Petrobras CEO Guarantees Bolivian Gas Supplies

Brazil will not suffer shortages of Bolivian natural gas despite Bolivia's May 1 nationalization of hydrocarbons production and refining, Brazil's federal energy company Petrobras (NYSE: PBR) CEO Jose Gabrielli told Globo television on Tuesday.

"We will take all measures possible, at all possible levels, to guarantee gas supply to the Brazilian market," said Gabrielli. "We will be intransigent in the defense of the rights and contracts Petrobras has in Bolivia and defend the right of gas supply to the Brazilian market."

Gabrielli said that Petrobras will continue to study the May 1 decree issued by President Hugo Morales that gives Bolivia's oil company YPFB ownership of all gas and oil produced in the country and a 50+1% control of Petrobras' two refineries in the country.

The decree effectively turns all operating oil companies into service providers to Bolivia's government, which would pay for the production of the oil. All oil companies in Bolivia have 180 days to sign new contracts or abandon their operations there, the decree said.

Petrobras has already declared becoming a service provider unfeasible after investing US$1.5bn in Bolivia in the past decade.

Petrobras, through its wholly-owned unit Petrobras Bolivia, owns 95% of Bolivia's refining capacity and controls 46% of its natural gas reserves, a daily production of 6 million cubic meters (Mm3/d), as well as almost a quarter of all fuel retail outlets and 100% of jet fuel supply in the country.

The appraisal involves top Brazilian government including left-leaning President Luiz Inacio Lula da Silva and cabinet members including presidential chief-of-staff and Petrobras board chairperson Dilma Rousseff and mines and energy minister Silas Rondeau, who met on Tuesday morning.

On Monday night Rondeau had labelled the nationalization decree "unfriendly".

"The essence of the debate will be over compensation for Petrobras investments in Bolivia since it is unlikely Morales will turn back on his decision," Eduardo Matias, a specialist in international law and partner at Brazilian international law firm L O Baptista Advogados, told BNamericas. "Although Petrobras can take the Bolivian government to international courts and arbitrage boards, the first rounds will be diplomatic and political."


Brazil imports 60% of the country's 41Mm3/d natural gas demand from Bolivia through the 30Mm3/d, 3,000km Brazil-Bolivia gas pipeline and a contract that expires in 2019.

Unlike Chile or Argentina, which need gas for most of their power generation, Brazil relies on hydro power for over 80% of its power supply, but natural gas is playing an increasingly important role in Brazil's economy.

Not only have industries increasingly turned to the fuel to replace more expensive and less efficient fuels, but government power planning officials have increasingly looked at gas-fired plants as an alternative to stabilize the seasonal changes in power supply because of rainfall as power demand is expected to grow at 5% yearly rate.

This has spurred a double-digit annual growth in natural gas demand and plans to increase supply from Bolivia, which sees gas as an important source of hard currency for the country.

This relationship led Petrobras to expect a less abrupt change in the political and legal scenario. Up to last week, it had been in talks with Bolivian government officials for an agreement in which it would lead as much as US$5bn-6bn in new investments in Bolivia over the next five years.

Only last week Bolivia's hydrocarbons minister Andres Soliz Rada met with Petrobras officials in Rio de Janeiro, a Brazilian mines and energy spokesperson told BNamericas.

"The surprise in Morales' decision comes from the fact that costs for unilateral decisions are very high in globalized economies," Matias said.

In the long run, Bolivia faces retaliatory economic measures and the confiscation of its assets abroad to compensate for the appropriation of private assets in Bolivia, but the highest price to pay for a poor country like Bolivia could be the drying up of foreign investment flows into the country, he added.

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