South American leaders seek to avoid crisis over oil

Bolivian President Evo Morales met regional leaders yesterday to try to shore-up diplomatic relations, after shocking them by nationalising his country's rich gas and oil fields at a stroke on Monday, and dispatching troops to guard dozens of plants.

But even before the hastily arranged summit in Argentina began, the presidents had split into two camps. In the radical corner were Morales and Venezuela's Hugo Chavez, the man widely considered to be his mentor. Chavez, a leader also given to provocative acts, flew into the Bolivian capital late on Wednesday for talks with Morales and immediately congratulated him on his bold plan.

South America's top two economies, Brazil and Argentina, were meanwhile seeking to be seen as the moderate voices of reason. Brazil's Luis Inacio Lula da Silva and Argentine President Nestor Kirchner also held separate talks yesterday before the full summit began at Pueto Iguazu on their joint border.

"[Brazil and Argentina] were caught completely off-guard. Morales made quite a dramatic move and showed he wanted to cast his lot with Chavez," said Michael Shifter, an analyst at the Inter-American Dialogue in Washington. "It's quite unsettling and quite embarrassing for Brazil, and to some extent for Argentina, and it exposes some real schisms and splits in the region," he added.

Yesterday's emergency presidential meeting came at the behest of Lula. Brazil is now going to have to pay significantly more for the Bolivian gas it is heavily dependent on, and state-owned energy company Petrobras is one of the companies most affected.

Petrobras has sunk millions of dollars into Bolivia, helping the tiny Andean country become a powerhouse, with the region's second biggest gas reserves after Venezuela. It has already said it is scrapping new investment after the nationalisation, which gives companies six months to renegotiate their contracts or get out.

Brazil has indignantly vowed to take the issue to international arbitration, arguing the gas contracts were signed under a previous government and must be respected. But Morales appeared in little mood to be conciliatory, and turned up the temperature of an already tense meeting, saying gas prices were not negotiable and Petrobras was trying to blackmail him.

In theory, leftist leaders like Lula and Kirchner should not oppose plans to boost state revenues in South America's poorest country, especially when Morales has made no secret of wanting to nationalise the industry to lift his people out of poverty. But Lula faces elections in October and will be under pressure to try to win more favourable terms for Brazil.

What worries leaders is Chavez's growing importance in the region. Soaring oil prices have given the leader of the world's number-five oil exporter the cash and clout to renegotiate contracts at home.

Besides traditional ally Cuba and now Bolivia, Chavez has also struck deals with Argentina and Ecuador to buy debt. "That makes it much more difficult for Kirchner to take a strong stand against Chavez," Shifter said.

Chavez has also given support for maverick Peruvian presidential candidate Ollanta Humala, and faced accusations that he is financing Mexican election front runner Andres Manuel Lopez Obrador.

Meanwhile, the Mercosur trade alliance that bound Brazil and its neighbours is crumbling as Uruguay seeks a bilateral trade pact with the United States. "The question you have to ask is simple. Who's leading the region?" Argentine newspaper Ambito Financiero wrote.