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31/10/2006 | BOLIVIA - BRAZIL: La Paz's Natural Gas Dilemma

Stratfor Staff

The Bolivian government trumpeted Oct. 28 the renegotiation of all standing agreements with foreign companies operating in its natural gas sector. All but one, that is; and the one continuing to say no holds the key to Bolivia's future.

 

In the aftermath of Bolivia's May 1 decision to nationalize its energy industry, questions about what role Bolivia would play as a regional energy provider have abounded. Nationalizations, after all, generally do not attract much foreign investment since they are more about seizing assets than developing them.

Under terms agreed to Oct. 28 with such firms as Repsol YPF and Total, some of these questions were answered. The firms agreed to recategorize state firm Yacimientos Petroliferos Fiscales Bolivianos (YPFB) as the sole seller and owner of Bolivian oil and natural gas domestically and internationally. Put another way, YPFB will now own all the projects and the foreign firms will now be the state entity's contractors.

YPFB will pay royalties to the government, and of course compensate the foreign companies for their services. The contracts are different for each field. Larger fields have longer-term contracts that pay higher royalties to the government while smaller ones have short-term contracts with lower royalties to compensate for the higher risk and lower economies of scale. Bolivia will keep between 82 percent of revenues from production at the larger fields and 50 percent for the smaller ones.

But what was missed amid all the Bolivian self-congratulation was the all-important issue of who will buy the natural gas produced under these revised agreements, and even more important, what price the entity will pay. Because though Bolivia produces nearly 11 billion cubic meters (bcm) of natural gas a year, it only consumes slightly more than 2 bcm. Put another way, the Bolivians are not going to be the ones paying for the natural gas produced -- that will be up to countries that import the natural gas.

The first possible purchaser is Argentina, which recently signed a deal with Bolivia to increase imports from less than 1.5 bcm at present to up to 10 bcm by 2010. This contract has one excruciatingly large problem, however. The pipeline connecting Bolivia to Argentina has a throughput of only about half that amount. Argentina estimates that building a new line to handle the added volume would cost about $1 billion, but if Argentina is going to spend $1 billion on energy, it will spend that money to exploit its own natural gas deposits. Before its December 2001 meltdown, Argentina was a net exporter of natural gas, and Buenos Aires hopes its purchase of Bolivian gas is only a stopgap measure.

The remaining natural gas Bolivia produces is shipped to Brazil, but though Brazil's energy firm Petróleo Brasileiro (Petrobras) signed over ownership of the natural gas fields like every other firm operating in Bolivia, it has not agreed to the sharp price increases La Paz is demanding for natural gas sales.

The reason is simple: Petrobras has been the single largest investor in Bolivia for some time, and is quite unhappy its assets have been nationalized. Bolivia is attempting to force Petrobras -- as the largest consumer of Bolivian natural gas -- to swallow the entire cost increase it is extracting from its energy industry with a minimum of compensation. As such, the discussion in Brazil is not over how to afford to pay more for Bolivian energy, but how to get along without it.

The answer is easier than one might think.

Though half of the natural gas consumed in Brazil comes from Bolivia, very little of it is used for electricity -- only 5 percent -- with the bulk of the rest of the country's power coming from an extensive array of hydroelectric plants. Some 60 percent of natural gas consumption goes to various industrial uses such as plastics production. These are new industries that did not exist before the import of Bolivian natural gas in 1999. Once cheap Bolivian natural gas came online, these industries sprung up like the proverbial fungus after a rainstorm.

That means that if the decision is made to cut Brazil off from Bolivia, the hammer would fall on a very small group of firms representing a new industrial base not firmly established in Brazil. And though the fallout from cutting off Bolivia would undoubtedly be painful, it would be survivable. More important, if a cutoff does not happen, Brazil will find itself more vulnerable to Bolivian decision-making in the future as these industries become more entrenched.

The Bolivians are overplaying their hand.

Bolivia currently sells to Brazil, and the Bolivians understand they must keep doing so to maintain income. But they believe Argentina will buy even more natural gas from them than Brazil does currently -- and that the Argentines will do so soon.

That is wishful thinking. Within a year, Brazil will be reducing the amount of natural gas it currently buys from Bolivia as the Brazilians expand natural gas production at home, build yet more hydropower plants and perhaps even finish a stalled nuclear power facility, as well as begin importing liquefied natural gas from further abroad. At the same time, Argentine purchases will increase, though slowly, and they will plateau at a level far below what the Brazilians were willing import.

In the end, Bolivia will indeed have nationalized its industry and secured commitments from a series of international firms to produce natural gas. But with a dearth of customers to sell that natural gas to, La Paz will only have succeeded in bankrupting the Bolivian state.

Stratfor (Estados Unidos)

 


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