NO GAS IN THE KITCHEN

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000366 SIPDIS SIPDIS E.O. 12958: DECL: 03/06/2018 TAGS: EPET ENRG EINV ECON VE SUBJECT: NO GAS IN THE KITCHEN Classified By: Acting Economic Counselor Shawn Flatt, for Reason 1.4 (D) ¶1. (C) Summary: The distribution system for liquefied natural gas (LNG) in cylinders, which is used by the majority of Venezuelan families for cooking, has been stressed to the point that it will cease to function unless price controls are lifted or subsidies are provided by the BRV. Price controls have been in place since 2004 while rampant inflation has decreased profit margins for distributors and eliminated incentives to reinvest in equipment. Failure to address this issue would resonate powerfully among many sectors at a time of growing unhappiness with the domestic economy. End summary. -------------- BACKGROUND -------------- ¶2. (C) According to local media more than LNG 100 distributors have declared a "financial emergency" due to the price freeze on their product. The problem is not due to a lack of LNG as there is sufficient LNG for the Venezuelan population in Venezuela; but rather a problem of distribution caused by price controls. LNG cylinders are used by homes and businesses which do not have natural gas piped directly to their location. Based on press reports and an industry spokesperson, 88 percent of Venezuelans use LNG cylinders. The government has declared LNG to be a first need product and a public service and has regulated the price. The 2004 price controls set the price at BF 3.7 per 10 kilograms (KG) of LNG, the most common quantity sold. Traditionally profits for the sale of LNG in cylinders from the 1980's until 2004, when new price controls went into effect, were 16-18 percent. Every 12-15 months price increases were established to maintain that profit margin. There have been no price increases since 2004. Cumulative CPI inflation since January 2004 until December 2007 has been 140 percent. According to the Angel Lopez, President of CONINGAS (strictly protect throughout),an industry lobby, sector inflation for the same period was 200 percent. The problem has also created fodder for BRV opposition parties. COPEI representative Angel Cacique was quoted in local papers on March 10 criticizing PDVSA: "instead of doing 1000 other things they (the BRV) should guarantee the distribution of bottled gas to the general population...there is no milk, sugar or gas... this is not justified when the price of a barrel of oil is 103 dollars." -------------- LNG DISTRIBUTION SYSTEM AND REINVESTMENT -------------- ¶3. (C) Lopez told Econoff on March 6 that the LNG distribution system in Venezuela is suffering from a lack of recapitalization. In particular the deterioration over time of LNG trucks and cylinders (bombonas) has crippled the LNG distribution system of LNG cylinders. For individual distribution companies there is no incentive to reinvest because of the declining profit margins. According to Lopez, there is almost a complete lack of supply to the regions farthest from the Caracas. According to Lopez some companies have been offered and have declined contracts above the price control price for fear of being closed by the government. ¶4. (U) The basic distribution chain for LNG is: ¶A. Large trucks (owned by distributors) receive LNG from gas plants (owned by the state). ¶B. LNG is delivered to cylinder filling plants (owned by distributors). ¶C. Smaller trucks (owned by distributors including the state) deliver cylinders filled with gas to consumers. Distributors are required to conduct tests in accordance with international and national standards. LNG cylinders have a seven-year period between hydrostatic tests. LNG trucks are tested every 10 years. In many cases these tests have not been performed due to a lack of investment. ¶5. (SBU) The BRV nationalized VENGAS and TROPIGAS, the two main Venezuelan LNG distribution companies, in 2007 with the intent to eliminate the "oligopoly" of foreign owned companies and eliminate the distribution problems caused by the private sector. The two companies controlled 55 percent of the LNG market. The BRV realized after the nationalization of VENGAS and TROPIGAS that the problem was not foreign ownership. 170 medium to small companies distribute LNG to the rest of the market and these companies suffer from a lack of capital and low profits margins that do not permit them to reinvest in their distribution system. CARACAS 00000366 002 OF 002 The BRV has been working with the pro-government National Workers Union (UNT) (which represents the 17 different unions whose members distribute LNG for VENGAS and TROPIGAS) but the UNT is now requesting salary increases as well as medical benefits. ¶6. (C) Because of the current lack of profit margins in the LNG distribution business, there are many owners who would be willing to sell their businesses to the BRV. The BRV and PDVSA GAS Communal (PGC) have stated however that they do not intend to purchase any additional LNG companies. (Comment: They may have their hands full with VENGAS and TROPIGAS. End Comment.) Nevertheless, PGC recognizes that the need for capital investment within the industry. On March 9, the President of PGC, Douglas Machado, was quoted in local papers as stating that PGC "would construct the infrastructure to deliver LNG direct to 3.2 million homes". Recently PGC began delivering in small numbers gas cylinders through "Community Councils" into suburbs of Caracas. ¶7. (C) Both CONINGAS and UNT are proposing price increases or subsidies to increase investment and improve the LNG distribution system. They also both stressed that PDVSA GAS Communal was focused on solving the distribution problem. There has been no threat of strikes or work stoppages. According to news reports, they are working with the BRV in an "environment of conciliation". In addition to proposing salary increases and industry subsidies, recommendations include replacing worn out gas cylinders and cylinder gas valves. ¶8. (C) Comment: It appears that the BRV realizes the importance of solving the LNG distribution problem. However, as with other BRV attempts to fix price control caused shortages such as food staples, there are no quick fixes. New trucks and gas cylinders must be bought and delivered. As this is an issue which affects almost 90% of Venezuelans, an unsuccessful attempt to fix the LNG supply problem could have political consequences for the Chavez administration later in the year when Venezuelans go to the polls to elect governors and mayors. DUDDY