Is this the Big Deal the government's been waiting for?


119545_40cda684e71942c59903Hold the IMF talks! El Universal is reporting that PDVSA and Sinopec – a massive Chinese state-owned oil company – have signed a $14 billion agreement to develop the the huge Junin 1 block in the Western part of the Orinoco Heavy Oil Belt. The area could be producing 200,000 barrels a day when all is said and done.

As usual, no details are available. We don’t know what terms the Chinese obtained, what guarantees they obtained that the money would actually be spent on developing the area (rather than bailing out the government from its BoP pickle), or how much detail of terms and conditions has been agreed.

Still, it looks like a big big deal.

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  1. Easy Quico. That figure is related to the investments required for the development of the oil field (of which PDVSA must still pay 60%) over the lifetime of the project (25 years). It’s likely that the deal signed included some sort of financing by SINOPEC (maybe $1 billion?), but it wouldn’t be any different to those agreements already signed with companies as Chevron, Repsol, Eni, Rosneft, CNPC, etc., and they specify that those funds can only be used to pay for the development of the field.
    It’s a big deal for the oil sector over the long term. Not so much for solving the BoP crysis.

    • My understanding is that PDVSA’s 60% share has had to be financed by its partners in each of the other cases you mentioned, since they have zero cash on-hand. If so, the question is how the Chinese can ensure that the part of the capital they’re lending PDVSA stays in Junin.

      If the government is STUCK enough for lending that some are willing to talk to the IMfriggin’F, just IMAGINE the kind of concessions they’ll be willing to make Sinopec for a deal that allows them some wiggle room to channel quick cash back to a desperate government.

      And if you’re Chinese, and allowing a millardito here to go to the Tesorería Nacional in the short term buys you leverage for much better terms in the rest of the deal, wouldn’t you go for it?

      • One way of understanding the deal is by assumming that each partner must pay for the investment needed to develop these fields , if the total cost of development is say about 23 billion US$ , then if China assummes Pdvsa’s 60% contribution that would amount to about 14 billion US$ , which if the Chinese are any smart they will pay directly to the Contractors hired to carry out the Development. on behalf of Pdvsa . In short this doesnt mean that the govt gets any direct money from its chinese partner . the loan would be disbursed throughout the period of execution of the Development Project ( some 3 to 4 years ?) . Because the development cost very likely include the building of pipelines and an Upgrader to make the extra heavy crude transportable and refinable at conventional refineries , the 23 billion price tag is probably not off normal margins.

  2. No doubt, it will be done with all Chinese capital, workers, equipment, and technology. The main goal of the Chinese is to assure a supply of oil, AND to offload thousands of their excess male population.

  3. There is very likely a particular mechanism, in addition to what Bill Bass describes above, which would “guarantee” getting paid by PDVSA: PDVSA has been offering JV’s very recently a way to get paid offshore. I described it in my blog just now (written for AQ). Several people told me about it, both people dealing with foreign IOCs and NOCs (international and national oil companies) — as well as people (i.e. leadership) from the private sector in Venezuela, who want to invest in mature fields in collaboration with foreign investor partners. The private sector folks tell me they have first proposed the offshore mechanism . — (NOTE too: This is Sinopec’s FIRST EVER field with PDVSA if it goes through)

    • Tom your report (from what I hear) is spot on , there is among likely financing partners a deep distrust of Pdvsa’s capacity (or willingness) to pay back any money its lent to fund its 60% of the required investment . thus the structuring of mechanism whereby the money contributed on Pdvsa behalf by its partners is securitized so that payments recieved from the export sale of production to third parties under certain contracts goes straight into an offshore bank account or fund which is dedicated (up to a certain percentage) to paying back the partners their contribution . Hence Pdvsa loses control of the money to be paid from the export sale of oil under certain contracts . The export sale price only partially enters Pdvsa s accounts and the rest is transferred to the contributing partners. Pdvsa I hear is also soon to announce a huge new bond issue . Although I tend to agree with Franciscos assesment that Pdvsa will seek to have some part of the money go direct into its coffers, its not clear that any sane financing partner ‘carrying’ Pdvsa’s share of the investment will be willing to give Pdvsa or the govt any substantial money that most likely will never be used on the investment project . Of course to the extent production is increased or maintained the part of the related income which is needed to pay the corresponding royalties and taxes will probably not form part of what is deducted from the crude oil price used to pay the partners their contribution giving the govt some income which otherwise it might lose or never get.!! .

    • Tom

      From the Bloomberg article dated August 9th, 2013:

      “Merentes obtained the legal power to transfer money from these off-budget funds to reserves,” Asdrubal Oliveros, the director of Caracas-based research group Ecoanalitica, said in a telephone interview. “We’re going to see a surprise jump in reserves of up to $4.5 billion at any moment.”

      Any moment? How many days/months/years in a moment?

      • Indeed. But, the point is, PDVSA and the BRV have significant dollar “wiggle room” from these other funds the central bank / Merentes can now tap if needs be, and from the possibilities of various taxes and price raises, etc. It seems no collapse is ‘imminent’. I was surprised to find that several people I met with working in Venezuela in the private sector (head of one of the largest service companies working with PDVSA; significants of the Camara petrolero, etc) said the gov. has at least “a year or two” to negotiate financially. Of course, this is not a scientific sample. But, they had a good point: ticking off possible ways to get funds short term … though all agree that Pdvsa increasing production is essential (like by next year showing results)… and, as I emphasize, the mature fields seem to be very do-able in this regard.

        • “PDVSA and the BRV have significant dollar “wiggle room” from these other funds the central bank”

          Well, that’s the nub of it. It’s an unsupported assumption, impossible to substantiate. Wrong? Dunno. But maybe.

        • Thanks Tom for your response!

          You were the one who referenced that Bloomberg article with the assumption of 24 billion dollars being tucked away in Bandes/Fonden accounts. None of that money has been used to slow an economic free fall. Why? Not a penny so far. Yet Bank of America says the money is there. Your referenced the article Is it there? Really? I dunno either. But, there has been no attempt to use ‘that’ money in any way. Again, why? Were it to be discovered that the money is gone, it would rank as one of the greatest financial thefts in human history. Ponder that for a moment.

  4. The oil to be produced, if and when, would be refined on the Cabrutica refinery. The only problem is that this refinery does not exist. They have been talking about it since Giordani formulated his plan of the Orinoco-Apure Axis ( a gigantic version of the Ruta de la empanada). This refinery would have to be very special to be able to refine and upgrade the heavy Orinoco oil. Current cost estimte is already over $10 billion and increases every day. It is easy to see that this is one more castle in the sands.
    In the best of cases this is not an alternative that will give Venezuela the cash it needs now. If every thing went well (and it won’t) the first barrel of this Junin block fit to be sold commercially (this is, duly upgraded) would be leaving the country some time in 2019.
    Would Maduro still be around? Or Cabello?

    • Don Gustavo never tought that the Cabrutica Refinery Project was still on stream , its such a crazy idea , building a large refinery there , far away from any sea terminals , in the middle of nowhere , tripling the difficulties of getting equiments labour and materials to such isolated place , having to buld the living accommodations for thousand of labourers out of nowhere , etc Had heard that Pdvsa was thinking of building not one but several upgraders closer to the production fields so as to make transportation of the upgraded crude to the sea terminals easier but have no idea of what the planning is now Beats me why they dont just build upgrading facilities in the easter coast and mix the crude with diesel at the fields to transport it to the coast where the diesel can be reextraacted from the oil and sent back to the fields to be used again and again as they did in the Petrozuata project .

    • It seems, as usual, that this project is just more pie-in-the-sky. Sounds like the satellite project (in Fila De Mariches??). As for the IMF accord, hard-line Commie leaders in the Government/PSUV will have to die first, unless the Government survives Caracazo II (Of course, the alternative of Cuba II with food-rationing booklets/total facile Pueblo sub-servience is still out there as a very real possibility, incredibly enough).

    • Coronel – the day that you write anything positive about Venezuela will be the sign taht you are no longer being paid by the Carnegie Foundation. The country is not interested in your venemous pen paid for by filthy US dollars from the CIA.

      • Arturo:
        You have not been reading me. I write a lot of positive things about Venezuela, certainly not about that gang of red PDVSA gangsters that you seem to support. What I write about those gangsters, furthermore, happens to be supported by facts.
        Can you argue about what I say? If so, say it. Accusing me of getting money from Carnegie/CIA only proves you are a misinformed coward.
        Tell us who you are, Arturo. I don’t like to be insulted by someone using the pseudonym of a fried chicken.

  5. I think the bop improves regardless of whether the government or pdvsa get direct financing. In addition to the chinese workers and the imported machinery, a chunk of the project-related spending has to go toward local goods and services. These payment are in bolivares, and the chinese would have to convert their dollars into bolivares to pay for those. If the government is dollar starved, all it has to do is force the chinese to surrender their dollars to the central bank whenever a local purchase is needed. This improves the bop picture even if PDVSA does not get “el millardito.”

    How big this effect is depends on the local content of the project and on the surrender requirement. I imagine the chinese would rather sell the FX in the parallel market rather than get stuck with the expensive bolivares. But does anyone know what the current practice is?

    • Re content , typical project is 10% engineering (in technically sophisiticated projects mostly offshore) , 50% plus machinery (mostly imported ) and 40% labour (mostly local except for expatriate component) so maybe 40% of the offshore funding gets spent locally . Some offshore investors as well as most local ‘regime friendly’ contractors use black market transactions to magnify their profits. ( heard about Belorussians doing it regularly) . You also have to factor in graft , kickbacks , overcharges which normally are paid offshore. For every dollar sent in by the Chinese (or any out side investor) a higher amount of dollars has to be paid back with future oil shipments , so what the govt gets today it has to pay back tomorrow, with interest.!!

      However if the projects are succesful their execution can in the long run benefit both the regime and the country. !! Not easy given the countrys current situation but time will tell !!

    • Youd be surprised at the number of local Pdvsa contractors and suppliers who are paid in USD to cover the purported ‘foreign component’ of their domestically supplied goods and services . They also hire subcontractors who charge USD to profit from black market transactions and pay kick backs . Of course all these contractors and suppliers are govt connected . This also applies to foreign contractors hired by Pdvsa to perform part of the works. Remember Chinese funding comes with strings attached to the hiring of Chinese contractors .

      • Good point. In practice there are two component of the bop, official and unofficial, and in the past many if not most of the dollars from these projects have ended up in the latter. That was not biggie when the official bop was flush with dollars, but now I bet they will try to crack down on these subcontractors one way or another (except for the Chinese).

  6. So bright boy Quico – when is the IMF going to intervene in Venezuela as you appear to be repeating the same unfounded claims as they are doind on that psycho site dolartoday led by that academic cheat from the LSE Aleander Guerrero.

    • It amuses him, it’s the same reason humans have trolled one another for ages, starting with the advent of speech.

      Actually, it started before that. Gorillas tease each other with false offers of food, so trolling likely proceeded speech.

  7. Why spoil the fun? It wouldn’t be the same without the paleolithic, brain-wahed chavistas “contributing” to the discussion.

  8. I dont mind the trolling, but educated and civilized people dont insult each other in what should be intelligent and civil discussion. Arturo posts two comments today and insults each author without saying anything. Par for his course.

  9. El ministro del Poder Popular para Petróleo y Minería, Rafael Ramírez, informó a través de su cuenta en Twitter que Petróleos de Venezuela acordó con China un préstamo por 14 mil millones de dólares para el desarrollo del complejo Junin 10, ubicado en la Faja Petrolífera del Orinoco, para la producción de 220 millones de barriles diarios de petróleo.


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