Rick,
Thanks for the update. The rumor about the separation has been going on for weeks and we take it with mixed feelings. In terms of the Jose LNG project, we don't foresee significant impacts as the Project only is an offtaker of gas (i.e., purely physical) and commercial non-performance is not an issue. The contracts being negotiated with PDVSA have enough protections for non-delivery of gas. As you probably already know, PDVSA has an option to become a partner in the venture and now we might have this entity and not PDVSA as a partner, which might be an issue when making cash calls, if the event happens. I presume that will be taken care in the JV agreement since this is standard practice: in the event of cash calls, for example for an expansion, the partner not contributing the cash would be diluted. Of course, we would prefer to have PDVSA as a partner because we see them financially more solid. In any event, both are state-owned and both would be responding to the same policies set by the MEM.

If things are done the right way, there would be a complete separation between the gas and the oil industry and this would be good for us. To make a final assessment, however, we need a significant amount of information that is not available yet. We need that information to answer questions such as: Who will be the owner of the gas associated with oil production? If it is the new entity (otherwise it would not make a lot of sense making the separation), then PDVSA's E&P would be required to buy gas at the tariffs set by the MEM. If there is a buyer who is willing to pay a higher price, then the new entity will make the case that it prefers to sell to that entity. Moreover, PDVSA E&P would need to make clear how much gas it needs to sign the appropriate contracts, which will force an increase in the efficiency of the gas it uses, hopefully increasing the transparency of the sector. Right now, PDVSA E&P buys gas at a transfer price set internally, probably at prices significantly lower than the tariff. PDVSA E&P is the largest user of gas in the country, accounting for more than half the consumption. 

Another question is how the gas owned by the new entity will be priced (if non-associated gas is priced differently from associated gas)? Will it have the autonomy to sign contracts (of course with the blessing of the MEM)? Will the terms already negotiated with the Jose LNG be accepted? How much political intervention will the new entity have? Who will stay? 

So far the only people that have taken actions against the split are the employees themselves because they are concerned about the benefits they enjoy. There has been some strikes and demonstrations due to the separation.

The main benefit that I see is that it will make the price for E&P explicit, because we are dealing with two separate companies, and will allow other parties to search for gas (or its replacement such as Nitrogen, which under current plants would be three times the size of our project) and sign contracts with PDVSA E&P if that is cheaper. All this assumes an economic rationality that we have not seen in the sector, and therefore nothing might change. I'll keep you posted with any other developments.

Regards,
ALF



From:	Richard Shapiro/ENRON@enronXgate on 10/01/2001 09:05 AM
To:	Alberto Levy/SA/Enron@Enron
cc:	 

Subject:	FW: Venezuela to Create Separate Government Gas Company



-----Original Message-----
From: Nelson W. Cunningham [mailto:ncunningham@mclarty.com]
Sent: Monday, October 01, 2001 9:00 AM
To: Richard S. Shapiro Esq. (E-mail)
Cc: sdonehoo@mclarty.com; tfmclarty@mclarty.com; rkeene@mclarty.com
Subject: FW: Venezuela to Create Separate Government Gas Company


Rick --

Trust that Neal is keeping you in the loop on Venezuela developments.
Chavez has tried twice to reach Richardson (he keeps on trying Richardson's
home phone numbers, despite our telling his office that Richardson can best
be reached at his work numbers).  Chavez has been forward-leaning in the
tone of his voicemail messages, and we understand from Neal that Enron has
received some positive signals from the Venezuelan government in recent
days.

Richardson is back from Europe today and we'll check with him on any Chavez
updates, as well as press to make phone contact if it hasn't happened in the
past few days.

Attached is the public announcement of the important changes in the gas
sector that we previewed for you some weeks ago.  Our assessment continues
to be that this change is more positive for the Jose project than not.

Best,

Nelson

-----Original Message-----
From: Stephen Donehoo [mailto:sdonehoo@mclarty.com]
Sent: Thursday, September 27, 2001 6:40 PM
To: Neal Gerstandt (E-mail)
Cc: Bill Richardson; Nelson internet (E-mail)
Subject: Venezuela to Create Separate Government Gas Company


Neal,

FYI.  Sec. Richardson is in Europe so I have no word on Chavez.

Stephen

09/27 17:25
Venezuela to Create Separate Government Gas Company
By Patrick Gordon
Caracas, Sept. 27 (Bloomberg) -- Venezuela's Energy and Mines Ministry plans
to create a state-owned gas company as the country begins a campaign to
boost natural gas production.
The new company will replace PDVSA Gas, a subsidiary of the state oil
company Petroleos de Venezuela SA now in charge of the gas industry, said
Luis Vierma, director policy and planning for the Energy and Mines Ministry.
``Until now gas has always been placed in line behind oil at PDVSA,'' said
Vierma. ``We need a company that will focus on gas.''
He added that the as yet unnamed company will start operations before the
end of the year. Venezuela has about 147 trillion cubic feet of natural gas
reserves, the largest in Latin America and the seventh largest in the world.
Venezuela produced 3.42 billion cubic feet of gas in 2000, compared with 3.5
billion a year earlier.
The new company is being created as the South American country has increased
its emphasis on natural gas production.
Venezuela sold rights to six natural gas tracts in June, the first time
since it nationalized the oil and gas industry in 1975- 1976 that private
companies could participate in the exploration and production of natural
gas.
Critics said the removing natural gas production from PDVSA would be
inefficient and increase costs.
``It doesn't make any sense to separate the two businesses,'' said Luis
Giusti, former PDVSA president who is now a senior adviser for the Center
for Strategic and International Studies in Washington. ``Gas is usually
found with oil. That's why it's called the oil and gas industry,'' said
Giusti.
Venezuela and private companies may invest up to $50 billion over the next
30 years to develop Venezuela's 100 trillion cubic feet of probable offshore
gas reserves, he said.
Exploratory drilling for gas would begin Dec. 15 at the Deltana Platform off
the eastern coast, said Vierma.
Natural gas for November delivery rose 37.1 cents, or 16 percent, to $2.62
per million British thermal units on the New York Mercantile Exchange.

?2001 Bloomberg L.P. All rights reserved.