China has remained a rock solid supporter of Venezuela’s PDVSA, despite the company’s late oil shipments. The well of patience may run out sooner rather than later, writes Helen Castell
What: China has agreed to pump another US$2.7 billion into joint energy and other infrastructure projects with Venezuela.
Why: The Latin American country’s finances are in tatters and it needs all the funding it can secure.
What next: China is unwilling to pull the plug on financing now for fear of a popular backlash against its presence should the opposition win next year’s presidential elections.
News last week that China and Venezuela had signed a string of agreements that will see China pump US$2.7 billion into joint energy and other infrastructure projects jarred at first sight with earlier reports that the Latin American country’s state oil company owes Chinese firms millions of dollars’ worth of oil. While Beijing has its reasons for being lenient with its indebted ally, its patience must have a limit.
Among the 22 agreements, which the two sides said were aimed at promoting economic development and co-operation, Beijing and Caracas agreed to develop a 400,000 bpd refinery jointly in Jianyang, China. Venezuela’s PDVSA will take a 40% stake in the project, which will source 70% of its crude feedstock from Venezuela, while China National Petroleum Corp. (CNPC) will have a 60% share.
The China-Venezuela Joint Commission also said it was reviewing an expansion of the Puerto La Cruz refinery in Venezuela’s northeastern Anzoategui State. The plant has a current capacity of 129,000 bpd.
It is difficult to imagine, however, how PDVSA will hold up its end of any agreement, given the company’s – and Venezuela’s – reportedly perilous financial state.
PDVSA is already months behind on crude and fuel shipments it owes to China and Russia under oil-for-loan deals, internal company documents seen by Reuters suggested earlier this month. Chinese officials arrived in Venezuela on February 12 on a fact-finding mission related to the issue.
As of the end of January, the state oil company had failed to deliver almost 10 million barrels of refined products it owes to state-run Chinese and Russian firms, mostly because of dramatically declining oil production in Venezuela but also because of a string of problems ranging from unpaid docking fees to ageing ships. Some of the oil product shipments were supposed to be delivered as much as 10 months previously.
The company has also failed to deliver on schedule another 3.2 million barrels of crude outstanding to CNPC. The delayed shipments are reportedly worth around US$750 million in total.
It was also reported in January that more than 4 million barrels of Venezuelan crude and oil products were stranded in tankers in the Caribbean because PDVSA could not afford to pay for port inspections or to clean dirty tankers.
China has lent tens of billions of dollars to Venezuela, most of it via oil-for-loan deals that fund major infrastructure projects in the country.
An outright debt default by PDVSA – which has seen its oil production decline in each of the past four years, now to a 32-year low – looks “probable”, credit rating agency Fitch warned on January 31.
In December 2016, PDVSA’s production was down 45,000 bpd from the previous month. This is catastrophic for the Latin American economy and state coffers, given that the country relies on crude for more than 95% of its exports.
But Beijing has so far proved remarkably patient with PDVSA and with Venezuela, which counts China as its second biggest trading partner after the US.
Since becoming in 2001 the first Hispanic country to enter into a “strategic development partnership” with China – a relationship that progressed to “comprehensive strategic partnership” in 2014 – Venezuela has borrowed around US$60 billion from its Asian ally.
Venezuela’s huge oil reserves make its attraction to energy-hungry China easy to understand. It goes deeper than that, though. Another major benefit for Beijing from the relationship has been preferential access for Chinese companies to Venezuela’s domestic market. Venezuela’s imports from China surged to a value of US$5.7 billion in 2014 from less than US$100 million in 1999.
The two countries also share a similar world view, although more so during the days when socialist Venezuela was run by the late President Hugo Chavez, who was passionate about national sovereignty and suspicious of the US.
Venezuela’s oil wealth – and clout among Central American and Caribbean states that benefited from subsidised oil supplies – has also historically made it a useful ally in the region for China, which has invested heavily in Latin America. But now that low oil prices have left Venezuela decidedly weaker, the country’s usefulness as an unofficial champion of Chinese interests at regional bodies may start to decline.
Beijing is under pressure to keep its popularity up in Venezuela, especially at a time when opposition politicians in the country are increasingly critical of Beijing, and given the state of the economy appear to have a decent chance of toppling current President Nicolas Maduro in 2018’s election.
Some opposition lawmakers have argued that any international credit agreements whose terms were not approved by Venezuela’s National Assembly are effectively worthless. Such is the case with agreements governing much of the money China has lent to Venezuela. And if China were to fall out with a new government in Venezuela, its companies could find themselves barred from participating in lucrative infrastructure projects there.
A strong Venezuela is clearly in China’s interests, and giving PDVSA a breather while investing in projects that could help improve oil production in the Latin American country makes sense. Without a decent – and fairly speedy – recovery in oil prices, however, Venezuela’s strategic importance to China will start to decline, as will Beijing’s willingness to bankroll future energy projects.