[Updated/edited 5 June] The New York Times had an interesting article: “China is reaping biggest benefits of Iraqi oil boom” on June 2, 2013. The question that comes to mind is …
Why is Chinese production in Iraq booming, and in Venezuela lagging?
As late as 2007 and 2008, China clearly intended its investments in Venezuela to be its largest anywhere, to ramp up development of Venezuela’s huge Faja Orinoco extra-heavy oil reserves. In those years, Iraq was still mired in sectarian war. Yet, here we are in 2013, with Chinese production in Iraq surging and its companies’ production in Venezuela lagging. Why? Let’s first look at the Chinese relationship and logic in Iraq, then in Venezuela.
Geostrategic interests behind profit issue
The NYT article says that Chinese success in Iraq is largely because their oil companies aren’t especially interested in profits because they don’t have to answer to investors demanding higher returns; they just want to secure oil to bring home.
Yes, but one should see that this is also strongly a geostrategic imperative for Beijing. It is true Chinese firms can get along with lower profits, and they also have much more cash than others, which also helps them get in now at small profits for the long run. However, unlike other firms, they are under specific instructions by Beijing to persist at getting into countries with huge reserves like Iraq and Venezuela because it is in the geostrategic energy interests of Beijing to do so.
Chinese geostrategic motivations to stick in Iraq (and Venezuela)
Before examining the better situation, on the ground, for Chinese firms dealing with Baghdad as verses Caracas, it is important to recognize Beijing won’t ever give up on either state. Beijing is the one power having serious reservations about too much reliance on the US/Saudi-dominated “global barrel” market-and-security system. It is the only major power (aside from Russia) with aspirations to project power against the USA and its naval carrier fleets, at least in its near-home waters. For any such confrontation of any duration, it needs to have a certain significant percentage of oil brought directly home independent of the USA and the global market the USA dominates. So, China’s energy firms tend to blend their deepening integration into global oil-market processes with old-fashioned bi-lateral mercantilist relationships with producing states like Iraq and Venezuela. (See also the Addenda below.)
Different contractual and working relationships in Iraq and Venezuela
Chinese firms are clearly more willing to work with the difficult resource-nationalistic conditions imposed by the Iraqi and Venezuelan states. However, in many ways Iraq’s are more difficult, yet Chinese–and many others–do better getting production going in Iraqi than Venezuela. Why?Iraq mostly limits foreign firms to service contracts, making it difficult for them to book assets – again here Chinese goals are different from the private majors who need to book reserves. In contrast, Bolivarian Venezuela’s conditions seem much less nationalistic, allowing foreign firms (at least de facto) to book reserves, with up to 40% participation in oil projects. Although contractually more restrictive, the Iraqi’s conceptually simple service contract mileu may actually allow Chinese (and other firms) to better advance on the ground than in Venezuela with its more complex, partnering relationship.
This is not just more complex negotiations and contracting processes; the fact that Venezuela has such a weakened managerial and technical capacity, ever since the failed oil strike of 2002 against Hugo Chavez’ presidency, also makes closely coordinated partnering difficult. In contrast to PDVSA’s chaotic managerial situation, as soon as foreign firms began returning to Iraq, many remarked at the competence and humility of Iraqi engineers and managers–who had maintained Iraqi production through years of sanctions–relative to working with national oil company personnel in most other states in the Gulf Region.
Note too, in spite of strict terms on contracts, the Chinese have been allowed to bring significant numbers of Chinese workers to Iraq, which is something that would be impossible on the same level in Venezuela and most of Latin America where it would provoke significant and justified local worker opposition. Although Iraqi unions were quite active, especially around Basara and some other regions during the US occupation in defending workers’ interests, Chinese firms now seem to de facto have a freer hand on the ground in Iraq than in Venezuela.
Venezuela has long insisted, since before nationalization in 1976, on using its own workers and engineers, and generally, as today, being the operator of its fields. These are of course laudable aspirations. However, Venezuela’s Bolivarian PDVSA has chronically failed to competently use its domestic labor force and to re-build the managerial and technical capacity destroyed in the 2002 oil strike. In this situation, Venezuela’s more stringent limitations on labor and against foreign operation of projects, unfortunately, only means that little progress is made whenever money is invested.
Chinese goals are no different in Iraq from in Venezuela
There is no reason to think that the goals and motivations of Chinese companies and the Chinese state in Iraq are significantly different from those it has vis-a-vis Venezuela. So, why else might Chinese companies show significant production growth in, of all places, Iraq but not in Venezuela?
One may be as simple as infrastructure-in-place in Iraq that is not in place in the remote Venezuelan Faja. Iraq, even with the devastation of the US invasion and war, has infrastructure it could restore.
So too, Iraqi contracts have been bid on in competitive rounds. However, in Venezuela, under Hugo Chavez, while there was a Faja bidding round, a process of parallel, bi-lateral negotiations has also been ongoing, where negotiations for Chinese and others generally drag on interminably and non-transparently.
So, perhaps the explanation for China’s Venezuelan-production decline while China’s Iraq production has increased is not so much Venezuela’s resource-nationalistic high state-take as much as differences in the way PDVSA projects are mismanaged and investments tend not to find their way to projects, as well as due to infrastructure limitations and (understandable) limitations on large-scale importation of Chinese workers.
Venezuela loses out to Iraq
A few years ago, I gave some talks in Venezuela warning against then-prevalent notions there of “peak oil”. I maintained that Iraqi oil is very cheap to develop and plentiful, and Iraq’s return to the market could sink future investments in Venezuela’s much more expensive-to-develop Faj. If PDVSA didn’t get projects going before Iraq came back online, Venezuela could miss out. I even quoted Venezuela’s founding-father-of-OPEC, Dr. Perez Alfonso, who said that one of the main reasons Venezuela needed to be in OPEC together with the Middle East countries is that otherwise it could not compete against their vast, and much-cheaper-to-develop oil that could flood the market.
A Chinese official, about the same time, remarked to me: “Don’t worry, there is plenty of oil coming online in Iraq and Angola, and there we don’t have to deal with that man.” (i.e. Hugo Chavez). Now, here we are in 2012; Iraq is booming and Venezuela is in a yet-deeper production crisis.
China won’t give up on Venezuela in the long run, especially considering their energy geostrategy. But they are not going to throw away their money anymore, like they effectively did in the early days of the relationship with Caracas, and for which they feel they have gotten too few opportunities for their companies to produce Venezuelan oil.
ADDENDA: The non-issue of Chinese companies out-competing US companies in Iraq. Correctly understanding US oil motivations for the Iraq invasion.
When China’s success in Iraq has been discussed in the energy-sector and international affairs circles, the focus has mainly been to show that in a market-centered oil system (what this blog calls the “Global Barrel”) the fact that Chinese companies are getting the lion’s share of new Iraqi production is no threat to the USA’s energy security.
What should be added is that Chinese success in Iraq also does not mean that Washington’s oil-based motivations for its painful and mostly incompetently persecuted war to remove Saddam Hussein were geostrategically “unsuccessful.”
The oil motivations of the US (and Britain and other allies) in invading Iraq were never “colonial” or “mercantile” in nature. The idea was never to “grab” Iraqi oil and “give it to US oil companies.” That was the logic of the late-19th and early-20th century oil geopolitics. Today, when most oil circulates through a relatively unified world market traded in US dollars, maintaining confidence in an open oil market is key. All the old conflicts between consuming powers, all the geopolitical competing for “concessions” managed by private majors, are nowadays avoided by a collective market-centered security system.
The USA has set itself up as the protector of this global market-and-security system. Saddam Hussein was a threat to this market system, especially after he had seized Kuwait and threatened Saudi Arabia in 1991. It was fundamentally to protect this MARKET, and the global-energy pax-Americana based on this market—and NOT for a neo-colonial oil grab for its own multinational oil companies–that the USA preemptively removed Saddam (and did so, by the way, in the most inhumane and incompetent manner imaginable for the Iraqi people).
So, the fact that Chinese, or for that matter French or Russian oil companies might do well in Iraq, with US companies falling into second or third place, is not a fundamental problem for the USA.
two obstacles faced by foreign investors in Venezuela ( not just chinese) partnering with Pdvsa is (i) Pdvsa’s insistence that it operate the fields with its own people and managers which because these are so incompetent means things never get done the right way and (ii) because of the regimes control foreign currency profit repatriations , these investors are seldom if ever allowed to repatriate whatever profits they make on their investments (given Venezuelas surfeit of foreign currency income vs its many local commitments and obligations). Also not helping any is the chaos of working in Venezuelas climate of uncertainty and tax and regulatory overkill. !! Pdvsa is now very short of money having to depend on BVC handouts to simply continue with its overload of government imposed tasks . I understand however that they are in such fix now that they are really trying to find new creative ways of getting private investors to put up the money and operating support to maintain or increase production using future oil deliveries to guarantee future repayments. Dont know how far this will go but they are doing things that under a living Chavez they never dared do in the past.!!
Yes, I think you make two good points. Your second point, the difficulty to repatriate profits something that smaller foreign investors or potential investors from the USA have made to me as well. I should not forget to emphasize this point.
Also, I find interesting your final point, that you understand PDVSA is making new efforts to reach out to private investors – I assume here you are referring to the domestic Venezuelan private sector? What I have seen is all his meetings with the Venezuelan private sector in the last few months. Do you see much effect yet of the meetings Ramirez held with the private sector across the country, making plans for different companies to begin supplying specific services and supplies? (It sounds like you are working in the oil sector in Venezuela?)
I am lately particularly noticing a lot of efforts to get enhanced oil recovery projects going at MATURE FIELDS. This seems to be a PDVSA emphasis now, for getting production up in the short-term. For example, there are efforts with a new pipeline last year, and involving now the private sector around Lake Maracaibo. What do you see of this?
One very quick note: My general understanding of Iraq’s internal politics is that it’s a fairly fragile internal peace, whatever the regime’s definition of internal peace is. There are a great deal of people who are pretty upset with the status quo there, but who are exhausted and demoralized. As such, I think Venezuela’s long term stability is probably superior to Iraq. Libya-like situations, I think, is all too possible, where strikes and protests in one part of the oil infrastructure bottlenecks the rest. Venezuela’s regime is simply far more accountable to its public (it has to be) than Iraq, and this, along with the usual crazy corruption and oil strike damage, makes it difficult to work with. That public accountability is probably valuable when rough patches happen. Maliki, like Karzai, has no credibility aside from foreigners with vested interest in Iraq and cronies. Thus, I think things can spin out of control in Iraq in a way not possible in Venezuela.
Next, I strongly doubt Angola will give especially easy terms for very long. The blend of geopolitics and economic imperatives is almost certain to inspire strong trends to higher “regulation” of exported oil.
Lastly, I do not think the US cared about the integrity of the oil markets when it came to 1991. It’s more than Saddam has outlived his usefulness, the debts he ran up fighting the war against Iran would provoke him (if not invade Kuwait, perhaps defaults) towards unproductive behaviors, and the general desire to prevent industrialization in W Asia that could compete for the oil produced nationally.