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Bolivia—another strike from the resources curse?

An IMF study fears Bolivia's gas boom could explode. It wants the government to change tack

Bolivia is under pressure from the International Monetary Fund to offer tax and other incentives to attract more foreign companies and speed up the exploration and development of new gas reserves before existing fields run dry.

The IMF is also concerned at the country's fast-rising public debt as President Evo Morales's long-serving socialist government continues to spend heavily despite plummeting revenues from oil and gas exports.

In its latest report on the financial health of one of South America's poorest countries, the IMF also expressed doubts about the long-term focus of state-owned oil company YPFB on "exploitation rather than exploration". It also has reservations about Bolivia's big-spending plans to turn itself into an energy hub for South America.

Despite the IMF's concerns that Bolivia's resources boom may run out before the revenues can be channelled into lifting the country out of poverty, the government, including the central bank, has largely rebuffed the agency's suggestions. "The authorities did not favour staff's key policy recommendations," the report noted, in a departure from the normal restrained language. "More generally, they questioned if the IMF should make policy recommendations for Bolivia."

The IMF is not on its own in casting doubt on where Bolivia is heading in the resources downturn, particularly with its high taxation of gas revenues that have deterred outside investors. In March, the president of the National Chamber of Hydrocarbons and Energy, Claudia Cronembold, pointed out that YPFB will easily account for the bulk of spending in the sector—81%—in 2017, with privately owned companies responsible for the rest. And only about 20% of YPFB's capex is going into exploration.

Commodity-dependent

Since the fall in the price of crude, Bolivia has suffered what the IMF calls a "massive decline" in its commodity terms of trade. The country's income has fallen by nearly 14%. In fact, the collapse in the terms of trade is almost as bad as in Venezuela. If international prices continue to scrape along the bottom over the next few years, Bolivia faces "significant challenges in making further progress towards the targets set out in the authorities' Patriotic Agenda 2025, including eradication of extreme poverty, better access to health and education, and state-led industrialisation."

This is because fat surpluses in the current account have turned into heavy deficits.

Most of the exploration that led to Bolivia's resources boom has been done by a handful of foreign companies, notably Gazprom, Total and Venezuela's now debt-ridden state firm PdV. Gazprom hoped to do more but chose to form a partnership with Total, which was already active in the country, after running into years of red tape. The level of bureaucracy is often cited as a major deterrent to outside upstream investment.

The only major foreign exploration companies currently active in the country are BG-Shell, Total, Petrobras and Repsol. The first three are drilling in non-traditional zones, notably Huacareta (BG-Shell), Azero (Total) and San Telmo (Petrobras), while Repsol is looking for further opportunities in long-established acreage such as Boyuy and Boycobo.

The shortage of incentives is the major impediment, warns the IMF: "Improving exploration incentives in the hydrocarbons sector is a key priority." Although an 18-month old law introduced write-offs for production of crude oil and condensate, it doesn't go far enough to attract much-needed upstream investment. IMF mission chief for Bolivia, Ravi Balakrishnan, says bluntly: "The current effective tax burden is likely a deterrent."

"To attract further foreign direct investment into exploration, the government could allow expensing investments in exploration for hydrocarbon tax purposes and introduce an accelerated depreciation scheme for development expenditures," the IMF suggests. "Foreign financing and know-how appear crucial to making exploration a success." One IMF suggestion is for the government to offset exploration spending against hydrocarbon taxes.

In the meantime, the last big field discovered was Incahuasi, in 2004.

Tick, tock

Time is running out for Bolivia to find new fields. Gas production is in decline, with total volumes down by 1% in 2015 and by an estimated 1-2% in 2016. Even if discoveries are made in new areas—and no finds are expected until 2018 at the earliest, the fields won't come on stream until the mid-2020s. If, however, Repsol is successful in the established zones, Boyuy or Boycobo could be in production by 2019.

Proven reserves are estimated at around 10 trillion cubic feet, enough to keep plants running for a maximum of ten years at current volumes. But that's not nearly enough, insists the IMF, citing a risk of Bolivia being unable to meet internal, let alone external, demand for gas between now and 2025. "While production is expected to increase in the years until 2019, from about 2.12bn cf a day to close to 2.47bn cf/d, Bolivia would struggle to meet internal demand and minimum contractual export volumes even under the baseline scenario after 2021."

If the IMF's predictions are correct, YPFB is in a race against time if it hopes to build its energy hub before the gas runs out. The grand plan is to develop a downstream hydrocarbons industry and move into higher-value sectors in petrochemicals. The company is investing around $4.3bn in gas separation and petrochemical plants to turn natural gas into fertilisers and plastics. Half of the money has already been spent, nearly all of it financed by the central bank. Next up is a polyethelene plant.

However, the collapse in hydrocarbon prices could threaten the viability of this ambitious strategy. In 2017, Bolivia is expected to earn $2.1bn from gas sales, just a third of what it made when prices were high. That means that growth in GDP will halve compared with 2014.

Still riches in the earth

However, there's still a lot of gas in the ground in Bolivia. Although it's not looking hard, YPFB estimates the total potential of fields currently being explored to be 29 trillion to 35 trillion cf. It expects discoveries of 5 trillion to 10 trillion cf.

The IMF's forecasts are more sceptical, particularly if the Bolivian authorities remain reluctant to give up some hydrocarbon taxes to encourage more activity in the upstream. "The success of ongoing exploration activities is not assured and existing fields may be exhausted earlier than expected," it notes.

The first indigenous president, Morales was able to consolidate power during the gas boom. Generally, he's given good marks for using the revenues to improve the lot of Bolivia's 11m people, but poverty is still rife and Bolivia needs a few more years of hydrocarbon revenues to deliver a reliable supply of water, let alone power.

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