Mega Gas Project Advances In Bolivia

Mega Gas Project Advances In Bolivia

December 01, 2001

The Republic of Bolivia, Sempra Energy and an international consortium formed by Repsol-YPF, British Gas and British Petroleum signed a memorandum of understanding in early December to develop an approximately $5 billion natural gas project to export 800 million cubic feet a day of gas from Bolivia to Mexico and California.

The Pacific LNG Project

The memorandum of understanding commits the parties to negotiate exclusively with each other with the aim of reaching a 20-year agreement to develop the Pacific LNG project.

The proposed project focuses on the extraction and sale of natural gas from the rich Margarita fields located in the Tarija region in southern Bolivia. The fields have at least 13 trillion cubic feet of certified reserves, an amount of gas that may be sufficient to supply a four-train LNG condensing plant. The operator of the project would separate dry natural gas from the associated gas liquids at the Margarita fields and transport the dry natural gas through a pipeline to a port to be built on the Pacific coast of South America. Other pipelines may be built to transport the associated gas liquids. At the port, the dry natural gas will be condensed into liquids at a two-train LNG plant and then shipped in cryogenic tankers to a receiving terminal in Baja, California. The liquids will be vaporized back into natural gas at the terminal and then distributed to customers in southern California and northwestern Mexico.

The LNG receiving terminal in Baja will have a send-out capacity of approximately one billion cubic feet a day of natural gas and will be built by Sempra Energy and CMS Energy Corporation. The overall cost of this mega project has been estimated at approximately $5 billion. Full operations are expected to begin by 2006. Repsol-YPF is acting as the project manager during the preliminary development phase of the project.

Because this project is still in its nascent stages, many questions remain regarding its development.

Perhaps the most important questions from a project finance standpoint is who will be purchasing the gas and in what amounts. Everyone agrees on the growing need of the California market for natural gas to generate electricity; however, Bolivian gas needs to be priced at an attractive price in order to compete successfully with gas provided from other sources. Bolivian gas should be able to undercut gas from Oceania in the market because of the shorter distance to bring it to the California market.

Technical and regulatory concerns will also be considerable for a project this size.

Perhaps one of the most significant technical challenges will be to build at least one pipeline through the Andes to take gas from the Margarita fields to the Pacific coast of Peru or Chile. In order to accomplish this, the Bolivian government must assist the project sponsors in obtaining all the necessary permits from the governments of Peru or Chile to build the pipeline, transport the gas through their territory and install the port facilities and the LNG plant along their coast. Permitting is also necessary in California and Mexico since the pipeline that will distribute the gas in southern California and northwestern Mexico will need to join the existing distribution infrastructure in those regions. With respect to Bolivian permits, Bolivian authorities, including Bolivian President Jorge Quiroga, have expressed their full support of the project and their intention to issue all governmental approvals by the first half of 2002 by declaring it a project of “national interest”.

Last but not least is the question of where the shipping port and LNG plant will be located.

Because Bolivia is a landlocked country, it needs to use a port in Peru or Chile in order to ship the LNG to North America. Both the Peruvian and Chilean governments have expressed their interest in hosting this multi-billion dollar project. The Mejillones port in Chile offers a shorter route than the port of Ilo in Peru for the pipeline coming from Bolivia to the Pacific coast. However, Peru offers a shorter maritime route to ship the LNG to North America. In addition, Peru has close historical ties with Bolivia and is perceived as the favorite of the Bolivian interested parties. The ultimate decision about where the port and the LNG plant will be located will probably be made by the project sponsors.

The consortium that is developing the Bolivian part of the project consists of Repsol-YPF (37.5%), British Gas (37.5%) and Pan American Energy LLC, a joint venture of British Petroleum and Bridas (25%). Repsol-YPF, British Gas and British Petroleum are currently active in the Bolivian hydrocarbons sector and together control Atlantic LNG in Trinidad and Tobago.