Privatesector P U B L I C P O L I C Y F O R T H E Note No. 144 May 1998 International Gas Trade— The Bolivia-Brazil Gas Pipeline Peter L. Law The Bolivia-Brazil natural gas pipeline, which will transport natural gas more than 3,000 and Nelson kilometers, will cost US$2.1 billion to construct. Despite the substantial benefits for both Bolivia de Franco and Brazil and the involvement of reputable private partners, the perceived risks and complex- ities of this large project made financing it a major challenge. The pipeline will link supply in one country to a potential market in another. Neither of these countries has a tradition of indepen- dent regulation or economic pricing of fuels. And the pipeline will be the first major gas infrastructure project involving the private sector in Brazil, where the natural gas market is underdeveloped and the gas distribution infrastructure still very limited. This Note explains the historical factors that shaped the project, how the financing package came together, and the role the pipeline will play in liberalizing the Brazilian hydrocarbon sector. When the pipeline project started to get off the FIGURE 1 THE BOLIVIA-BRAZIL NATURAL GAS PIPELINE ground in the early 1990s, the Brazilian hydro- New pipeline carbon sector was dominated by government- Existing pipeline Offshore production owned entities and prices were heavily regulated. At the federal level the oil and gas company Petrobras, the main player in the project, still had a monopoly on exploration, exploitation, refin- ing, and maritime and pipeline transportation. BRAZIL Natural gas distribution was reserved for state- BOLIVIA owned distribution companies, although petro- leum distribution was open to foreign investors. São Paulo Prices were equalized across regions, and the Rio de Janeiro prices of liquefied petroleum gas (LPG) and fuel oil were subsidized. For Petrobras exploiting Brazil’s modest natural gas reserves had been ARGENTINA secondary to producing oil, and the share of natu- ral gas in the energy market in the early 1990s Supply contract: YPFB (Bolivia) and was a mere 2 percent. Petrobras had introduced Petrobras (Brazil) natural gas only in 1988, supplying small quanti- 16 mmcmd for 20 years Bolivia segment: 500 km, US$0.4 billion ties to the existing São Paulo distribution net- Brazil segment: 2,600 km, US$1.7 billion work as associated gas from local oil fields.1 But with Brazil forecasting strong growth in energy Note: mmcmd is million cubic meters per day. demand, natural gas gained appeal as a means to offset increasing dependence on more The World Bank Group ▪ Finance, Private Sector, and Infrastructure Network International Gas Trade—The Bolivia-Brazil Gas Pipeline expensive fuels. Meanwhile, Bolivia needed to Bolivian reserves to the export project and de- find a new market for gas exports. The country fined a diminished (but still critical) role for YPFB had been exporting gas by pipeline to Argentina as the aggregator and shipper of future gas ex- since the 1970s, with these export sales repres- ports to Brazil. The capitalization of YPFB fol- enting some 80 percent of Bolivia’s total gas pro- lowed shortly after, and two private exploration duction, but new discoveries in Argentina gave and production companies and one oil and gas notice that this was no longer tenable. The idea transportation company eventually won the in- for natural gas trade between Bolivia and Brazil ternational competitive tender. The Bolivian had been around since the 1930s, and in 1990 transportation company, Gas Transboliviano S.A. the two governments decided to give a gas export (GTB), was formed for the gas export project as pipeline another serious look. After a prelimi- a private joint venture among Enron, Shell, and nary feasibility study the two state monopolies, Bolivian pension funds. Petrobras in Brazil and Yacimientos Petroliferos Fiscales Bolivianos (YPFB) in Bolivia, signed a The project structure allowed a degree of cross- gas sales contract in 1993. border ownership by each sponsor group, and special committees were formed with repre- Private investors emerge sentation from all sponsors to resolve techni- cal and financial issues and ensure cross-border Neither government was in a position to fund harmonization of the project. This feature the pipeline project. As a first step to raise pri- proved effective in helping to speed up project vate finance, Petrobras embarked on a series of development. roadshows in 1994 to choose private equity part- ners for a new pipeline company on the Brazil- A financing plan takes shape ian side. Petrobras ultimately selected the BTB consortium, comprising British Gas, Tenneco In 1997 the project still lacked a firm financing (now El Paso Energy), and Broken Hill Propri- plan. The project required a large, bulky, up- etary, to form the Brazilian transport company front investment with a gradual buildup of tariff (Transportadora Brasileira Gasoduto Bolívia- revenues, and a final gas price that would pro- Brasil, S.A. [TBG]). This company, with an ini- vide incentives for a speedy uptake of gas by tial 51 percent ownership by Petrobras, would potential customers—industrial users and power own the Brazilian part of the pipeline. However, plants. Market soundings had indicated a lack of the private partners began to signal to the gov- capacity for long-term commercial funding. Com- ernment that fair access to downstream markets mercial debt would be high cost with short ma- and market-based pricing policies would be im- turities (eight to ten years) because of perceived portant for the realization of the project—policies Brazilian country risk, regulatory risk, and sup- in line with those recommended earlier by the ply risks, resulting in debt service difficulties and World Bank to the Brazilian government as key a final gas price that could severely limit market for the development of the hydrocarbon sector. penetration during the critical initial years. (Com- In late 1995 an amendment to the Brazilian con- mercial lenders perceived some supply risks, since stitution removed the Petrobras monopoly, sub- known Bolivian reserves were only sufficient to ject to an implementation law that was approved meet 80 percent of the gas sales contract. But in by Brazil’s Congress in August 1997. the World Bank’s view the risks were likely to be small because the capitalization of YPFB had at- On the Bolivian side an agreement of associa- tracted some US$1 billion of private capital for tion was reached between Enron and YPFB that further exploration and development.) included the development of the Bolivian sec- tion of the pipeline. YPFB was being prepared In 1997 the World Bank and its multilateral coun- for capitalization and sale by international tender. terparts, convinced that both countries were se- A hydrocarbon law passed in 1996 committed rious about opening their hydrocarbon sectors FIGURE 2 THE BOLIVIA-BRAZIL PIPELINE—TAKE (AND SHIP) OR PAY FRAMEWORK Gas is transferred from YPFB to Petrobras at the border. YPFB GTB TBG PETROBRAS BRAZILIAN GAS BOLIVIAN DISTRIBUTION PRODUCERS YPFB collects GTB transports TBG transports Petrobras COMPANIES gas from gas to the gas to states for sells gas to producers border Petrobras. distribution and delivers it to for YPFB. companies. the pipeline. to competition and private participation, decided lay the project until a new government was to appraise the project on the understanding elected, urged Petrobras to quickly seek a solu- that transmission tariffs (and private investor tion. Petrobras responded through two mecha- rates of return) would be regulated to ensure nisms. First, it agreed to finance a fixed price that any benefits of extended maturities result- turnkey construction contract for the Bolivian ing from their loans and guarantees would be section of the pipeline, with repayment to be passed on to final consumers. A World Bank made through the waiver of future transportation analysis showed the project to be economically fees. Second, it agreed to prepurchase part of viable and the best of several alternatives, in- the uncommitted upside capacity of the pipeline cluding using different pipeline routes from on both sides of the border, an arrangement that Bolivia, constructing a pipeline from Argentina became known as the transport capacity option. to Brazil, and constructing large gas-fired power plants in Bolivia and transporting the power to Who takes the risks? Brazil using high-voltage transmission lines. (The final pipeline route was selected to minimize Petrobras bears most of the project risk on both environmental impact, and the project includes sides of the border. YPFB will collect gas from full measures to protect the interests of indig- the producers, and the gas will be transported enous people living near the pipeline). On the to the border under a ship-or-pay contract with Brazilian side multilateral lending and partial GTB (figure 2). Here, Petrobras will take own- credit guarantees offered the prospect of longer ership of the gas for delivery to the five Brazil- loan maturities and a gas price just right to pen- ian state gas distribution companies under etrate the market. Thus the World Bank agreed similar transportation arrangements with TBG. in December 1997 to provide a direct loan of US$130 million and to continue preparing a The supply risk on the Bolivian side falls on partial credit guarantee of US$180 million to YPFB. But this risk is small because of addi- TBG. Other multilaterals, including the Inter- tional supply likely to become available from American Development Bank, provided financ- new discoveries in southern Bolivia and possi- ing totaling US$380 million. The multilateral bly northern Argentina. The biggest risk lies in financing covered 40 percent of the financing the market in Brazil. Four of the five distribu- requirements as senior debt, Petrobras provided tion companies are paper companies with as another 40 percent sourced from bilateral agen- yet no pipes in the ground, and gas will have to cies, and the equity sponsors provided the rest. penetrate a market dominated by high-sulfur fuel oil. (Petrobras has an equity stake of about one- On the Bolivian side only 20 percent of financ- third in several of the distribution companies. 2) ing was available from shareholder equity. With Although the ultimate market risk lies with the the Bolivian government unprepared to provide distribution companies, it is Petrobras that is sovereign guarantees, little progress was being contractually obligated to pay YPFB for the gas made to close the financing gap. The Brazilian and the transportation companies for their government, realizing that this threatened to de- transportation services. International Gas Trade—The Bolivia-Brazil Gas Pipeline Moreover, through its turnkey construction con- ment will therefore submit a plan for eventual tract, Petrobras takes the construction risk on reduction of Petrobras’s shareholding in a way the Bolivian side. And if the pipeline in Brazil that will ensure the best chances for commer- is not built on time, it is Petrobras who will cial success. incur financial penalties payable to YPFB and the distribution companies. As part of the agreements reached with the World Bank, the Brazilian government has de- Toward sector liberalization veloped a plan to phase out fuel price subsi- dies and deregulate petroleum product prices The size and scope of the pipeline give it the within a three-year transition period (from leverage to play a key role in opening the Bra- August 1997). The concept of distance-based zilian hydrocarbon sector to competition and transport tariffs, a departure from the traditional private participation. The project and accom- pricing mechanisms, will encourage use of the panying policy reforms will establish the prin- best fuel supply option in each area of Brazil. ciples of unbundling and transparent pricing Open access to transmission systems, combined in transactions between gas supply, transpor- with increased private participation in upstream tation, and distribution. The pipeline will help development, will be a major force in control- promote interfuel competition in Brazil by al- ling extraction costs and increasing supplies lowing a large increase in gas supply, and in- of domestic gas in Brazil. It will ultimately lead crease the number of players in the market by to wider choices for consumers, allowing large Viewpoint is an open forum intended to making the upside capacity of the pipeline consumers to negotiate directly with produc- encourage dissemina- available to shippers other than Petrobras. ers and importers for the best commercial terms. tion of and debate on ideas, innovations, and best practices for ex- During the project preparation stage it was still Conclusion panding the private unclear to what extent Brazil’s hydrocarbon sec- sector. The views pub- tor would be opened to competition, as the Many prospective international gas pipeline lished are those of the authors and should not hydrocarbon law was not passed until later. projects are under consideration—projects in be attributed to the The World Bank therefore sought to include Central and South Asia, and projects propos- World Bank or any of good practice policy principles relating to open ing pipelines from Russia to China and from its affiliated organiza- tions. Nor do any of the access, ownership, and pricing in the authori- Turkey to Eastern Europe. Given the large in- conclusions represent zation agreement between the government of vestments required, the main challenge is to official policy of the Brazil and TBG that sets out the parameters design financing schemes that work. There are World Bank or of its Executive Directors under which the pipeline will eventually oper- few blueprints to draw on. The World Bank or the countries they ate. These policies include nondiscriminatory can play a key transitional role in such projects. represent. third-party access, the adoption of distance-re- But there needs to be demonstrable commit- To order additional lated transmission tariffs for the uncommitted ment to opening the natural gas industry to copies please call upside capacity of the pipeline, and the re- competition and private investment and estab- 202-458-1111 or contact quirement that TBG would act only as a gas lishing sound regulatory and pricing policies. Suzanne Smith, editor, Room F6P-188, transporter and not engage in gas trading or The World Bank, upstream or downstream cross-ownership. Al- 1 The São Paulo distribution network was originally constructed to 1818 H Street, NW, though Petrobras will be the dominant share- distribute manufactured gas. Washington, D.C. 20433, 2 To counter Petrobras’s bargaining power, the distribution compa- or Internet address holder of the Brazilian transportation company nies used collective negotiations to achieve acceptable price and ssmith7@worldbank.org. for a transition period, the Brazilian govern- take-or-pay conditions, an approach that proved highly effective. The series is also ment has agreed with the World Bank to even- available on-line (www.worldbank.org/ tually maximize private participation in the Peter L. Law (plaw@worldbank.org), html/fpd/notes/ project. To initiate this too quickly would risk Energy Specialist, and Nelson de notelist.html). unraveling the many complex project agree- Franco (ndefranco@worldbank.org), Printed on recycled ments already reached and fail to maximize Principal Power Engineer, Oil and paper. the value of the Petrobras shares. The govern- Gas Thematic Group