Chavez’ Billion-Dollar Snub of US
Sunday, October 07 2007 @ 10:43 PM UTC
Contributed by: Don Winner
No matter that Chinese markets are 30 days away from Venezuela by tanker, compared with five to six days for US Gulf ports. The cost of transporting crude to China will shave several dollars per barrel from Venezuela’s take, analysts say.
“Chavez would clearly have to lower the price of the crude,“ says Lucian Pugliaresi, who heads the Washington-based Energy Policy Research Foundation. “He would have to offer a discount of between $5 and $10 a barrel.“
If that’s the case, the cost to Venezuela could hit $5 million to $10 million a day in lost profits, or as much as $3.7 billion a year. Still, that may be a price Chavez is willing to pay since a long-term supply and refining agreement would boost Venezuela’s toehold in the world’s fastest growing energy market. China is now the world’s second-largest oil importer, trailing only the US. Any long-term pact would also allow Chavez to lessen his dependence on the US market.
“From the Chinese perspective, they see a man in Venezuela who hates the US and is willing to do things that don’t make economic sense,“ says Jim Williams, who heads the London, Arkansas-based WTRG oil consultancy firm. “So, they think, why not take advantage of this situation.“
Chavez has made no secret of his desire to lessen his country’s dependence on the US, which he has repeatedly accused of seeking to overthrow his government, including backing an abortive 2002 coup attempt.
Despite the rhetoric, the US still takes about two-thirds of Venezuela’s daily oil exports of about two million barrels. Venezuela supplies about 10 percent of US oil imports and ranks among Washington’s five largest suppliers.
But that is changing. Deliveries to the US have fallen in the face of rising domestic consumption and as Chavez has sought to open new markets, especially in Asia, and to a lesser degree the Caribbean and South America. Venezuelan oil shipments to the US fell 9 percent from 2004 to 2006 to about 1.42 million barrels a day, and are down an additional 8 percent for the first six months of this year, according to statistics from the US Department of Energy.
During the same period, Venezuelan oil exports to China have soared tenfold from 14,900 barrels a day in 2004 to more than 150,000 barrels today. And if Chavez has his way, that number could more than triple by 2010.
Despite the rhetoric, Venezuela supplies about 10 percent of US oil imports and ranks among Washington's five largest suppliers.
Given falling Venezuelan oil production, any increase in exports to China, India or other Asian markets would come at the expense of the US, analysts say.
Although Chavez says that his country’s oil output will rise to 5.8 million barrels a day by 2012, few believe him given problems at the state oil company Petroleos de Venezuela, which has seen its investment funds diverted to the President’s social programs.
Closer energy ties with China come with a cost, analysts say. To make any agreement more feasible, Venezuela would need to find a Pacific outlet for its crude, either by using an existing pipeline in Panama, or building a new one in Colombia, to avoid shipping its oil around the tip of South America, analysts say.
And secondly, China’s existing refineries can’t process Venezuelan heavy crude, which is high in sulfur and metals. That has forced Chavez to send China fuel oil or other finished products so far.
“Building new refineries in China is essential if Venezuela hopes to boost exports there,“ says Williams.
A Petroleos de Venezuela (PDVSA) spokesman said talks about the refineries continue but gave no details.
Unlike their publicly traded brethren, the Chinese have stayed. China National Petroleum Corp. (CNPC) operates several oil fields in a joint venture with PDVSA, and is also involved in certifying reserves in one heavy oil block.
PDVSA is also buying drilling rigs and oil tankers from China, in addition to creating a joint venture shipping company.
However CNPC has also had its share of problems with PDVSA, including a project to produce a boiler fuel that was unilaterally terminated by Venezuela.
“Chinese national oil companies have faced the same challenges operating in joint ventures with PDVSA as private international companies,“ says one Western oil executive. “The advantage given to the Chinese has been access to new opportunities.“
It remains to be seen whether CNPC and other Chinese companies will be able to find sufficient capital for the Venezuelan joint ventures. The Chinese have scant experience in heavy oil ventures, an obstacle they are trying to remedy by investing in Canadian oil sands.
Venezuela’s four existing heavy oil ventures, which were taken over by the government earlier this year, were put together by international oil majors.
Nonetheless, long-term political goals may trump existing obstacles and current economic considerations, says Julian Lee, an analyst at the London-based Center for Global Strategy. “There is an element on both sides seeing this as a strategic guarantee,“ he says. “The Chinese are scouring the globe, seeking to lock up energy resources, and the Venezuelans, under their present leadership, are seeking to diversify from the North American market.“