Argentina Looks to Bolivia After Abrupt Drop in Natural Gas Reserves

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). In Argentina, natural gas utilization is exorbitant due to the fact that it makes up 49% of the country's energy consumption. In order to combat inflationary trends in the energy sector, Argentina’s government froze natural gas prices in 2002. This paralyzed investment in new natural gas reserves, and, as a result, Argentina is now estimated to have less than ten years of reserves left. According to the ex-president of CAISE (the Argentinean Association of Investors in the Electric Sector), Argentina will need to import gas from Bolivia or limit its exports to Chile. Whatever measures Argentina takes, politicians are under pressure to limit increases in energy prices as the Argentinean public has grown used to inexpensive natural gas and electricity. These utilities cost between one-fifth and one-third of what they cost in Chile or Brazil.

Yet an increase in energy prices is inevitable if Argentina runs out of natural gas reserves. If this happens, Argentina will need to buy supplies from the international market, and thus the country’s energy costs will depend on international natural gas prices. Many are hoping that the country does not reach that point before it takes steps to restore conditions favorable to investments in natural gas exploration. Argentina’s government is considering providing incentives for exploration of regions widely believed to have deposits of natural gas. If these investments do not occur, Argentina risks an abrupt increase in prices as a result of a shortage and perhaps will have to start rationing natural gas.

Given this situation, gas reserves in Bolivia are of great strategic value for Argentina. Bolivia’s reserves are abundant and relatively inexpensive for Argentina. But an increase in natural gas importation from Bolivia would still result in an increase in prices, and Argentineans would have to cope with the fluctuations in price inherent in the natural gas market.

Results Of Bolivian Elections May Bring Difficulties To Argentina

The newly elected President of Bolivia, Evo Morales, is a great admirer of Fidel Castro, Hugo Chavez, and Che Guevara, and his future government is likely to be a leftist regime focused on helping the poor. During his campaign, he said he would alleviate poverty by means of the profit Bolivia receives from sales of gas and petroleum. To this end, Morales declared that he will renegotiate current contracts, which implies that he believes the price Argentina currently pays for Bolivia’s gas is too low. As a consequence of his declarations, Argentina (and Brazil) may see an increase in the prices they pay to import natural gas. According to Palma Cane, an economist and expert in international energy issues, Argentina will likely be on the list of countries experiencing an increase in energy prices.

Notwithstanding this potentially unfavorable situation, Argentina currently buys only 5.5 million cubic meters of gas from Bolivia, and that amounts to only 5% of Argentina’s natural gas consumption. Therefore, the expected increase in natural gas prices will likely not be overwhelming, unless Argentina is forced to vastly increase its imports from Bolivia.

Under a current treaty, Bolivia sells Argentina natural gas at a rate of $2.20 per million BTU. That agreement is set to expire on December 31, 2006. If the newly elected Bolivian president decides to raise the price of natural gas before that date, he first needs to terminate the treaty. Thus, any rise in natural gas prices in Argentina is expected for 2007 and not before that.

Repsol-YPF, Petrobras, Pan American Energy, and Total are some of the firms operating in Argentina and Bolivia.

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