Killing the Goose
Last year I described the internal struggles over Bolivia's natural gas resources as an example of the need for a comprehensive approach to sustainable development. Now it appears that the Bolivian Senate sees it as a chance for larceny bordering on expropriation, as reported by the Financial Times (subscription required.) Raising the combined royalty and wellhead tax on Bolivia's natural gas to 50% will leave the companies that risked their capital and expertise to develop this resource with little chance of earning a return.
While I don't know the detailed project economics in question, it's important to understand the difference between producing gas in Bolivia compared to producing it in Oklahoma. Lacking much domestic industry, most of the gas must be piped to neighboring countries to reach a market. A little knowledge of South American geography suggests the challenges this entails; the pipelines to the closest markets for Bolivian gas are long, expensive and costly to operate. By the time you back the pipeline charges out of the delivered price of the gas, which is probably about $2.00/thousand cubic feet (MCF), the wellhead value of the gas could be under $1.00, leaving less than $.50/MCF to cover production costs.
Finding and producing gas in a remote, landlocked country with minimal local infrastructure isn't going to be very profitable at $.50/MCF. (US gas producers are currently netting $4 or $5 at the wellhead.) Even if you are a avowed socialist leading street protests against the evil capitalist exploiters of your country's patrimony, it ought to be self-evident that running off the only folks who can produce this resource is tantamount to killing the golden goose. If the protesters focused more on how to make the best use of reasonable royalties and less on grinding the foreign investors into the dust, they would stand a better chance of actually having a future royalty stream to divvy up.
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