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Bolivia, a landlocked country in the centre of South America, looks like the obvious hub for for the region’s natural gas supply.
It has the second-biggest reserves after Venezuela, shared borders with resource-hungry Brazil and Argentina, and plans to expand infrastructure with a $2bn pipeline to the south.
But the renationalisation in 2006 of the hydrocarbons sector by then newly elected president Evo Morales has given rise to questions about the sector’s capacity to grow in the medium term.
Carlos Alberto López, an independent analyst and former energy minister, comments: “Although Bolivia will continue to supply Brazil and Argentina with most of their gas imports in the near term, its long-term market potential is at stake.”
He says a number of factors are combining to dim the growth prospects of an industry that accounts for 39 per cent of total exports, 49 per cent of government income and 5 per cent of GDP. These are heightened political risk, delays in infrastructure projects such as the southern pipeline to Argentina, and inadequate capital for exploration and production.
Gas export revenue fell 38 per cent in 2009 to $1.96bn, according to the national statistics agency.
The country also faces increasing competition from imports of liquefied natural gas (LNG), as Brazil and Argentina seek to reduce dependence on their sometimes volatile neighbour.
Turning up the heat further, Peru will begin exporting gas in June, and Brazil’s plans to exploit its newly discovered reserves may give it export capacity.
The hydrocarbons ministry has announced plans to increase output from 41.21m cu m/d in 2008 to 100m cu m/d in 2015, and Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), the state-owned hydrocarbons company, says it will invest $1.2bn in exploration over the next five years.
YPFB is seeking partnerships with companies that still have a presence in Bolivia, such as Repsol of Spain and Petrobras of Brazil, as well as new entrants: Gazprom, the National Iranian Oil company and PDVSA of Venezuela.
“The government views these largely state-driven players as a better match for YPFB, and they may be better able to adjust to Bolivia’s politicised environment,” says Mr López.
Strong macroeconomic performance throughout the global downturn – GDP growth of more than 5 per cent between 2006 and 2008, 3.36 per cent in 2009 and 4.5 per cent forecast for 2010 – gives Mr Morales some leeway.
And the billions of dollars in extra proceeds following hydrocarbon nationalisation allowed him to boost public investment to 10.5 per cent of GDP in 2009.
But the country will still need private investment to develop its Sabalo, Itau, Margarita and San Alberto fields to increase production in the medium term.
Erasto Almeida, Brazil and Bolivia analyst at Eurasia Group, says Bolivia has little spare capacity without investment. He is sceptical that the government will muster the level of private support it is seeking.
“They believe they can get investment by pressuring investors …They think they have leverage, a very valuable natural resource, and to some extent that is true,” says Mr Almeida.
“But the environment for investment has already deteriorated significantly and if they keep pressing hard, it’s going to be very difficult.”
Last month, days before the government took over five power-generating companies, Alvaro Garcia, the vice-president, threatened a consortium led by Repsol with nationalisation of its Margarita field if it did not meet investment targets.
“The investments in the Margarita field have to happen this year, and if they fail to invest, we’ll do it …YPFB will have to take the responsibility of investing and take direct control of production at the field,” Mr Garcia said.
YPFB, meanwhile, has been dogged by accusations of inefficiency and corruption, culminating in the imprisonment last year of Santos Ramirez, a former congressman and YPFB head, following a corruption scandal involving the death of oilman Jorge O’Connor.
Mr O’Connor was shot and killed on his way to deliver $450,000 in cash to the home of relatives of Mr Ramirez – the opposition later said the money was a kickback for granting an $86m contract to Mr O’Connor’s company to build a gas processing plant.
The contract was later cancelled and Mr Ramirez’s successor, Carlos Villegas, sacked more than 70 employees in “unnecessary” posts or accused of corruption.
Natural gas has been an incendiary issue in Bolivia.
In 2003, bloody protests over plans to export LNG forced the resignation of President Gonzalo Sánchez de Lozada, and a 2004 law increasing state royalties on hydrocarbons was not enough to save his successor, Carlos Mesa.
For the country’s impoverished indigenous majority, which propelled Mr Morales to power in 2006, gas had become just one more resource exploited for the benefit of a privileged few.
“Reversing the trend [of underfunding production and exploration] without losing political support will be critical for the success of Mr Morales’s term and the Bolivian economy,” says Mr López.