Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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The investment commitments signed in the Gas Forum

"Bolivia signs three exploration contracts with Repsol and Petrobras for US$ 20,000 million in rent [Government Participation]" Headlines like this were published a few days ago on the Forum of Gas Exporting Countries, held in the city of Santa Cruz de la Sierra (Bolivia) in November 2017. In this regard I would like to point out some issues about this news.

What is this Forum about? Forums like the one we had in Santa Cruz are in general a debate space where the main conclusions don’t have an impact, in the short term, on natural gas international markets. It’s not an instrument where decisions and /or conclusions are mandatory for the participating countries. On the other hand, large producing countries like United States of America don’t participate in the Forum, three of those whom participate (Iran, Russia and Qatar) together they have more than 3,000 TCF of gas reserves... Bolivia has 10 TCF, yes 10. At this point I remember a saying from my mom: "How we plowed the ant said to the ox!"

Is the forum of exporting countries the correct space to sign investment commitments? From my point of view, no... necessarily. The bidding of blocks of hydrocarbon interest is an international standard practice in countries committed to attract foreign private investment, in fact, there are many countries that perform this activity on annual basis. Therefore, it’s not necessary to finance a Forum of this size to promote block bidding.

Perhaps someone could counter-argue: "Bidding blocks in the forum helped us to 'kill two birds with one stone', we carried out the Forum and offered blocks" then, I could ask: "There are no cheaper mechanisms for bid blocks? Moreover, when the Forum, for the Bolivian reality is completely irrelevant. "

Now let's have a look at the announcement of the three exploratory contracts "for $ 20,000 MM in rent".

Who approves the exploratory contracts? This issue is not minor and was subject of immense debate in the past (in Bolivia). Given the sensitivity of the matter, it must be treated very careful, an exploration contract (according the new Bolivian Constitution) must be approved by the Assembly (the old Congress). Therefore, despite the photos, TV shows, advertising spots and others, the signed agreements must be converted into contracts, and then passed to the Bolivian Assembly for proper debate and (if yes) approve them (at least that is the theory). For now, they are papers with (sure) big and bombastic signatures.

US$ 20,000 million rent? Since the detailed information on these subjects is almost impossible to achieve in Bolivia. The only thing that remains is, as a private investigator, to elucidate a reality based on some clues. Well, first I want to simplify the analysis, instead of "US$ 20,000 million" let's call it 20. These 20 come (with high probability) from the 18% royalties and the 32% IDH (Bolivian oil and gas production tax) (none of them created thanks to the so-called nationalization of hydrocarbons). Under reasonable assumptions, these 20 correspond to 3 fields of 2 TCF each one, that is, 6 TCF in total.

Up here nothing new. The detail that we should ask to authorities is whether the incentive approved by law in 2015 (for new oil investments) is included in the analysis. If it’s not, the situation would be as follows:

Possible new reservations: 6 TCF

Government take:                                   20

Incentive:                                                 8

Government take net of the incentive: 12

To make this even simpler. Royalties and the IDH achieve the "awkward and blessed" 50%, with the recently approved Incentive Law this percentage could decrease to 30%. Number that is not minor... we are talking about a possible incentive of USD 8 billion thanks to these "investment agreements".

All this discussion remembers me the following text:

"If something I learned seeing our garden die, is that neither the good nor the bad stops to review our calculations, it doesn’t appreciate our efforts, it just happens" Ray Loriga – “Rendición”

Have an excellent week.

Mauricio Medinaceli Monrroy

La Paz, November 28th, 2017

 

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In the Blog section I invite you to read: "The future of Bolivian natural gas exports to Brazil"

 

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