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Bolivian Hydrocarbons: White Knight to the Rescue?

Long dismissed as an economic minnow and laggard, Bolivia, hitherto much more notable for its harsh Andean climate and tortuous geography than for its clout in regional energy affairs, appears to have outsmarted its mighty neighbours and maneuvered itself into pole position to become the continent’s foremost energy hub.

“Who would ever have predicted that one of Latin America’s smallest and poorest nations would muster the chutzpah to reshuffle the entire energy dynamics of the region…we’re talking about a thorough game-changer,” exclaims one analyst. Yet this is precisely what appears to have happened. With plunging oil prices and chronic mismanagement having left Venezuela’s petro-economy teetering on the brink, Brazil deeply distracted by the ongoing political instability from the Petrobras scandal and Argentina’s new ‘business-friendly’ regime still struggling to undo more than a decade of Kirchnerismo, it is the plucky mountain nation that seems to have asserted itself first.

The turning point of Bolivia’s energy future can perhaps be traced back to President Evo Morales’ eyebrow-raising 2006 nationalization of the nation’s underexploited natural gas market, thus fundamentally altering his country’s economic development trajectory. Crucially, IOCs were encouraged not to quit the market altogether, but to remain present in the form of newly established joint ventures with state champion, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). “There was a great qualitative leap in the understanding of our international relations…. the Bolivian people determined to take their destiny into their own hands …and despite the international stigma of what some perceived to be an unorthodox policy, virtually all those multinational energy companies present in Bolivia opted to stay with many more entering the market in subsequent years,” recalls Bolivian Ambassador to Argentina, Liborio Flores Enriquez.

Bolivian Vice President Alvaro García Linera paints a very similar picture, “Previously Bolivia’s natural resource endowments were badly distributed with our citizens accruing very little benefit and many of the profits derived being repatriated rather than re-invested… so we changed all that!” he recounts. “We noticed that the profit yields for the multinational oil companies were disproportionately high, but at the same time recognised that they were taking on a high degree of risk due to the widespread social instability at that time…so what we did was stabilize the country and economy creating a predictable and plan-able business environment in which foreign companies could thrive, benefits could be more fairly shared and a greater proportion of proceeds reinvested,” he proudly explains.

“What we did was stabilize the country and economy, creating a predictable and plan-able business environment in which foreign companies could thrive, benefits could be more fairly shared and a greater proportion of proceeds reinvested.”

Alberto Garcia Linera, Vice President of Bolivia

Today many of those very same foreign entities are being courted to take part in an ambitious state-sponsored drive to lift reserves to 11.5tcf by 2021 and to 18tcf by 2025. Many perceive bountiful opportunities. The French oil giant Total, for example, recently feted the entry into production of Incahuasi gas field, a highly promising play some 250 kilometers from Bolivia’s budding oil and gas capital, Santa Cruz de la Sierra. “This is one of the most important gas and condensate fields to come on-stream in recent years and will be able to feed Argentinian and Brazilian bound exports as well as the domestic market,” asserts Arnaud Breuillac, President of Exploration & Production at Total Group. Incahuasi is now forecast by many to raise total production from 5.2 million cubic meters of gas per day to more than 7 million by the end of the year.

But the country’s heady aspirations do not stop there. Bolivia’s grand strategy, reliant on gas much more than its small oil reserves, is to establish itself as the ‘uncontested beating energy heart of South America.’ “Geographically we are properly situated right at the very heart of the continent. What happens to be an incredibly strategic position was once thought to be an impenetrable gap, but now we correctly view ourselves as the great connector linking up the entire region,” notes Flores Enriquez. Already the country enjoys the distinction of being the main external supplier of natural gas to the big economic heavyweights of the continent, Brazil and Argentina, but the end goal is much more ambitious. “Morales’ government has committed to rendering Bolivia the energy distribution hub of South America by 2025 in a scheme that involves not only gas but electricity distribution as well,” he discloses.

A bold blueprint is already in the works. “Argentinians ultimately strive to become energy self-sufficient, but it will take quite some time, so we will be selling them gas directly in the meantime. Brazil, by contrast, will be a long-term customer requiring the equivalent of two thousand megawatts each year supplied by us,” reasons García Linera. “Even with these measures, though, we will not be reaching our full potential, so we are currently exploring the feasibility of freezing the gas and send it to other countries as distant as the Far East… At the moment we are even striving for an agreement with Peru to gain access to the sea, not only to export frozen gas, but also to serve as the energy corridor connecting Brazil and China,” he reveals.

Bolivia has hence adopted a 9-year plan to accomplish this transformation, which will require an investment to the tune of some 32 billion dollars according to YPFB, an astronomical sum equivalent to an entire year of Gross Domestic Product (GDP). “Given the current backdrop of low prices, many countries in the region have been forced to draw in their horns and scale back on Capex, yet this has not been the case with us and we now enjoy the distinction of being the only country in our neighbourhood to be treating this crisis as an opportunity by continuing to invest, safe in the knowledge that we will most certainly reap the rewards later down the line,” enthuses Guillermo Achá, YPFB’s president.

“We now enjoy the distinction of being the only country in our neighbourhood to be treating this crisis as an opportunity by continuing to invest, safe in the knowledge that we will most certainly reap the rewards later down the line.”

Guillermo Achá, President, YPFB

Bolivia has certainly been placing unprecedented investments in a suite of facilities – from separation complexes to petrochemical plants to LNG terminals – all geared towards exiting a model of pure extraction and raw resources export and entering a new world of aggregated value buttressed by a formidable industrial base grounded on gas. “You’re witnessing the implementation of a robust industrialization strategy that will enable us to extract greater value out of gas resource by selling it as processed and in derivatives such as fertilizers and plastics, rather than merely in raw unadulterated form,” argues planning minister, René Orellana.

Indeed the much-lauded “industrial revolution” seems well underway. One only need look towards the roll out of the $700m Gran Chaco natural gas liquids separation plant and Gran Chaco propylene and polypropylene complex. Meanwhile an ammonia and urea plant to make fertilizer is also under construction and will cost an estimated $877m. In tandem, investments of around $9.6bn have been ring-fenced for power generation, the logic being that exporting electricity to Latin America’s turbo economies would fetch greater profit margins than lugging across unprocessed commodities. All that remains to be seen is whether the gamble will pay off.

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