Part II: Venezuelan heavy oil: China’s persistence is finally paying off

Major Chinese Faja heavy-oil-production contracts had not materialized till now. Why not?

(This is continued from Part I)    On the one hand, technical reasons would be given against closing deals with the Chinese. For example, it was thought by some in PDVSA that Chinese companies lacked the technology to efficiently implement the refineries needed to upgrade Venezuela‘s extra-heavy oil to a grade light enough to enable it to be accepted by foreign refineries. On this excuse, some top PDVSA executives had pressed Chinese firms to focus on making joint proposals together with, say, Total of France.  This was because Total had already proven the quality of its upgrader-refinery technology in one of the four proof-of-principle projects foreign companies had implemented during the previous government’s apertura period. (The apertura was the liberal “opening” of the oil sector to significantforeign financial and tech involvement in the late-1990′s and early 2000′s.  The Chavez administration later reversed this opening with its 2006 “migration to mixed enterprises” and a partial re-nationalizations of the four heavy-oil projects in the Faja developed by foreign companies.)

However,  insiders to these relations recently told me that such resistance among PDVSA managers to finalizing deals with the Chinese are often exacerbated by feelings of mistrust.  One explained: “Venezuelans (in the oil sector) dislike dealing with the Chinese.  They’re used to dealing with Americans. All the technology and equipment in the country came from Americans.  They know how to read the Americans; they don’t know how to read the Chinese and, so, they don’t trust them.”

In fact, I was told first-hand  and second-hand stories about cultural-based or even language-based misunderstandings that have occurred in the course of negotiations.  On occasion this has led to hot tempers between Chinese and PDVSA officials, until better translations or explanations were offered.

In general, when it comes to Venezuelan perceptions and trust of Chinese firms and managers (here I am mainly  talking about Venezuelan managers in PDVSA or working on joint projects such as railroads), it seems to be the case  that, although China obviously has a core of excellent engineers and English-speaking personnel available, people working with them have told me that Chinese NOC’s have not always sent their best personnel to Venezuela.  I am also told that Chinese turn-over, at the middle management level at least, is rather rapid .  This has contributed, legitimately, to a low opinion among PDVSA managers, and in other sectors, of ultimate Chinese capabilities.  However, whatever these managers formerly or even still feel about Chinese capabilities and intentions, the situation has changed in the past year as far as the door beginning to open to deepened Chinese participation, as I will explain later.

Of course, there are well-known reasons as to why contacts have not been signed for major Faja heavy-oil production projects with any foreign oil companies  during the Chavez years.  And, those that were signed, for the first time, in February 2010,  are only now poised to see actual work begin (more on this later).  What are these reasons?  For one thing, there have been long periods of time when President Chavez has been almost completely preoccupied -”laser focused” is how I have generally described it - with consolidation of political power and winning elections, often for several months at a time.  For example, this was the case from summer 2008 until the November 2008 regional elections, and then continuing into the follow-up referendum in February 2009 that granted Chavez the ability to run for president without term limits. But, President Chavez’ laser focus on consolidation of political power still did not end then; it continued right on into the last quarter of 2009.  During periods such as that one, the President routinely takes the most competent top leaders of PDVSA from their offices and puts them in charge of running local campaigns.  Indeed, during such periods no foreign company was  ever able to advance deals, although negotiations would be held during these times.  But, here I am looking at additional problems, specific to Chinese NOCs, that have held back their attempts to close deals with PDVSA.  Of course, the Chinese are known for their use of state-to-state deals and financial assistance to further their commercial interests.  Here too, things have not gone as expected.

Chinese consternation over state-to-state agreements that are supposed to give them an advantage but generally do not

Another problem particular to Chinese companies is a notion their executives tend to hold that once a state-to-state agreement has been made, everything should fall into place on the commercial front, almost automatically. In this regard, I have been repeatedly told that Chinese companies persist in misunderstanding that Venezuela does not run like China. In Venezuela, after the state agrees to a project, one still has to make people in upper management and in government bureaucracies happy, either because they simply do not agree with that the measures are in the national interests, or, because they will not proceed untill they receive some under-the-table largesse in return for their cooperation.

In general, after state-to-state decisions have been taken deciding that some commercial oil project or other commercial deals should be concluded, Chinese executives often felt that further constraints and demands emanating from PDVSA managers were outrageous. It’s not that corruption or bribery per se are considered outrageous by the Chinese side.  What gets their goat is the fact that, in Venezuela, state-to-state agreements do not seem to instill any particular sense of awe in the lower managerial and ministerial ranks which might make things happen.  Venezuelan PDVSA managers would still insistence, in the further negotiations, to have an explanations of the supposed benefits of the project to the interests of PDVSA and/or the nation, of Chinese ability to carry it out,  or, to rather subtly insist on some sort of payoffs to be made before anything at all could progress.

(Sometime I will talk about how these such payments are typically taken care of; about informal, parallel tracks that exist in Venezuela alongside any formal, official negotiations for new contracts and deals. There are individuals who specialize in arranging and providing these services, and, from the background, they acquire significant power to make or break any deal.  This is not something new to Bolivarian Venezuela, but its extent, by all accounts, is much more extensive than during prior governments.  In any case, the Chinese are at times not pleased that state-to-state agreements do  not absolve them from meeting the demands of this well-established informal apparatus of corruption.)

The resistance of Chinese management to get into details of payoffs after state-to-state agreements have been made are not the only way they miss the mark on how to get things done in Venezuela.  Chinese managers aer rather more understated (subtle, modest, …) in their approach to projects than other oil men that Venezuelan managers are accustomed to dealing with.  This approach by Chinese NOCs can quite literally put them off the radar of Venezuelan managers.

For example, it was very recently brought to my attention that a long-time member of the board of directors of PDVSA had remarked, rather modestly, that he did not recognize the name of one of the major Chinese oil companies. Yet, this is a company that had been active in the country, working and seeking new contracts, for many years! This of course also says something about top Venezuelan managers, but, it also shows that Chinese NOC executives simply do not know how business needs to be done to get the attention and/or confidence of Venezuelan officials.

Again, I am concerned that readers may think I am giving PDVSA a pass by focusing here on problems peculiar to Chinese personnel in doing business in Venezuela.  So, I will point out that, of course, PDVSA’s low technical and managerial level (competence)  is  to blame for the general atmosphere of delays in negotiations and project roadblocks faced across the board by any and all foreign oil companies.   The origins of Bolivarian-PDVSA’s technical-managerial incapacity was the dismissal of about half of PDVSA’s workforce, especially professionals, after the 2003 anti-government strike.  As a direct result of this, PDVSA negotiation teams simply lack the competence to figure the consequences of the provisions being offered and counter-offered from one day to the next.  As the vice-president of a major service company told me, who has long dealt with PDVSA, they simply cannot go home in the evening and, with confidence, do the spreadsheets to see where things are going or rapidly figure out how engineering plans might have to be changed.  Furthermore, he explained, the managerial disarray and lack of capacity in PDVSA in recent years also makes for an overly hierarchical chain of command.  Indeed, modernization of managerial structure towards a more horizontal, autonomous-unit organization-and-decisions model, was a task which old PDVSA had only begun to address, but which, since the 2003 strike and mass firings, has now dramatically worsened.  This is why PDVSA suffers from over-reliance on the personal authority of leading individuals as verses formal procedures and team work.  All this deeply affects negotiations with any company, and especially over Faja projects which have complex regional overlaps with one another.  So, all the problems I am speaking of here that are specific to PDVSA-Chinese dealings are superimposed on these larger, general problems  any company, foreign or domestic, has in dealing with PDVSA.

Some problems specific to the diplomatic front in Chinese-Venezuelan relations that have retarded Chinese progress in the country

If the Chinese are upset that state-to-state decisions do not sufficiently instill responses on the commercial front, there are also a couple striking problems within the diplomatic front itself.  By all accounts, state-to-state agreements with Bolivarian Caracas are taken quite seriously by the Chinese. However, these agreements result in “nothing being done by the Venezuelans.”  A Venezuelan foreign service technocrat, who has been privy to many of the diplomatic encounters with Chinese representatives during the Chavez years, recently very honestly and simply told me this, and then elaborated on the assertion in detail.

This failure to carry through on agreements (the necessity to always “cumplir” with promises made, which the president often stresses on television) greatly frustrates the Chinese, of course.  Beijing has step-wise lost respect for the Bolivarian state and its leadership.  They have come to view President Chavez, as far back as 2006-07, as “not a serious person” as one of his own former ambassadors who had direct dealings with China at various times was not reticent to tell me.  Whenever this attitude started, it especially advanced after the big agreements signed in Beijing in December 2007 with President Chavez, and about which the Chinese seemed particularly excited, led to naught.  (Then there is the story about President Chavez arriving on Navidad/Christmas in Beijing to celebrate with Venezuelan foods, after the Chinese side had made clear that there was no basis for another visit, so soon after signing an MOU and nothing yet having been accomplished, and so had suggested Christmas, thinking this would dissuade him from arriving.  While this story is rather well-known, I give it credibility as it came to me from Venezuelan diplomatic personnel who were involved in the particular visit.)   

Another issue on the diplomatic front is that, unlike Venezuelan relations with other Latin American states, where President Chavez gets personally involved in the negotiations with other presidents, in the case of China, except for perhaps when he himself goes to Beijing, Chavez does not attend such meetings, for reasons of protocol.  The lead person of the Chinese delegation in Venezuela is never of sufficient rank. Meanwhile, it is precisely this sort of personal, president-to-president involvement, for which Chavez is well-known, that is said to have often saved agreements with other Latin American states.  This personal involvement  is particularly important in Bolivarian Venezuela where the state bureaucracy and PDVSA are in organizational disarray.  But, such measures are not possible with the Chinese.  For example, President Chavez often only briefly comes to sign an agreements in Caracas with the Chinese, makes his public comments and then leaves the room, with the Chinese representatives left to speak with lower-ranked personnel. 

I should add that, quite independently of the explanations here about Chavez not becoming personally involved because the Chinese don’t send high enough ranked persons, which has come to me from the Venezuelan side, I have also been told independently by someone on the Chinese side that they in fact have made a general point of avoiding sending their highest-ranking persons to Venezuela (so as not to provoke the North Americans – more of this anon).

All in all,  the inability and capriciousness of the Venezuelan state and PDVSA to “cumplir” with MOU’s and other state-to-state agreements with China contributed to a Chinese loss of respect for the competence and reliability of the Bolivarian state and President Chavez. 

After many useless agreements and giving the Venezuelan state considerable amounts of money over the last four years,  the expected commercial contracts for Venezuelan oil still were not forthcoming.  Chinese patience was clearly worn thin.  But, China cannot give up on Venezuela.  There is simply no other place in the world with so much untapped oil, and also a chance for special access. 

The limit, however, for Beijing’s patience finally seems to have arrived around March 2010, and especially by the end of 2010, as the Chinese continued to observe the complete lack of Bolivarian Venezuela’s transparency in spending Chinese money.  This has been a very crucial factor in finally really seriously changing China’s attitudes towards Venezuela in the past year.  They had already been making demands on President Chavez to change his behavior vis-a-vis things he does that tend to provoke the Americans, but now they wanted to also know what had happened to all their money.  Much more specific demands – for transparency and accountability, as well as access to oil contracts – were then placed on Caracas.  With this, Chinese fortunes and participation in the Venezuelan oil sector finally seem to be on a trajectory towards palpable improvement in the last several months. 

In addition, in the same time-frame, the panoply of Venezuelan crises made the Bolivarian government also more interested in getting Chinese NOCs involved in getting things done Venezuela – including producing new oil fields in the Faja.  To wit:

First, President Chavez’ new imperative to increase oil production has begun to enhance the Chinese role in Venezuela

To be continued …

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