Foreign investment promotion in the natural gas industry

By PPO Abogados

A decrease of production in natural gas fields and limited results in exploration projects have led to the possibility of Bolivia modifying its hydrocarbon law as a measure to attract foreign investment in the industry. The possibility was called up by the Minister of Hydrocarbons of Bolivia, Franklin Molina, in a recent appearance before the Senate.

The hydrocarbons law (Law 3058, May 2005), imposed a tax increase on oil companies and expanded the presence of the State in the hydrocarbon production chain. Bolivia possesses approximately 12.5 trillion cubic feet (TCF) of natural gas reserves (both proven and probable). Of this amount, 10.7 TCF are proven reserves. The state hydrocarbons company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB), generally forms joint ventures (55-45 percent sharing, with the state owning the majority share) for a limited period of 40 years with private companies for extraction services. The hydrocarbons law and a subsequent Supreme Decree (May 2006) require that companies sell all production to YPFB and that domestic market demand be met before exporting hydrocarbons.

Furthermore, these laws transfer the entire transport and sales chain over to state control. After the law was enacted, hydrocarbon companies were required to sign new contracts with YPFB, agreeing to pay 50 percent of gross production in taxes and royalties.
After an initial growth, natural gas production has declined during recent years and investment in exploration activities are also in decline.

"We do not have an increase in gas reserves, which leads us to rethink the entire regulatory framework", Molina stated before Senate, where a bill was approved to modify the oil services contract for the exploration and exploitation of natural gas in the Charagua area, located in the department of Santa Cruz and with an estimated potential of 2.1 trillion cubic feet (TCF) of natural gas.