BOLIVIAN GAS: SHORTAGES OF LPG TO COME?

C O N F I D E N T I A L SECTION 01 OF 02 LA PAZ 002524

SIPDIS

SIPDIS

STATE FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 03/07/2017
TAGS: ECON PGOV PREL EPET BL
SUBJECT: BOLIVIAN GAS: SHORTAGES OF LPG TO COME?

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

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Summary
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1. (U) The Liquefied Petroleum Gas (LPG) market in
Bolivia is a good test case of what is happening in the
overall hydrocarbon sector. Prices are held artificially
low, demand is stimulated, supply and investment decrease,
and the growing threat of shortages presage possible
political turmoil. End Summary.

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LPG - What is it?
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2. (U) When natural gas comes out of the ground it is a
mixture of several substances. Methane (83%) is the most
common and is used as 'natural gas'. However, ethane (7%),
propane (4%) and butane (3%) also accompany methane to the
service. Liquefied Petroleum Gas (LPG) is composed
principally of propane and butane and, thus, makes up around
7% of 'natural gas' production. In Bolivia, LPG is produced
at four facilities located directly within the major natural
gas fields and at two refineries in Santa Cruz and
Cochabamba. (Note: LPG can also be produced during the
refining of liquid petroleum. End note.)

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Supply and Demand
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3. (C) Since 2000, consumption of LPG in Bolivia has been
growing at an annual rate of about five percent and has risen
from 732 Metric Tons per Day (MTD) in 2000 to 973 MTD in

2006. Prices, which have been frozen for the last decade,
have significantly stimulated demand but have also created
growing market distortions. In Bolivia, the standard 10kg
canister of gas costs around US$2.50. That same canister
costs double in Argentina, four times as much in Peru, and
nearly five times as much in Brazil or Chile. Needless to
say, despite a ban on all LPG exports (in effect since 2004),
smuggling may be pushing up demand. Jorge Martignoni, Vice
President of Vintage Petroleum, estimates that contraband
boosts demand by around 2-3%. Additionally, despite being
dangerous, cars that have been modified to run on Vehicular
Natural Gas (VNG) can also run on LPG. Jorge Martignoni
believes that up to 15% of LPG demand goes to fueling
automobiles; at US$2.50 for a 10kg canister many clearly
believe it is worth the risk.


4. (U) Capped prices unfortunately do not only stimulate
demand; they depress supply. Bolivian production of LPG
peaked in 2002 when domestic supply hit 1227 MTD. By 2006,
that figure had fallen to only 918 MTD and estimates predict
that Bolivia will produce less LPG than it consumes in 2007.
These falling production figures are a reality despite
technological advances in the two refineries. These advances
boosted production of LPG from liquid petroleum from 142 MTD
in 2002 to 205 MTD in 2006. These gains cannot, however,
offset the declining production figures at the four
facilities located within the gas fields. Production from
these plants totaled 1085 MTD in 2002 but fell to only 713
MTD in 2006.

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Comment
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5. (C) The LPG market provides an example of how price
controls are affecting the hydrocarbon industry in Bolivia.

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Market manipulations are stimulating demand, encouraging
contraband and dangerous practices, and dampening investment
and supply. The problem was not wholly created by the
current administration, but they are the ones that will most
likely have to deal with it. If the imbalance between supply
and demand continues to grow, Bolivian consumers will not be
shy about expressing their discontent. Currently, the
national oil company YPFB is choosing to send more LPG to La
Paz than to Santa Cruz. If shortages grow, distribution of
scarce resources through political reasoning will exacerbate
regional and economic divisions.
GOLDBERG