Petrobras, BG Group Undeterred By Poor Business Environment

BMI View: Petrobras and BG Group have both been awarded oil and gas exploration concessions in Bolivia , boosting their exposure to the country ' s prospective oil and gas resources . The move comes a t a time when there is enduring concern about resource nationalism in the country ' s strategic sectors, as well as a deteriorating below-ground picture. Indeed, the country ' s oil and gas reserves base is forecast to remain in decline over the next decade, threatening its position as a significant regional gas exporter.

The recent awarding of the Cedro area, located in the Santa Cruz department, to Petrobras and the awarding of the Huacareta area in the Chiquisaca and Tarija departments to BG Group are important deals which will draw much-needed exploration and production (E&P) activity into Bolivia, as well as associated foreign investment. However, it is important to note that five areas were actually put out to tender by the Bolivian government, with licences for the Madre de Dios, La Guardia, and Alegria going unawarded. For their part, unsuccessful bids were submitted by Ecopetrol, Chevron, Statoil, Kogas, Tecpetrol, and Sinopec.

Both Petrobras and BG Group already have a significant presence in Bolivia, with the majority of the country's gas and condensate output serving key export markets, including Brazil and Argentina. Indeed, this latest agreement is likely part of a five-year, US$500mn investment by BG Group into Bolivia's gas sector, which was originally announced in May 2011 ( see 'Rewards Outweigh Risks As BG Commits To Bolivian Gas Development,' May 23 2011). Through delivery arrangements with Bolivia's state-owned YPFB, BG supplies gas for domestic use and regional export.

Short-Term Gain, Long-Term Pain

We are forecasting that Bolivia's gas sector will expand over the long term. We expect total natural gas production to rise from an estimated 16.8bn cubic metres (bcm) in 2012 to 20.5bcm in 2021, largely on the back of production from the Margarita gas field operated by BG Group, in partnership with Repsol. However, this projected rise in production would come at the expense of Bolivia's dwindling proven gas reserves. Indeed, reserves have been in steady decline since 2010 when an independent audit by US-based consultant Ryder Scott downgraded proven gas reserves by half. Bolivia's longer-term prospects as a major regional gas supplier are therefore contingent upon new and successful gas exploration.

Running Out Of Steam
Bolivian Natural Gas Production And Reserves

A large-scale increase in E&P activity by foreign companies has been stymied by an enduringly negative business environment, encouraged by a government prone to stoking the fires of resource nationalism. Indeed, the recent nationalisation of two electricity distribution companies owned by Spain's Iberdrola underscores this point.

For its part, BG had significantly reduced its activity in Bolivia as a result of the deteriorating business environment - caused by the nationalisation of the country's hydrocarbon assets in May 2006. In February 2007, BG said that it would not commit to large new investment to Bolivia, saying that existing operations remained profitable, but in truth the new terms under the nationalisation decree did not allow sufficient profitability to justify significant new investment. Nevertheless, the announcement that the company is continuing to invest in the development of the country's gas industry bodes well for Bolivia, which is keen to significantly boost production, and shows that some companies are willing to invest in the country's below-ground potential despite the risks.

This article is tagged to:
Sector: Oil & Gas
Geography: Bolivia, Bolivia, Bolivia, Bolivia