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China Puts Oil Over Politics in Deal to Boost Venezuela Output

Public Policy

China’s move to invest $2.2 billion in Venezuela for a share of increased crude production shows a desire to extract itself from the country’s political fights while securing access to its vast oil reserves.

The deal, which represents China’s first economic support this year for the beleaguered South American country, would help Venezuela reverse declining oil output by improving its infrastructure. In exchange, Venezuela would promise to send its largest creditor even more oil — 800,000 barrels a day — compared with about 550,000 in September. The deal will be finalized in mid-December.

As low oil prices ravage Venezuela’s economy and President Nicolas Maduro struggles to maintain his grip on power, China is paying greater attention to things like fiscal stability and political risk in its overseas lending. The increased scrutiny could complicate its pledge to deploy $60 billion across Africa over the next three years, much of it preferential loans and state-backed investments in countries that are heavily reliant on commodity exports.

While Maduro hailed the Venezuela pact as proof of China’s commitment, its focus on oil production illustrates a wariness in Beijing against assuming more risk with a socialist government that’s struggling to avoid default. Financing oil infrastructure helps China ensure a long-term presence in a country that hosts the world’s largest proven crude reserves and sits in the U.S.’s strategic backyard.

Oil Flow

“The imperative is to ensure no disruption of oil flow,” said Mei Xinyu, a senior researcher with China’s Ministry of Commerce. “The political situation takes a back seat to the importance of oil production. Even if the opposition party takes power in the future, they’ll still need Chinese loans to pump out oil.”

Subsequent agreements between the two countries would probably follow the same model, with China providing assistance to improve oil facilities and maintain exports, Mei said. A policy paper on Latin America released on Thursday by the foreign ministry said China is ready to “actively explore” mechanisms for the long-term supply of energy resources to reduce the impact of external economic risks.

The state-run China National Petroleum Corp. has ordered local units to cut non-oil-producing investments, according to the company’s account of a meeting held in Caracas on Friday by Chairman Wang Yilin. He told the meeting that Latin America retained strategic importance despite the “unstable investment environment” and “growing default risk.”

Hedging Bets

The moves come as runaway inflation and a shrinking economy push Venezuela closer to default and fuel criticism of Maduro, whose late predecessor, Hugo Chavez, fostered strong ties with Beijing. In recent months, China has been hedging its bets and communicating with the opposition, which controls congress and wants a referendum to recall the president.

At stake is almost $19 billion of debt that Venezuela is projected to owe China by year’s end, according to Barclays Capital Inc. The Inter-American Dialogue, a Washington-based research group, estimated that China lent about $65 billion to the country between 2007 and 2015, which has been paid back largely with oil shipments.

Meeting those commitments has proved challenging for Venezuela, which has seen oil production slide to a six-year low amid a prolonged slump in crude prices. The agreements between CNPC and Venezuela’s state-owned Petroleos de Venezuela SA include increasing production at three joint ventures, rehabilitating oil wells in Venezuela and building a refinery in China.

The 800,000-barrel target falls short of a 1 million-barrel goal that was under discussion in August, according to Chinese state media. China imported an average of 424,000 barrels a day from Venezuela in the first nine months of the year, an increase of about 30 percent over last year, according to data from the General Administration of Customs.

‘Older Sister’

“We are going to reach 800,000 barrels a day with China,” Maduro said at Nov. 17 news conference with CNPC’s Wang in Caracas. “Our older sister China has not left Venezuela alone in hard times.”

CNPC issued a statement on Monday confirming the deal and describing Wang’s conversations with Maduro as “candid, effective and fruitful.” The Chinese Ministry of Foreign Affairs didn’t reply to a faxed request for comment.

Chinese President Xi Jinping has been stressing his country’s commitment to Latin America while visiting the region to attend the Asia-Pacific Economic Cooperation summit in Lima, Peru. Xi is expected to conclude the week-long trip Thursday without a stop in Venezuela.

Matt Ferchen, head of the China and the Developing World Program at the Carnegie–Tsinghua Center for Global Policy in Beijing, said the low-key treatment of the deal suggested that China saw it as just another long-term investment, not a game-changer.

“If it were really a big deal the Chinese were proud of, they would make diplomatic hay out of this,” Ferchen said. “My guess is this is just a ploy by Maduro to grab some of the attention and headlines surrounding Xi’s trip, which obviously doesn’t include Venezuela.”


7 Comments on "China Puts Oil Over Politics in Deal to Boost Venezuela Output"

  1. Davy on Fri, 25th Nov 2016 4:12 am 

    More examples of China’s inability to realize bad debt both internally and abroad. China is a master of extend and pretend. This policy will likely end badly. I learned in business when I was a finance and credit guy don’t throw good money after bad. If you see your debt is going bad get what you can and get out. Bend over and make a deal. Sometimes you can wiggle your way out whole but most of the time debt decays quickly. A better policy is to know your limits and be ready to accept a hit. Manage your bad debt allowances with your receivable aging. That is normal today’s world is not normal anymore.

    Of course a national economy is quite different from a small business but eventually at some point they do intersect. At some point China is going to have to pay for malinvestment at home and abroad. They have chosen to push off that period. Who knows maybe they will succeed in a way that is particular to the Chinese way. I think it is rather more of the same phenomenon going on in the global economy everywhere and that is the inability to normalize. This is leading to unfunded liabilities and bad debt even in a repressed economy. The moral hazard of extend and pretend is alive and well. The financial crisis of 08 is closing in on a decade and there has been steady trend away from normalization even today.

    China is trapped in Venezuela. Its true cost of oil there will jump significantly if its investment goes bad. From the look of things and the inability of oil to break out of its current price range that looks probably. Venezuela’s national oil company almost defaulted on its bonds recently. Just in the past few days it was late on payments. Sounds like a slippery slope for China.

  2. Hubert on Fri, 25th Nov 2016 6:24 am 

    China would have been better off as a 3D World. They have added nothing to the world except pollution.

  3. makati1 on Fri, 25th Nov 2016 6:44 am 

    Hubert, read any good “Made in…” labels lately? Most of the ‘stuff’ you buy comes from China directly or indirectly.

    As for the pollution, when Trump brings back all that polluting industry to America, you will see the air in China clear up and yours turn to smog. Better be careful what you wish for.

  4. Davy on Fri, 25th Nov 2016 7:02 am 

    Yea, most of the landfill material makati. Some of the best products come from Europe. Makati, do you realize that often the products are engineered and designed in the states and that intellectual work is then sent to China for production? I am sure you know that don’t you?

  5. Sissyfuss on Fri, 25th Nov 2016 10:40 pm 

    And many times that intellectual work is simply stolen,Davy and sold back as products to the suckers. The Chinese certainly make interesting bedfellows.

  6. makati1 on Fri, 25th Nov 2016 11:31 pm 

    I guess that is how they happen to have the fastest super computer in the world? Fun giving Americans credit for Chinese intelligence, isn’t it?

    And how did Americans get their rocket science, etc? By pardoning Nazis and bringing them to the US after WW2. The US imports their brains. There are certainly few, if any, native born.

    But, enjoy your private little world if it keeps you happy. The real one is much more interesting.

  7. Bob Inget on Sat, 26th Nov 2016 2:51 pm 

    You all are missing something.

    2.2 Billion dollar loan gets finalized mid December
    wipes out ALL of Venezuela’s US exports.
    At present, 800,000 is ALL the oil Venezuela is capable of exporting. full stop.

    Saudi Arabia’s share is 11% (due to be cut 1%)
    Venezuela’s 9% (due to expire)
    Can North America increase production by 10% between now and December 15th ?

    China is making these deals all over Africa.

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