Quid Pro What?

China’s Vice President Xi Jinping arrived in Caracas on 17 February for a two-day visit.

Foreign Minister Nicolas Maduro said an agreement will be signed during the Chinese official’s visit, expanding the joint Venezuela-China infrastructure fund from $6 billion to $12 billion.

The joint infrastructure fund was created in 2007 with an initial capitalization of $6 billion, of which Venezuela would put up $2 billion and China $4 billion.

A memorandum of understanding to double the fund’s capitalization was signed in Beijing by President Hugo Chavez on 24 September 2008.

Chavez since 2007 has pitched the joint Venezuela-China infrastructure fund as an indication of the importance Beijing assigns to a strong strategic alliance with the Bolivarian revolution.

But China’s communist government is a much better “businessman” than the Bolivarian revolution, where billions are spent without any accountability and “Thou Shalt Steal” is a commandment.

China isn’t capitalizing $8 billion for free; not at all.

The $8 billion Chinese contribution to the joint infrastructure fund is structured as a commercial loan payable by Venezuela with oil.

Full details on the terms and conditions of this loan have never been disclosed by the Chavez government, and independent oil experts haven’t invested much effort in discovering this information.

But it’s a commercial loan, and Venezuela is not staying current with its “debt payments.”

Pdvsa was supposed to supply China with 400,000 b/d in 2008, but it only managed last year to ship an average of 168,000 b/d, according to official Chinese government oil import data.

On a full-year basis, this means Pdvsa could have “missed” debt payments to China equivalent to 84.68 million barrels of oil.

Let’s assume only half of these missed deliveries of 84.68 million barrels – or 42.34 million barrels – were actually allocated to repaying China’s contribution to the joint infrastructure fund.

The lower figure is still equivalent to nearly double the 23 million barrels of oil that Pdvsa has shipped to Uruguay’s Ancap since 2005, under a bilateral supply agreement with financing and payment terms similar to the PetroCaribe initiative.

News reports from Montevideo indicate Ancap currently owes Pdvsa between $440 million and $500 million – so it can be inferred that Venezuela’s “past due debt payments” to China are not chump change.

In monetary terms, how much does Pdvsa “owe” China’s government on the missed oil deliveries? What are the “interest charges” on those missed deliveries? Also, how was the pricing formula structured for repaying China its $4 billion initial loan? Does the same pricing formula apply to the second $4 billion loan? What types of crude or refined products are being shipped to China? Mostly fuel oil and Merey 16 heavy crude, we’re told.

Also, how are the transportation costs structured? We’re told Pdvsa is “eating” 100% of the transportation costs, which reportedly averaged about $16/barrel in third quarter 2008, but may have dropped in tandem with lower international freight prices. Are the tankers Chinese-owned, directly or indirectly? No reliable details of the tanker charters have been made public here either.

Will China’s vice president sign an agreement on this visit which commits Beijing to actually forking out $4 billion in cash at a time when Pdvsa is almost insolvent due to the collapsed price of oil and the Chavez regime’s extraordinary feat of spending over $890 billion in oil revenues during the past decade?

What does China get in exchange? Surely Beijing wants more than oil supplies on below-market terms?

The Chavez government has signed dozens of agreements with China since 2005, committing Pdvsa, among other commercial initiatives, to:

*Participating as a minority stakeholder in the planned construction of three or four refineries in China with a combined capacity of 600,000 b/d to 800,000 b/d.

*Participating as a majority stakeholder in the planned development of between 600,000 b/d and 1.2 million b/d of new extra-heavy crude production capacity in the Orinoco oil belt, with CNPC and other state-owned Chinese oil companies taking minority stakes.

*Developing joint production ventures in other areas of eastern and western Venezuela.

*Creating a joint venture to build (assemble?) oil drilling rigs in Venezuela.

*Creating a 50-50 joint shipping venture to transport 1 million b/d of Venezuelan oil to China by 2013-2014. Of course, that deadline has been pushed back now that Pdvsa is saying it won’t reach 5.6 million b/d of crude production capacity until 2016, instead of 2012.

At a minimum, China’s vice president likely will urge President Chavez to ensure Pdvsa meets its contractual supply commitments. Oil demand in China has softened considerably, and it’s likely a hard crash for the Chinese economy in coming months could drive oil demand in that country even lower. (Yes, we think China’s economy is on the brink of a hard crash, not a soft landing, with potentially dangerous social and political repercussions.)

China’s vice president also may push Chavez to agree on better terms for Chinese minority stakeholders in any joint ventures Pdvsa actually may sign this year with CNPC and other Chinese companies.

Finally, the agreements signed on this official visit, part of a five-country tour aimed at bolstering China’s trade and investment ties in Latin America, may simply reaffirm commitments already agreed upon during the past four years.

If one reviews the Venezuela-China energy agreements signed over the past three years, there tends to be a great deal of repetition in what is signed and officially announced in Caracas by the Chavez government.

But if Chavez wants to secure $4 billion in cash which his regime, and Pdvsa, need desperately, it’s certain Beijing will require that Venezuela must, at least, start to meet its existing supply commitments.

About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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