The forthcoming self-sufficiency of its two major gas-buying neighbours forces the Bolivian government to seek alternative markets.

▲ Yacimientos Pretrolíferos Fiscales Bolivianos (YPFB) gas plant [Corporación YPFB].

ANALYSIS / Ignacio Urbasos Arbeloa

Bolivia, under Evo Morales, is the only economic success story of all the Latin American countries that embraced left-wing populism at the beginning of this century. Together with Panama and the Dominican Republic, Bolivia has achieved the highest GDP growth in the region in the last five years, and all this in a difficult context of decline on the part of its main trading partners: Argentina and Brazil[1]. The political stability brought by Evo Morales since 2006, together with prudent counter-cyclical macroeconomic policies and a new hydrocarbon management are part of the formula for this success. Nevertheless, there are huge economic and political risks for Bolivia. On the one hand, natural gas accounts for 30 percent of exports and is destined exclusively for Brazil and Argentina, countries that are close to gas self-sufficiency. Finding alternative routes is not an easy task for a landlocked state, with a diplomatic conflict with Chile and separated by the Andes from Peru. Moreover, the Bolivian government's bid to exploit lithium through national companies that integrate its processing to favour industrialisation is a risky strategy that could leave the country out of the growing global lithium market. Finally, Evo Morales and MAS have followed a growing authoritarian trend, allowing the president to be re-elected, undermining the separation of powers and the recent 2009 constitution. In the next decade, the new Bolivia faces the challenge of reorienting its natural gas exports, diversifying its Economics and consolidating a real democracy that allows for sustained growth of its Economics and its role as a regional actor.

Natural Gas: at the heart of 21st century politics discussion

During the failed oil exploration in the Chaco in the 1960s, abundant reserves of natural gas of great economic potential were discovered at finding . resource Although it was a less valuable resource than crude oil, an incipient gas industry soon developed with the help of foreign companies, mainly American, such as Standard Oil. business In 1972, the first nationalisation took place, with the emergence of YPFB as the state-owned company in charge of the exploration, production, transport and refining of Bolivian energy resources in partnership with foreign companies. In the same year, the first gas export pipeline to Argentina was built. By 1999, Bolivia will export natural gas to Brazil through the Santa Cruz-Sao Paulo pipeline, whose project took more than 8 years of negotiations and construction work and introduced Petrobras as an important player in the sector. In this way, Bolivia entered the 21st century with a growing gas industry, mostly privatised by the first government of Gonzalo Sánchez de Lozada, and boosted by a very favourable fiscal model for foreign companies[2].

The year 2001 marked the beginning of a turbulent political period in Bolivia with the so-called Water War. A wave of protests arose from the privatisation of municipal water services at framework during financial negotiations between the IMF and the government of Hugo Banzer. At the nerve centre of these protests in Cochabamba, the figure of Evo Morales emerged, the coca growers' leader, who will continue to increase his popularity unstoppably. Gas became the protagonist in 2003, with a new wave of protests against the construction of a natural gas pipeline from Tarija to Mejillones (Chile) for consumption by the Chilean mining industry and export to Mexico and the US in the form of LNG. The civil service examination at project argued the historical incoherence of contributing Bolivian resources to the exploitation of the mining region lost to Chile in the War of the Pacific (1879-1883), which deprived Bolivia of an outlet to the sea. In addition, an alternative, more costly gas pipeline through Peru was proposed, but one that would supposedly benefit Bolivia's northern region and would not be a national humiliation. The protests took a nationalist and indigenist turn into a full-blown revolution that blocked La Paz, the international airport and plunged the entire country into violence and shortages. President Lozada ended up resigning and most of his government fled abroad, while project was cancelled and buried forever.

The new president Mesa came to power with the promise to call for a binding referendum on gas, the establishment of a Constituent Assembly and a reform of the Hydrocarbons Law, including a review of privatisation processes. The referendum ended up giving victory to Carlos Mesa's proposals, albeit with a leave participation and a confusing essay of the questions. President Mesa, unable to capitalise on the legitimacy granted to him by the plebiscite, Withdrawal at position and called early presidential elections in 2005, which brought to power the first indigenous president in Bolivia's history, Evo Morales, with an absolute majority. Natural gas thus became the main catalyst for political change in Bolivia.

Hydrocarbon reform

The arrival of Evo Morales brought about a profound change in the hydrocarbons legal framework . In 2006 the new hydrocarbons law "Heroes del Chaco" was passed, nationalising Bolivia's energy resources, expropriating 51% of the shares of companies involved in the sector and establishing a direct tax on hydrocarbons of 50% subject to an extra 32% royalty to YPFB in those fields with more than 100 mcf of annual production[3]. This legislation, in the words of Evo Morales, "turned the tables from 18% to 82% of the state's hydrocarbon revenues"[4]. internship The legislation, although adorned with radical revolutionary rhetoric, has proven to be moderate and viable in the medium deadline, as it allows for much less burdensome tax formulas for energy multinationals and did not involve major expropriation of assets. As can be seen in the graph below, tax revenues from natural gas have grown enormously since 2005, the year of the reform, without dramatically affecting natural gas production. Moreover, this reform was accompanied by record highs in commodity prices in 2006, 2007 and 2008, cushioning the percentage reduction in foreign companies' revenues. In 2009 Bolivia included in article 362 the primacy of oil service contracts, a formula in which multinationals do not obtain any rights over the hydrocarbons extracted, but are remunerated for the services provided. 

Since the reform, exports have been relatively stable, buoyed by growing demand in both Brazil and Argentina. The most controversial case occurred in the particularly cold winter of 2016, when Bolivia halted exports due to maintenance work at the Margarita field. This unmasked a stark reality about Bolivia's proven natural gas reserves and the need to increase exploration and drilling in the country. Bolivia's current reserves amount to 283 bcm (10 tcf), enough for only 10 years of export activity at the current rate. Aware of this status limit, the YPFB corporation has launched an investment campaign for 2019 amounting to 1.45 billion dollars, of which 450 million will be dedicated to exploration work[5]. Much of the investment in the sector in recent years has been directed towards industrialising natural gas production instead of exploration work, building refining plants such as the Bulo Bulo ammonia and urea plant[6]. Exploration and production work is currently being carried out by Total, Shell, Repsol and Petrobras[7]. This effort is intended to counter the IMF's report , which considered Bolivia's natural gas reserves to be too low to turn the country into a regional energy centre, Evo Morales' greatest aspiration[8]. For YPFB, there are probable reserves of 850 bcm (35 tfc) that would guarantee a long life for the gas sector, but it should rethink its fiscal policy in order to attract foreign companies, which currently account for only 20% of total investment[9].

The future of Bolivian natural gas

From agreement with the contracts signed with Brazil (1999) and Argentina (2005) export prices are indexed to a basket of hydrocarbons, which in general has guaranteed Bolivia a very favourable price, higher than the Henry Hub price, but which makes the country equally dependent on fluctuations in international commodity prices. However, the revolution in non-conventional technology and new and now cheaper forms of transport such as LNG are transforming the reality of the natural gas market in the Southern Cone. This new situation, linked to the end of the contracts with Brazil in 2019 and Argentina in 2026, puts the future of the main asset of the Bolivian Economics in jeopardy.

As can be seen in the graph sample , Bolivia's trade balance and fiscal stability depend on the volume of natural gas exported and its international price. The survival of the current Bolivian economic model and the presidency of Evo Morales depend to a large extent on the income derived from this hydrocarbon, which is a fundamental factor for the future of the Plurinational Republic of Bolivia.

Brazil

Since 1999, Brazil has become the main destination for natural gas exports, being Bolivia's only client in the period 2001-2005. This position allowed Petrobras to entrance as the main investor in the sector until the year of nationalisation, which led to significant diplomatic friction between the two countries. It was the complicity between Morales and Lula, as well as the importance of maintaining harmony between left-wing governments in the region, that prevented a major confrontation between the two countries. Despite the words of Petrobras' president in 2006, Sergio Gabrielli, announcing the company's end for good in Bolivia, it has continued to be an important investor due to the profitability of its activities and the strategic importance of Bolivian gas for Brazil.

It seems clear that natural gas will play an important role in Brazil's future, as the country's main electricity source source, hydroelectric power, requires other sources to replace it when there is a shortage of rainfall, as occurred between 2012 and 2014. This context favoured the entrance of natural gas in the electricity mix, which went from 5% in 2011 to 25% by 2015[10]. 10] However, Brazil started a decade ago with the revolutionary pre-salt hydrocarbon exploitations, which have allowed the country to increase its crude oil production from 1.8 mbd in 2008 to 2.6 mbd in 2018. Natural gas production associated with these fields is expected to enter the Brazilian market as the necessary infrastructure is built to connect the off-shore fields to the still insufficient network pipeline network, something that is expected to improve with entrance of private players in the sector following the 2016 energy reform. Similarly, Brazil already has three LNG import plants, allowing it to diversify its imports, as it did during 2018 when Bolivia was unable to supply the 26 million cubic metres per day agreed in 1999. All this puts Petrobras and Bolsonaro, who is on the ideological antipodes of Morales, in a privileged negotiating position, and who could bet on increasing imports of increasingly cheap North American LNG and reducing the volume of Bolivian gas. In any case, due to certain non-compliances in the supply of gas from Bolivia, the contract will be extended for at least two more years until the volumes pending from submit , which Brazil has already paid for, are reached.

Argentina

The other natural gas market for Bolivia is also undergoing profound transformations, in this case derived from unconventional shale and tight oil techniques. The Vaca Muerta field, considered one of the largest shale deposits in the world, has begun to produce the first returns after years of investment by YPF and other multinationals. Despite Argentina's economic instability and the fiscal reforms demanded by the IMF that will delay the total development of this giant field[11], it is expected that by 2022 its production will cover approximately 80% of Bolivian imports, returning to the path of self-sufficiency achieved in much of the 1990s and 2000s[12]. For the time being, Argentina has already managed to renegotiate the volumes of natural gas imported in summer and winter in a way that is more favourable to domestic demand[13]. 13] In addition, Argentina authorised natural gas exports to Chile after a 12-year hiatus[14] and made its first LNG export in May 2019[15], which are early signs of growing domestic production.

It seems clear that the Argentinean market will not have a long run for Bolivian natural gas and will probably end its imports when the contract ends in 2026. Other options include using the entire network of Argentinean pipelines as transit to other destinations via LNG or to neighbours such as Uruguay, Paraguay or even Chile.

Peru

For some months now, Bolivia has been engaged in a public diplomacy campaign to extend a gas export pipeline to Puno, a Peruvian city located on Lake Titikaka. Although Peru has significant natural gas production in Camisea that allows it to export large quantities of LNG, the country launched a programme known as Siete Regiones (Seven Regions) to universalise access to natural gas. Southern Peru can be supplied more cheaply through Bolivian imports due to the proximity of the La Paz pipeline, but there is reluctance, especially in the pro-Fujimori civil service examination , to import a surplus commodity into the country. This formula would be integrated into a plan to export liquefied petroleum gas from Bolivia to the same area, while Peru would build a gas pipeline to import oil and derivatives from the Pacific port of Ilo to La Paz. For Bolivia, the Peruvian market may be a temporary solution while exports continue to diversify, but it will have an early expiry date given Peru's natural gas reserves, which are twice as large as Bolivia's, and the logical trend towards greater domestic production to cover demand throughout the country. Equally, it seems sensible to think that the Peruvian coast will in the future be one of the points through which Bolivia could export its natural gas in the form of LNG if the regional market is saturated.

Chile

From an economic point of view, Chile is the most attractive country for Bolivian exports. It lacks natural gas reserves and its mining area, with high energy demand, is located in an area relatively close to Bolivia's gas pipeline and oilfields network . However, the centuries-old dispute over Bolivia's original territories annexed by Chile in the War of the Pacific (1879-1883) has been an insurmountable obstacle in the present century. It is worth mentioning that during the 1950s and 1960s Bolivia exported oil to Chile and the US via the Sica Sica-Arica pipeline; in other words, the refusal to export natural gas to Chile has been a banner used by Evo Morales and not a historical tradition in the relationship between the two countries.

After the huge mobilisations caused by the Gas War, Evo Morales was able to catalyse popular fervour and use the territorial dispute to increase his popularity. In fact, a large part of his efforts in the previous legislature were focused on achieving the longed-for exit to the sea through the International Court of Justice in The Hague. In 2018, this court ruled in favour of Chile, ruling that Chile has no duty to negotiate a territorial settlement with Bolivia. Morales' refusal to export natural gas to Chile looks set to continue for the duration of his presidency.

However, the 1904 Treaty of Peace and Friendship signed by both states grants Bolivia full customs autonomy in the Chilean ports of Arica and Antofagasta and the right to keep goods in transit for 12 months, with free storage for its imports, and 60 days of free storage for its exports. These conditions seem ideal for the construction of an LNG plant in Arica or Antofagasta to export natural gas by sea while supplying northern Chile, which needs cheap natural gas to displace coal. Difficult political relations between the two countries complicate the viability of this project, which should not be ruled out when Morales leaves office and there is greater harmony, as happened with Pinochet and Banzer in power.

Household consumption

Domestic consumption of natural gas in Bolivia has grown at an annual rate of 4.5% in the period 2008-2018, driven by subsidised prices for consumption and the implementation of state projects aimed at providing added value to natural gas extraction, such as the Bulo Bulo urea plant or the Mutún steel industry. Bolivia's per capita income and electricity consumption are expected to continue to rise over the next decade. If the volume of natural gas subsidies grows similarly while export revenues decline, Bolivia's delicate fiscal balance could take a similar path to that of Argentina. The process of domestic industrialisation through natural gas does not seem far-fetched either, as long as it is based on market rules and not at the expense of public finances. The country has already achieved self-sufficiency in fertilisers and is already a growing exporter, an example of the economic diversification that the Morales government is pursuing.

The question: Is there a market for everyone?

After reviewing the regional context, it may appear that the natural gas market in South America will be saturated by future oversupply. As can be seen in the graph, natural gas demand in the Bolivian neighbourhood will increase from 107 bcm to 140 bcm per year by 2030. Peru, Argentina and Brazil are likely to increase their production and could reach self-sufficiency in the 2020s. This complicates the commercialisation of Bolivian gas, but does not make it impossible. Firstly, the geographical reality of South America means that certain cross-border projects are cheaper than others within the region, as in the case of southern Peru. Similarly, the increasingly lower costs of exporting gas by sea make it possible to find a market for surplus regional production, as in the case of Peru, which concentrates its gas exports to Spain. In a context of increasing energy interconnection, Bolivia will be able to continue exporting natural gas, albeit from a less privileged position and having to invest in export infrastructure. The main challenges lie in increasing exploration activities by attracting more foreign and private investment, as well as the search for new markets, with the Chilean question being a central element in this discussion.