Relations between Brazil and Bolivia have hit a new low after Brazil said President Evo Morales’s decision to nationalise the gas sector had left the industry “paralysed” and La Paz threatened to take Brasília to court to secure higher prices for gas exports.

The heightened war of words comes days after Bolivia’s government ann-ounced a “temporary suspension” of its nationalisation policy, saying it lacked funding to pay compensation to foreign investors.

Ties between the two countries have been deteriorating since May, when Mr Morales announced his nationalisation plan from a gas field operated by Petrobras, the Brazilian state-owned energy company and the largest foreign investor in Bolivia.

Since then Petrobras and YPFB, its Bolivian counterpart, have been locked in negotiations over taxes, export prices and volumes. The Morales administration wants an increase in the price paid for gas exports from current levels of about $4 per million BTUs to at least $5.

The two countries had originally said that if they did not reach agreement by September 14 they would take their case to international arbitration. However, when the fourth round of talks between Petrobras and YPFB ended in failure last week, they agreed to extend negotiations for another 60 days.

But on Tuesday Andrés Solíz, hydrocarbons minister, warned that La Paz was prepared to go to court should talks fail. “Either there is a bilateral agreement within 60 days or there will be an arbitration,” he said. “That’s the decision of the Bolivian government.”

Mr Solíz’s comments came as José Fernando de Freitas, Petrobras’s president in Bolivia, said uncertainty over hydrocarbons policy had prompted Brazil to cut all non-essential investment.

“We don’t have any meetings with government authorities, absolutely no draft of a contract,” Mr de Freitas said.

“The longer it’s delayed, the longer the delay of a possible recovery of the hydrocarbons industry, which at the moment is paralysed.”

The exchange is the latest in a string of disagreements that have tested relations to breaking point.

Last month Julio Gomez, Bolivia’s deputy minister of hydrocarbons, accused Petrobras of fiddling with gas measuring equipment to make it show that output was lower than it really was. Petrobras denied the charge.

Luiz Inácio Lula da Silva, Brazil’s president, responded by admitting that his country had made a strategic mistake in becoming dependent on Bolivian gas and pledged to work for natural gas self-sufficiency by 2008.

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