21 Dec The industrialization of gas in Bolivia: “Everyone is good… until they are Bad”
I have a great friend who often says, “Mauri, everyone is good… until they are bad,” naturally bringing a smile to more than one bystander. Let me tell you that the other day, this phrase came to my mind because I believe it applies not only to people but also to many of “the things the Government does.” As an economist, I will call these “things” Public Policies.
A public policy is good… until it is bad, and that is when all the problems arise. Those who have had the fortune (or misfortune) of taking public policy courses know that it is crucial to anticipate all possible consequences so that a theoretical idea does not collapse upon implementation. In fact, I believe something similar could happen with the so-called, worn-out, mistreated, crushed, overused, and even abused idea of “gas industrialization.”
I must warn non-Bolivian readers that the discussion I am raising is somewhat local; however, it could well apply to other natural gas-producing countries.
Let’s start with the usual argument: “The price of the industrialized product is higher than the price of the raw material.” Very well, let’s assume for a moment that this is true. Then, we can construct the following graph: in it, we see that the export price of natural gas as a raw material (in light blue) is lower than the price of the industrialized product (in green). Since, I hope, we all agree so far, let’s take this graph as our “base” for analysis.
Now, most of the gas industrialization projects I have analyzed, as well as the Hydrocarbons Law, require or establish that the price of natural gas used as a raw material for industrialization must be lower than its export price. In fact, the Hydrocarbons Law already specifies a figure: this price must not exceed 50% of the export price. With this new information, the updated graph now shows that the price of the industrialized product incorporates a lower gas price, which I call the “New Natural Gas Price.”
When this idea is presented, the immediate counterargument is: “That doesn’t matter because the green area (in the graph) still compensates for the loss caused by the lower natural gas price.” This is not entirely true. Why? Because the price of the industrialized product must cover both operational and investment costs. So, with this new piece of information, the updated graph will look like the one attached below.
In this new context, the key question is whether the Final Benefit (in green) compensates for the loss due to the lower natural gas price. Some will say yes, others will say no—we won’t know until Bolivia’s state oil company, YPFB, presents the financial analysis of the industrialization projects it intends to undertake.
In any case, a major problem follows: royalties and taxes (IDH) in Bolivia are calculated based on the price of natural gas. Since the sum of both concepts (royalties and taxes) in Bolivia reaches the (rather impractical) figure of 50%, this payment can be visualized in the new blue blocks in the following graph. In other words, since municipalities, regional governments, universities, funds, police, etc., receive “gas money” from the blue area, if this gas is industrialized, their revenues will be drastically reduced (see the new blue block).
And now comes the million-dollar question: Who keeps the green area (if it even exists)? For younger readers, I just want to point out that the only certainty, in the short term, when an industrialization project is undertaken, is the red area.
I also leave it to younger readers to analyze regional issues—what happens when producing regions receive lower royalties, and the industrialization project is built in another region? What about the market challenges of the industrialized product—is it really as large as expected? What about future natural gas supply—what is our true level of reserves? And so on.
Anyway, my dear friends, I promise not to end 2013 with such a pessimistic view of something that has so many Bolivians excited. After the 25th, I will post a final summary. For now, I wish you all a wonderful night on the 24th—may it truly be a night of peace.
S. Mauricio Medinaceli Monrroy
La Paz
December 21, 2013
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