Evo Plays the Gazprom Pelota

I am a few days behind in commenting on the signed deal between Gazprom and Bolivia’s state-owned YPFB to develop gas fields in Tarija, but the relationship between these two resource nationalist states appears to be deepening (see my earlier post). Yesterday Gazprom announced it had signed exploration deals for three fields (not just two, as was previously speculated), with an investment of up to $2 billion in 2009 which could produce as much as 300 bcm of gas. A Gazprom rep told the FT that “Due to its large gas reserves, Bolivia is the country that most interests us in the region. I consider it will be the region’s leader in gas terms and our objective is to go as far as to exploit as much as we can.” … and exploit, they might…

Russia’s enthusiasm is shared by the Bolivian side, whose President Evo Morales even took a break from playing fútbol with Diego Maradona to attend the contract signing ceremony, where he made a point of telling the Russian investors that they are more welcome than previous energy corporations (which had their assets nationalized in 2006). BolPress reports that President Evo compared the Gazprom agreement to a similar development deal with Venezuela’s PDVSA, saying that these two agreements represent “a new way” of bilateral state-to-state deals. He said “Here there is a responsibility, there is a commitment, and within Andean culture commitments are sacred, they are respected, and they are fulfilled.“And Evo has reason to lay it on thick with the comforting talk of investment security – Bolivia is in very deep trouble, unable to tap into its gas wealth, with current reserves running dry, and the nation’s integrity and unity seriously threatened by disputes over distribution of the hydrocarbon wealth. Bolivia’s recent expropriatory history also is strongly discouraging to foreign investors, yet Gazprom seems to display an unnatural confidence and immunity from this political risk.The substance of the agreement is significant. Gazprom will have one year to carry out its geological study of the considerably large Sunchal, Acero and Carohuaicho blocks. More than 80% of Bolivia’s natural gas (the second largest reserves in South America) are located in the southeastern Tarija region, and the vast majority of these fields are woefully underdeveloped and in dire need of capital. In developing these three blocks, Gazprom will likely end up becoming a major exporter to both Brazil and Argentina, and, if Bolivia is ever able to work out a pipeline deal with Chile and Peru, there is a future possibility of Pacific LNG exports. Representatives from Gazprom have also discussed their interest in oil and oil services projects as well as electricity generation.The cheerful president may have adamantly stated that he wants “partners, not patrons” to help develop the country’s natural gas wealth, but that may precisely be the downside of the political deal Evo organized with Russia. Like President Hugo Chavez’s ongoing interest in influencing political events in Bolivia, the YPFB deal brings yet another bossy guest into the house. And as the oil and gas price continues to balloon while global reserves dry up, for Gazprom to get in early on Bolivia is a major coup for their future sustainability and their growing role as Moscow’s foreign policy instrument.However it is not all doom and gloom, as I had stated in my previous post about Russia’s interest in Bolivia. There has been a discernible shift in attitude by the Bolivian state toward foreign participation in energy, as the pragmatic issues of how the state will fund its social platform without economic growth settled in on the minds of the country’s decision-makers. There are rumors and unspecific news briefs that indicate that Repsol, Total, and several other energy multinationals could join in on gas development in Bolivia very soon, which could end up being a win-win deal for the Bolivian people if Evo is able to keep the peace until the pipes start pumping the gas.Arguably, the political survival of President Morales depends upon the successful development of Tarija region, and many argue that he was pressured and rushed into this deal with Gazprom by restless critics and stakeholders in YPFB. The uncoordinated state-run interest has had numerous difficulties getting organized, and there has even been a major personnel change as a new interim president, Santos Ramírez Valverde, was appointed to rapidly bring in the needed investment. So far he is getting the job done, and the board seems optimistic with his stewardship.What is much more troubling than Gazprom’s potential ambitions to gain influence in Latin America is Bolivia, and other resource nationalist states, to hold a preference for political deals over strictly commercial arrangements. Like Paulo Scaroni of Italy’s Eni, Evo has come to swift understanding in today’s oil and gas market, politics trumps business sense. Energy has become so laden with the power of scarcity that private sector multinationals compete with political currencies more than just dollars and euros (just look at Chinese infrastructure aid to help win energy contracts in Africa). Evo is facing a revolution in the very region that Gazprom will be exploring … what a great ally to have in his corner if secession hits.There is also an impact on the market and energy security from these cozy state-to-state deals. What happens is that we lose clarity and predictability as the motives and rationale between the government’s political objectives and the company’s profit objectives create a distortion in the market. Latin American consumers desperately need these gas reserves to be developed by the most efficient actor in the market, and if this responsibility is simply tossed to the most politically convenient interest that offers an unrelated quid pro quo, then in the long run, everyone loses. I do hope that for the sake of Bolivia’s fragile stability, Evo is able to chart a course independent of the pressures from Moscow and Caracas.