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China loans make Venezuela’s outlook more precarious

Patience is wearing thin among both China and other trading partners

Venezuela's economic forecast continues to worsen. The government is struggling to pay back interest on loans to China—the terms of which were relaxed back in June 2016—and its dependency on oil exports to the Asian superpower have become "a question of survival", as one analyst puts it.

Along with Russia, China has lent Venezuela over $77bnincluding $250m the Development Bank of China approved on 5 July to increase petroleum development—but Caracas has exhausted its debtors' and expropriated investors' patience, and some have started to seek refund via the seizure of cargoes shipping PDVSA oil.

Several Venezuelan oil cargoes have been seized in the Dutch Caribbean islands in the past two yearswhere PDVSA, the country's state oil company—was distributing around a quarter of its oil. Curaçao, Bonaire, Aruba and St Eustatius are key oil transportation hubs for Venezuela, which operates several of the terminals, refineries and storage facilities located on the islands.

The latest seizure took place at the beginning of May and included 4 million barrels of Venezuelan crude oil stored on St Eustatius Island. The seizure was ordered by a court to enforce an arbitration award in favour of ConocoPhillips that PDVSA had refused to pay. As seizures multiplied, PDVSA was forced to stop using its Caribbean facilities.

Consequently, delays for deliveries increased. At the beginning of 2017, Venezuela was overdue on 13 million barrels of crude and refined oil products to China and Russia. In April this year, it had delivered less than 70% of the contracted deliveries.

Added to that, Venezuela does not have enough storage capacity to deliver its customers. Since the seizure of its assets in the Dutch Caribbean, PDVSA had to send back all its oil tankers to Venezuelan ports which are now over-crowded and have no space to accept foreign tankers.

PDVSA's temporary solution is to conduct ship-to-ship transfers about 9km outside Venezuelan ports. That's a complex operation, and adds at least an additional $1 per barrel, say analysts, including insurance and operational charges.

For foreign energy companies buying and investing in Venezuelan oil the risks have been well established—at least since Hugo Chavez expropriated ExxonMobil and ConocoPhillips from Venezuelan oil projects in 2007. But as the political and economical situation in Caracas has got more unstable, especially in the past two years, the risk of investing in Venezuela's energy sector has only increased.

Venezuela has yet to develop and offer a safe legal environment to attract Chinese and other investors back. More generally the country urgently needs to invest in the modernisation of its transport and communication infrastructures. Leaking and obsolete Venezuelan oil tankers are no longer accepted in international waters and other countries' ports, so PDVSA is forced to rent more than double the number of oil tankers it usually does, to complement its own fleet.

Frosty relations ahead?

If no changes occur in the Venezuelan government's policy, analysts predict at best a significant stagnation of commercial relations with China and potentially other trading partners, and at worst the disillusionment of Venezuela-based Chinese manufacturers and investors "who will not wait long for Venezuela to fulfil its already largely eased commitments" says one analyst.

Venezuela was ranked the world's second least reliable country to invest in. Indeed, challenges for Chinese investors to safely invest in Venezuela's oil sector are many. They include "a weak governance of the country's economy, corruption, a lack of managerial skills that has an influence on projects implementation, a lack of accountability as well as ability to honour each agreement," according to Janet Cesar and Henry Rodriguez, of Intelego, a Venezuela-based consulting company.

More broadly, "important adjustments on the primary good trading policies, more skilled human resource" and reliable infrastructure are needed for energy trade between China and Latin America to keep growing, says Peter Feng, assistant chairman, New Jinyuan Group.

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