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UNCLAS SECTION 01 OF 05 CARACAS 001791 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
ENERGY FOR CDAY, DPHUMPHREY, AND ALOCKWOOD 
NSC FOR DTOMLINSON, EB FOR MMCMANUS, EPSC FOR FCOREILLE 
 
E.O. 12958: N/A 
TAGS: ENRG EPET SENV EINV VE
SUBJECT: VENEZUELA,S PROPOSED MEGA NATURAL GAS PIPELINE FOR 
SOUTH AMERICA (GASUR) 
 
REF: CARACAS 1709 
 
This message is sensitive but unclassified.  Please treat 
accordingly. 
 
¶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. 
 
--------------------------------------------- ------ 
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. 
 
--------------------------------------------- ------ 
QUESTIONS SURROUNDING GASUR's FINANCIAL FEASIBILITY 
--------------------------------------------- ------ 
 
¶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. 
 
--------------------------------------------- ------ 
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 
WHITAKER