CAN BRAZIL SAVE THE BOLIVIAN GAS SECTOR?

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 003098

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/27/2017
TAGS: ECON PGOV PREL ENRG EPET EINV EMIN BL
SUBJECT: CAN BRAZIL SAVE THE BOLIVIAN GAS SECTOR?


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


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Summary
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1. (C) The Bolivia gas sector appears headed for crisis.
Currently out of compliance with 3 out of 4 major
international contracts, the industry faces increasing
commitments to the Argentine market and growing demand at
home. The government realizes it needs investment and, after
over a year of hostile actions directed at Brazilian
interests, it is reaching out to Brazil to reinvigorate the
hydrocarbon sector. A number of agreements have reportedly
been reached in advance of President Lula's upcoming visit to
Bolivia on December 11-12, which is being trumpeted as a
harbinger for substantial new hydrocarbon development. In
reality, however, additional Brazilian investment will do
little to alleviate the near-term gas shortages and will not
be nearly enough for Bolivia to meet its long-term
obligations -- nor will it provide the much needed economic
boost Evo Morales would like. End Summary.

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Bolivian Reality
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2. (SBU) Gas production in Bolivia has fallen slightly from
a peak of 40.7 million cubic meters of gas per day (MMm3/d)
in 2006, to current production levels which vary between 38
and 39MMm3/d. Contractual obligations would consume all of
Bolivia's production, but the Bolivian state hydrocarbon
company (YPFB) decided about two months ago to not supply any
gas to Comgas, a Brazilian provider, or the Cuiaba electrical
generator, located in western Brazil. This gave them an
additional 2MMm3/d, but even then rising domestic demand
(currently at 6MMm3/d) and Brazilian demands that Bolivia
supply the maximum amount of gas allowed under the contract
to Sao Paulo together consume a total of 37.5MMm3/d. (Note:
The Brazilian contract dictates that up to 31.5MMm3/d be put
in the pipeline so that the contractual maximum of 30MMm3/d
arrives in Sao Paulo -- gas is burned along the way to power
the pipeline. End Note.) This means that only between 1.5
to 2.5MMm3/d is available for an Argentine contract which
calls for a minimum contractual amount of 4.6MMm3/d.
Moreover, and ominously for the Bolivian industry, the
Argentine contract additionally calls for a "ramp-up" in
production to 27.7MMm3/d by 2010. (Note: It was recently
made public that Enarsa, Argentina's state-run energy
company, is demanding payment for undelivered gas due to a
'take or pay' provision in the contract. The two countries
are currently in negotiations to settle the dispute. End
Note.) In sum, to meet current contractual obligations,
envisioned additional industrial uses (Jindal's Mutun steel
project),and domestic demand estimates, Bolivia would need
to nearly double its output by 2011.


3. (C) Bolivia clearly needs to find more gas, and recent
announcements of upcoming agreements with Petrobras are being
spun as possible ways to avoid crisis and reestablish
reliable and increasing supplies. Investment commitments are
being announced in the press and will likely be confirmed
when President Lula visits La Paz on December 11-12. (Note:
Chilean President Bachelet will also attend to allegedly
discuss proposed bi-oceanic connections among other themes,
but her presence at meetings focused on the gas industry may
suggest that Bolivian deals with Chile may also be in the
works. End note.) According to Auturo Castanos, Petrobras
representative in La Paz and former head of YPFB, Bolivian
negotiators want investment and production increases "Now!"
Furthermore, other companies are expected to follow
Petrobras' lead on investment, so the government is putting
particular importance on negotiations with the Brazilian
company. Bolivia's desires, however, do not mesh with
reality within the hydrocarbon sector.

LA PAZ 00003098 002 OF 003



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Industry Reality
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4. (C) The mood of hydrocarbon companies operating in
Bolivia is best summed up by Castanos when he said that "no
one wants to be here." Ideally, companies just want to
recuperate their sunk costs and sell out if they can. He
emphasized that not one dollar had been invested in Bolivia
from a company not present prior to the 2006
"nationalization." Announcements of investments must be
looked at with this overall sentiment in mind, and thus be
analyzed as ways that companies are merely attempting to
maintain production and recoup investment.


5. (C) Looking at the data provided by YPFB, the lack of
exploration and development of Bolivia's gas resources
becomes clear. In 2000, there were 14 exploratory wells
(wells being drilled outside of established fields). By
2006, this figure had dropped to three and according to
Castanos, two of these wells came up dry and the results from
the other well are still unknown. The story is similar when
looking at developmental wells (wells being drilled within
established fields). In 2000, there were 10 such drilling
operations, currently there is only one. In Castanos' view,
there will be no significant new production in Bolivia before
2010, regardless of any investment decisions made today.
Moreover, he felt that it was unclear whether gas would again
flow to Cuiaba, which has already started to operate with
diesel. This is especially true if there is a successful
groundbreaking at the Mutun iron deposits to which YPFB has
committed 8MMm3/d for 2011. The viability of this project
appears at risk due to the unrealistic commitment of cheap
gas.


6. (C) In addition to the time constraints of gas
exploration and drilling (18 months is a common industry
estimate for the time it takes to initiate exploration and
obtain production),the Bolivian context adds additional
delays. Recent strengthening of environmental regulations
and more active and empowered local indigenous populations
have delayed several projects. For example, to lay the new
pipeline to Tarija, separate agreements had to be signed with
each indigenous group whose land the pipeline traversed along
the way. A new well being contemplated by the Chaco Oil
Company has been delayed by over four months while they wait
for the environmental permit. In a view shared across the
industry, Castanos said that there really isn't environmental
protection in Bolivia, just extortion by local groups. The
problem may grow worse with the recent signing into law of
the UN Declaration on the Rights of Indigenous Peoples.

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Brazilian Negotiations
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7. (C) It is expected that a large portion of any announced
investment plans will go simply to maintaining current
production levels; moreover, much of Brazilian investment
might simply be applied to the purchase from Total of the
rights to the large Itau field. These "investments" do not
represent additional production, but rather the simple
transfer of an existing asset. That said, Petrobras will
likely develop the field, but Castanos estimates that it will
only represent between 7-9MMm3/d of additional production by
2010; a far cry from the approximately additional 30MMm3/d
called for by the Argentine contract and Mutun project alone.


8. (C) Beyond the investments and production that Bolivia
is calling for in negotiations, Castano pointed to two other
sticking points. The first is that Bolivia is asking for
Brazil to lower its demand from 30MMm3/d to 27MMm3/d in order
to free up gas for the Argentine contract. Brazil is
unlikely to cede on this issue and gas exports to Brazil
must, by contract, be fulfilled before exports to Argentina.

LA PAZ 00003098 003 OF 003


In fact, Jorge Luiz Kauer, General Manager of Transierra, a
pipeline operator, told Econoff that over the last month he
has been unable to do any maintenance on the pipeline because
Petrobras is demanding the full contractual delivery of gas
24 hours a day. Some 90% of Brazilian electricity is from
hydropower and with dam reserves at low levels, Castanos
contends that Brazil cannot afford to cut the level of gas
being used for electrical generation.


9. (C) Lastly, Bolivia is seeking a premium for its "wet
gas." This refers to the higher content of propane and
butane in exported gas because Bolivia has yet to construct a
separation facility to process out these more valuable
bi-products. The end result is that Bolivian gas does have a
higher BTU value, and Bolivia is seeking a higher price to
reflect that. Media reports on November 23 indicate a
possible agreement on this issue.

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Lula and the Political Angle
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10. (C) Beyond the effort to maintain current supplies,
Castanos saw a political agenda motivating the Lula
administration to negotiate further contracts with Bolivia.
First, he believes that Lula is seeking a method to
counteract Venezuelan influence in Bolivia through increased
economic ties. Chavez has announced grandiose projects in
Bolivia, but the only thing to emerge from two years of
promised investments have been random checks distributed to
local authorities. Second, Castanos thinks that Lula is
trying to show himself as a leader in regional affairs. He
took some hard hits domestically over Bolivian
nationalization, and is now trying to show himself as a
leader who can negotiate and land deals with his neighbors.
In a separate conversation, Oscar Serrate, Vice President of
Transredes, opined that by bringing in Bachelet to the
meetings, Lula is attempting to involve Chile to further
mitigate the Venezuelan influence. Finally, Petrobras does
not always walk hand in hand with the Brazilian government.
It is a separate entity, and Serrate believes that many
devils will emerge in the details when Petrobras begins to
elaborate its investment plans. Petrobras has been burned
once by Bolivia; it will be very cautious in making any
further commitments.

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Comment
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11. (C) Perhaps the Bolivian government now realizes that
YPFB cannot meet the investment needs of the sector even with
the help of the Venezuelans. It sees a train wreck
approaching and is reaching out to the Brazilians for help.
Despite the harsh rhetoric and actions directed at Brazil
over the past year, investment may indeed be forthcoming, but
it will be too little and too late to help the Morales
government improve the economic outlook in the short term.
Indeed, Bolivia will likely pass through jarring economic
times before it again sees the foreign investment necessary
to effectively exploit its hydrocarbon resources. Brazil is
interested in its own political image and in guaranteeing its
current gas supplies. While the promise of a shared agenda
is obvious, domestic political realities will keep Bolivia
from being a reliable economic partner. Investors, including
Petrobras, know this and will work to protect committed
assets, but are unlikely to deliver much more until a more
stable political environment emerges.

GOLDBERG