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Natural Gas in Bolivia: Risks and Opportunities
Carlos Feu Alvim email@example.com
José Israel Vargas firstname.lastname@example.org
The recent institutional crisis in Bolivia that culminated in the resignation of the second President in two years and caused institutional changes in the petroleum and gas sector (that supposedly caused it) has reactivated the Brazilian doubts about the reliability of natural gas supply from that country.
Electricity and natural gas (NG) have some similarities. It is hard to store them and they demand a close connection between the producer and the final consumer. Furthermore, they are practically clean fuels, increasingly adequate for urban consumption.
On the other hand, all other liquid fuels (such as petroleum and its products) and solid ones (like mineral coal) are relatively easy to transport and store.
This umbilical connection between producer and consumer creates inevitable dependence that permits to overcome mutual fears.
This behavior has been corroborated by international experience. A noteworthy example of this ”stability” is the energy supply from the Cahora Bassa Power Plant in Mozambique. During the years when this country had a communist and predominantly black regime and South Africa, its visceral enemy had a white, racist and capitalist government, the electricity supply between them was not interrupted due to political reasons. Other examples are the natural gas connection between the former Soviet Union and Western Europe, in spite of the Cold war, and that between Kadafi’s Lybia and Italy, a member of the European Union.
The natural gas supply from Bolivia to Argentina has been provided without difficulties during two decades. Even after becoming self-sufficient regarding natural gas and at the end of its import contract in 1992, Argentina continued to buy Bolivian gas until Brazil could absorb the surplus. Besides, it was expected that reversing the gas flow in the gas pipe would permit Brazil to import Argentine gas via Bolivia. However, it should be remembered that the international financing organizations wanted to preserve what they considered “the largest Bolivian legal revenue”. Furthermore, the United States interest in assuring to Bolivia the natural gas revenue was a guarantee to obtain financing for the undertaking.
Bolivian Natural Gas
The implementation of the agreement that permitted Petrobrás to import gas from Bolivia has caused heated debate in the company at the occasion. Opposition to the agreement was expressed through the AEPET (Association of Petrobrás’ Engineers) whose main allegations were: Bolivia had no proved gas reserves, Brazil had much gas to be discovered and finally, Bolivia was not trustworthy. A technical group within the company , coordinated by José Fantine (then the Planning Superintended) studied all the technical and strategic aspects of the matter. According to this engineer, approval from the first-line managers and directors was obtained without any undue pressure. AEPET’s opposition presented also political and ideological aspects related with the eventual end of the internal petroleum monopoly since the future company that would exploit the gas pipeline should obligatorily have foreign partners. Petrobrás’ participation in the exploitation (that lead to large discoveries) and the consequent production in Bolivia was a subsequent action as a function of the privatization of the sector that occurred there. Therefore, two large business emerged: gas production (that now is under new nationalization and taxation) and gas import.
The recent events in Bolivia have already produced consequences on the trust concerning future projects and that has led Petrobrás to revise the northeast gas pipeline project (Gasene) as well as other investments on thermal power plants and industrial installations. However, the historical experience makes one hope that in the medium and long term the difficulties due to the present Bolivian political situation will be overcome. On the other hand, Petrobrás’ evaluation seems to be that the Bolivian taxation does not eliminate the profitability of the undertakings already embarked on that country and the gas volume inventory would guarantee supply during the time necessary to amortize the investments already made.
The decision of the new Bolivian government, to be elected in 2005, would have to consider that natural gas is responsible for 29% of the country’s exports (data of 2004). The current price rise of oil and natural gas in the international market and the Bolivian gas production increase should raise the relative importance of that revenue. The hypothesis that a constituted government in Bolivia would interrupt supply to Brazil is considered as rather unlikely. On the other hand, a more stable government would tend to find a solution in which the agreed price does not discourage demand and consequently future investments.
It should be remembered that in the most discouraged conditions there are risks inherent to the usual transport system (gas pipeline) resulting from natural and technical causes or sabotage acts. Actually, guarding an installation that stretches for thousand of kilometers (557km in Bolivia) against war acts is practically unviable.
Even though the hypothesis seems unlikely and that there has not been a real menace concerning gas supply in the recent events, it is essential to analyze Brazil’s vulnerability vis-à-vis supply reduction or interruption of Bolivian gas both to prevent its eventual consequences and to guide the Brazilian energy planning itself.
Natural Gas in South and Central America and the Availability of Gas in Bolivia
Some elements of the present analysis are necessary in this first approach. Initially it should be considered data relative to NG in South and Central America potentially interesting for analyzing the problem and they are summarized in Table 1.
Table 1: NG in South and Central America in 2004 (billion m3)
Source BP (http://www.bp.com)
The preliminary exam regarding NG availability in Bolivia must take into account some crucial points listed below.
The Bolivian production capacity considering its reserves.
Assuming a prudent reserve/production ratio of 20 years, one gets a production potential of 44 billion m3/year based on the known reserves. An evaluation of the probable reserves could lead to higher values. From this point of view, there is an offer that makes it viable importing gas from that country in the considered time horizon.
Brazil’s competitors for the Bolivian gas.
1. Bolivia - Naturally, Bolivia will have priority in using its own gas. Its commercial primary energy consumption in 2002 (IEA data) was equivalent to 4.8 billion m3/year of which 27% in NG. Assuming that the NG share in the Bolivian energy matrix would reach 55% (like Argentina now), the consumption limit would be 2.4 billion m3 or 2.8 billion m3 in 2004 (assuming an increase of 8%). Should the economical activity double in ten years (7% annual growth of the GDP) and if the energy demand should follow this growth, the Bolivian consumption would only be about 5 billion m3/year and about 40 billion m3/year would be exported.
2. Argentina – In the nineties, as previously noticed, Argentina considered itself as a natural gas exporter in the following decades. Its infrastructure was specially prepared for that purpose by establishing connections with Brazil and Chile. However, Argentina already had a reserve/production ratio close to the minimum limit that is strategically acceptable, namely ten years. Argentina’s plans for free export emerged from the expectation – after all not materialized – that privatization would lead to a fast increase of reserves. So, it is probable that Argentina in the next years will concentrate on satisfying its own needs and on carrying out (if possible) the already signed contracts. The unusual NG share in its energy matrix leads to the possibility that its demand growth rate will be somewhat reduced. Figure 1 summarizes the Argentine situation. It can be noticed that in the last 20 years its reserves had no significant growth whereas production and consumption have systematically grown.
Figure 1: Reserves, production, consumption and reserve/production ratio in Argentina
3. Chile and other South America countries – It should be initially noticed that Chile is entirely dependent on the NG imported from Argentina. Besides, it presents an important NG share in its energy matrix (29%). Considering the inexistence of national production, its annual consumption must be supplied by neighbor countries unless it imports liquefied (cryogenic) NG. The most evident supply option in the continent are the Peruvian reserves (besides Bolivia). This circumstance makes it particularly vulnerable to the present pressure from Bolivia that uses NG as instrument to re-conquer its access to the sea. The annual Chilean needs are presently 8 billion m3/year. The third country that will have a potential demand in South America is Colombia; presently its production is sufficient only to satisfy its internal demand. In the future Colombia could have NG from its neighbors Peru and Venezuela. Concerning the latter, the present political problems must be overcome.
4. USA and other developed countries– The distance barrier that limits the NG trade to distant countries will be removed as prices of NG transported in the liquefied form in cryogenic ships becomes viable. Incidentally, it should be noted that the price of NG imported by Japan (CIF) was below the average price offered in the USA for piped gas. In the case of North America, the NG known reserves are similar to those of South America for a potential demand that is at least ten times larger. The USA already imports cryogenic NG from Trinidad Tobago (13.1 billion m3/year in 2004). The possibility of exporting NG to the USA is under consideration by Bolivia but the country is confronted with the difficulty of not having a port. In fact, one of the problems that led to the resignation of President Meza was the fierce popular opposition to an agreement between Bolivia and Chile aiming at exporting Bolivian NG using a Chilean port. However, it should be noticed that no matter how much the cryogenic and transport costs are reduced, it will always be higher than that corresponding to the transport via gas pipeline to Brazil or Argentina. So, the Bolivian option for cryogenics will always be disadvantageous to the Brazilian option because Bolivia will have lower revenue for the same final prices. The other existing option for exporting gas for distant places is under the liquid form (gasoline, diesel, naphtha and other products) obtained from natural gas through the GTL (gas-to-liquids) process. However, this process will be first adopted in countries where practically there is no economic option for the associated NG produced.
Impact on Brazil of reducing or canceling Bolivian gas import
In 2004 imported NG represented 37% of the gross internal offer. The dependence evolution is shown in Figure 2.
Figure 2: Internal offer dependence on imported NG (Data from the Brazilian Energy Balance of the Ministry of Mines and Energy - BEN/MME 2005)
In Table 1it was shown that Brazil has now only 4.6% of the Latin America known reserve. Having access to an external source of piped NG is in principle a comparative advantage vis-à-vis other countries that should not be neglected. Considering the distance between Venezuela and the regions of large potential consumption in Brazil, Bolivia is the best option due to its reserves and localization. It should be remembered that natural gas substitutes other heat sources with lower environmental impact and is an alternative to several petroleum applications whose share in the world energy matrix already seems to be declining. The Brazilian reserves, shown in Figure 3, do not permit large expansion in the medium term. In effect, even though the reserve/production ratio for almost two decades has maintained itself in the 30 years level, the reserve/consumption ratio was 17 years in 2004. That is, in order to have a sustainable expansion of the NG share in the Brazilian energy matrix, based exclusively on the national production, it would be necessary a significant increase of the local reserves.
Figure 3: NG Production, Reserve and Demand Evolution in Brazil.
Since the use rate will grow in the next years, not counting on NG from Bolivia does not seem to be a good strategic option for Brazil.
The production, transformation and use of natural gas in 2004 are shown in Table 2, according to BEN/MME 2005 data. There is a total offer of about 25 billion m3 of which 8 billion m3 were imported. After re-in injection in petroleum wells and subtracting the fraction not used (burned in the petroleum platforms) the gross internal offer is 20 billion m3/year. If we subtract 1.5 billion regarding other transformations (mainly liquid compounds), about 18.5 billion are left for other uses, of which 4.5 billion are used for electricity generation and 14 billion for final consumption.
Table 2: Production, Transformation and Use of NG in Brazil in 2004
Source: BEN/MME 2005
Imports of dry NG (8 billion m3/year) assign about 18.5 billion m3 both for final consumption and electricity generation. That is, if the supply of Bolivian gas is interrupted, more than 40% would have to be reduced in this end use. It is important in the future to have alternatives to national non-associated gas and gas from other origins (like Peru and even cryogenics) which would be able to supply – at least partially – eventual shortages
An important question - that transcends the scope of this article – is the dimensioning of the future Brazilian demand and the administration of the national reserves exploitation that takes into account the availability of external sources. In the present situation, in terms of primary energy, the NG share in the Brazilian matrix is 9% of commercial energy (data of 2004) while the world average is 24%. That is, a share of this same order of magnitude in Brazil would correspond to a consumption of about 50 billion m3/year or about 140 million m3/day. Recently e&e (No 49) has projected the energy growth for the 2000-2035 period in Brazil using a methodology based on the concept of equivalent energy for a moderate economic growth scenario. The energy consumption growth would be 4.7% annually. Assuming the same growth for the natural gas potential demand and that the participation in the energy matrix would reach the world average, the Brazilian demand would be 65 billion m3/year in 2010 and could exceed the previously mentioned 140 billion already in 2020. If the Brazilian reserves are in the estimated limit of 1.5 trillion m3 (present reserves and those to be discovered) it seems convenient and prudent to be able to use the neighbors’ reserves.
Alternatives for NG Contingencies
In the hypothesis of a possible interruption of Bolivian NG, the possible measures are basically to increase the offer or restrict demand. Since most of the NG produced in Brazil is gas associated with petroleum production, the possibility of rapidly increasing the internal offer is small. There is not an adequate infra-structure for storing gas or importing liquefied NG as well. The maneuvering margin for increasing offer is limited but it certainly exists. In a rough approximation, an increase above 1 billion m3/year should not be expected.
A preliminary analysis indicates that there is a large potential for substitution in the refineries (annual consumption of 3 billion m3 ). The transport sector absorbs about 1.5 billion m3, however most of the vehicles fleet could run going back to traditional fuel. Electricity generation corresponds to 4,5 billion m3. For a limited time period and in periods of adequate water reserves, reducing electricity generation in NG power plants would be possible. In the industrial sector (responsible for about 7.5 billion m3/year) it is certainly possible to identify where substitution is possible in order to minimize restrictions to offer.
All mentioned substitutions, with few exceptions, will imply financial and/or environmental costs. However a temporary interruption of Bolivian NG supply would not cause insurmountable problems. On the other hand, it is always convenient to have alternatives to imports since that would also minimize the risk of eventual boycott for political reasons.
In the analysis presented in the e&e nº 49 issue concerning the electrical sector it became clear the regulating role of thermal power plants in the electricity generation system because of oscillations in the rainfall regime. With the growing participation of NG in electricity generation (Figure 4), this type of electricity generation regulation runs the risk of causing a negative impact on the gas sector. So there is already a clear necessity of regulating the NG supply in the Brazilian energy system that has not been adequately equated. Since offer tends to be rigid (associated gas + imports in the take-or-pay process), regulation should be made on demand. This can be carried out by contracting demand that permits interruption. So it would be very interesting for the energy system to have installations that could operate with other fuels.
In the future, a regulation in the offer would be desirable (national non-associated NG and NG from other countries) in order to stabilize the system.
Figure 4 : Uses of NG in the electric energy generation in Brazil not including the re-injected and non-used NG (data from BEN/MME 2005).
Historical examples from other countries show that the mutual dependence relationship between the producing and consuming countries seems not to affect the energy trade even in the hypothesis of a conflict between the parts (which is not the case of Brazil and Bolivia). Therefore interruption of NG supply is a remote possibility.
The preliminary analysis carried out here seems to indicate that there is a margin – at least for a limited time –for absorbing the interruption of external gas supply with acceptable loss.
Imports of NG from Bolivia (at adequate prices) are the most indicated option in the regional range for complementing the Brazilian production, considering the national reserves known by now.
An analysis of the countries that could possibly be in competition regarding the Bolivian NG indicates that Brazil has a privileged position considering the volume it can absorb and the availability of a gas pipeline network of its own.
The regulation of the national NG market – even in the absence of supply interruption – should be strategically analyzed considering the possibility of significant variations in NG demand for electricity generation in a predominantly hydraulic system that does not have multi-annual regulation. It should be desirable to organize for NG (and also for electricity) a system that could tolerate offer and demand variations in order to cope with the climatic, energy and also political circumstances.
During decades Brazil has been an energy island vis-à-vis its neighbors, The South America integration in the energy area has been slowly developing and the Bolivia/Brazil gas pipeline is an important step in this direction. This integration brings mutual benefits but it obligatorily brings geopolitical complications that are inherent to the main role of Brazil in the continent.
It should be remembered that Brazil lacks a long term energy planning that integrates all energy sources. Along with the continental integration it is necessary to include in this planning the energy trade with its neighbors. Studies to prevent and face contingencies should be a continuous activity
 There is the possibility of transporting gas in liquid form at low temperatures using cryogenic ships. The cost of this type of transport has made its use difficult; it corresponded in 2004 to 7% of world consumption and 26% of world exports (http://www.bp.com). Sixty per cent of this type of export is bound for Japan and Korea for which there is no other option for gas supply.
 Mistrust is unavoidable whenever trade involves countries whose institutions (or social-political situation) are particularly unstable. This mistrust – that would exist in any supply of strategic goods – is however attenuated and not aggravated by the type of existing connection.
 Denominated “I Group”.
 José Fantine (presently Executive Coordinator of the Excellency Centers Space) points out that in the recent Bolivian crisis, the interruption of gas supply to Brazil or its price increase was ever discussed. It was just discussed internal price increase due to tax increase. But this increase cannot be transferred to the importer (Petrobrás), since the gas price is regulated by contract. The alarm regarding interrupting the pipeline gas flow occurred because the highways were blocked preventing the release of the liquids produced in the natural gas plants and this would lead to fill up all storage space and therefore to halt natural gas production. Tax increase has decreased the local operators’ profit, among them Petrobrás, but this has no relation to gas supply to the gas pipeline.
 Central America is of little practical importance in what concerns Brazil’s supply but it has been included because data has been aggregated in the source.
 Even though large term contracts influence NG prices imported by Japan, the fact represents the viability of this type of import vis-à-vis the present petroleum prices.
 The USA has started a rush to build terminals that could serve multiple imports.
 In Latin America Venezuela (and not Bolivia) would be the obvious cryogenic NG supplier for the USA since it has the largest reserves. Evidently the present political conditions regarding the Bush and Chavez Administration do not favor such agreement.
 Even though the GTL process is not a “mass” process that is commercially dominated, it can produce diesel oil and other products at costs lower than those of products directly obtained from petroleum (less than 40 US$/barrel for highest quality products from a gas that has the Bolivian production cost). Therefore the next route for the gas owners is to associate to produce diesel oil, gasoline or aviation kerosene or petrochemicals. The first commercial scale plants are starting operation and several enterprises entirely dominate the technology.
 Dependency relative to total offer (production + imports) was 30% but regarding final use and electricity generation, this dependency was 44%.
 As an illustration of contingency hypothesis one could think of increasing production in 0.5 billion and reducing 1.5 billion in vehicles use, 2 billion in refineries, 2.5 billion in electricity production and 1.5 billion in industry (total of 8 billion m3/year).
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.