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Consolidation Is Inevitable For Canada’s Oil Industry

Consolidation Is Inevitable For Canada’s Oil Industry

Canada’s economically dependent oil industry…

Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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China Sees Opportunity As Venezuela’s Oil Industry Hits Rock Bottom

Venezuela’s near-collapse and strict U.S. sanctions are creating an opportunity for Russia, Iran and China to strengthen their presence in Latin America, a region that for decades has been under U.S. hegemony. While Russia and Iran have, to an extent, gained a foothold in Venezuela by providing crucial support to the embattled Maduro regime, it is China that stands to benefit the most if it can secure a close relationship with the socialist authoritarian regime.

Venezuela is endowed with tremendous oil wealth with the pariah South American country possessing the world’s largest petroleum reserves of 304 billion barrels. The growing desperation within Caracas, caused by the petrostate’s near-collapse, has created an opportunity for China to exploit Venezuela’s vast hydrocarbon resources. This could not occur at a more crucial juncture for China with the country overtaking the U.S. to become the world’s largest refiner and the largest importer of crude oil. China’s endless thirst for petroleum, which is a crucial source of energy for its growing economy, is forcing Beijing to look at obtaining greater access to oil supplies around the globe. China’s state enterprises have shown a willingness to circumvent U.S. sanctions to receive crude oil imports from Venezuela and Iran.

Growing pressure to obtain additional crude oil supplies saw Chinese logistics firm China Concord Petroleum Co, known as CCPC, emerge as a leading player in circumventing U.S. sanctions to supply Venezuelan crude oil to East Asian refiners. The firm’s importance is highlighted by data sourced by news agency Reuters which shows that during April and May 2021 vessels charted by CCPC carried more than a fifth of Venezuela’s oil exports during those months. According to a Reuters investigation, CCPC has acquired at least 14 petroleum tankers to transport Venezuelan and Iranian crude despite Washington’s sanctions against both pariah states. By July 2021, Venezuela’s oil exports grew for a second straight month reaching 713,097 barrels per day with most of that crude oil destined for China.

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After abandoning directly extracting Venezuelan crude oil in August 2019 as a response to the stricter sanctions applied by the Trump administration, Beijing is focusing on expanding its presence in the OPEC member. Reportedly, state-controlled China National Petroleum Corp, or CNPC, is sending staff to Venezuela in preparation for investing in operations as President Maduro finalizes legislation aimed at facilitating greater private control of energy projects. That legislation the authoritarian leader hopes will attract the foreign investment urgently required to rebuild Venezuela’s shattered petroleum industry thereby allowing Caracas to reconstruct Venezuela’s failing economy. CNPC is also in negotiations with PDVSA regarding ramping up production at five joint ventures it has with Venezuela’s national oil company. 

The importance of attracting foreign investment is emphasized by the parlous state of Venezuela’s once-mighty oil industry with production continuing to decline. By August 2021 oil output for PDVSA and its foreign partner was reported to be an average of 520,000 barrels per day, or slightly less than the 524,000 barrels pumped a month earlier and significantly less than the 713,097 barrels exported by Caracas for that month. Unsurprisingly, July’s oil output is well below the target set by petroleum minister Tareck El Aissami, who in a June 2021 Bloomberg interview stated production will rise to 1.5 million barrels by the end of this year. To meet that ambitious target Venezuela would need to almost triple average daily oil production from July 2021 levels.

The only means of reaching such an ambitious target and eventually returning Venezuela’s oil production to over 2 million barrels daily is by attracting significant foreign capital. PDVSA believes it will take $58 billion to restore production to pre-Chavez 1998 levels of around 3 million barrels per day. Whereas, Maduro has indicated that investing as little as $30 billion will boost production potentially to as much as 5 million barrels daily. Those numbers based on the analysis conducted by other industry experts appear implausible with a far larger investment needed. Leading industry-academic Francisco Monaldi director of the Latin America Energy Program at the Houston-based Center for Energy Studies at Rice University’s Baker believes Maduro’s and PDVSA’s estimates are overly optimistic. In a February 2021 policy brief, Monaldi explained it would take an investment of $10 to $12 billion annually for a decade, “over $110 billion in total” for Venezuela to lift crude oil output to 1 million barrels per day within two years and then reach 2.5 to 3 million barrels daily by the end of 10 years.

Other sources including the economic advisers to the U.S. recognized interim President Juan Guaido’s estimate it will require an even greater investment, potentially up to $250 billion to reach pre-Chavez production of over 3 million barrels per day.

Even Maduro’s moves to create a more investor-friendly environment for international oil companies have not attracted the significant capital required to resurrect Venezuela’s rapidly corroding petroleum industry. This is because Washington’s strict sanctions, notably those imposed by the Trump administration during 2019 which cut Caracas off from global energy and capital markets, are deterring investment from foreign energy companies. It is Western energy majors which are crucial to rebuilding Venezuela’s shattered petroleum industry because much of the country’s oil infrastructure was designed and built by US and European companies during the 1970s oil boom. 

While U.S. sanctions are preventing investment by Western energy supermajors, Beijing certainly possesses the capital and technology required to resurrect Venezuela’s crumbling energy sector. China’s $1 trillion Belt and Road Initiative highlights the considerable resources, labor, and technology at Beijing’s disposal. The world’s second-largest economy has shown a willingness to circumvent and even defy U.S. sanctions when doing so provides China with a tangible benefit.

Any push by CNPC to boost investment through its partnership with PDVSA will give Beijing greater control over the world’s largest petroleum endowment. That would not only ensure greater energy security for an oil-hungry economy that is set to overtake the U.S. and become the world’s largest by the end of this decade but substantially bolster China’s geopolitical power. Beijing’s desire to expand its influence in Latin America is in direct response to Washington’s ongoing presence in Asia and support for Taiwan. It will also strengthen China’s influence in Latin America, a region traditionally under U.S. hegemony, giving Beijing greater access to South America’s abundant natural resources including oil, gold, silver, copper and rare earth metals. Beijing believes this will enhance its standing vis a vis Washington and give it the upper hand in the ongoing rivalry between the two giant economic and military powers.

Any investment by Beijing in Venezuela will provide the socialist Maduro regime with a financial lifeline that will allow PDVSA to expand petroleum production thereby bolstering the Venezuelan government’s ability to resist U.S. sanctions. That will prolong the existence of an autocratic regime that has proven nearly impervious, despite cracks appearing in recent months, to U.S. sanctions for over a decade. It is worth considering that Beijing, by ramping up Venezuelan oil operations, is improving its prospects of recovering an estimated outstanding $19 billion in oil backed loans. By August 2020, Maduro’s regime had secured a grace period for repayments until the end of that year with the COVID-19 pandemic weighing heavily on production. OPEC data shows that by June 2020 Venezuela’s oil production had fallen to an average of 336,000 barrels per day, although it has been steadily climbing since then.

Source: OPEC Monthly Oil Market Report.

If Beijing returns to being a lender of last resort and provides the capital as well as other resources needed to rebuild Venezuela’s crumbling petroleum industry, then Maduro’s power will strengthen while the value of Washington’s sanctions will decline. It is Maduros’ growing weakness and fears the Venezuelan state will collapse which are the driving force behind recent unilateral actions aimed at building a rapport with Washington and seeking an easing of sanctions. That has created an opportunity for the Biden administration to seek an alternative path when dealing with Venezuela, the autocratic Maduro regime and the county’s massive humanitarian crisis that will cease to exist if Beijing steps in to fill the void.

By Matthew Smith for Oilprice.com

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  • Chuck ZZ on September 09 2021 said:
    A naval blockade on one or two of Irans offshore platforms and 30% tariff on all non essential "made in China" crap will get their attention.
  • Mamdouh Salameh on September 09 2021 said:
    The author is well advised to read my comments on his published articles. In so doing, he will avoid repeating like a parrot the same mistake about China being the world’s second largest economy. He will learn that China and not the United States is the world’s largest economy and has been so for at least the last 5 years based on purchasing power parity (PPP) which is the only credible measure used by both the World Bank and the IMF to compare the GDPs of countries of the world. Accordingly, China’s GDP in 2021 is estimated at $26.66 trillion compared to $22.785 trillion for the United States or 17% bigger.

    Now back to China and Venezuela. Long before US sanctions were imposed on Venezuela, both China and Russia have been extending loans to Venezuela based on loans-for-oil. And much earlier than that, China on its way to become the world’s largest economy has been looking to invest in oil resources around the world starting in Africa. In fact, the World Bank has credited China’s investments with enabling Africa to grow at an average 4.4% annually for more than a decade. China is now the largest investor in OPEC’s second largest producer, Iraq and the largest importer of Iranian crude. Moreover, its investments and influence are continuing to spread worldwide under the Belt and Road Initiative (BRI). Venezuela is, therefore, no exception.

    With the government of Nicholas Maduro opening up the country to foreign investment, China is back with billions of dollars to invest in Venezuela’s oil industry. China’s oil giant CNPC is also in negotiations with PDVSA regarding ramping up production at five joint ventures it has with Venezuela’s national oil company. In so doing, China gets paid in oil for its loans, openly challenges US sanctions and secures a foothold in what used to be the United States’ backyard.

    Because of China’s purchases of increasing volumes of Venezuelan and Iranian crudes, Venezuela’s oil exports grew in July 2021 for a second straight month reaching 713,097 barrels a day (b/d) with most of that crude oil destined for China while Iranian crude exports have been exceeding 1.5 million barrels a day (mbd) of which more than 1.0 mbd have been going to China.

    Venezuela hopes to achieve a production level of 1.5 mbd before the end of the year. I am sure that with China's help it will.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bill Simpson on September 21 2021 said:
    Let Brazil and Columbia worry about Chinese influence in neighboring Venezuela. Better to let the Chinese get oil from Venezuela, than from Texas, draining it dry. Once it is gone, it is gone forever. Better hope an enormous hydrogen and battery infrastructure is in place before oil production begins to decline much. If not, you will discover what not having enough to eat is like.

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