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Venezuela: China secures long-term oil supply, Chávez secures finance

"CHINA needs energy security and we're here to provide them with all the oil they need," said Venezuela's president Hugo Chávez last month. His country also needs cash. So a new oil-for-loans deal signed with Chinese state-owned China National Petroleum Corporation (CNPC) is a good fit

The agreement will see China's development bank loan Venezuela $20bn and CNPC take a minority stake in a $16bn project to develop the heavy-oil Junin 4 block, in the Orinoco basin. Production should amount to 400,000 barrels a day (b/d) by 2016. CNPC will also pay PdV, Venezuela's national oil company, which will hold 60% of the joint venture, a $0.9bn signature bonus.

Chávez described the deal as a "super-heavy fund". It is also a long-term one, signalling once again China's ability to use its financial clout to secure the big contracts that guarantee its energy supplies. The agreement for Junin 4 will last for 25 years, giving Venezuela plenty of time to repay the loan through oil shipments. Part of the investment – about $6bn – will be spent on an upgrader to convert the ultra-heavy crude into lighter oil for processing. The field will ramp up from 50,000 b/d in 2012 and over the course of the contract produce 2.9bn barrels, says PdV. Assuming CNPC's investment in the field corresponds with its 40% stake and the oil is used to pay down the $20bn debt, the deal gives China Venezuelan crude for under $10 a barrel.

That is cheap, considering that Venezuelan crude last month was trading at around $75/b on the international market. But China has already established a model for putting its swollen currency reserves to good use. The latest loan is among the largest the country has ever made, but it corresponds roughly to one signed in 2008 with Russia's state-owned Rosneft and Transneft. They were also strapped for cash, but had long-term oil supplies to offer.

In Russia, the payments were used to balance the books of the two companies. But Chávez says the new Chinese cash will be used to finance more of his developmentalist programme in Venezuela, pumping money into agriculture, housing and other infrastructure projects. Venezuela is already paying down a loan of $8bn Beijing extended in 2007, with exports of almost 0.5m b/d of crude to the country.

Some of the new cash could also be used to help PdV finance its other projects. It has scheduled a host of new projects in the Orinoco basin, inviting Western and Russian firms to help develop the fields. But to reach an output target of 4m b/d will need up to $80bn of investment, says Rafael Ramirez, the oil minister. The International Energy Agency puts Venezuela's production at 2.25m b/d, well above the country's Opec quota target.

If China's involvement helps finance that capacity expansion it will give the country a grip on Venezuela's Orinoco heavy-oil basin. Venezuela claims that reserve is larger even than Canada's oil sands, where Chinese firms have also sought assets. The Western majors once dominated Venezuela. Chávez and now China have put paid to that.

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