With the United States preoccupied with the Middle East, another great power of the 21st century is paying close attention to Latin America. China is devoting considerable diplomatic and economic resources to strengthen its strategic energy alliance with Venezuela--a country that at present provides 20 percent of U.S. oil imports. To the apparent ignorance of Washington, a great game, set in this century and continent, is currently underway.
Chinese oil companies often act as arms of government policy. Officials in Beijing lack confidence in the free market's ability to reliably supply China with oil over the long term. They thus have few qualms about who they deal with and what inducements they offer to guarantee China's access to oil. Indeed, China has already used its veto power at the UN and has deployed thousands of troops to protect its oil interests in the Sudan, unfazed by that country's deplorable human rights record. China has adopted a similar policy in Iran, recently signing a massive deal to develop that country's Yadvaran field, while the rest of the world frets about Tehran's nuclear ambitions. Beijing has also extended a $2 billion "ultra-low-interest loan" to Angola in order to gain exploration and development rights to several potentially rich offshore oil blocks. In Nigeria, China recently agreed to make $4 billion in "infrastructure investments" in exchange for four oil exploration licenses. Such policies indicate China would be quite willing to support Chavez's "Bolivarian Revolution"--economically, politically and, perhaps, even militarily--in exchange for access to Venezuelan oil. Nearly 200 years after the Monroe Doctrine, the possibility, however remote, of a Chinese military presence on Venezuelan soil is sobering.
China and Venezuela need each other. China craves oil. It is now the world's second largest oil consumer, after the United States. To maintain its prodigious growth, China will have to import an estimated four million barrels per day by 2010--nearly twice what it currently imports. Venezuela, in turn, needs capital and technical expertise to operate its complex fields. China's oil companies offer both in increasing abundance.
Venezuela's leftward lurch under Chavez has left the country's oil industry--the source of more than half its government's revenue--in a precarious position. Venezuela's state oil company, Petroleos de Venezuela (PDVSA), long enjoyed an unusual reputation as an efficiently run state enterprise, thanks to its having been managed independently of politics. In 2002, however, thousands of oil workers went on strike to protest Chavez's decision to subject the company to direct political control by the Energy Ministry. Chavez, whose "revolution" was built on promises to distribute oil wealth to the country's poor, struck back harshly, firing over 18,000 "opposition sympathizers." Although a short-term political victory for Chavez, the firing crippled the company's technical staff--a body blow from which PDVSA will not soon recover.
Moreover, PDVSA's Fitch credit rating (BB-) is at least four levels lower than that of other major international oil companies, like Exxon (AAA), while falling output makes it difficult to use future production as collateral for project funding. Even though Venezuela is enjoying windfall revenues from the current oil-supply crunch, longer-term trends are ominous. Daily production is now at least 700,000 barrels lower than when Chavez came to power in 1999. The country is presently unable to meet its OPEC quota of 3.165 million barrels per day, even though it still holds more than seventy billion barrels in stated reserves. The problem is that Venezuela's thick oil, often as viscous as tar, is difficult to produce. While all oilfields require investment in new drilling to replace reserves and maintain production, this is particularly true in Venezuela. Most Venezuelan wells must be actively pumped to squeeze out an average of 150 barrels per day. By comparison, Saudi wells typically flow at around 5,700 barrels per day. Venezuelan oil wells also deplete at an average rate of 25 percent per year, demanding constant investment in new drilling to maintain, let alone increase, production.
In 1998, one year before Chavez's election, oil prices averaged $14 per barrel and an average of 82 rigs were drilling new wells at any given time. In 2005, the last year for which comprehensive data is available, oil prices were four times higher, but Venezuela had less than sixty rigs drilling new wells at any given time. Exploration and production should have risen to keep up with growing demand, but given Chavez's policies, investors have been too nervous to respond to market incentives.
Indeed, Venezuela's revolutionary upheaval is driving away the Western oil companies that are PDVSA's traditional partners. Over the past eight years, Chavez has steadily denounced international capitalism, warned of imminent American invasion and threatened to block oil exports to the United States. Foreign oil companies are being charged "back taxes" and an increase in royalty demands, backed by the threat of expropriation, has particularly chilled investors. In April 2006, PDVSA seized oil fields run by ENI of Italy and Total of France, and took over five others that were "voluntarily" relinquished by ExxonMobil, Repsol of Spain, Statoil of Norway and other operators. Indeed, ExxonMobil, the world's largest energy company by market capitalization, has announced its plans to leave Venezuela altogether.
Attacking Western oil companies may make political sense, but Chavez's policies have hamstrung Venezuela's oil industry. Meanwhile, Venezuela's population is growing by more than 335,000 mouths each year. As the oil pie continues to shrink, it will have to be cut into ever-smaller slices. Without a new energy partner, Chavez's revolution will go broke.
Enter China
