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China Looks to Latin America for Potential Oil Supplies

China's search for oil to power its fast-growing economy has led it to various parts of the world where there are large oil reserves. Although it is geographically far away from China's shores, the Chinese have been actively pursuing deals in Latin America. Venezuela holds the most interest for Beijing.

For the past several years, Chinese diplomats and trade representatives have been looking far and wide in Latin America, seeking joint partnerships and stakes in oil and mining operations.

Last year, Sinochem, a Chinese oil trading company, signed a $100 million deal with Ecuador for a 14 percent stake in an oil field there. China has also explored oil deals in neighboring Peru. The Chinese have gone to Brazil to invest in infrastructure projects in exchange for soybeans, cotton and sugarcane-based ethanol fuel. Brazil is a leader in the development of this renewable source of energy.

But oil remains China's primary need and the Latin American country that offers China the greatest potential is Venezuela. China started making deals for oil in Caracas even before President Hugo Chavez came to power in 1998 and began a policy of diversifying his nation's oil export market. The United States is Venezuela's current top customer, but Mr. Chavez has had rocky relations with Washington. A former director of Venezuela's state-owned oil company, Petroleos de Venezuela, and a Chavez critic, Jose Toro Hardy, says China is unlikely to replace the United States as the nation's prime customer.

"Venezuela has very large oil reserves, but our oil reserves are not good quality reserves," he explained. "Our oil has lots of sulfur. It has lots of metals. It requires very special refineries to be able to transform that bad quality oil into high quality products. There are no such refineries in China. On top of that, there is no way to transport that oil from Venezuela to China in economical terms."

China has become a major importer of Venezuela's Orimulsion, a tar-based fuel developed and branded by Petroleos de Venezuela that can be used in boilers. Chinese companies in partnership with Petroleos de Venezuela are investing $330 million to produce 6.5 million metric tons of Orimulsion annually by the end of this year. China has constructed at least one major electrical power plant designed to burn this fuel in Guandong province.

As for oil, international security expert Gal Luft, director of the Institute for the Analysis of Global Security in Washington, says China's need for oil will outweigh any logistical problems in obtaining it.

"It makes sense for the Chinese to look for oil anywhere they can. They went into the Sudan. They have gone to other African countries. They go to the Caspian and they also go to Venezuela," he said. "Of course, the crude is shipped by very large crude carriers and they have to go through unstable waters sometimes, but so is the oil the United States is importing from the Middle East and Africa and other places around the world."

The Chinese are expected to invest around $500 million over the next few years in Venezuela. China could also work deals for oil through swaps, buying Venezuelan oil for export to the United States, say, in exchange for oil closer to home.

Some strategic planners worry that China may soon clash with the United States over oil reserves in the Middle East and, perhaps, even in the Americas. The moves by Venezuela to diversify its customer base and its deals with China have, so far, had little effect on deliveries to the United States. Venezuela is the fourth largest supplier of oil to the United States.

One constraint on Venezuela is the fact that a large part of the oil it sends to the United States goes through Citgo, a U.S.-based refining and distribution company that is a subsidiary of the Venezuelan state-owned oil company. For this reason, Toro Hardy, the former oil company director, questions President Chavez's policy of quarreling with the United States.

"If we do not sell oil to the United States, as President Chavez keeps repeating, that he will stop selling oil to the United States, well, we will simply be killing Citgo, which belongs to us," he said.

But many political analysts doubt that the Chavez rhetoric will ever lead to a halt in exports to the United States. His defenders note that much of his anger toward the United States comes from April, 2002, when he was briefly overthrown in a coup and the Bush administration was slow to condemn the assault against his democratically elected government.

President Chavez has also caused friction with Washington by selling oil to communist Cuba at cut-rate prices. The Venezuelan leader would probably like to expand his deals with China as well, but there has been no cut in exports to the United States. Many U.S. oil industry representatives say their relations with the Chavez government have been smooth and that the oil has kept flowing except for a period in late 2002 when much of the sector was shut down by a strike instigated by Chavez opponents.

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