Refining a Relationship: Venezuela and China

Hugo Chavez and Hu Jintao met on September 24, 2008 and signed 12 cooperative deals dealing with “trade, oil, finance, education, justice, telecommunications, infrastructure, sports and cultural relics” (Xinhua). The  economic and oil agreements appear to be the most politically important since Venezuela is aggressively attempting to diversity its options in dispersing its abundant supplies of heavy crude oil.

Below, I explore possible effects of Chavez’s goal to ship 1,000,000 barrels of oil a day to China by 2012.

Amount of Trade / Growing Cooperation.

In 2001, China and Venezuela established a joint trade “committee [that] aims at consolidating and strengthening trade cooperation. “ (Xinhua), which helped China become one of Venezula’s five largest trading partners. The US, Brazil, and Colombia are among the others.  China’s money, however, mostly travels toward the EU, the US, Japan, and the ASEAN nations (People’s Daily).

Year on year, China’s trade with Venezuela is steadily increasing. “Bilateral trade in the first seven months reached $6.23 billion, compared with $5.9 billion for all of 2007, Foreign Ministry spokeswoman Jiang Yu said” (Bodzin and Wang, Bloomberg).

Below is a chart examining the rise in trade between China and Venezuela.

(Unless otherwise indicated, data is from China Daily July 5, 2008; figures in USD.)

“Heavy” New Agreements

In the September 25th agreements, “Hu said China would like to deepen “all-phase and integrated” oil cooperation with Venezuela, encourage businesses to invest in Venezuela and establish a trade zone. China will also participate in building Venezuela’s infrastructures, including railway system, telecommunications network, social housing and hydro-power” (Xinhua). Additionally, China and Venezuela plan to construct two refineries, one in each country (Oil and Gas Journal).

Venezuela hopes to make 1,000,000 barrels/day in oil deliveries to China by 2012. The Venezuelans have been working diligently toward that goal; “In the first 7 months of 2008, Venezuela exported 5.18 million tons, or 38 million bbl, of crude to China—an increase of 93.8% over 2007.” (Oil and Gas Journal).

To facilitate cooperation and investment, China and Venezuela set up the “Joint Financing Fund, also known as the “heavy fund”” in early 2008 with capital of $6 billion (China Daily) [$4 billion of which was provided by China]. On September 25th, the countries agreed to double the investment to $12 billion (Shanghai Daily).

A market research report by Business Monitor International expects Venezuela will increase its 2008 production from 2.75 million b/day in 2008 to oil and gas liquids production of 2.93 million b/d by 2012. Internally, “[c]onsumption is forecast to increase by around 3% per annum to 2012, implying [domestic] demand of 675,000 b/d by this point. The export capability would thus be about 2.26mn b/d by 2012″ (*A).

Crude Predictions / Feasibility

Logistics of shipping the distance from South America to China will be important to overcome. To in-part facilitate this obstacle, “the two have a shipping joint venture that will build the shared very large crude carrier” (Guardian). Still, according to the Heritage Foundation, the largest supertankers cannot pass through the Panama Canal, which increases costs of oil transport from Venezuela to China. Expansion of the Panama Canal should be completed by 2014. Expansion will expand the current locks from “33 metres (108 feet) wide” “The new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC; also “Brazil’s Passage To China“).

It is important to retain a sense of perspective about Venezuela’s importance to China. China wants Venezuela’s oil, but Venezuela currently supplies only 4 percent of China’s total oil imports, according to a quotation by a Chinese government official on Bloomberg, but from data elsewhere it appears the number is closer to 10 percent. [Forbes clarifies that Bloomberg misunderstood the quotation- China receives 4% of Venezuela's crude exports.] China imports about 46% of its oil needs (Xinhua).

In 2007-08, China mainly imported oil from Saudi Arabia (656,000 b/d, 17.92%of its total oil imports) and Iran (433,000 b/d, 11.83%) among others (Shichor, Jamestown).

In 2006, China’s oil imports mainly came from; Angola (~500,000 b/day), Saudi Arabia (~470,000 b/day), Iran (~350,000 b/day), Russia (~350,000 b/day), and Oman (~220,000 b/day). At that time, Venezuela’s supplies of oil did not even rank among China’s top five suppliers. (Data from the EIA).

Zweig, David and Bi Jianhai’s important article; “China’s Global Hunt for Energy.” (Foreign Affairs. Sep./Oct. 2005. 28.)  noted that, as of 2004/5, China had relatively diverse sources of oil imports. China’s largest four oil suppliers accounted for the following percentages of China’s imported oil; Saudi Arabia (14%), Oman (13.3%), Angola (13.2%), and Iran (10.8%)).

Still, China’s oil import demands are rising and were up 14.7% in 2007. Every year, Venezuela supplies greater and greater amounts of oil to China, from a mere 50,000 b/day in 2005 to over 300,000 b/day in 2008.

Consequences. Can Hugo Shift to China?

Hugo Chavez needs other places to sell his oil if he plans to act on his anti-American rhetoric (PINR). Currently, though, the US is very important to Venezuela’s economy. “The U.S. buys about two-thirds of Venezuela’s daily exports of 2 million barrels,” which works out to about 1.3 million-1.5 million b/day (Bodzin and Wang, Bloomberg). As of 2005, over 60% of Venezuela’s oil exports went to the United States and was the United States’ fourth-largest oil supplier (Bajpaee, Jamestown). Interestingly, however, “U.S. imports of Venezuelan oil fell by 11.7 percent to a five-year low in the first four months of the year” (IHT).

The US is Venezuela’s largest trading partner, and Venezuela is the US’s 9th largest trading partner in terms of imports in 2006 and 2007. Venezuela accounted for over 37,000 million in trade in 2006 and 39,000 million in trade in 2007. In 2008, partially due to oil’s price spike, trade was up 58.5% to 32,000 million by July 2008, according to the Industry Trade Association of the US Dept. of Commerce.

China’s purchases of 364,000 b/day from Venezuela is about 1/4th of US purchases. Currently the United States is more attractive for Venezuela to ship to because the US has refineries which can deal with heavy Venezuelan crude, and the United States is much closer and cost-effective for Venezuela to ship toward.

Chavez interestingly claims that “Venezuela won’t suspend crude exports to the U.S. on increased supplies to China” (Bloomberg). If both the Chinese and the Venezuelans make significant investments in developing Venezuela’s oil fields, this will be possible. In fact, “PDVSA hopes that Chinese oil companies [alone] will produce at least 400,000 barrels of crude a day in Venezuela by 2011.”

However, President Chavez’s highly socialist economic policies might cripple indigenous Venezuela PDVSA investment into oil field development and refining. Although Venezuela may intend a “win-win” situation, the reality might turn into a zero-sum game where Venezuela gradually decouples crude shipments away from the United States’ heavy oil refineries (which refine nearly a third of Venezuelan heavy crude), and directs them toward domestic and Chinese refineries.

It is important to note that with expected growth of only 200,000 additional barrels/day expected by 2012, Venezuela may redirect oil and further decouple its economy from the United States in order to meet its self-imposed ship-to-China obligations.

Last Words

As a result of its closer economic relationship with China, Venezuela appears to be purchasing political “cover.” The less its economy is dependent on America’s, Venezuela can more deeply pursue Chavez’s Bolivarian Revolution. It seems this deal mainly benefits Venezuela in its short term goals of independence from American economics.

In the long term, China gains a diplomatic ally, influence in South America, a guaranteed crude supply (because few countries can process Venezuela’s heavy crude), respect as an international economic leader, and gains expertise in heavy crude refining.

Otherwise Notable

* China and Venezuela political relations (until 2003) from China’s Consulate in New Zealand.

* China Daily’s China-Venezuela Special (July 5, 2008).

* Another EIA article on Venezuela, with information on refining capacity (October 2007).

* (Added October 12) Forbes looks at China-Chavez relations (Oct 1, 2008)

(*A) Also of note; “Between 2007 and 2018, we are forecasting an increase in Venezuelan oil production of 23.2%, with liquids volumes rising steadily from 2.72mn b/d to 3.35mn b/d.” Business Monitor International Report.