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.

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