VENEZUELA - Gas Exports.

PDVSA intends to relaunch Venezuela's LNG export project to be built at Mapire Bay, on the Paria Peninsula in the east. A $2.2 bn scaled down version of a $5.8 bn, 6m t/y project has been adopted with its capacity to be limited to 4m t/y. Called Cristobal Colon, it had been planned in 1990 to be on stream before 2000 to supply both the US market, Latin America and Europe.

The JV for this, Sucre Gas SA with an initial capital of $45m, was set up in 1994 between PDVSA (then through Lagoven, with 33%), Shell (30%, the technical project leader), Exxon (29%, upstream operator), and Mitsubishi Corp. (8%). In June 1996, an agreement was signed by Lagoven transferring to Sucre Gas the upstream studies and the rights to develop offshore gas fields dedicated to the project.

The partners, which have delayed the venture since 1993, have already spent about $50m on studies for the project and on appraisal wells. Now they have to overcome four challenges, before construction may begin:

1. PVDSA's stake in Sucre Gas is to be raised from 33% to 51%, in line with a new hydrocarbons law issued in November 2001 which stipulates that the government must take at least 51% in oil and gas ventures. The 51% equity would be held by PdV Gas. The foreign companies have made a hint that they would not object to this, provided that PdV Gas pay a 51% share of the investment and makes the disbursements on time.

2. Cutting costs from the original estimate of $5.8 bn has been a prime target. Hitherto, costs have been cut to $2.2 bn for a 4m t/y capacity. (The original $5.8 bn estimate was broken down as follows: $2.2 bn for construction of three 2m t/y liquefaction trains and infrastructure; and $3.6 bn were to be split almost equally between offshore fields' development for a dedicated reserve of 10 TCF, the pipeline system and the purchase of tankers to transport the LNG to the markets.

3. The selling price has been the biggest challenge to all promoters of LNG export projects across the globe. For Sucre Gas, a fob price of $2.40/m BTU is the breakeven point.

4. The gas reserves: ExxonMobil, the proposed upstream operator, has to find and prove in the four offshore fields in the Gulf of Paria, of Sucre province, 10 TCF of recoverable non-associated gas reserves. But Shell has said 12 TCF will be the minimum needed, so that the partners can later expand the venture to 6m t/y and operate for 30 years as well as give Sucre Gas the latitude of expanding thereafter to 7.5m t/y.

Venezuela has the largest reserves of natural gas in Latin America. In late 1999 then Energy and Mines Minister Ali Rodriguez said PDVSA could triple the estimated 147 TCF of recoverable gas within five years. Lagoven, whose upstream operations were taken over by PdV E&P and downstream assets were absorbed by PdV M&M in a restructuring process completed in early 1998 - said in 1996 it could easily prove the 12 TCF minimum and indicated a potential of more than 16 TCF in the four offshore areas near the LNG project's proposed location. So far, PDVSA has proved almost 11 TCF in the four offshore fields in the Gulf of Paria.

Most of the existing LNG export ventures around the world were built when the price of oil was strong. In the late 1970s and early 1980s, the CIF price of LNG in Europe and Japan averaged more than $6/m BTU, though LNG import projects in the US were suspended and West European buyers received gas by pipeline at lower prices. In late 2000 and early 2001, the spot price of gas in the US exceeded $11/m BTU; and in California in early Jan. 2001 the spot price was once quoted at more than $40/m BTU. Now the futures price of Dec. gas at NYMEX is about $2.57/m BTU, as oil prices have declined rapidly since the Sept. 11 terrorist attacks against the US.

In 1985, when the final contracts for Australia's North-West Shelf LNG project were signed, the CIF-Japan price of LNG was more than $5/m BTU. In 1990, when the Cristobal Colon project was conceived, gas prices were averaging $2-3/m BTU in the US and over $4/m BTU in Europe.

As most of the Venezuelan LNG would be sold to the US, the pricing challenge to the partners is considerable. Although there are indications that the US market for gas will be strong in the next decades, with oil prices worldwide expected to be strong as well, the risks are high and the partners want them to be minimised.

PDVSA Gas executives said recently construction of the LNG project would start in 2003, and two trains should be on stream in 2005. It will supply the eastern US, the Caribbean, Central America and north-east Brazil.

2nd LNG Venture: Financially-troubled US energy firm Enron has promoted a second LNG venture in Venezuela with a capacity of 2m t/y at Jose, eastern Venezuela, to cost about $600m. But in 2000 the company failed to sign an agreement on this with PdV Gas. A PdV Gas executive was quoted in March 2001 as saying: This project has "gone from the fridge to the freezer".

Enron executives in March 2001 said they were concerned that PdV Gas could not supply the proposed plant with enough gas. Venezuela's current gas pricing policy, which sets gas prices up to 2007, was another nail in the project's coffin.

Enron had agreed to buy the gas at a price lower than the new one set in late 2000. But in late 2000 PdV Gas insisted on the new pricing level and Enron failed to sign an agreement to launch the project. The gas was to be supplied from the Anaco-Jos methane pipeline, which is yet to be built.