June 2022 – @alvaroriosroca – Paradoxical, but what we relate below took place in March, April and May 2022 between Bolivia, Argentina and Brazil. Let’s move on to the anecdotal story.
Bolivia was for a long time the main producer and supplier of natural gas through pipelines in the Southern Cone countries. In 2015 Bolivia produced about 61 Million Cubic Meters per Day (MMMCD) to supply its domestic market and its two export contracts to Brazil (Petrobras) and Argentina (IEASA).
The reserves came from discoveries made 25 years ago. With Law 3058 and the so-called nationalization, they were quickly exploited and leased. Gas exports are expected to reach 50,000 billion dollars between 2006 and 2020. Both measures, however, slowed down exploration to replenish reserves that were being consumed at an accelerated pace. By the end of 2021, production was around 41 MMMCD with an approximate decline rate of 4.4% per year.
While this was happening, Vaca Muerta (shale) was discovered in Argentina and the Pre-Salt (offshore) in Brazil, both with enormous productive potential to produce natural gas. Both Petrobras in Brazil and IEASA in Argentina knew about the sharp decline in production in Bolivia that began in 2015. Will both companies tell me that they did not know about this sharp decline? We stated it in 2013 and here is the proof They warn that Bolivia is dangerously reducing its gas reserves – Economí¬a – Opinión Bolivia (opinion.com.bo).
Both companies and their countries did not do their homework to replace the declining production in Bolivia to supply its demand with production from their respective countries. In particular, they did not build infrastructure to supply their domestic needs, rested on their laurels and bet on importing LNG instead of developing their own production.
Finally, analyze that the fuel oil markers for natural gas prices were becoming obsolete, since they had to be linked to the Gas with Gas competition markers, i.e. they had to be linked to international gas price markers or LNG landed prices in the destination countries. Argentines and Brazilians also relied on the low international LNG prices resulting from the oversupply and the low demand of the pandemic.
In 2021 came the economic recovery, the prices of LNG began to rise and in February 2022 the perfect storm came with Mr. Putin’s invasion of Ukraine, which made the European Union tremble with natural gas supply and energy security. The powerful Europeans rushed to monopolize the world’s LNG and prices soared from a historical average of 6 to 8 Dollars per Million BTU (USD/MMBTU) to 25 to 40 USD/MMBTU, i.e. three to four times more.
Argentina’s coffers are staggering to deal with these imports. Where to get dollars that do not exist in the economy? IEASA and diplomat’s trip to Bolivia to see how YPFB could scrape the pot to deliver cheap regional gas linked to fuel oils. In addition, the internal supply of northern Argentina was put at risk. The tango country was in a tremendous energy crisis and YPFB had only 8 MMMCD to deliver when the market needed 14 MMMCD.
IEASA’s and Argentina’s diplomat’s trip to Petrobras and Brazil to release gas from the contract with YPFB to go to the conflictive and needy Argentinean market. Bolivia’s request to Brazil to cede gas, Petrobras’ refusal indicating that it had to import very expensive LNG. YPFB’s request to negotiate prices according to clause 6.11 of the contract. Negative response.
YPFB finally makes a somewhat Solomonic decision and decides to cut around 6 MMMCD to Petrobras and pay a penalty (98% of the perfectly valid price that occurs in the industry). YPFB passes the penalty to IEASA of Argentina with a plus of 4 USD/MMBTU. Additional Bolivian revenues close to 100 MMUSD in the winter months. The price above 8 MMMCD then rises to 20 USD/MMBTU. IEASA and Argentina reduce their LNG purchase bill significantly and solve the winter shortage in the north of the country in 2022.
Petrobras launches a gas price increase to end users and blames YPFB for the situation. It does so, moreover, knowing that the pre-salt route 3 would deliver an additional 4 MMMCD in this period, benefiting from the price increase. In troubled waters the fishermen’s gain, as the adage goes.
This is the way we are going in the Southern Cone and at the rate we are going, next winter the same fight will take place. Argentina is not moving forward with the Esperanza gas pipeline. It is time to make investments in infrastructure to avoid this situation. Argentina: ‘Gas pipeline of hope’ in its decisive hour | EL DEBER. Gas marker prices are set with gas and much more. These impasses damage our ideologized countries and we give away money importing LNG having it at home. Argentine gas will avoid costly LNG in the region | Los Tiempos. Bolivia must continue exploring, but how?
*Alvaro Rios was Minister of Hydrocarbons in Bolivia and is currently a partner of Gas Energy Latin America.