14 Mar Grandma’s jewels in Bolivia (A brief discussion on natural gas reserves)
The other day I read something insightful: a pessimist sees a glass half empty, an optimist sees it half full, while a super optimist is simply happy to have a glass. This highlights how the same reality can be interpreted from multiple perspectives. This diversity of views often arises in the hydrocarbons sector. As my good friend Gonzalo Chávez once remarked while commenting on my book about the gas nationalization: in this sector, numbers are tortured until they confess the desired truth.
A clear example of this dynamic is Bolivia’s natural gas reserves. Recent months have seen varying interpretations of reserve levels, sparking debate about how long they might last. With the latest certification and current production data, the pressing question is: How much longer can Bolivia rely on its currently certified natural gas reserves? I would like to share some reflections on this sensitive issue.
The Reserves-to-Production (R/P) ratio is a widely used metric in the hydrocarbons industry to assess reserve trends. How does it work? Imagine your grandmother, in an act of great generosity, left you an inheritance of 50 diamond necklaces. Once you recover from the initial shock, you calculate: if you need two necklaces per year, your inheritance will last for 25 years (50/2). Applying the same principle to Bolivia’s natural gas, the R/P ratio trend shows a steady decline in recent years, as illustrated in the figure below, which uses certified and proven reserves from 2009 and estimates depletion by 2012. This downward trend should naturally raise concerns among the country’s energy policymakers.
Is the R/P ratio perfect? Not at all. It is a static indicator that only reflects past trends without accounting for future production. Returning to the grandmother’s necklace example, when you estimated the inheritance would last 25 years, you did not consider the possibility that your annual needs might increase—perhaps you’ll get married and have children, requiring more than two necklaces per year. Similarly, the R/P ratio focuses only on current data without factoring in future changes.
A second method to analyze reserves involves comparing future production projections with currently certified reserves. This approach requires the challenging task of forecasting the future, a limitation the R/P ratio avoids. However, with careful assumptions, it can be informative. Based on gross gas production data from the Ministry of Hydrocarbons and Energy, YPFB, and the 2009 reserve certification, the estimated reserves as of December 2013 would be around 7.45 TCF.
Considering Bolivia’s gas export contracts with Brazil and Argentina, rising domestic consumption, the urea plant, and liquid separation plants, the annual gas requirement from 2014 onward is approximately 1 TCF. This suggests Bolivia’s proven gas reserves could last about 7.5 years—around five years less than the R/P ratio indicates.
A third analytical approach involves reviewing the production profiles of individual fields and comparing them to demand trends. Returning to the necklace analogy, imagine your grandmother didn’t give you all 50 necklaces at once but instructed the bank to deliver two per year. Once you have a family, your needs might increase to three necklaces annually, but the bank (and your grandmother’s mischievous grin) continues providing only two.
Similarly, considering the production capacity of existing fields alongside rising demand, supply shortages could emerge by 2016. This wouldn’t imply the reserves are exhausted but rather that production growth is failing to keep pace with demand. Some critics might argue, “Just produce more aggressively!” However, my petroleum engineer friends would caution against this, as over-extracting can damage the fields and compromise long-term production.
As this analysis demonstrates, each indicator has its strengths and limitations—they are just tools for understanding the situation. Bolivia’s hydrocarbon potential is significant, but unlocking it requires:
* Access to attractive markets: While expanding domestic production has social benefits, subsidized prices discourage the investments needed for exploration and production.
* Reasonable and prudent operating conditions: Production taxes near 50% fail to provide progressive incentives for exploration and field development.
* Institutional and legal reforms: The sector needs substantial regulatory improvements to encourage sustainable growth.
God was generous with Bolivia, granting it “grandma’s jewels” in the form of natural gas. During the 1990s (the much-criticized neoliberal era), Bolivians managed to secure markets for these jewels. Today, we still live off them. To conclude, I ask you, dear reader: What would you do with grandma’s jewels?
S. Mauricio Medinaceli Monrroy
La Paz
March 14, 2014
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