BOLIVIAN PETROLEUM PRIVATIZATION TAKING SHAPE

Aug. 7, 1995
Bolivia is boldly embracing a free market philosophy that extends to liberalization of the country's petroleum sector. Although petroleum industry privatization is being considered by several South American countries, only Argentina has so far completely opened its oil sector and fully privatized its state oil company. The Bolivian government's own version of privatization, "capitalization," is a groundbreaking attempt to attract massive investment from the private sector without

Bolivia is boldly embracing a free market philosophy that extends to liberalization of the country's petroleum sector.

Although petroleum industry privatization is being considered by several South American countries, only Argentina has so far completely opened its oil sector and fully privatized its state oil company.

The Bolivian government's own version of privatization, "capitalization," is a groundbreaking attempt to attract massive investment from the private sector without leaving the government open to accusations of stripping the country's assets for short term electoral gain.

STRATEGY UNVEILED

The Bolivian government's Strategy to sell state owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB) was unveiled after a behind-closed doors debate that included such major companies as Enron Corp., Exxon Corp., Amoco Corp., and YPF SA. The two most likely options are to sell the company as a single unit, an option much preferred by many of the interested international oil companies, or to split it into upstream and downstream units.

The recent disclosures have come after New York's Salmon Bros., the investment bank appointed to promote the sale, delivered a confidential report on the different possible strategies to capitalize the company that has clearly been influential in tipping the scales away from keeping YPFB as a single unit.

Under the capitalization process, five new companies will emerge to cover each of the main industry activities: exploration, production, refining, transportation and marketing. YPFB's oil fields and exploration blocks will also be divided up between the exploration and exploitation companies. "There is a tough task ahead assessing the value of the various assets in each of the divisions," said Alfonso Revollo, minister of capitalization.

The evaluations will provide a book value for each of the new companies to be carved out of YPFB.

The state run Unidad de Analisis de Politicas Economicas (Udape) has estimated the total value of YPFB - based on a valuation of its assets, production levels, and post-capitalization earnings potential - at $700-800 million. That assessment is dependent on a number of variables such as the agreement of natural gas export volumes to Brazil and the potential to increase oil output that currently averages 32,000 b/d.

NOVEL PRIVATIZATION

The capitalization formula is being applied not only to YPFB but also to five other large state run enterprises and the sale of the country's electric power producers to three U.S. power companies: Dominion Energy, Energy Initiatives, and Constellation Energy, which occurred June 29.

The capitalization of these companies is achieved through a novel form of privatization that involves the sale of a 50% controlling interest to a private investor or so called "strategic partner." The remaining government owned Shares are to be distributed among Bolivia's adult population of 3.2 million through newly created private pension funds.

The capital put up by investors is to remain in the company to capitalize it and will not end up in state coffers. This incentive is needed to balance the fact that investors will receive only a 50% stake in the companies they take over. Pension fund managers will effectively become the largest other shareholders, with small stakes being purchased by company employees. The Bolivian government therefore receives no direct benefit from the sale.

The setting up of a new umbrella regulatory authority, Sirese, received congressional approval last March and will act as the watchdog body responsible for administering the new independent superintendencies responsible for monitoring each of the sectors being sold.

The hydrocarbons superintendency will ensure a level playing field competition in the privately managed oil industry and adjudicate in disputes between companies, government, and consumers. The administration of all gas pipelines and gas distribution networks wilt fall under its authority, although it is not yet clear whether this will include the future gas sales contract to Brazil and existing gas exports to Argentina or be restricted solely to Bolivian national distribution of gas.

TIMING DISPUTED

Disagreement continues to flare up between Revollo and Arturo Castanos, the head of YPFB.

A difference of opinions over the proposed timetable for the capitalization of YPFB erupted into accusations from Revollo that Castanos didn't know what he was talking about.

Revollo has predicted that YPFB will be capitalized by Dec. 25 but recently qualified this by adding that this depends on everything going well with the new hydrocarbons law when it is presented to Congress. "Capitalization of YPFB will be accomplished by Dec. 21 this year," he said.

A question still hangs over the exact status of the new legislation proposed for the deregulated market. Following a meeting of cabinet ministers at the end of June, which included Castanos and Energy Minister Mauricio Gonzalez, Revollo declared that most of the details of the law were now in place.

The government has reiterated that the new hydrocarbon law will continue to protect Bolivia's interests without jeopardizing private investment in the country's hydrocarbon sector.

Delays in the development of the new sectoral legislation, due to be presented to Bolivia's congress about Aug. 15, were being played down with a statement from Minister for Economic Development Jaime Villalobos that the new bill was in its final stages and the government was only engaged in fine tuning.

"The removal of discretion in the awarding of contracts and open access to the pipeline network are just two of its provisions," Villalobos said.

"We think this law will be tremendously advanced", Gonzales said when asked about the new law. "The law anticipates the need for $4 billion to be invested in the sector over the next 10 years."

The need to generate that level of investment means the law must create incentives for the private sector with an internationally competitive tax regime, Gonzales added.

Tax rebates are likely to be available, claimable against taxes paid in the company's country of origin. Other tax incentives may include a special low tariff regime to encourage the exploitation of smaller gas fields.

More detailed information is not yet available, but the strategy will

leave joint venture contracts with international oil companies administered by the General Directorate of Hydrocarbons, a new body within the government's energy secretariat. The secretariat is to take on many of the important functions currently assigned to YPFB, although YPFB's post-capitalization partners will be the operators. The state is to retain control of contract negotiations and will administer and oversee the implementation of all contracts.

INTERNATIONAL INTEREST

Among companies looking seriously at YPFB, Amoco demonstrated its interest recently when it sent an 18 strong delegation led by Amoco Vice Pres. Rebecca MacDonald to Bolivia.

At a June 6 meeting with Bolivia's President Gonzalo Sanchez de Lozada, company representatives lobbied the president to keep YPFB as a single company with a declaration that Amoco's interest in YPFB and Bolivia hinges on the company remaining a single entity. The recent disclosure of the new capitalization strategy thus is expected to come as a blow to Amoco, which had hoped to use YPFB as a bridgehead into the gas markets of South America. Amoco currently holds the biggest gas reserves in North America.

Exxon Exploration Bolivia has offered to make an investment of $10 million in some of the sectors targeted for capitalization. Exxon is renewing an active presence in Bolivian drilling after a 58 year absence with its Toledo X-1 well about 70 km south of the city of Oruro in the Poop'o Sur block.

The joint venture between YPFB and Exxon is the first time in 20 years that new exploratory drilling for oil is being undertaken on the Bolivian altiplano. If oil is struck, access to export markets can be gained through the nearby crude oil pipeline to the Chilean port of Arica. As of mid-July, the Toledo X-1 was drilling below 2,600 m en route to 4,500 m.

Argentina's former state oil company YPF has informally expressed its interest to participate in the capitalization of YPFB. The disclosure came in a statement made by newly appointed YPF Pres. Nells Leon after a June 29 meeting with Gonzalo Sanchez de Lozada.

YPF recently acquired Maxus Energy Corp., Dallas, for an estimated $800 million (OGJ, June 19, P. 29). Maxus is developing Bolivia's Surubi oil field in association with YPFB, and YPF is close to signing two gas exploration joint venture contracts with YPFB. The company also is looking to clinch similar exploration contracts with private operators in Bolivia.

BOLIVIAN POTENTIAL

The high interest expressed by international companies in investing in Bolivia's petroleum sector resides to a large extent in its untapped potential.

That can be seen in a 1994 study by Gaffney, Cline & Associates, Dallas, that focused on gas resources and utilization in South America's southern cone countries.

Gaffney, Cline noted that much of Bolivia's eight sedimentary basins - which total 224,000 sq miles, or 53% of the country's land mass - remain underexplored (Fig. 1)(119052 bytes).

Only the Sub-Andean and Pie de Monte basins produce hydrocarbons. Only 13% of gas production is used locally, with 45% exported to Argentina and one third reinjected for reservoir maintenance.

While reported probable gas reserves are pegged at 2.1 tcf-beyond proved reserves of 4.5 tcf--Gaffney, Cline considers that former figure understated, given a reserve potential of 22 tcf.

Proved oil reserves are estimated at 108 million bbl.

"The country's dwindling oil export capacity has encouraged the government to seek external investment in the upstream petroleum sector, and initial indications suggest that proven oil reserves could increase by a factor of four during the 1990s," the consultant said. "However, the country remains gas prone, and the main problem will be to monetize any new gas discoveries.

"Although there is some scope to increase local gas consumption, export projects represent the only feasible means of utilizing profitably the country's indigenous gas reserves."

GAS SUPPLY INFRASTRUCTURE

Gaffney, Cline notes that Bolivia's gas transmission system (Fig. 2)(128845 bytes) was constructed to supply gas to industrial and power generation facilities and for export to Argentina.

Transmission capacity is about 460 MMscfd of which about half is committed to exports to Argentina. Adequate capacity exists in the system to meet expected future demand with only minor upgrading, the consultant said.

YPFB subsidiary Yabog gathers gas from YPFB and private producers in Bolivia for delivery to YPFB's transmission system at Taquiperenda; local markets in Santa Cruz, Tarija, El Puente, and Guabira; and Argentina.

YPFB supplies gas to Cochabamba, Oruro, La Paz, Sucre, and Potosi.

"Privatization of this (gas transmission system) could provide a significant investment opportunity if high volume pipeline gas exports to Brazil are progressed," Gaffney, Cline said.

In the distribution sector, separate companies, public and private, have been established in Cochabamba, Santa Cruz, Tarija, and Sucre, with YPFB selling directly to the state electric utility and to large industrial consumers. YPFB is expected to divest its stakes in the distribution companies as market deregulation proceeds, the consultant said.

Gaffney, Cline predicts Bolivian gas demand(16972 bytes) will grow by 260% to 2015, with the strongest growth in the electric power generation sector (Table). But because that incremental demand volume is expected to total only 170 MMscfd, that pales in comparison with the potential for exports to Brazil of 565 MMscfd and 40-80 MMscfd to Paraguay, and lesser prospects for exports to northern Chile because of that country's relatively low potential gas consumption and competition from indigenous coal.

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