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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Increasingly Desperate Venezuela Makes Oil-for-Cash Deal With China

Increasingly Desperate Venezuela Makes Oil-for-Cash Deal With China

Venezuela is showing increasing signs of desperation as it takes out an additional $4 billion in loans from China in exchange for oil.

The deal, announced July 21, will give embattled Venezuelan President Nicolas Maduro an immediate influx of cash, which he needs to keep the economy afloat. Average Venezuelans are suffering from a shortage of basic goods, food and medicine, and inflation hit an eye-popping 62 percent for the 12-month period ending in June.

With foreign currency running short, President Maduro might seek a currency devaluation to boost the economy. But that route could also lead to more inflation and a worsening of the country’s economic crisis.

Thus, President Maduro has turned to China for help. Already having taken out more than $40 billion in loans from China since 2008, Venezuela agreed to send an additional 100,000 barrels per day in oil to China in order to pay for an additional $4 billion in loans. That comes on top of the 500,000 barrels per day Venezuela already exports to China, with almost half of it going to pay down prior debt.

While President Maduro may welcome the cash, it is not at all obvious that this deal is good for Venezuela over the long term. For one thing, diverting more oil to China will force Petroleos de Venezuela S.A. (PDVSA) – the state-owned oil company – to cut back on exports to other destinations, such as the United States. That will put even greater financial pressure on the struggling oil sector, as a large portion of exports to China aren’t bringing in any revenue.

On the other hand, the Venezuelan government insists that more exports to China will come from an overall increase in production; officials are promising to squeeze out another 1 million barrels per day from its oil fields in the coming years.

Related Article: Whose Oil Will Quench China’s Thirst?

But that is going to be extraordinarily difficult for PDVSA to do. Venezuela has had a chronic difficulty in lifting oil production, despite sitting on top of an estimated 298 billion barrels of oil, the largest in the world.

Venezuela Oil Production
Source: EIA

Venezuela’s oil production comes from two basins – the Maracaibo basin and the Orinoco basin. The oil fields in the Maracaibo basin are located in the northwest part of the country in and around Lake Maracaibo. These fields produce a sort of medium grade crude, and Maracaibo has traditionally been Venezuela’s most productive oil region. However, despite accounting for almost half of the country’s oil output, the fields are mature and in decline.

The Orinoco basin, on the other hand, contains a truly massive amount of oil. The U.S. Energy Information Administration estimates that the region could hold 513 billion barrels of oil, although the extent of which is recoverable is uncertain. The problem with the Orinoco belt, which stretches across the midsection of the country, is that its oil is of the heavy, sour variety. To develop it, Orinoco will need a significant investment of capital, something that PDVSA and the national government are sorely lacking.

Underinvestment has been a problem for Venezuelan oil for more than a decade. In 2002, a huge strike by PDVSA workers led to the consolidation of government control over the oil company. More than 18,000 workers were fired, and PDVSA increasingly became an arm of the government.

This allowed the late President Hugo Chavez to dispense cash and oil to increase his influence, both domestically and regionally, but it also depleted PDVSA of both human and financial capital. Oil production has not recovered since, and there is little reason to believe that President Maduro can turn things around now, especially considering the economic predicament the country is currently facing.

Which brings us back to the latest cash-for-oil swap that Venezuela made with China. President Maduro has far more pressing concerns than ensuring that the proper investments are made in Orinoco oil fields. There is no shortage of urgent needs in Venezuela – a creaking electricity grid, violent crime, lack of basic goods, and billons of dollars in debt owed to an array of international companies. On top of all that, the government has lost millions of dollars of past Chinese loans to corruption, a fact that the opposition is all too eager to point out.

All of that is to say that the $4 billion loan Venezuela secures from China will merely be a Band-Aid, and there is little reason to believe that PDVSA will be successful at dramatically boosting its oil production any time soon.

By Nick Cunningham of Oilprice.com

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