FROM THE ECONOMIST INTELLIGENCE UNIT

A still-unresolved political crisis in Bolivia has served as a reminder that the day-to-day operations of South America’s natural-gas users depend to a large extent on the continent’s weakest economy and democracy. In Brazil, more than one-half of the natural gas consumed is imported from Bolivia. The political, and increasingly class-defined, calamity that has ousted two presidents in La Paz in 20 months threatens to interrupt the flow of natural gas to Brazil, and is forcing its government, and industries, to formulate contingency plans.

A modicum of calm has recently returned to La Paz, but the peace is uneasy and is probably only temporary. A heady protest movement remains bent on nationalising Bolivia’s hydrocarbons fields as well as multinational oil and natural-gas companies’ assets.

The Bolivia-Brazil natural-gas pipeline extends more than 3,000 km between Río Grande in central Bolivia to São Paulo state and then Porto Alegre farther south. Several natural-gas fields operated by Repsol YPF (Spain) and BP (UK) were invaded in mid-June by protesters targeting multinational oil and natural-gas operations.

Brazil’s state-owned hydrocarbons conglomerate, Petrobrás, which controls the pipeline and owns refineries in Cochabamba and Santa Cruz, imports US$600m worth of natural gas from Bolivia a year--a figure equivalent to 7% of Bolivia’s GDP. Although Petrobrás was not hit directly by the social unrest, on June 8th Brazilian officials reported a notable reduction in the daily supply of Bolivian natural gas.

Before business could return to normal, and before Bolivia’s new caretaker president, Eduardo Rodríguez, agreed to early elections, Brazilian officials were drawing up contingency plans. The Mines and Energy Ministry advised industrial consumers of natural gas to switch to oil or diesel fuel wherever possible.

A natural-gas shortage poses the most acute danger in São Paulo and Brazil’s south, where some 2,000 companies use it to fuel their day-to-day operations. São Paulo state’s energy secretary, Mauro Arce, has warned that natural-gas-fuelled power stations would be the first to suffer in the event of a cut in supply, followed by automotive vehicles, mainly taxis in urban centres. Residential consumers of electricity and natural gas would be the least likely to be affected. However, as Coca-Cola (US) was preparing one of its plants in Belo Horizonte to switch from natural gas to bottled gas (GLP), the company announced that the costs involved would force it to increase prices.

In the end, the government’s contingency plan did not have to be implemented. Yet the Bolivian situation is a serious alert and a serious setback for natural-gas distributors, which have invested heavily in recent months to boost the fuel’s domestic usage. The crisis promises higher prices for industrial natural-gas consumers and greater risk for investors operating across a wide swath of South-east Brazil, at least in the short term.

Weaning itself of Bolivia

South America’s overall longer-term energy prospects are brighter. Petrobrás is due to start pumping natural gas from recently discovered deep-sea reserves in the Santos basin by 2008, which will help reduce the company’s dependence on Bolivian imports. Consequently, substantial investment is urgently needed in transport infrastructure, mainly pipelines.

In addition, the governments of Argentina, Brazil, Chile, Peru and Uruguay have pledged to strip the red tape from a US$2.5bn pipeline project aimed at reducing the regionwide risk of future energy crises. The so-called gas ring will transport some 30-35m cubic m/day of natural gas from Peru’s Camisea fields to Chile via a 1,600-km pipeline connecting Pisco with the Chilean seaport of Tocopilla. Most of the Peruvian natural gas is expected to flow on to Argentina, Uruguay and Brazil through upgraded existing pipelines and the construction of a US$300m conduit between Uruguaiana in southern Brazil on the Argentinian border and Pôrto Alegre, Brazil.

Officials believe they can expedite the political, legal and technical processes associated with the project so as to have it operational in 2007. France’s Suez group, already working on a technical solution for the Pisco-Tocopilla pipeline through its Tractebel subsidiary, will be part of the consortium of multinational energy companies formed to execute the project. If the plan materialises in its entirety, Brazil could benefit by importing an additional 5m cu m/d of natural gas from sources other than Bolivia.

On a more political front, the governments of Argentina, Brazil and Venezuela have pledged to boost co-operation among their state-owned oil and natural-gas companies in the name of integration and, in the words of Venezuela’s leader, Hugo Chávez, regional solidarity.

SOURCE: ViewsWire Latin America