China sees opportunity as Venezuela’s oil industry hits rock bottom

Venezuela’s near collapse and strict US sanctions create an opportunity for Russia, Iran and China to strengthen their presence in Latin America, a region that has been under US hegemony for decades. While Russia and Iran have, to some extent, gained a foothold in Venezuela by providing crucial support to the struggling Maduro regime, it is China that will benefit the most if it can establish a close relationship with the authoritarian socialist regime.

Venezuela is endowed with immense oil wealth, the pariah country of South America having the largest oil reserves in the world at 304 billion barrels. Growing desperation in Caracas, caused by the near-collapse of the petro-state, has created an opportunity for China to exploit Venezuela’s vast hydrocarbon resources. It couldn’t come at a more crucial time for China, the country overtaking the United States to become the world’s largest refiner and largest importer of crude oil. China’s endless thirst for oil, which is a crucial source of energy for its growing economy, is forcing Beijing to seek better access to oil supplies around the world. Chinese state-owned enterprises have shown their willingness to bypass U.S. sanctions to receive imports of crude oil from Venezuela and Iran.

Growing pressure to secure additional crude oil supplies has seen Chinese logistics company China Concord Petroleum Co, known as CCPC, emerge as a leading player bypassing US sanctions to supply Venezuelan crude oil to refiners in East Asia. The importance of the company is highlighted by data from the Reuters news agency which shows that in April and May 2021, ships charted by CCPC carried more than a fifth of Venezuela’s oil exports during those months. According to a Reuters investigation, CCPC has acquired at least 14 tankers to transport Venezuelan and Iranian crude despite Washington’s sanctions against the two pariah states. In July 2021, Venezuela’s oil exports increased for a second consecutive month, reaching 713,097 barrels per day, with most of that crude going to China.

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After abandoning the direct extraction of Venezuelan crude oil in August 2019 in response to stricter sanctions applied by the Trump administration, Beijing is focusing on expanding its presence in the OPEC member country. Apparently, the state-controlled China National Petroleum Corp, or CNPC, is said to be send staff in Venezuela to invest in operations as President Maduro finalizes legislation to facilitate greater private control of energy projects. This legislation, the authoritarian leader hopes, will attract the foreign investment urgently needed to rebuild Venezuela’s crumbling oil industry, thus enabling Caracas to rebuild Venezuela’s failing economy. CNPC is also in negotiations with PDVSA regarding increased production in five joint ventures it has with Venezuela’s national oil company.

The importance of attracting foreign investment is underscored by the precarious state of Venezuela’s once powerful oil industry, with production continuing to decline. By August 2021 oil production for PDVSA and its foreign partner has been reported that’s an average of 520,000 barrels per day, slightly less than the 524,000 barrels pumped a month earlier and significantly less than the 713,097 barrels exported by Caracas for that month. Unsurprisingly, July oil production is well below the target set by Oil Minister Tareck El Aissami, who in a June 2021 Bloomberg maintenance the announced production will reach 1.5 million barrels by the end of the year. To meet this ambitious goal, Venezuela would need to nearly triple average daily oil production from July 2021 levels.

The only way to achieve such an ambitious goal and ultimately reduce Venezuela’s oil production to over 2 million barrels a day is to attract significant foreign capital. PDVSA estimates that it will take $ 58 billion to restore production to pre-Chavez 1998 levels, or about 3 million barrels per day. While Maduro has indicated that investing as little as $ 30 billion would potentially increase production up to 5 million barrels per day. These numbers based on analysis by other industry experts seem implausible with a much larger investment required. Francisco Monaldi, a leading scholar and director of the Latin American energy program at the Houston-based Center for Energy Studies in Baker at Rice University, believes Maduro and PDVSA’s estimates are overly optimistic. In February 2021 guidance note, Monaldi explained that it would take an investment of 10 to 12 billion dollars per year for a decade, “more than 110 billion dollars in total” for Venezuela to increase the production of crude oil to 1 million barrels per day in two years, then reached 2.5 to 3 million barrels per day. after 10 years.

Other sources, including U.S. economic advisers, have acknowledged that interim president Juan Guaido would need an even bigger investment, potentially up to $ 250 billion to achieve pre-Chavez production of over 3 million barrels per day.

Even the steps Maduro took to create a more investor-friendly environment for international oil companies failed to attract the significant capital needed to resuscitate the corroding Venezuelan oil industry. Indeed, Washington’s strict sanctions, including those imposed by the Trump administration in 2019, which cut Caracas off from global energy and capital markets, deter investment by foreign energy companies. He is Western energy majors which are crucial to rebuilding Venezuela’s crumbling oil industry, as much of the country’s oil infrastructure was designed and built by American and European companies during the oil boom of the 1970s.

As U.S. sanctions prevent investment by Western energy supermajors, Beijing certainly has the capital and technology to resuscitate Venezuela’s crumbling energy sector. China’s $ 1 trillion Belt and Road Initiative highlights the considerable resources, manpower and technology at Beijing’s disposal. The world’s second-largest economy has showed a will bypassing and even defying US sanctions by doing so offers China a tangible advantage.

Any effort by CNPC to stimulate investment through its partnership with PDVSA will give Beijing greater control over the world’s largest oil endowment. This would not only ensure greater energy security for an oil-hungry economy expected to overtake the United States and become the largest in the world by the end of this decade, but would significantly strengthen China’s geopolitical might. Beijing’s desire to expand its influence in Latin America is a direct response to Washington’s continued presence in Asia and its support for Taiwan. It will also strengthen China’s influence in Latin America, a region traditionally under US hegemony, giving Beijing better access to South America’s abundant natural resources, including oil, gold, silver, copper. and rare earth metals. Beijing believes this will strengthen its position vis-à-vis Washington and give it the upper hand in the current rivalry between the two giant economic and military powers.

Any investment by Beijing in Venezuela will provide Maduro’s socialist regime with a financial lifeline that will allow PDVSA to increase oil production, thus strengthening the Venezuelan government’s ability to resist US sanctions. This will prolong the existence of an autocratic regime that has proven almost impervious, despite the cracks that have appeared in recent months, to US sanctions for more than a decade. It should be noted that Beijing, by stepping up Venezuelan oil operations, improves its prospects of recovering from a exceptional $ 19 billion in oil-backed loans. In August 2020, Maduro’s regime had obtained a Grace period for reimbursements until the end of this year with the COVID-19 pandemic weighing heavily on production. OPEC data shows that in June 2020, Venezuela’s oil production had fallen to an average of 336,000 barrels per day, although it has steadily increased since then.

Source: OPEC Monthly Oil Market Report.

If Beijing again becomes a lender of last resort and provides the capital and other resources needed to rebuild Venezuela’s crumbling oil industry, then Maduro’s power will grow as the value of Washington’s sanctions diminishes. This is the growing weakness of Maduros and the fears of the Venezuelan the state will collapse which are the driving force behind recent unilateral actions aimed at forging relations with Washington and seeking a relaxation of sanctions. This has created an opportunity for the Biden administration to seek an alternative path in the face of Venezuela, the autocratic Maduro regime and the country’s massive humanitarian crisis that will cease to exist if Beijing steps in to fill the void.

By Matthew Smith for Oil Octobers

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