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China spurns Venezuelan exports

US sanctions are forcing Asian refiners to abandon the Latin American nation

Chinese companies are largely boycotting directly importing crude from Venezuela, ramping up pressure on the country’s ailing oil sector and paving the way for Russia to increase its influence.

State-owned Chinese firms CNPC and its subsidiary PetroChina have both suspended loadings of Venezuelan crude. China Oil, the trading arm of oil firm CNPC—wary of provoking US sanctions—cancelled deliveries in August. CNPC will now extend the embargo on direct imports of Merey blend, a mix of Venezuelan crude and bitumen, for a third consecutive month.

China has previously been one of the Venezuela’s staunchest allies and largest importers. Around two-thirds of crude exported from Venezuela has been shipped to China in recent months. Collapsing Venezuelan production has made China an even more vital lifeline. Opec reports Venezuelan September output at less than 645,000bl/d, compared to over 725,000bl/d the previous month—and an average of 1.35mn bl/d across 2018.

“Russia had a big stake already, and it is getting bigger and bigger with each passing day” Hanke, Johns Hopkins University

China also has a strong financial vested interest in Venezuelan production. The country has extended more than $60bn in investment loans to the Bolivarian Republic—stretching back as far as 2007, when the government negotiated a $4bn bank loan with the China Development Bank. Pdvsa, the Venezuelan state-owned oil company, agreed to guarantee CNPC 10,000bl/d of supply in exchange.

China’s appetite to loan Venezuela money against crude supply has, though, waned dramatically. From 2010-13, Venezuela accounted for 64pc of all Chinese loans in Latin America. In contrast, between 2014-17 Venezuelan credit fell to just 17pc of total investment in the region. Since then, China has offered very little credit, instead prioritising oil production from its joint venture projects. 

“China is caught between a rock and a hard place,” says Michal Meidan, director of the China energy programme at the Oxford Institute for Energy Studies. “It receives Venezuelan crude as repayment for loans and it is a feedstock CNPC sells to the Shandong independents. Also, the Chinese government does not want to appear to be abiding by US sanctions. But, at the same time, the value of these transactions is not worth the risk of financial sanctions.”

Butting heads

China’s relationship with the Venezuelan authorities has also deteriorated. The Petrosinovensa joint venture between Pdvsa and CNPC (which holds a 49pc stake) in the Orinoco delta, blending heavy sour crude with lighter grades for export, was temporarily suspended when the Venezuelan firm missed payments.

Having earlier in the year talked of plans to increase Petrosinovensa capacity from 130,000bl/d to a potential 330,000bl/d, Venezuelan officials then arrested senior staff on the project as those expansion plans evaporated.  Even the existing infrastructure is plagued by storage deficiencies and has been operating well below capacity.

644,000bl/d – Opec reported production in September

“The Trump administration’s executive order has majorly hampered Pdvsa’s ability to export crude,” says Andrew Stanley, associate fellow at thinktank the Center for Strategic and International Studies. “This, combined with refinery runs that continue to fall, has seen storage levels at export facilities and upgraders build significantly towards operational capacity.” Venezuela has attempted to free up storage space by shipping more crude to Cuba.  

Holding sway

US sanctions have also opened the door for Russia. State-controlled Rosneft has become the de facto supplier of Venezuelan crude—one of the only sources of secondary supply. The bulk of the company’s Venezuelan offtake is sent directly to its Nayara refinery on the Gujarat coast in India.

Russia has injected around $20bn into Venezuela, including a $6.5bn loan from Rosneft in exchange for 133,000bl/d. The Russian state-owned company is also heavily involved in domestic Venezuelan production. “Russian financial and technical support has provided a significant lifeline to Pdvsa,” says Lucia Caamano Stanek, principal Americas analyst at political risk consultancy AKE International.

Rosneft has stakes in several joint ventures, including Petrovictoria (40pc), Petromonagas (16.7pc), Petroperija (40pc) and Petromiranda (40pc). Earlier in the year Russia confirmed plans to reach FID in 2020 on two offshore gas fields, Patao and Mejillones, in both of which Rosneft has a 100pc stake. Expected production is 25mn m³/d, with the possibility of building a pipeline or an LNG project. 

“The Russians have a lot in the game,” says Steve Hanke, professor of applied economics at Johns Hopkins University and a previous chief economic advisor to the former Venezuelan President Raphael Caldera. “Russia had a big stake already, and it is getting bigger and bigger with each passing day.”

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