The natural gas industrialization in Bolivia: «Everybody is good… until is bad»

The natural gas industrialization in Bolivia: «Everybody is good… until is bad»

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I have a great friend whom often uses the phrase: «Mauri, everybody is good… until is bad», of course with this sentence gets more than one smile. Why start like this? because the other day it came to my mind this phrase because I think it applies not only to individuals but also to many of » the things that the government does»… economist at the end, to these «things» I’ll call «Public Policy».

To me, a public policy is good… until is bad and then all problems arise, for this reason, people who had the fortune (or misfortune) to had public policy classes know that they need to anticipate all the consequences for a (theoretical) idea before the implementation. I think something could happen with the mentioned, worn, battered, crushed, used, outraged idea about the «natural gas industrialization in Bolivia». I must warn to the not Bolivian reader that the following discussion is local, however, it could be apply to the natural gas producer countries .

Let’s start with the usual argument: «the industrialized product price is higher than the raw material price». Well, let’s assume for a moment that this is true, then we can construct the following graph, you’ll see that the export price of natural gas as raw material (in light blue) is less than the industrialized product price (in green). As, I hope, we all agree in this idea, we can assume this graph as our «base» case analysis.

However, much of the natural gas industrialization projects that I analyzed and also the current Hydrocarbons Law, require or needs that the natural gas price as a raw material for an industrialization process (inside the country) should be lower than the export price of the product, in fact, the Hydrocarbons Law gives you a number, the natural gas price for an industrialization process can’t be greater than 50% of the natural gas export price. With this new information, the new chart shows the new natural gas (as a raw material) price inside the industrialized product price, which I call «New natural gas price».

When I discuss this idea the immediate counterargument is, «but that doesn’t matter because even with a lower natural gas price, the green area (see the chart) compensates any the losses». This is not entirely true, why? Because the industrialized product price must cover also operating and investment costs, then, with this new piece of information, the new chart will be something like this.

In this new context , the question is the Final Profit (green) will compensate the loss of a lower natural gas price?. Some people will say yes, others say no… we will not know until the Bolivian state oil company (YPFB) will show us the financial analysis of the industrialization projects.

In any case, a big problem comes now. The royalties and production taxes (IDH) in Bolivia are paid using the natural gas price, since the sum of both concepts (royalties and taxes) in Bolivia reached the (brute) number of 50 %, then we can visualize this payment, in the following chart, with the new blue blocks. In other words , all the institutions who gets money from the hydrocarbons sector in Bolivia (municipalities, local governments, universities, funding , police, etc.) will receive «the gas money» using the blue area, therefore, if this gas is industrialized their resources will decrease dramatically, see the new blue box.

And now comes the million dollar question, Who gets the Final Profit (if any) in green? For younger readers, just tell you that the only money for sure in the short term, with an industrialization project, is the red area.

Also I leave for younger readers analyze the regional problems when the producer regions will receive lower royalties and the industrialization project will be built in another region; analyze the market size for industrialized products, is it really as great as expected?; analyze the natural gas supply problems, what’s our true level of reserves?… and so.

Anyway, my dear and beloved friends I promise not end year 2013 with such pessimistic view of something that keeps so excited to many Bolivians, after 25th I promise to post something different (something like a summary). For now, I wish for you a nice 24th… full of peace.

Mauricio Medinaceli

La Paz, December 21st , 2013

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