Bolivia stumbles on road to riches from its natural gas
By Richard Lapper and Jonathan Wheatley in São Paulo and Andrés Schipani in La Paz
Less than a decade ago, it looked as though Bolivia's fortunes were about to change. Vast reserves of natural gas discovered after a flood of private investment in the 1990s suddenly gave South America's poorest country the chance to be at the hub of economic integration in the region.
A new pipeline guaranteed regular sales to power-hungry Brazil. A market also seemed assured in neighbouring Argentina. By developing liquefaction plants, allowing it to ship liquefied natural gas (LNG), it seemed Bolivia could dream of opening markets farther afield.
Yet what could have been a steady march to prosperity has become a lurching stumble into stagnation and crisis. "Since September, [Bolivia] has plainly been unable to fulfil its commitments," says Carlos Alberto López, a consultant with Cambridge Energy Research Associates and a former Bolivian energy minister. "It is extremely unlikely that it will be able to do so in the medium term."
Like two other countries in the region with significant gas reserves -- Argentina and Venezuela -- Bolivia has been unable to develop its resources at a rate needed by consumers in neighbouring countries, where a commodities boom is fuelling faster growth.
In Bolivia, much of the problem stems from the decision two years ago to nationalise the industry.
The move remains popular. "Evo delivers -- the nationalisation advances successfully," reads graffiti beside a mountainous road up to La Paz, referring to President Evo Morales, the leftwinger elected in December 2005. With prices now higher, government income from gas has been rising.
But nationalisation seems to be hobbling long-term development of Bolivia's most strategic resource.
After the initial disputes surrounding nationalisation, companies signed new contracts allowing them to work alongside YPFB, the government-owned hydrocarbons company, in October 2006.
However, there are fears in the private sector that a controversial new constitution -- subject to approval in a referendum -- will give indigenous communities the power to veto developments. Gas companies have also been disappointed by management standards at YPFB.
Investment has stalled. Between 1996 and 2002, private and foreign companies ploughed more than $3bn into the industry, raising proven reserves from 6,600bn to 54,900bn cubic feet (187bn to 1,555bn cubic metres). By contrast, for the past three years, annual investment in exploration and production has hovered around $200m.
The industry is now operating near capacity. With total output of less than 42m cubic metres a day, Bolivia is hard-pressed to supply domestic demand and meet its contracts of 30m cubic metres a day to Brazil and 7m -- rising to 27.7m by 2010 -- to Argentina..
Officials in La Paz deny that things have gone wrong. "Bolivia is not suffering an energy crisis," says an official at the hydrocarbons ministry. "It will have enough gas to supply its internal market and it will deliver at least until the end of the first half of the year what it has agreed to deliver to Argentina."
Alvaro García Linera, vice-president, says that $960m in new investment is in the pipeline for 2008. This week, he threatened to get "very tough" with companies if they failed to deliver.
But Michelle Billig, director of political risk at New York-based consultancy PIRA, says: "It is difficult to see how they can attract that kind of investment this year. It would require a U-turn. They would have to clarify what the terms of the contracts are."
Companies operating in the sector do not seem in much of a hurry. Last month, the UK gas group BG told investors that the company required "political, legal and fiscal stability" before it committed large investments.
Brazilian leaders are keen to maintain political stability in Bolivia and will ensure that some money is committed, but Petrobras, Brazil's government-controlled oil company, is unlikely to invest much more than $60m. Much of that will be on maintaining existing operations. Brazil is stepping up its own exploration and production plans. Meanwhile, South America will look to imported LNG -- increasingly economically viable because of rising energy prices -- to meet any shortfalls. Regasification plants are being built in several countries.
Mr López reckons such plants will eventually supply more than 50m cubic metres a day -- exactly the amount that Bolivia was originally planning to supply.
Reporting by Richard Lapper and Jonathan Wheatley in São Paulo and Andrés Schipani in La Paz
Copyright The Financial Times Limited 2008