''Economic Brief: Venezuela's Pipeline Deals''

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''Economic Brief: Venezuela's Pipeline Deals''

The recent gas pipeline agreement between Venezuela and Colombia is the latest step in an effort by Venezuelan President Hugo Chavez to better integrate South America. The pipeline deal was signed by Chavez and Colombian President Alvaro Uribe on November 24, 2005. The agreement puts onto paper the decision to construct a two-way gas pipeline between Colombia and Venezuela.

The pipeline agreement is the beginning of a larger project that will bring crude oil from Venezuela to the Pacific Ocean, where it will then be transported to Asia. It also comes after Chavez and Argentine President Nestor Kirchner discussed building a natural gas pipeline connecting the two countries. Both the Venezuelan and Argentine leader also expressed their optimism that the proposed pipeline will be part of a larger project involving Peru, Bolivia, Chile and Ecuador.

Venezuela's Recent Pipeline Deals

According to the Venezuelan-Colombian pipeline agreement, construction will begin in 2006, and the pipeline will cost more than US$230 million. Caracas will pay the entire cost of the pipeline, and will own and operate it. The pipeline will span 215 kilometers (134 miles) from Colombia's La Guajira peninsula to Venezuela's Paraguana Refinery Complex. Paraguana is one of the largest refineries in the world, and can process 940,000 barrels a day.

During the first seven years of service, the pipeline will move Colombian natural gas to the Paraguana Refinery Complex until Colombia's natural gas reserves are depleted. After that point is reached, the flow of the pipeline will be reversed and Venezuela will then feed gas to Colombia.

On November 21, in a separate deal, Chavez met with Argentine President Nestor Kirchner to discuss building a natural gas pipeline between Venezuela and Argentina. The proposed pipeline would connect the two countries by passing through Brazil, and is estimated to be around 6,000 kilometers in length and comes with a projected price of US$10 billion; the pipeline would be constructed by Petrosur.

Integrating South America's Energy Resources

The proposed pipeline deals point to Chavez's hope of further integrating South America. Chavez announced that the gas pipeline with Colombia -- combined with the deal with Argentina -- could be the start of construction of a longer pipeline that would connect Venezuela, Colombia, Peru, Bolivia, Chile and Ecuador. Indeed, at a joint press conference, Uribe said that the gas pipeline should be seen "as part of the energy integration of South America and Central America."

Chavez hopes that by incorporating Bolivia into the continental pipeline project, South America would be able to consolidate its energy resources and create a lucrative export market, especially to Asia which has seen its energy demand grow tremendously. The significance of Bolivia is that it is South America's second-largest source of natural gas after Venezuela. After meeting with Kirchner, Chavez said that the massive pipeline project would guarantee energy "to all of South America for the next 200 years."

In the words of PINR analyst Dr. Michael A. Weinstein, "Chavez's vision, like Bolivar's, is continentalist, projecting the scenario of a unified South America composed of cooperating states that form an independent power bloc in the world and do not follow U.S. leadership." Chavez's energy ambitions are part of this larger objective. [See: "Venezuela's Hugo Chavez Makes His Bid for a Bolivarian Revolution"]

Chavez Diversifies his Energy Clients

The pipeline deals fit into Chavez's goal of expanding his energy export market. For instance, both Chavez and Uribe stated that they hoped their natural gas deal would be the beginning of a larger plan that would involve constructing a bigger pipeline to move crude oil from Venezuela's oil fields to Colombia's Pacific coast for export to Asia. Venezuela and China have already signed multiple trade and cooperation agreements, and Chavez would like to become a major source of China's energy needs.

In the past, Chavez sparked concern in the United States when he announced that he would like to see more of Venezuela's oil exports go to China. Venezuela, for instance, increased 2005 oil exports to China by five times the 2004 amount, amounting to 70,000 barrels of oil per day; Chavez has stated that he wants this number to hit 300,000 barrels per day by the end of 2006. Currently, about 50 percent of Venezuela's oil exports go to the United States.

Additionally, on November 15, Venezuela's state-owned oil company P.D.V.S.A. and the China National Petroleum Corporation (C.N.P.C.) signed a one-year fuel supply contract. P.D.V.S.A. agreed to provide C.N.P.C. with 100,000 barrels of crude oil per day, in addition to 60,000 barrels of fuel oil per day.

The Bottom Line

Chavez is using Venezuela's vast energy resources to pursue his objective of better integrating South America. His main goal is to organize and strengthen South America so that it can resist the pressures of the United States, its powerful neighbor to the north. Chavez's push against the Free Trade Area of the Americas (F.T.A.A.) and his support of the competing South American trading bloc Mercosur must be seen in this light. [See: "Summit of the Americas Fails to Establish Agreement on F.T.A.A."]

The fact that Chavez has received the support of other influential South American countries -- such as Brazil -- makes it difficult for the United States to isolate and weaken him. The United States will continue to push its allies in the region, such as Mexico, to support the F.T.A.A. and to discredit Chavez's tactics. The problem is that the United States needs the support of Brazil and Argentina for these efforts to be effective; as of now, those two states appear to ascribe more to Chavez's continentalist vision.

Look for Chavez to continue to lobby Brazil and other states in Mercosur to use the trading bloc as a tool to further integrate the region. Brazil, which is increasingly emerging as an important power center in South America, will continue to look favorably upon this objective. Furthermore, with higher than usual energy prices, making trade in the industry extremely lucrative, expect Venezuela to achieve success in convincing the region's states of the need to integrate their pipeline infrastructure.

Report Drafted By:
Erich Marquardt

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