BOLIVIAN GAS: ACTIVITY RETURNS TO THE GAS FIELDS

C O N F I D E N T I A L SECTION 01 OF 04 LA PAZ 000522 SIPDIS E.O. 12958: DECL: 04/07/2019 TAGS: ECON PGOV PREL ENRG EPET EINV BL EFIN PINR SUBJECT: BOLIVIAN GAS: ACTIVITY RETURNS TO THE GAS FIELDS REF: A. LA PAZ 2614 ¶B. SAO PAULO 121 Classified By: A/EcoPol Chief Brian Quigley for reasons 1.4 (b, d). - - - - Summary - - - - ¶1. (C) Despite the controversy surrounding Santos Ramirez's tenure as head of Bolivia's state hydrocarbon company (YPFB), he was able to clarify partially the operating environment for the major players in the Bolivian gas sector. As a result, activity has returned to many fields. That said, YPFB attempts to begin exploration and exploitation are unlikely to produce any results in the near term and corruption charges continue to swirl around the company. Additionally, Petrobras, which produces around half of Bolivian gas, is reporting difficulty in its attempt to develop alternatives for diminishing production in its existing mega-fields. Lower Brazilian demand and export prices that have now been cut in half from their peak, also spell trouble ahead for Bolivia's fiscal health. End Summary. - - - - - - - - - - - - - - - - Service Companies Back to Work - - - - - - - - - - - - - - - - ¶2. (C) Most of the actual work in the Bolivian gas fields is done by service companies. One of the larger of these companies is American-owned Weatherford. The General Manager there, Jaime Barrenechea, reports that activity has significantly picked up in 2009. Whereas 2008 was a slow year for the company, Barrenechea says that now Weatherford is working intensively on well maintenance. He doesn't think that the larger companies are investing any "new money" in the sector, but rather are at last spending money that had previously been budgeted for Bolivia. He believes that the companies were waiting for a more clear-cut operating environment to make the investments, and those times have arrived. ¶3. (C) The General Manager at the Bolivian Chamber of Hydrocarbons (CBH),Raul Kieffer, also told EconOff that the operating environment has improved for the companies. Kieffer says that the production contracts will be signed any day now. While many vagaries will persist in the contracts, their signing will enable the private firms to operate with more certainty. Carlos Delius, the Vice-President of the CBH, also saw better times ahead for his Bolvian-owned service company Kaiser and said that while Santos Ramirez may have been a crook, he was able to get things done. Roberto Dominguez at Repsol also praised Ramirez for at least pushing through the new contracts. While Repsol is moving forward with phase I of their plans for Bolivia (Reftel),Dominguez worries that the industry is now back to dealing with the ineffective Carlos Villegas as YPFB president. For Delius, perhaps the biggest breakthrough is that YPFB may now realize that it cannot "do it all." - - - - - - - - - - - - YPFB's Great Adventures - - - - - - - - - - - - ¶4. (C) One of the Morales administration's goals is to turn YPFB into a wholey integrated hydrocarbon company. YPFB's drive into exploration and exploitation is a key element to LA PAZ 00000522 002 OF 004 this vision. To this end, YPFB-Anonymous Partnership for Petroleum Services and Industry (SIPSA) was created by Santos Ramirez to carry out YPFB's drilling operations. With much fanfare a drilling rig was brought from Venezuela and was given the task of perforating a relatively simple well for the now fully state owned company, Andina (Ref. A). Like many Ramirez initiatives, the circumstances surrounding SIPSA's creation are shady. Upon taking control of YPFB, Villegas announced that SIPSA would be abolished. Repsol's Roberto Dominguez says that as a result the drill is sitting unused in the field. There is a team of five drilling managers from the Venezuelan hydrocarbon company PdVSA, but there are no qualified Bolivians to actually operate the drill. He doesn't see the drilling beginning any time soon as neither YPFB nor Andina have the people trained to carry out the perforation. ¶5. (C) In addition to the SIPSA failure, exploration by the YPFB/PdVSA joint venture PetroAndina continues in northern La Paz state. They are looking for oil that the Bolivian state is convinced exists; private companies are not so sure (several exploratory wells were drilled over a decade ago, but no company thought the results merited further exploration). Arturo Castanos, the Petrobras representative in La Paz, thinks ridicules the idea. With subsidized prices and the 50 percent tax on production, exploration for oil makes no sense in Bolivia. Moreover, it would have to be a mega-field to justify building the infrastructure in remote and isolated northern La Paz to get the oil either to the refineries and/or to any surrounding markets. In any case, at the current pace of activity, any discoveries are years away. ¶6. (C) The Bolivian government has been actively courting other national hydrocarbon companies to work with YPFB. Russia's Gazprom responded by signing an agreement with Bolivia and even hired the ex-ambassador to Bolivia to be Gazprom's representative in Santa Cruz. Raul Kieffer of the CBH reports that now Russia has pulled out of two of the three concessions granted to it by the Bolivian government. They may still work with French-owned Total to exploit the third field, but will not work directly with YPFB in the other two concessions. Kieffer said that Gazprom is interested in building a new pipeline to Argentina. The several billion dollar project would open a greater market for Bolivian gas, but the question remains, who will pay for it? Will Gazprom accept an IOU from the state companies of Bolivia and Argentina? Would any bank or multilateral loan these companies the money? - - - - - - - - - - - - - - - - - - - Petrobras: Not Only Political Problems - - - - - - - - - - - - - - - - - - - ¶7. (C) The Petrobras representative in La Paz, Arturo Castanos, does not understand why the Bolivian government has treated Petrobras so poorly. Petrobras and the Brazilian government built the pipeline that has opened a vast market to Bolivia and sales to Brazil have given Bolivia unprecedented financial surpluses over the past few years. In payment, Bolivia has nationalized the Petrobras refineries, threatened all of their Bolivian activities, and forced the company to provide half of the domestic market with below-cost gas. While political considerations have likely held Petrobras in place during these tumultuous political times, commitment to Bolivia and a willingness to make substantial future investments may be waning. ¶8. (C) According to Castanos, beyond field maintenance in the mega-fields of San Alberto, San Antonio and Margarita, LA PAZ 00000522 003 OF 004 the only exploration that Petrobras is undertaking is in the Ingre field. It was believed that this field would be able to make up for diminishing production in the three mega-fields (although production over 1 million meters cubed a day (Mm3/d) is unlikely). Castanos says that for a major company to drill exploratory wells there needs to be about a 15 percent chance of success. In the case of Ingre, Petrobras put the odds of success at 30 percent. That said, difficulties have plagued the project and costs have risen from US$35 to US$55 million and they still have not hit any gas. Expectations are moderating for the project, but that said, the Ingre field is all that Petrobras has in the pipeline. (Note: The effects of dwindling production in the old mega-fields is first felt in the production of liquids. Bolivia has been self-sufficient in gasoline production (as a bi-product from the gas wells). This is rapidly changing. Castanos says that the only reason the public has not been aware of the dropping levels of national gasoline production is that YPFB is now mixing an inferior gasoline. In the short term, consumers will notice no difference in vehicle performance; the damages being done to the engine will be seen down the road. End note.) ¶9. (C) The Chamber of Hydrocarbons is predicting a slight rise in production for 2010, but Castanos is much less optimistic. He says that production is off 30 percent already this year (due to less demand from Brazil). As opposed to the end of 2008 when Brazil was consistently importing 30 Mm3/d, it has dropped imports down to around 20Mm3/d in 2009. In order to comply with the contract, which calls for an average of 24Mm3/d to be exported over the calendar year, Brazil will soon ask for more gas to be shipped (Ref. B). To Brazil's advantage, the price paid for Bolivian gas will adjust downward to around US$4 per BTU on April 1st at the same time they will begin asking for more volume (the price in 2008 ranged between US$8-10). ¶10. (C) Castanos does not see Brazil going back to consistently importing 30Mm3/d in 2009 or 2010. In fact, he thinks they may invoke clauses in the take-or-pay language of the contract that allows them to pay for gas now and actually receive it up to 10 years in the future. As a result, with no other market for their gas, producers in Bolivia would have little incentive to increase production. Repsol's Dominguez is less concerned about Brazilian demand. He thinks that Brazilian offshore discoveries or liquid petroleum gas (LPG) imports will never be able to compete on price with Bolivian gas. As a result, Repsol is moving forward with planned expansion of production. - - - - - - - - Fiscal Impacts - - - - - - - - ¶11. (C) The drop in gas production for 2009 combined with the dramatic fall in price will have significant impact on Bolivia's fiscal balances. By our calculations taxes on the hydrocarbon sector account for around two thirds of total revenue for the Bolivian state. Gas exports make up about half of all exports and, in 2008, earned Bolivia about US$2.5 billion or between 10-12 percent of GDP. It appears that difficult fiscal times lie in wait for the newly elected or re-elected president in 2010. - - - - Comment - - - - ¶12. (C) Corruption and incompetence within YPFB remain a LA PAZ 00000522 004 OF 004 substantial hurdle moving forward for the Bolivian gas industry. In some areas, it appears that the government is stepping aside and letting the private companies carry out their work, but in the ever changing political operating environment of Bolivia this could change quickly. No one is predicting that Bolivia will again be seen as a potential hub for gas development in South America any time soon, but it does appear that production will be maintained at levels sufficient to meet the contract with Brazil (and their lower demand),while also keeping up with domestic demand. URS