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    China Business
     Feb 7, 2013


Page 1 of 2
China at risk with Venezuela oil bet
By Matt Ferchen

Referring to the evolving political crisis in Venezuela, a Shanghai Academy of Social Science scholar, Zhang Jiazhe, recently remarked, if Hugo Chavez dies, "the diplomatic effect on China won't be large because China-US competition is in Asia not Latin America. Economically, China-Venezuela relations are based on oil and weapons sales".

Back in 2006, Beijing University Professor Ha Daojiong, however, sounded a more skeptical note when he wrote, "The search for overseas oil supplies has led Beijing to pursue close diplomatic ties with Iran, Sudan, Uzbekistan and Venezuela - all countries that pursue questionable domestic policies and... foreign policies". [1]

These two different Chinese foreign policy perspectives highlight an ongoing debate - and not only inside of China - about how

 
Chinese state-owned enterprise (SOE) pursuit of global energy supplies was or was not leading China into unwanted and unhealthy foreign entanglements.

The logic of Chinese SOE energy investments in all these "questionable" countries is straightforward: China needs more energy than it can produce domestically and its SOEs are "going out" to help supply domestic demand. In Sudan and Iran, however, Chinese national oil companies' (NOCs) investments exposed Beijing diplomatically to internationally controversial political regimes.

Chinese state-to-state energy ties to such "pariah states", including more recent examples in Libya and Burma (Myanmar), have mostly been based in the Middle East, Africa or closer to China in Central and Southeast Asia. [2]

The geographic focus, however, has now for the first time shifted to China's presence in the Western Hemisphere as Venezuelan president Hugo Chavez' health crisis evolves into a broader political crisis not only for Venezuela but for his regional allies and potentially for China.

Today, it is in Venezuela that another Chinese state firm, this time the China Development Bank (CDB), has led China into another potential foreign policy quagmire.

China's ties to Venezuela highlight a crucial, but often overlooked issue: the questionable logic that Chinese NOC "equity oil" acquisitions in controversial but energy-rich countries are justified by energy security needs. Indeed, Venezuela's evolving political crisis may further expose the flaws in China's state-capitalist approach to energy security.

This is because Chinese firms have used the justification of energy security to expand investments and financial ties to Venezuela, but a significant portion of the oil is not actually going to China.

If Chinese equity oil from Venezuela or other controversial countries is acquired by Chinese state firms in the name of energy security but then resold on global markets for profit, this begs the question of whether Chinese SOEs are unnecessarily exposing China to excessive political risk.

Where's the oil flowing?
The conventional wisdom about the China-Venezuela relationship, propagated most forcefully by Chinese officials keen to emphasize their country's non-political interests in Venezuela, is that it is based on oil. Simply put, China needs oil and Venezuela has it.

The CDB's point-man on Venezuela, Li Kegu, summed up the logic of relations when he said, "We [China] have lots of capital and lack resources, they have lots of resources and lack capital, so it's complementary" (Bloomberg, September 27, 2012).

China is the second-largest oil importer in the world (after the United States) and its oil demand growth is the fastest. Venezuela recently was declared to have the world's largest petroleum reserves, surpassing Saudi Arabia.

Lauding the rapid development of China-Venezuela oil ties, the Chinese press recently reported that Chinese imports of Venezuelan oil may reach 1 million barrels per day (b/d) by 2015 from a starting point of only 59,000 b/d as recently as 2005. By all outward indications, then, Venezuela-China oil ties should be a straightforward example of China's self-declared win-win, complementary trade and investment relations with Latin America.
Such an assessment, however, would be premature and misleading because while oil is certainly the key link in China-Venezuela ties and while the amount of oil that "China" receives from Venezuela has certainly expanded rapidly from a low starting point in the last decade plus, there are a number of puzzling results that emerge from a closer analysis of official Venezuelan and Chinese trade statistics. [3]

The most important of these is that official PDVSA (Venezuela's state oil company) export statistics are consistently higher than official Chinese import statistics. Table 1 below lays out these official statistics and the percentage that Venezuelan exports exceed Chinese imports in every year since 2006 (full 2012 statistics, however, have not yet been published). 


Sources: Informe de Gestion Anual de Petroleos de Venezuela S.A. (PDVSA), 2006-2012; "Zhongguo shiyou he tianranqi jin chukou zhuangkuang fenxi [Analysis of Chinese Oil and Natural Gas Imports and Exports]," in Zhongguo shiyou jingji, March 2012. The standard accounting measure for oil is in thousands of barrels per day equivalent, but China measures imports in millions of metric tons. The industry standard of 20,000 b/d equivalent to 1 million metric tons was used for the conversion.

These figures indicate, in every year from 2006 through 2011 during the boom in Venezuela-China oil trade and investment ties, PDVSA has consistently claimed an average of around one-third more oil exports to China than China has claimed in imports.

As the figures also show, however, in some years (eg 2008 and 2009) China's official import figures were well under half and even closer to only one fourth of Venezuela's official export figures. Other recent studies also corroborate the higher percentage disparities, showing a gap of 55%-70% in both 2010 and 2011. [4]
What is the explanation for this consistent disparity and why does it matter? Although neither the Venezuelan nor the Chinese authorities have commented on these discrepancies in their official oil accounting statistics, a number of explanations come to the fore. Key among them are geography and chemistry.

On the former, Venezuela is far away from China as well as the majority of its international oil transport routes (most of which are in the Middle East and Africa). On the latter, Venezuela's heavy-grade oil is not well-suited for Chinese refining capacity.

Tied to these fundamental challenges is what is already known about Chinese national oil companies and their use of global equity oil acquisitions. A wide range of reports from international oil organizations like the International Energy Agency to policy think-tanks to academic publications have all indicated that frequently the majority of Chinese NOC's equity oil is actually resold on local or international markets. [5] For example, one 2007 study showed that in 2006 Chinese NOCs resold close to 70% of their overall global equity oil production. [6]

Combining the general pattern of Chinese NOCs reselling of their equity oil with the specific geographic and refining challenges China faces in Venezuela, a logical conclusion is that the accounting discrepancies in Table 1 can largely be explained by Chinese NOC's reselling of their Venezuelan oil. Further, it is likely that such resale is happening much closer to Venezuela (and the United States) than to China. [7]

Indeed, in a 2005 interview, the Chinese ambassador to Venezuela noted "the natural markets for Venezuelan oil are North and South America". Ultimately, then, a significant portion, sometimes the majority, of oil that "China" receives through the CDB-led loans-for-oil deals with Venezuela is most likely in fact resold by its NOCs, never physically arriving in China.

Such oil resales (at least of oil products) may be standard behavior for other international oil companies, but for China's state-owned firms it has political consequences. 

Continued 1 2  






China's resources policy attracts attention of congress (Feb 2, '12)

 

 
 



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