Bolivian State Oil Company Signs Gas Contract with Gazprom

YPFB Signs Contract with Gazprom

The recently installed president of the state oil company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), Santos Ramírez, and the Russian state gas company Gazprom's representative in Latin America, Stanislav Tsygankov, yesterday signed an agreement for a study into the exploration of areas reserved for YPFB, reported the state news agency ABI. The agreement will see the creation of a strategic association for a one-year geological study on the Sunchal Block in the department of Tarija. If the two companies decide to sign an exploration and production contract once the study is complete, YPFB will take a 51% stake in the project and Gazprom, will provide training for YPFB employees. Although there was no official statement regarding the amount of investment that the Russian company is expected to make in Bolivia, a report in the Financial Times stated that a Bolivian government official told the paper last year that the contract could be worth US$2 billion while a separate report by Dow Jones cited YPFB spokesman Victor Hugo Chávez as saying that Gazprom's initial investment will be US$250,000.

Increased Role for YPFB

The deal with Gazprom is part of a strategy by YPFB to regain a dominant role in the upstream sector that it lost following the partial privatisation of the oil sector in the 1990s. In line with this strategy, YPFB in January 2008 signed six new contracts with three companies for exploration studies on six blocks in areas reserved for the state oil company. A consortium comprising GTL International and Nalwa Steel & Power, a subsidiary of India's Jindal, is to explore for oil in four blocks in the departments of La Paz, Santa Cruz, and Chuquisaca. Pluspetrol signed a contract for the Huacareta gas block in the departments of Chuquisaca and Tarija and Tecpetrol for the San Telmo block in Tarija. Meanwhile, Petroandina, a mixed company comprising YPFB and the Venezuelan state oil company PDVSA, plans to start exploration in blocks in the north of the department of La Paz in 2008.

Outlook and Implications

Bolivia needs to increase foreign investment in order to boost production and meet demand from the domestic and export markets. However, it is unclear as to how wise partnerships with companies like PDVSA, Gazprom or the Iranian state oil company NIOC are for the country over the long term. In the case of PDVSA, the company's plans to explore in Bolivia appear to be primarily motivated by the Venezuelan President Hugo Chávez's desire to bolster a political ally rather than by commercial considerations given Venezuela's own abundant gas reserves and its reduced cash flow as a result of the government's reliance on PDVSA's revenue to fund its social projects. Gazprom's motivations are also unclear as the company has no other operations in the Southern Cone gas market and already has significant gas production at home. If Gazprom's main interest in Bolivia is to build an international portfolio and establish itself as a truly global player, but the company has no clear reason for selecting Bolivia over any other country apart from its sizeable gas reserves then this potentially raises questions about its long-term commitment to investing in the country.

Instead, new investments planned by the 12 companies that signed new contracts in Bolivia in 2006 following the nationalisation of the gas sector are critical for ensuring future production growth. Of particular importance was the announcement last December from Petrobras, the Brazilian state oil company, that it and its partners plan to invest between US$750 million and US$1 billion in Bolivia. Sizeable investments are also planned by Repsol-YPF, which yesterday confirmed plans to invest over US$1 billion in the country, and BG, which has pledged to invest US$16 million in 2008 alone. In an attempt to push forward these investments, the new head of YPFB yesterday began a round of meetings with foreign companies operating in Bolivia to make sure that they are complying with their investment commitments, warning that any companies that did not would face sanctions. Ramírez's first meetings were with BG, Repsol-YPF, and Chaco. Further meetings are planned today and tomorrow.

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