Relations between Venezuela and China

Por Venezuela Real - 19 de Abril, 2007, 13:06, Categoría: Petróleo/Energía

Oliver L. Campbell
April 17, 2007

In an article in GlobalInsight dated 11 April, Steven Knell writes that PDVSA ceased Orimulsion production as a result of high crude oil prices and that this will have ”shaken Chinese confidence in the reliability of Venezuela as a long-term source of supply.” While I agree with the first statement, I seriously question the second.

When Orimulsion was launched in 1990, it was targeted at power plants that burnt coal and priced to compete with steam raising coal. It was never expected to be a big money winner, but a source of extra income since the oil component--30 percent is water-- was excluded from the OPEC quota, and its substitution for coal did not affect the other OPEC partners.

However, the writing has been on the wall since 2002 when PDVSA stated the average sales price for Orimulsion was $7.00 per barrel which, less production costs of $3.50 and processing costs of $2.00, left a margin of $1.50 a barrel. In the same year, the average crude oil price was £21.00 which, less production costs of $4.00, gave a margin of $17.00 a barrel. Noting this large price difference, in 2003 the government decided to greatly reduce production of Orimulsion and concentrate on two other options--to upgrade the extra-heavy oil or to blend it with a light crude oil. The first option produced the greater profit, but insufficient upgrading capacity meant the second option had to be used as well. The latter has the advantage of needing little investment, while the upgrading plants are extremely costly and take years to construct.

The first upgraded crude was produced by Petrozuata in 2001 and, since then, the four consortia operating in the Orinoco Belt have been hugely successful. They currently produce some 600,000 b/d and upgrade crude oil of an average of 9º API into one between 16º and 32º API depending on the complexity of the upgrading plants. This has created a new ball game with the government promoting upgrading at the expense of Orimulsion.
Although the decision to cease production of Orimulsion at the end of 2006 was only taken last year, the intention to run down Orimulsion dates back to 2002. The clients buying Orimulsion, including the Chinese, must have seen this coming and those with long term contracts are seeking compensation from PDVSA. The latter could offer fuel oil at discounted prices, or a lump sum equivalent to the present day value of the benefit of burning Orimulsion rather than coal.

PDVSA has just won one case for breach of contract, brought by Enel, the Italian electricity supplier, which was decided by arbitration in Paris. New Brunswick Power started an action against PDVSA in September 2005 claiming damages of $1.8 billions for breach of a 20 year contract and for the cost of converting the power plant to burn Orimulsion. Though heads of agreement were initialled, their case is weakened by the fact the contract was never signed. Beating the gun may turn out to be a costly error.

Of course, it is regrettable when a State breaks contracts and some believe it cannot be condoned. However, a State is duty bound to look after the interests of its citizens and, when unforeseen changes occur, it will not dwell on legal niceties but take steps to safeguard its position.

It is doubtful the Chinese were ever “shaken” by PDVSA’S decision to stop Orimulsion production and, even if they were, they have been very generously treated. The government has stated that Sinovensa, instead of producing Orimulsion, will now blend extra-heavy oil with light oil, to produce a crude of some 16º API, until such time as upgrading facilities are in place. The Chinese have also been greatly favoured by being assigned an area to develop in the Orinoco Belt.

President Chávez wants to diversify Venezuela’s customer base and depend less on the USA so he is looking on China to be a long term buyer. The Chinese wish to invest in Venezuela, and it is surprising the number of Chinese workers one can now see in that country. There is also talk of Venezuela and China building a jointly owned refinery in China. All this bodes for a long term association and, though it does not guarantee future oil supply, Mr Knell’s assertion that the Chinese “would do well to hedge against future shifts in Venezuelan export orientation” is not supported by the present close relations between the two countries.

The only quasi guarantee of supply is if a country has refineries in another such as is the case with Venezuela’s refineries in the USA which are owned by CITGO. If supply and demand are in balance any “shifts” in supply just mean getting oil from another country. A problem only exists if a large supplier, such as Iran or Iraq, for political reasons falls out of the system and stops exporting oil.

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