A Pipe Dream for Chavez?

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

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.