Published On: Fri, Jan 27th, 2017

China’s master plan for the Caribbean

venezuela_chinaVenezuela holds the world’s largest oil deposits in an area called the Orinoco Oil Belt. In 2012, Venezuela was the tenth largest oil exporter. The country is ranked nine in 2013.

To sustain future long-term contracts for oil supply, China commenced talks some years ago with former President Hugo Chavez in Venezuela. This country had been supplying the US with 3.00 MMbbl/d making it America’s fourth-largest supplier of crude. However, China now wants some of this crude oil and will therefore directly compete with the US. To facilitate this, China has already invested US$3B in Venezuela’s oil sector.

In May 2008, Chinese energy company PetroChina, a subsidiary of CNPC, announced a deal with Venezuelan state oil company, Petroleos de Venezuela (PDVSA), to build a 0.40 MMbbl/d refinery in China’s Guangdong province. The deal allowed Hugo Chavez to increase political and economic ties to China, but undervalues the oil it will export and puts pressure on an already overburdened PDVSA.

Later in August 2009, President Hugo Chavez announced he had secured a US$8 billion loan from CNPC in return for access to fuel oil until 2012.

Fundamentally, shipping oil from Venezuela to China is a dicey prospect. VLCC tankers, too big for the Panama Canal, are obliged to navigate round the Cabo de Hornos (Cape Horn) before beginning the long journey across the Pacific Ocean (or the other direction, around Africa). For China, the financial costs of importing oil from Venezuela are high, and the risks of extending supply lines across such long distances cannot be discounted. However, in a later development, Sinopec expressed interest in upgrading an oil pipeline from Venezuela that would run through Panama and to the Pacific, thus orientating Venezuela toward China.[1]

If long-term supply contracts are eventually signed, then they may be honoured at the expense of US supplies. There simply is not enough oil sourced from Venezuela to go around satisfying both China and the US. A statement advanced by Condoleezza Rice, former US Secretary of State, welcomes China’s initiatives, but hopes it will be “able and willing to match its growing capabilities to its international responsibilities”. Potentially, this is a point of conflict between the two nations.[2]

To compound the issue, Russia is also negotiating with Venezuela for oil supply and in exchange has offered arms and munitions to the country. Theoretically Russia could exclude Chinese aspirations as well as impacting on US supplies. This contention may not be correct, however, as there may be hidden agendas between China and Russia. They may be de facto allies? They may have pre-agreed their strategy before negotiations by either party commenced with Venezuela? It is difficult to understand the precise relationship between China and Russia. This will be detailed later.

Attention should be drawn to the joint naval exercises undertaken by Russia and Venezuela in the southern Caribbean in October/November 2008. This gave cause for further concern.

Another factor, which adds to the prospect of uncertainty, is that labour problems are inherent within Venezuela. In 2002, approximately half of Petroleos de Venezuela (PDVSA) workers went on strike and caused over 2.0 MMbbl/day drop in oil production. There have been large fluctuations in the PDVSA’s oil production level.

Political problems also abound. The late President Chavez’s relations with Fidel Castro set a pattern that continues to worry the US and may prevent any real inflow of foreign investment to upgrade the ageing oil infrastructure. This is exacerbated by threats to terminate oil exports to the US as a rebuke for US “aggressive” behaviour towards the former Chavez regime.[3]

The game has not changed.

Nicolas Maduro, installed as the new Interim President immediately after the death of Hugo Chavez on 5 March, 2013, took up the ‘anti-US reins stance’ and expelled two US Embassy officials from Venezuela: COL David Delmonaco, US Air Force Attaché, and Assistant Air Attaché, MAJ Devlin Kostal. The US officials were allegedly expelled for spying on the country’s military. The US Government reciprocated a week later by expelling two Venezuelan diplomats from Washington DC.

US Government officials had previously expressed optimistic hopes that Chavez’s passing could start a new chapter in the relationship between the US and Venezuela. During the Venezuelan election campaign, a US State Department official had issued public statements supporting Henrique Capriles, who was Maduro’s main challenger for the Presidential position. The wrong horse had been backed.

Nicolas Maduro was elected President on 14 April, 2013. He faces almost insurmountable problems. Maduro will need to replenish inadequate infrastructure, combat increasing inflation, honour extravagant promises made by Chavez, and possibly renegotiate long-term contracts that provide below-market-price crude oil to China, Cuba and other partners. Maduro also has to tackle high crime rates and numerous social problems.

Maduro claims he has brought the crime rates down by some 55 per cent especially in Capriles’s former electoral heartland.

PDVSA is under extraordinary pressure to increase production and bring in more money to help solve those problems. Accidents like a refinery fire, pipeline explosion or oil spill could trigger a political breakdown or irreparably damage PDVSA’s production capacity. It is entirely conceivable that President Maduro will be forced to reckon with major protests and strikes, possibly including violence or sabotage of infrastructure.

The Chinese Government is fully conscious of the difficult circumstances facing the new Madura regime.

It has acted quickly. The China Development Bank has offered a $4 billion loan to Sinovensa, a joint venture between PDVSA and CNPC. This loan was ratified in June 2013. PDVSA is currently working on arrangements with oil service providers to pay some $2 billion in overdue payments and for new cash flow mechanisms.

Since 2008, China has lent Venezuela a massive $46.5 billion. This figure is more than half of all the loans the country has received in the same period. Most of these are “tied loans”, that is “loans-for-oil”. In many cases, the loans are conditional on PDVSA procuring machinery and equipment for oil drilling with the contracts mostly awarded to Chinese owned companies. China is Venezuela’s biggest creditor and has strategic intentions on securing all the oil Venezuela has to offer. Obviously this energy procurement strategy is advanced for many reasons as discussed later in this book.

By way of conjecture, if the cost of constructing the Nicaragua Canal is added to the loans already given to Venezuela, plus the generous loans to other Caribbean littoral countries and to some northern located-South American states, then China has contrived a master plan well in excess of $100 billion in investments to gain economic domination in this region of the Caribbean.

Other loans with less stringent conditions have been offered to Venezuela. Chevron has offered a $2 billion credit for the Petroboscan venture. The country is negotiating for similar funding with Repsol SA and Royal Dutch Shell.

PDVSA has targeted output capacity of 3.5 MMbbl/d by the end of 2014.

It is to be noted both China and Russia are quietly making inroads into Cuba.

The Caribbean will always be the soft underbelly of the United States.

Explanatory Notes

[1] Ratliff, William, Pragmatism Over ideology: China’s Relations with Venezuela,“China Brief”, Jamestown Foundation, March 2006; Ellis, US National Security Implications, page 8

[2] The late former President, Hugo Chavez, when in power, appeared to be following in the footsteps of Fidel Castro. Chavez encouraged anti-American “Latinos” and communists from Latin American countries to travel to Venezuela to receive ideological indoctrination and/or training in asymmetric warfare. The training programme could mean that Chavez might have had/set up a network of subversive agents in countries like Bolivia, Columbia, Ecuador, Panama (linking up with Chinese intentions), Peru, and elsewhere in South America. “Dictator” Chavez could have been in power for several decades “a la the Castro model”.

[3] Ibid

By David L. O. Hayward, Management Consultant
Managing Principal at D L O Hayward & Associates

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