China and Venezuela sign $ 11 bn oil deal

Venezuelan President Hugo Chavez signed more than a dozen accords with China valued at $ 11 bn, including ones on energy and transportation, as the South American country seeks to lessen its dependence on the US.
China will invest $ 2 bn in the country's oil industry, and another $ 9 bn to help Venezuela build a railroad, Chavez, who was on a five-day official visit to the world's fourth-largest economy, said in Beijing. The South American country will also double oil sales to China next year to 300,000 bpd and more than triple them within five years to half a million bpd, Chavez said.

“Today we became secure energy suppliers for China,”' Chavez told in a televised broadcast from Beijing. “We are very happy, we are very content with our growing ties with China.”
Chavez has sought to lessen Venezuela's dependence on the US, which buys about two-thirds of the country's daily exports of 2 mm barrels. Chavez, who took office in 1999, has repeatedly threatened to cut off sales to the US, alleging its government has attempted to assassinate or overthrow him.

Chavez's visit is an attempt by China to tell the US that it has influence in South America and that it supports Venezuela's efforts to move away from the US, said James Brock, a Beijing-based independent energy adviser for major foreign oil companies. Venezuela could sell China up to 1 mm bpd in the next decade, Chavez said. The South American country exported 14,000 bpd to China in 2004.
“China is one of the world's largest oil consumers, while Venezuela is one of the world's largest producers,” Chavez said. “Because of that, our countries complement each other.”
The visit will “push forward the development of our bilateral relations” and promote cooperation on “all aspects” China's President Hu Jintao said at a welcoming ceremony.

Among energy accords, state oil company Petroleos de Venezuela signed an agreement with China National Petroleum Corp., the parent of China's largest oil company, to form a joint venture to manage and produce oil from the fields in the Zumano region and another to certify reserves in the Orinoco Oil Belt, Chavez said.
Zumano, in the eastern part of the country, has proven reserves of about 400 mm barrels of light oil and 4 tcf of natural gas. Petroleos de Venezuela will hold a majority stake in the enterprise. The Zumano fields are currently producing about 25,000 bpd.

The two companies will certify reserves in the Junin 4 tract, one of Venezuela's heavy oil blocks. Venezuela is seeking to certify reserves in 27 blocks, which Chavez says may hold up to 235 bn barrels of oil.
Like Canada's oil sands, much of the crude in the Orinoco belt wasn't recognized as recoverable because it is heavy oil that is difficult and expensive to extract. Petroleos de Venezuela said that the new joint ventures are expected to produce up to 400,000 bpd by 2011.

“China would want to keep their options open on securing supply,” Gavin Thompson, country manager for China at energy consultant, Wood MacKenzie, in Beijing said.
“Venezuela would like to see lots more Chinese investment for onshore, and the Chinese have experience in that area, in enhanced oil recovery from older, life-long fields, as long as the environment isn't very challenging like in deepwater. That's very good for Venezuela.”

Venezuela has previously pledged to boost oil sales to China, the world's second-largest energy consumer, with mixed success. Oil Minister Rafael Ramirez said in January that oil sales to China would top 300,000 bpd by the end of this year. Venezuela's efforts to boost sales to China have been hurt by the type of crude oil it produces, which is heavy in metals and sulphur. China's refineries aren't equipped to process the oil.
“China won't be able to process Venezuelan crude for 5 to 10 years,” said Roger Tissot, an analyst with PFC Energy in Washington, DC.

Long distances are another factor, Tissot said. Venezuela can send oil to the US gulf coast in four to five days, while shipment to China can take as long as 40 days. Transportation costs also are higher, and Venezuela is probably losing as much as $ 3 a barrel by paying for the crude to be shipped to China, according to oil analysts.
“There're some very clear economic reasons why they (the Chinese) are not as bullish about Venezuela as perhaps they might be,” said Wood MacKenzie's Thompson.

Venezuela also signed contracts for 18 oil tankers worth $ 1.3 bn, and 13 oil drilling rigs, Petroleos de Venezuela said. As Chavez has sought new markets for his country's crude, oil sales to the US have fallen. Venezuelan oil and petroleum product sales to the US fell 6.3 % for the first five months of this year, according to the US Energy Department.
Still, Venezuela is one of the top four suppliers of crude oil and fuel to the US, according to Energy Department figures. In some months the country sends more to the US than Saudi Arabia.