ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and George Bedoya

February 23 – March 9, 2010

Español

Argentina and Bolivia revisit their gas supply contract.

The impact of Chile's earthquake on the mining and energy sectors.

Oil and gas production trends in Colombia and Venezuela.

Argentina and Bolivia revisit their gas supply contract.

In late February, Argentinean Minister of Planning Julio de Vido and Bolivian Vice President Álvaro García met to discuss amendments to a 2006 contract between the two nations' state-owned hydrocarbon companies, Yacimientos Petrolíferos Bolivianos (YPFB) and Energía Argentina S.A. (Enarsa).

After eight months of negotiations, both state-owned companies agreed to amendments that aim to gradually increase Bolivian gas exports to Argentina. The current contract sets exports at 7.7, although actual exports have constantly been below this level due to falling demand in Argentina. For example, in January of 2009, gas exports to Argentina were only 2.7 Mmcmd and reached 5.5 Mmcmd in March of the same year.

As a result of the contract amendments, the volumes have been adjusted to 5 Mmcmd in 2010, and are then set to increase to 7.7 Mmcmd in 2011, 11 Mmcmd in 2015, 20 Mmcmd in 2017, 23 Mmcmd in 2019, 25 Mmcmd in 2021 and finally to 27.7 in 2026.

As mentioned in previous reports, gas sales from Bolivia to Argentina have fluctuated considerably, since volumes and prices established in the 2006 contract have not been rigorously met. The uncertainty caused by these fluctuations has had major impacts on planning decisions made by both countries, such as taking on infrastructure projects or allocating gas to other markets.

For example, earlier this year Argentina announced they were planning to build a pipeline called "Integración" to supply its northern regions with Bolivian gas. However, due to the unpredictable supply from Bolivia, the date to begin construction has not been set yet. Similarly, Enarsa had to hire 14 ships this year to import liquefied natural gas (LNG) from Trinidad and Tobago to fulfill projected domestic gas consumption for 2010 and 2011.  But the problems have not only been on the supply side. Argentina's demand has varied seasonally, and the country also significantly reduced its gas imports from Bolivia when its economy experienced a slowdown during the last quarter of 2008 and the first quarter of 2009.

In response to these trade obstacles, both countries have sought a new agreement ensuring the sale and payment of the contracted volumes of gas. To this end, they have scheduled meetings between the technical commissions of both state-owned companies to establish mechanisms to guarantee delivery and payment, through "take or pay" and "deliver or pay" clauses.

Christina de Kirchner and Evo Morales, respectively the Argentinean and Bolivian presidents, signed the revised contract provisions in late March, after Carlos Villegas, the interim president of YPFB, and Exequiel Espinoza, president of Enarsa, approved the contract's amendments and technical specifications.

With this new agreement, the Bolivian government expects to receive US$ 20 billion in gas revenues between 2010 and 2026. Furthermore, signing the amended contract will allow Bolivia to secure the Argentinean market against possible competition from Chile's new re-gasification plant, GNL Quintero.

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The impact of Chile's earthquake on the mining and energy sectors.

The 8.8 Richter earthquake that hit Chile on February 27 had its greatest impact on the city of Concepción, the capital of the region of Biobío, destroying more than a million homes nationwide and costing hundreds of lives. But it also had a serious impact on the mining and energy sectors in this region and across the nation. In response, the state-owned mining company Codelco and the National Petroleum Company, ENAP, took on a series of measures to face the consequences of this natural disaster.

Due to energy generation and distribution problems, Codelco had to suspend activities in its highest-producing copper mines, El Teniente and Andina, located in the regions of O'Higgins and Valparaíso, which produce 210,000 and 400,000 tons of copper a year respectively. Likewise, work stopped in the San Antonio harbor in Valparaíso: the export hub for Chilean copper. However, other mining sites, such as those operated by Barrick Gold, Teck and Freeport, were not affected.

As Chile produces approximately one third of the world's copper, the media speculated that there were uncertainties regarding the international copper supply, which could lead to a 3 to 4% price increase.

However, Codelco's authorities said that, due to their existing stocks, their copper exports would remain at the same levels as before the earthquake. The authorities also said they had access to other export ports in northern Chile, namely Mejillones and Antofagasta, which were still active.

The earthquake also affected the main fuel refinery of the country, located in the region of Biobío, which was damaged and was forced to halt operations until its facilities could be repaired. Although authorities from ENAP denied this could cause a fuel shortage, representatives of the company also noted they were preparing for hydrocarbon imports to prevent possible power cuts which would affect the domestic and mining sectors the most. However no more energy cuts were registered and, after a few days, mines returned to work as usual.

One of the main concerns of mining companies was ensuring they had adequate energy supplies after ENAP’s refinery was damaged and the country's new gas terminal, GNL Quintero, had to suspend incoming gas imports for several hours. In the case of domestic and transport fuel use, ENAP representatives said they had enough diesel and benzene stocks to supply service stations located in the affected regions of Valparaiso and La Araucania, enabling them to operate as usual. Nevertheless, in some affected regions, service stations became victims of looting and vandalism.

Despite having suffered one of the worst natural disasters of the last few years, the mining and energy sectors in Chile have not been significantly affected, beyond temporary concerns about energy supplies for mining activities, and the transportation and domestic sectors.

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Oil and gas production trends in Colombia and Venezuela.

Since the beginning of 2008, Colombia has been experiencing a significant increase in oil production, exploration of new wells and fuel exports. Indeed, the country's Ministry of Energy and Mines announced that crude oil reserves had risen by 32.5% in the last four years—meaning an increase of 491 million barrels over 2006 levels of 1,509 million barrels. Colombia today produces 742,000 barrels of oil per day, but is expected to reach 788,000 barrels per day by the end of 2010.

Contract allocation for exploration and exploitation activities in the country has increased by 273% in the same period of time. By the end of 2010, the number of blocks offered for exploitation will represent approximately 52 million hectares. Colombian crude oil exports reached US$ 10.27 billion in 2009—a number that is likely to rise.

This evolution of the sector has meant that oil constitutes a larger share of the country's Gross Domestic Product (GDP), which reached 3.2% in 2009, up from 1.78% in 2006.

Venezuela's situation differs significantly, as oil production continues to fall, without any sign of short-term recovery. The economic crisis, the fall in international oil prices and the production cuts imposed by OPEC have all affected the country's oil capacity, but it has also been hampered by the lack of investment in the sector. Together with the low productivity of recently nationalized companies, such as companies that provided drilling services in the state of Zulia, there have also been energy cuts due to drought—which has in turn affected oil exports. Indeed, with the decline of the water level in the reservoir of the El Guri dam, the Venezuelan government has chosen to increase internal consumption of hydrocarbons to supply thermal power plants, and therefore produce energy without depending on its main hydroelectric power plants. But, of course, this means lower exports and lower tax revenues for the country. 

This generated worries within the Colombian government, since Venezuela is supposed to begin exporting gas to Colombia in 2012. In May 2007, the two countries signed an agreement establishing that Colombia would export 450 million cubic feet of gas per day (Mcfd) to Venezuela between then and 2012. After 2012, Venezuela was to begin exporting its gas to Colombia.

Colombia had been exporting gas since 2007 as agreed, but recently it has only been able to send 300 MMcfd, as domestic demand for thermoelectric power plants has increased as a consequence of the deleterious effects of the El Niño phenomenon on the availability of hydroelectric power.

However, now that it is Venezuela's turn to export to Colombia, the Venezuelan government has declared that it cannot guarantee its supply, for exactly the same reasons that Colombia faltered in holding up its side of the bargain: they need gas to supply Venezuela's thermal power plants due to hydroelectric shortages.

For now, both countries are evaluating their energy sector strategies. Venezuela is expecting investments in the Orinoco Oil Belt (blocks of Carabobo and Junín) to increase oil production and has also been negotiating an agreement with China to exchange financing for oil. Meanwhile, Colombia hopes that discoveries in the Sucre region's La Creciente oil field—one of the ten largest global gas discoveries in 2006—and potential reserves in the Orinoco's eastern plains will allow the country to increase production, and thereby reduce their dependence on Venezuelan oil or gas imports from Trinidad and Tobago.

It is evident that different climate problems and water shortages have generated energy crises in both countries, and this in turn has had negative impacts on the oil and gas sectors. With hydrocarbons being used as a fuel source for thermal power plants, there have been increases in domestic demand in both Venezuela and Colombia. In the context of climate change and the possibility of continuing water shortages, the production of electricity through thermal power plants seems more viable. And although the new discoveries have yet to be confirmed and extracted, both countries will have to adjust their export volumes to allow a greater allocation of oil and gas for domestic electricity generation.

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Sources: La Razón, Eldeberdigital.com, Clarin.com, El Comercio (Peru), The New York Times, The Wall Street Journal, The Los Angeles Times, The Guardian, El Mercurio, Business Week, La República (Peru), La República (Colombia), El Universal, El País

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