Courtesy of STRATFOR (subscription required), a report on China’s support of a faltering deal between Venezuelan state-run oil company Petroleos de Venezuela (PDVSA) and Brazilian energy company Petroleos Brasileiros (Petrobras) over the Abreu e Lima refinery possibly as a way of tying Brazil to Venezuela, hobbling Brasilia’s ability to compete elsewhere.  As the article notes:

“…The China Development Bank has agreed to provide loan guarantees for Venezuelan state-run oil company Petroleos de Venezuela (PDVSA) to back 75 percent of PDVSA’s 10 billion real ($5.7 billion) commitment to the Abreu e Lima refinery, under construction by Brazilian energy company Petroleos Brasileiros (Petrobras), according to an Oct. 14 report by Veja. According to the report, Portuguese bank Espirito Santo will finance the remaining 25 percent of PDVSA’s commitment. The terms of the loan guarantees have not yet been made public, but it appears that the Brazilian Development Bank’s concerns about the financial stability of Espirito Santo pushed PDVSA to look for alternative means of financing.

STRATFOR does not have direct knowledge of why China decided to enter into the PDVSA-Petrobras deal. However, China’s loan guarantees are consistent with its expanding ties to Venezuela, and it could stand to heavily profit from the deal. However, given China’s competition with Brazil, it is possible that the Chinese loan guarantees are motivated as much by a desire to hamper Brazil by tying this refining project to the unstable PDVSA.

The deal for a joint PDVSA-Petrobras refinery was originally finalized in October 2009. Petrobras is committed to owning a 60 percent stake, leaving the remaining 40 percent with PDVSA. The refinery is expected to process 230,000 barrels per day (bpd) of oil to supply Brazil’s domestic market with diesel and liquefied petroleum gas to northeastern Brazil. Approximately half the oil to be processed by the refinery is expected to come from the Carabobo bloc of Venezuela’s Orinoco Belt, an area jointly explored by PDVSA and Petrobras. The oil from this area of Venezuela is some of the heaviest, sourest crude in the world; combined with similar crude from Brazil, this will give the refinery a focus on heavy crude markets.

Though Petrobras has already begun construction on the project, the financing for the deal has been pending for two years in the face of PDVSA delays. The offer from the China Development Bank is the firmest backing so far in the negotiations, and it comes just in time for the Nov. 30 deadline for PDVSA to find the cash or back out of the project. Still, the deal is not yet assured. There is pressure from within Petrobras to walk away from partnering with PDVSA. One concern for Petrobras is that by committing to import oil from Carabobo, the refinery will be more costly. Furthermore, as the financing drama (among other ongoing issues) demonstrates, PDVSA can hardly be considered a reliable business partner.

The Complexities of the China-Venezuela Relationship

This deal fits into the framework of China’s growing relationship with Venezuela. The two have signed deals worth more than $30 billion in recent years. This loan would be worth an additional $4.2 billion. Although details of the China Development Bank’s agreement with Venezuela are unavailable, it is likely that Venezuela plans to pay China back in crude oil. According to PDVSA, total exports of crude and refined petroleum products fell 11.6 percent to 2.41 million bpd in 2010 from 2.73 million bpd in 2009. Total exports to North America and the Caribbean also fell in 2010. On the other hand, exports to Asia (dominated by China) rose 154 percent to 341,000 bpd in 2010.

Diversifying oil away from the United States is a strategic goal for the Venezuelan government and has been the explicit policy of the Chavez administration since the failed coup attempt of April 2002 that Chavez blamed in large part on the influence of the United States. However, there are reasons to believe that while the reported volume of shipments to China has gone up dramatically, much — if not most — of that oil is actually turned around and sold to U.S. refineries.

China has limited ability to process the heavy, sour crude Venezuela sells. The refineries best equipped to handle Venezuelan crude are in the Caribbean and along the Gulf coast of the United States. For China, it is four to six times cheaper — a difference of hundreds of thousands of dollars per shipment — to ship oil into the North American market than it is to ship it some 15,000 kilometers (9,321 miles) to the Chinese mainland. A U.S. diplomatic cable from 2010 released by Wikileaks reported that an internal PDVSA audit indicated that Venezuelan-Chinese oil-for-loan deals had resulted in oil sales to China for as little as $5 per barrel. Even if the average sale value is much higher, at just under $100 per barrel on the open market, China stands to profit heavily from resale of this oil to local markets.

The reality of the matter is that for all the talk about having diversified away from the North American market through this relationship with Venezuela, the actual dependence on the U.S. market remains very high. The significance of a real deal on Abreu e Lima would be in the actual commitment of a substantial portion of Venezuelan crude to a non-Asian, non-North American market. This would represent a real step toward diversification for Venezuela in a way it has not yet been able to achieve.

The Geopolitics of Oil Refining

The Abreu e Lima deal is motivated in part by politics and in part by technical needs. PDVSA signed the deal with Petrobras under the administration of Brazilian President Luiz Inacio Lula da Silva and at a time of high optimism for Venezuela’s prospects for diversification and regional cooperation. However, PDVSA’s repeated delays have turned the agreement into a source of tension for the two neighbors.

Venezuelan President Hugo Chavez stated in a recent news conference that there is pressure from within Petrobras to back out of the deal and build the refinery on its own. It would in many ways make sense for Petrobras to do so. Having access to PDVSA’s stream of heavy, sour crude — some of the world’s most technically difficult to refine — would give it solid footing in the heavy crude market. In the long term, the global crude mix is expected to get increasingly heavy, and this would be a step toward preparing for that eventuality. However, such a move would tie Petrobras to the politically volatile Venezuela. A deal with PDVSA is also not entirely necessary. Petrobras could source heavy crude from the open market on its own or even scrap the idea of a focus on heavy crude altogether, turning to other key oil producers such as Angola for partnerships.

STRATFOR does not have direct visibility into the Chinese decision-making on this deal, and the factors at play are exceedingly diverse. What we do know is that in most ways, Brazil and China are competitors. Nowhere is China more competitive than when it comes to securing access to resource deposits around the world. It is therefore logical that China would facilitate the completion of this deal between Petrobras and PDVSA as a way to lock the two together, thereby forestalling additional competition with Brazil for global oil supplies.