Global Insight Perspective | |
Significance | With the official termination of the orimulsion supply deal previously agreed with PDVSA, PetroChina is considering retooling its Zhanjiang two 600MW electricity generators to improve their utilisation. |
Implications | PDVSA's decision to cease orimulsion production was a short-term one driven by high international crude market prices, but this experience cannot help but have shaken Chinese confidence in the reliability of Venezuela as a long-term source of supply. |
Outlook | PDVSA has agreed to compensate PetroChina and may supply the NOC with fuel oil as a substitute for the orimulsion; coal is another possible fuel source for the installation. The compensation suggested could also take the form of upstream access or conventional crude volumes. Still, there are more questions about how Venezuela will keep all the supply-side promises it has made to China than answers at the moment. |
Deal…No Deal
Officials at PetroChina are said to be picking up the pieces of a promising supply deal with PDVSA of Venezuela in reports by Reuters today. The two NOCs are in the process of negotiating a settlement for forfeited orimulsion volumes that PDVSA was due to supply to PetroChina and although there are grounds to expect that immediate issue to be resolved, there could well be longer-term consequences to consider
The dispute in the here and now centres on the breakdown in a supply pact PetroChina and PDVSA signed back in 2005, amid increased engagement between two of the world's largest daily crude producers and consumers (see Venezuela: 29 December 2005: PDVSA to Export Crude Oil to China; Colombia Forces Offshore Block Redraw). Alongside increased imports of crude and fuel oil, as well as new upstream access, China was in line to benefit from some 2.5 million tonnes of Venezuela's trademark orimulsion extra-heavy crude boiler fuel for a period of 33 years. On the basis of the integrity of this new supply source, PetroChina configured the two 600MW generators it had under construction at Zhenjiang to burn orimulsion.
However, the win-win situation for producer and consumer alike was flipped on its head by the decision taken by Venezuela last year to cease all orimulsion production (see Venezuela: 29 September 2006: PDVSA Announces End of Orimulsion Production in Venezuela). Despite the presence of a number of orimulsion supply contracts with consumers from China to Singapore, South Korea and Japan to Canada, as well as MoUs for sales elsewhere, it was deemed more commercially expedient to blend the orimulsion fuel with lighter crudes to form a 16 API blend suitable for export, in order to take advantage of the high international oil market price environment. This left PetroChina out in the cold and although 500,000 tonnes of orimulsion have been delivered so far this year, the final shipment was received in March.
Understandably, PetroChina's grievance has not fallen on deaf ears and the two sides are looking at routes to offset the breakdown that has occurred. PDVSA is said to have agreed to provide some compensation, but the question remains as to what form that will take. The withdrawal of the boiler fuel has left a hole in Venezuela's total targeted supply volumes to China, which stand at 300,000 b/d for 2007. Therefore, PDVSA could well raise the fuel oil supplied to PetroChina or adjust conventional crude volumes upwards to reach this target. Only the former would be of use at PetroChina's Zhenjiang power plant, though, and given the cost benefits of retooling the facility to run on coal, one would expect the Chinese NOC to pursue that route. Only one of the two generators has actually been online due to inadequate orimulsion supplies and a shift to coal-fired generation would bring the promise of improved utilisation. Such an eventuality would lead PetroChina to push for another form of compensation, of which upstream access would be the most sought after, but increased supply volumes in the future the most likely.
Outlook and Implications
Of that PetroChina should be wary. At the very least, this situation gives the Chinese authorities grounds to question just how reliable a supplier Venezuela will be in the future. Consider the following: actual deliveries to China are already well below the targets that Caracas has set out. PetroChina is said to be expecting to receive roughly 200,000 b/d this year. Although that is an increase of 13% on the 160,000 b/d supplied in 2006, it is 40% short of the 320,000 b/d mark that Venezuela's Energy Minister Rafael Ramirez has forecast exports will average for the year ahead.
Indeed, although there has been unprecedented collaboration between these two sides (see. China: 26 March 2007: Progress on CNPC Deal Strengths Ties between China and Venezuela and Venezuela: 30 January 2007: PDVSA and CNPC Sign Agreement over Venezuelan Offshore Block), the 1 million b/d that President Hugo Chávez has stated he wants to sell to China by 2012 looks a distant prospect. According to Reuters, that would be roughly six times what PetroChina received last year, a level that included 84,000 b/d of crude, 53,000 b/d of fuel oil and 23,000 b/d of orimulsion. If anything, the deal for orimulsion safeguarded a certain allocation for China as the market for that fuel is limited. The increase in relatively lighter crude content as part of total Venezuelan exports puts China in competition with more markets and that does not bode well for the latter's energy security. The capacity to be able to deliver on the wave of supply MoUs that Venezuela has signed of late is predicated upon rates of upstream investment that are not materialising (see Venezuela: 29 March 2007: PDVSA's Net Profits Fall as Social Spending Rises). Although he may be loath to admit it, President Chavez cannot be everything to everybody. So, although PetroChina will likely find a reasonable route out of the difficulties it has come to face as a result of PDVSA's shift, the Chinese authorities would do well to hedge against future shifts in Venezuelan export orientation with a more diverse supply strategy through 2012 and beyond.