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Brazil trying to convince Bolivia to cut natural gas prices.

LA PAZ -- Brazilian officials are scrambling to restructure a gas supply contract with Bolivia in a desperate bid to deal with a growing energy crisis. However, local producers are resisting efforts to renegotiate natural gas prices.

The 1999 opening of the 1 billion cubic feet per day (Bcf/d) natural gas pipeline linking reserves in Bolivia with markets in Brazil was hailed as the start of a new era in energy cooperation between the two nations and a crucial step in keeping ahead of growing demand for electricity in Brazil. Since then, however, the news has been almost totally bad.

Bolivian gas was due to fire 49 thermal power plants in Brazil, but only three have been built and just 10 more are in development.

The problems include high gas prices, unattractive contract terms in Brazil, financial uncertainty caused by the devaluation of the real several years ago and hopes that cheaper Argentine gas will eventually arrive in Brazilian markets.

Shipments of natural gas to Brazil are just 25% to 30% of the pipeline's capacity and analysts say growth will likely be slow.

Petrobras President Henri Philippe Reichstul recently met with Bolivian officials in a bid to persuade them to renegotiate the pricing mechanism for Bolivian gas. Currently, gas prices are tied to a basket of international fuel oil prices, a formula advocated by Petrobras. However, as world oil prices have risen, the price of natural gas has risen as well, making Bolivian gas uncompetitive in Brazil. Sources say gas prices have risen from $1.13 per million Btus to a peak of $1.69 per MMBtu at the end of 2000 before easing in succeeding months.

Petrobras is in even more trouble because it signed a take or pay contract for 70% of the contract volume, meaning it must pay for the gas whether or not the company can sell it or actually takes delivery. Petrobras assumed, wrongly, that its monopoly over pipeline transportation to Brazil would force customers to buy gas on the company's terms.

But the company has failed to sell the gas and recently lost its monopoly over the pipeline after a court ordered Petrobras to allow other customers to use the line. As a result, Bolivian producers have been scrambling to sign contracts with Brazilian buyers. First off the mark was British Gas Bolivia (BGB), which signed a deal to sell gas to its Brazilian unit Comgas, the country's largest gas distribution company. "Petrobras may own the pipeline but it doesn't own the markets," said BGB general manager Ed Miller. US gas company Enron is also expecting to sign its own deals to supply power projects in Brazil later this year.

Reichstul is asking Bolivian producers and the government to cut gas prices to around $0.90 per MMBtu, arguing that the lower price is needed to fend off competition from other companies eyeing Brazil and to assure the construction of additional generation capacity.

The Bolivian government said it would study the proposals, but local producers have flatly rejected the idea.

In an apparent move to circumvent the local producers, Petrobras, recently signed a gas transportation contract with Bolivian pipeline company Transredes to move more than 210 MMcf/d of gas from its own fields in Bolivia to the Brazilian pipeline. This will enable the company to sell its own gas in Brazil, presumably at lower prices. The company would still have to pay itself the higher prices dictated by the Bolivian purchase contract, but buying its own gas for sale in Brazil would make the arrangement feasible.
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Title Annotation:energy crisis, Brazil
Publication:America's Insider
Article Type:Brief Article
Geographic Code:3BRAZ
Date:May 17, 2001
Words:593
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