Arcaya & Asociados
February 25, 2008
China has given Venezuela a $4 billion loan to be repaid in shipments of fuel oil, Venezuelan President Hugo Chavez said Feb. 21, adding that this is the first such agreement Beijing has signed. However, this is not the first time that state-run oil company Petroleos de Venezuela has borrowed money in return for oil and fuel. Chavez is doing all the talking as China and others hungry for Venezuelan oil continue to make these deals quietly. So far, they have not put U. S. energy imports in jeopardy.
Venezuelan President Hugo Chavez said Feb. 21 that China has loaned $4 billion to state-run oil company Petroleos de Venezuela (PDVSA), to be repaid in shipments of fuel oil. He added that this is the first agreement of its kind ever signed by Beijing. Chavez, however, is doing all the talking on this deal, likely because, although Beijing wants the fuel, it does not want to aggravate Washington any more than it must.
Although this deal's November 2007 signing was reported widely in the Chinese press, no official Chinese government statement has been issued. It was reported that China has transferred $4 billion — and Venezuela $2 billion — into a $6 billion investment fund dedicated to local Venezuelan development projects. The fund, jointly founded by China Development Bank and Venezuela Bandes Bank, is expected to be expanded to $18 billion within the next nine years.
Over the years, Chavez has announced many deals with the Chinese that later were said to have never happened. But the likelihood that this deal has gone through is high. Meanwhile, some of those earlier deals — significant ones — have started to come together. For example, China National Petroleum Corp. (CNPC) confirmed in November 2007 that it had a 40 percent stake in a joint venture it set up with a PDVSA subsidiary to operate in the oil-rich Orinoco Belt under the name of Sinovensa. This is not the first time that PDVSA has borrowed money in return for oil and fuel deliveries. A similar deal was signed with Japan at the end of 2007 for $3.5 billion in loans from a Japanese consortium of banks and trading houses.
Moreover, the loan deal is for refined fuel — not crude oil. Chinese imports of Venezuelan crude oil have been limited because China is short on refining capacity for the poorer grade of Venezuelan crude. So getting refined oil makes things simpler and less costly for China. In the meantime, CNPC already has started building refineries in southern China capable of processing Venezuelan crude.
China has said before that to insulate its energy supply routes from the U. S. Navy, it would never use Venezuela as a significant supplier. This has not changed. The loan deal diversifies China's fuel oil import sources, but does not turn Venezuela into a significant energy supplier to China. Beijing typically has stayed fairly quiet on such deals in Latin America, because of that area's proximity to –- and its status as a major source of crude for — the United States. Venezuela is the United States' third largest source of oil, providing 12 percent of its 2007 total imports.
So when PDVSA issued statements about "paralyzing" all commercial contact with U. S. supermajors such as ExxonMobil by diversifying its exports to new Russian, Iranian and Asian buyers, Beijing played it smart by staying mum.
Ultimately, until China succeeds in increasing its heavy crude refining capacity, and Beijing starts to see Venezuela as a more attractive — geopolitically less risky — heavy crude supplier than Middle Eastern countries, China poses no real threat to the U. S. crude oil supplies from Venezuela — regardless of how vocal Chavez is about replacing the United States with other buyers.
U. S.-Venezuelan energy disagreements such as the PDVSA-ExxonMobil legal dispute are more for political show than anything else. Chavez wants to demonstrate that his country is not reliant on U. S. oil revenues and signal to the world that its national energy company is capable of standing up against its U. S. counterparts. But as long as the United States remains the most profitable export destination for Venezuelan oil, Chavez's threats remain empty. And he needs the money to buy support at home. To gain more domestic support, on the same day Chavez spoke about the China deal, Venezuelan Foreign Minister Nicolas Maduro said that PDVSA's dispute with ExxonMobil had moved from a legal dispute into the "political sphere."
More oil-for-loan deals will likely come about. If non-U. S. energy buyers are willing to quietly put up front money and infrastructure investments for fuel, Chavez is unlikely to turn them down, although whether deliveries follow is another matter. But such deals pose no real threats to U. S. crude imports, yet. Instead, Pdvsa's profit (including the parent company and affiliates) was USD 896 million in the same period, or 2 percent of the consolidated revenues at USD 42.9 billion.