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Bolivia’s gas conundrum as it celebrates six years nationalised

On May Day, it will be six years since President Evo Morales nationalised Bolivia’s gas sector. The anniversary offers Morales the opportunity to hail the success of his strategy in boosting production, but has it also sown the seeds of the sector’s long-term decline?

Bolivia's gas industry is doing well. Gas production was at its highest level ever in 2011 at 45.07 million cubic metres per day (cm/d), up nearly 30% since 2006 and more than five times production in 2000. Investment rose to a post-nationalisation high of $1.293 billion in 2011 – far higher than in previous years. And the government expects that figure to rise to just over $2bn this year.

Revenues are also at an all-time high as the country’s oil-linked gas supply contracts with neighbours Argentina and Brazil have benefited from elevated global oil prices.

The sector looks poised for further gains over the next two to three years. Spanish firm Repsol, the biggest foreign investor in Bolivia’s gas sector, is leading the way with its Margarita project. Repsol, along with its partners in the project, BG and Pan American Energy, will invest a total of $1.4bn increasing output at the gasfield, which lies in southern Bolivia. Repsol has said that it is targeting production from the project of 15m cm/d by the end of 2013, up from about 2.5m cm/d in December last year.

Petrobras, which imports gas into Brazil from its fields in southern Bolivia, has also ramped up investment in the country. In March, the company announced that it had started up operations at the third processing train at the Sabalo field, Bolivia’s biggest producing field. Petrobras and its partners – Bolivia’s state-run YPFB and France’s Total – have invested a total of $300 million upgrading and expanding facilities at the project. As a result, production from the field is expected to rise from around 14 million cm/d at the end of last year to 19 million cm/d by the middle of next year.

The Margarita and Sabalo projects will account for nearly all of the planned increase in Bolivia’s gas production over the next two years. Growing production should allow the government to continue enjoying rising revenues.

Under its WTI-linked pricing structure, Bolivia has seen the price it receives for gas sent to Argentina rise to nearly $11 per million British thermal units (Btu) from around $7/m Btu at the start of last year and as low as $4.60/m Btu in the wake of the financial crisis in 2009.

Brazil pays less than Argentina for its imports, with its WTI-linked contract pricing imports at around $9.60/m Btu, up from about $5.60 at the start of 2010.

Revenues from gas sales in January and February this year were $447m, up 48% from $302m over the same period last year, according to YPFB.

Sting in the tail

But the success seen today is largely the result of discoveries made before nationalisation. Some are warning that the seeds have been sown for the industry’s decline and it may already be too late to turn things around.

“The situation looks good now. But down the road in 2016 or 2017 the Bolivians are going to start to suffer,” Alvaro Rios, who is a former Bolivian energy minister and now a managing partner at consultancy Gas Energy Latin America, told Petroleum Economist.

“Instead of a prominent and growing gas industry evolving we will see a slowdown because of a lack of exploration investment and a lack of continuity in market and field development,” Rios added.

Although investment is at an all-time high, it has almost exclusively been focused on developing discoveries made over the past decade. That has been good for production, which has increased steadily and could rise to nearly 70m cm/d by 2014 as the country ramps up production to meet growing import demand in Argentina, according to Rios.

But the country has not invested in exploration and has not been replacing its reserves. Since nationalisation only a handful of wildcat exploration wells have been drilled in the country – as few as just five or six, Rios reckons.

Of those, only Total’s Aquino well has resulted in a notable discovery. The French major said that the find flow tested at 500,000 cm/d of gas and 500 b/d of oil, but has declined to estimate the size of the field. The government, though, has touted the field as a potentially major find of around 370bn cm that could one day produce as much as 6.5m cm/d. Even if the discovery is that large, it is the only project in the pipe with long-term production potential.

The Bolivian government has started to recognise that it needs to stimulate interest in exploration. It has launched the first licensing round since the oil and gas sector nationalisation in 2006. The round includes 15 blocks and is seeking to attract investors to less explored regions of the country in the hopes of opening new basins. The winning bidders are to be announced in September, with contracts to be signed by the end of November.

But the round has so far drawn little interest from foreign investors, partly because the terms offer the same service contracts put in place after the industry was nationalising. Many analysts argue that the service contracts do not offer enough incentive for companies to invest in frontier exploration.

With little interest from outside investors much of the investment in exploring untested areas has fallen on YPFB. The state-run company’s YPFB Petroandina subsidiary is investing around $87m on frontier exploration this year and will drill two exploration wells – the Timboy X-2 in Guarague South A and the Lliquimuni Central X-1 at the Lliquimuni Block north of the capital La Paz. The company has run 2-D seismic surveying at the Lliquimuni Block and estimated potential reserves of around 28bn cm of gas.

A scandal in 2010 that called into question the extent of Bolivia’s natural gas reserves has added impetus to the hunt for new resources. Bolivia had reported reserves of around 700bn cm for several years after it broke its assessment contract with consultancy DeGolyer and MacNaughton in 2005. That had allowed the country to claim the second largest gas reserves in Latin America, behind only Venezuela.

A subsequent Ryder Scott reserves assessment, commissioned by the government and finished in 2010, forced Bolivia to recognise that its reserves were less than half what had been claimed – about 280 billion cm. That put the size of Bolivia’s reserves behind not just Venezuela, but also Argentina, Brazil, Peru and Trinidad and Tobago, according to BP data.

Longer-term doubts

The dramatic fall in estimated gas reserves and the country’s struggle to attract the investment needed to find new resources has cast doubt over Bolivia’s reliability as a long-term supplier. The country’s supply agreements with Argentina and Brazil commit Bolivia to export a combined total of as much as 247bn cm of the country’s 280bn cm of proved gas reserves through 2026.

Bolivia’s declining reserves are not its only concern. Transformations in the energy sectors of its two main export markets – Argentina and Brazil – also pose long-term threats to Bolivia’s gas future.

Argentina signed a new gas deal with Bolivia in 2010. That deal will see the country increase imports from 7.7m cm/d in 2010 to 13.6m cm/d this year and rise incrementally each year to 27.7m cm/d in 2021. The contract holds volumes steady at 27.7m cm/d through the end of the agreement in 2026.

But the discovery of the prospective Vaca Muerta shale formation in the Patagonian province of Neuquen could dramatically reduce or eliminate Argentina’s gas import requirements. The US Energy Information Administration estimated last year that Argentina has nearly 22 trillion cm of recoverable shale-gas reserves.

Early exploration results have seemed to confirm Vaca Muerta’s immense potential. Before its Argentine business ran into trouble Repsol YPF reckoned its acreage alone held as much as 22.8bn barrels of oil equivalent (boe) of resources. Repsol said that an intensive investment and development programme could see Argentina’s gas output double over the next 10 years. The country produced about 110m cm/d of gas in 2010 and imported a total of around 10m cm/d. Even if Argentina is able to realise only a fraction of Vaca Muerta’s potential it could spell the end of imports from Bolivia.

Bolivia’s best hope might be that Argentina has slowed the development of Vaca Muerta by choosing to nationalise Repsol’s former subsidiary in the country YPF. Many have warned that the move will scare off the foreign investment and technology needed to develop Vaca Muerta.

In addition to new domestic resources, meanwhile, Argentina has built liquefied natural gas (LNG) import capacity that has diversified its buying options. The country has two floating regasification terminals – Escobar LNG and Bahia Blanca LNG – with a combined import capacity of 22.155m cm/d. A third terminal is planned for 2014, and Argentina’s Enarsa has signed a 20-year 5m tonne a year supply contract with Qatargas to supply the plant.

It is a similar story of increasing domestic production and diversified LNG imports in Brazil. State-run Petrobras forecasts Brazilian domestic gas production to leap from 55m cm/d in 2011 to 78m cm/d in 2015 and 102m cm/d in 2020. Strong economic growth and increased use of natural gas to generate electricity in the country is expected to keep import demand strong over the same period, according to Petrobras. But it is clear that huge oil and gas discoveries offshore Brazil mean that the country will be able to satisfy an increasing amount of its own demand.

The developments in Argentina and Brazil have not passed by Bolivian president Evo Morales, who recently expressed concern over the future of his country’s most important industry. “I’m worried what would happen to Bolivia if it didn’t have a market for its gas ... We now depend on Argentina and Brazil because we sell our gas there. If they no longer want our gas, who do we sell our gas to?” Morales said during a speech earlier this year.

Chile to the rescue?

The most obvious answer to that question would be Chile. A deal there would open a new import-dependent market to Bolivian gas and could open the way to international markets if land-locked Bolivia could establish LNG export access on the Chilean coast.

Such a deal was nearly struck in the past decade. But public antipathy towards Chile is strong in Bolivia, which lost its access to the Pacific Ocean in a war with Chile in the 1880’s. The 2002 proposal to build a gas pipeline to Chile’s coast was met with widespread protests that eventually brought down the government of Gonzalo Sanchez de Lozada a year later. In 2004, Bolivians voted in favour of a referendum that prohibited the sale of gas to Chile until Bolivia had regained sovereign access to the sea.

Morales rose to power partly on the back of outrage generated during what was known as the “Gas War”. Because of that he might find it difficult to reverse course. “I think Evo Morales is very locked into the position he took before he took power... it is going to be very difficult to convince the Bolivian people now to sell gas to Chile when seven years ago president Morales led a gas war over the issue,” Rios said.

The debate was reopened in March when Bolivian Senator Eugenio Rojas raised the idea of revisiting the gas referendum. His comments, though, sparked protests and the idea seemed to be rejected by foreign minister David Choquehuanca, who argued that a 13-point plan to restore diplomatic relations signed between the countries in 2006, which includes a provision that would give Bolivia sovereign access to the sea, was the blueprint for progress. The problem is that almost no progress has been made on implementing that agreement.

So Bolivia faces a conundrum in securing the future of its gas sector. It needs new markets to encourage investment in new exploration. But at the same time it needs investment – and potentially the political will to break its impasse with Chile – to open these fresh markets. Says Rios: “Bolivia is in a rough situation over the long term because the country has not explored for new reserves and hasn’t developed new markets.”

Figure 1: Bolivia
Figure 1: Bolivia's oil and gas infrastructure
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