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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.
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