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Government Moves to Increase Natural Gas Profits - International Law Office

International Law Office

Energy & Natural Resources - Bolivia

Government Moves to Increase Natural Gas Profits

September 04 2006

Although Bolivia has the second largest natural gas reserve in Latin America and its geographical location gives it an advantage in comparison with its competitors, the country currently sells natural gas to only two countries: Brazil and Argentina.

Although the government must take care of this captive market, it also needs to consider ways in which it can expand the market to new clients. In recent months the government has been looking at ways to increase natural gas prices within the existing market and to extend this market further.

A commission headed by President Evo Morales travelled to Argentina earlier this year in order to execute an amendment to the current gas sale contract. The amendment resulted in a price increase of $0.90 to $5 per British thermal unit of gas. This is a good business move for Bolivia, but what about Argentina? Argentina has passed on the cost of the increase to Chile. Previously Argentina produced no natural gas, so it executed a commercialization contract with Bolivia. However, Argentina then became a producer of natural gas itself and thus executed a sale contract with Chile. Argentina now needs some Bolivian natural gas, so it uses the gas imported from Bolivia for own internal purposes and exports the natural gas it produces itself to Chile. The Chilean government has expressed its unhappiness with the situation and the increased gas prices applied by Argentina.

The situation is more complicated regarding the natural gas business carried out by Bolivia with Brazil. Brazil buys approximately 26 million cubic metres of natural gas per day at a cost of $4 million - much of the country is dependent on Bolivia for its natural gas. In accordance with the negotiation provisions set down in the natural gas supply agreement between the two countries, Bolivia has already notified Brazil that it intends to increase the price. Brazil has refused to accept the increase, arguing that it is not within the scope of the terms agreed in the supply agreement. However, Brazilian President Ignacio Da Silva has declared that within the next few years Brazil will cease depending on other countries for its natural gas supplies.

Although the Argentine government agreed a new price with Bolivia, Bolivia is trying to impose the increase on Brazil unilaterally. This may be rewarding for Bolivian interests in the short term, but in the long term Bolivia may lose its current market rather than expanding it as it has been sending unwelcome signals to the international community.

Nonetheless, Bolivia has been granted the vice presidency of the multilateral committee of the Grand South Pipeline. In addition, at the last meeting of the Southern Common Market Bolivia was offered the opportunity to become a partner in the pipeline. However, it remains to be seen whether Bolivia's energy policy is sufficient to expand its natural gas markets to other countries within the region.

For further information on this topic please contact Rodrigo A Henriquez Essmann at Indacochea & Asociados, Abogados by telephone (+591 3 535 356) or by fax (+591 3 581 200) or by email (rhenriquez@indacochea.com.bo).

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