Tuesday, July 26, 2005

Bolivia Gas Reserves Decrease - Lower Investments Blamed

Petroleum World quotes,Luis Lema Molina, Tarija's superintendent for hyrdo-carbons, stating that Bolivia's proved natural gas reserves have gone from 27 trillion cubic feet (or 727 billion cubic meters)in 2002 to 22 trillion cubic feet (TCF) in 2005. The percentage he says is 'significant since it is all subject to (the lower) investments made in the sector'.

Proved Reserves???

This does not mean: 1. that there is less natural gas under Bolivia's ground, or 2. five trillion cubic feet were sold at huge profits by evil multinationals. The basic definition of proved reserves "are those quantities of natural gas, which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions. There is no 100% reliable way of quantifying how much natural gas lies thousands of feet below the surface in a particular area. Once you drill and start producing, it becomes easier to estimate how much you have in a particular field or reservoir, and this leads normally to increases in proved reserves.

Bolivia's Natural Gas industry - defined as an active producer of significant amounts of natural gas - is in its relative infancy. The 2002 figures for proved reserves were based on information collected in the significant amount of exploration that took place in the 1990's. Lema Molina says the adjusted figures were calculated onceextraction started, which is normal in the industry. He cites the example of one exploratory well that hit water, 12,000 feet below the surface, making it tougher to work that particular well - and also taking whatever estimated deposits there out of the count.

It Takes Money To Make Money

This is a capital-intensive industry, which relies on technology, needing constant investment to even maintain production at current levels. U.S. industry is estimated, to need investments of around "$1.44 trillion in capital between 1999 and 2015 in order to keep pace with demand growth." Since 1997 in Bolivia, Petrobras, France's Total, and Spain's Repsol, have invested about $3.7 billion dollars, and the proved reserves also increased almost 10 fold at the time, from 170 bcm before 1997 to 1,481 bcm by January 2001 (IEA 2003 Cited Here).

As Lema himself says:

Reserves are intimately linked to investments. If there is more activity in exploration it will necessarily expand reserves in a region that has the fundamental elements to increase reserves, but it is not worth saying we have bigger volumes of gas and liquid if we do not prove it in reality"

Political Instability - Less Investment

It is undisputed that investments in the gas industry are going down, largely due to post-2002 political climate and resulting instability. Investment for 2004 is down to 235.9 million dollars from 2003, when it was 280/5 million dollars.

This is what happens when politicians arbitrarily vote to rescind long-standing contracts, raised taxes 100 percent on the product, and threaten to nationalize the entire industry. It puts companies with large investments on the edge. Repsol for one, has indicated that the new tax law throws a wrench into its plans, to increase production.

Remember the 'commercially viable' cost of extraction? When your costs associated with production go way up, pumping gas out of certain fields becomes less lucrative, and reserves go down. As Fundacion Millenio pointed out this would dropping production of smaller fields dispersed in several departments, and concentrating on key mega-fields in Tarija. Lema himself mentions other wells which have been abandoned for now, keeping them in reserve. And there is no guarantee that even in productive fields, additional drilling will be done, restricting production.

Long term there might be ruinous consequences for the industry as a whole, since basic infrastructure can be compromised. Lema claims thatthis lowered investment, has affected not only exploration and exploitation, but also (investment) in ducts and plants. ."

Opportunities Lost

Lema suggests that some of Tarija's business leaders might have been right in signaling (in 2002) "that there were big risks involved if new markets like the U.S. and Mexico were not opened." In other words, when certain multinationals wanted to buy Bolivian gas, send it through a pipeline to Chile, where it would be shipped to Mexico for ultimate transport to the U.S., it was an opportunity lost. Billions of dollars would have been spent on Bolivian soil for infrastructure and additional exploitation, which again would result in increased proved reserves.

This industry does not operate in a vacuum. Companies who have invested in Bolivia's gas fields, are now looking elsewhere. Repsol for one, has indicated that the new tax law throws a wrench into its plans, to increase production, and is looking to extricate itself.

And when one side loses an opportunity there are always others who seize on the chances created. This has reached such a point that Peru, Argentina, Brazil, and Chile have recently come up with a scheme - and found financing- that involves expanding production in Peru, and supplying the other countries through new pipelines.

Rhetoric vs. Reality

Lema diplomatically says that reduced reserves, should be cause for some needed 'reflection', since in "Bolivia it was too easy to take populist positions, versus certain realities of the (oil and gas) industry." That is a gentle way of saying that Evo and friends' outdated slogans and silly demands, have nothing to do with reality.

This is just another way in which the collective tantrum in the Altiplano, fueled by Evo Morales' and his cohorts' playing on old suspicions and hatred, has been extremely costly to the country. Chasing away the people who developed the industry, only hurts the industry as a whole, and loses money. The demagouges offer no solutions.

If, nationalization became a fact, the reality is that there is no money in the country of the type needed to fully exploit the gas under Bolivia's surface. The economy, is not doing so bad. First it grew last year - albeit at a slower rate than the rest of South America. In addition, the national deficit was reduced, and the external debt went down. Government revenues have increased, mainly due to the gas exports. That has also created a favorable trade balance Increased gas exports coupled to the higher prices of gas, have contributed much to this, as has tighter discipline of government spending. But the entire thing is stretched to the limit, and no way will they be able to raise the cash.
The only people capable of financing and maintaining the sector are multi-nationals.

Overall, the basic needs to feed and educate the poor, and to build up the infraestructure of the country. With the favorable economic conditions, coupled with a steady infusion of tax revenues coming from a productive oil and gas sector, these real issues could be dealt with. Ironically, in the name of the 'poor', the luddites of today are making what should be Bolivia's bounty, into a far-away dream.


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