Oil-Rich Venezuela Meets Oil-Hungry China

In late September,
Venezuelan President Hugo Chávez visited China as his second stop on a
multi-continent diplomatic mission. Cuba was his first stop, followed
by China, Russia, Belarus, France and finally Portugal. During his
brief time in Beijing, Chávez met with several high ranking Chinese
officials, including President Hu Jintao. The two countries signed
several mutual cooperation agreements involving education, sports,
trade, telecommunications, and most importantly, oil.

The Oil Deals

President Chávez has repeatedly asserted that he envisions China as an
important global oil consumer. Some of the agreements reached by
Caracas and Beijing will boost Venezuela's oil exports to China. By
expanding China's share of Venezuela's oil consumption, the South
American country could decrease its heavy dependence on the U.S.
market, which has been the largest consumer of Venezuelan oil.
According to the Venezuelan media, the two countries will cooperate to
build four tankers and at least two refineries. The first refinery will
be located in the oil-rich Orinoco Belt in Venezuela and the other in
China's coastal province of Guangdong. Venezuela's state-run oil
company, Petróleos de Venezuela, S.A. (PDVSA) will be responsible for
shipping the oil to its Asian counterpart. Additionally, the two
nations will double the amount of capital invested in existing
development projects jointly undertaken by Beijing and Caracas
beginning a few years ago, from $6 billion to $12 billion. China will
contribute two-thirds of the funds, with an allotted amount going
toward increasing Venezuelan oil exports, according to Chávez. The
South American leader's goal is to further diversify Caracas' petroleum
client base through reaching an output of 500 thousand barrels of crude
per day (bpd) to China by 2009 and to double that figure by 2012.
Ultimately, the Venezuelan president optimistically hopes to become the
top oil supplier to China.

Same Summit, Different Attitudes

President Chávez does not hide his intentions to strengthen a political
alliance expand upon economic ties with China, which are already quite
strong. China is about to launch the first Venezuelan satellite, the
Simón Bolivar, on November 1, 2008. Moreover, the Southern American
country leader has tried to link the two geographically remote
countries together through a shared ideology; he has claimed that he is
a "Maoist." During a trip to China in 2004, Chávez said that if Simón
Bolivar and Mao Zedong had met, they would have been good friends for
they upheld the same humanitarian ideals. Regardless of Chávez's
grandiose statements, Beijing has remained cautiously careful regarding
its relationship with the Venezuelan leader. When asked about Chávez's
visit to China in a press conference staged by the foreign ministry in
Beijing, the spokesperson Jiang Yu answered that bilateral ties between
China and Venezuela were "normal state-to-state" relations.

Rhetoric aside, Venezuela also revealed more to the press about the
detailed strategy on which the two countries will cooperate in the
energy sector. For example, President Chávez disclosed the plan
regarding the joint construction of four oil tankers as well as the
expansion of a joint investment fund. On the other hand, China's
official news agency, Xinhua, has used vague language to describe
China-Venezuela relations. The oil cooperation between the two
countries regarding oil refinery and transportation is collaborative in
every aspect. Since the Venezuela-China agreement only represents four
percent of Chinese imported oil, other countries' trade relationships
with Venezuela will not be adversely affected, Beijing clarified.

Chávez led the media to believe that relations with China will go
far beyond just oil. Prior to his departure to China, he publicly
stated that his country would purchase 24 K-8 aircrafts from China in
order to replace much older U.S. models. However, Beijing has never
confirmed this announcement and there has been no further details
regarding such a military deal between the two states. When asked about
it, the Chinese spokesperson stated that she did not "have the
information" about any such putative military trade deal. Chávez once
said that China is an important ally of Venezuela on the
anti-imperialism agenda. He claimed that "it is more important to be in
Beijing than to be in New York." Regarding the current financial crisis
in the U.S., Chávez announced that both China and Venezuela are not
affected by the crises because both countries "had and are having
revolutions." According to China's President Hu, "Chávez is a good
friend of Chinese people." However, in contrast with Chávez's fervent
expressions, Beijing has shown some restraint in defining China's
relations with Venezuela as not relating to "any other third party or
contain any ideology." It is a bilateral relationship which aims to
enhance mutual benefit and development. By stating that China is
willing to establish friendly relations with every Latin American
country, this assertion somewhat downplays the ideological appeal of
Chávez to China.

When it comes to Chávez, it is usually about politics

President Chávez has given high credits to China for several reasons.
Economically, China is among the largest oil consuming nations in the
world, second only to the U.S. Furthermore, its oil consumption demands
are on the rise. Beijing's avaricious appetite for energy has
positioned it to become an important Venezuelan oil client. He needs to
tell his own people and his Latin American counterparts that his plan
for substituting U.S. market share with other more compatible trading
partners is starting to take place. Politically, the Bolivarian
Revolution leader sees China as a key ally in furthering his
anti-imperialist agenda. China, a rapidly rising power in world trade,
is perceived by many developing countries as an economic role model. At
the same time Beijing continues to peddle the notion that it
comprehends the struggles of the Global South. For its part, Washington
is cautious in its relations with Beijing, seeing it as a potential
competitor rather than a trustworthy partner like the nations of
Western Europe. To Chávez, all the aforementioned components are good
reasons to strengthen ties with China as a hopeful recruit in a
potential anti-U.S. bloc.

China's Concerns

For China, Venezuela is undoubtedly an important business partner. Its
abundant oil reserves make Venezuela a valuable source of the precious
commodity for China. However, Beijing has been maintaining a relatively
low-profile relationship with Caracas, pointing to only the cooperative
factors between the two countries.

While China acts aggressively in certain respects, it does not want
to be considered a threat to the world. Instead, China chooses to act
peacefully as its global influence grows. While it is not shy about
showing off its economic advances, it is careful not to exceed the line
of proper deportment. Hosting the 2008 Olympic Game was the perfect
occasion for Beijing to show the world that China had reemerged
peacefully, and that its government was trying hard to erase any
international skepticism. While Chávez indefatigably waves the flag of
anti-imperialism, Beijing is working hard to elevate its reputation.
For example, it states that Chinese relations with Venezuela are no
different from those with any other countries in the world.
Operationally speaking, China's leftist hue is fast fading when
compared to more vibrant leftist regimes in Latin America such as
Venezuela, Bolivia and Nicaragua. While these leftist South American
countries are flamboyant in their anti-U.S. position, China remains
committed to pragmatism and does not automatically dance to such an
anti-imperialist beat. Beijing definitely will fight to uphold its own
national interests with Washington, like the clash between a U.S.
reconnaissance aircraft and a Chinese fighter jet over the South China
Sea in 2001. However, Beijing has no reason to fight with Washington
over Caracas since the U.S. absorbs by far the largest amount of
Chinese commodities, exceeding both Canada and Mexico. Simply stated,
China views its ties with Venezuela as business relationship.

On the other hand, China would not give up any chance to stabilize
its oil imports, including those from Venezuela. This is a priority
because the oil sector is of great importance to the Chinese. Some
Chinese analysts view the China-Venezuela oil alignment as a serious
matter. In fact, China is considering the possibility of replacing
Angola with Venezuela as a major supplier. According to a researcher in
China's Ministry of Commerce, Angola, Saudi Arabia and Iran are
presently the three main oil providers for China. With Beijing's
increasing oil demand, looking for new providers has become essential.
In this script, Venezuela is destined to play a major role. In the mean
time, Caracas is becoming more important due to the fact that it also
provides heavy oil and bitumen for China. In the future, the two
countries might form a geo-energy community. This potentially
represents a significant energy strategy for China.

A Win-Win Situation?

Even though China seeks to form a long term trade relationship with
Venezuela, it is trying to quell any concerns the international
community may have towards the relationship. Beijing argues that it
will not threaten U.S. economic interests in Venezuela because the
amount of U.S. investments overwhelms those of China, with the former
representing $300 billion in trade, and the latter only $4 billion,
according to a statement by the Chinese ambassador to the U.S. in 2006.
In addition, the contribution of Venezuela's oil to China's oil
security strategy is still limited due to the difficulties of
transportation and refinement. Moreover, cooperation between China and
Venezuela includes tackling multiple areas of shared interests, with a
focus not only on energy. Therefore the U.S. should not have to have
too many concerns when it comes to its fractious trading partner. The
most important message that China wants to send to the West is that it
will continue to pursue oil deals with Venezuela, but at the same time,
it will not interfere with any bilateral relations that Venezuela has
with the U.S.

However, the explanations offered by the Chinese only tell us half
of the story. It is true that Chinese investment in Latin America still
cannot even remotely exceed that of the U.S., but it is increasing
notably. As President Chávez mentioned, China is going to double its
investment for the development fund. Likewise, according to Georg
Caspary in his article "China Eyes Latin American Commodities," along
with the recently accelerated growth in commodity imports from Latin
America – around $ 50 billion – the investments in commodity related
fields will also grow remarkably. With the growing Chinese investment
in Latin America, the importance of China towards the region, not
solely Venezuela, will increase as well.

Technically, the U.S. is the most important petroleum customer for
Venezuela because of their proximity to each other. China does not have
the same advantage. It only takes 3 to 4 days to ship oil from
Venezuela to the U.S, but it takes numbers of weeks to ship to China.
Venezuela has to carry it through the Panama Canal and across the
Pacific Ocean. The long distances increase the cost of the oil. If
Venezuela cuts off its oil supply to the U.S., its oil revenue will
unquestionably decrease, and the country's economy will suffer.
However, based on the actions taken by President Chávez up to this
point, he does not seem to mind the revenues lost by importing more oil
to China.

According to an article in Business Week, energy cooperation between
Caracas and Beijing would have its strategic benefits. China would
prefer having a major new energy provider. For Venezuela, this could
mean declining the influence of unwelcome major customers. So perhaps
it will be a win-win situation for both China and Venezuela. However,
in the article "Chávez-China Oil Deal May Produce Unsuspected Winners,"
the authors suggest that the U.S. should not be concerned about the
China-Venezuela energy tie. On the contrary, the U.S. can take this as
a turning point for it to start investing in research of alternative
energy. Ultimately, this could lead U.S. independence from foreign
energy. Nevertheless, in the short run, few changes are likely to be
made; Venezuela and the U.S. will remain strong energy trade partners.
Alternative energy projects still need years to mature and become
applicable. Venezuela still needs revenue from its U.S.-oil sales to
implement social reforms. Although Hugo Chávez has repeatedly told the
world that he will halt exporting oil to the U.S., the statement has
not yet borne fruit. Even though Venezuela may be in the midst of a
"revolution," it still cannot escape the impact of the U.S. financial
crisis. President Chávez himself claimed at a summit with Brazilian
President Lula de Silva that the destructive power of the global
financial crisis is like the force of "one hundred hurricanes,"
according to a New York Times report on October 2, 2008.

In an era when energy and other natural resources are weighed with
great importance, it is inconceivable for any country to claim that
its motivation is plainly economic without any strategic or security
concerns. This is especially true for developing countries which are
hungry for natural resources in order to promote their growth. In the
game of energy security, China has proceeded cautiously in Venezuela or
for that matter, elsewhere in Latin America; it is definitely far from
being an insouciant player in this game. On the contrary, China has
developed a very carefully wrought strategy on how to stabilize its
energy supplies coming from Russia, The South China Sea region, Central
Asia, The East China Sea and the Americas. Many neighboring countries
like Vietnam and The Philippines are worried if China will use force to
ensure its energy supremacy in the region is not threatened. Therefore,
the U.S. has reasonable concerns to be sensitive to Hugo Chávez's next
step, particularly whether it will affect the country's oil exports to
the U.S. As for Venezuela, it is apparently using its oil as a
bargaining chip to shore up its policy of confronting Washington.

This analysis was prepared by COHA Research Associate Iris Liu