China and the Venezuela Oil Sector - energy.duke.edu and the Venezuela Oil Sector R. Evan Ellis Presentation to Duke University Durham, NC December 5, 2013 • Chinese operating in

China and the Venezuela Oil Sector

R. Evan Ellis

Presentation to Duke University

Durham, NC December 5, 2013

http://upload.wikimedia.org/wikipedia/commons/f/fa/Flag_of_the_People's_Republic_of_China.svg

• Chinese operating in Venezuela since Jun 97 • CNPC in Intercampo Norte (Maracaibo), Caracoles • Modest presence / Mature fields

• Ormulsion - 2001 JV with CNPC “Sinovensa” using MPE-3 • Takeover of PdVSA after Feb 03 end of general strike, firing of

20,000 workers • CNPC in Zumanao (Dec 04) • Halt to Ormulsion production in Sep 06 to produce Syncrude

• Pdn ↑ from 20,000 bpd (Ormulsion) to 112,000 (Syncrude) • Drilling rigs (starting 2007…50 by 2013 (For Chinese projects)

• 20 assembled in Venezuela (starting Dec 09) • Nationalization (May 07) – Rqt. for new joint companies

• Reformulation of Chinese operations

Background

For more information, contact: Dr. R. Evan Ellis Tel: 703-328-7770 Email: [email protected]


• Junin-4 (Petrourica) ($16.4B Commitment - $900M down) • Pushed by award of Junin-6 to Russian consortium • Delays from lack of infrastructure, PdVSA lack of capital • Plan to blend-up Petrourica + Sinovensa output to exportable syncrude

• ↑ Sales to PRC* …based on production from mature fields • 49,000 b/d (05) (Ormulsion+Fuel Oil)->626,000 b/d (13)

• Approx. half for loan repayments / PRC NOCs + *Much stays in region • Gas: CNOOC in Mariscal Sucre – Announced 11 but never happened

• Primary PRC focus (CNPC, Sinopec) on oil, only associated gas • Talk of awards to Chinese companies involving Junin-1, Junin-8,

Boyaca-4 • New deals (Sep 13) after pause – Junin 1, 10 (PdVSA needs royalties) • Liquidity issues: PdVSA hits up partners, although mostly mature fields

• To be repaid by future production ($2.5B) • CNPC ($4B), Schlumberger ($1.5B), Chevron, Repsol?->$10B in 2013 • Majors pushing for new framework agreements

Background (contd.)



PRC Loan Flows and Terms (Est.)

For more information, contact: Dr. R. Evan Ellis Tel: 703-328-7770 Email: [email protected] 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007

$4B to Heavy Inv Fund Ph. I 100k b/d x 3 yrs @ $50/bbl Ref

≈ $1-4B ICBC Loans ≈??? b/d x 3 yrs (est)

$5B to HIF / LRLV Fund (Tr. C) ≈100+k b/d x 3 yrs?? @ Mkt?

Transition Elections

$4B to Heavy Inv Fund Ph. II 130k b/d x 3 yrs @ $40/bbl Ref

$4B to Heavy Inv Fund, Ph. II Renewal 1 of 3?

$4B to Heavy Inv Fund, Ph. I Renewal 1 of 3 (for Sinovensa?)

≈ $12B to LRLV Fund (Tr. B) ≈??? b/d till paid Exp. 2020->

$8.8B to LRLV Fund (Tr. A) 200k b/d till paid @ $40-$50/bbl Ref Exp. 2020->

≈ $10B to LRLV Fund Maduro wanted but didn’t get

$4B CDB to PdVSA For Sinovensa (CNPC) Exp.?

•China Fund (3 instruments) • Heavy Investment Fund Phase I • Heavy Investment Fund Phase II • Long Range / Large Volume Fund

• Traunche A, B, now C? •CDB loan to PdVSA • ICBC loans (not yet)


Summary of PRC Position in Venezuela Petroleum Sector

•Intercampo, Caracoles (CNPC) – Maracaibo, •Petrozumano (CNPC) - Anzoátegui •MPE-3 (Sinovensa (CNPC))

•112,000-> 330,000 bpd by 2016 •Junin-4 (Petrourica (CNPC))

•$16.4B inv. / 400,000 bpd

•Junin 1 – Sinopec •$14B inv. / 200,000 bpd

•Junin 10 – Sinopec •$14B inv. / 220,000 bpd

•Junin 8 – 2010 Agreement w. Sinopec to quantify reserves •Boyaca 4 – Chinese company, Reliance, or other? •Petropiar – CITIC 10% stake from PdVSA (in JV w. Chevron) $1B? •Acq. of Petronas interest in Carabobo-1? (or to OVL or Repsol?)


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Refining – Future Capability Depends on PRC?

In-Country: • 1.28m bpd capacity / Plans to ↑ by 400,000 bpd (if funds)

• Operating at 60-70%: Aging infrastructure / lack of investment • Explosion in Amuay refinery (2012), Fires (El Palito)

• Paraguaná Refinery Complex (955,000 b/d) – The big one • Puerto de la Cruz (195,000) (Wilson Energy Services (PRC)

• $834M contract to upgrade this in October 2013 • El Palito, San Roque

Abroad: •CITGO infrastructure (2.8M bpd) …Selloff, turning away (eg. NuStar) •Curacao - But Gov’t pressuring PdVSA for promised investment •Aruba – Just agreed to re-open / But does PdVSA have $$$ for rent? •Refinery of the Pacific (Petroecuador-PdVSA-CNPC) - 300,000 bpd

• Geared for Ecuadoran (Napo/Oriente) crude / PdVSA role small •Abreu-y-Lima - 230,000 bpd – Petrobras going forward on its own •Petrochina-PdVSA refinery in Guongdong (CNPC/PdVSA)

•400,000 bpd / CNPC doing the work, hoping to be repaid in oil For more information, contact: Dr. R. Evan Ellis Tel: 703-328-7770 Email: [email protected]


Upgraders – Key Long-Term Obstacle

• 4 legacy upgraders – 10 years old

• 630,000 b/d capacity…Only at 500,000 due to maintenance issues • Fire in Petroanzoategui upgrader Nov 13 • Fire at Petropiar upgrader in 2011

• New Upgraders $4-$5 billion each • Delayed for lack of capital…But can’t just dilute early

production indefinitely • Limits to dilutant • Problems with storage, transport and recovery:

Sediments, byproducts

• If built, PRC most likely candidate with capital + risk tolerance



Transport Support


•4 Chinese VLCCs to PDV Marine (CV Shipping)->Anzoátegui •Ayacucho with 2M Barrel capacity (Oct 13) •Boyaca (Nov 13) – But hasn’t shown up yet… •Carabobo (May 2014) – Initially expected last year

•Paid for through China Fund •LNG tankers in future? Context: ↑ shipments to Asia driving need for expanded fleet…but ships slow in arriving

• PdV Marine ordered 42 tankers in 06…Only 5 delivered • Three never sailed (PRC, Iran, Argentina) • PdVSA forced to rent two Suex Max tankers

• Land Transport – Work on rail, other projects •China Railway Road – Rail upgrade (China Fund)

•2013 agreement with Essar, India Oil?


Chinese Difficulties With Venezuela


• 2005 CNPC tax dispute with SENIAT • Sep 2006 - Stopped Ormulsion pdn after plant to use it (2

generators of 600 MW) built in Zhanjiang • 2007, forced to turn to coal, sought compensation

• CDB guarantees 75% of loan from BNDES for Abreu-e-Lima Refinery ($1.5B)(Feb 12)…PdVSA decides not to participate (Feb 13)

• CDB frustration with lack of progress on Venezuelan projects for monies loaned (2010, 2011 tech teams, 2013 public comment)

• Embezzlement of $84M from China Fund food program 2011-12 • Feb 2013 – Polite “no” to request for new $4B loan during Jaua

visit (Feb 13) • Diversion of output to US Gulf Coast refineries (2013) for short-

term cash need • Sep 2013 – Strict conditions on new $5B loan tied to projects


Venezuela Outlook


• ↓ Production (2.4M bpd->1.5M bpd?) • Mature fields declining + no money for Orinoco or upgraders • Refiner problems with oil quality + sustained use of early production • NuStar breaks 30,000 b/d contract early (Nov 13) to buy from Canada

• ↑ Internal Consumption (negative revenue/bbl) • ↓ Revenue from exports

• Preferential Supply Agreements with Cuba, Petrocaribe (400,000 b/d) • No shipments to Honduras, Guatemala drops out

• Earmarking of production to pay loans (China fund + partner loans) • Net price drop as long-term contracts end ($94 / bbl16)

• Diversion of profits to Missions / FONDEN, corruption • ↑ transport expenditures for shipments to Asia (≅1.1M b/d to India, PRC) • Liquidity Crisis:

• Borrowing from partners $10B: Repsol, Chevron, Schlumberger, CNPC • West – Mortgaging gold to Goldman Sachs, Loan from JP Morgan? • PdVSA 2016 bond

Unsustainable, but unclear how it will end… Some will get out, some may have leverage to force PdVSA to their terms…

Canada+Brazil+Shale: How valuable Venezuela’s heavy oil be to the survivors?


Questions & Comments?


China’s Return to Venezuela


• Elias Jaua trip (Feb 13) – Venezuela turned down for $4B new loan

• Chinese signals of discomfort in Washington (Mar 13) • Diosdado Cabello Trip (Jul 13) • Trying to overcome Chinese lack of confidence…but also

building own relationships • Rafael Ramirez Trip (Sep 13) – Stage Setting • Nicolas Maduro Trip (Sep 13)

• China-Venezuela Mixed Commission Meeting • Ministerial level – Typically annual, end of year • 28 Agreements this year, including new $5 billion, Junin

1, 10 • Mostly Ag and telecommunications projects • Chinese interest in US reaction


• 2003 – CNPC acquires 45% interest in PlusPetrol Norte (Argentina-Peru)

• Ecuador – First major takeover– CNPC buys Encana ($1.42B - 2005)

• 2009 – 2011 M&A wave: Sinopec-Repsol (Brazil) - $7.1B, Sinochem-Statoil ($3.1B), Sinopec-Oxy($2.4B), CNOOC-Bridas ($3.1B), Failed CNOOC bid for PAE

• Other key – Omimex (Sinopec-OVL, 2006), Emerald Energy (CNPC, 2011), CNPC->Petrobras Peru (2013)

• Advance of Chinese petroleum service companies in support of Chinese owners (Kerui, CPEB, etc.)

Context (1) – Chinese Oil Companies in LATAM


• Market Economies – Acquisition of shares in key oil projects, partners with key capabilities (eg. Brazil experience, deepwater drilling)

• Initially developed projects where injection of capital is needed • ALBA – Expansion of state-to-state partnerships in parallel with loans


• Ecuador – Earliest and significant portion of economy • Loans backed by parallel contracts for oil delivery (to

Petroecuador starting 2009, later with MOF) • 90% of Ec. Oil exports to the PRC…Most resold • Currently $10.8B? Incl. $2.6B in 2013 – Many hydro projects

• ↑ Petroleum sector projects, incl. Refinery of the Pacific, opening of Yasuni, 80+ PRC companies

• Nicaragua – Restricted – Lack of diplomatic relations, but… • Work on / loans for $40-80B Nicaragua Canal (CRR, China Harbor)

• Bolivia - Hydroelectric project, road/rail work, smaller projects • Some YPFB collaboration, paper mills

• Argentina • $1.4B+ in soy exports, now corn & beef • $10B+ in road/rail projects • Urea plant, mfg in Tierra del Fuego, Sierra Grande mine (CMC)

Context (2) – PRC Support for ALBA / Argentina (Gen)



Orinoco Tar Belt



Orinoco Tar Belt



Orinoco Tar Belt



Orinoco Tar Belt



Documents

China and the Venezuela Oil Sector - energy.duke.edu and the Venezuela Oil Sector R. Evan Ellis Presentation to Duke University Durham, NC December 5, 2013 • Chinese operating in