Successful Chavista initiative

Five years ago, I was skeptical of Hugo Chávez’s plans to reorient Venezuela’s oil exports from the United States to the People’s Republic. But it looks like he did it. Considering that U.S. demand for Venezuelan oil is set to plunge what with Canada (regardless of Keystone) and domestic production, it seems like a prescient move.

It wasn’t easy to reorient sales. China needed to build the downstream refining capacity to process Venezuelan crude. Venezuela’s production is very sour. (Data from Eni’s 2012 Oil & Gas Review.) To refine high-sulphur oil, you need refineries with cokers. In 2007, only 2.5% of China’s refining capacity had the necessary machinery. Moreover, it was all already in use: new crude from Venezuela had noplace to go besides the United States.

As a result, when Venezuela started signing the loans-for-oil deals with China, the Chinese oil companies mostly sent the crude along to the United States. The below figures show PDVSA’s sales to Chinese buyers and the amount of physical petroleum products that arrived on Chinese soil from Venezuela. Note the difference? Chinese companies took possession of Venezuelan oil in Venezuela ... and then shipped it to the United States. As late as 2010 (when I saw the 2009 figures) it looked like Chinese companies were going to stick to shipping Venezuelan oil north to the Imperio but not really take much of the stuff east to the PRC. Moreover, a lot of what it did take was used to make asphalt, considering how hard it was to process. Not exactly a strategic necessity.

	PDVSA sales to China	Chinese imports from Venezuela	Difference
2006	97,000	84,000	13%
2007	95,000	82,000	14%
2008	321,000	129,000	60%
2009	370,000	105,000	72%
2010	178,000	151,000	15%
2011	319,000	230,000	28%
2012	451,000	367,500	19%

Source: Informe de Gestión Anual de Petróleos de Venezuela S.A. (PDVSA), 2006-2012; “Zhongguo shiyou he tianranqi jin chukou zhuangkuang fenxi [Analysis of Chinese Oil and Natural Gas Imports and Exports],” in Zhongguo shiyou jingji, March 2012. The standard accounting measure for oil is in thousands of barrels per day equivalent, but China measures imports in millions of metric tons. The industry standard of 20,000 b/d equivalent to 1 million metric tons was used for the conversion. 2012 data is from Platts: http://blogs.platts.com/2013/05/21/venz-numbers and page 93 of the audited PDVSA financial statements.

It no longer looks that way. Chinese companies are still not taking all Venezuelan crude and products back to China, but the resale percentage has crashed. Last May 2012, PetroChina and PDVSA started construction on a $9.4 billion refinery capable of processing 402,000 barrels per day (bpd). PDVSA is supposed to pay 40% of the cost ... funded via a loan from China. (See page 9 at the link.)

(In fact, the Chinese refinery-upgrading began back in 2008.)

PDVSA has also been beefing up its tanker fleet. In March, it added four tankers with a combined capacity of 2.9 million barrels, taking its fleet up to 18 vessels. The company is purchasing enough new ships to take its fleet up to 46 and supposedly will move 40% of production in its own fleet.

That last will take a little while to achieve. Venezuelan tankers travel to China by via the Cape of Good Hope (really!) with a travel time around 55 days at sea, roughly 65 days total. Call it 130 days round-trip. That means a tanker can make 2.8 round-trips per year. At 750,000 barrels per tanker per trip, PDVSA needs about 64 Aframax tankers just to carry its current exports. The new Sino-Venezuelan refinery includes VLCC berths, but that still means 24 supertankers. New, that would run PDVSA about $2.9 billion.

Does buying the tankers make sense? Lease rates bounce around all over the map, but a VLCC is now running around $12,00 per day, so 24 tankers would cost $40 million per year ... only a hair under 4% of the capital cost. Now, $12,000 is close to an all-time low. (Prices in fact touched $4,000 earlier this year.) PDVSA currently can borrow around 6.5% (the minimum LIBOR is usually 2% in PDVSA contracts) which implies that buying ships makes sense if you think that lease rates will go above $21,000 ... a price not only well within historic norms, but on the low-end of rates over the past decade.

So, yes, at first glance buying tankers makes sense; it is not just a vanity project.

In short, Hugo succeeded in convincing the Chinese to reorient the diet of their refining facilities around Venezuelan oil, redirected the oil to go there, and began to construct the fleet needed to get it their at a competitive rate. And if use the same data another way, it is not hard to show that a pipeline through Colombia makes sense. (Link to Tom O’Donnell’s great blog.)

The only problem, of course, is that Venezuelan product is flat and domestic consumption is rising. So there is only so much oil that can be redirected from the U.S. to the People’s Republic. And all those loans from China will have to be paid back. But that shouldn’t to take away from what seem to have been a pretty good move, carried out well.

Even if it is almost certainly a case of doing the right thing for the wrong reasons.

Comments

[shah8]

I know it's a one off liner, but it begs the question that's not answered in the post. What *were* Chavez' reasons?

[Noel Maurer]

Who knows? I'm serious ... I gave up trying to figure him out several years before he passed away.

[Carlos Bellorin]

Oh! Albert O. Hirshman would have loved this. The unintended consequences of bad planning/failure is the kind of things he explained in his essay "The Principle of the Hiding Hand".

[Bernard Guerrero]

Question: Why are tanker rates depressed, and why do you expect a (near-term?) rebound?

[Noel Maurer]

Bernard --- I'm doing blog maintenance and keep finding things that have just sat around. So the below is two years late. But here's what I wrote back then:

Dropping North American imports have depressed the tanker market. That will likely end, since there are alternative markets. Should that assessment turn out to be wrong, then tankers are useful for storing unsold oil. Either way, the market should recover.