By Alistair Scrutton

SANTA CRUZ, Bolivia (Reuters) - In theory, it was a recipe for easy cash in one of the Western Hemisphere's poorest nations that just happened to be sitting on one of Latin America's biggest natural gas reserves.

All Bolivia had to do was negotiate with companies eager to pipe out trillions of cubic feet of gas to energy-hungry California, then wait a few years before enjoying the sweet smell of royalties for the next two decades.

In practice, a $6 billion plan to develop Latin America's second-biggest gas reserves is in a quagmire, delayed for more than a year due to a potent cocktail of civil unrest and a century-old border dispute with Chile that could sink a project soon to face stiff competitors such as Russian gas fields.

"A window for opportunity exists for Bolivia today. But that market (for world gas) will close when the market decides on a supplier," said Paul Jordan, senior executive at British Gas Group PLC, one of three companies in the Pacific LNG consortium involved in the project.

"And that may not be within the control of Pacific LNG," he added in his air-conditioned offices in the tropical town of Santa Cruz, the center of most gas operations in Bolivia.

The project envisages landlocked Bolivia choosing whether to pipe gas hundreds of miles either to a Chilean or a Peruvian port on the Pacific before being be shipped to Mexico and moved by train to California.

Energy specialists say Chile's ports – on a straight line on maps from the fields – are the cheapest option. But many Bolivians are up in arms at their gas being piped via their neighbor, an old enemy after Bolivia lost its access to the coast in an 1879 war.

President Gonzalo Sanchez de Lozada has hinted he favors Chile but his government, boxed in by civil strife amid economic downtown, has put off a decision that was due in early 2002. Government officials say a decision will be made by the end of this year.

In the meantime, energy companies say, time is running out amid a growing supply worldwide of gas and other competitors to feed the California market such as Russia's Sakhalin Islands.

INDUSTRY VS INDIANS

Bolivia has 55 trillion cubic feet of gas reserves, second only to Venezuela.

British Gas, which along with Spain's Repsol and BP Plc makes up Pacific LNG consortium, says the project could supply nearly a fifth of energy needs of California – a market similar in size to Japan.

But many Bolivians want to pipe via Peru, a fellow Andean nation mired in poverty that desperately needs foreign investment. That plan could cost LNG an extra $600 million.

Industry analysts favor Chile, as does LNG.

"Should the government of Bolivia think Peru is more appropriate then the investors would have to revaluate the project," Jordan said.

But feelings run high in Bolivia, where school text books say that Chile stole their land. Graffiti such as "Chile? I'd die first" litters La Paz's colonial streets.

Few doubt the plan, which could bring in $5.7 billion for Bolivia, will help the nation recover from its worst downturn since democracy returned two decades ago.

"Bolivia is no longer the producer of tin and silver it once was. Gas could provide Bolivia with a spinal vertebra for the economy for years," said Raul Kieffer, the head of the Bolivian chamber of energy firms.

"This is a huge reserve but it is still less than 1 percent of world reserves. Bolivia is not the only country around and investors are worried about the delay," he added.

Lozada, a U.S-educated businessman who opened Bolivia to investors in the 1990s, was elected again in 2002 with just 22 percent of votes. He runs a weak congressional coalition against a strong Indian movement opposing the Chile route.

In February, at least 29 people were killed in riots over government austerity policies.

"Common sense says it must be Chile. But Lozada fears further uprisings like February," said Alberto Bonadona, a well-known Bolivian economist.

There are signs of progress. Industry officials say LNG may sign by the end of the third quarter a deal with U.S.-based Sempra or Marathon Oil Corp. to sell gas – a condition Bolivia demanded before deciding on Chile or Peru.

Industry watchers say the government could also try and involve state-owned energy firm YPFB to appease nationalistic concerns. The energy industry has also started television ads saying that "Bolivia needs our energy to escape the storms."

For Bolivian business leaders, it is a battle that must be won. "Bolivia must show the world it is playing the rules of the game – that investors can trust Bolivia," Kieffer said.