Chavez's Billion-Dollar Snub of the U.S.

Venezuela President Chavez is cutting a deal to ship oil to China, which will lessen profits—and dependence on the U.S.

by Peter Wilson

Venezuelan President Hugo Chavez can't be accused of letting economic realities derail his energy policies, especially if it helps him snub the U.S.

Venezuela's and China's state oil companies will invest up to $10 billion to develop a heavy oil patch in the South American country, Venezuela's Oil Minister Rafael Ramirez said last month. Production of up to one million barrels a day would be destined for the Chinese market, where the two companies may also build three refineries to process the crude.

No matter that Chinese markets are 30 days away from Venezuela by tanker, compared with five to six days for U.S. Gulf ports. The cost of transporting crude to China will shave several dollars per barrel from Venezuela's take, analysts say.

"Chavez would clearly have to lower the price of the crude," says Lucian Pugliaresi, who heads the Washington-based Energy Policy Research Foundation. "He would have to offer a discount of between $5 and $10 a barrel."

If that's the case, the cost to Venezuela could hit $5 million to $10 million a day in lost profits, or as much as $3.7 billion a year. Still, that may be a price Chavez is willing to pay since a long-term supply and refining agreement would boost Venezuela's toehold in the world's fastest growing energy market. China is now the world's second-largest oil importer, trailing only the U.S. Any long-term pact would also allow Chavez to lessen his dependence on the U.S. market.

"From the Chinese perspective, they see a man in Venezuela who hates the U.S. and is willing to do things that don't make economic sense," says Jim Williams, who heads the London, Arkansas-based WTRG oil consultancy firm. "So, they think, why not take advantage of this situation."

Major Supplier

Chavez has made no secret of his desire to lessen his country's dependence on the U.S., which he has repeatedly accused of seeking to overthrow his regime, including allegedly backing an abortive 2002 coup attempt. Despite the rhetoric, the U.S. still takes about two-thirds of Venezuela's daily oil exports of about two million barrels. Venezuela supplies about 10% of U.S. oil imports and ranks among Washington's five largest suppliers.

But that is changing. Deliveries to the U.S. have fallen in the face of rising domestic consumption and as Chavez has sought to open new markets, especially in Asia, and to a lesser degree the Caribbean and South America. Venezuelan oil shipments to the U.S. fell 9% from 2004 to 2006 to about 1.42 million barrels a day, and are down an additional 8% for the first six months of this year, according to statistics from the U.S. Department of Energy.

During the same period, Venezuelan oil exports to China have soared tenfold from 14,900 barrels a day in 2004 to more than 150,000 barrels today. And if Chavez has his way, that number could more than triple by 2010.

Refinery Costs

Given falling Venezuelan oil production, any increase in exports to China, India or other Asian markets would come at the expense of the U.S., analysts say. Although Chavez says that his country's oil output will rise to 5.8 million barrels a day by 2012, few believe him given problems at the state oil company Petroleos de Venezuela, which has seen its investment funds diverted to the President's social programs.

Closer energy ties with China come with a cost, analysts say. To make any agreement more feasible, Venezuela would need to find a Pacific outlet for its crude, either by using an existing pipeline in Panama, or building a new one in Colombia, to avoid shipping its oil around the tip of South America, analysts say. And secondly, China's existing refineries can't process Venezuelan heavy crude, which is high in sulfur and metals. That has forced Chavez to send China fuel oil or other finished products so far.

"Building new refineries in China is essential if Venezuela hopes to boost exports there," says Williams.