Part IV: Another $6.5b in loans: The frustrated Beijing-Caracas courtship

(Greetings! It’s good to be back blogging.)  The common perception is that Chinese oil companies in Venezuela are winning big deals on very favorable terms.  However, as I’ve stressed in previous posts, Beijing is actually very frustrated not to be getting the deals it expects for new Faja heavy oil fields, especially considering its big investments in the Bolivarian state.  More evidence continues to emerge.

From 21-23 November the “10th Meeting of the China-Venezuela High-Level Committee” took place in Caracas at the Hotel Gran Meliá, with something like 400 businesses and state representatives coming from China.   

One of the big issues being negotiated at the conference was The Chinese Fund, which has been staunchly advocated by Venezuela’s Executive Office … Rafael Ramírez, the Venezuelan Minister of Energy and Petroleum and president of Pdvsa, acknowledged Tuesday that they are negotiating an increase in the volume of crude used to pay back foreign currency financing from China. (El Universal)

As usual, the conference ended with President Chavez and the head of the Chinese delegation signing a deal for a big loan ($6.5b) and big development projects for Chinese firms, all to be paid back in oil.  $4.5 of this is going to oil-related projects.  Loans and projects like these are solely intended by Beijing to get its oil companies favored access to Faja heavy oil reserves.  But, what have Sinopec and CNPC actually gotten?

Is Sinopec happy?

Note that Sinopec didn’t get anyting from the Gran Meliá agreements.  Also, you might recall that I wrote in an earlier blog that, at the end of the summer, a Chinese NOC was offered a lucrative new Faja field.  This was Carabobo 2, offered to Sinopec at a time of Bolivarian attempts to improve relations with Beijing.  

However, it turns out that Carabobo 2 was not offered as a sole Chinese-PDVSA project, but for Sinopec to share with another foreign firm.  Moreover, for quite some time now, Sinopec had made it very clear that they are not going to endlessly negotiate if Bolivarian Venezuela does not significantly improve the contract terms it offers.  Nevertheless, the terms offered for Carabobo 2 didn’t budge from those that Sinopec had been complaining about for years.  Compared to the special consideration Beijing feels it should receive after years of extending huge loans and development projects, this was all quite unacceptable.  So, Sinopec rejected the offer.

But, what happened with Carabobo 2?  Interestingly, in October-November of this year, Carabobo 2 was awarded to the Russian firm Rosneft for $2.2b. 

With all the oil Russia has at home to develop, it is hard to believe Rosneft really intends to make the billions in investments it would require to develop this virgin field.  But, why did the Russians take it when Sinopec would not?  With any Russian deal in Venezuela, one has to ask what’s the arms aspect of the deal?  For example, I am told that the bonus money that was very publicly paid by Putin in Caracas at the signing of its Junin 6 field in 2010 went right back to Russia for repayment of outstanding state loans for arms purchases.  (Putin was very “generous” in his efforts to get the Junin 6 field: “‘Our partners have said they are ready to expand our partnership in the energy sector. If an agreement is reached, Russia will pay Venezuela an additional $1 billion bonus for oil field development,’  Putin said after talks with Venezuelan President Hugo Chavez.” Such theatrics.)  In any case, this points up a disadvantage China has vis-à-vis Russia. 

First-and-foremost, China needs contracts to actually produce Venezuelan reserves—part of its quest to acquire commodities throughout Latin America.  While, China can throw around a lot of cash and development projects to curry favor, selling major weapons systems to Venezuela is not a card Beijing can afford to play.  However, Russia has long experience from Cold War days playing such games in the USA’s backyard.  For the Russians, if they mess up, well, they have plenty of oil elsewhere, and, anyway, at least half of their aim in Venezuela is to simply to cause trouble by putting some geopolitical pressure on the US.  China doesn’t have that luxury.  For the Chinese, this would be a dangerous game to begin now. China really has to keep things calm in the neighborhood and actually produce lots of oil.

In any case, the outcome of this whole episode is that Sinopec still does not have a nice new Faja field to show for all its years of work in Venezuela … it was upstaged by Rosneft.  It is no wonder that Sinopec didn’t even bother sending any representatives from China for the November Gran Meliá conference.  Sinopec is clearly extremely unhappy with President Chavez and PDVSA.

Is CNPC happy?

Most of the $4.5 from the Gran Meliá meeting going to oil projects will go to the CNPC-PDVSA joint venture Petrosinovensa in the Carabobo region of the Faja

Certainly, this new investment will push production up for Petrosinovensa.  And this is all well and fine in that CNPC seriously wants to increase production and so does PDVSA.  But, Petrosinovensa is a field developed long ago, in the 1990s with old-PDVSA when Orimulsion was produced there.  Meanwhile, since 2010, CNPC has a contract in hand for a new Faja field, Junin 4.  Problem is, Junin 4  lacks any of the infrastructure that Petrosinovensa has.

The reality is that Junin 4—the only major, new heavy-oil field that either CNPC or Sinopec have received after all these years of China’s “special relationship” with President Chavez—is a kind of infrastructure black hole in the south of Guárico State with not even the most rudimentary support an oil company might need to work there.  Consider that, at a time when Venezuela struggles to keep old refineries on line and to keep the lights on everywhere from Maracaibo to Maturin, PDVSA has said it will somehow build a syncrude upgrader (i.e. a new refinery) in the aptly named town of Soledad, presently connected to the outside world by only a dirt road. 

CNPC does not believe the needed infrastructure is coming anytime soon.  So, CNPC has to be satisfied with pushing up production at a field it already developed years ago with old-PDVSA because, for now, that’s all that can be done.  CNPC is also not so happy with its situation.

It only adds insult to injury (from China’s point of view) that Minister Ramirez insisted to the media, after the November conference, that there is no longer any special below-market deal being given to China for the oil it gets in repayment for its loans.

China´s bottom line

Of course, China’s trade with Bolivarian Venezuela will continue to grow, right along with its loans and development projects.  

A few years ago, Chinese authorities told me the expectation was that  their Venezuelan investments would become the largest anywhere in the world.  Recently, a US investigative reporter told me his agency expects that is already the case.  While one should be careful, as many promised lines of credit to Bolivarian Venezuela have not yet actually been delivered, the point is, this is a lot of cash and a really big bet on the part of Beijing.

Getting paid in oil for loans has never been Beijing’s goal in Venezuela.  This is a consolation prize.  Beijing’s bottom line is to have its own national oil companies contract for major, new Faja oil production projects.  Yet, given Venezuela´s declining capacity with infrastructure, these projects are simply not on the visible horizon.  Meanwhile, China is perceived by many in the Venezuelan opposition and abroad as taking advantage of the country, something which will certainly be harmful to China’s long term interests.