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Chavez cosies up to China amid US sanctions

US sanctions on Venezuela, for supplying fuel to Iran, will have little practical impact as the country forges closer ties with rapidly developing Asian markets

The US had imposed sanctions on Venezuela’s state-owned PdV for delivering at least two shipments of refined petroleum products, worth $50 million, to Iran. PdV is one of seven shipping and oil companies accused of supplying fuel to the Islamic republic in defiance of a US embargo intended to pressure Iran to “comply with its international obligations” to abandon its nuclear development programme.

Venezuela reacted angrily, calling the sanctions acts of “new gringo aggression". But, in reality, they will have little practical effect. The sanctions don’t directly affect Citgo, PdV’s US-based, 750,000 barrels a day (b/d) refining business, or prevent Venezuelan oil exports to the US.

They do, however, prevent PdV from competing for US government contracts, obtaining export licences and from receiving credit from Export-Import Bank, the US export-credit agency. And investment is crucial to Venezuela’s upstream future.

From output levels just below 3 million b/d in 2000, oil production now stands at 2.2 million b/d, according to the International Energy Agency. Opec output quotas may account for some of this fall, but sustainable production capacity is now just 2.35m b/d, claims the agency. And decline rates of up to 25% in some of Venezuela’s mature oilfields mean investment of around $3bn a year is needed just to maintain this diminished capacity.

Many international oil companies (IOCs) have become reluctant to invest in Venezuela’s oil sector since President Hugo Chavez’s 2006 nationalisation campaign. Some, including US supermajors ExxonMobil and ConocoPhillips, abandoned the country. More recently, the government unveiled a huge tax hike on oil-export earnings.

And national oil company PdV has often seen its budget plundered for spending programmes elsewhere in the economy. No wonder: oil accounts for around 12% of GDP, 94% of export earnings and more than 50% of government revenues.

But Chavez has been forging new deals with Asian companies, particularly Chinese, which could provide the investment Venezuela needs to boost its oil production and keep subsidising the president’s social programmes.

In early June, China agreed to provide $40 billion to develop two joint ventures between national oil companies (NOCs) CNPC and Sinopec, and PdV. Two separate projects would each produce 400,000 b/d of extra-heavy crude in central Venezuela’s Orinoco belt. PdV will hold 60% stakes, with the Chinese companies each taking 40% in the projects.

Since 2007, Chinese development banks have handed another $32 billion to Venezuela in oil-related deals, lifting China’s financial commitment to the country’s oil sector to $72 billion. Details of these heavy-crude projects are still being fleshed out, but will certainly involve the loans being repaid with crude oil supplies.

PdV also plans to develop four other Orinoco-belt joint-venture projects: with Chevron, Repsol, Eni, India’s state-owned ONGC and a consortium of Russian companies, including Lukoil and Gazprom. Venezuela hopes the ventures will provide an additional 2.25 million b/d of extra-heavy crude capacity by 2016.

In April, oil minister Rafael Ramirez said PdV should be producing 4.5 million to 5.0 million b/d by 2014 – more than doubling production in just two and a half years. The majority of this planned increase will come from six proposed Orinoco-belt projects. But construction has been delayed until 2013 or 2014, after next year’s presidential elections, making the production targets overly optimistic.

Furthermore, to reach the output target, PdV says capital expenditure (capex) of $42 billion a year, over a period of six years, will be needed, with the NOC providing around $32 billion a year of the total. Considering the company’s 2010 capex was just $11.4 billion and that Ramirez himself has indicated that it will be around $12 billion for 2012, the plans seem delusional.

So Chinese investment will be critical; but it is not just China that is lending large sums of money to Venezuela. In mid-June, Japan said it will provide $1.5 billion to PdV in exchange for 15 million barrels of crude over the next five years. The Japanese government says the deal (even at a cost of $100 a barrel) is vital for the country’s energy supplies following the nuclear disaster at Fukushima, which has left nearly 12.5 gigawatts of nuclear generating capacity off line).

And the shift in focus for Venezuela’s oil exports towards Asia looks set to continue, with Chavez hoping to double the 460,000 b/d the country already sends to China. But despite the frosty relations, exports to the US will not halt yet.

Stern political rhetoric from both the US and Venezuela aside, commercial relations between the countries are “very pragmatic”, says IHS analyst Diego Moya-Ocampos. “It wouldn’t be in Chavez’s interests [to cut exports],” he adds.

The reality is that the commercial relationship between the US and Venezuela is of mutual benefit. The US buys 45% of Venezuela’s crude output and Venezuelan exports make up around 10% of US supplies. (Although the amount of Venezuelan crude exported to the US fell to an average 878,000 b/d in February, down from a peak of 1.78 million b/d in 1997, according to the US Energy information Administration.)

Venezuela’s US-bashing rhetoric is also part of a political strategy “to detract attention from problems within Venezuela”, says Moya-Ocampos.

Chavez, who will be running for re-election in 2012, has faced growing opposition from former party supporters who are uniting against him. At the beginning of June, members of Venezuela’s political opposition formed a new coalition, the progressive front for change (FPC), which includes numerous political figures who previously backed Chavez. The FPC aims to help the main opposition Democratic Unity Roundtable party to win next year’s presidential elections.

Some of the rhetoric may also be to distract attention from Chavez’s now-public health problems. The president has been battling cancer. He fled to Cuba in mid June to seek medical treatment and was reportedly governing from his hospital bed. Speculation was mounting that his health was deteriorating before his reappearance in Venezuela at the beginning of July.

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