How much oil is Venezuela really sending China day after day? It’s a murky subject, covered in opacity on both sides, and the source of much confusion. With Venezuela now reportedly failing to deliver all the oil it’s committed to delivering, China is looking at creative ways of squeezing value out of the gargantuan loans they’ve sent to us, including making moves on Venezuela’s offshore oil facilities, with consequences we’ll be paying for for years to come.

A recent investigation by Reuters made waves, finding that “at the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes (Chinese and Russian) firms – with shipments delayed by as much as 10 months. It also failed to make timely deliveries of another 3.2 million barrels of crude shipments to China’s state-run China National Petroleum Corporation (CNPC).”

That’s certainly serious, and it makes it sound like the number of barrels being sent is decreasing. But it isn’t.

We took a deep dive into the National Bureau of Statistics of China, the China Customs Information Center, and OPEC, and, if anything, found a rising trend. Venezuela exported an average of 270,000 barrels per day to China in 2014. That rose to 349,000 in 2015, and then further 365,000 in 2016.

Nonetheless, due to the fall in oil prices, the annual value of those exports went in the opposite direction: $8.34 bn in 2014, $5.09 bn in 2015, and $4.54 bn in 2016.

China is looking at creative ways of squeezing value out of the gargantuan loans they’ve sent to Venezuela.

Oil-for-loan agreements were negotiated when the barrel of oil was over $100. Today, with crude at less than half that price, you need more oil to service the debt at the same rate.

But increasing shipments to China without boosting production will only come at the expense of exports to other countries like the United States —which pay in greenbacks that PDVSA is in dire need of.   

Submerged in operational and financial problems, PDVSA has for years been missing targets for increased production. According to a recent article in Market Watch, Venezuelan oil production may tumble 20% by the end of 2017.

“At a minimum, it will lose at least another 200,000 b/d to 300,000 barrels per day,” said James Williams, energy economist at WTRG Economics. “Assuming Maduro is still in office, by end of the year we expect Venezuelan production between 1.7 and 1.8 million barrels per day.” Venezuela has consistently pledged it will boost oil output. As recently as last November, President Maduro was saying we would tap $2.2 billion from a Chinese credit line to boost oil output at joint ventures with China National Petroleum Corp. Yet another promise in the tapestry of the unfulfilled.     

Oil-for-loans was supposed to be a win-win proposition. It’s turned into a lose-lose nightmare.

Assuming Maduro is still in office, by end of the year we expect Venezuelan production between 1.7 and 1.8 million barrels per day.

So why does China remain invested in Venezuela? The standard answer is that, with some $60 billion lent since 2007, they’re in too deep to pull out now. And with PDVSA barely keeping up with payments —and sometimes quietly failing to do so— China’s getting creative on ways to get its money back. The trouble is that some of this “creativity” has dire strategic implications for Venezuela.

Ah! Oh! Curaçao!

For signs of what’s to come, look to Curacao’s Di Korsou refinery, better known as The Isla, and to the Bullen Bay Oil Terminal on the island, sites operated by PDVSA since 1985.

On September 2016, Curacao signed a memorandum of understanding with China’s Guangdong Zhenrong Energy Co. (GZE) for the modernization of the refinery, the oil terminal and a 20 year lease of those facilities after the lease with PDVSA ends in 2019. The document was signed after PDVSA failed to live up to its contractual obligation to invest.

The loss of The Isla and the Bullen Bay Terminal could be crippling for PDVSA, as the company has become increasingly reliant on them to make up for the shortfalls of its own facilities back home. Isla has been supplying the Venezuelan market with gasoline and diesel, because Amuay and Cardón no longer produce enough for the home market. The terminal also receives increasing volumes of imported light crude for refining and to dilute the extra heavy crudes from the Orinoco Belt.

If PDVSA can’t renew the lease agreement, Venezuela will lose one of its main deep-water ports to load Very Large Crude Carriers (VLCC) for trips to Asia. A large portion of PDVSA’s crude shipments to China take off from the Bullen Bay Terminal.

By getting hold of a Caribbean refinery like The Isla, with its access to the North American market and the widened Panama Canal, China would gain an important foothold in the region. This would leave PDVSA dependent on Chinese assets to process and ship crude not just to China, but also to the United States and Europe. El negocio redondo.

Once seen as a trustworthy and valuable partner in the region, PDVSA has turned into the Caribbean family’s drunk uncle.

This January, a GZE delegation met with Curacao’s Prime Minister Hensley Koeiman. They asked the PM to mediate contact between the company and PDVSA. After the meeting, Curacao’s PM and Finance Minister jointly stated that they were impressed with the intentions of the Chinese companies, adding that if the project continues, it would create many jobs for the local community.

Once seen as a trustworthy and valuable partner in the region, PDVSA has turned into the Caribbean family’s drunk uncle, always promising to pay back the last loan by asking for a new one. It seems unlikely that Curacao will reward PDVSA for its misdeeds and renew the lease in 2019, especially having a lucrative mango bajito provided by the Chinese. Under the framework agreed with GZE, the China Development Bank will finance up to 85% of the Isla refinery upgrade, which includes building a new gas terminal and expanding oil storage.   

There’s an old Chinese saying that goes: a mountain does not turn, but a road does. If Venezuela cannot fulfill its end of the bargain, China will most likely find a road through Curacao to gets its money back.

33 COMMENTS

  1. So, basically if I got the gist of your article right, if PDVSA doesnt pay the Chinese, no problem for China, as the oil is going to have to pass through their leased refinery so they can say aha, here is what you owe us…

    Or did I get it wrong?

    • I don’t think China will resort to those kind of tactics, they don’t really need to. They will most certainly gain the upper hand in future negotiations though. something in the likes of “in order to use our installations some % of oil has to go towards debt repayment”

  2. First Venezuela gives its sovereignty to Cuba.
    Then China is given Venezuela’s sovereign assets such as PDVSA and a large amount of real estate.

    Maduro and his aides are living the high-life on payoffs from Cuba and China.
    El Pueblo is paying for Cuba, China, and Maduro but seeing no benefits.

    After China gets its share of oil, Venezuela distributes massive amounts of virtually free gasoline for domestic consumption, Vzla production declines 20%, and U.S. shale oil production expands then Venezuela main industry-oil production- may actually need subsidies to keep on functioning.

    Unbelievable!

  3. USD 60B in loans.

    It seems ruled by a Clan imposed there by China, Odebrecht-Lula and Cuba. The result: Venezuela currently.

    Just for fun:

    The Gorges Dam China (22 GW more than Venezuelan total power generation): USD 22B
    Rusky Bridge, Russia (world’s longest bridge): USD 1B
    Etihad Rail, UAE (longer than Venezuela): USD 11B
    Jamnagar Refinery, India (world’s biggest refinery, and way over Venezuelan full capacity): USD 6B
    Sadara Chemical Company, Saudi (world’s largest petrochemical complex): USD 20B

    • Wonderful comparison–and, if you add in the min $240 bill. stolen by corruption over the past 15 years, you could have built 4 of each–Venezuela, world basket case, submerged in an ever-devouring black hole (mixed metaphor fun).

  4. Hold on… It looks like VZ should have won here. If they sold oil futures to China in 2014 for the 2014 price, and the price subsequently dropped, then VZ sold oil at a higher price than they would have if forced to sell on the future market. Wasn’t the “loan” from China really pre-payment for oil? Then VZ should be very happy.

    Or did they do the super stupid thing and agree to pay back the loan from future oil revenues no matter what the actual price? The price dropped, forcing VZ to take more and more of the production to make up the difference.

    Any producer of a commodity should have locked future options when the price was high enough to sustain profit. In other words, sell the volatility risk to others (such as China). Then their ass would be covered and they could pay their bills and still have some fun money.

    • “Or did they do the super stupid thing and agree to pay back the loan from future oil revenues no matter what the actual price?”

      If you have to ask, you don’t know Chavismo very well. They have been making an art of “the super stupid thing” for many years.

  5. Wondering how that India deal factors in to this. In late 2016 India and PDVSA signed an agreement for $1.45B USD for joint oil production. That means that India gets a large chunk of future production. I assume that PDVSA is betting that they can deliver that oil to India by making their existing fields more productive.

    http://www.voanews.com/a/venezuela-india-sign-oil-deals-worth-billions/3581808.html

    Between PDVSA borrowing from India, China, Russia and mortgaging everything to do so, it appears that they are way over-leveraged. This is gonna to end in tears.

  6. The size of China’s loans to Venezuela is bigger than any loan by the World Bank to any country. They are also some 20% more risky. See: http://www.thedialogue.org/map_list/ for the amounts of loans from China to Latin American countries.
    These direct state loans are not the whole story. Chinese companies are involved in no less than 17 sectors of the Venezuelan economy, financing some gigantic flops such as the Tinaco-Anaco railway by the China Railway group, power stations by Sinohydro, phones by ZTE and housing by CITIC Group, among other poor ventures.
    The Chinese want to grab several mining prospects in Venezuela.
    The Venezuelan government already defaulted on the loans and China had to agree to a change in the conditions, a concession that gave Venezuela some breathing room. The Chinese are extremely worried about their investments in Venezuela!
    If the region gets tough with Maduro the Chinese might not come to the rescue.

    • Interesting. And Venezuela knows that they can get away with screwing their biggest creditors because China and Russia can’t send in military assets as repo-men. They can’t because the US Navy won’t like Russian or Chinese military assets running around the Americas shooting off guns, even if they have a damn good reason.

      Well. I’m sure they will find other ways to exact their revenge. I’m guessing sabotage would be an effective way to make sure the PDVSA doesn’t get to sell oil to anyone if they refuse to pay back what they owe. Not that VZ needs any help in that department. They are doing a pretty good job of shooting themselves in the foot every chance they get.

      • Ron, the reds will gladly welcome Russian military. Anything. They will bend over backwards and give ruskies mil basing rights. The investment is strategic….global chess.

        The ruskies have not taken eye off ball. They are patiently waiting and when they deem fit, will make further moves. Venezuela is the strategic crown jewel of the hemisphere. Because of its location and resources. Obviously the ruskies wish someone else was in charge: enter TEA in two years. Tillerson is not going to make nice with ruskies over BRV. Global chess!

      • Venezuela knows they cant screw their biggest creditors. Military threats are not needed – just cut the flow of money and the Chavistas are screwed.

        But they are also screwed if they get even less money for selling oil in the market.

        So, as the saying goes, they are reduced to “undress one saint to dress another”, and employ all the (useless) trick of the irresponsible – see who can you stop paying today to pay somebody else today and pray tomorrow will solve your problem

  7. Really interesting article, but just to add some clarification:

    “For signs of what’s to come, look to Curacao’s Di Korsou refinery, better known as The Isla, and to the Bullen Bay Oil Terminal on the island, sites operated by PDVSA since 1985.”

    It is called “Refineria di Korsou B.V.” (translated from papiamento: Curacao’s Refinery Ltd.) a.k.a. RDK, and it’s a company owned by the Curacao’s government, which in turn owns the refinery, the Bullenbaai oil terminal, and other local assets required for the exploitation of the oil business on the island.

    There is also “Refineria Isla B.V.” a.k.a. as “Isla” (without “the”, or “la”), which is a Curacao company owned by PDVSA, which has the rights to operate RDK’s assets till 2019.
    Most locals know the entire thing plainly as Isla.

    Now some insight:
    It’s true that part of the contract between RDK and Isla included the clauses for PDVSA to maintain and upgrade the refinery, since it’s really old and in dire need of actualization for it to comply with modern pollution standards. When it is refining at full capacity, you barely can breath in the surroundings.

    PDVSA in the meantime, has done nothing to improve RDK in the last 18 years. There are many stories and tales about the real reason for this, specially since we all saw Chavez announce several times the construction of new refineries all across the Caribbean (not yet one finished), but none to upgrade the one with more strategic weight, but the ones that ring most are:
    -He wasn’t able to exert any mayor geopolitical influence on Curacao (since it’s a Dutch free associate state), in comparison with e.g. Jamaica or any other Caribbean country
    -The costs to upgrade the old refinery are astronomical, beyond any practical business case, even a chavista business case in a territory they can’t “control”.

  8. Funding under the Fondo Chino probably carry much better conditions than those governing ordinary public Bond financing , of course having a mortgage on revenues from the sale of oil to chinese oil companies and others adds a security to the chinese transactions which the bonds lack …but the rates used in the Fondo Chino financing are much more favourable than those charged under the bonds …….the thing is that the regime went overboard in borrowing recklessly to fund its political and social programs , and the ease with which the Fondo Chino allowed them to finance that funding made them take on more debt that was rational…!! Because the Fondo Chino operated on shorter time lines and involved the use of Chinese contractors and suppliers and the use of sales revenues they soon became a problem for the country finances . Some 2 year ago I heard a Regime Fellow tell me in hushed tones that the problem was that they ‘had gone too far’ in using the oil for funding mechanism and that now they were stuck…!!

    The Chinese are no fools and they are less sentimental about ideological things than Chavez and his succesors …so they will not take on more risk than absolutely neccessary to protect their interests , the new investment announcements are for show mostly and wont make any serious headway until things become more stable and organized ……!!

    My guess is that they would stand to gain by a regime change where the ‘new people are better organized and economically more conventional than the ones that they now have as counterparts in Venezuela ……, wouldnt surprise me if they ve had contacts with the opposition to signal their sympathy for a change provided it didnt affect their interests too harshly….!!

    • “Funding under the Fondo Chino probably carry much better conditions than those governing ordinary public Bond financing…” [snip rest of Marxist apology]

      No, it does not. From the loan initiation if the price of oil increases then Venezuela owes the same number of barrels at the original price, and if the price falls then Vz owes the original dollar value — that is: more barrels. It is a no-lose deal for China and a guaranteed-lose deal for Venezuela. Source: China University of Petroleum (Beijing), a public policy think-tank.

      • My understanding is that what is owed China is not a fixed number of bls but a us$ amount (previously disbursed by china to Fondes) which must be paid from the PROCEEDS of oil sold to various customers which instructed to by PDVSA ( on behalf of the Govt) to deposit the price of those supplies into a chinese bank account from where the money is used to pay chinese lenders under the Fondo with some left over amounts paid back to Venezuela .

        Different blends of crude oil and products with variable prices are sold to these customers while the amount recieved by Fondem is a set US$ / Remimbi amount , so there is no way for Venezuela to owe China a fixed set of bls , the bls are just the means whereby payment of what is owed China is made , but what has to be paid is NOT the bls per se but the proceeds from their sale .

        Sorry but it does seem that the think tank is likely misinformed ……. there is a disadvantage for Venezuela to trade ‘oil for loans’ but it is not that payment is made in Bls , but as I understand it , its not.!! but something else which has been discussed before in these pages…!!

        • “My understanding is that what is owed China is not a fixed number of bls but a us$ amount…which must be paid from the PROCEEDS of oil …”

          That’s precisely what makes the deal a guaranteed loser for Venezuela. It makes no difference if the loan is denominated in USD or barrels at a fixed USD price. The terms are so onerous that clearly the chavistas never intended to meet them (and they never have). The deal was negotiated by two crooks trying to take advantage of each other.

          “My understanding … Sorry but it does seem that the think tank is likely misinformed [Haw!]…” Please understand if I accept the word of an official policy arm of the PRC over your rather flexible “understanding.”

          And “My guess is that they would stand to gain by a regime change …” But the oppo has repeatedly signaled that they would repudiate any such loan. None of that matters; just your guesses and “understanding.” =)

          • The deal is composed of several documents , its better when you have read them than if you have to take some elses word for what they contain . Again my understanding according to sources which have some knowldege of the actual deal is that the method of payment provides for the payment to be made in money and not in bls ……..in that respect the think tank is wrong ….I agree that the deal is a loser for Venezuela but not for the reason which you state , if the price of the oil is arms lenght and the interest rate is lower than has to be paid to bondholders then thats not where the problem lies. The oppo is not saying that they will not recognize the debts under the Fondo except to the extent that Venezuelan Laws have been broken in having them signed and performed …there is no reason to believe that is the case , the Chineses are as stickler for legal formalities as any normal financier and have sought legal counsel from independent firms which are not regime suppliant ….so if the Oppo has any objection it will be for any later transaction which for example has not been approved by the NA (where such approval is required).

            The chinese will gain by having a govt change because this govt is incompetent in the running of venezuelas economy and pdvsa and that makes their investments here always a problem !! My guess is that there is a lot of dissatifaction with the regime from many officials inside China because of the inept way it handles handles the govts affairs …….!! The chinese are much more business oriented that people give them credit for ……..!!

  9. Hi Parsifal, thanks for your interesting contribution. Could you please help me find the oil exports numbers from your chart? I failed to find them in the links provided and the Chinese customs’ website requires a login. A year ago Venezuela and China negotiated a grace period for the oil payments, where Venezuela would be paying only interest but no amortization for two years, so I’m surprised your chart shows an increase in oil exports to China. If they are indeed increasing, is it clear that it is for repayments? Or could it be that part of it is paid in cash and not to amortize the loan, given the grace period?

    • Understood that China agreed to the grace period extended to the Republic on the implicit condition that the money so released would be used to pay Chinese Creditors of Pdvsa their debts falling due during that period …so it involved no actual increase in the funds which Venezuela would have available for other uses !! For example to pay for food imports to feed Venezuelas starving population…!!

    • Not all the oil being sent is for debt repayment, although it is unclear what % of it actually is, estimates point to 30-40% being used to amortize the loan, but no one really knows for sure. Besides the lack of transparency, there are several overlapping agreements where debt repayments are stipulated at different rates and intervals, and you also have to include the grace period you just mentioned. In conclusion, who knows how much cash PDVSA is receiving from China.

      As for the numbers in the chart, it was kind of complicated to acquire them. I used data from OPEC for the value of the Venezuelan barrel (monthly values), then data from the Chinese Customs looking for imports based on HS Codes by country of origin, and finally dividing the total monthly value of crude imports from Venezuela by the $ of the Venezuelan barrel. So it wasn’t that straight forward. The Chinese Customs page does require you to login, but you need a Chinese phone number to register and you can only download a certain amount of info per month. I had to use 5 different accounts to get everything I needed haha. Best I can do for you is sending you the complete chart, just text me though FB.

  10. As such where is the money?

    How many big infrastructures projects has been built in Venezuela in the last 8-9 years? USD 60B after 2006, should be translated in big things after two or three years and so on. As such, can anyone pop up one?

    Add all oil revenues, and all the bonds?

    I only recall chavez opening an arepera in Parque Central in a former Arturo”s. That‘s it?

    • Oh, but he: opened a Cuban ice cream maker (lasted a year, or so), a “ruta de la empanada” (stillbirth), “cultivos organoponicos” (quickly abandoned), confiscated private major agricultural seeds/fertilizer/equipment/loans supplier “Agro-Islena”, renamed “Agro-Patria”, which now provides virtually nothing to growers; and, (continuing to name only a few) confiscated millions of hectares of private productive agricultural/cattle lands, renaming them with “Revolutionary” monikers, none paid for, most given to peasants, who ate the cattle/livestock, put up 4 poles with a tin or plastic “roof” to take possession, and who now produce nothing….

  11. Plan Marshall in current value cost USD 120B, to rebuild war-devastated regions, modernize industry, make Europe prosperous

    The USD 60B came when Venezuela was not devastated by any means and was prosperous thanks to the oil revenues (the national debt was smaller than the International reserves)

    As such, these USD 60B have ever entered the country?

  12. More Chavista brilliance-let’s chase the wicked yankee gringos out so we can let another bunch of chinese gringos come in and take over everything again and we’ll be back where we started except in much worse shape! Even Castro couldn’t have planned it better!

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