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Argentina turns to Bolivia for gas

With Argentine gas production falling and the country increasingly reliant on spot LNG cargoes the government has turned to Bolivia to secure its long-term gas-supply requirements, reports Robert Olson

ARGENTINA has finally signed up for a significant increase in natural-gas imports from Bolivia, ending years of short-term solutions to its gas-supply deficit. The agreement, which will result in a five-fold expansion of Bolivian gas shipments to Argentina by 2017, will make Argentina as big a customer for Bolivia as Brazil is.

Bolivia's potential to be a significant natural-gas producer has long been thwarted by its difficult geography and politics. An obvious way to turn the impoverished country's gas reserves into cash for development has been liquefaction, but hostility to exporting gas through neighbouring Chile, as a result of a century-old grievance over coastal land seized in a 19th century war, has made that impossible.

For a while, Brazil and Argentina looked like attractive markets – big enough to support the large pipelines needed to make overland gas shipments profitable, but uncertainty over Bolivian policies following President Evo Morales' decision to nationalise the sector slowed investment down. Further complicating matters has been Brazil's emergence as a big gas-reserves holder in its own right, which has eliminated one market while Argentina's ad hoc approach to energy policy has held back developments needing long-term commitments.

Argentina has now adopted a long-term energy strategy. The two countries amended their existing gas-import contract at the end of March, which will result in a big increase in exports over the next seven years – raising the prospects for new investments in Bolivia's upstream. And while this is not the first time the countries have lined up agreements that on paper promise progress, but in reality yield little, the deal appears more substantial than those in the past.

Argentina has agreed to set up a trust fund and take out letters of credit to guarantee payment. In return, Bolivia has agreed to be more flexible on gas deliveries, allowing Argentina to cut purchases during the southern hemisphere summer when demand is generally lower, as well as agreeing to penalties if it fails to meet contractual delivery obligations.

The amended gas contract comes after months of negotiations and appears to indicate a more nuanced approach from the government in Buenos Aires to energy policy. The country is increasingly dependent on spot liquefied natural gas (LNG) imports to meet peak demand in winter and while the price it is paying for cargoes for delivery in the next several months is not excessive, its growing need for imports has underscored Argentina's vulnerability to supply disruptions overseas.

Thanks to the Atlantic basin LNG glut Argentina has been able to source 14 cargoes for delivery this winter at an average price of $7/m Btu, a level comparable with what it pays for pipeline imports from Bolivia, but substantially more than many domestic gas producers receive at older fields. Enarsa, the national energy company, may need another four cargoes of spot LNG to make it through the winter and is already projecting that Argentine LNG demand will reach at least 22 cargoes in 2011 when it plans to have a second temporary floating regasification terminal in operation in Ensenada, west of Buenos Aires.

But policymakers are aware than betting international gas prices will remain low for the foreseeable future is risky. They also acknowledge that efforts to boost domestic supply through liberalising the price paid for gas from new fields as well as for shale gas and tight gas should help bolster output. But years of government-imposed price caps have left investors with few prospects ready for immediate development.

Argentine gas output slipped to 132.6m cubic metres a day (cm/d) in 2009, more than 7% below its 2004 peak of 143.1m cm/d, as producers stopped drilling because of low prices. However, by agreeing to keep the existing pricing formula for Bolivian gas in place, Argentina seems prepared to allow domestic gas prices to continue to rise.

The revised import agreement, which runs until 2026, calls for shipments to rise from 5m cm/d to 16m cm/d in 2013 and 27.7m cm/d by 2017. According to YPFB, the country's national oil company, the agreement should bring in up to $11bn in revenues for the Bolivian government in the form of royalties and taxes on gas production. YPFB is already working to speed up talks with investors for new blocks to meet its supply commitments.

Investing upstream

Spain's Repsol, along with partners Total and Pan American Energy, are to invest $1.5bn in the Margarita-Huacaya gasfield, aiming to raise output to 14m cm/d by 2013 from 2m cm/d. Total has also said it wants to boost gas output from the fields it operates in the country by an additional 5m cm/d by 2013. Total and newcomer Gazprom, which has expressed interest in joining pipeline projects between Argentina and Bolivia, are both looking to add new acreage in Bolivia, YPFB says.

Argentina is not, however, tying itself exclusively to Bolivia. Enarsa is working on a $200m project to build a permanent onshore LNG regasification terminal that would start operations in 2013 near the port of Bahía Blanca, replacing the existing floating-regasification terminal that it leases from Excelerate Energy. The onshore terminal would be able to handle larger vessels than the Excelerate facility as well as offer increased storage capacity.

Venezuela could potentially supply LNG to Argentina, although given that country's fiscal difficulties and commitments to oil production Brazil is a more likely supplier of spot LNG cargoes. The Brazilian government released its legal framework for LNG exports in March, permitting operators to ship gas abroad on a spot basis once the domestic market is fully supplied. Petrobras is already working on a floating LNG concept with SBM Offshore to develop the gas resources of its pre-salt areas.

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