Venezuela overstates size of Beijing deal

Venezuela's government is overstating the scope of 28 bilateral agreements signed in Beijing last week during President Nicolas Maduro's four-day visit, disgruntled presidential palace and energy ministry officials tell Argus.

The $5bn line of credit announced by Maduro and his economy and finance minister Simon Zerpa last week was originally negotiated in 2014, the palace official said, but was never disbursed by China Development Bank (CDB) because of Chinese concerns over how the funds would be spent by Caracas.

"Maduro has announced several times since 2014 that his government had obtained firm guarantees from CDB of a new $5bn loan or line of credit," the official said, but it's always been the same loan.

This included a $2.2bn line of credit to help raise crude production at CNPC's joint ventures with PdV in 2016. Those funds were never disbursed.

CNPC's upstream joint ventures with PdV include Sinovensa, the 15,000 b/d Petrozumano venture in eastern Venezuela, and the 400,000 b/d PetroUrica venture in the Orinoco oil belt's Junin 4 block.

Unlike previous loan announcements from Beijing, Chinese government officials will be posted to Caracas to ensure the funds are used only for expanding production at joint ventures in which state-owned CNPC and state-owned PdV are partnered, an energy ministry official said.

"One of the issues that CNPC and CDB stressed firmly in their recent talks with Zerpa and other Venezuelan officials is that PdV must increase its crude exports to China very quickly," the palace official said.

The Maduro government also has agreed in principle to raise CNPC's stake in the 130,000 b/d Sinovensa crude blending joint venture from 40pc to 49.9pc as allowed by the 1999 Bolivarian constitution. This would be done to partially pay down a portion of the $23bn of outstanding oil-backed debt Caracas still owes Beijing for over $62bn of mostly oil-backed loans received since 2007, mainly from China Development Bank. But "months of negotiations are likely" between CNPC and PdV before the parties reach a binding deal, the ministry official said.

The value of the Sinovensa shares PdV has offered CNPC has yet to be agreed upon.

Maduro said yesterday in Caracas that the bilateral agreements signed in Beijing on 14 September included a written pledge to raise PdV's crude exports to China to 1mn b/d by the end of 2018, with all of the $5bn line of credit earmarked for that purpose.

The Maduro government claims that PdV exports to China averaged about 700,000 b/d in 2017. But this figure cannot be confirmed independently because PdV has not released its official results for last year yet. A PdV eastern division upstream executive also tells Argus that the export figure for last year cited by some Maduro government officials "appears to be very inflated."

Chinese crude imports from Venezuela have averaged 360,000 b/d so far in 2018, a decline of 60,000 b/d compared with the same period of 2017, vessel tracking data indicate. PdV's internal data on exports to China as of July 2018 show an even steeper decline, of 184,000 b/d year on year.

China took 176,112 b/d of Venezuelan oil exports in July 2018, accounting for just 13pc of total July exports, according to official internal PdV data for the most recent month which Argus obtained.

Venezuela's oil exports averaged 1.389mn b/d in July 2018, with the US taking 584,592 b/d or 42pc of the total, followed by India with 367,795 b/d or 26pc. China was a distant third in July, followed by Cuba with 93,728 b/d or 7pc, PdV said.

In the case of China, the volume of exports seems out of proportion to billions of dollars in oil-backed loans that Beijing has extended over the past decade, but the direct data probably underestimates the share of exports heading east. PdV routinely transships some of its exports through the Caribbean to Asian destinations.

Exports to India partly reflect PdV's oil-backed debt to Russia, which emerged as a significant patron of Caracas in 2016 with a $1.5bn loan from Rosneft that was collateralized with 49.9pc of the equity in PdV's US refining subsidiary Citgo.

Nayara Energy, which is owned by Rosneft, trading firm Trafigura and Russia's UCP Investment, is able to process Venezuela's heavy grades such as Merey blend and diluted crude oil (DCO) at its 400,000 b/d Vadinar refinery. Another Indian buyer of Venezuelan crude is Reliance.

Local critics including current and former PdV executives maintain that Maduro's public assurances that Venezuelan exports to China will increase to 1mn b/d by the current year's end are neither credible nor logistically feasible. But these critics admit that Maduro's China visit suggests the apparent chill in bilateral relations dating back to 2015 appears to be thawing.

"Venezuela is joining China's belt and road initiative (BRI)," Maduro said yesterday, without giving details of specific infrastructure projects that could be developed in Venezuela with Chinese capital. A local Chinese diplomat declined to comment on agreements signed in Beijing and Maduro's remarks yesterday. But he described the Venezuelan leader's trip to China as "a positive bilateral development."

Caracas-based economist Robert Bottome said Maduro's visit to Beijing "tends to confirm that China is committed in the long-term to securing the largest possible share of energy and mineral commodities it can extract from Venezuela, which requires in the near-term what could be a risky gamble in terms of publicly voicing support for the Maduro government."

China's decision to re-engage with the Maduro government isn't simply a response to the recent economic reforms enacted last month, but an apparent belief that Maduro has effectively neutralized political opponents and is consolidating power, Bottome said. "For the time being that makes Maduro the only credible power left to deal with in Venezuela," he said.