Venezuela Freight Transportation Report 2008

Following a meeting between the two countries' Presidents in the Brazilian city of Manaus in September 2007, Brazil and Venezuela said they were re-launching the project to build a trans-continental gas pipeline. Presidents Luiz Incio de Silva of Brazil and Hugo Chvez of Venezuela also signed a series of joint energy projects. The two Presidents said they would relaunch the South Gas Pipeline project, intended to transport Venezuelan gas to Argentina through Brazil, with branches connecting Uruguay, Paraguay, Bolivia, and Ecuador. The 8,000km pipeline proposal is roughly costed at US$20bn. It is seen as a way of connecting gas-rich countries such as Venezuela and Bolivia with those that have growing energy needs such as Brazil and Argentina. It remains to be seen how fast the project will progress, but for the moment Venezuela continues to ride an oil boom, and that continues to have a marked influence on the freight transport sector.

Seeking to seize a nationalist, anti-US leadership role in the region, President Hugo Chvez has turned his attention to a series of ambitious projects, designed to underpin the growth and diversification of the country's hydrocarbons exports. BMI's newly released Venezuela Freight Transport Report forecasts that as strong oil and gas revenues eventually begin to moderate, Venezuela's total freight carried, measured in million-tonnes km, will grow at an average annual rate of 4.9% in 2007-2011, a little ahead of GDP growth which will average 4.4% over the same period. As a result, the total value of transport and communications will grow to reach US$20bn by 2011, representing 9.3% of the country's GDP.

We expect Venezuelan pipeline throughput to grow by an annual average of 5.4% in 2007-2011. While oil volume growth will moderate, the big developments will take place in natural gas. At present there are chronic shortages of gas in western Venezuela, and a new pipeline to Colombia is initially being used to bring in imports from that country. Venezuela, however, sits on the largest gas reserves in the region, mainly located in the east of the country. President Chvez's vision is that these can be used not only to cover the domestic deficit but also to reverse the flow, pumping gas to Colombia, and eventually to supply key South American nations such as Brazil and Argentina, through a continental pipeline. The initial aim (potentially over-ambitious in our view) has been to boost natural gas production by 30% by 2008. In line with the president's plans, in 2006 Venezuela joined Mercosur, the South American trade pact between Brazil, Argentina, Paraguay and Uruguay (with Bolivia as associate member).

Venezuela's ambitious plans, which require massive investments over many years, may not survive sharply lower oil revenues, which could come within our forecast period. Also, significant political and business environment risks must be factored in. The Chvez presidency has been erratic, and its commitment to regional integration projects has tended to be politically-led (Venezuela left the Andean Pact because it disagreed with other members who were seeking free trade agreements (FTAs) with the US). As for the business environment for the freight industry, BMI gives Venezuela the joint lowest score (with Argentina) among the major Latin American markets - 33 (out of a theoretical maximum of 70), well below the regional average of 40.3. The regulatory and competitive environments are particularly weak.

In fact, while oil and gas wealth underpins our Venezuelan freight transport forecasts, it is also true that, given this advantage, the freight industry could have done much better. In emerging economies freight growth tends to run significantly ahead of GDP, but in Venezuela, on our projections, the gap will be only 0.5 percentage points on an annual average basis over the next five years. Pipeline throughput and sea cargo is largely driven by the oil sector. Rail freight will grow strongly because of mineral exports, but is developing from a very low base. Road haulage is held back by a failure to invest in the highway network. Airfreight growth is moderate to disappointing compared with neighbouring countries. The bottom line then, is that Venezuela's freight industry can expect moderate, but below-potential growth over the next five years, and that it remains exposed to the risk of a sharper downturn in international oil prices.