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Bolivia turns screw on Brazil

Argentina has agreed to increase the price it pays Bolivia for gas supplies. That will put more pressure on Brazil to agree to new terms, writes Robert Cauclanis

BOLIVIA'S leftist President Evo Morales may be deeply suspicious of capitalism, but he showed in June that he clearly understands one steadfast rule of free markets: the more competition there is between buyers of Bolivia's natural gas, the more his country can charge for its main export.

Morales' latest achievement – convincing Argentina to accept a sharp price increase on Bolivian imports – makes him look like a shrewd negotiator, especially because it will exert pressure on Brazil, the largest buyer of Bolivian gas, to accept similar terms.

Following weeks of price negotiations, Argentina agreed on 29 June to pay 47% more for the 5.5m cubic metres a day (cm/d) of Bolivian gas it imports. The price will rise from $3.40/m Btu to $5.00/m Btu on 15 July and will remain at that level until the end of the year, when it may be renegotiated.

The price increase has not yet caused a great deal of concern in Argentina. Bolivia's 5.5m cm/d makes up less than 5% of Argentina's gas consumption. In addition, Bolivia supplies about 15% of the gas it produces to Argentina, while nearly 75%, or 26m cm/d, is shipped to Brazil.

However, Buenos Aires wants a significant increase in Bolivian gas supplies to the north of the country before 2009. It is forecast that by then it could be buying as much as 28m cm/d of Bolivian gas – around 20% of its projected demand. That would mean Argentina would be buying a similar amount of Bolivian gas to Brazil, which has a contract to purchase up to 30m cm/d from Bolivia until 2019. After years during which Brazil has been the only large buyer of Bolivian gas, it may now have to compete with Argentina for supplies.

Securing supplies
Argentina will also be seeking to secure supplies under a long-term contract and will discontinue a policy of renewing supply contracts annually. Argentina restarted purchases of Bolivian gas in 2004 during an energy crisis after a five-year gap in which it imported almost no gas from the country. A 275 km, 7.7m cm/d pipeline links gas-rich southern Bolivia to northern Argentina.

Argentina's willingness to pay much more for Bolivian gas weakens Brazil's negotiating prospects with Bolivia, which is looking for an equal or greater price increase for the gas it sells to Brazil.
Bolivia's state-owned energy company, YPFB, has entered a formal, 45-day negotiation period with Brazil's Petrobras over gas prices. If the parties fail to reach an agreement, they are expected to resort to international arbitration. Bolivian energy minister Andres Soliz Rada wants to charge Brazil as much as $7.50/m Btu – more than US reference prices.

Petrobras has said it is unlikely to accept any larger increase than those permitted on a quarterly basis, depending on price changes in a basket of reference fuels, under the existing contract terms. The latest increase – of 10% – occurred on 1 July and Petrobras is now paying $3.70-3.80/m Btu. However, while it remains strongly opposed to changes to the existing terms of the sales and purchase agreement, it will meet YPFB at the negotiating table.

Since 1999, when the 30m cm/d Bolivia-Brazil pipeline began operating, Brazil has had a significant advantage in its negotiations because it has been the only big buyer of Bolivian gas. This time, sensing that an Argentine deal with Bolivia could weaken its position, Brazil's government dispatched high-ranking officials to Buenos Aires last month seeking to convince Argentina not to accept a major price increase.

Even Morales' political adversaries in Bolivia complimented him on the success of the price negotiations with Argentina. The price to Argentina will now be much closer to the US reference prices Morales has said Bolivia deserves to receive for its gas, in the $6-7/m Btu range.

Chile, which relies heavily on gas imports from Argentina, is expecting Argentina to charge more for its gas to reflect the higher prices from Bolivia, and the Argentine administration has told its gas exporters to expect a new export tariff.
Argentina has not announced any plan for a steep raise in domestic prices, which have remained low and under tight government control since the country's financial meltdown in 2001. Chilean officials are, therefore, worried that Argentina will try to pass on most of the higher costs of Bolivian gas to Chile, which relies on Argentine gas shipments for most of its daily supplies. Bolivia refuses to ship gas directly to Chile because of a border dispute more than a century old.

Since 2004, the price paid by Argentina for Bolivian gas has shadowed the price paid by Brazil. But La Paz now wants to force Brazil to follow Argentina. Bolivia is betting that rapidly rising demand in the region (see Figure 1) – growing at 9.5% a year in Argentina and around 20% a year in Brazil – will warrant long-term price increases.

Meanwhile, Argentina's state-run oil company, Enarsa, is said to be considering proposals for a $1bn, 960 km pipeline linking southern Bolivia to northeast Argentina, known as the Gasoducto Noreste Argentino (GNA). Enarsa may choose a builder within 120 days and the 20m cm/d pipeline could be finished in two years, Argentine officials said in early July.

Encouraging exploration
However, keen not to become too reliant on Bolivia, Argentina's government has also been encouraging oil companies to boost their domestic gas exploration and production budgets. In June, Spain's Repsol YPF said it will accelerate its investment programme in the country during 2007-09, spending $6bn over that period. Repsol YPF said 77% of that spending would go towards boosting production in already explored areas, exploring new deep-water offshore blocks and launching a tight-gas pilot programme to recover reserves from dense, hydrocarbons-bearing sands.

Also in June, Argentina said it has lined up $0.689bn in financing from Brazil's state-owned development bank, BNDES, for domestic pipeline expansions, including a $200m expansion of the Petrobras-controlled General San Martin pipeline, which links the Tierra del Fuego region in southern Argentina to the Buenos Aires metropolitan area.


Gazprom looks to Latin America for expansion

Russia's Gazprom is looking at South America, with its young but fast-growing gas market, as a land of growth opportunities. Russian officials have recently discussed joint ventures with the state-owned oil companies of Bolivia, Brazil, Argentina and Venezuela.

While South America's per capita gas consumption is tiny compared with that of Gazprom's core European market, demand growth rates of 10-20% a year in the region have piqued the Russian company's interest.

In June, Bolivia's state-owned YPFB held talks in La Paz with a high-ranking Gazprom delegation, whose members said Gazprom is interested in investing $2bn-3bn in the gas-rich country, despite the recent nationalisation of its hydrocarbons industry.
The investments in Bolivia, which would take the form of joint ventures with YPFB, would include pipeline expansions, gas-processing plants, exploration and field-development projects, and eventually a multi-billion dollar project to ship Bolivian liquefied natural gas to North America. Russia's ambassador to Bolivia, Vladimir Kulikov, said Gazprom is anxious to apply to Bolivia its vast experience in exploration, production and pipeline projects, and that the company would be sending engineers to Bolivia to carry out further studies.

On 4 July, during a trip to Argentina, Russian prime minister Mikhail Fradkov said his government is keen to support Gazprom's expansion into Latin America in the near future. He claimed the company might help design and implement the mammoth, 8,000 km pipeline being planned to ship 150m cubic metres a day (cm/d) of Venezuelan gas to Southern Cone countries, including Argentina.

Gazprom officials said in February that the company had been offered a role in the planned pipeline, which would be the world's longest. Venezuela's President Hugo Chávez claims the pipeline, which would probably cost over $20bn to build, could be operational by the middle of the next decade. But many analysts claim high costs, environmental concerns and potential political disputes in the region mean it will never be built.

In Venezuela, home to Latin America's largest gas reserves, with an estimated 4.5 trillion cm, Gazprom has held talks recently with state-owned PdV on several ventures, including domestic gas and oil products pipelines. In September 2005, Venezuela awarded Gazprom exploration rights to two gas-prone offshore areas, and Russian officials say Gazprom is interested in other Venezuelan field concessions.

Meanwhile, Gazprom is among several foreign companies, including Lukoil, Repsol YPF, CNPC and Petrobras, carrying out seismic studies to help quantify heavy crude reserves in the southern Venezuelan Orinoco Belt region, which the Chávez government claims will prove to hold about 235bn barrels. Chávez wants to book the reserves to help secure financing for new heavy-crude projects in the Orinoco Belt, and to convert Venezuela into the world's largest hydrocarbons reserves-holder, surpassing even Saudi Arabia's estimated 250bn barrels. Those surveys may lead to future field development partnerships with PdV says the government.

On 6 July, Gazprom said it held meetings with officials from Brazil's Petrobras in Moscow and will soon sign framework agreements to operate with Petrobras in Brazil. Among the potential areas for joint ventures is the building of large gas pipelines in Brazil, and exploring and developing South American oil and gas fields, Gazprom said.


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