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Awaiting policy decisions

Bolivia's new government is still trying to work out how to implement its promise to nationalise the gas sector. But, amid growing demand from its neighbours for its gas, a full nationalisation looks neither in the country's interests nor feasible, reports Robert Olson

HAVING ridden to power on a wave of popular anger over the failure of liberalising economic reforms to distribute wealth more evenly, Evo Morales is now tackling the challenges of office. Among the biggest the new Bolivian president faces is implementing his promise to nationalise the country's natural gas sector, where foreign companies, among them Petrobras of neighbouring Brazil, have invested billions of dollars discovering vast gas reserves that, for some time, have been viewed throughout South America as the solution to the region's chronic shortage of energy.

For this reason – and because the two biggest investors in Bolivia are Petrobras and Repsol YPF, the dominant supplier in Argentina – foreign governments are jockeying for position both to curry influence with the new government and to curb its ambitions. Petrobras has said it is willing to invest $5bn in partnership with chemicals firms such as Braskem to help develop the Bolivian gas industry and its downstream sector. Repsol YPF, battered by its recent reserves downgrades (PE 3/06 p7), has been less ambitious, but has still promised to study spending $150m on a liquefied petroleum gas extraction plant in the country – although its investments in Bolivia are officially frozen until the legal situation in the country is cleared up.

Raising revenues

For now, Morales and his ministers appear to be focusing on raising government revenues to pay for the redistributive policies he promised during his run for office. Under the country's 2004 Hydrocarbons Law, wellhead taxes effectively amount to a 50% royalty, so pushing through price increases for gas exports to Brazil and Argentina would have a considerable effect on state revenues. The country exports some 1bn cubic feet a day (cf/d) to Brazil and another 200m cf/d to Argentina. Prices range between $3.18/m Btu and $3.25/m Btu at their destination point. Wellhead prices are considerably lower, given the long distances the gas must be shipped to market.

At present, Bolivia supplies half of Brazil's gas, so any big increase in wellhead prices would have a considerable effect on Brazil's energy market, despite gas playing a relatively small role in the country's energy mix. Brazil expects gas demand to double over the next five years as demand from power generation and heavy industry increases. A sudden increase in the price of gas could affect these plans and with them Brazil's economy.

Argentina, meanwhile, relies mainly on domestic supplies, but demand is outstripping local output, leading to shortages. Plans to increase imports from Bolivia to 1bn cf/d or more have been floated, but these are being held up while Bolivia decides what it wants to do with its gas. Argentina is, however, reluctant to accept substantially higher prices, as this would put pressure on the government to permit further increases in domestic wellhead prices, which are being held down in part to help combat inflation.

Only energy-poor Chile, whose relations with Bolivia are so bad that it is politically impossible for Bolivia to sell it gas, seems willing to move to higher energy prices. The country is building South America's first liquefied natural gas import terminal and officials expect gas prices in Chile to reach $7/m Btu once it begins operating, given the cost of importing gas from Australia or Peru. Indeed, the outgoing Chilean president, Ricardo Lagos, has even urged Morales to look at the gas price in Chile as the benchmark for the rest of South America.

A cooling of relations

Unhappiness with the prospect of such a substantial increase in prices has helped to maintain interest in Venezuela's proposed Grand Gas Pipeline of the South project, which would see over $20bn spent to link Venezuela with Brazil and Argentina. Venezuela's enthusiastic backing of the project has led to a cooling of relations with Bolivia although technical and financial difficulties and Venezuela's lack of sufficient non-associated gas reserves mean the project is unlikely ever to leave the drawing board.

Everybody needs good neighbours

BRAZIL plans to scale back its reliance on Bolivian natural gas in the next few years by expanding domestic production. But although Petrobras' chief executive officer, Sergio Gabrielli, expects Brazil to be importing 30% of its gas from Bolivia by 2011, compared with 50% now, it will remain heavily reliant on its unpredictable neighbour, writes Tom Nicholls.

Gas accounts for just 6% of Brazilian energy supply, with most – about 85% – of the country's electricity provided by hydro generation. Demand is around 42m cubic metres a day (cm/d), around half of which is supplied through the Bolivia-Brazil pipeline. But investments in new production capacity to supply Asian consumers with Brazilian commodities means gas demand should soar as new smelters and steel mills are commissioned. Petrobras sees demand more than doubling by 2010 – to around 100m cm/d.

Most of the incremental gas will come from local sources and most of those are owned by Petrobras. The state-controlled firm is planning to spend over $5bn in the next few years on six major offshore gas developments, including the 72bn cm Mexilhão gasfield, discovered in 2003, and the more recent BS-500 find. These, along with a number of smaller fields as well as associated gas from heavy-oil discoveries being developed offshore, will add some 50m cm/d to Brazilian gas output by the end of the decade. Of expected total domestic gas production of around 70m cm/d in 2010, Petrobras says it should be supplying 59m cm/d.

The master plan

Both Mexilhão and BS-500 are in the Santos Basin, where Petrobras and its partners plan to spend around $18bn over the next 10 years on various gas and oil exploration and production projects. Petrobras' master-plan for the development of Santos' gas and oil resources forecasts an increase of about 12m cmd in gas supply to southeast Brazil from the second half of 2008. By the end of 2010, this volume should have grown to about 30m cm/d.

The technical problems presented by the Santos fields' high-pressure, high-temperature wells are significant, Gabrielli said at a briefing in London last month. But although meeting the 2008 start-up deadline will be difficult, Petrobras' plans remain on track. Said Gabrielli: "We are now finishing drilling tests and, up until now, we have had good results." Even so, Mexilhão is the company's first major gas development, which adds a degree of uncertainty to the project.

Much of the new volumes of gas Petrobras plans to produce in the coming years will come from five main points – which Petrobras calls "poles" – in the Santos Basin, an area that will make a "decisive contribution" to the development of the gas market.

Mexilhão will be producing 8m-9m
cm/d of gas from the second half of 2008 and should be operating at capacity of up to 15m cm/d early in the next decade. The target for BS-500 is 20m cm/d, plus 150,000-200,000 barrels a day (b/d) of oil. A third pole, Merluza, has a production potential of 9m-10m cm/d by 2010. The so-called South pole could produce 3m cm/d, Petrobras claims. A fifth – the Centre pole – has "major potential", although Petrobras has not disclosed any figures.

Yet even if Petrobras meets all its production targets, Brazil will still be heavily reliant on Bolivia and, if it failed to agree terms with La Paz, would face supply interruptions and significant shortages. Gabrielli does not think this is very likely. "Bolivia is very important to us," he admitted, but pointed out that Brazil is also vital to the health of the Bolivian economy, which should mean negotiations are reasonably balanced. "We are very important to Bolivia. We are the most important source of foreign exchange and tax contributions." There is, he added, "common ground under which we can find a good solution. Everything is going in the right direction."

As Brazil seeks to develop its own gas industry, new infrastructure is needed. The 1,365 km Gasene pipeline will be vital to growth. It will eventually connect the gas-rich south with the growing commodities-based economy in the northeast. The project, which seems to be back on track after rising costs and delays threatened to derail it, is being built in three stretches – Cabiunas-Vitoria; Cacimbas-Vitoria; and Cacimbas-Catu. Already under construction, the Cacimbas-Vitoria section is due for start-up in March 2007 and will bring gas as far north as Espírito Santo. Flows will initially be 10m cm/d, rising to 20m cm/d by 2015.

Gasene will also form an essential part of Petrobras' plans to tap the gas reserves offshore Espírito Santo, where, in February, Petrobras began production from its Peroa-Cangoa gasfield. Initial flows are 1.3m cm/d, building to 8m cm/d by 2008. By the end of the decade, associated gas production from nearby oilfields – such as the 100,000
b/d Golfinho field and the 60,000 b/d Jubarte field – should add another 4.7m cm/d.

There is a remote possibility that Brazil could also receive piped gas from Venezuela if an ambitious scheme developed by Caracas, Brasilia and Buenos Aires gets off the ground. At the London briefing, Gabrielli insisted the pipeline – a 150m cm/d monster that would snake 8,000 km through the Amazon and wind up in Argentina – is a genuine contender for investment. But many analysts claim environmental objections, technical hurdles and a shortage of available gas in Venezuela will probably prevent the project going ahead.

Nevertheless, security of supply is becoming an issue in South America. Brazil has woken up quickest to the dangers of over-reliance on a single supplier and is focusing its efforts on building up its own offshore gas business to counterbalance Bolivia (see box p6).

Argentina's own gas plans are less well developed, partly because of the government's foot-dragging on reform. But a higher price for Bolivian gas coupled with government policies guaranteeing reasonable access to market could well spur increased exploration for gas in both Brazil and Argentina, as well as encourage more rational consumption, both of which would be an important milestones in the development of the South American gas industry.

But all of this depends on what sort of nationalisation of the gas sector the Morales government decides on. With limited financial resources, an outright take-over of the sector would be difficult and it would cause severe diplomatic problems with its larger neighbours. Yet a so-called soft nationalisation that emphasised the state's ownership over hydrocarbons resources as well as increased government surveillance and control over the activities of the industry might not be enough to satisfy Morales' more radical supporters.

This issue has been simmering since the passage of the Hydrocarbons Law, which was designed to placate nationalists while leaving some room for private-sector participation in energy ventures. At the time, Morales and his allies refused to accept this proposed compromise and although the legislation was eventually enacted, continued protests by the nationalists led to the resignation of the president and early elections, which Morales won.

Morales himself sounded conciliatory notes when assuming office, but he then appointed two radicals to influential positions in his government. Both the hydrocarbons ministry and the presidency of YPFB, the state oil and gas company, are in the hands of leftists who regularly publicly criticise foreign companies and their role in the gas industry. Morales himself has also repeated their claim that foreign energy companies have been conspiring against his government.

Despite this difficult operating environment, Bolivian officials continue to meet representatives of the foreign companies, including Repsol YPF, which has been accused of smuggling 230,000 barrels of oil out of the country. Repsol YPF denies any criminal wrongdoing, saying the situation has probably arisen out of an administrative lapse. The case highlights, however, another aspect of the government's nationalisation drive. As in Venezuela, the government appears to be closely linking increased bureaucratic control over all aspects of production and other operations with national sovereignty.

Nevertheless, direct ownership appears to be a goal of the Morales government. Recently, the development ministry said the government was studying ways for it to acquire a 51% shareholding in all of the companies that were privatised in the so-called capitalisation process in the 1990s that placed loss-making state-owned firms into the hands of foreign investors.

Among these are two big oil and gas firms – Andina, controlled by Repsol YPF, and Chaco, a smaller firm controlled by a partially owned Argentine unit of BP. Presumably, Petrobras' operations, which include the country's only oil refinery would be included in such a scheme. Ominously for these investors, the communiqué from the ministry suggested that in the case that a negotiated solution leading to the government acquiring a majority shareholding in these firms was not achieved then other unspecified measures might be taken.

Behind the scenes, however, Brazilian and Argentine diplomats are trying to find a solution that will suit all parties. The main concern for these two countries is security of supply and it is widely felt that unless Bolivia provides some role for private investment then the two nation's plans to raise gas consumption based in part on rising Bolivian supply over the next decade could well be in trouble. Because Morales' most pressing need is for money, officials hope that an agreed increase in gas prices along with a renegotiation of the existing contracts to give YPFB a more substantial role will be the eventual form of any deal.

Ironically, should Brazil and Argentina agree to a substantial increase in delivered gas prices, it could well provide a significant spur to the search for offshore gas resources in both countries, particularly in Argentina, where offshore exploration is in its infancy. This could produce new supplies to compete with those in Bolivia as well as encourage a rationalisation of demand. Argentina, in particular, would benefit from this as the double-digit annual rates of growth in the country's gas demand cannot be sustained indefinitely.

Bolivian officials have indicated their support for some sort of price increase combined with contract renegotiations, although much may hinge on the role provided to YPFB. "We want to be partners in the productive chain, not just tax collectors," Andres Soliz, the hydrocarbons minister, told the state news agency ABI last month.

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