Making a bad situation worse: covid-19 hits Bolivia’s hydrocarbons market

Making a bad situation worse: covid-19 hits Bolivia’s hydrocarbons market Ricardo Indacochea and Mariana Pereira

Bolivia’s oil and gas market has suffered from structural flaws for years, but covid-19 is exacerbating the challenges facing the industry. Indacochea & Asociados energy partners Ricardo Indacochea and Mariana Pereira consider what the global pandemic means for Bolivia’s hydrocarbons sector.

The covid-19 pandemic could not have come at a worse time for the hydrocarbon industry in Bolivia.

It is evident that the historical drop in international hydrocarbon prices – caused by the world’s largest oversupply ever, expansion in the development of new forms of alternate energy production and decreasing demand in key markets such as China – has affected Bolivia. This is because natural gas is Bolivia’s main source of export income. Keep in mind that, under Bolivia’s major export contracts, payment prices are indexed to the international price of oil.

In addition to this unpromising international panorama, Bolivia has been facing its own internal problems for several years. This has resulted in a structural crisis of its hydrocarbon industry, which for a long time was considered as a “star industry”.

Casting a long shadow

Without a doubt, one of the main elements causing this structural crisis is the lack of legal certainty for private actors in Bolivia when it comes to the regulations governing the hydrocarbons sector. There is an urgent need – for which we believe there would be consensus from industry players – for a total restructuring of Bolivian regulations regarding hydrocarbon activities.

During the 14 years of the Evo Morales government, the state’s hydrocarbons policy took a populist approach, leading it to favour nationalising the hydrocarbons industry to the detriment of legal security. Without the required legal security, large international oil corporations decided to make only moderate investments in Bolivia, taking into consideration the large sums of money that the hydrocarbons industry generally requires to operate.

An example of this approach was Bolivia’s denouncement of practically all the bilateral treaties of reciprocal protection of investments that it had agreed and executed with the biggest countries in the world. This left investors at the mercy of the Bolivian constitution, which does not allow international arbitration in cases related to non-renewable resources. Needless to say, this constitution had been imposed by Morales’ party.

As a consequence of this situation, as expected, private investment in the hydrocarbons industry decreased dramatically in the past decade, leaving only a residual investment in Bolivia that was related to the maintenance of companies and operations that foreign entities acquired before the nationalisation of the industry.

Making matters worse

Bolivia is under a transitional government led by President Jeanine Añez, which – before covid-19 – had called for national elections to be held on 3 May 2020. Due to the pandemic, it is uncertain when national elections will take place. Therefore, there is a maintenance of the status quo when it comes to international investment in the hydrocarbons sector.

Within this highly politicised scenario, covid-19 arrived to further complicate an already shaken and battered hydrocarbons industry.

According to recent declarations made by the former executive president of Yacimientos Petroliferos Fiscales Bolivianos (YPFB) [Bolivia’s state-owned oil exploration company], the pandemic and consequent declaration of a national health emergency, which forced a strict lockdown across the country, has reduced internal demand for fuels, but not completely paralysed it.

YPFB has been working to keep supplying domestic demand. In compliance with current regulations, consumers pay a fixed amount per litre of gasoline and diesel that is subsidised by the government. This implies a saving for the state as long as the international price of hydrocarbons is low.

But in contrast with the above and as mentioned before, Bolivia has been negatively affected by the decrease of oil prices with regards to the export of gas to Argentina and Brazil. Projections for these exports were calculated at US$51 per barrel; to date they are priced at roughly 50% less.

Another of the undesirable effects of this pandemic is that industry players are likely to see increased requests for the suspension or extinction of contractual obligations under the argument – justified or not – of force majeure due to the pandemic or by the corresponding quarantine decreed by the government. Therefore, we foresee a rapid escalation of legal conflicts, many of them to be resolved through arbitration, where both service providers and producers will try to argue that this exceptional situation exempts them from obligations that are now impossible or practically impossible to accomplish.

As if the above was not troublesome enough, another sensitive point in this chain of events is the possibility that Brazil – arguing force majeure as a consequence of covid-19 – might not comply with an addendum agreement signed with Bolivia regarding export gas negotiated volumes. YPFB and Brazilian state-owned energy company Petrobras are working jointly to try to resolve this potential conflict by maintaining the minimum compromised volume initially agreed on, 14 million cubic meters daily. The only way out of this unexpected and complicated situation for Bolivia is probably to soften its position and seek negotiated solutions among the main players.

Unfortunately, YPFB has said that to cope with the pandemic, personnel restructurings will take place, its expenses will be reduced and the company will focus on the development of urea plants.

We hope that the much-needed structural changes in the sector’s regulations are made sooner rather than later, creating a healthy business environment again. This would allow Bolivia to resume its role as a valuable player in the global energy and hydrocarbons industry

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