The Lincoln Plawg - the blog with footnotes

Politics and law from a British perspective (hence Politics LAW BloG): ''People who like this sort of thing...'' as the Great Man said

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Thursday, November 06, 2003

Bolivia: one or two facts about the gas industry that not many people know

If those with the country's best interest at heart want to engage the average interested gringo [1], rather than the visceral globalophobe or the ga-ga noble savage groupie, they could do worse that deal with questions like those raised in a couple of pieces from November 6 in El Diario of La Paz arising from a conference at the Colegio de Geólogos de Bolivia on the subject Política Gasífera del Estado Boliviano.

The first piece alleges that oil companies operating in Bolivia are doing an excellent job in avoiding the country's taxes: they can't help paying the applicable royalty of 18% on the value of production (except by fraud - and the companies aren't being accused of that, in the piece, at least). But, it says,
Las empresas tienen mil maneras de no pagar el Surtax y el impuesto a las utilidades...

The piece refers to the practice whereby a multinational can transfer profits from one country to another by head office consultancy charges [2]. But any cross-border transactions involving companies within the same group are susceptible of manipulation for precisely this purpose.

(While the potential for this kind of avoidance of tax is no doubt huge, unless countered by carefully crafted laws administered by an honest and competent bureaucracy, I'm not sure how much tax - ballpark - that Bolivia is losing. Extraction of gas in large quantities is, I believe, a relatively recent phenomenon. And a paper (PDF) from February 2002 [3] has a table (p11a) showing that, out of total Bolivian state revenues of around $2.1bn in 1999, hydrocarbon revenues accounted for around $550m, of which oil company profits tax and VAT came to $120m. Substantial sums, certainly - impossible to say how much greater they would have been without oil company tax avoidance activity.

According to the DOE Energy Brief for Bolivia (updated to October 2003), production has substantially risen since 1999, as a result of the contract to supply gas to Brazil: has that resulted in an increase in profits tax paid by the oil companies? Perhaps they've had extra deductibles on account of investment required by the extra production.

The second piece looks at the alternative proposition of the anti-export brigade: that the gas be industrialised in Bolivia.

One difficulty is, it seems, that a viable petrochemical operation would need a regular supply of 30-40m cubic metres a day - or 1.1bn-1.4bn cubic feet a day - an amount roughly equivalent to the total contracted to be sold to Brazil once full production levels are reached [4].

Another question is the possibility of stripping out the ethane from the gas supplied to Brazil. The piece says that ethane alone (amongst the various component chemicals of natural gas) is necessary to support of petrochemical industry; but that Brazil would resist the suggestion for the very good reason that they would want the ethane in Bolivian gas for a petrochemical industry of their own!

(Perhaps a deal could be done whereby Brazil would take smaller volumes from Bolivia, but would allow Bolivia to strip out the ethane. Don't say this blog isn't both helpful and practical!)

  1. Even in the wider meaning of the word, a fairly select group, I'm beginning to suspect.

  2. There is an interesting paper (PDF )from a World Bank conference which describes the generic questions that a country with oil and gas reserves needs to address in structuring its tax and royalty regime for the industry.

  3. For the Andean Competitiveness Project, one of whose authors is from the Center for International Development at Harvard, no less! It models the effect of the Brazilian gas deal on the Bolivian economy as a whole.

  4. The Brazilians have been trying to renegotiate for lower levels of exports, according to the DOE Brief, partly because they have discovered reserves of cheaper gas in their own territory.

    Bolivian gas reserves are put at 24-55tn cubic feet. At 1.4bn cubic feet a day, the required flow would therefore, according to my very shaky maths, exhaust the reserves in between 50 and 100 years (very roughly).

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