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Venezuela borrows $5bn from China to boost output

China has not lost confidence in the oil producer despite price slump and falling crude output

Venezuela has secured a further $5bn in loans from China to help the cash-strapped oil producer boost output despite the price slump, the country’s president, Nicolas Maduro, said 1 September during a trip to Beijing.

The loan is the latest sign that China hasn’t lost confidence in Venezuela even as crude output has fallen over the past few years and the oil price decline has plunged the Latin American country into an economic crisis. The latest deal pushes the total amount in oil-for-loans deals between the countries to around $50bn.

The relationship, however, has been troubled at times. China has been frustrated by the slow pace of progress at its mega-projects in the Orinoco heavy oil belt. And the price decline forced China to ease the repayment terms for Venezuela as it struggled with the oil downturn.

Venezuela’s crude fell to $36.48/barrel in the last week of August, so every barrel Venezuela now sends to China pays off less than half as much of the loan than it did 18 months ago. China had little choice to renegotiate the terms, though, because Venezuela simply doesn’t have the capacity to double its exports to China to make up the difference.

But China clearly still sees long-term gains in locking up Venezuelan crude supplies while prices are low and Venezuela is struggling to pull in much needed foreign investment from other sources. The rate of China’s crude demand growth is slowing but it will continue to grow for many years, and Beijing is keen to diversify its supply sources.

Maduro said that Venezuela is now sending 0.7m b/d to China and that would rise to more than 1mn b/d once oil prices recover. Venezuela’s exports to the US, historically its most important market, averaged around 0.8m b/d in the first six months, according to the US Energy Information Administration. Its daily production is about 2.44m b/d.

As with previous loans, the funds from the latest deal will likely go directly to China’s projects in Venezuela. And the most likely target for the funds is the PetroSinovensa project, a joint venture between state-owned oil companies PdV and China National Petroleum Corporation where production has been on the rise. PdV officials told Petroleum Economist during a tour of the Orinoco earlier this year that output from the projects had risen from 20,000 b/d a couple years ago to 170,000 b/d and the companies hoped to raise that to 330,000 b/d by 2017. But hitting that target will require substantial investment in drilling hundreds of new wells and infrastructure to blend and export the oil. 

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