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

In my travels and interviews in Venezuela this summer, it became clear that there has been a major advance in the relationship between China and the Bolivarian administration of President Chavez.  China’s dogged persistence and large state-sponsored investments in Venezuela – apparently the largest they’ve made to date in any country – are finally beginning to bear fruit.  The new Chinese influence is being simultaneously extended to both oil and non-oil sectors. 

Partly this development is due to the many crises affecting the Bolivarian state, and decisions it has been forced to take to make increasing national oil production a priority.  To advance this program, President Chavez’ administration has made initial moves to grant Beijing access to Venezuelan oil in major ways it had not previously. 

However, there are two sides to this story: on the other side, increasing Chinese participation is also a product of China having step-by-step put some quite sharp demands on PDVSA and the Venezuelan Bolivarian state for financial transparency and accountability, for geopolitical stabilization, and in particular, for Chinese firms being granted large-scale access to new heavy-oil fields in the Faja of the Orinoco River.  The key ingredient here is that China has slowly accumulated significant leverage though its protracted financial assistance to the Bolivarian state.   If China’s demands are not met, further promised Chinese state-to-state financing, desperately needed by President Chavez, simply will not be delivered.

The hour of gathering Bolivarian crises

Clearly, a major reason for new Chinese inroads at this particular moment in time, after so many years and so much money having already been expended in their efforts to gain significant Faja heavy oil contracts, is the general decline of competence of the Venezuelan state under Chavista management.

From Maracaibo to Caracas to Monagas, there is a heavy, palpable sense of across-the-board failures in Bolivarian social and economic programs, programs which were supposed to improve the lives of the people and to enhance national sovereignty.  A striking feature during my discussions in July and August in Venezuela was that even well-placed Chavistas now often admit, with a sense of resignation, that most programs the president has championed have not really worked, and that his latest programs (to build housing, to improve electricity service, etc.) won’t succeed either. 

In this situation, the Chavez administration is now constrained to turn more to China to provide assistance in two key areas in hopes of saving the Bolivarian process.  If the process does not soon collapse, and if a seriously ailing President Chavez can achieve re-election in September 2012, China will likely have placed itself by then in a position of significantly increased influence in Venezuela.  Most of this influence, involving legal, contractual and financial accords, could not be quickly or easily reversed by any new opposition-led government.  What are these areas of influence? 

Two main aspects to Chinese participation/involvement in Venezuela:

  • First: Gaining preferential, large-scale access to Venezuela’s vast untapped heavy-oil reserves. There simply is no other country anywhere that offers China entry into an oil patch of such spectacular size.
  • Second: Providing Chinese state-to-state financing, managerial and technical assistance, and development projects in civil infrastructure, agriculture and non-oil industries.

Before going on, I want to make it absolutely clear that nothing whatsoever in the second aspect of Chinese participation in Venezuela takes place as an end-in-itself.  That is, Beijing has absolutely no requirement or expectation to directly make profit on this second aspect.   Though it would be a welcomed bonus to do so. These investments are solely intended to “provide access to oil,” in particular to the vast, untapped Faja of the Orinoco River‘s extra-heavy oil reserves that have recently boosted Venezuela’s proven reserves above those of Saudi Arabia’s.

I have been very directly told by Chinese diplomats outside Venezuela, as well as Chinese oil executives and engineers inside Venezuela that the sole intention behind Chinese participation in any non-oil sector is merely to gain access to oil. Jokes are made about the absurdity of “making a profit” by “building railroads” or “developing agriculture” in Venezuela. This is all purely for “access to oil.”

So, how have Chin’s stars finally begun to rise in Venezuela? And, why do I say “finally“?

Contrary to the superficial vision from afar of long-time major access by China to Venezuelan oil, in fact, over the past eleven-to-twelve years, its much publicized largess in grants and loans most definitely had NOT resulted in the sort of major oil production contracts China was seeking. The commercial results have been nowhere near what one would expect. In my experience, and that of colleagues or contacts actively involved in the Venezuelan oil sector throughout the Chavista years, Chinese national oil company executives have quite consistently expressed consternation at their inability to close on the big deals they had expected President Chavez to bestow on their companies. In fact, over the past few years one could just as often find Chinese executives, in private at least, expressing indignation at being again and again being let down by PDVSA upper management or the Bolivarian state.

Many times Chinese executives had every reason to believe they were on the verge of winning large-scale contracts in the Faja heavy-oil region following months of careful company-to-company negotiations and state-to-state agreements being signed. But, every time, major deals failed to materialize.  Some deals that were much trumpeted in the Venezuelan press were actually last-minute face-saving deals to hide the utter failure, again, to reach a deal on a new field in the Junin or Carabobo blocks of the Faja.  

Such was the case with a deal for a Chinese company to exploit a mature field, signed during a visit by a Chinese vice-president to Caracas in April 2009, [] when the long-expected Faja deal that was supposed to be signed at this occasion failed to materialize.

Within PDVSA there had been particular resistance over the years to making deals with Chinese national oil companies (NOC).  This remained the case even though PDVSA president and energy minister Rafael Ramirez indicated in late-2008 his complete approval that specific large-scale joint production projects with Chinese NOC should go forward in the Faja.

But, China is now finally being seen by the Bolivarian state in PDVSA as more trustworthy and capable of delivering on the deals it has so persistently offered to implement for heavy-oil development.  Why is this now so?  But, first, why was it not so earlier?

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

… to be continued.

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3 responses to “Part I: Venezuelan heavy oil: China’s persistence is finally paying off

  1. Pingback: Part II: Venezuelan heavy oil: China’s persistence is finally paying off | The Global Barrel

  2. Pingback: Setty recommends: The Global Barrel | Setty's notebook

  3. Pingback: Venezuela Receives Support, China Consolidates Interests - Venezuelan Politics and Human Rights

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