Petrobras president Jose Sergio Gabrielli made the announcement during an energy summit in Italy. Although he declined to specify why his company decided to pull out, company executives indicated it was largely over pricing considerations. Petrobras had never finalized the joint venture with Venezuelan counterpart PDVSA, which was to hold a majority stake in the fields. Still, Petrobras’s withdrawal will likely cause delays in a project that is crucial to Venezuela’s development plans.

Tensions over the project had been building for months. Petrobras was pushing to liquefy Mariscal Sucre gas for export at international prices, while Venezuela wanted to use the gas for domestic consumption at artificially low prices. Petrobras has plenty of other more profitable gas projects to develop instead, especially considering that the huge new Tupi discovery holds up to 8 billion barrels of oil and its reserves hold roughly 15 percent gas.

Petrobras has experience in offshore and unassociated gas production that PDVSA lacks, meaning the Mariscal Sucre project could now miss its first-production target of 2010. And since PDVSA is diverting billions of dollars to social spending programs, it may take some time to come up with the $3 billion needed to develop the project.

Even with the delays, PDVSA will eventually start production at Mariscal Sucre, alone or in another partnership. North of the Paria peninsula, Mariscal Sucre is in shallower water than fields in nearby Trinidad and Tobago, and Venezuela’s Deltana Plataforma project – where Chevron also wants to develop LNG capacity. Mariscal Sucre poses fewer technical problems than Deltana Plataforma, according to industry experts, and initially will produce 18 million cubic meters of gas a day (nearly 636 million cubic feet a day) – more than enough to eliminate Venezuela’s need to import gas from Colombia.

Chávez has high hopes for Mariscal Sucre, which is an integral part of his “natural gas revolution” that aims to have some 11 billion cubic feet of gas production a day by 2011. Venezuela currently produces some 7 bcf a day, according to the government, although the BP Statistical Review of World Energy – which does not include gas flaring and recycling – put 2006 output at just shy of 3 bcf a day.

Petrobras and PDVSA still have time to mend their relations on other projects such as the joint Abreu e Lima oil refinery in Brazil, where they are due to start construction together. But PDVSA has been slow to commit to the deal. If that project falls through, relations between the two countries could turn downright sour.