Since 1920, the Standard Oil Company of the United States acquired a concession to explore and exploit the Andean foothill zone in southeastern Bolivia. It causes development of Bolivia's petroleum resources. A series of small oil fields were discovered there, but Standard Oil's operation was expropriated in 1937 to form the nationalized Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). In the mid-1950s North American companies were again encouraged to resume operations, and in 1956 the Bolivian Gulf Oil Company (a branch of Gulf Oil Corporation) began a decade of successful oil and natural gas strikes in the Santa Cruz region. In 1966 Gulf began exporting oil to southern California via the YPFB pipeline to the Pacific port of Arica, Chile, and it also boosted the YPFB's sales to the domestic market and to Argentina. Political uncertainties disrupted the industry, however, and in 1969 Bolivia nationalized the Gulf Oil operation. The government again promoted foreign oil investment in 1972, but production continued to fall during subsequent decades because of a lack of capital and the failure to replace depleted wells. In addition, some oil had to be imported to meet soaring domestic consumption. The YPFB was partly privatized in the 1990s.

Oil production peaked in the early 1970s but declined throughout the rest of the decade and into the 1980s. Production dropped from 47,000 barrels per day (bpd) in 1973 to only 21,000 bpd in 1988, the result of price fluctuations, obsolete machinery, minimal exploration, YPFB mismanagement, and declining reserves. As part of the NPE, the government restructured YPFB into three autonomous subsidiaries in 1985 and reduced its payroll by one-third. One of YPFB's major goals was to accelerate oil exploration and improve its inadequate reserves-to-production ratio. Proven reserves were estimated at 158 million barrels in 1988. In order to augment reserves, most economists believed that Bolivia would need to rely more on foreign oil companies for exploration.

Oil exploration in Bolivia in the 1980s remained highly regulated by the government, but revisions in the country's petroleum code were expected after 1988. For exploration purposes, the country was divided into four regions, three of which were higher risk areas; in the fourth region, where reserves were unknown, YPFB had exclusive rights for exploration. The YPFB's region was located in southeastern Bolivia, and the other regions covered the rest of the country's mostly unexplored subsoil. YPFB, however, also issued contracts for foreign oil companies to explore portions of its own select region and others. In September 1988, Occidental signed a thirty-year contract with YPFB for exploration and production in a 2.5- million-hectare area, encompassing the Madre de Dios and Lapachos regions of La Paz, Beni, and Pando departments. YPFB also managed the country's oil refineries, which had a 74,000 bpd capacity, or three times more than output. The refineries, located in Santa Cruz, Cochabamba, and Chuquisaca departments, produced a diverse range of petroleum products, such as lubricating oils, gasoline, naphthas, jet fuels, diesel, solvents, and ether.