies. Other countries where resource nationalism is reported include Ecuador and Peru. Some commentators note that such nationalism is strongest in countries like Bolivia, with large indigenous populations.

However, it is still not clear whether Morales will offer compensation to foreign energy producers. Although he is prone to populist rhetoric, his concern in practice may be to renegotiate contracts with foreign firms. Only time will tell. In addition, in the large Latin American economies, notably Brazil and Mexico, such resource nationalism is not apparent.

Meanwhile, there are high-profile disputes about energy resources in other parts of the world. Libya has increased its taxation of oil companies. A few months ago there was also a conflict when Gazprom, the huge Russian energy company, got into a conflict with the Ukraine over the price of natural gas it was supplying. At one point Gazprom, in which the Russian government has a majority stake, threatened to cut Ukraine’s gas supplies. For the Russian company, it was giving away natural gas to its neighbour at below the market price. The dispute has yet to be resolved. China, which is still under Communist Party rule, emphasises taking control of natural resources as part of its energy security. It has even been accused of ignoring human rights abuses in Sudan and Iran’s nuclear proliferation as a result. In China’s case, its concern is more as a substantial user of energy, to fuel its rapid industrialisation, than as a producer.

But there is another way of looking at many of these developments. As Andrew Milligan, head of global strategy at Standard Life Investments, says: “There are expropriations and changes of rules by a range of governments around he world.”

From a practical perspective, governments are keen to maximise their revenues from rising energy prices. In this sense the moves in Latin America can be seen as in line with initiatives elsewhere. For example, Britain has imposed windfall taxes on North Sea energy producers. Friso Rengers, an energy fund manager at ABN Amro, draws an unflattering comparison between Gordon Brown in Britain and resource nationalists in the third world. “In the UK Chancellor Brown just takes what he needs from the oil industry,” he says.

In addition, elements within the European Union and America have raised the possibility of windfall taxes on Big Oil. In the developed world they may not be sending in the troops but in some respects the effects could be the same. In addition, Western politicians can sell such measures to the public as promoting energy security, and as part of a responsible environmental policy to reduce pollution.

Whatever the reasons for such moves there could be a significant impact on energy companies. Essentially what is being suggested is a transfer of resources from energy firms to the state. As a result, the profits of energy producers could fall just as government coffers are swelled.

Return on equity could suffer as a result. For example, according to an analysis by the Wall Street Journal, the tax rate on Exxon Mobil was 47% in the first quarter of 2006. This compares with 41% for the corresponding period in 2005. Although there were some one-off factors involved in this increase, there was still a substantial rise in the firm’s effective tax rate.

However, John V Mitchell, an associate fellow at Chatham House, Britain’s top foreign policy think tank, is sceptical about such claims. He says moves by governments to benefit from rising revenues “are perfectly normal when oil prices are high”.

Mitchell acknowledges that in response to such moves “the oil companies will make a great deal of noise”. He rejects the argument that the increase in taxation on oil companies will make it difficult for them to invest for the future. “Most major oil companies are short of opportunities rather than money,” he says.

ABN Amro’s Rengers takes a more negative view. He says that such measures reduce the amount of oil or natural gas that such companies produce. They may just leave it in the ground, and prices could rise still further as a result.

Milligan of Standard Life Investments says that market awareness of such questions is increasing. “It is a topic that is beginning to appear on the investors’ radar screen,” he says.

Ultimately the impact may depend on the extent to which large producers take up such measures. The impact of Bolivia’s move was more symbolic than practical for the world market. But if substantial producers start imposing windfall taxes, the oil companies are likely to feel a significant effect.

The rising price of energy, by its nature, can also create tensions between producers and consumers. Whatever its ideological dressing, the concern is generally for each side to get the best deal at the expense of the other.