BOLIVIAN GAS: THE PRESSURE IS BUILDING

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 002467

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/07/2017
TAGS: ECON PGOV PREL EPET BL
SUBJECT: BOLIVIAN GAS: THE PRESSURE IS BUILDING


Classified By: EcoPol Chief Mike Hammer for reasons 1.4 (b) and (d).

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Summary
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1. (SBU) The first signs of an emerging crisis in the
Bolivian gas sector are becoming apparent. Gas supply can no
longer meet current contractual obligations. Production has
fallen to 38.3MMm3/d and contractual obligations are up to
39.4MMm3/d. Moreover, investment in the sector is tentative
and insufficient to increase supply significantly. Given the
reality of growing domestic demand, industry and/or consumers
will soon face shortages. End Summary.

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Supply Stagnation
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2. (C) Gas production in Bolivia reached its peak in 2006
at 40.7 million cubic meters of gas per day (MMm3/d). As of
August, production had fallen to 38.3 MMm3/d. Current
contractual agreements total close to 40MMm3/d and no new
large-scale production increases are on the horizon. (Note:
Contracts generally specify a range of possible delivery
amounts and allow the buyer to request deliveries of gas
within the specified range. The 40MMm3/d figure reflects the
maximum that buyers could contractually demand. End note.)
Part of the fall in supply (more than 1MMm3/d) was caused by
the discovery of water in a well in the major field of
Margarita. This problem may or may not be fixed quickly, but
according to Ed Miller, President and General Manager of Gas
TransBoliviano, a pipeline operator, it is symptomatic of
wells being pushed beyond their secure operating capacity.


3. (SBU) Stagnant production is the result of a dramatic
fall in levels of investment. In 1998, annual investment in
the gas sector reached US$604 million; by 2006 the figure had
fallen to US$198. Moreover, current investments are only
directed at field maintenance and not new development.
Current production is based in investments made nearly 10
years ago and falling growth rates support this conclusion:
From 2003 to 2004 production rose 36%; from 2004 to 2005 it
rose 37%; from 2005 to 2006 it rose 14%; and growth for the
current year was projected at only one percent before the
problems in the Margarita field which may turn the figure
negative. Hence, while the government touts rapid earnings
growth from gas (a result of favorable market conditions),
investments are not being made to fully capitalize on the
robust regional demand.


4. (C) In the fields, the lack of sufficient investment
is manifest in a dearth of new drilling. In the late 1990s,
16 drilling rigs operated in Bolivia; there are now only
three. In a conversation with Emboff, Petrobras officials
feared that even if new commitments to drill were made, high
global demand for rigs could be a significant limiting
factor. In general, the standard industry time frame for new
Bolivian production to come on line is three years.

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Current Contracts
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5. (SBU) There are currently three major contractual
obligations totaling 38.8MMm3/d that face Bolivia: The Gas
Supply Agreement (GSA),which commits up to 30MMm3/d to Sao
Paulo, Brazil; Cuiaba, which promises 1.1MMm3/d to an
electrical plant in western Brazil; and a 7.7MMm3/d agreement
with Argentina. Moreover, the agreement with Argentina is a
"ramp-up" contract which increases yearly deliveries until
2010 when Bolivia is committed to supply 27.7MMm3/d to its
southern neighbor. Along with these contractual obligations,

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Bolivian domestic demand has doubled over the last three
years from approximately 3MMm3/d to 6MMm3/d. Together with
the contractual obligations, Bolivia's current production of
38.3MMm3/d cannot match the demand. (Note: Mining and
electricity generation in Bolivia are also heavily reliant on
gas for power. For example, the government has promised
8MMm3/d to an Indian firm to develop the large Mutin iron
deposit. End note.)

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Who Goes Without?
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6. (SBU) At the beginning of September, Brazil insisted
that the GSA commitments be fully realized and 30MMm3/d be
delivered. In August, it had been receiving a slightly lower
flow of gas. The Minister of Hydrocarbons and Energy Carlos
Villegas stated that the increase was to help Brazil deal
with shortages of water, which were leading to electricity
shortfalls. However, this contract also has a "delivery or
pay" clause, which would subject Bolivia to fines if it did
not meet its obligations. Moreover, in order to pass
30MMm3/d through the Sao Paulo pipeline, delivery to Cuiaba
was cut to zero until September 14. No such "delivery or pay'
clauses exist in the Cuiaba contract.


7. (C) In August, Argentina was receiving around
4.6MMm3/d. Local newspapers report that 4.6MMm3/d is enough
to match current demand in Argentina, but as Ed Miller of Gas
TransBoliviano pointed out, it is also the minimum figure
that Bolivia can deliver without incurring 'delivery or pay'
penalties. (Note: The contract says that Argentina can
request between 4.6MMm3/d and 7.7MMm3/d. End note.) In
concert with the increase in deliveries to Brazil however,
Argentina had its supply cut to only 2.3MMm3/d.
Interestingly, Carlos Villegas claimed that the drop to
2.3MMm3/d will not generate fines from Argentina. The
relationship with Argentina appears to be less contractual
and more congenial at the moment. Yussef Akly, Strategic
Manager and Spokesman for the Bolivian Chamber of
Hydrocarbons, believes that this cooperation will continue in
the short term. The real test will be in 2010, when
'delivery or pay' clauses will kick in with certainty and
there is no chance that Bolivia can meet its commitments.


8. (C) More evidence of a special flexibility with
Argentina comes from the way pricing has been handled. The
new contract was announced with much fanfare in October 2006.
The base price was set at US$5 per million BTU. It now
appears that for the last five months, Argentina has been
paying only US$4.5 per million BTU. This has reduced the
total amount paid over the period from US$170 million to only
US$150 million. The local press is protesting the loss of
the US$20 million, but special relationships come with a
price. To date, Argentina has made no public demands for
compensation for the shortages of the contractually obligated
gas deliveries.

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Comment
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9. (C) The Bolivian national oil company YPFB will be
increasingly forced to choose who gets Bolivia's limited
supply of gas: Brazil, Argentina, Bolivian industry or
Bolivian consumers. Brazil has shown a willingness to enforce
contractual obligations and Petrobras shows no interest in
making investments beyond those needed to maintain current
production. Argentina, on the other hand, has yet to publicly
tighten the screws, but it will be difficult for Bolivia to
meet short-term obligations to the country and almost
impossible for it to supply the increasing levels of gas
stipulated in the contract leading up to 2010. For the

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moment, politics seem to be softening strict economic
demands. As to the domestic market, the stress is starting
to show. Headlines trumpet looming gas and electricity
shortages and yet the government projects strong growth in
the gas powered mining sector. Something has to give; time
will tell who takes the hit and who gets the blame.
GOLDBERG