China Business entrevista

Dec 2, 2006

Oil lubricates Beijing-Caracas relations
By Jose Orozco

CARACAS - As its trade with Venezuela increases, China's political influence in the Latin American country also grows, which may well serve both countries' interests.

Venezuelan President Hugo Chavez' visit to China this August accomplished two goals, the signing of oil and infrastructure agreements as well as getting China to support Venezuela in its bid for a United Nations Security Council seat. Although Venezuela lost that bid, Chavez' visit showed the United States

that geopolitics and trade go hand in hand in the China-Venezuela "strategic alliance".

Attracted by China's investment power, many Latin American countries are seeking closer trade ties with China, which in turn seeks raw materials and new markets in which to flex its muscles. China's trade with Latin America increased fivefold from 1994 to 2004, reaching an annual US$40 billion. A recent local news story estimated that Venezuela-China trade, having reached $2.1 billion in 2005, would hit $4 billion this year.

Yet the US remains Venezuela's No 1 trade partner, purchasing 60% of Venezuelan oil exports. Trade with the US reached $40 billion last year, $34 billion of which was Venezuelan exports and overwhelmingly oil-based, according to the US State Department website. Venezuela wants to break that dependence and diversify its oil customers.

But the strategic alliance with China isn't merely an economic venture. Tension has marked relations between the US and Venezuela since Washington backed a 2002 coup against Chavez that unseated him for 48 hours.

Chavez has called US President George W Bush "the devil" and the US a threat to humanity.

Since taking office in 1998, Chavez has visited China four times. China already works with Petroleos de Venezuela SA (PDVSA), the state oil company, on the Intercampo Norte and Caracoles fields and has signed agreements to operate jointly the Zumano block's mature oilfields as well as the Orinoco Belt's Junin block. Venezuela exports about 150,000 barrels per day to China, but Chavez has promised to increase that number to 1 million in 10 years.

"The oil issue is of utmost importance because we are diversifying the petroleum business," said Chavez on his recent visit to China. "It's one step more in a strategic alliance." But analysts see China as being more strategic for Venezuela's geopolitical ambitions than the other way around.

"The use of the term suggests a magnitude that isn't present," said Mazhar Al-Shereidah, an oil-economics professor at the Central University of Venezuela in Caracas. "It's a political understanding, but not a political alliance."

Many analysts argue that Chavez wants to help China's ascent to power, while China takes a pragmatic and business-minded approach to its dealings with Venezuela. While diversifying its oil-customer base is a smart move, say experts, politics has led Venezuela to diversify toward less profitable customers, hurting its bottom line.

Through PetroCaribe and other agreements, Venezuela provides oil at significant discounts. The Chavez government claims these oil deals strengthen regional integration efforts, while critics say Chavez is trying to buy support for his anti-US struggle. Venezuela assumes the high transportation costs on its oil shipments to China, for instance, so eager is it to become friends with China, say analysts.

Chavez has repeatedly threatened to cease oil shipments to the United States if it intervenes in Venezuelan affairs, suggesting he would like to divert oil to China, squeezing the US. But analysts say diverting those 1.5 million barrels per day to China faces significant obstacles.

"The biggest obstacle is China's inability to refine Venezuela's high-sulfur crude," explained Patrick Esteruelas, Latin America analyst for Eurasia Group in New York. "Although China is building additional refining capacity, it's mainly for heavy crudes from the Persian Gulf, which have much lower sulfur content. This leaves little room for Venezuelan crude."

By contrast, the US states on the Gulf of Mexico coast have refineries ideally set up to refine Venezuela's heavy crude, along with being just a four- or five-day trip away.

Oil shipments to China take more than 40 days from Venezuela. A proposed pipeline through Colombia to the Pacific would cut transportation time to about 25 days, bringing Venezuela and China closer. Yet the pipeline project isn't going anywhere right now.

While oil grabs all the attention, Venezuela is keen on obtaining Chinese technology. The August agreements included Venezuelan purchases of Chinese tankers and oil-drilling rigs. There are plans for China to help Venezuela manufacture its own drilling rigs at home.

"The Chinese developed their own technology without copying foreign models," said Al-Shereidah. "That attracts a country that doesn't want to imitate."

For Saul Ortega, a pro-Chavez deputy and president of the legislature's Foreign Affairs Commission, "Chinese technology is very important."

The key to Venezuela's Chinese ambitions, argues Esteruelas, lies in boosting investment, and with it, production. Although Venezuela claims to produce 3.3 million barrels per day, most industry experts estimate production at about 2.6 million. They attribute much of the flagging production to the traumatic loss of half of PDVSA's workforce at the turn of 2003. Chavez fired them for taking part in an oil strike aiming to oust him from power.

Although PDVSA plans to produce 5.8 million barrels per day by 2012, the new Orinoco Belt projects won't produce oil until 2008 or so and profits that could support new exploration and production have instead been used to pay for social programs. These programs meet urgent social needs, but the country's long-term economic health depends on heavy investment of its own.

Before Venezuela can dream of diverting oil away from the US, it needs to get its house in order, said Esteruelas. "With their production woes, there's no way they can send significant volumes of oil to China," he said.

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