A Pipe Dream for Chavez?

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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.

Wilson is a correspondent in Caracas.

With Joshua Schneyer in Rio de Janeiro