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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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