VENEZUELA,S PROPOSED MEGA NATURAL GAS PIPELINE FOR SOUTH AMERICA (GASUR)

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06CARACAS1791 19 June 2006 Solo uso oficial Embassy Caracas

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TAGS: ENRG, EPET, SENV, EINV, VE
SUBJECT: VENEZUELA,S PROPOSED MEGA NATURAL GAS PIPELINE FOR
SOUTH AMERICA (GASUR)

REF: CARACAS 1709

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1. (U) SUMMARY: Venezuela’s proposed mega natural gas
pipeline for South America (GASUR) — which could span 12,000
to 15,000 kilometers and cost $20 to $40 billion to construct
— is Chavez’s most recent and audacious effort to use the
country’s hydrocarbon endowment to expand his influence in
the region. If realized GASUR would someday carry natural
gas from fields in northeastern Venezuela to northeastern
Brazil and then south through Brazil, linking up with
pipelines emanating from Bolivia and extending into southern
Brazil, Argentina, Paraguay, and Uruguay. Rafael Ramirez,
Venezuela’s Minister of Energy and Petroleum, stated in May
that Petroleos de Venezuela (PDVSA) and Petrobras hope to
begin project development in August 2006 with the ultimate
aim of extracting gas reserves in and around the coastal
Venezuelan state of Sucre. Serious questions remain,
however, regarding GASUR’s technical, financial, and
political feasibility, particularly regarding its
environmental impact, with various industry experts calling
the project "pharaonic", "a dream", and "crazy". END SUMMARY.


CHAVEZ’S MOTIVE BEHIND GASUR


2. (U) Chavez has made clear that political interests are
animating his push for GASUR: visiting the Vatican in May
2006, he remarked that, "if Venezuela were thinking of
earning money, we would not be planning this project."
Acknowledging that selling natural gas to the United States
would be better for Venezuela economically, he stated "we are
certain that this project is going to be the backbone of a
new model of integration in South America and, moreover, in
Latin America." Chavez is thus championing GASUR as the
flagship in his fleet of proposals to deepen political and
economic integration among Latin American countries with
Venezuela assuming a leadership role (the so called
Bolivarian Alternative for the Americas, or "ALBA") (Reftel).


GASUR: A CLOSER LOOK


3. (U) Ongoing formal planning talks among the projects,
primary participants — Venezuela, Brazil and Argentina —
began in January 2006; Bolivia joined the group in May.
Energy Minister Ramirez stated in May that contracts had
already been signed for engineering studies regarding GASUR’s
construction costs and timeline, as well as its definitive
route. Without explanation, however, on June 6 the energy
ministers of the four currently participating countries
postponed until the end of the month a meeting to evaluate
construction plans previously planned for that week. The
next meeting among the four heads of state is scheduled for
August 2006 in Caracas, and the group has stated that project
plans should be finalized by then. Minister Ramirez stated
that conclusion of the planning talks in August should make
possible a September meeting in Brazil among all South
American countries to discuss the project’s regional
ramifications. Because planning talks continue, publicly
available details regarding GASUR’s final form are still thin.

4. (U) In its original conception, first advanced by Chavez

CARACAS 00001791 002 OF 005

in January 2006, GASUR was to be an approximately 8,000
kilometer pipeline from gas fields in eastern Venezuela
southward to Brazil and Argentina. Early talks among the
original three participants made clear, however, that
Venezuela’s gas fields would not in the near term be
sufficiently developed, and Bolivia’s participation was
deemed necessary to feed GASUR’s southern sections in the
project’s early stages.

5. (U) According to a May presentation by Jorge Luis Sanchez,
President of Enagas, the Venezuelan state natural gas entity,
in its current conception GASUR is projected to consist of
three phases — North, Central, and South — whose pipelines
would total roughly 12,000 kilometers of new construction.
GASUR,s North Phase is foreseen to supply 1,765 million
cubic feet per day (MCFD) from as yet undeveloped fields in
northeast Venezuela to Fortaleza, Brazil, on that country,s
northeast coast, via a new pipeline of 4,378 kilometers to be
constructed through the northeast of the Amazon Basin. The
Central Phase would consist of a new 2,642 kilometer pipeline
to be constructed from Santa Cruz, Bolivia, eastward to
Brasilia, Brazil, carrying 530 MCFD. The South Phase would
consist of two new pipelines: one of 2,462 kilometers
carrying 880 MCFD from Yocuiba, Bolivia, eastward through
northern Argentina and on to Porto Alegre, Brazil, and
another of 2,454 kilometers carrying 350 MCFD from Tarija,
Bolivia, eastward through Paraguay to Montevideo, Uruguay.
Specific plans for connecting the three phases along a
north-south access through Brazil have not been made public,
but doing so would create the "backbone" of continental
integration promoted by Chavez and be necessary for
Venezuelan gas to reach central and southern Brazil,
Argentina, and Uruguay, as projected. Sanchez’s presentation
showed such a link-up conceptually and stated that it would
raise the total length of the pipeline network to just over
15,000 kilometers. Venezuela plans ultimately to supply 5.3
billion cubic feet per day (BCFD) to the Southern Cone.

6. (U) Venezuelan authorities state that GASUR will cost $20
billion to construct, but Petrobras has estimated that
construction will cost "much more" than $25 billion, while
other Brazilian gas experts have said that the figure could
reach $40 billion. The ultimate sources of GASUR,s
construction financing remain unknown, though Chavez has said
that Venezuela will contribute "several billion" dollars to
the project, and the Inter-American Development Bank has
expressed interest in taking part, should studies indicate
that the project is feasible. Serious questions remain,
however, regarding GASUR,s technical, financial, and
political feasibility.


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QUESTIONS SURROUNDING GASUR’S TECHNICAL FEASIBILITY


------

7. (U) Foremost among the challenges facing GASUR,s
construction is its sheer magnitude. At roughly 12,000
kilometers for the three phases, and 15,000 if they were
linked, GASUR would be more than three times the length of
the longest extant pipeline, the Yamal, which runs from
Russia to Eastern Europe. Simply procuring sufficient
materials for the project would be difficult. A Venezuelan
steel industry expert stated at recent natural gas seminar in
Venezuela that 8,000 kilometers of tubing would swallow
Venezuela’s entire domestic steel production for a year and a
half and cost $6 billion alone. In addition, Venezuela would
need to import various tubing accessories from the United

CARACAS 00001791 003 OF 005

States or Europe, as no Latin American companies produce
them. The steel expert said that the total cost for the
tubes and accessories for an 8,000 kilometer project would be
$12 billion. Further, components of the pipeline’s attendant
infrastructure — including an estimated 40 compression
stations and 160 valve stations for an 8,000 kilometer
pipeline — would need to be ordered two and half years in
advance.

8. (U) The terrain through which the North Phase, and any
eventual connection of it with the Central Phase, would have
to pass is Brazil’s unforgiving Amazon River Basin. The
river complex is comprised of some 1,000 tributaries, which
snake through the region’s rainforest, legendary for its
density and viewed as critical to the global environment for
its carbon-dioxide processing capacity and its biodiversity.
From dry to rainy season, the Amazon river’s width grows from
10 to 50 kilometers and its depth increases by 7 meters.
Moreover, its estuary generally measures some 240 kilometers
across. Setting environmentalists, objections aside,
industry experts warn that constructing the pipeline through
such forbidding terrain would be daunting, making liquefied
natural gas (LNG) transported by tanker a more attractive
option for delivering Venezuelan gas to the Southern Cone.

9. (U) Questions also remain regarding the extent of
Venezuela’s available natural gas reserves, which it claims
to be 151 trillion cubic feet (TCF). Of these, PDVSA
estimated in 2003 that only 13 TCF are "free gas", i.e., not
associated with petroleum deposits, and therefore available
without restriction for GASUR if successfully extracted.
Nelson Hernandez, an independent Venezuelan petroleum and
water engineer, estimates that GASUR would require 38.7 TCF
to be economically viable. What portion of Venezuela’s 137
TCF of associated gas reserves would be needed for
reinjection to support petroleum production remains a matter
under discussion between Venezuela and Brazil. Brazilian
authorities have called Venezuela’s figures into question and
demanded that an international body certify them and provide
such an analysis directly to Petrobras.

10. (U) Should such reserves be confirmed to Brazil,s
satisfaction, the parties to GASUR recognize that several
years of investment in Venezuela’s fields would be required
before the gas could feed the pipeline to supply its southern
consumers. In addition, Venezuela has stated repeatedly that
it would not export natural gas until it satisfied its own
domestic gas deficit, which currently stands at over 1.5
BCFD; Enagas projects it will not satisfy Venezuela’s
domestic gas deficit until 2008. The participation of
Bolivia, whose fields are geographically closer to GASUR’s
consumers and substantially more developed than Venezuela’s,
would therefore be necessary to feed the pipeline in the
near-term.


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QUESTIONS SURROUNDING GASUR’s FINANCIAL FEASIBILITY


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11. (U) If constructing and feeding GASUR were determined to
be technically feasible, the next question would be whether
the project were financially feasible. Chavez’s willingness
to compromise Venezuela’s economic interests for the sake of
his political aggrandizement is one matter, but convincing
potential project financiers to do the same is another. For
many analysts, Venezuela’s numbers do not add up, and if they
do, they do not compare favorably with shipping LNG in

CARACAS 00001791 004 OF 005

tankers to the Southern Cone.

12. (U) Enagas has presented figures directly comparing
pipeline and LNG transport to Fortaleza, showing pipeline
transport at $1.28 per million British Thermal Units (MBTU),
and LNG delivery at $2.01/MBTU. Industry analysts accept
this Enagas analysis as reasonable, but note that GASUR
anticipates transporting Venezuelan gas to far more distant
markets, where cost discrepancies between pipelines and LNG
begin to reveal themselves. Hernandez, the independent
Venezuelan engineer, has estimated that the cost to deliver
Venezuelan gas via pipeline to markets in southern Brazil and
Argentina could be as little as $1.70/MBTU, but as much as
$5.00/MBTU, making LNG delivery by tanker likely to be far
more economical.

13. (U) Further, considering not only transport, but
production and distribution costs as well, Hernandez
estimated that the average cost to consumers in such markets
further south would be $12.55/MBTU. In contrast, Venezuelan
Energy Minister Ramirez claimed in February that, while
Venezuela had yet to perform studies to determine the final
price to GASUR consumers, it would ultimately be more than
$5.00/MBTU. Other industry experts estimate that only a
price above $8.00/MBTU would permit recuperation of GASUR,s
initial investment. By comparison, under the contracts in
place before Bolivia nationalized its gas sector, Brazil and
Argentina paid $3.23/MBTU and $3.18/MBTU, respectively. On
February 21, prior to having signed on to the project,
Bolivian President Evo Morales characterized as "absurd" the
notion that Venezuela could ever sell its gas to Brazil or
Argentina at prices competitive with Bolivia’s.

14. (U) Venezuela’s data also appear to overestimate the
potential market for its natural gas in the Southern Cone.
Independent analysts in Brazil forecast a domestic deficit of
approximately 2.5 BCFD by 2020; Venezuela’s Ministry of
Energy and Petroleum (MEP), however, has claimed that GASUR
would deliver as much as 4 BCFD to Brazil. Until the
project’s proponents are able to reconcile these supply,
demand, cost and price figures, it will be difficult to
convince potential investors of GASUR,s financial
feasibility.


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QUESTIONS SURROUNDING GASUR’s POLITICAL FEASIBILITY


------

15. (U) Even if studies did show the project to be
technically and financially feasible, serious questions would
remain regarding the political will of the GASUR coalition.
Rifts between the parties have surfaced. Bolivia has argued
that the project should be undertaken only by state-owned
companies and has balked at partially private-sector-owned
Petrobras’s participation. In response, Brazilian Foreign
Minister Celso Amorim declared that &if Petrobras does not
participate in GASUR, there will be no GASUR, very simple.8
The parties have yet publicly to reconcile these matters.

16. (U) The issue has in fact assumed greater salience in the
wake of Bolivia’s nationalization of its gas sector *
including Petrobras assets * and Bolivian accusations of
Petrobras malfeasance in Bolivia’s gas market. In addition,
a Bolivian professional association of hydrocarbons industry
participants has complained that GASUR runs against Bolivia’s
interests as it will displace Bolivia as the leader in the
Southern Cone’s natural gas market.

CARACAS 00001791 005 OF 005

17. (U) For its part Brazil has expressed concerns regarding
who would construct, regulate, and control GASUR,s
infrastructure, much of which will lie within Brazil’s
territory. El Universal, the leading Venezuelan daily for
coverage of the hydrocarbons sector, reported on May 10 that
Foreign Minister Amorim stated before the Brazilian Senate
that Venezuela would only transport gas to the Amazonian city
of Manaus: from there the system of pipelines comprising
GASUR in Brazil would be "entirely national", so as to reduce
Brazil,s dependence on foreign gas. According to the same
piece, Mauricio Tolmaskim of Brazil,s Ministry of Energy and
Mines elaborated that under GASUR "each country would be
responsible for the pipeline in each part of its territory,
and the project would be an amalgamation of efforts."
Furthermore, Brazil,s Vice-Minister of Energy and Mines,
Nelson Hubner Moreira, drew attention to the risk of wedding
the country to Venezuelan and Bolivian state gas entities,
stating that "there would have to be guaranteed long-term
supply contracts and they would have to be fulfilled by
private companies or by Petrobras."

18. (U) Political pressures have likewise emanated from
sources beyond the parties themselves: environmental groups
have raised alarms about the project’s potential impact.
Nelson Hernandez, the Venezuelan engineer, noted that
constructing GASUR would entail cutting a 25-meter-wide
swathe through the Amazon jungle along the pipeline’s route,
and more deforestation would be required for access roads and
pressure and valve stations. Work on GASUR could also
disrupt various indigenous communities along its proposed
route in both Venezuela and Brazil. Addressing such issues
in Brazil implies real time and costs: recently, inaugurating
the commencement of work on a much smaller, 670 kilometer
pipeline in the Amazon region, Brazilian President Lula da
Silva remarked that two years of courtroom battles with
environmental prosecutors had passed since the decision had
been taken to construct that project. Roberto Smeraldi,
director of Friends of the Earth/Brazilian Amazon, has
estimated that securing the necessary Brazilian environmental
permits to cross the Amazon would take at least five or six
years. A Venezuelan environmental group, Friends of the
Great Savannah, has stated that the project would be "the
definitive step for the destruction of the Amazon, the
Venezuela Guayana and diverse ecosystems of the Caribbean and
Atlantic Coastline."

19. (SBU) COMMENT: Many obstacles lie in GASUR’s path —
technical, financial, and political — but Chavez has clearly
made the project a priority and is expending substantial
political capital in the region to promote it. As the
project moves forward, the challenges of finding financing,
resolving disputes among the participants — particularly
between Brazil and Bolivia — and addressing
environmentalists’ concerns will become more acute. The
parties may reach a working agreement by August and
preliminary labor on certifying Venezuelan gas reserves for
extraction may begin before the end of the year. But it is
highly unlikely that, seven years from now, anything like the
GASUR project foreseen by Chavez will exist. END COMMENT
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