Bolivia's gas dream
The country needs to boost its reserves and cashflow to realise its energy ambitions
Bolivia's president Evo Morales has grand plans to turn his landlocked nation into an energy hub for Latin America. The pipelines that already ferry natural gas thousands of kilometres south to Brazil and Argentina are vital to keeping La Paz's coffers full. Morales wants to expand those exports and break into new markets. He has pushed talks with Lima to build a new gas link to carry Bolivian gas to a proposed new industrial base in nearby southern Peru. Trucks now take Bolivian gas into the tiny Paraguayan market, but a preliminary deal for a new pipeline has been signed.
Some in Morales' administration have even broached the idea of selling gas to Chile. It's a commercially sound idea that has been thwarted by Bolivians' long-running antipathy towards its neighbour, which is blamed for seizing its coastline at the turn of the 20th century. The hostility erupted in 2003's "Gas War", when president Gonzalo Sánchez de Lozada was ousted from office by protests over plans to sell gas to Chile.
They are all part of Bolivia's 10-year, $30bn vision for a network of new pipelines, power generation facilities and downstream ammonia and gas plants that would provide the foundation of a supply network to nations on Bolivia's borders.
There is a problem, however. It's not clear Bolivia has enough gas, or cash, to pull it off. The scale of Bolivia's gas bounty has been in doubt since a scandal in 2009 saw the nation's proved reserves slashed by outside auditors from around 27 trillion cubic feet to around 10 trillion cf. The reserves problem has been compounded by the fact that exploration activity all but shut down following Morales' 2006 nationalisation of the industry.
Morales appears to acknowledge this and wants to turn things around. The Energy Ministry has pledged to boost proven gas reserves by 80%—to 18 trillion cf—by 2025. To that end, Morales has pitched the attractiveness of Bolivia as an energy hub to the international oil and gas industry.
It's not clear that many are buying the idea, at least not with the terms currently in the offing.
In a major report earlier this year, the IMF warned that high taxes and the lack of incentives for new exploration are the major impediments. The mission chief for Bolivia, Ravi Balakrishnan, put it bluntly: "The current effective tax burden is likely a deterrent."
$30bn - What the government wants to spend on new projects
Among the IMF's suggestions are the introduction of such standard accounting write-offs as an accelerated depreciation scheme for development expenditures. "Foreign financing and know-how appear crucial to making exploration a success," the report noted. Potential investors probably won't be heartened by the fact the Bolivian government and the central bank largely rebuffed the IMF's suggestions, including its concerns about the overall viability of the energy hub in a depressed market. Nothing in Bolivia's framework for foreign investors encourages them to put cash on the line in risky new exploration ventures, especially not at a time when companies are trimming budgets.
Another problem is the lingering concern over Morales' nationalisations and the slow pace at which companies have been compensated for their seized assets. More than 10 years after a score of foreign-owned businesses were subsumed by the state, Bolivia has paid just $0.828bn in reparations, according to the latest accounts of the Procurator General—the main negotiator. That amount, which covers 12 of the takeovers, represents just a quarter of the $3.4bn that has been sought through arbitration.
At the same time, the government makes much of the fact that nationalisation has been good for Bolivia. As minister for hydrocarbons Luis Sanchez routinely points out, between 2006 and 2016 government revenues from hydrocarbons soared from $0.5bn a year to $6bn.
The short-term cash haul is coming at the long-term pain of putting off investors. Despite its largely unexplored gas reserves, major upstream deals signed so far this year have been with companies that have long-established links with the country rather than the new ones that Bolivia urgently needs to fulfil supply commitments to neighbouring countries.
Overall Bolivia boasts 35 exploration projects with a potential of 35.1 trillion cubic feet of undiscovered gas. But between 2018 and 2019, eleven exploration projects with a potential 12.16 trillion cf of gas will be prioritised. The licence holders of these blocks are the usual suspects. Shell, which inherited the assets from its BG deal, Repsol, Total, Gazprom, Petrobras, Buenos Aires-based Pluspetrol and Argentina's state oil company YPF, which will operate in five different areas in the Rio Salado and Charagua fields.
Sergio Guzman, a Bolivia expert at the consultancy Control Risks, points out in Americas Quarterly, a Latin America-focused publication, that "to date most investment in the sector has come from state oil companies and majors from friendly nations such as Russia, Argentina and Spain, which benefit from privileged diplomatic relations".
President Morales has particularly high hopes for a new block in Iñiguazu, located in the gas-rich Tarija region near the major Margarita-Huacaya producing field. The project, with a claimed potential of more than one trillion cf in new gas reserves, is being led by Repsol. "Our wish is that Iñiguazu block is a field like Margarita [Bolivia's most prolific field]," the president said during a June visit by Repsol boss Antonio Brufau. It's a testimony to the need for outside investment that Morales himself has taken a personal role in the negotiations. If all goes well, Repsol says Iñiguazu could be producing as early as next year.
Russia's Gazprom has recently stepped into the breach left by fleeing western companies, winning favour in La Paz. Gazprom is part of a Total-led consortium that started pumping gas from the Incahuasi field last year. Located beneath the Andean foothills, Incahuasi is an important element in the regional hub plan. Although currently being sold only on the domestic market, Incahuasi gas has been earmarked for export to Brazil and Argentina under new agreements.
Gazprom signed a series of new deals in 2016. Under those, it is exploring prospects in Vitiacua, La Ceiba and Madidi in the upper Amazon basin, and in 2018 it plans to start drilling alongside Total and state-owned YPFB in the Azero block, just outside a prolific region. Longer term, the Russian giant hopes to play a leading role in building out much of the downstream facilities associated with Bolivia's energy hub vision, should it come to fruition.
A new exploration deal signed with Echo Energy, a London-listed and Latin American-focused gas company, has been cited as evidence of an improving climate for foreign investment. Echo has a joint evaluation agreement with Pluspetrol for a 75 square km block in the Huayco region. The block is in the gas-rich Tarija Basin and is close to regional gas pipelines that connect to high-value markets in Brazil and Argentina. If the survey shows promising deposits, Echo says it will take an 80% stake. Chief executive Fiona MacAulay, who highlights the lack of investment in the Huayco area, says Echo is also "looking at other possibilities in Bolivia."
One swallow doesn't however make a summer. Echo is a junior operator with just $39m in the bank. Clearly, most of the majors continue to run shy of Bolivia. And although Sanchez talks up Bolivia as an ideal location for oil and gas investment, problems persist.
Adding to those problems has been scandal at YPFB. In April, Bolivian investigators accused YPFB of "irregularities" in the bidding process for a $149m purchase of drilling equipment from Italy's Drillmec. The contract was cancelled, seven mid-level managers were sacked and chief executive Guillermo Acha was ousted. Then, in late June, the new management at YPFB tore up a $2.2bn contract with Italy's Tecnimont and Spain's Tecnicas Reunidas for early design work at a proposed petrochemical plant, the kind of project that is vital to the energy hub vision, citing "administrative errors" discovered during a review of the deal. According to hydrocarbons minister Sanchez, it will take a few months to call another public tender.
Acha has been replaced by Oscar Barriga, a former deputy minister of industry, who has ordered a forensic audit of the management of YPFB to "identify those issues that require prompt attention." The audit will include other YPFB deals made under Acha's incumbency.
The government recognises it has a yawning shortfall in oil and gas production that threatens its export ambitions. According to the National Hydrocarbons Agency (ANH), in 2016 Bolivia produced 2.1bn cf a day of natural gas and 41,587 barrels a day of crude, which is way below what's needed. Compared with 2015, earnings from oil and gas exports collapsed by nearly 47%, to $2.12bn—the price of Bolivian gas sold to Brazil and Argentina is pegged to the WTI crude benchmark. To redress the situation, YPFB has set an ambitious target of boosting national output to 2.7bn cf/d by 2020. Much more will be needed for Bolivia to become a major regional supplier.
The president has pinned his future on hydrocarbons. He often cited the role the nationalised oil and gas industry has made to Bolivians' lives by helping to lift millions out of poverty. YPFB's marketing slogan is "The force transforming Bolivia." Talking to refinery workers in August, Morales promised investment in the sector this year would be $2bn, 10 times more than in 2006. As he said: "At the moment Bolivia lives on gas."
The big issue is whether the country can find enough of it.