14 Dec How Competitive is the Bolivian Gas in Brazil?
After spending over a week in Brasília, a sign in front of my hotel, where there’s a Shell gas station, caught my attention: “Etanol Comum 3.199, Gasolina Comum 4.079.” This translates to ethanol priced at USD 0.82 per liter and gasoline at USD 1.05 per liter. To provide a broader context, that’s Bs 5.71 for ethanol and Bs 7.31 for gasoline. Brazil is a beautiful country with kind people, yet its domestic fuel prices tend to follow international trends closely.
While reflecting on this, I recalled a paper that Jorge and I wrote about the acceptable price ranges needed to stimulate gas exploration and production in Bolivia while remaining competitive in Brazil’s natural gas market.
Let’s break it down step by step.
Imagine you want to sell homemade jam in your neighborhood using your grandmother’s recipe. One of the first questions you’ll ask yourself is: At what price can I sell this jam? The standard answer would be at the price consumers are willing to pay. So, what is the maximum price they might accept? It would be the price of the imported jam they are already buying.
The logic is straightforward: if your jam costs more than the imported version, few will buy it, maybe not even your grandmother. However, if it matches or undercuts the imported jam’s price, consumers will consider it a genuine alternative, and many will enjoy the taste of your grandmother’s recipe.
A similar principle applies to Brazil’s gas market. Brazil can now import liquefied natural gas (LNG) by sea, which serves as the “imported jam” equivalent. Therefore, for Bolivian natural gas to be “competitive,” it must be priced based on a netback calculation, starting from Brazil’s LNG import price and working backward.
How does this work?
Start with the LNG import price in Brazil.
Subtract Brazil’s domestic transport tariff (blue circle).
This gives the “border price” (green circle).
Subtract Bolivia’s transport tariff (black circle).
You get the price in Río Grande (purple circle).
Finally, subtract internal transport costs within Bolivia.
You obtain the wellhead price (red circle).
The critical question from our paper arises here: Is the resulting wellhead price from this netback calculation attractive for investors? In other words: Does this price cover exploration and production costs while offering a reasonable profit margin for producers in Bolivia?
The next figure illustrates the numbers involved. The netback results in a producer price of USD 6.38/MMBtu, while the price needed to cover production and exploration costs is USD 7.99/MMBtu. Therefore, Bolivia’s required price range for exploring and developing new reserves exceeds the netback price, making Bolivian gas uncompetitive in Brazil.
Notably, some analysts, when presented with these figures, mistakenly argue for a USD 7.96 wellhead price, completely ignoring transport costs in the process.
Why aren’t we competitive? The primary reason is Bolivia’s excessively high production taxes, among the highest globally. To counteract this, the Bolivian government introduced a subsidy in the form of an exploration incentive—essentially reimbursing part of the IDH tax paid by producers.
With this subsidy, the scenario improves: the price required by the producer (USD 5.16/MMBtu) now falls below the netback price (USD 6.38/MMBtu). Therefore, Bolivian gas can compete with LNG in the Brazilian market.
However, this competitiveness is marginal and comes at the expense of reduced tax revenue. As a seasoned oil industry friend once told me, “Mauricio, in the end, all the straps come from the same leather.” Once again, the confused analyst mentioned earlier might inaccurately argue that a wellhead price of USD 6.38 is unfair by comparing it to the unrealistic USD 7.96 figure.
Technical Note:
The producer price estimation uses the EMV method with a 15% discount rate.
Transport tariffs used in the netback calculation account for partial pipeline amortization.
The LNG price used (in Brazil) corresponds to a WTI price of USD 60/barrel.
YPFB’s share in exploration and production contracts assumes a 10% profit share.
The good news? Yes, Bolivia can be price-competitive with LNG in Brazil.
The bad news? This competitiveness is sustained through reduced tax revenue. Consequently, future gas sales to Brazil will generate fewer fiscal resources for Bolivia and have a diminished multiplier effect on the national economy.
S. Mauricio Medinaceli Monrroy
Brasília
December 14, 2018
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