Global Insight Perspective | |
Significance | Venezuela is the world's fifth-largest oil exporter, while China is the second-largest oil consumer behind the United States. |
Implications | For China, the accords are in line with its efforts actively to seek to diversify its supplies in a bid to reduce its dependence on Middle Eastern oil and increase its energy security. Deteriorating relations with the United States also support the case for Venezuela’s diversification of its export markets. |
Outlook | Despite this, the United States remains a natural market for Venezuelan oil exports, and China is unlikely to replace it as the primary destination for Venezuelan oil exports any time soon. |
Venezuela and China Seal Energy Deals
Venezuela and China signed 12 energy agreements yesterday, during a meeting between President Hugo Chávez and Chinese Premier Hu Jintao, according to a statement released by PDVSA.
Among the deals were a memorandum of understanding signed by China National Petroleum Corp. (CNPC) and the Venezuelan Petroleum Corp. (CVP), an affiliate of the state-owned PDVSA to create new mixed companies to operate the Intercampo Norte and Caracoles oil blocks in Venezuela. CNPC obtained operating rights for the Intercampo Norte and Caracoles oil blocks in Venezuela in the third round of operating contracts held in 1997, but, like other companies participating in the sector, has been forced to migrate its operating agreements to joint ventures that comply with the 2001 hydrocarbons law. CVP also signed an agreement with CNPC for a joint venture to develop the Junin 4 block in the Orinoco heavy oil belt, where reserves are currently under the process of certification. According to the statement, production from this block is expected to reach 200,000 b/d by 2010. CNPC and PDVSA also plan to produce oil from the Zumano region in the state of Anzoategui in eastern Venezuela, in line with earlier accords.
More significant are Venezuela's plans to raise crude oil and product exports to China to 500,000 b/d from 150,000 b/d in three years and up to a 1 milllion b/d in a decade.
Complementary Energy Objectives
Closer oil ties between Venezuela and China are mutually beneficial to both parties. As President Chávez said yesterday, China, as one of the world's largest consumers, and Venezuela, as one of its largest producers, “are absolutely complementary”. Venezuela is seeking to diversify its export markets and like other countries in the region has been actively courting Chinese investment. Indeed, this is President Chávez's fourth visit to teh East Asian giant. While most attention has focused on the consequences for the U.S. economy of a possible disruption to Venezuelan oil supplies, Venezuela's dependence on the U.S. market is much greater, with around half of Venezuelan total production going to the United States in recent years. This dependence on a single market puts Venezuela in a vulnerable position, especially given the state of political relations between the two. There are no doubt also political benefits to be gained for Venezuela from closer ties with China in energy and other economic spheres. President Chávez has frequently called for the creation of a multi-polar world in order to offset the global dominance of the United States and has used oil as a foreign-policy tool to strengthen relations with other countries, including some regarded as “pariah” nations by the North American superpower. Venezuela’s latest act of political defiance towards the United States takes the form of a bid to occupy Latin America's seat on the UN Security Council. With that goal in mind, Chávez has toured the developing world securing backing from a plethora of countries from the Caribbean Community and Common Market—CARICOM (see Venezuela: 10 July 2006: CARICOM Backs Venezuela's Candidacy to UNSC), the Arab League, and Iran among others. The oil-motivated trip to China also falls within his international-promotion visits to foster support in the UN. China did not fail to respond positively to Chávez's plea for votes, once again highlighting the warming political ties enjoyed by both countries.
In contrast China's spectacular rate of economic growth over the past decade has led to a rapid rise in its demand for oil, which has far exceeded its rate of domestic production, leading to a growing dependency on oil imports. In this context, managing the country's import dependence and improving energy security (through the ownership of overseas oil and gas assets by Chinese state oil companies and the diversification of supplies in order to reduce dependence on the Middle East) have become policy priorities for the Chinese government.
Outlook and Implications
Although the Venezuela-China energy alliance is in line with their respective energy policies, both will be aware of the broader geopolitical implications. Stronger oil ties between Venezuela and China come amid deteriorating relations between Venezuela and the United States and there will no doubt be concern among some U.S. legislators that the latest supply deal with China, and also the recent announcement that the state oil company PDVSA plans to sell its stake in the Lyondell-Citgo refinery in the United States, are a prelude to Venezuela carrying out Chávez's threats to cut off oil supplies to the United States if it tries to remove him from power (see Venezuela: 24 July 2006:U.S. Government Urged to Make Plans for Possible Venezuelan Oil-Supply Disruption).
However, the diversification of export markets does not necessarily mean that Venezuela is positioning itself to be able to cease all oil exports to the United States, currently its largest single market and the recipient of around 1.5 million b/d of oil from Venezuela. This is primarily because it would not make commercial sense. The United States is, in many ways, considered a natural market for Venezuela. Venezuela makes more money selling oil to the United States, than to markets further afield. According to reports, Venezuela is already going to forfeit US$3 per barrel on the oil it exports to China as a result of higher shipping and insurance costs. The construction of a proposed oil pipeline to the Pacific Coast via Colombia could potentially lower transportation costs in the future, but despite China having been invited to invest in such a project in the past it was not included among any of the energy deals signed yesterday.
Furthermore, there are some refineries in the United States that are especially configured to process heavier Venezuelan crudes, while the lack of refining capacity for heavier crude in other large consuming countries such as China or India will ultimately limit the potential for growth in oil exports from Venezuela, unless it is accompanied by new investments in the refining sector.
Although the diversification of Venezuela's export markets and, in particular, its alliance with China may not represent the threat to U.S. interests that some may fear, unless Venezuela is able to combine its search for new markets with higher output, U.S. supplies could be affected. Indeed, there are signs that this may already be happening. Data from the International Energy Agency (IEA) showing that Venezuelan oil production was down by 4.5% in the second quarter of 2006 at 2.58 million b/d, from 2.7 million b/d in 2005, followed the earlier release of figures from the U.S. Department of Energy showing a 6% decline in exports to the United States in the first four months of 2006.