My comments in blue below.




Robert Johnston@ECT
01/31/2001 08:40 AM
To: Alberto Levy/SA/Enron@ENRON
cc: Scott Tholan/Corp/Enron@Enron, Emilio 
Vicens/ENRON_DEVELOPMENT@ENRON_DEVELOPMENt 

Subject: Re: Venezuela Briefing Paper  

Alberto- thanks for the quick-turnaround on your comments.  As I said on the 
phone last night, we are working on a short deadline as well.  Before making 
the changes you suggest, it would be helpful to get clarification on a couple 
of points:

1. Objective of the document- our group's task is not to promote the LNG 
Project.  I think that Mike McConnell and his team want multiple data points 
on this issue, including both ours and yours.  We were asked specific 
questions about political, economic, and regulatory risk in Venezuela, first 
by the RAC Group and then by Mike McConnell.  At the same time, we want to be 
fair and accurate, which is why you and Emilio are involved in the process.  
That said, I will review the document to ensure that it is not excessively 
skewed toward oil issues (although Emilio will note there have already been 
major changes from the first draft).  I will also add your comments to the 
"Energy and the Venezuelan Economy" from the first paper.

2.  Gas Law vs. Hydrocarbons Law.  I seem to be getting a little bit of a 
mixed message here- either we know what will be in the new law or we don't.  
Our sources have said that it will "synthesize", but not fundamentally change 
the Gas Law (then why bother), essentially applying the gas royalty tax 
structure to liquid hydrocarbons. I believe that what the new law might say 
is that the royalty scheme  for the free gas will apply to the gas associated 
with oil production (which is under the scope of the Hydrocarbons Law). The 
tax structure for liquid hydrocarbons is specified in the Income Tax law, 
which was recently changed to reflect the current tax structure (i.e., 67.7% 
for oil, and 34% for gas, both associated and free). I haven't heard any 
rumors about changes in the the Income Tax law.

 Two issues here seem important-- first, the fact that there is uncertainty 
about the law's contents. Yes, there is, but the promise that it will be 
circulated among investors, and that their opinions will be seriously 
considered, mitigates those risks. Second, the apparent fact that the 
"sliding scale" for gas royalties might be eliminated. I hope the point above 
clarifies the issue. I will definitely add your point about the plans to 
circulate the law to investors for review and would appreciate clarification 
on these other points.

3. PDVSA as a policy-maker- tough one here. Please look at the incentives 
here. Who has incentives better aligned with Enron?  My biggest concern about 
PDVSA and MEM is the fact that there has been delays to the auctions for the 
upstream gas projects.  Shouldn't Enron look at this as a possible problem 
for our project and a sign of possible regulatory delay/confusion? I strongly 
believe that the regulatory risks for the LNG projects are less significant 
than what might be expected. First, since this is an export project, domestic 
regulations do not apply. The terms and conditions, prices, volumes, 
guarantees and penalties are governed by the contracts between Enron and 
PDVSA. Participation by the Ministry is to approve these contracts. The only 
significant regulatory risk is that once exports start, if the domestic 
market is not satisfied for lack of gas, the goverment abrogates the contract 
(this was the case for Panama-Colombia pipeline, for example. We successfully 
removed this possibility.) This scenario, given the abundant reserves, is 
unlikely however, see for example the Bolivian case. I reject the notion that 
the government is trying to setup investors. Naivete, perhaps; lack of 
experience, all of the world; but no bad intentions here.

4. MEM as policy-maker, PDVSA personnel and ENAGAS-  I think that we 
fundamentally agree on these points and I will add your comments about the 
experience of Enron people with PDVSA and with respect to ENAGAS "being 
headed in the right direction."  With respect to gas royalties, Emilio left 
me message indicating that there was uncertainty concerning how they will be 
calculated.  As I understand (I'm not saying that I agree), royalties will be 
calculated the following way: Independently of what Enron pays to PDVSA for 
the gas, the royalty will be imposed at the hub price (MEM envisions three 
hubs in Venezuela). The relevant hub will be Anaco. From that hub price, all 
the costs to take the gas to the hub such as gathering, processing and 
transportation, will be substracted (and not added!) This will fix the 
royalty at the well head gas. Multiplied by the volume, ala, the amount of 
royalties to pay. This methodology should be out in about a month. Again, I 
think that it is important to point out these kinds of uncertainties to the 
EGM executives reviewing the deal.  Emilio also mentioned that the royalties 
will be paid by the gas supplier to Enron--but wouldn't these costs 
ultimately be passed through to Enron?  Help me clarify this point.

5. Political/Economic paper- congrats for your superb comments here, which I 
accept virtually unchanged.    The only questions I have concern inflation 
(which I will revisit with my contacts for the Institute of International 
Finance in Washington) and the telecoms law.  Your estimates of inflation are 
in line with our expectations. With respect to the telecoms law, what was the 
timing of its passage? Depending on how you count because it was in the works 
for a long time, but debates on the law that was finally passed lasted about 
a year. I must admit that there was a lot of pressure to pass the law because 
the concession to the basic telephone service monopoly was about to expire 
and therefore the law received fast-track to be approved in time for the 
introduction of competition. 

6. Experiences of other firms--we have specifically been asked to look at 
this question.  All the majors, except ExxonMobil (Shell has marginal 
involvement but has significant investments in gasoline distribution) in the 
operative and profit-sharing agreements. For example, BP-Amoco is deeply 
involved. Chevron has the largest oil field in Venezuela (100.000 bpd). All 
the majors, in one way or another have significant investments in Venezuela. 
I any event, the pressure to renegotiate the contracts (except the 
Williams-Enbridge, who's terms were grossly beneficial to them and most 
people agree that the country was being ripped off) come from the investors.  
Can you shed more light on where you think we are being "speculative"? 
"However, companies like Shell are likely to stay away and pursue only 
technical studies over the next several years waiting the next down cycle for 
the economy";..." It is important to note that the question of gas tariffs 
are seen as a low priority by the Chavez government, which views oil exports 
as the easiest and most lucrative source of revenue for the state.  The 
all-encompassing goal of expanded fiscal returns from energy production and 
exports  centers around oil." A perceived gas deficit, the need for 
additional gas to compensate pressure loss at the wells, the realization that 
gas is an important component in the strategy to industrialize the country, 
is creating pressures within the government to finally get the process going. 
Relevant people is working hard, world class consultants have been brought 
onboard. We believe there's a real chance that the gas bidding rounds will be 
completed this year.

Let's take one more crack at this this morning before we submit our final 
paper.  I sincerely appreciate your efforts on short notice.

Thanks again,

RJ






Alberto Levy@ENRON
01/30/2001 09:44 PM
To: Robert Johnston/HOU/ECT@ECT
cc: Scott Tholan/Corp/Enron@Enron, Emilio 
Vicens/ENRON_DEVELOPMENT@ENRON_DEVELOPMENt@ECT, Guido 
Caranti/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Richard Shapiro/NA/Enron@Enron 
Subject: Re: Venezuela Briefing Paper  

Robert,
Please find below my comments to your second paper on the Venezuelan Energy 
outlook:
Objective of the document. The document serves as a briefing paper for a 
visit that has a specific object, the promotion of the LNG Project. The 
evaluation, therefore, should be made in that light, and at most in reference 
to future Enron projects (basically, constrained to the gas business 
downstream.) References to the Oil industry, and given the comments below, to 
the Hydrocarbons Law, should be minimized, as they are of marginal 
importance. The document on the political outlook, on the other hand, 
sufficiently covers the implications of a reduction in oil revenues.
Gas Law vs. Hydrocarbons Law. It is not only my belief, but of many 
participants in the industry, that the Gas Law will be preserved as it is and 
will not be abrogated by the new Hydrocarbons Law. The source of the 
confusion might be that the Hydrocarbons Law will encompass the Exploration 
and Production of associated gas (gas "associated" to the production of oil.) 
The other stages, as well as E&P of non-associated or free gas are regulated 
by the Gas Law. Therefore, all references to this issue should be eliminated.
Hydrocarbons Law. The only copy of the Hydrocarbons Law available for review 
is the original draft that was part of the set of energy laws that were 
approved in 1999: Electricity, Mines and Gas. It was acknowledged that the 
original Hydrocarbons Law had significant deficiencies and for this reason it 
was delayed. Currently, only a petit committee is working on the new version, 
basically the Ministry's Counsel and the Minister himself. A high ranking 
official assured me that the draft would be circulated among investors before 
approval to repeat the success achieved with the Telecommunications Law. The 
draft in circulation (that BTW was very hard to find given its deficiencies), 
however, clearly stipulates that it does not cover the non-associated gas. 
PDVSA as policymaker. Some actions by the Chavez Administration are highly 
rational and in the interests of the investors (see my comments to the 
political outlook document.) For example, the fact that PDVSA is loosing its 
ability to set policies is, in theory, appropriate. It must be recognized 
that PDVSA, as a monopoly of the Venezuelan Oil and Gas Industry, behaves 
like one. Therefore, the policies it sets are in its interests and not 
necessarily in the interest of the industry, or the country. An example is 
tariffs for integrated operations. In this respect, the Gas Law clearly 
separates the activities of production, transportation and distribution in 
order to minimize the exercise of monopoly power. 
MEM as policymaker. It must be acknowledged that the Ministry of Energy and 
Mines lacks many tools and abilities to formulate policies, but also that 
they are making a significant effort to overcome these shortcomings. MEM is 
handling very complex processes, and naively believed that they could produce 
all the regulations within an unrealistic time frame This lack of experience 
(as well as lack of leadership, I must admit) is the source of delays.
Contract renegotiations. Contract renegotiations have been made at the 
request of investors. Some investors are loosing money big time, but this is 
the nature of the E&P business (no wonder we got out of it!)
Quality of PDVSA personnel. It is acknowledged that PDVSA is not the best run 
company in the world and that a significant human capital has been lost in 
recent years. It is my experience as well as others in Enron, however, that 
there is still people sophisticated enough to do business with, as evidenced 
in the complexity of the Gas Supply Agreement and the Participation Agreement 
of the LNG Project and the regulations and tariffs of transportation services.
ENAGAS, the regulatory entity (not ENERGAS). It is acknowledged that ENAGAS 
lacks independence from the Administration, that it is little developed and 
that it is still not fully formed. I have had two meetings with the heads of 
the regulatory agency explaining who we are, what we want and how we plan to 
achieve it, and they responded with clear goals, admitted the conflicts they 
face, and how they plan to do about them. We are not completely satisfied 
with the results, but now there is a much better understanding of what each 
is looking for (and more hope that the project will go forward.)
I honestly believe that the document requires significant redrafting, in 
particular those aspects that highlight risks immaterial to the project such 
as the behavior of the domestic market in the short term,  or that are 
speculative (e.g., the behavior of large foreign firms), contradictory (e.g., 
break-even of $1.200 per capita in oil revenue vs. growth in GDP with only 
$500 per capita in oil revenues), and/or repetitive. I have specific comments 
that I think would be more effective if I gave them to you verbally. Please 
call me if you have any questions,
ALF



Robert Johnston@ECT
01/29/2001 04:44 PM
To: Alberto Levy/SA/Enron@Enron
cc: Scott Tholan/Corp/Enron@Enron, Emilio 
Vicens/ENRON_DEVELOPMENT@ENRON_DEVELOPMENt 

Subject: Venezuela Briefing Paper

Hi Alberto:

I work with Scott Tholan, who asked me to forward our draft briefing paper on 
Venezuela.  Per his message this morning we need a quick turnaround on this 
paper in order to get the final copy to Mike McConnell on Wednesday.  The 
comments from Emilio Vicens on the original draft have been incorporated, to 
clean up some technical errors and reduce the emphasis on the oil sector.

Robert Johnston
Manager, Political and Sovereign Risk
Enron Global Markets
713-853-9934