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Riot police clash with protesters during a rally demanding a referendum to remove Venezuela's President Nicolas Maduro in San Cristobal, Venezuela, earlier this month. Photo: Reuters

China secures more oil from Venezuela, but Beijing wary government losing fragile grip on power, say analysts

China wants to keep oil flowing from Latin American nation, but is making overtures to its political opposition amid anti-government riots and protests

China’s move to invest US$2.2 billion in Venezuela for a share of increased crude production shows a desire to extract itself from the country’s political fights while securing access to its vast oil reserves.

The deal, which represents China’s first economic support this year for the beleaguered South American country, would help Venezuela reverse declining oil output by improving its infrastructure. In exchange, Venezuela would promise to send its largest creditor even more oil — 800,000 barrels a day — compared with about 550,000 in September. The deal will be finalised in mid-December.

As low oil prices ravage Venezuela’s economy and President Nicolas Maduro struggles to maintain his grip on power, China is paying greater attention to things like fiscal stability and political risk in its overseas lending. The increased scrutiny could complicate its pledge to deploy US$60 billion across Africa over the next three years, much of it preferential loans and state-backed investments in countries that are heavily reliant on commodity exports.

While Maduro hailed the Venezuela pact as proof of China’s commitment, its focus on oil production illustrates a wariness in Beijing against assuming more risk with a socialist government that is struggling to avoid default. Financing oil infrastructure helps China ensure a long-term presence in a country that hosts the world’s largest proven crude reserves and sits in the US’ strategic backyard.

“The imperative is to ensure no disruption of oil flow,” said Mei Xinyu, a senior researcher with China’s Ministry of Commerce. “The political situation takes a back seat to the importance of oil production. Even if the opposition party takes power in the future, they’ll still need Chinese loans to pump out oil.”

Subsequent agreements between the two countries would probably follow the same model, with China providing assistance to improve oil facilities and maintain exports, Mei said. A policy paper on Latin America released on Thursday by the foreign ministry said China was ready to “actively explore” mechanisms for the long-term supply of energy resources to reduce the impact of external economic risks.
Venezuela’s President Nicolas Maduro. Photo: Bloomberg

The state-run China National Petroleum Corp has ordered local units to cut non-oil producing investments, according to the company’s account of a meeting held in Caracas on Friday by chairman Wang Yilin. He told the meeting that Latin America retained strategic importance despite the “unstable investment environment” and “growing default risk”.

The moves come as runaway inflation and a shrinking economy push Venezuela closer to default and fuel criticism of Maduro, whose late predecessor, Hugo Chavez, fostered strong ties with Beijing. In recent months, China has been hedging its bets and communicating with the opposition, which controls congress and wants a referendum to recall the president. 

At stake is almost US$19 billion of debt that Venezuela is projected to owe China by year’s end, according to Barclays Capital. The Inter-American Dialogue, a Washington-based research group, estimated that China lent about US$65 billion to the country between 2007 and 2015, which has been paid back largely with oil shipments.
An opposition supporter shows a prescription to riot police as people protest against the shortage of medicines and demand a referendum to remove President Nicolas Maduro during a demonstration in Caracas, Venezuela , on November 17. Photo: Reuters

Meeting those commitments has proved challenging for Venezuela, which has seen oil production slide to a six-year low amid a prolonged slump in crude prices. The agreements between CNPC and Venezuela’s state-owned Petroleos de Venezuela include increasing production at three joint ventures, rehabilitating oil wells in Venezuela and building a refinery in China.

The 800,000 barrel target falls short of a one million barrel goal that was under discussion in August, according to Chinese state media. China imported an average of 424,000 barrels a day from Venezuela in the first nine months of the year, an increase of about 30 per cent over last year, according to data from the General Administration of Customs.

“We are going to reach 800,000 barrels a day with China,” Maduro said at a November 17 news conference with CNPC’s Wang in Caracas. “Our older sister China has not left Venezuela alone in hard times.”

CNPC issued a statement on Monday confirming the deal and describing Wang’s conversations with Maduro as candid, effective and fruitful. The Chinese Ministry of Foreign Affairs did not reply to a faxed request for comment.

President Xi Jinping has been stressing his country’s commitment to Latin America while visiting the region to attend the Asia-Pacific Economic Cooperation summit in Lima, Peru.

Matt Ferchen, head of the China and the Developing World Programme at the Carnegie–Tsinghua Center for Global Policy in Beijing, said the low-key treatment of the deal suggested that China saw it as just another long-term investment, not a game-changer.

“If it were really a big deal the Chinese were proud of, they would make diplomatic hay out of this,” Ferchen said. “My guess is this is just a ploy by Maduro to grab some of the attention and headlines surrounding Xi’s trip, which obviously doesn’t include Venezuela.”

This article appeared in the South China Morning Post print edition as: Wary Beijing secures more oil from Venezuela
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