Since he was elected President of Venezuela in November 1998, Hugo Chavez Frias has transformed the political map of Venezuela, South America's foremost oil producer. In a single year, Chavez triumphed over his political opponents, routing Venezuela's now discredited traditional political parties. Most significantly, Chavez won approval from the people in a referendum held on December 15, 1999 for the much heralded constitution of the Fifth Venezuelan Republic. For Venezuela, 1999 was the year of politics par excellence.
By contrast, in 1999 the Venezuelan economy stagnated, despite rising oil prices. Unemployment and under-employment soared, and the economy contracted. Levels of new direct foreign investment collapsed by up to 75% of 1998 totals. To top it all, the country suffered one of Latin America's worst natural disasters on December 15 and 16 when mudslides caused by torrential rains killed thousands of people, destroyed tens of thousands of homes, and caused billions of dollars worth of damage. The oil industry faced a difficult year, which saw the resignation of Luis Giusti, the market-oriented former president of Petroleos de Venezuela, S.A. (PDVSA) before Chavez took office; the appointment of Roberto Mandini, the ex-president of Corpoven, S.A. (a former PDVSA affiliate); and Mandini's subsequent resignation on August 28. Mandini's replacement is Hector Ciavaldini, a staunch Chavez supporter. The new Minister of Energy and Mines, Ali Rodriguez Araque, though an opponent of the Oil Opening (Apertura) policies of the Caldera Administration (1994-1999), is well respected in the oil industry.
The energy policy of the Chavez Administration took shape during the past year or so. The new Venezuelan government believes in taking a leading role in the world oil market for the Organization of Petroleum Exporting Countries (OPEC). Minister Rodriguez was a prime mover in agreeing and implementing deep new oil production cuts, which he claims, perhaps justifiably, have stabilized world oil prices at the current high levels. This policy, as implemented in Venezuela, has led to production cuts of more than six hundred thousand barrels of oil per day, and a distinct lack of enthusiasm for new oil exploration. However, rises in the price of oil have transformed Venezuela's budgetary situation.
But in sectors of the energy industry which do not relate to exploration and production of oil, the policy of the government is much different. The government seeks to attract new investment in oil refining in Venezuela, to encourage private investment in Orimulsion, and to treble Venezuelan petrochemical production by the year 2008. The electricity industry is to be opened up to private investment, and some of the existing state electricity companies are to be privatized. Most importantly, the Chavez Administration has from the outset announced its intention to expand and transform Venezuela's Cinderella natural gas business by opening it up to foreign and domestic private investment.
The constitutional and legislative provisions establishing the gas opening are in place. But legal analysis of the Venezuelan gas regime is challenging at this time: A brand new Constitution has never been interpreted by Venezuelan courts; a new gas law has similarly never been interpreted; and multiple supporting resolutions bearing on specific activities such as transportation, the upstream regime, and so on, have not yet appeared. The first mid-stream project, the Anaco-Puerto La Cruz gas pipeline, was announced and opened for expressions of interest in February 2000. Accordingly, the Chavez Administration has not yet used its powerful new tools to offer multiple concrete opportunities for investment in natural gas to private investors. These opportunities should begin to appear during 2000.
This article will first give a brief summary of the principal economic and historical aspects of the Venezuelan gas business. …