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Once Mighty Gas Hub Crippled as Leftist Leader Faces Vote

Once Mighty Gas Hub Crippled as Leftist Leader Faces Vote

(Bloomberg) -- For two years, Bolivia pushed to boost natural gas production, a longtime key to its prosperity, by drilling for new discoveries on its southeastern lowlands. The result: An 8 kilometer (5 mile) deep dry hole.

There’s arguably no more apt symbol for the situation facing both Bolivia and Evo Morales, the fiery leftist president who is seeking re-election after 14 years in office. Over the years, gas sales to Brazil and Argentina have helped Morales cruise through downturns in global commodities, triple the minimum wage and boost social programs. But no more.

Once Mighty Gas Hub Crippled as Leftist Leader Faces Vote

With cheap seaborne gas imports flooding its coastal neighbors, the landlocked country’s gas exports have plunged 25% this year through July. And without new discoveries, Bolivia’s aging wells will be increasingly less profitable over time. Meanwhile, both Brazil and Argentina are aggressively working to produce their own gas moving forward.

“This government hasn’t made any new discoveries,” said Freddy Castrillo, hydrocarbons secretary for the Tarija department that produces about 55% of the country’s natural gas. “The scenario for prices is completely unfavorable, production is down, and our main clients -- Brazil and Argentina -- are becoming our main competitors.”

Madrid-based Repsol SA drilled the Boyuy well in the southeastern lowlands at a cost of about $140 million. It is continuing to evaluate results there, the company said in an emailed statement.

Long known as Latin America’s economically-capable socialist, Morales is facing his toughest re-election campaign yet ahead of a first round Oct. 20 vote. Morales had 40% support in a poll published by La Razon on Sunday. To avoid a runoff, Morales needs at least 40% and a 10-point lead over his closest rival, who was at 22% in the poll.

The difficulties won’t end there. No matter who wins, they’ll face tough economic challenges that could change the face of a nation that has gained a level of comfort under Morales’s aggressive social spending programs.

The country’s oil and gas income has fallen to about 20% from 35% over the past five years. Meanwhile, public debt soared to 54% of gross domestic product in 2018, according to the International Monetary Fund, limiting options to prevent a hard landing after more than a decade of economic expansion.

Once Mighty Gas Hub Crippled as Leftist Leader Faces Vote

At the same time, there’s little room to boost domestic gas use in a country where private industry has a constrained role, and the government has been burning through a rainy day fund ahead of this year’s elections, according to Todd Martinez, a director at Fitch Ratings, which revised its outlook on Bolivia to negative in June.

“The relatively stable and solid performance of Bolivia in the past few years and the headline numbers are somewhat misleading because, in our view, they reflect policies that look to be increasingly unsustainable,” Martinez said in an interview.

Ecuador Warning

Neighboring Ecuador serves as a warning for the social tensions that can result from austerity measures in countries with vulnerable populations reliant on government largess. The removal of fuel subsidies earlier this month sparked protests against President Lenin Moreno, who decamped from the capital of Quito to a coastal city to escape the unrest, and then reversed the fuel-price increases.

“The main threat to Bolivia is Bolivia itself,” said Ricardo Bedregal, the head of Latin American upstream research at IHS Markit, a consultancy. “There are no fiscal incentives to attract new investors to the game. There’s nothing to change the declining trajectory.”

Meanwhile, Brazil and Argentina have both invested in liquefied natural gas import terminals along their coastlines at a time when Argentina has announced world-class discoveries at its shale fields and Brazil is moving to better tap the high-value deep-water region known as the pre-salt.

Two Pipelines

When Brazil signed its contract with Bolivia in 1999 and Argentina signed its deal in 2006, gas was a scarce and expensive fuel mainly due to storage and transport difficulties. The three countries were able to get around that by having two pipelines built that directly linked the landlocked nation with its neighbors.

Now the cost to build terminals that can receive huge LNG tankers, store the gas and vaporize it for in-land power generation, is relatively cheap. And Argentina this year announced it expects to save $460 million over two years in a renegotiated supply deal. Bolivia did get an Argentine training jet out of the deal for delivering volumes above contracted amounts during May and September.

Once Mighty Gas Hub Crippled as Leftist Leader Faces Vote

The reversal of leverage between Bolivia and Brazil couldn’t be starker. In 2006 Evo Morales rolled up in a military convoy to a Petroleo Brasileiro SA natural gas field to announce a nationalization to end “looting” by foreigners. Brazil’s president at the time, Luiz Inacio Lula da Silva, openly lamented that his country had put its faith in a single gas supplier. Local media in Brazil called the televised takeover an invasion.

None of that swagger was on display in January when Morales traveled to Brazil for the inauguration of President Jair Bolsonaro, a conservative champion for business interests. Morales spoke of brotherhood and cooperation between the countries.

Meanwhile, Bolivia’s announced plans to build alternate pipelines to Peru and Paraguay -- projects that could take year to complete -- haven’t left the drawing board.

“It’s not going to be the same as before with easy, stable income,” said Alvaro Rios, a former Bolivian hydrocarbons minister and director of Gas Energy Latin America, a consultancy. “Petrobras is under a lot of scrutiny from buying expensive gas from Bolivia. They’re going to end up with some volume. The rest needs to be negotiated in open access.”

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net, Reg Gale, Mike Jeffers

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