- Economic improvements in Argentina over the next decade will erode Bolivian natural gas exports.
- A restrictive regulatory environment and geographic isolation from natural gas markets outside the Southern Cone will continue to limit exports and investment.
- High revenue from large fields in southeastern Bolivia will enable La Paz to continue antagonizing private companies in the short term, but even regulatory reform might not be enough to counter the Argentine threat.
Bolivia has been enjoying the benefits of a natural gas export boom, but the good times could well be coming to an end. At present, natural gas accounts for nearly half of Bolivian export revenue by value, driven by rising production from three major natural gas fields in southeastern Bolivia's Tarija department. La Paz's annual income from natural gas exports rose from $2.8 billion to $6 billion between 2010 and 2014, as natural gas prices remained heavily influenced by the price of fuel oil in Brazil and Argentina.
Fortunately for landlocked Bolivia, both countries have been ideal long-term consumers of natural gas. In the case of Argentina, declining natural gas production, a domestic regulatory environment that dissuades investment by foreign energy firms and a lengthy economic crisis have created an energy production deficit filled partly by Bolivian natural gas exports. Bolivia now provides around 13 percent of Argentina's daily natural gas consumption. Meanwhile in Brazil, rising natural gas demand for power generation has created a shortfall in production that Bolivian natural gas partly satisfies.
The Argentine Threat
Bolivia's reliance on the Argentine and Brazilian domestic markets means that changes in those markets will heavily influence La Paz's continued exports. Major changes are unlikely to happen in the next few years, but they could occur and affect Bolivian export growth in the coming decades.
Argentina is of particular concern to Bolivia. It has been a major export market for Bolivian natural gas since Argentina's own natural gas production began declining in the mid-2000s. The next Argentine president, however, will likely begin taking the first tentative steps toward addressing Argentina's economic stagnation, including liberalizing the energy sector. For Argentina to improve its attractiveness to foreign investors, the next president will have to significantly relax currency controls in place since 2011, ease import restrictions that currently limit companies' ability to bring equipment into the country, and reassure foreign firms that their holdings will not be expropriated and that the regulatory environment will not change quickly because of shifting political priorities.
The adjustments needed to grow foreign investment in the energy sector probably will not occur during the next Argentine presidential term. But when they are eventually implemented, energy investments in Argentina will likely raise its production, diminishing Bolivia's share of the Argentine natural gas market in the process. Since this boost in Argentine natural gas production is likely at least a decade away, Bolivian natural gas exports will remain secure in the medium term.
Meanwhile, although Brazil will also continue ramping up its natural gas production, rising natural gas consumption could cause Brazil's demand for Bolivian natural gas to actually increase. At present, however, increasing Brazilian production has reduced Bolivia's overall share of the Brazilian natural gas market to less than 35 percent.
Regulatory and Geographic Hurdles
Bolivia's inability to attract foreign investment and expertise could stagnate the country's production growth. The main challenge to investment in Bolivia is the government's regulatory scheme, which will likely continue hampering private investment in the oil and natural gas sectors. The current regulatory environment is the product of the 2005 legal reform and the May 2006 nationalization of assets belonging to private firms.
These decisions reversed initiatives by previous presidents in the 1990s to privatize and weaken state-owned energy firm Yacimientos Petroliferos Fiscales Bolivianos (YPFB). After 2006, private firms could only enter into service contracts, production-sharing agreements and joint ventures with YPFB, and all oil and natural gas extracted had to be sold through YPFB. With the reforms, YPFB became the primary regulator in the energy sector, but it also dissuaded greater foreign investment in a country whose geography and limited export markets already presented significant barriers to investment.
Since Brazil and Argentina are Bolivia's only nearby major markets, few additional firms are interested in entering Bolivia. Chile was barred from receiving Bolivian natural gas exports because of Bolivia's lingering resentment at losing its sea access to Chile in a 19th-century war. Declining Argentine purchases could compel Bolivia to lift the ban on sales to Chile. But the Andes pose a formidable geographic barrier separating Chile from existing fields in southeastern Bolivia, so any sales to Chile would require the construction of costly infrastructure.
Bolivia's declining natural gas reserves because of low exploration activity could eventually prompt La Paz to soften its stance toward international companies. However, the high revenue gained from only three large fields in southeastern Bolivia will likely enable the government to continue antagonizing private companies in the short term. But even if Bolivia loosened regulations in the long term, it might be equally as helpless in the face of an eroding Argentine market share and geographic isolation.