Bolivia and Brazil
Guest Column

YPFB's urea white elephant

Bnamericas Published: Tuesday, June 30, 2020

According to the analysis presented below, the billion-dollar urea project developed during Bolivia’s previous MAS government could not, cannot and will not go anywhere under current conditions.

We are writing this piece at a time when the government is very wisely transferring budgeted resources of approximately US$2bn from a future propylene-polypropylene plant in the south of the country to much-needed sectors such as health.

We applaud this decision. We don't want another white elephant, this time in the south of the country, when we know and knew previously that there is no raw material (reserves) for the petchem plant, that the markets are complex and far away and there is no way to export the products. We don’t want the country's scarce resources to be pumped into another fiasco.

Gas in the world is only industrialized when there is no market or it is a byproduct of oil. Its greatest benefit is in using it and exporting it as fuel. Bolivia had and still has a market for its scarce gas.

Worse still, the urea plant was located in the most inappropriate place possible. Far from gas production and the markets, which also led to an increase of between 10% and 15% in initial investment.

The total investment was around US$1.1bn including the plant, unfinished train lines, wagons and others. Everything indicates that no market, economic, financial or feasibility studies were carried out before the central bank handed the cash to our beloved state hydrocarbons firm YPFB .

Urea prices in the largest and nearest market, namely Brazil, are measured in the CFR Brazil. In 2011 and 2012 there were high prices of urea worldwide with an average CFR Brazil of US$460/t. The average price between 2000 and 2015 was US$300/t. It’s at this price, or lower, that any analysis should be performed.

Let's take two CFR prices from the 2000-2015 average: one at US$300/t and the current one, which is US$235/t.

Let’s also take two prices of gas to the plant: one the subsidized price that is used of US$0.96/MMBTU and a current export market price of US$4.6/MMBTU.

Let's assume that the plant produces at 80% of installed capacity, depreciates in 25 years and the reported costs of operation, maintenance and transportation to the border with Brazil are used. Finally, an 8% rate of return is used on the investment made.

And now, fasten your seatbelts because we're going to crash.

At 235/4.6 the loss in present value for YPFB is approximately US$1.37bn.

At 235/0.96, with subsidized gas, the loss is US$844mn.

At 300/4.6 the loss is US$971mn and, finally, at 300/0.96 the loss is US$445mn.

And we have other data. We know that the plant operated at 31% of its installed capacity in 2018 and 39% in 2019. We don't want to scare people by providing the rest of the numbers.

Well, the million dollar question is whether YPFB can perform magic by lowering operating and maintenance costs to market prices, and not paying exorbitant prices under the contract with the electric company Bulo Bulo (a subsidiary of YPFB Chaco). That is to say, a state company profiting from another state company?

It will also be necessary to see if YPFB has the capacity to negotiate and lower transportation and storage prices that have been agreed with unions and companies. Finally, we’ll see if credibility can be built up among urea buyers in Brazil.

Was the urea plant born dead? Do we really want YPFB to build the propylene-polypropylene one?

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