BEIJING (Reuters) – China could be the near monopoly buyerof Venezuelan fuel oil after Beijing stepped up financial aidto cash-strapped Caracas, but it will be years before highervolumes of crude from the OPEC member begins flowing East.
Venezuela is struggling with multiple problems including acash crunch caused by President Hugo Chavez’s use of oil moneyto fund socialist projects, surplus fuel oil due to refineryoutages and must seek alternative buyers for the crude itstopped shipping to Exxon Mobil Corp due to a legalrow.
In an unprecedented move to ease its cash squeeze,state-run PDVSA had asked for $1 billion upfront payment in atender to sell eight fuel oil cargoes of 1.8 million barrelseach. The tender was scrapped when potential buyers balked, butPDVSA is still holding talks with PetroChina, traderssaid.
If a deal comes through, it would mean China soaking upnearly all the Venezuelan fuel oil exports to Asia and raiseterm imports by the world’s second-largest oil consumer by afurther 20 percent over a year, traders said.
"If prices are really attractive, yes, we do have theappetite to take more fuel oil. But that also means PDVSAcutting back supplies to other buyers as that is about all theycan export," said a PetroChina trading manager, who declined tobe named.
China, which is keen to secure long-term supplies to meetits surging demand, has more than doubled liftings ofVenezuelan fuel oil, a heavy residue used to power ships andmake road-paving bitumen, since fourth-quarter 2007.
The increased supply, now at 5.5-7.3 million barrels amonth, started around the same time as Beijing-backed ChinaDevelopment Bank granted Caracas a $4 billion loan for whichPDVSA said it would repay in fuel oil.
PetroChina, China’s main proxy in energy deals with theLatin American nation, also aims to raise crude oil importsfrom Venezuela by a quarter or more this year to at least100,000 bpd.
The combined supply of fuel oil and crude would be nearChavez’s promise to supply China 350,000 bpd by the end of thisyear, roughly 5 percent of China’s total oil demand.
Victor Shum, of Purvin & Gertz, said it would be economicsuicide if Caracas were to significantly shift away its crudesupply from the United States now, as China did not yet havethe capability to refine its highly acidic and high-metal oil.
The U.S. buys most of Venezuela’s exports to meet around 11percent of its daily imports, but relations have been pricklyand Chavez early this month halted oil sales to Exxon Mobil.The top U.S. firm recently won court orders freezing up to $12billion in Venezuelan assets to ensure compensation for an oilproject Chavez nationalized last year.
But Beijing and Caracas have the political and commercialdrive to push forward Chavez’s pledge in November to boostsupply to China to 1 million bpd by around 2011, or 13 percentof current Chinese oil demand.
"China wants to diversify sources of supply. Venezuela is apartner with open arms," Shum said.
"We are going to see more investments in the coming years,such as a joint venture refinery in China, for Venezuela toincrease crude exports significantly," he added.
PETROCHINA’S AIMS
A boost in fuel oil supply would provide ammunition toPetroChina’s ambitions to become a leading player in Singapore,the world’s largest marine fuel market where the Chinese stategiant owns a 2 million-barrel storage facility.
The trader ships about half its Venezuelan imports intoChina’s booming domestic marine fuel market.
China also appears to be in a position to press Caracas tolower prices for its crudes, which are of poorer qualitycompared to rival heavy grades from Saudi Arabia and Iran.Beijing has significantly boosted term supplies for 2008 fromthe two leading Middle Eastern producers.
But even at lower prices, China’s ability to processVenezuelan crude would be limited.
"Most of the Venezuelan crudes are consistently high acid,high metals and high sulfur. Not many refineries can runthese," says Al Troner, head of Asia Pacific EnergyConsultancy.
Almost all the 82,000 bpd Venezuelan crude China importedfor 2007 ended up in processing for bitumen, demand for whichis growing under China’s heavy spending on roads and bridges.
(Additional reporting by Maryelle Demongeot and Yaw YanChong in Singapore)
