Will a South American Natural Gas

November 29, 2005

BOARD OF ADVISORS Featured Q&A with the Energy Board of Advisors Jeffrey Davidow James R. Jones President Co-chair, After meetings with Argentine strengthening regional energy integration Institute of the Manatt Jones President Nestor Kirchner last and diversification of Venezuela from US Americas Global Strategies LLC week, Venezuelan President political and economic dependency. Some Hugo Chavez vowed to help of these projects also respond to market Ramon Espinasa Doris Rodriguez Q build a natural gas pipeline from realities and are likely to go ahead. Others Consultant, Partner, Venezuela and Argentina. Do you think Integration Andrews Kurth LLP may not pass the market test. A gas Department, the pipeline, which could serve as a foun- pipeline from Venezuela to Argentina is dation for a South American natural gas Inter-American Everett Santos one of them. First, a 6,000-km pipeline is Development Bank Chief Executive Officer pipeline network, will be built? What are too long, and at such distances LNG would Emerging Markets some obstacles to the project? What become a viable competitor. Second, Luis Giusti Partnership impact would it have on Southern Cone Brazil is expected to find substantial gas Senior Adviser, energy markets? reserves, which in addition to supplying its Center for Strategic & Roger Stark International Studies domestic market can be used for LNG Partner, Guest Comment: Michelle Foss: exports. Third, Bolivia will not stay idle Kirkpatrick & Lockhart Q&A continued on page 6 David Goldwyn Nicholson Graham LLP "It depends on the details. There already is a South American gas President, PHOTO OF THE WEEK Goldwyn International Roger Tissot pipe network, but issues in Strategies LLC A Director, Argentina that led to abrogation of supply Markets & Countries contracts and the interminable geopolitics William Irwin Group surrounding Bolivia's role, or not, as a Manager, International PFC Energy major supplier continue to interfere. Government Affairs Chevron Corporation Obstacles include Brazil (why would Max Yzaguirre Petrobras support a competing pipeline?), President, Hunt-Mexico, Inc. commodity prices (will Chavez continue to have the financial resources to anchor this adventure?), terrain and cost (daunt- ing), and lack of a clear imperative from a customer point of view. Impact on Southern Cone markets could range from new momentum for competitive markets Subscribers may pose questions to the Board of Advisors for the Featured Q&A by to creation of a gas 'sink'." contacting [email protected] Roberto Lavagna resigned as Board Comment: Roger Tissot: Argentina's economy ministry on "President Chavez's regional Monday. See related story on page 4. projects are driven mostly by Photo: economy ministry. A political motivations, aimed at Inside This Issue

FEATURED Q&A: Will a South American Mexican Lawmaker Proposing Relief Grupo Dolphin Buying Employee Natural Gas Pipeline Project Go Ahead?...... 1 Fund for Oil-Related Disasters...... 2 Shares of Argentina's Edenor...... 3 Mexico Approves Pipeline Deal News Briefs: Gaz de France, Board Member Profile: Doris Rodriguez, with Arizona Energy Firm...... 2 PDVSA, Petrobras ...... 2 Partner at Andrews Kurth LLP ...... 3 Bridas Corp. May Be Selling BNDES Approves Financing The Dialogue Continues: Will Bolivia Reach Oil & Gas Assets, Report Says...... 2 for Amazon Pipeline Project...... 3 a New Deal with Foreign Companies? ...... 4

ENERGY SECTOR BRIEFS Oil & Gas News

Gaz de France Sells Stake in Gaseba Uruguay to Petrobras Mexico Approves Pipeline Deal billion, people familiar with the matter Paris-based Gaz de France said with Arizona Energy Firm told Reuters on Monday. Bridas has oil and gas interests in South America's Southern Friday it has agreed to sell its 51 per- Phoenix-based Arizona Clean Fuels Yuma Cone and across Central Asia, and holds a cent stake in Gaseba Uruguay to (ACFY) announced Wednesday that it has 40 percent stake in Pan American Energy, Brazil's state owned Petrobras. reached an understanding with Mexico's Argentina's second-largest oil and gas pro- Petrobras will pay $12.8 million for energy ministry allowing the company to ducer after Repsol-YPF. It was not imme- the shares, including a $1.8 million move ahead with plans for a $2.5 billion diately clear whether Bridas' controlling shareholder loan held by Gaz de pipeline project to deliver "company- stakeholder, the Bulgheroni family, was France, according to the release. owned crude oil" in Mexico to the ACFY selling the 40 percent stake in Pan Gaseba Uruguay holds the conces- refinery planned for Yuma County, American, or a stake in Bridas, according sion for the distribution of natural Arizona. The distinction between "compa- to Reuters, which cited an estimated value gas in the province of Montevideo, ny-owned" crude and Mexican oil is criti- of the sale at $5 billion. China National with approximately 1.4 million cal to the deal because Mexico's Petroleum is reportedly interested in inhabitants, through 2025, accord- Constitution has banned foreign firms acquiring the assets, Reuters reported. from upstream oil and gas activities since ing to Petrobras. 1938. According to reports, ACFY will buy Mexican Lawmaker Proposing Relief Source: company statement. Mexican Heavy Maya crude in southern Fund for Oil-Related Disasters PDVSA to Start Work on Mexico, load it onto boats, and then ship it Colombia-Venezuela Pipeline to the mouth of the proposed pipeline A Mexican lawmaker is calling for the cre- "receiving point," to be located in either ation of a special relief fund to help local State-owned Petroleos de Venezuela (PDVSA) will get to work during the first half of next year on a natu- The distinction between "company-owned" crude and Mexican oil is ral gas pipeline connecting Colombia and Venezuela, PDVSA critical to the deal because Mexico's Constitution has banned foreign President and Venezuelan Energy firms from upstream oil and gas activities since 1938. Minister Rafael Ramirez said last Thursday. The announcement came after Venezuelan President Hugo Baja California or Sonora, Mexico. communities hurt by oil-related accidents Chavez and his Colombian counter- Company spokesman David Treanor, who at state-owned Pemex, local daily El part, Alvaro Uribe, signed an energy led the negotiations in Mexico, stated that Universal reported on Sunday. Federico cooperation agreement. The the project is "a symbol of cross-border Madrazo Rojas, a member of the lower collaboration that will result in significant chamber of deputies from the opposition pipeline, which will extend from bi-national benefits." WesPac Pipelines PRI party, said his proposal for a Colombia's Puerto Ballena to Lake will finance, construct, operate, and main- Contingency Fund for Petroleum Disasters Maracaibo in Venezuela, should be tain a crude oil supply system, which will would make funds available to cities and completed within two years, consist of a marine offloading facility, ori- towns affected by oil spills, fires, and Ramirez said. gin terminal tank farm, and a pipeline to explosions involving Pemex infrastruc- Source: company statement. supply the refinery, according to an ACFY ture. Existing compensa- Petrobras Declares Oil Field release. WesPac is in the initial stages of tion mechanisms are ineffi- Commercially Viable permitting the crude oil transportation cient, untimely, discrimina- system in both Mexico and Arizona, and is tory, and tend to only make Brazil's state-owned Petrobras currently in discussions with Techint things worse, Madrazo said. announced Monday that the Mexico regarding a contract for engineer- Existing legislation only Inhambu heavy oil field in the state ing, procurement and construction of the allows Pemex to compen- Madrazo Rojas of Espirito Santos is commercially pipeline project. sate state governments in Photo: Mexican viable. Petrobras said it now plans to the event of such accidents, Congress. undertake a development plan for Bridas Corp. May Be Selling according to El Universal. Creation of a the field, during which it will deter- Oil & Gas Assets, Report Says special fund is especially necessary given mine the amount of reserves. Pemex's aging infrastructure in some Argentine energy producer Bridas Corp. is areas, Madrazo asserted. For example, he Source: company statement. selling oil and gas assets worth about $5 said, 11 cities and towns in the state of

Tabasco were at risk of an oil accident- related disaster from 10 kilometers of Board Member Profile underground Pemex pipeline, lengths of which are 20-25 years old. Between 1997 The Energy Advisor is pleased to profile a different member of its Board of Advisors in and 2001, 57 percent of the 2,592 environ- each issue. Subscribers can pose questions to the Board by contacting Robert Simpson at mental emergencies that took place in [email protected]. Mexico took place at Pemex installations, Madrazo said. Earlier this month, Doris Rodriguez, Partner at Andrews Kurth Mexico's Congress passed legislation low- LLP. ering taxes on Pemex, which badly needs the tax savings for new investments in Based in Houston, Doris Rodriguez has represented Latin infrastructure and exploration to main- American and domestic companies in energy sector transactions tain and increase production. throughout her career.

BNDES Approves Financing Rodriguez was directly involved with the international legal coun- for Amazon Pipeline Project sel teams in the privatizations of YPF,S.A., the former state-owned Argentine oil and gas company, and PETROPERU, the former Doris Rodriguez The board of Brazil's state-run develop- state-owned Peruvian oil and gas company. ment bank, BNDES, has approved a one- She has worked in Argentina, Chile, Colombia, Ecuador, Guatemala, Honduras, year, 800 million-real ($US 366 million) Mexico, Nicaragua, Panama, Peru, and Venezuela. She currently represents a major loan to finance the construction of two international oil services company with respect to all of its financings, including cor- natural gas pipelines in the country's porate credit transactions and structured finance transactions. Rodriguez also recently Amazon region, the bank said on Monday. represented a major United States power producer in the sale of its interest in a power In a press release, BNDES said it approved plant located in Mexico to a Spanish electric utility. She has advised clients concerning the loan for the construction of a pipeline electric power plant projects in Ecuador and in Argentina. In addition, Rodriguez has to carry gas from the Urucu gas fields, counseled a major US mining company regarding a coal mining project in Venezuela. located in a remote rainforest region, to the city of Manaus, the capital of Rodriguez joined Andrews Kurth in 2001 and was previously the head of LeBoeuf, Amazonas state, and another connecting Lamb, Greene & McRae's Latin America Practice and co-managing partner of Urucu to the town of Coari. BNDES said LeBoeuf's Houston office. She was previously with Andrews Kurth in the Houston the pipeline construction project, the total office from 1980-1998 and became partner in 1988, at which time she became the first cost of which is estimated at 1.44 billion Hispanic woman elected partner of a major Houston law firm. reais, would create 37,000 direct and indi- rect jobs. The pipelines would provide She holds her JD from the University of Houston Law Center, cum laude, where she was Manaus and surrounding areas a cheaper editor of the Houston Law Review from 1979 until 1980. She received her BA from the and more environmentally friendly alter- University of Houston, summa cum laude. native to diesel fuel, BNDES said. Environmentalists, however, have expressed concerns that the pipeline project will damage pristine Amazon rainforest areas and harm isolated Indian com- (EDF) for $100 million. When it made tling the government over rate freezes and munities. that deal, Dolphin said it would make the fines that have been imposed over black- same offer to buy employee shares. EDF outs. At the beginning of 2005, the gov- Power Sector News still owns the other 25 percent. Dolphin is ernment fined three local utilities a com- privately held and run by Marcelo bined 1 million pesos for blackouts in Mindlin, a former executive at real estate January and another 12 million pesos for Grupo Dolphin Buying Employee giant IRSA Inversiones y not making investments needed to keep Shares of Argentina's Edenor Representaciones. Edenor distributes up with growing demand, according to electricity to parts of the capital and Reuters. Last week, as this summer sea- Argentine fund manager Grupo Dolphin greater Buenos Aires province with about son's harshest heat wave drove demand said November 22 it was making a public 2.2 million customers. In the first nine for electricity beyond capacity, more offer for 10 percent of Argentina's largest months of this year, the company report- blackouts across Argentina occurred. A electricity distributor, Edenor,from ed a loss of 49.1 million pesos ($US 16.4 planning ministry official told Reuters last Edenor's employees, Reuters reported. In million), compared with a loss a year ear- week that new fines would be issued over June, Dolphin bought a 65 percent stake lier of 75.4 million pesos. Edenor and the most recent blackouts, but no figures in Edenor from Electricite de France other Argentine utilities have been bat- were cited in the report.

Economic News The Dialogue Continues Kirchner Names New Economy Minister After Lavagna Steps Down A continuation of the November 22, 2005 Q&A

Argentine President Nestor Kirchner on The government of caretaker protection agreements and will more Monday appointed a political ally as econ- President Eduardo Rodriguez than likely take their cases to interna- omy minister to replace Roberto Lavagna, in Bolivia failed to meet a tional arbitration—where they will whom the president asked to resign amid Q November 15 deadline to have good cause for reimbursement disagreements over economic policy. renegotiate contracts with multina- and a ruling in their favor. For now, Kirchner named Felisa Miceli, president of tional oil and gas companies, putting they are paying—under protest—the state-owned Banco de la Nacion the next government on a possible col- new, higher tax imposed by Congress Argentina—Argentina's biggest bank—to lision course with the multinationals, in May. These extra funds are being become the country's first female econo- which are threatening to take their channeled into the national Treasury my minister. Bond and stock prices, as case to international arbitration if the and are helping to bring down Bolivia's well as the currency fell on the news, as government does not agree to reduce fiscal deficit. Without a doubt, Bolivia's analysts pointed to the risk involved in taxes. Do you see a resolution before next government will be tasked with Kirchner's decision to remove Lavagna, the next government takes office early renegotiating contracts with foreign who was considered a next year? How strong a case would hydrocarbon companies, since the pragmatic and inde- the multinationals have in internation- recent deadline was not met. These del- pendent voice in the al arbitration court? How heavy does icate negotiations might be left to Evo Kirchner government. the threat of arbitration weigh on the Morales (MAS), a leading candidate in Argentina's benchmark Bolivian government? the race for the presidency on MerVal stock index December 18. Morales has vowed to Felisa Miceli Photo: Banco de la closed almost 4.5 per- Guest Comment: Iván take a tougher position with the for- Nacion Argentina cent lower while the Rebolledo: "Although eign direct investment community, peso weakened 0.42 percent to end at President Rodriguez made including more punitive changes to 2.9975/3.00 pesos to the dollar, according A the renegotiations of con- existing contracts and even nationaliz- to Reuters. On JP Morgan's Emerging tracts one of the cornerstones of his ing the hydrocarbons industry. If it is Markets Bond Index Plus, Argentina's risk short term in office, as well as appoint- not his administration directly, then it spreads widened 10 basis points to 364 ing a former minister of economic might be called for by the new con- points. Analysts say they do not expect development, Xavier Nogales, as his stituent assembly, which will be tasked major policy changes under Miceli, private emissary to dialogue/negotiate to write a new Constitution in 2006." although they say her appointment will with the hydrocarbon companies, and likely give Kirchner a stronger voice in fis- having just appointed his third minis- cal and economic matters. "Miceli is a dis- ter of energy within six months—all appointing replacement to the extent that this has proved unattainable and she is likely to exercise a passive role as unsuccessful. Exxon Mobil, Repsol Iván Rebolledo is President of the economy minister," JP Morgan's Vladimir YPF, BG Group, BP, Total, and others Bolivian-American Chamber of Werning wrote in a research note pub- are demanding that the government Commerce. lished this morning. Lavagna, who headed respect existing bilateral investment the ministry since April 2002 following the country's default and devaluation at the end of 2001, oversaw the nation's restructuring of more than $100 billion of debt earlier this year. Lavagna helped keep stem inflation. Inflation is rising this year with the deputy foreign minister, Jorge the budget in surplus as Kirchner urged at an average of almost one percent per Taiana, and the appointment of Nilda more spending and took a tough stance month, and the Central Bank expects that Garre, Argentina's ambassador to with creditors and the International it will finish the year in double figures. Venezuela, as defense minister. Monetary Fund. However, serious policy Lavagna's entire economic team resigned, disagreements developed between including Finance Secretary Guillermo Latest EU Banana Tariff Proposal Kirchner and Lavagna, with Lavagna Nielsen. Lavagna's departure was part of a Rejected by Latin America reportedly advocating greater flexibility broader cabinet reshuffle announced on such issues as frozen utility rates, a new Monday morning, including the replace- European Union governments on Friday agreement with the IMF, and measures to ment of Foreign Minister Rafael Bielsa agreed to a new, lower tariff on banana

Copyright © 2005, Inter-American Dialogue Page 4 of 6 Inter-AAmerican Dialogue’s Latin America Energy Advisor November 29, 2005 imports of 176 euros ($US 207) per ton, the ban on consecutive presidential terms POLITICAL & ECONOMIC BRIEFS but Latin American countries said the tar- and establishes campaign rules for sitting iff is still not low enough, according to presidents seeking re-election. However, Venezuela Signs Arms Deal with Reuters. It was the third tariff proposal by the Court imposed some restrictions on Spain Today Despite US Concerns the EU, whose first two proposals of 230 the popular Uribe's presidential re-elec- euros and 187 euros per ton were rejected tion campaign, limiting his ability to use Spain and Venezuela on Monday by World Trade Organization arbitration state funds and institutions to promote his signed a deal for the sale of $1.56 panels as discriminating against Latin candidacy and prohibiting him from billion worth of Spanish military American suppliers. Latin American using the presidential palace as his cam- equipment to Venezuela, despite countries, led by Ecuador, the world's paign headquarters or have his speeches objections by the United States. biggest banana exporter, have challenged broadcast on the state's official television Venezuelan President Hugo Chavez the EU's import regime for bananas amid channel. In his speech on Sunday, Uribe on Sunday applauded Spain's deci- fears they will lose market share when the gave assurances that he would not abuse sion to "[resist] the imperial govern- EU transitions from a quota system to a his power in order to hold onto office. ment's attempt to trample over tariff-based system at the start of next "The government over which I preside has them" and go through with the sale. year. They are demanding a duty of no a responsibility to establish a historic Venezuela says the purchase of the more than 75 euros per ton. Former precedent, so that the institution of presi- four coastal patrol ships, four European colonies in Africa, the dential re-election serves to deepen Caribbean, and Pacific currently enjoy democracy [and] gives the people full corvettes, 10 transport planes, and preferential treatment for their banana faith in their capacity to define the destiny two maritime surveillance planes is exports and claim that easier access to the of the country," Uribe stated. Under elec- part of a program to modernize its European Union for Latin American tion rules, he cannot start officially cam- armed forces. The US ambassador to bananas would harm their smaller-scale paigning until January 28. Early polls Spain expressed concern last week producers. Last month, officials from indicate Uribe, whose approval ratings "that the sale could be a destabiliz- Caribbean banana-growing countries hover at around 70 percent amid a steep ing factor" in Latin America. reacted with dismay and disappointment decline in violence and kidnappings dur- Source: ABN, Reuters. after the WTO struck down the EU's pro- ing his administration, would easily win posed 187 euro per ton tariff, and some the election. Critics of presidential re-elec- Pinochet Under House Arrest officials even questioned the value of tion fear it would give the presidency too Former Chilean dictator Augusto WTO membership in light of the ruling. much power vis-a-vis the other branches Pinochet spent his 90th birthday on [Editor's note: see a related Q&A in the of government. Friday under house arrest after he August 11, 2005 issue of the daily Latin was charged the day before for hav- America Advisor.] Honduran Opposition Candidate Declares Presidential Victory ing a role in the disappearance of Political News seven government opponents in Honduras' governing National Party on 1974. Pinochet also faces charges of Monday accused an electoral official of tax fraud, forging passports and Uribe Declares His Candidacy in prematurely declaring the opposition can- documents, and incomplete asset Colombia's May Presidential Election didate the winner of the country's presi- reporting related to an estimated dential election on Sunday and demanded $27 million hidden in foreign banks. Colombian President Alvaro Uribe for- a vote recount, the Source: Reuters. mally declared on Sunday that he would Associated Press reported. Colombian Economy Expanded seek re-election in next May's presidential Supreme Electoral 4.5 Percent in Third Quarter vote, vowing to consolidate security gains, Tribunal President reduce poverty, and fight corruption while Aristides Mejia on Sunday Colombia's economy grew 4.5 per- respecting democracy. "Democratic secu- declared Manuel Zelaya of cent in the third quarter compared Zelaya rity and social policy go hand in hand," the opposition Liberal Photo: candidate's to the same three months a year ago, Uribe said in a speech, the text of which Party the winner after the Web site. the government's national statistics was posted on the presidential Web site. Tribunal reported that Zelaya had won department, DANE, said last "Security provides the trust, the invest- 50.8 percent of the vote to the National Tuesday. DANE said foreign investment, and resources for social policy, and Party's Porfirio Lobo Sosa's 45.2 percent. ment could exceed $6 billion in as this progresses, it obtains the supports However, the Tribunal did not say what of [popular] opinion so that security is percentage of the total votes had been 2005, helping push growth for this sustainable." During the past two months, counted, and Lobo Sosa is refusing to year to 4.5 percent. Colombia's Constitutional Court has accept the results. "I'm going to defend the Source: Reuters. okayed legislation passed last year that lifts right of my people to have their votes

Featured Q&A and the need to protect against adverse Latin America Energy Advisor Continued from page 1 ecological consequences. Even if a is published weekly by the losing additional markets, particularly pipeline as proposed could be justified Inter-American Dialogue, Copyright © 2005 when the country’s economic lifeline on economic grounds, political hurdles Erik Brand, depends on the use of B2B and gas could be difficult to overcome. General Manager, Publishing exports to Argentina. The project would Depending on the path chosen, the Robert Simpson, also imply significant environmental pipeline will involve a minimum of three Editor challenges, as it crosses sensitive Amazon countries and numerous local commu- rainforests. In short, this project may be nities. While Chavez is dreaming of a Devin Finn, another of President Chavez's efforts to regional energy system and may be will- Reporter grab newspaper headlines." ing to make compromises in terms of the Danielle Jetton, economics to Venezuela to achieve his Computer Services Coordinator Guest Comment: Ted Izatt: "The political goals, we believe other countries Inter-American Dialogue: proposed pipeline is possible in the region will be much more sensitive Peter Hakim, from a technological stand- to their domestic political needs. Given President point, and it could serve as an the economic, environmental, and polit- A Michael Shifter, important part of a South American ical hurdles involved, it could well be Vice President, Policy energy grid. However, there are signifi- some time before the pipeline is built cant hurdles that suggest a pipeline of and there will be minimal impact on Joan Caivano, this magnitude will not be built for more global energy supply and demand funda- Director of Special Projects than a decade, if ever. With large mentals. Development of the South Dan Erikson, American energy grid will likely occur Director for Caribbean Projects from incremental projects that are based on fundamental economics, rather than Claudio Loser, Visiting Senior Fellow “ ... There are significant grandiose visions." hurdles that suggest a pipeline of Judith Morrison, Executive Director, Inter-Agency Consultation this magnitude will not be built on Race in Latin America for more than a decade, if ever. Marifeli Perez-Stable, ” Vice President for Democratic Governance – Ted Izatt Michelle Foss is Chief Energy Economist Jeffrey M. Puryear, and Head of the Center for Energy Vice President, Social Policy Economics at the University of Texas at untapped natural gas and oil reserves in Austin. Viron Vaky, Argentina and in many of the countries Senior Fellow that the pipeline would likely pass Roger Tissot is a member of the Energy Subscription Inquiries are welcomed at through, the economic justification for Advisor board and Director of the [email protected] the pipeline is marginal absent substan- Markets & Countries Group at PFC tial demand increases in the region. Energy. Latin America Energy Advisor is published Furthermore, the economics would be weekly by the Inter-American Dialogue 1211 Connecticut Avenue, Suite 510 further hurt by challenging terrain, Ted Izatt is a Managing Director at Bear Washington, DC 20036 including mountains and the rainforests, Stearns. Phone: 202-822-9002 Fax: 202-822-9553 The opinions expressed by the members of the Board of Advisors and by guest commentators do not necessarily represent those of the publisher nor do they represent any consensus of belief. The analysis is the sole view of each counted," he told hundreds of support- line conservative, promised during his commentator and does not necessarily represent the views of their respective employers or ers at National Party headquarters. In a campaign to reinstate the death penalty firms. The information in this report has been statement Monday evening, outgoing for "abominable crimes" including sexu- obtained from reliable sources, but neither its President Ricardo Maduro appealed for al assault, kidnapping, and murder. accuracy and completeness, nor the opinions based thereon, are guaranteed. If you have any "calm, peace and order," and urged both Honduras abolished the death penalty in questions relating to the contents of this publi- parties to "be prudent when it comes to 1937. Zelaya, who has proposed life cation, contact the editorial offices of the Inter- making statements, and wait for the imprisonment, campaigned on an anti- American Dialogue. Contents of this report may not be reproduced, stored in a retrieval results of all the balloting." Amid ram- corruption platform. Both candidates system, or transmitted without prior written pant gang-related crime in Honduras, are wealthy landowners and support a permission from the publisher. Lobo Sosa, a former leftist turned hard- free trade agreement with the US.