China and Venezuela

The National Security Strategy says this about Venezuela:

Venezuela, a demagogue awash in oil money is undermining democracy and
seeking to destabilize the region

Under Chavez, Venezuela is not only developing ties with Iran, but it is also building relationships with China. One way it is doing so is with its chief resource, oil. China is hungry for oil, and in Venezuela, China sees a partner that can supply it with petroleum. Chinan also knows Venezuela can cause headaches for the United States, but the question is how far China will go in aggravating the United States in its own backyard.

An article in the latest China Brief at the Jamestown Foundation describes the balancing act.

Chavez does not seem to grasp Beijing’s concern here and has repeatedly tried to pull China in on his side in disputes with Washington. For example, he has condemned Washington’s refusal to supply spare parts for Venezuela’s aging F-16s and for blocking his efforts to purchase aircraft from Spain and Brazil on the grounds of U.S.-licensed components used by the Spanish and Brazilian companies. “The gringos are sabotaging and they are impeding,” Chavez said in a speech in mid-January (AP, January 18). “Well, it doesn’t matter. We will buy [the planes] from China [or] Russia.” Several weeks later he told supporters: “We could easily sell [our] oil to real friends and allies like China, India or Europe” (AP, February 6).

In mid-2005 the Chinese ambassador in Caracas tried to put a brake on Chavez’s rhetoric in a long interview (El Universal, August 28 and 29, 2005). He understood Venezuela’s wish to diversify its clients, but added that “the natural markets for Venezuelan oil are North and South America.” He conceded that China was cooperating with the Venezuelan government in the expectation of securing access to some of the oil for itself. Yet his blunt comments suggested two things: that China still is not convinced Venezuelans are serious and committed enough to pull off the production projects, and that China’s interest is strictly commercial. That is, China will not allow Chavez to make China his ally in battles with Washington.

As suggested here, Venezuela has not been shy about brandishing its oil as a possible weapon against the US.

Chavez seeks a special relationship so that China can replace the United States as Venezuela’s chief foreign client, Burgos adds, enabling him to toss the U.S. out of Venezuela in the context of his continent-wide “Bolivarian revolution.” At present, the United States imports about 15% of its foreign oil from Venezuela. Late in 2005, Chavez noted that so long as the United States does not try to invade Venezuela and overthrow him, oil will continue to flow north (ABC Nightline, September 16). In the end, however, this self-styled successor to Fidel Castro seems to think Venezuela must break all economic dependence on the United States, and even a Fudan (Shanghai) University specialist sees Chavez using oil as “a diplomatic weapon” (China Daily, November 22). In early February 2006 Rafael Ramirez, the president of Venezuela’s state-run oil company Petroleos de Venezuela (PDVSA), reviewed Venezuela’s oil-related relations with China in a Caracas interview, saying “we are hoping to send 300,000 bpd to [China] very soon” (Xinhua, February 9). This would be double the current amount, most of which goes into asphalt. (Much of what China buys now is orimulsion, a low-grade, dirty fuel oil made by PDVSA from the heavy oil of the Orinoco Tarbelt.) Venezuela’s ultimate goal is to provide 15-20% of China’s oil import needs. Much of that might have to come from what the United States now receives, for Chinese and foreign sources fear that production is falling, not rising, in Venezuela.

Ambassador Alcalay warns, however, that selling to China rather than the United States is “neither sensible nor realistic,” as China’s ambassador himself suggested, for several reasons. China has no refineries that can handle the heavy, highly sulfurous Venezuelan crude, while Venezuela already has its own in the United States that do—the Citgo group. Still more problematic is the long and torturous transportation route around southern Africa and through the dangerous Malacca Strait. The Panama Canal is near Venezuela, but it is too narrow for the Very Large Crude Carriers that transport so much crude today. PDVSA has opened an office in Cuba, as it has in Beijing, and plans to build a super-tanker shipping terminal at Matanzas, east of Havana. Venezuela says it will increase its number of tankers from 21 to 58 over the next seven years with a ship-building program in cooperation with China, while China could provide some ships of its own (AP, August 20, 2005). Another option is pipelines. Colombian President Alvaro Uribe and Chavez have already agreed to construct one to a Colombian Pacific port. This route will greatly facilitate transporting oil to China, though Beijing does not seem to be involved in the project.

This passage mentions two difficulties for Venezuela. First, the difficulties of shipping oil west through the Panama Canal to China, and second, the fact that China's refineries are not well equipped to handle Venezuela's heavy oil.

Citgo does have refineries that can handle the heavy oil. This is one reason the United States makes a natural market for Venezuelan oil. However, Citgo is a subsidiary of Venezuela's state-owned oil company, Petroleos de Venezuela S.A. (PDVSA). As such, Venezuela has some leverage over American oil.

In fact, there have been noises that Venezuela may be seeking to sell Citgo, which it would make it less dependent on the US market. It may not be the wisest move for Venezuela, however, because as I mentioned, China is not ready to take that oil. Venezuela may hurt itself in the process.

As for the Panama Canal, there have been talks about pipelines from Venezuela to the Pacific coast of Panama, to transport oil that way to the Chinese market.

Although there is talk about eventually building a pipeline from the Venezuelan oil fields across Colombia to Pacific ports in Colombia or Ecuador, such a facility would at the present time be vulnerable to sabotage because it would run across a war zone and present a tempting target for Colombian rebels who have long made a habit of attacking the country’s existing pipelines. Moreover, the necessary Pacific port facilities do not exist.

That leaves Panama’s interoceanic pipeline, which runs from Chiriqui Grande in Bocas del Toro province to Puerto Armuelles in Chiriqui province, as the most reasonable route for Venezuela to China oil shipments in the foreseeable future. That pipeline, which was built when the United States opened the oil field on Alaska’s north slope with a legal provision that its production could not be exported, was originally used to transport Alaskan oil to the US east coast. Later the law was changed and the oil companies found it more advantageous to export Alaska’s petroleum to Japan and supply the eastern United States with oil from Venezuela and other countries east of the Panama Canal, and thus for a number of years the pipeline was unused. Then new safety regulations that barred single-hulled oil tankers from US waters and other developments in the world oil market led to the pipeline’s refurbishment and reopening, but mainly to the expansion of the terminals and storage facilities at either end of the pipeline. Large-scale oil shipments from Venezuela to China, however, would dramatically increase the pipeline’s use.

(Only the smallest modern tankers fit through the Panama Canal. Very little crude oil transits through the waterway, although some petroleum distillates and other fuels like liquid propane gas are shipped through it.)

The Venezuelan and Panamanian governments (the latter part owner of the Bocas-Chiriqui pipeline) have been negotiating, talking in terms of pumping some 120,000 barrels of oil to China per month. Our pipeline has a capacity for 800,000 barrels per day, but its pumps were installed to move oil from the Pacific to the Atlantic (south to north) and they would need to be modified or reversed to send the fuel in the other direction.

The Torrijos and Chávez administrations, along with that of Álvaro Uribe in Colombia, are also exploring the possibility of an oil pipeline running from Venezuela to Panama. This would be in addition to the projected natural gas pipeline from Venezuela to Colombia, then under the Caribbean Sea to Panama.

China has expressed interest in funding such a pipeline.

What would really raise US hackles would be if Venezuela decided to sell China its US subsidiary Citgo. Such a move would allow Chinese oil companies to ship Venezuelan crude to refineries on the US's western seaboard, and from there on to ships across the Pacific. Observers say Chávez has discussed a potential deal with the Chinese, but he shares with China a desire not to make relations with the US any more complicated than they are already.

One major obstacle to increased energy cooperation between China and the region is the sheer distances involved, and the lack of straightforward shipping routes. As well working on the Panama Canal, China is also interested in funding a pipeline through Columbia, which would take Venezuelan crude to the Pacific.

Chavez is well aware of how oil can give his thugocracy some leverage. He's been quoted as saying "Oil is a geopolitical weapon." Venezuela is a member of OPEC, and has recently suggested it might cut production in solidarity with Iran, but last month agreed not to lower production.

There are certainly enough problems in the world that require the focused attention of the United States, but Venezuela is a problem lurking in the weeds. If a confrontation with Iran becomes acute, and oil supplies are threatened, Venezuela may also join in with denying oil to the United States. Oil markets are already nervous about what happen to the price of oil during a serious crisis involving Iran. Venezuela may only make it worse.

For its part, aware that egging on Venezuela in a battle with the US would not be taken well, China is not pushing the issue. But China has plans of its own, it is a rival of the US, and Venezuelan oil is an inviting supply. The United States must be vigilant in managing these potential threats.