(FORTUNE Magazine) – Peruvian President Alan Garcia Perez had an emphatic message for Belco Petroleum Corp. of Peru. First he nationalized the U.S.-owned company and froze its bank accounts. Then, to drive the point home, he ordered Belco's Lima headquarters surrounded by police toting submachine guns. Negotiations between the two parties had clearly broken down. Garcia's dispute with Belco centered on a desire to end old tax breaks and force more reinvestment of income inside Peru. Occidental Petroleum managed to negotiate a new arrangement. But Belco balked at Garcia's demand that it repay $50 million in old tax credits. Positions hardened, and the police moved in. Garcia said that Belco's owner, Omaha-based HNG/InterNorth, would be reimbursed for the nationalization, minus the back taxes. Nonetheless, HNG/ InterNorth, having lost $400 million in assets and more than half of Belco's worldwide production capacity, announced it would take a significant fourth- quarter write-off. Yet the real loser may be Peru. Belco's Peruvian assets consist primarily of 88 offshore platforms. Oil industry analysts doubt that Petroperu, the state-owned oil company, can keep up production. Says Robert L. Christensen, an analyst with First Boston: ''Petroperu may be able to run current operations, but Peru's offshore geology requires new wells to be drilled all the time. I don't know if they have the capability to punch new holes.'' Garcia seems willing to try.