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30/06/2005 | Bolivia Pledges to Honour Export Contracts

WMRC Staff

Bolivia's interim President Eduardo Rodíguez pledges to honour Bolivia's existing export contracts with Brazil and Bolivia, but the approval of new regulations to support the implementation of a new hydrocarbons law means that companies are unlikely to unfreeze planned investments in Bolivia's hydrocarbons sector.

 

Global Insight Perspective

Significance

The government has approved three decrees setting out the regulatory framework for the implementation of a controversial hydrocarbons law that will allow the state oil company YPFB to participate in all stages of the hydrocarbons production chain, as well as significantly increasing the tax burden on foreign investors in the sector.

Implications

The new hydrocarbons law promulgated in Bolivia in May 2005 has threatened to reduce the cash flow of oil and gas companies and to result in the freezing of new investments in the gas sector. Continuing calls for the full nationalisation of the hydrocarbons sector mean that there is a risk that the investment climate might further deteriorate.

Outlook

Although the interim president's pledges to honour existing export contracts will help reassure companies such as Repsol-YPF, BG and Petrobras, new projects that would have augmented gas exports from the country are less likely to come to fruition without a stable legal framework that encourages new investment.

Implementing the New Hydrocarbons Law

The Presidency Minister Iván Avilés announced yesterday that the government has approved three decrees regulating the new hydrocarbons law that was promulgated by Congress President Hormando Vaca Díez on 17 May 2005 after former president Carlos Mesa refused to sign or veto the bill. The three decrees are Decrees 28224, 28223 and 28222.

Decree 28224 instructs the Hydrocarbons Ministry, Interior Ministry and Defence Ministry to work together in order to guarantee the state's control of hydrocarbon deposits. It grants resources to the Treasury Inspector's office to conduct audits into the capitalised (partly privatised) companies Chaco, Andina and Transredes and requests that the Finance Ministry grant resources to the reformed state oil company YPFB. It also creates the National Centre for Mediation and Control of Production and Transportation.

Decree 28223 regulates the distribution of the new hydrocarbons tax (IDH) of 32% between oil- and gas-producing departments and those without significant reserves. Half of the total revenues raised by the new tax will be transferred to the country's four hydrocarbon-producing departments; 31.25% will be transferred to non-producers; and 18.75% will be retained by the Treasury for distribution to public-sector bodies and social projects.

Decree 28222 establishes procedures for the payment of royalties by oil and gas companies, requiring payment in advance in dollars.

The regulations will allow the implementation of a hydrocarbons law that is regarded as 'confiscatory' by foreign oil and gas companies and has intensified calls from gas-rich provinces for greater autonomy, but is at the same time not regarded as far-reaching enough by radical leftist groups that want the full nationalisation of the hydrocarbons sector.

Bolivia Pledges to Honour Export Contracts

Bolivia's interim President Eduardo Rodíguez said in a television interview on Sunday that Bolivia would honour its natural gas sales contracts with Brazil and Argentina. This will be welcomed by its neighbours. Argentina is reliant on Bolivian imports to help offset fresh domestic gas shortages during the 2005 Southern Hemisphere winter. In the case of Brazil, Bolivian gas normally covers approximately 65% of national consumption. Despite frequent social protests and political instability since the 2002 elections, Bolivia has been a reliable gas supplier to Brazil; it was only when the three weeks of protests preceding former president Mesa's resignation threatened to disrupt exports that Brazil made preparations for a contingency plan. Political uncertainty in Bolivia has in recent weeks prompted discussions between Mercosur countries about the possibility of a regional gas loop that could see gas from Peru supply the region. However, in an indication that this did not mean that Bolivia was being pushed out, Peru's President has said that Bolivia should be included in the negotiations. All three of Chile's presidential candidates have pledged to guarantee Bolivia's access to Chilean ports, although this issue of sovereignty will almost certainly not be open to debate.

Outlook and Implications

Although the interim president's pledges to honour existing export contracts will help reassure its neighbours, new projects that would have augmented gas exports from the country are less likely to come to fruition without a stable legal framework that encourages new investment.

The US$3.5 billion that foreign companies have invested in the gas sector since 1997 allowed the country to increase its proven and probable natural gas reserves from just 6 Tcf to 48.7 Tcf. However, faced with a small domestic market and limited demand growth from neighbouring Brazil in the initial years following the start of operations of the Bolivia-Brazil gas pipeline, monetising those reserves has been one of the largest challenges facing recent governments in Bolivia. The collapse of the Pacific LNG export project proposed in Bolivia following the 2003 'Gas War' that toppled the government of former president Gonzalo Sánchez de Lozada means that Bolivia has already lost out to Peru in its bid to become the first country in the region to export LNG from the Pacific coast. The death of the Bolivian project to export gas to North America was reaffirmed earlier this month after one of its main stakeholders, Repsol-YPF, announced its decision to participate in Peru's LNG export project instead. Although Peru has offered to process Bolivian gas as well in the future, the reluctance of private companies to invest in a more expensive pipeline via Peru instead of Chile means that the revival of a project to export gas to North America appears more distant than ever.

Meanwhile, plans to increase the fiscal burden on private companies, as well as to make contract changes obligatory rather than voluntary under the new hydrocarbons law, have already prompted foreign companies to put investments on hold and have reduced the likelihood of new export projects going ahead, including the construction of a new gas pipeline between Argentina and Bolivia that would have increased Bolivian exports to its neighbour by 20 MMcmd and a US$1.5-billion cross-border petrochemical project with Brazil.

WMRC (Reino Unido)

 


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