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Saturday Lagniappe

Venezuela's multibillion-dollar natural gas pipeline project is on hold—the news affects Chavez's power, his neighbors, and Petróleos de Venezuela

A Pipe Dream for Chavez?

By Peter Wilson

President Hugo Chavez loves using Venezuela's vast oil and natural gas reserves to enhance his power and prestige in Latin America, while thumbing his nose at the U.S. But his hopes for playing an even greater role have suffered an embarrassing setback as potential partners back away from his most ambitious project to date: a planned $20 billion natural gas pipeline that would have spanned the continent, bringing Venezuelan gas to Argentina, Brazil, and Uruguay. The apparent decision by Venezuela's neighbors to freeze or even nix the project may lead to further delays in Venezuela's plans for developing its natural gas reserves.

Many analysts have considered the complex pipeline project, which Chavez proposed nearly two years ago, to be a long shot at best. The 8,000 km-long system, which was scheduled to begin operating in about a decade, would run from Venezuela's Caribbean coast through Brazil's Amazon rainforest before heading south to Argentina, Uruguay, and Bolivia. Rather than sending more lucrative liquefied natural gas (LNG) to the U.S., Venezuela planned to ship about 150 million cubic meters a day when the pipeline opened. "The pipeline was dead on arrival," says Patrick Esteruelas, an analyst with New York-based Eurasia Group. "Cost estimates for the project were increasing every year, and there were environmental risks. There were also doubts about Venezuela's ability to supply the pipeline with gas."

That seems to have been a key factor in the thinking of Venezuela's neighbors. Even though Venezuela has the world's eighth-largest gas reserves, the country currently has a shortage of the fuel due to its traditional emphasis on oil production. That has forced Chavez to build a pipeline to Colombia to take deliveries of natural gas while he ramps up domestic production.

Ambitions and Doubts

And doubts abound about Venezuela's ambitious natural gas production plans. The government aims to start offshore production and end the gas deficit by 2009. But skeptics warn that Chavez may not be able to achieve those goals. Since he came to power in 1999, Venezuela's oil production has declined 25% despite government pledges to boost output. Given the uncertainties, potential customers such as Brazil are more attracted to Bolivia, which is already exporting gas, or to other countries shipping LNG. "Venezuela has the gas," says Pietro Pitts, editor-in-chief of Caracas-based trade publication, Latin Petroleum. "But until they start taking it out of the ground, it's all talk and no one will be taking their proposals seriously."

Brazil and other potential customers may also be leery about becoming too dependent on Venezuela and Chavez. Brazil and Venezuela have repeatedly clashed this year, with Chavez criticizing Brazilian plans to produce ethanol for the U.S. market. Chavez has also criticized Brazil's delay in approving his country's entrance into Mercosur, the South American customs union. Brazilian politicians, meanwhile, have attacked Chavez for not renewing the license of a television station that was critical of the president. "Chavez is rather blatantly trying to compete with Brazil for leadership of Latin America through his largesse," says Susan Purcell, who heads the University of Miami's Center for Hemispheric Policy.

At a Cost

Chavez sought to blunt criticism of the project, saying that Venezuela could supply South America with natural gas for decades at a tremendous cost savings to consumers while creating hundreds of thousands of new jobs. Chavez offered to sell the gas at below U.S. prices for LNG. In a speech to supporters in early August, Chavez accused the U.S. of killing the project, but analysts aren't convinced. "I really don't think the pipeline was killed by U.S. pressure," says Roger Tissot, an analyst with Washington-based PFC Energy. "If I were to blame anybody it would be Petrobras, which I think was less enthusiastic about a project that clearly looks very difficult to justify in economic terms. Without Petrobras' blessing, I don't know how Venezuela could go ahead." Petrobras (PBR) Chief Executive José Sergio Gabrielli told reporters on Aug. 14 that the company will make a decision in December.

Ultimately, the biggest loser in the decision to freeze the pipeline may be Venezuela's natural gas industry, which is struggling to ramp up output to meet growing domestic demand. Despite its reserves, Venezuela faces several obstacles to increasing output. More than 90% of the country's onshore gas must be extracted by producing oil. And most of the country's daily gas production of 6.5 billion cubic feet is now reinjected into oil fields to push crude to the surface. That's why increasing output at rich new offshore gas fields is crucial.

Four oil majors—Chevron (CVX), ConocoPhillips (COP), Statoil (STO), and Total (TOT)—are already developing three offshore blocks in the Deltana Platform field, which straddles the border with Trinidad and Tobago. Other companies, including Russia's Gazprom (GAZP.RTS), are exploring offshore fields in the Gulf of Venezuela, which abuts Colombia.

Natural Choices

But it won't be easy going for the energy giants. Chavez seems likely to move to amend the natural gas law by yearend, following earlier changes to oil legislation, which raised taxes and royalties while giving state oil company Petróleos de Venezuela (PDVSA) control of all projects. The gas law presently allows foreign companies to own 100% of natural gas projects in the country, while setting royalties at 20%, and income taxes at a 34% rate. The existing Deltana Platform contracts also stipulate that 90% of production will be for more lucrative export markets, and only 10% for the price-controlled domestic market.

Chavez will likely change the rules to give PDVSA a bigger role, resulting in fresh delays, industry sources predict. "If you're looking for contract sanctity, Venezuela isn't the place to be," says a Western oil executive who adds that it would be very hard to persuade his company's board of directors to undertake a major project in the South American country now. Venezuelan Energy Minister and PDVSA President Rafael Ramirez declined repeated requests for an interview.

Chavez seems likely to continue proposing new ways to tap his country's gas reserves. In mid-August, he proposed building a pipeline that would run across the Caribbean and supply Puerto Rico, Haiti, and key ally Cuba with gas. He also said he would invest in a regasification plant in Argentina, which would process LNG. Chavez isn't looking to sell natural gas to the U.S., its traditional oil customer. "If I was only thinking about money, I would sell [natural gas] to North America," Chavez told his supporters. But his eyes are focused more on increasing his power in the region.

Peter Wilson is a Business Week correspondent in Caracas. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by Business Week, on the August 21, 2007 edition. Joshua Schneyer in Rio de Janeiro contribute to this story. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 08/25/07

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Venezuelan funding to Latin American and Caribbean countries in 2007

2007-08-26 02:26:56 -

Venezuelan President Hugo Chavez's government has pledged more than US$8.8 billion (¤6.5 billion) in aid, financing and energy funding in Latin America and the Caribbean so far in 2007. Bandes is a Venezuelan state development bank. Below is a list of pledges sorted by type.

ENERGY

_ US$3.55 billion (¤2.61 billion). Nicaragua: To build 150,000 barrel-a-day oil refinery. (Source: Venezuelan Foreign Ministry, April 30

_ US$1.6 billion (¤1.2 billion). Estimated financing per year under preferential oil deals to at least 17 countries. (Source: Chavez, March 15

_ US$340 million (¤250 million). Nicaragua: Grants and loans to supply oil, nine electricity generators. (Source: Venezuela government statement, March 7

_ US$240 million (¤176 million). Bolivia: Exploration of gas and oil fields. (Source: Bolivian Hydrocarbons Ministry, Aug. 8

_ US$170 million (¤125 million). Bolivia: To build two liquid natural gas extraction plants. (Source: Venezuelan Foreign Ministry, April 30

_ US$100 million (¤73.5 million). Nicaragua: To supply 32 electricity generators. (Source: Chavez, Jan. 10

_ US$89 million (¤65.4 million). Nicaragua: To build 120 megawatt electricity plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$80 million (¤58.8 million). Haiti: To build 10,000 barrel-a-day oil refinery. (Source: Venezuelan Foreign Ministry, April 30

_ US$63.7 million (¤47 million). Jamaica: For state oil company to buy 49-percent stake in Jamaican refinery. (Source: Jamaican Energy Ministry, May 18

_ US$56 million (¤41 million). Haiti: To build 60-megawatt electricity plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$30 million (¤22 million). Bolivia: To build diesel electricity generation plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$28 million (¤20.6 million). Bolivia: To build thermoelectric plant. (Source: Bolivian Hydrocarbons Ministry, Aug. 8

_ US$8 million (¤5.9 million). Cuba: To build liquefied natural gas re-gasification plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$5 million (¤3.7 million). Bolivia: Electricity-saving project. (Source: Venezuelan Foreign Ministry, April 30

_ US$4.7 million (¤3.5 million). Bolivia: To set up 15 service stations to distribute fuel. (Source: Venezuelan Foreign Ministry, April 30

_ US$4 million (¤2.9 million). Haiti: To build LNG re-gasification plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$200,000 (¤147,000). Ecuador: Donation of two drills for oil exploration. (Source: Chavez, Aug. 9

ENERGY FUNDING TOTAL: US$6.3686 billion (¤4.68 billion

FINANCING

_ US$1 billion (¤730 million). Argentina: Planned bond purchases, including US$500 million (¤367 million) in bonds purchased in August. (Source: Chavez, Aug. 7

_ US$100 million (¤73 million). Bolivia: Planned purchase of Bolivian government bonds. (Source: Cabezas, Aug. 2

_ US$30 million (¤22 million). Nicaragua: Debt forgiveness. (Source: Chavez, Jan 10

_ US$8 million (¤5.9 million). Guyana: Debt forgiveness. (Source: Rodolfo Sanz, Venezuela's deputy foreign minister for Latin America and the Caribbean, Aug. 9

FINANCING TOTAL: US$1.138 billion (¤840 million

DEVELOPMENT AID

_ US$250 million (¤184 million). Fund to finance joint economic projects in region's socialist-oriented countries. (Source: Venezuelan Foreign Ministry, April 30

_ US$150 million (¤110 million). Dominica: Funding for housing, airport upgrade, scholarships. (Source: Chavez, Feb. 15

_ US$135 million (¤99 million). Argentina: Bandes loan for Sancor dairy cooperative. (Source: Venezuelan Finance Minister Rodrigo Cabezas, Feb. 22

_ US$88 million (¤65 million). Nicaragua: Grants and loans for tractors, AIDS treatment, sending 86 Nicaraguan athletes to sports tournament, 100,000 Hepatitis B vaccines, etc. An additional US$2 million (¤1.5 million)listed below under humanitarian aid. (Source: Venezuelan government statement, March 7

_ US$30 million (¤22 million). Bolivia: Bandes capital for low-interest loans. (Source: Bandes president, May 7

_ US$25 million (¤18.4 million). Ecuador: Bandes capital for new branch to offer low-interest loans. (Source: Bandes President Rafael Isea Romero, May 24

_ US$21 million (¤15.4 million). Haiti: Fund for medical aid and training from Cuban specialists, building homes and unspecified «equipment.» (Source: Venezuelan government statement, March 3

_ US$20 million (¤14.7 million). Bolivia: Grants for local infrastructure projects in health, schools, sports and other areas. (Source: Bolivian Public Finance Minister Luis Arce, April 12).

_ US$20 million (¤14.7 million). Nicaragua: Loans for rural poor, health care and education. (Source: Chavez, Jan. 10

_ US$20 million (¤14.7 million). Nicaragua: Capital for Bandes branch for low-interest agricultural loans. (Source: Bandes president, May 24

_ US$10 million (¤7.3 million). Nicaragua: Funding for social projects. (Source: Chavez, Jan. 10

_ US$2 million (¤1.5 million). Guyana: Donation to build a homeless shelter. (Source: Guyanese Foreign Minister Rudy Insanally, Aug. 2

_ US$875,000 (¤642,670). Bolivia: Computers to digitalize Bolivia's national identification card system. (Source: Bolivian government announcement, April 13.

DEVELOPMENT AID TOTAL: US$772 million (¤567 million

INFRASTRUCTURE

_ US$350 million (¤257 million). Nicaragua: Donation to build Pacific-Atlantic highway. (Source: Nicaragua Infrastructure Minister Pablo Fernando Martinez, Jan. 22

_ US$150 million (¤110 million). Bolivia: Asphalt plant. (Source: Venezuelan Foreign Ministry, April 30

_ US$57 million (¤42 million). Haiti: Funding to expand Port-au-Prince and Cap-Haitien airports. (Source: Venezuelan government statement, March 3

_ US$5.5 million (¤4 million). Bolivia: Funding for paving streets and other improvements to poor neighborhoods in La Paz. (Source: Bolivian government statement, July 14

_ US$3 million (¤2.2 million). Haiti: Donation for garbage trucks. (Source: Chavez, March 13

INFRASTRUCTURE AID TOTAL: US$565.5 million (¤415 million

HUMANITARIAN AID

_ US$15 million (¤11 million). Bolivia: Donation for flood victims. (Source: Chavez, Feb. 26 and March 2

_ US$2 million (¤1.5 million). Nicaragua: Free medicine. Announced as part of larger US$90 million (¤66 million) in grants and loans. (Source: Venezuelan government statement, March 7

_ US$1.5 million (¤1.1 million). Peru: Two planeloads of earthquake relief supplies, with more planned. (Armando Laguna, Venezuelan ambassador to Peru, Aug. 22

HUMANITARIAN AID TOTAL: US$18.5 million (¤13.6 million

MILITARY AID

_ US$10 million (¤7.3 million). Bolivia: Funding to fix military barracks. (Source: Bolivian Defense Minister Walker San Miguel, May 21 and 22).

MILITARY TOTAL: US$10 million (¤7 million

TOTAL OF PUBLIC PLEDGES: US$8.87 billion (¤6.51 billion