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Boom times for Bolivian gas but new reserves are needed

Production and exports are on the rise, but the country urgently needs to find new reserves and markets

Bolivia is quietly enjoying a golden age for its gas industry. Production has doubled over the past decade and rising revenues are fuelling one of Latin America’s fastest economic growth rates. The boom has been sustained by a fortuitous mix of high oil prices, timely investments and surging demand for the country’s gas from its neighbours Argentina and Brazil.

Bolivian gas production has risen every year but one since 2000, and has surged in recent years thanks to new investment in its largest gasfields and expanded pipeline capacity to its southern neighbours. Last year, according to government data, output rose 14% to 21.27 billion cubic metres (cm), making it Latin America’s fourth-largest natural gas producer. Carlos Villegas, the head of state-run gas producer YPFB, expects output to rise to 25.5bn cm by the end of this year. Production has increased by 66% since the country’s gas reserves were nationalised in 2006, defying, for now at least, the dire warnings made by critics of leftist president Evo Morales’ decision. 

The country’s successful run stands in contrast to many of its neighbours, which have struggled to realise their own ambitions to ramp up oil and gas production. Venezuela’s slow-burn economic crisis and erratic energy policy has brought development its massive heavy oil reserves in the Orinoco belt to a virtual standstill. Brazil’s pre-salt has been much slower to come online than the country had hoped. Argentina’s nationalisation of Repsol’s stake in the Vaca Muerta shale has setback development there. And Opec-member Ecuador’s oil output has stalled as the country has failed to bring in new investors after its nationalisation in 2010.

Meanwhile, Bolivia continues to grow, albeit on a relatively small scale. A pragmatic streak in the Morales government has ensured that hundreds of millions of dollars of much-needed foreign investment has flowed into its three largest gasfields – Sábalo, Margaratia-Huacaya and San Alberto. Combined, the fields account for 70% of the country’s total output. 

Spain’s Repsol, with partners BG Group and PAE, led a $640 million expansion of the Margarita-Huacaya field that has been one of the largest contributors to new producition. In December last year Repsol brought the Margarita-6 well on line, which at 6m cubic metres a day (cm/d) is the country’s largest ever producing well and accounts for more than 10% of total output. 

The project, in Bolivia’s remote and geologically complex sub-Andean basin, was costly. Repsol said the well took 18 months to drill and cost $74.5m, a timeline and price tag comparable to drilling a deep-water well. Yet increasing demand for Bolivian gas made the investment attractive even under the tighter terms put in place by Morales after the industry was nationalised. 

Repsol and its partners now plan to drill the Margarita-7 and -8 wells to boost production further. Output averaged around 10m cm/d in 2013 and the new wells are expected to increase output to at least 15m cm/d at its peak. The field is the main source for Bolivian gas exports to Argentina.

Output has also been on the rise at Petrobras’ Sábalo gasfield, the country’s largest producer. In 2012, the company and its partners, state-run Bolivian producer YPFB and France’s Total, brought a new well on stream and spent $115m to add a third processing train at the field. Production at Sábalo rose 16% last year to 18.4m cm/d, about a third of Bolivia’s total production. 

About 15% of Bolivia’s gas stays at home, where local industry, power producers and households are supplied with very cheap natural gas at around $1 per million cubic feet (cf), though many of the country’s poorest communities are still not hooked up to the grid.

Most of the country’s gas, though, is shipped via pipeline to Brazil and Argentina. Both countries in recent years have been forced to increase gas imports, from both Bolivia and the global liquefied natural gas (LNG) market, as domestic production has failed to keep up with demand. 

Their pain has been Bolivia’s gain. Gas exports have risen more than three-fold over the past decade to 17.1bn cm last year, nearly matching Trinidad & Tobago, which has historically been Latin America’s largest gas exporter. Around 70% those exports go to Brazil under a long-term supply deal with Petrobras. Shipments to Brazil rose 14% last year to 11.65bn cm as the country suffered severe droughts that cut into its hydro-power capacity. Exports to Argentina have also been on the rise, reaching 5.46bn cm in 2013, up 20% from the previous year.

There is scope for exports to Argentina to rise sharply in the coming years. The countries signed a deal in 2010 that calls for new pipeline capacity that could nearly double capacity to 27.7m cm/d, or around 10.1bn cm a year, which would almost match export capacity in place to Brazil. That, however, will depend on Argentina’s success developing its own substantial shale gas reserves.

The rise in demand for Bolivia’s gas has coincided with a period of sustained high oil prices, which has been a boon for the country’s economy. Exports are linked to the US WTI crude benchmark, and with prices averaging around $98 a barrel last year, Bolivia brought in around $9/m cf for the gas it sent to Brazil and around $10.50/m cf for gas shipped to Argentina. Although relatively high compared to gas prices in some other parts of the world, Bolivian pipeline gas is cheaper than importing LNG for Argentina and Brazil.

There is a potential downside to Bolivia’s WTI-linked pricing structure. It was conceived at a time when WTI was seen as a proxy for global oil prices. But with new shale barrels from the Bakken field flooding into the US midwest’s storage facilities, WTI has become a much narrower benchmark, driven increasingly by the idiosyncrasies of domestic production and infrastructure dynamics. 

Those dynamics have little to do with what is going on in Bolivia’s gasfields or the markets in Brazil and Argentina, but they determine the price of Bolivia’s most important export. Bank of America Merrill Lynch analysts forecast WTI prices falling to $94/b this year and $91/b next year, but say they see a risk the benchmark could fall as low as $50/b in the next two years because of distortions in the market. A sudden fall is US oil prices could bring significant pain to the Bolivian economy, which counts on natural gas to bring in about half its total export earnings. 

For now though, the Bolivian economy is enjoying the fruits of its gas boom. Earnings from gas exports have jumped from $1.97bn to around $5.5bn last year. The economy grew at 6.7% in 2013, its highest growth rate in the last 30 years and the IMF expects growth of 5.4% this year. 

Morales has even won praise from the IMF and Wall Street analysts, historically seen as enemies by the leftist president, for his prudent management of the influx of petro-dollars. Unlike allies in Venezuela, which frittered away the country’s hydrocarbon bounty, the Morales government has built up a sizable foreign reserve. “The Bolivian economy is in a very strong and comfortable position to respond to external shocks that may occur,” says Ana Corbacho, the IMF mission chief to Bolivia.

That is good, because there are a number of ways Bolivia’s gas boom could start to unravel. For one, there are persistent concerns about the country’s relatively low reserves levels. The issue has become highly politicised in the country. A study by former energy minister Alvaro Rios last year warned production might have to stop as soon as 2017 because of declining reserves. That was countered by YPFB head Villegas, who said the country has 317bn cm of reserves, enough to last through 2023. 

Still, Bolivia urgently needs to find new reserves to underpin its long-term export contracts. That task will fall largely to YPFB. Foreign investment has continued to flow into existing project developments. But Bolivia’s service-model contract, in which companies do not own reserves but are paid for the work they do, does not provide much incentive for high-risk frontier exploration, the kind of work that leads to major new finds. Villegas, however, says his company is up to the task. YPFB plans to spend $16bn to explore 51 new exploration areas, which Villegas says could hold well over 1 trillion cm of reserves. 

The country will get some help from a consortium led by France’s Total, which is developing the Incahuasi gasfield is southern Bolivia. The company, which is working alongside Russia’s Gazprom and Argentina’s Tecpetrol, has committed to a first phase of development that will start producing 6.5m cm/d of gas in 2016, mostly for export. The company is still exploring the area and hasn’t put out a reserves figure.

At the same time, Bolivia needs to shore up its export markets. For the foreseeable future, the land-locked country will remain wholly reliant on exports to Argentina and Brazil, a situation which cannot be sustained in the long term. Both countries have potential reserves large enough to eventually meet their own demand, and are investing billions of dollars to reduce their import dependence.

Morales clearly recognises the situation and has devoted much of diplomatic energy to breaking into new markets. The most obvious outlet for Bolivian gas is Chile. The country has few reserves of its own, yet its energy strategy has committed to gas as a primary source of energy for decades to come. It would also provide Bolivia access to the Pacific where it could liquefy its gas and send it on to the international market. 

But relations between the countries are toxic and the domestic politics of selling gas to Chile are highly charged. Bolivia still holds bitter resentment towards Chile over the loss of its coastline in the War of the Pacific more than a century ago. In 2004, Morales pushed through a referendum banning the sale of gas to Chile until it wins back access to the sea. And last year his government ratcheted up the pressure, filing a suit in the International Court of Justice to overturn a 1904 treaty that settled the current borders. The gambit is domestically popular, but unlikely to produce any real results.

Morales’ hardline stance on the Chile gas issue has forced him to look elsewhere, but there are no easy answers. He has put forward the idea of exporting gas through the proposed Ilo port in southern Peru, where Bolivia was granted a 99-year lease by the Peruvian government in 1992. But the project shows no signs of progressing, and Morales had to cancel a trip to visit the port earlier this year. More recently, Morales has pushed a proposal to ship gas through Argentina and Paraguay to Uruguay, where Bolivia would provide gas in exchange for a beachhead on the Atlantic coast. 

Uruguay is likely to welcome the new supply. In a bid to diversify away from piped supplies from Argentina, Montevideo commissioned a floating storage and regasification unit from GDF Suez, but this is not expected to start up until 2015. But the Bolivian project would be technically and diplomatically complex, likely requiring billions of dollars of new investment and cooperation between multiple governments. Past failures in the region to carry out grand economic integration projects do not inspire confidence. Moreover, Bolivia would have to prove it has the reserves to underpin such a plan and the capacity to ramp up production.

Bolivia’s Pacific play looks far stronger, but the future of the country’s gas industry may depend on coming to terms with its old nemesis in Chile. 

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