The oil-rich and cash-starved nation finds a partner in China
CARACAS — Four years ago, when President Hugo Chávez delighted his Chinese hosts by announcing Venezuela would boost its crude oil exports to one million barrels a day by 2012, many industry analysts considered the plan a costly pipe dream.
Venezuela was selling China just 150,000 barrels daily in August 2006 when Chávez announced his strategy to reduce ties with Uncle Sam and embrace the Asian giant. This shipment was roughly one-tenth the amount Venezuela was then shipping to the United States. “We are diversifying our markets,” the Venezuelan president said during a state visit to Beijing.
Given the shipping distance and the higher cost of refining Venezuela’s heavy crude, many analysts dismissed the plan. But analysts no longer scoff at the deepening energy ties between oil-hungry China and Venezuela, which is suffering from declining oil production and is searching for badly needed investment capital.
Venezuela now ships 360,000 barrels of crude a day to China, making Venezuela the third-largest supplier, according to the Venezuelan government. China and Venezuela closed out 2010 by signing more than $40 billion in energy-related deals that are intended to boost daily oil production by 800,000 barrels.
More than a political alliance, Chávez has been looking for a long-term, and deep-pocketed, business partner. Yet while analysts may agree that diversifying markets makes sense, some worry that Venezuela is merely trading dependence on the United States for dependence on China — pledging its oil reserves to guarantee debt repayment.
“Venezuela is potentially becoming increasingly dependent on the financing of the Chinese,” said Roger Tissot, an international oil consultant based in Canada. But for the Venezuelan government, Tissot noted: “There aren’t many alternatives.”
The deals with Venezuela and other countries in the region are part of China’s effort to diversify its oil supplies away from the Middle East by financing oil exploration in other parts of the globe. For more than a decade, the country has been on a global quest to meet its growing energy needs with stakes in Africa and Latin America.
“China is using its insatiable appetite for resources as a way to develop resources in countries such as Venezuela, which is in need not only of capital but also of infrastructure and the expertise to get that oil,” said John Ing, president and CEO of Maison Placements Canada, an investment firm headquartered in Toronto.
With its oversized foreign reserves of more than $2.5 trillion, China has become “the banker of the world,” Ing said in a telephone interview.
The growing importance of China for Venezuela does not stop with oil. Trade between the two countries has skyrocketed from $1.3 billion in 2005 to nearly $8.9 billion in 2009, according to Bancoex, Venezuela’s state-run foreign trade bank.
The China Development Bank has extended some $20 billion in loans to Venezuela. Chávez has tapped the funds to pay for construction of 10,000 housing units at a cost of $400 million. The homes are part of the rebuilding efforts after November rains and flooding left more than 130,000 people homeless. Venezuela is also using the loan to finance the purchase of 33 civilian aircraft within the next five years.
Both countries also agreed last year to replenish a bilateral investment fund made up of $4 billion from China and $2 billion from Venezuela.
The funds from China are a lifesaver for the Venezuelan government, which is no longer friendly with the International Monetary Fund and other big global lenders.
Like much bilateral lending, there are strings attached. Borrowers such as Venezuela must use Chinese companies. Along with oil, Venezuela has awarded billions of dollars worth of contracts to China for housing, infrastructure, agriculture and power-plant projects, as well as for the purchase of commercial aircraft and military equipment.
Venezuela has also agreed to repay the billions of dollars with shipments of petroleum. Under the terms of the lending, it is required to repay the loans with shipments of 200,000 barrels of oil a day out of the total 360,000 barrels supplied to China. Venezuela has agreed to increase this repayment amount to 300,000 barrels a day by 2012.
The past year brought a slew of oil-related deals between the two. In April 2010, the China National Petroleum Corporation and Petróleos de Venezuela signed a joint venture agreement to produce 400,000 barrels a day at Junin 4, an oil field in the Orinoco oil belt named after a 19th century South American independence battle fought in Peru.
A separate Chinese state-owned entity, the China National Offshore Oil Corporation, signed an agreement with the Venezuelan state-owned oil company to cooperate in developing the Mariscal Sucre offshore natural-gas project that is expected to eventually produce 1.2 billion cubic feet of gas and 37,000 barrels of oil a day.
The China Petroleum & Chemical Corporation, known as Sinopec, has signed agreements to work with the state oil company to build the Cabruta refinery, with a capacity of 200,000 barrels per day. In December, CNPC signed a $6 billion contract to expand Cuba’s Cienfuegos oil refinery, jointly owned by Cubapetróleo and PDVSA. The project will be financed mostly by China’s Export-Import Bank along with other Chinese banks and is guaranteed by Venezuelan oil, according to news reports.
Also in December, Sinopec and PDVSA announced an agreement to develop the Junin 1 oilfield. The joint venture by the two state-run oil companies is slated to produce 200,000 oil barrels a day, according to the Venezuelan oil company. As part of the agreement Sinopec may also help PDVSA develop the Junin 8 oilfield, which could product up to 200,000 barrels a day. Both of these oil blocs have heavy, hard-to-refine crude.
China has already poured money into expanding capacity and improving the quality of its installations to process the high-sulfur crude at home. The Beijing government has drawn up plans to construct a new refinery for Venezuelan crude in China’s Guangdong province.
Tissot, the Canadian oil expert, said that diversification may make sense, given the current growth coming from emerging markets.
“Market growth is not in Europe or North America,” Tissot said. “Growth is in China. It makes sense if you are an oil country to sell where the market is growing.”
Chávez has also proposed selling off the refineries that belong to Citgo, the PDVSA subsidiary in the United States that was formed decades ago — when output exceeded demand — under the company’s strategy to guarantee its oil sales. Venezuelan oil exports to the United States have now dropped below one million barrels a day; oil from Canada has filled in that gap.
“It kind of makes sense to reallocate your investment portfolio, reducing exposure to the U.S. market in terms of growth and profitability and perhaps looking into markets where growth and profitability are more attractive,” Tissot said.
But selling Citgo wouldn’t provide Venezuela a huge pay-off because refining margins are small in the United States, he added.
And, at the same time, Venezuela’s embrace of China has done little to create what Chávez has championed as “oil sovereignty.”
“They’re in a situation very contrary to oil sovereignty,” Tissot said. “If you sell oil reserves, you’re selling the future—privatizing the oil.”
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