September 21, 2004

Natural Gas as Engine for Development

MABB is a registered TM.

How important is Natural Gas for Bolivia?

Bolivia is betting all on its reserves of natural gas. The current president and his administration are placing all their hopes, energy and action on Bolivia's gas reserves. President Mesa has indicated he wants to use the gas reserves as a motor for industrialization and economic development, as well as a diplomatic tool to bring Chile to the negotiating table to talk about sea access for Bolivia.

President Mesa drafted the bill on the hills of the July 18th referendum when Bolivians chose to back Mesa's policies. With a renewed mandate, Mesa pretends to use Bolivia's natural gas reserves to carry out his energy and foreign policy. The new bill seeks to fulfill all of the decisions made by Bolivians who voted on the five questions of the referendum.

Among other things, the bill calls for the recreation of the national energy company YPFB and for the creation of a new company, Petrobolivia. Both of these companies will represent the Bolivian state in all aspects relating to the natural resources. An additional aspect of the law is the use of natural gas reserves as an industrialization and development engine to push Bolivia out of poverty.

But, is Bolivia expecting too much from its gas resources? Can the government rely on Bolivia's gas to take the country out of poverty?

The Energy Information Administration (EIA), an agency under the umbrella of the US Department of Energy, and a source of data and research on energy in the world, has released its 2004 International Energy Outlook report. We take a look at this report and other sources and make some conclusions about what Bolivia can reasonably expect from its production and commercialization of their natural gas.

World reserves
According to the IEO2004 report, as of January 1, 2004, proved world natural gas reserves, as reported by Oil & Gas Journal, were estimated at 6,076 trillion cubic feet (tcf).

The developing world accounted for virtually all the increase in proved reserves over the last years. The most significant increase was seen in Qatar, where the estimate of proved gas reserves grew from 508 tcf for 2003 to 910 tcf for 2004. A Smaller increase yet still substantial, of 128 tcf were reported for Iran. Nigeria's reserves increased by 35 tcf. According to the report, almost three-quarters of the world's natural gas reserves are located in the Middle East, Eastern Europe and the former Soviet Union, with Russia, Iran, and Qatar combined accounting for about 58 percent of the total.
The natural gas industry in Central and South America is still at an early stage of development. The report states that at the beginning of 2004, Central and South America held 4.1 percent of the world's proved natural gas reserves (about 250 tcf).
The region's largest natural gas reserves are in Venezuela (148 tcf) and Trinidad and Tobago, Bolivia, and Argentina also hold reserves of more than 20 tcf each. Brazil and Peru have reserves of about 8 trillion cubic feet.

Consumption of natural gas in the world is projected to increase by 70 per cent by 2025. The most robust growth in consumption is expected to be in the nations of the developing world. Most of that increase is projected to be used in electricity generation. Whereas in the developed world, the increase is expected to grow at a more moderate rate, with the greatest increase in the US. This moderation is attributed to the maturity of the natural gas market in these nations.

The IEO2004 report also makes projections for natural gas production. Once again the developing world is projected to have the largest increase. The region of the Middle East is expected to produce 18.8 tcf by 2025. That is an increase of 10.5 tcf from the 8.3 tcf in 2001. The industrialized countries are projected to produce an average of 0.7 percent per year by 2025. This is the smallest increase in the projections.

Despite high rates of increase in natural gas consumption, particularly over the past decade, most regional reserves-to-production ratios have remained high. Worldwide, the reserves-to-production ratio is estimated at 60.7 years. Central and South America has a reserves-to-production ratio of 68.8 years, Russia, 75.5 years, and Africa 88.9 years. The Middle East's reserves-to-production ratio exceeds 100 years.

Future expectations
According to the most recent United States Geological Survey (USGS) estimates, released in the World Petroleum Assessment 2000, a significant volume of natural gas remains to be discovered. The mean estimate for worldwide undiscovered gas is 4,258 tcf. Of the total natural gas resource base, an estimated 3,000 tcf is in "stranded" reserves, usually located too far away from pipeline infrastructure or population centers to make transportation of the natural gas economical. Of the new natural gas resources expected to be added over the next 25 years, reserve growth accounts for 2,347 tcf. More than one-half of the mean undiscovered gas estimate is expected to come from the Russian Federation, the Middle East, and North Africa; and about one-third (1,169 tcf) is expected to come from a combination of North, Central, and South America. Although the United States has produced more than 40 percent of its total estimated natural gas endowment and carries less than 10 percent as remaining reserves, in the rest of the world reserves have been largely unexploited. Outside the United States, the world has produced less than 10 percent of its total estimated natural gas endowment and carries more than 30 percent as remaining reserves.

The Bolivian situation
If Bolivia is counting on getting out of poverty by exporting its natural gas, it has to take a good look at the world market and realize the picture is not that rosy. Taking into account that South America as a total has only about 4.1 percent of the total proven world natural gas reserves, it is relatively clear that Bolivia does not have that much gas to compete in world markets. That is compared to Qatar, which boasts a whopping 940 tcf of proven reserves or even Venezuela, which has 148 tcf of proven natural gas reserves. However, it is said that Bolivia has a total of 54 tcf of proven and probable reserves. That gives Bolivia a respectable second place in Latin America.

The look above is in the context of a world view. When we zoom into the more regional picture, the prospects look a little better. As the report highlights, most of the production as well as consumption of natural gas is expected to take place in the developing nations, with most of the production coming from the Middle East and the former Russian Federation. However, consumption is set to increase also in the Latin American region. From this increase, Bolivia can possibly profit.

Bolivia is already exporting natural gas to Brazil and Argentina. These are two of the most lucrative markets in the region. As far as prospects go, the Brazilian market looks more lucrative for Bolivia. Consumption of natural gas in Brazil increased from 119 billion cubic feet (bcf) in 1991 to 339 bcf in 2001. In 2002, Bolivia exported a total of 139.4 bcf to Brazil. Brazil imports 44 percent of its natural gas. These numbers indicate a solid base for Bolivia to keep supplying its natural gas to Brazil. On the other hand, Brazil's policy goal is self-sufficiency in energy. In light of recent reserves discoveries of 14.8 tcf and a weaker investment ability in domestic plants, Brazil is currently seeking to reduce imports of Bolivian gas.

Another possibility to expand Bolivia's prospects is Liquid Natural Gas (LNG). Bolivia, as part of its strategy for export, wants to be able to export LNG outside the region. This form of gas is better suited for transportation to far away places. One such place, Bolivia wants to export its LNG is the US. However, there is a need to bring the product to the sea. Currently, there is a decision, by the government and backed by the results of the referendum, to use a Peruvian port instead of a more economic port in Chile. This decision raises the costs of exporting, not only because there will be a need to build a pipeline through a rough terrain, but also because the Peruvian port is further away than the Chilean port. The debates are still ongoing and a final decision is only half made.

Even though the prospects to use Bolivian natural gas as a development engine is promising, Bolivia's strategy for development is not on solid ground. Factors like the world markets are a strong force influencing what happens with this policy. The government better not rely solely on natural gas for its economic strategy. The international market for natural gas will be very competitive and at times perhaps brutal.