BOLIVIAN GAS: PURGATORY

C O N F I D E N T I A L SECTION 01 OF 04 LA PAZ 000968

SIPDIS

E.O. 12958: DECL: 06/28/2019
TAGS: ECON PGOV PREL ENRG EPET EINV BL EFIN PINR
SUBJECT: BOLIVIAN GAS: PURGATORY

REF: A. LA PAZ 522

B. 08 LA PAZ 1024

Classified By: A/EcoPol Chief Holly Monster for reasons 1.4 (b, d).


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Summary
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1. (C) Over the past three years investments in the
Bolivian gas fields have been minimal; this is changing, as
companies have begun to make significant investments to
guarantee enough gas for both domestic demand and exports to
Brazil (with any excess going to Argentina). Moments of
optimism that actual growth might also be possible have been
tempered by the realities of dealing with the often
irrational and incompetent Morales government. Petrobras
will continue to lead the sector forward, but it is motivated
as much by Brasilia's political concerns as by economic
opportunities. Meanwhile, state control over much of the gas
infrastructure is taking its toll and the recent decree
obligating that any service contracts be offered to the state
hydrocarbon company (YPFB) first not only violates the
recently signed delivery agreements, but at the very least
adds another bureaucratic hurdle to making investments.
Neither heaven nor hell, Bolivia looks likely to keep the gas
companies in purgatory for the near future (End Summary).

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Contracts Signed, Surprise Decree
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2. (C) The gas production capacity in Bolivia remains
around 40-42 million cubic meters per day (Mm3/d),where it
has been relatively stable since the 2006 nationalization.
Due to natural declines in well productivity however, the
companies must now begin to make more substantial investments
in field maintenance and new wells if production is to
continue at the same level. Significant progress was made
towards this goal, and the companies signed delivery
agreements with the government in early June. Jaime
Barenechea, North Area Manager (Bolivia/Northern Argentina)
for the U.S. service company Weatherford, told us that
business has accelerated markedly this year as a backlog of
field maintenance projects are finally being realized.
Moreover, he estimated that four large drilling rigs would
arrive in Bolivia over the next four years. No one is
projecting a sizable jump in production, but there is general
consensus that current levels will be maintained or possibly
increased to the vicinity of 44-45 Mm3/d over the next five
years.


3. (C) Optimism aside, the Morales Administration may well
still defuse any positive momentum. By all accounts, company
executives came out of a Friday meeting in early June with
the Minister of Hydrocarbons Oscar Coca feeling positive
about the assurances he gave them regarding the support
necessary to make productive investments. The following
Monday however, all were caught by surprise by a Presidential
Decree mandating that any contracts for services or provision
of equipment in the sector must first be offered to YPFB.


4. (C) The decree was likely a ploy to ensure that the
three drilling rigs YPFB plans to bring to Bolivia are put to
use, but someone in the ministry decided to expand the decree
to include all services. (Note: The one rig that is already
in Bolivia (Ref. a) is now inoperable. While attempting to
drill for the Andina Company, the rig's electronic control
systems burned up. No replacement parts were available.
While on loan from Venezuela, the rig is of Chinese origin
and parts have been requested from China. The two additional
rigs that YPFB plans to import will also be Chinese. End

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note.) The decree violates provisions in the delivery
agreements that dictate an open bidding process and all of
the companies operating in Bolivia have sent protest letters
to the government. According to Raul Kieffer, General
Manager of the Bolivian Chamber of Hydrocarbons, both Chaco
and Andina sent the most harshly critical letters. As both
of these companies are now fully (Chaco) or majority (Andina)
owned by the Bolivian state, Kieffer takes it as a positive
sign that they will try to maintain technical autonomy. In
Andina's case, it is also likely that after YPFB's first
failed attempt at drilling for them, they do not want to have
more YPFB services forced upon them.


5. (C) The biggest fear in the industry is that YPFB will
admit they don't have the capacity to carry out a given
service contract, but will use the decree to name a specific,
politically connected service company to the contract.
Petrobras Bolivia President Claudio Castejon said that even
if it doesn't come to this, the decree will mean significant
delays and yet more bureaucratic hassle. Currently he has
200 service contracts to bid out and does not cherish the
idea of waiting for YPFB to process the bids and admit they
don't have the capacity to carry out any of them.

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YPFB Transport and Possible Further Nationalization
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6. (C) YPFB Transport was born with the full
nationalization of the principal pipeline operator
(Transredes) in May, 2008. Technical staff and managers
where all kept in place and there have been no major
disruptions in service. That said, the nationalization is
beginning to show some negative effects. Over the past year,
YPFB Transport has had five different presidents. The
current president, Cyro Camacho, was named after the former
president publicly accused YPFB President Villegas of trying
to run the company as his personal (and corrupt) fiefdom and
was promptly fired. Camacho is widely praised in the
industry and comes from a technical background within
Transredes. Despite this, Keiffer reports that the Andean
Development Corporation (CAF) has delayed loans to YPFB
Transport because of the frequent turnover in leadership.


7. (C) In the field, the nationalization also appears to be
having an effect. Roberto Dominguez, who covers Andina for
minority owner Repsol, said that Andina detected a cracked
pipe in one of its fields on a Friday afternoon. Only after
much insistence did YPFB Transport send a team out to fix the
pipe over the weekend. According to Dominguez such lax care
of the infrastructure would not have happened under
Transredes. Unfortunately, the risk of a serious mishap in
the gas network is growing. Additionally, Jorge Kauer, the
General Manager of Transierra, which operates the still
private pipeline connecting the major southern field with the
export pipeline to Brazil, thinks that President Morales is
likely to nationalize his company before the end of the year.
Transierra simply offers the easiest way to expand the
network and increase the capability to export to Argentina.

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Petrobras: A Special Relationship with Bolivia
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8. (C) Petrobras always seems to get the worst deal out of
any new regulations or tax structures put in place by the
Bolivian government. The switch in rules to supply the
domestic market perhaps hit the hardest (as Petrobras must
supply some 70 percent of domestic demand at below cost
(Ref.b),but a new tax law is also taking another bite out of
their profit potential. Under the new delivery agreements,
an additional tax must be paid to YPFB which most heavily
penalizes operators of the established mega-fields, i.e.

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Petrobras. While operating in Bolivia is particularly
difficult, company president Castejon told us he thought that
Petrobras would remain in Bolivia for geopolitical reasons
even if they were only breaking even financially.


9. (C) Currently Petrobras has four major areas of
investment planned. In the San Alberto field they plan to
spend $200 million over 2-3 years to maintain production
levels. In San Antonio, they will spend $270 million over
3-4 years and attempt to increase productions by 50 percent.
They are currently running an exploratory well in the new
Ingre field, but two major set backs have pushed up the costs
from $33 to $60 million. Finally, Petrobras hopes to become
the operator in the Itau field (currently controlled by Total
and British Gas),but is still waiting for permission from
the Ministry of Hydrocarbons to alter the concession. All
said, Petrobras continues to be the sector's biggest fish.

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Southern Pipeline Dreams
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10, (C) Despite dropping their demand for gas substantially
at the start of the year, Brazil will continue to be
Bolivia's principle market for gas until the end of the
contract in 2019. That said, the potential of sending
additional gas to Argentina is still a possibility.
According to Jaime Barrenechea of Weatherford, several
factors point towards greater future export volumes to the
south. First, Barrenechea says that declining production in
northern Argentina will free up room in the existing
pipeline. Second, the Techint Group, based in Argentina,
holds interests in the pipeline in Argentina, gas fields on
the Bolivian side of the border (through subsidiary
Tecpetrol),as well as several milling operations in Northern
Argentina that are in dire need of additional gas.
Barrenechea hypothesizes that there may well be enough
private players on both sides of the border to make
significant additional gas exports to Argentina a reality
over the mid-term.

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Comment
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11. (C) Many paint the Bolivian economy in general and gas
industry in particular as poised for a significant crash;
they are not. Over the next one to two years, growth will
not be dramatic, but neither will economic deceleration. The
drop in commodity prices has hurt the economy and will be
particularly acute for the remainder of the year as prices
paid for gas to Brazil lags the market price by some six
months, but Bolivia's historically high level of reserves and
likely government spending leading towards the December
elections will prop up the economy through 2009. Predictions
for 2010 will largely depend on the world economy, but given
the recovery in commodity prices and likely steady exports of
natural gas, a sharp economic downturn is unlikely. The
Bolivian economy appears only truly bad when compared to what
might have been. No longer is construction of a gas
separation facility likely, no longer do the private
companies talk about production levels of 80 Mm3/d and
higher, and no longer is Bolivia moving towards being the gas
hub for South America. In a recent meeting with the Bolivian
Country Representative for the Brazilian engineering firm
Oderbrecht, Gustavo Assad ticked off four or five large
engineering projects that were very promising in Bolivia:
the hydroelectric system on the Madeira River (two dams are
under construction in Brazil, none in Bolivia); the gas
separation facility on the Brazilian export pipeline; the
highway to the north which has promised financing from Brazil
(and has gone nowhere since being announced by Lula last
year); potential lithium mining in the Salar de Uyuni; and

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the Mutun mining project in Santa Cruz (which shows no signs
of significant development any time soon). Despite the
potential, Odebrecht currently has no projects in Bolivia.
The economic cost of the Morales economic strategy will not
likely be a dramatic collapse, but rather a drawn out period
of stagnation: Welcome to purgatory.




CREAGAN