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

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Oil Companies Leaving

A Petroleos de Venezuela (PDVSA) spokesman said talks about the refineries continue but gave no details. PDVSA President Rafael Ramirez, who is also the country's Oil Minister, declined repeated interview requests. Calls to China National Petroleum Corp.'s Venezuelan offices weren't returned.

The growing energy axis between China and Venezuela came about as a result of Chavez seeking to limit the influence of international oil companies in his country. Since 2004 Chavez has repeatedly raised taxes and royalties on foreign oil companies operating in his country, while mandating that Petroleos de Venezuela be given a majority stake in all oil operations.

His steps have led both Exxon Mobil Corp. (XOM) and ConocoPhillips (COP) to exit the South American country (BusinessWeek.com, 6/26/07), and analysts expect others to follow, drying up important funding and technology.

China's Challenges

Unlike their publicly traded brethren, the Chinese have stayed. China National Petroleum Corp. (CNPC) operates several oil fields in a joint venture with PDVSA, and is also involved in certifying reserves in one heavy oil block. PDVSA is also buying drilling rigs and oil tankers from China, in addition to creating a joint venture shipping company.

However CNPC has also had its share of problems with PDVSA, including a project to produce a boiler fuel that was unilaterally terminated by Venezuela.

"Chinese national oil companies have faced the same challenges operating in joint ventures with PDVSA as private international companies," says one Western oil executive. "The advantage given to the Chinese has been access to new opportunities."

'High Expectations'

It remains to be seen whether CNPC and other Chinese companies will be able to find sufficient capital for the Venezuelan joint ventures. The Chinese have scant experience in heavy oil ventures, an obstacle they are trying to remedy by investing in Canadian oil sands.

Venezuela's four existing heavy oil ventures, which were taken over by the government earlier this year, were put together by international oil majors.

"The Chinese are on a learning curve for heavy oil technologies and at this moment do not have the expertise of private international companies," says the executive. "The Venezuelan government has high expectations for the technologies to to be applied in new heavy oil developments, aiming for significantly improved recovery efficiencies. I do not think that Venezuela will allow the Chinese or other [national oil companies] to use outdated technology in developing heavy oil blocks."

Nonetheless, long-term political goals may trump existing obstacles and current economic considerations, says Julian Lee, an analyst at the London-based Center for Global Strategy. "There is an element on both sides seeing this as a strategic guarantee," he says. "The Chinese are scouring the globe, seeking to lock up energy resources, and the Venezuelans, under their present leadership, are seeking to diversify from the North American market."

Wilson is a special correspondent based in Caracas.