Can China Save Venezuela’s Collapsing Oil Industry?

China is throwing Venezuela a lifeline, although it is unlikely to pull the country back from the abyss.
 
China Development Bank will reportedly invest $250 million in Venezuela’s Orinoco Belt in an effort to stave off the decline of the country’s heavy oil production. That comes as China is also mulling a much larger $5 billion investment plan in Venezuela.
 
Venezuela’s oil production has fallen by more than half in the last few years, with output down to just 1.36 million barrels per day in June, according to the IEA.
 
The investment from China does not come from mere altruism. Venezuela has been sending China several hundred thousand barrels per day of oil for several years as repayment for past loans. But the catastrophic decline of Venezuela’s oil production threatened those shipments. China was in danger of never being paid back for the tens of billions of dollars that it loaned to Venezuela.
 
The crisis rose to a new level the last two months. The seizure of PDVSA’s assets on several Caribbean islands by ConocoPhillips deepened the problems for Venezuela. Unable to process heavy crude on those islands, PDVSA tried to bring operations back to the country.
 
But Venezuela lacks adequate infrastructure to export oil at levels it had been when PDVSA operated the Caribbean facilities, so the loss of those assets meant that PDVSA could not load enough oil onto ships. As a result, a backlog of ships sat idle off the coast, and PDVSA was under pressure to declare force majeure on oil shipments.
 
Ultimately, that means that Venezuela does not have enough oil to meet all of its contractual obligations. And the inability to load oil onto very large crude carriers from Venezuelan ports threatens to interrupt long distance shipments to customers around the world – including China.
 
Reuters reports that Venezuela’s shipments to India declined by 21 percent in the first half of the year compared to a year earlier, presenting problems for Indian refiners who are also under pressure to curtail imports from Iran because of sanctions.
 
The IEA estimates that Venezuela’s production could fall close to the 1 mb/d mark by the end of this year, implying a loss of around 600,000 bpd since the start of 2018. “As for 2019, it is hard to see a recovery and output is likely to fall further,” the IEA said in June. “For now, we estimate an additional loss of around 200 kb/d over the course of next year, to around 800 kb/d – but the decline could be far steeper.”
 
Related: The Biggest Risk For Natural Gas Markets
 
China hopes to stem the losses at Venezuela’s Orinoco heavy oil belt. “Upgraders operated by foreign joint-venture partners in the vast Orinoco heavy oil belt are breaking down and running below capacity due to the stress associated with sourcing diluents, payment and corruption issues and staff security,” the IEA said. “Flows from Venezuela’s ageing conventional oil fields are falling fast.”
 
But it isn’t at all clear that China’s investment will slow the decline. For one, the sum is too small to have a significant impact. But in a broader sense, Venezuela has been taking out loans from China for years and it hasn’t led to economic progress. A report earlier this year from the Center for Strategic & international Studies argued that far from being an economic boon to Venezuela, China’s financial assistance has kept Venezuela hopelessly dependent on oil, while other sectors of the economy have been entirely hollowed out.
 
Moreover, as Venezuela racks up debt defaults, as seems unavoidable, China will be there to pick up the shattered pieces. The state-owned oil companies from China and Russia “will probably market a significant share of PDVSA’s exports and operate an increasing share of its production, guaranteeing the repayment of their loans,” Francisco Monaldi wrote in a report from the Atlantic Council in March. While China may offer some financial assistance, but it probably won’t lead to a rebound. The most likely outcome will be Venezuela continues to decline and is forced to hand over slices of the country’s assets to China.
 
Venezuelan officials may sell the latest loan from China as a sign that things are turning around, but that is unlikely to be the case.
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