Petroleum had been known to exist in Bolivia since the colonial period, but serious exploration did not begin until 1916. In that year, foreign firms probed for oil, marking the start of a long and sometimes bitter relationship between foreign oil companies and the Bolivian government. The government nationalized the oil industry from 1916 to 1920, denationalized it from 1920 to 1937, and nationalized it again in 1937 under the control of YPFB, where it remained in 1989. A revision of the country's petroleum code in 1952 allowed foreign companies to drill for Bolivian oil. Nevertheless, the only successful company--Bolivian Gulf, a subsidiary of Gulf Oil--was nationalized in 1969 in an acrimonious dispute with the government. Two foreign firms, Occidental International and Tesoro Petroleum, held service contracts with YPFB in the late 1980s.

Oil production peaked in the early 1970s but declined throughout the rest of the decade and into the 1980s. Production dropped from 47,000 barrels per day (bpd) in 1973 to only 21,000 bpd in 1988, the result of price fluctuations, obsolete machinery, minimal exploration, YPFB mismanagement, and declining reserves. As part of the NPE, the government restructured YPFB into three autonomous subsidiaries in 1985 and reduced its payroll by one-third. One of YPFB's major goals was to accelerate oil exploration and improve its inadequate reserves-to-production ratio. Proven reserves were estimated at 158 million barrels in 1988. In order to augment reserves, most economists believed that Bolivia would need to rely more on foreign oil companies for exploration.

Oil exploration in Bolivia in the 1980s remained highly regulated by the government, but revisions in the country's petroleum code were expected after 1988. For exploration purposes, the country was divided into four regions, three of which were higher risk areas; in the fourth region, where reserves were unknown, YPFB had exclusive rights for exploration. The YPFB's region was located in southeastern Bolivia, and the other regions covered the rest of the country's mostly unexplored subsoil. YPFB, however, also issued contracts for foreign oil companies to explore portions of its own select region and others. In September 1988, Occidental signed a thirty-year contract with YPFB for exploration and production in a 2.5- million-hectare area, encompassing the Madre de Dios and Lapachos regions of La Paz, Beni, and Pando departments. YPFB also managed the country's oil refineries, which had a 74,000 bpd capacity, or three times more than output. The refineries, located in Santa Cruz, Cochabamba, and Chuquisaca departments, produced a diverse range of petroleum products, such as lubricating oils, gasoline, naphthas, jet fuels, diesel, solvents, and ether.

Seventy-five percent of Bolivia's oil was drilled in four Santa Cruz oil fields--La Peña, Monteagudo, Caranda, and Camiri--with the balance provided by fields in the departments of Chuquisaca and Tarija. A major new field, Vuelta Grande, was scheduled to begin production in 1989, providing upwards of 5,500 bpd. Most oil fields had large reserves of associated natural gas.

Natural gas reserves in 1988 were estimated at 33 billion cubic meters. The primary gas fields were concentrated in Santa Cruz and Tarija departments, with additional fields scattered in various other departments. In 1988 natural gas production equaled roughly 13 million cubic meters a day, almost half of which was reinjected. Sixty-five percent of all gas production originated from four large gas fields in Santa Cruz: Río Grande, Colpa, Vuelta Grande, and Caranda. In the late 1980s, YPFB exported close to 90 percent of the country's gas, about 6 million cubic meters a day, to Argentina via an 847-kilometer gas pipeline that was constructed in 1972, extending from Santa Cruz to the border town of Yacuiba. In total, 4,346 kilometers of gas and oil pipelines of varying sizes extended through the country in 1988. Domestic gas use, equivalent to about 10 percent of production in 1988, was expected to increase when a gas pipeline connecting the highlands to the lowlands opened in 1988 and as electricitygenerating plants increasingly turned to gas as their source of power.

The contentious nature of negotiations between Bolivia and Argentina for purchasing natural gas in the mid-1980s demonstrated the subsector's dependence on foreign markets. Disagreements revolved around the market rate Argentina paid for Bolivian gas, the proportion of currency and in-kind payments, and Bolivia's failure to make its debt payments to Argentina, its largest bilateral creditor. Following a two-year period that nearly bankrupted Bolivia's treasury, the two nations signed a comprehensive agreement in 1987. Under the accord, Bolivia agreed to cut its gas price by 20 percent and peg it to market levels. Argentina resumed its gas payments to Bolivia with 80 percent of its payment in convertible currencies and 20 percent in goods, such as wheat. In the late 1980s, however, the status of the agreement beyond 1992 remained unclear.

After more than ten years of negotiations, in 1988 Bolivia and Brazil signed a preliminary agreement that was to pave the way for exports of natural gas, urea, and polyethylene to Brazil in the early to mid-1990s. Although the details were still being finalized in 1989, the pact was slated to include a 600-kilometer gas pipeline from Santa Cruz to the border town of Puerto Suárez and then to São Paulo; 3 million cubic meters of gas exports a day; the manufacturing of 200,000 tons a year of urea fertilizers and 100,000 tons of polyethylene, used for packaging and tubing; and a series of other thermal and hydroelectric projects. If the supply of gas did not reach Brazil by 1992, however, and the Argentine agreement was not renewed, Bolivia faced a potentially untenable cash-flow situation by 1993.

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Source: U.S. Library of Congress